19 March 2019 - Article
by Jeanne R. Solomon and Mark Tice This week's corporate news roundup includes an overview of new restrictions on stockholder appraisal rights under the Delaware General Corporation Law, and a win in federal court for a company claiming that Delaware's unclaimed property audit techniques violated its substantive due process rights. The SEC also imposed a heavy fine on a public company that used severance agreements to discourage former employees from acting as SEC whistleblowers: DELAWARE LIMITS STOCKHOLDER APPRAISAL RIGHTS Delaware recently enacted amendments to the Delaware General Corporation Law that include new limitations on stockholder appraisal rights. In general, minority stockholders in a Delaware corporation that is acquired in a merger have a right to request a judicial determination of the fair value for their stock and be paid that amount in lieu of the merger consideration. The recent amendments require Delaware courts to dismiss any appraisal proceeding unless (a) the number of shares entitled to appraisal exceeds 1% of the outstanding shares in the class or series of stock that is eligible for appraisal; (b) the payment to be made for such shares in the merger exceeds $1,000,000; or © the merger is between a parent entity and its subsidiary. The recent amendments also permit the surviving corporation to require appraisal petitioners to accept a voluntary payment prior to a Delaware court's final valuation. In doing so, the surviving corporation may reduce the amount of accrued statutory interest that it would otherwise be required to pay on any appraisal award. For more information, click here. SEC FINES PUBLIC COMPANY FOR SEVERANCE AGREEMENT RESTRICTIONS ON POTENTIAL WHISTLEBLOWERS The SEC recently imposed a $265,000 fine against BlueLinx Holdings Inc. for including terms in severance agreements that impeded former employees' participation in an SEC whistleblower program under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that provides financial incentives to encourage whistleblowers to report possible U.S. securities law violations. The severance agreements required former employees to waive any right to receive a financial reward in connection with divulging company confidential information to the SEC. The severance agreements also required former employees to notify the company's legal department prior to disclosing to third parties any financial or business information about the company (with the SEC not being expressly carved out of this restriction). The SEC determined that the restrictions undermined the SEC whistleblower program and also required the company to include a provision in all of its severance agreements that clarifies employees' rights to disclose information to interested government agencies. For more information, click here. FEDERAL COURT RULES DELAWARE UNCLAIMED PROPERTY AUDIT TECHNIQUE VIOLATES DUE PROCESS A federal court recently ruled that Delaware's unclaimed property audit techniques use extrapolation methods that violate unclaimed property holders' substantive due process rights. In 2008, Delaware auditors had requested unclaimed property records dating back over several decades, a longer period than the company typically held records under its record retention policy. When the company was unable to produce certain older records, the Delaware auditors extrapolated from the information available to them and determined that the company owed Delaware over $1 million in unclaimed property. In reaching its decision, the court stated that it was particularly troubled by Delaware's decades-long wait to conduct an audit, its attempt to circumvent a six-year statute of limitations on unclaimed property actions, its failure to give the company notice that it would need to indefinitely retain unclaimed property records in order to defend against “unmeritorious” audits, and the Delaware auditors' failure to follow fundamental principles of estimation when using available information to calculate unclaimed property liability. For more information, click here. To subscribe to our weekly Corporate e-newsletter and receive future news updates, please click here. If you would like to read up on previously published Corporate-related news, please visit our e-newsletter archive by clicking here.