20 March 2018
by Jeanne R. Solomon and Clinton Jang In our global, interconnected, rapidly changing business environment, GCs, CFOs, CEOs, entrepreneurs and other business leaders need to be familiar with both their own areas of expertise and the broader legal and economic developments affecting their businesses. Below is a list of some prominent developments in relevant economic, transactional and legal matters that have taken place over the past 6 weeks.
Securities Law Developments
SEC ADOPTS BUSINESS CONDUCT STANDARDS FOR SECURITY-BASED SWAP DEALERS AND PARTICIPANTS The SEC recently adopted final rules on a comprehensive set of business conduct standards for security-based swap dealers and majority security-based swap participants. The rules require security-based entities to deal fairly with potential counterparties by communicating in a balanced manner and disclosing material information regarding the security-based swap, including material risks and conflicts of interest. Additionally, US security-based swap dealers will be required to comply with transaction-level business conduct requirements with respect to all of their transactions, except for certain transactions occurring via foreign branches. For more information, read here.
SEC IMPOSES SERIES OF SUBSTANTIAL WHISTLEBLOWER AWARDS In May 2016, the SEC issued three whistleblower awards totaling approximately $10 million, bringing its total to about $68 million in awards to 31 whistleblowers since the program's 2011 inception. One of the awards was over $3.5 million awarded to a company employee whose tip bolstered an ongoing investigation with additional evidence of wrongdoing that strengthened the SEC's case. A second award involved over $5 million payable to a former company insider whose tip led the SEC to uncover securities violations that would have been nearly impossible for the SEC to detect but for the whistleblower's information. The third award involved over $450,000 to two individuals who assisted the SEC in a corporate accounting investigation. The largest prior awards were about $30 million in September 2014 and about $14 million in October 2013. The SEC has stated that the recent surge in awards reflected the tips' high-quality nature and the public's increased awareness of the program. Whistleblowers who provide original information that leads to a penalty exceeding $1 million in a Dodd-Frank Act securities violation case may be awarded 10% to 30% of the assessed penalty. For more information, read here.
Mergers & Acquisitions Developments
DELAWARE CHANCERY COURT OPENS POSSIBILITY OF INCREASED APPRAISAL SUITS IN MANGEMENT-LED BUY OUTS A recent Delaware Chancery Court opinion opened the possibility that the chancery court would look beyond market price in appraisal actions, encouraging shareholder attorneys to bring future appraisal challenges. The court held that fair value of Dell Inc.'s stock in a 2013 take-private deal led by CEO Michael Dell was $17.62, an increase of 28% of the $13.75 transaction price. Vice Chancellor J. Travis Laster noted that the transactions was a management-led buyout and not an arms' length deal, thus requiring a more thorough examination beyond merely looking at the deal price. Vice Chancellor Laster clarified that fiduciary duty claims and appraisal claims required two separate analyses. While the court noted that there had not been any breaches of fiduciary duty by Mr. Dell or other members of Dell management, it also noted that Dell had shown in its trial that it was in the middle of shifting its company from the shrinking personal computers market to address the rapidly expanding smartphone and tablet market, thus supporting a higher appraisal price. For more information,read here. **
NEW YORK ADOPTS DEFENDANT-FRIENDLY STANDARD FOR SHAREHOLDER SUITS IN GOING-PRIVATE MERGERS BY CONTROLLING SHAREHOLDERS A New York court recently ruled that the business judgment rule applies in shareholder litigation challenging going-private transactions, except in instances where certain shareholder protective conditions are not present. The ruling upheld the dismissal of a shareholder suit in which the plaintiffs alleged that the merger was unfair because a controlling shareholder did not pursue higher third party bids. A lower court judge had used the business judgment standard to evaluate the board's decision to consummate the going private transaction deal, which the plaintiffs argued was the wrong standard. The appeals court applied the business judgment rule because it found that the plaintiffs had not shown that necessary protections were absent, citing a 2014 Delaware decision lowering the more stringent entire fairness standard to the business judgment rule in certain cases, placing the burden of proof on plaintiff shareholders. The court found that relevant factors in determining whether shareholder protective conditions are present include whether the merger was approved by both (a) an informed majority of the minority stockholders who were not coerced in their vote, and (b) a special committee of truly independent directors that met its duty of care in negotiating a fair price and did not lack freedom to reject the offer and was not otherwise prevented from hiring its own advisers. For more information, “read here.”:%20https://www.nycourts.gov/ctapps/Decisions/2016/May16/54opn16-Decision.pdf
U.S. Federal Data Privacy Law Developments
CONGRESS SET TO UPDATE ELECTRONIC COMMUNICATIONS PRIVACY ACT WITH EMAIL PRIVACY ACT The U.S. House of Representatives recently passed a privacy reform bill that requires the government to obtain probable cause warrants in order to access digital customer records maintained by service providers (such as Google and Facebook), including emails and documents stored on cloud servers. Passed with overwhelming support in the House (and positively received by technology companies and nonprofit organizations), the bill now moves to the U.S. Senate, which is considering the Electronic Communications Privacy Act Amendments of 2015 (S. 356). The bill also requires a service provider to notify its customers as to receipt of a warrant, court order or subpoena, unless a court orders the provider to delay notification. For more information on the H.R. 699 bill, read here. FTC AND FCC COLLABORATE IN PARALLEL PROBES RELATING TO MOBILE DEVICE SECURITY UPDATES The FTC and FCC each recently launched efforts to better understand mobile device companies' data security update practices. Regulators have asked large carriers and mobile device companies such as Apple, Google, Verizon and AT&T to disclose information concerning their procedures for issuing security updates to address smartphone and other mobile device vulnerabilities. The questions have focused on matters such as timing of updates and technology required for the updates. While it remains uncertain what the FTC and the FCC will do with the information they receive from the queried mobile device companies, the specificity of their questions indicates an interest in implementing focused standards to protect consumer privacy, either through informal agency guidance or by urging Congress to legislate formal rules for the mobile device industry. For more information, read here (FTC) and here (FCC).
U.S. Federal IP Law Developments
DEFEND TRADE SECRETS ACT PASSED BY CONGRESS, NOW AWAITING WHITE HOUSE APPROVAL Both houses of Congress recently passed the bipartisan Defend Trade Secrets Act (DTSA), a landmark bill permitting companies to go directly to federal court to fight trade secret theft, now expected to be approved by the White House. To date, trade secret theft law has been relegated to the U.S. states, which requires state court litigation or persuasion by a plaintiff as to Department of Justice intervention. While most U.S. States (47 states), the District of Columbia, Puerto Rico and the U.S. Virgin Islands currently have on their books some form of the Uniform Trade Secrets Act, variation in state laws and laws as to interstate theft of trade secrets make the state-courts venue as to defense and protection of trade secrets cumbersome. For more information, read here. FEDERAL COURT REJECTS LIMITATIONS TO VENUE IN PATENT CASES A federal appeals court recently denied a request from a liquid sweetener company to restrict the location for a patent suit filing, rejecting the company's argument that would have had the effect of barring most patent suits from the popular non practicing entity (NPE or, derogatorily, €œpatent troll€) forum of the Eastern District of Texas (which handles nearly half of all patent cases nationwide). The defendant had been sued in a federal court in Delaware and sought to move the case to Indiana where it is headquartered. The court rejected as meritless the company's argument that a 2011 federal law overruled a prior court decision, and that the 2011 law specified that patent suits may be filed only in jurisdictions where the defendant is incorporated, organized or has an established place of business, in cases where the defendant allegedly has infringed the plaintiff's patent rights. While the case did not involve the Eastern District of Texas, the defendant's success would have had the effect of blocking most patent suits from being litigated in the Eastern District of Texas, since few patent defendants are based in that jurisdiction. For more information on the TC Heartland case, read here. To subscribe to our weekly Corporate e-newsletter and receive future news updates, please click here.