In a recent decision of the Delaware Court of Chancery, the Court struck down a corporate bylaw provision of NutriSystem, Inc., a Delaware corporation (the “Company”), ruling the provision to be inconsistent with the Delaware General Corporation Law.  See Fretcher v. Zier, No. CV 12038-VCG, 2017 WL 345142 (Del. Ch. Jan. 24, 2017).  The Company’s bylaw provision, which had recently been adopted as an amendment to the Company’s bylaws, stated that the stockholders of the Company may remove directors, but only upon the vote of “not less than 66 and two-thirds percent…of the voting power of all outstanding shares” of Company stock.  Id. at *1.  This bylaw provision is in contravention of 8 Del. C. § 141(k) under which directors may be removed by a majority vote of corporate shares.

Plaintiff, a shareholder of the Company, brought a class action suit on behalf of the shareholders of the Company against Defendants, who were comprised of the Company and the Board of Directors of the Company.  Id.  Prior to the adoption of the subject bylaw amendment, the relevant bylaw allowed Company stockholders to remove directors only for cause and upon the affirmative vote of two-thirds of all outstanding shares of Company stock (the “Removal Provision”).  Id.  On January 7, 2016, the Company filed a Form 8-K with the Securities and Exchange Commission announcing that the Board had approved an amendment to the Company’s bylaws which removed the “for cause” requirement from the Removal Provision.  Id.

The Plaintiff filed his Verified Class Action Complaint on February 24, 2016 (the “Complaint”) pleading two counts.  Id. at *2.  In Count I, the Plaintiff alleged a breach of fiduciary duty against the Defendants, contending that the directors breached the duty of loyalty by enacting an unlawful bylaw to entrench themselves in office.  Id.  In Count II, the Plaintiff sought a declaratory judgment that the Removal Provision violates Section 141(k).  Id.  The Defendants moved to dismiss the Complaint on May 27, 2016 and the Plaintiff moved for partial summary judgment on Count II on August 9, 2016.

The Defendants defense was centered on two legal issues.  First, the Defendants focused their argument on 8 Del. C. § 216, which permits corporations to adopt bylaws specifying the required vote for the transaction of the business of the corporation, subject to other voting requirements necessary to take specific actions.  Id. at *3.  The Defendants conceded that the specific provisions of Section 141(k), addressing removal of directors, supersede this general permissive language, but argued that Section 141(k) “does not dictate a contrary result” because the Section “sets the rules only for the circumstances under which stockholders may remove directors without cause, and does not address the percentage of the vote that is required to remove directors.”  Id.  Second, the Defendants argued that the majority vote portion of Section 141(k) is a permissive provision, noting that Section 141(k) provides only that a majority of stockholders may remove directors, “thereby leaving the bylaws free to require a minority, a supermajority or even unanimity as a requisite for director removal.”  Id.

The Court disposed of Defendant’s arguments using a plain language reading of the statute, ruling that “[Section 141(k)] provides that holders of a majority of stock may—not must—remove directors; that is, if they so choose, the section confers that power.”  Id. at *4.  Stated otherwise, the permissive portion of Section 141(k) is whether a director is removed — not the required vote for such removal.

The Court denied Defendant’s Motion to Dismiss and granted Plaintiff’s Motion for Summary Judgment with respect to Count II.  Count I was withdrawn.  Id.

This decision is a stark reminder that corporations should be mindful of statutory rules when drafting and adopting bylaws.  While corporate statutes serve as guidelines in some circumstances, careful attention must be given to those provisions of a state’s corporate law that are to be literally, not figuratively, construed.

Updates and speculation regarding the forthcoming merger between AT&T and Time Warner have dominated the recent news cycle. Many pundits and business professionals have debated whether a vertical merger of such magnitude will survive regulatory scrutiny. The transaction will be reviewed by the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) as per the Hart-Scott-Rodino (“HSR”) Antitrust Improvements Act of 1976 (the “Act”).

The Act requires that parties who are planning to complete certain mergers, acquisitions, and transfers of assets or securities make a comprehensive filing with the FTC and the DOJ. The parties may not finalize the transaction until a determination is made by the agencies as to whether the transaction will negatively influence United States commerce in violation of antitrust laws. Parties may complete due diligence and make plans for post-transaction activities during the agencies’ review.

Effective as of September 1, 2016, the FTC, with the concurrence of the DOJ, adopted new standards concerning HSR filings which are meant to make the process easier and more efficient for filers.

With the new changes, the FTC has authorized filers to make HSR filings by submitting a DVD containing the filing. Filers will retain the option to submit a paper filing, but may not file on any other format, including CDs, flash drives, or SD cards. The filer should submit two DVDs to the FTC and two DVDs to the DOJ for review. If the DVD contains a virus or is either encrypted or password-protected, the submission will be rejected. Any errors with the DVD or the files on the DVD will require a replacement DVD. The DVD filing must include paper copies of the cover letters, original affidavits, and certification pages. All other documentation must be submitted on the DVD if the filer wishes to file by DVD, as there is not an option to file a combination DVD/paper filing.

Additionally, the FTC updated the instructions that apply to the HSR form. While some of the updates relate to filing by DVD, most were implemented in order to streamline the instructions and make them less complicated for filers. The form itself is not affected by these amendments.

The FTC vote to publish the Federal Register Notice was unanimous at 3-0. The Federal Register Notice and the new instructions to the form may be viewed at the following link.

To expedite review, the FTC encourages filers to follow the recommendations located on the “Style Sheet.”

 

The SEC has adopted final rules to address intrastate and small offerings, further expanding and modernizing the manner in which start-ups and other small businesses are able to raise capital.  The final rules amend Rule 147 under the Securities Act of 1933, as amended (the “Securities Act”) to facilitate the continued application of intrastate offering exemptions under State securities laws, including States’ crowdfunding provisions. The rules also create a new exemption, Rule 147A, which will permit general solicitation (including via internet) and will permit sales to residents within a State where the issuer was formed or where such issuer has its principal place of business.  In addition, the final rules amend Rule 504 to increase the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million, while repealing Rule 505 that limited such offerings to accredited investors and to up to 35 other persons who do not satisfy the financial sophistication standards.

The new Rule 147A and the amended Rule 147 include the following provisions:

  • A requirement that the issuer either (a) is formed or (b) has its principal place of business within the State in which the securities are sold (without requiring that issuers be incorporated or organized in the State where they are making the exempt offering under the new rules), and that the issuer satisfy at least one “doing business” requirement;
  • A new “reasonable belief” standard for determining the residence of the purchaser at the time of the sale of securities;
  • A requirement that the issuer obtain a written representation from each purchaser regarding the purchaser’s residency;
  • A six-month limit on resales to persons residing within the State or territory of the offering only;
  • An integration safe harbor that would include any prior offers or sales of securities made by the issuer under another provision, as well as certain subsequent offers or resales of securities by the issuer after the completion of the offering; and
  • Disclosure requirements, including legend requirements, regarding limitations on resales.

The amended Rule 504 retains the existing requirements, with the following changes:

  • An increase in the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million; and
  • A disqualification of bad actors from participating in an offering (consistent with the requirement of Rule 506).

The final rules also repealed the exemption previously provided under Rule 505. The amended Rule 147 and new Rule 147A will be effective 150 days after publication in the Federal Register.  The amended Rule 504 will be effective 60 days after publication in the Federal Register.  The repeal of Rule 505 will be effective 180 days after publication in the Federal Register.

The final rules are available here.

After a Saturday night of taking in the Big Apple, you meet your friends for 10:00 a.m. brunch on the Upper West Side.  You decide that you’d like to chase your blueberry pancakes with a refreshing mimosa, but the server stops you: “I’m sorry, but we don’t serve alcohol until noon.” This was the response for decades until now.

The Alcoholic Beverage Control Law, a law which dates back to the prohibition era, disallowed the sale of alcohol on Sundays until noon throughout the State of New York.¹  On Wednesday, September 7, 2016, Governor Andrew Cuomo signed legislation which sought to modernize the prohibition era law which originally established the rules and regulations regarding the sale of alcohol.²  As of September 7, 2016, restaurants in New York may serve alcohol as early as 10:00 a.m. on Sundays.  Additionally, twelve permits per year will be made available outside of New York City for restaurants to serve alcohol as early as 8:00 a.m.

The looser measures come as Governor Cuomo seeks to embrace New York’s burgeoning craft alcoholic beverage industry and stimulate business for bar and restaurant owners.  The legislation as originally proposed permitted alcohol to be served at 8:00 a.m. on Sundays, but 8:00 a.m. was opposed by some legislators who feared that an earlier time would invite unwelcomed morning noise and ruckus.  Thus, compromise was struck with drinks being poured starting at 10:00 a.m.  Cheers!

¹ N.Y. Alco. Bev. Cont. Law.

² NY LEGIS 297 (2016), 2016 Sess. Law News of N.Y. Ch. 297 (S. 8140).

 

The SEC’s recently-adopted changes to Form ADV and Rule 204-2 of the Investment Advisers Act of 1940, as amended (the so-called “books and records rule”), raise important considerations for many private fund advisers – particularly those that also advise separately managed accounts or that manage multiple funds through affiliated entities.

In particular, the amendments will: (1) call for the collection of more specific information about advisers’ separately managed accounts (“SMAs”), (2) permit so-called umbrella registration on a single Form ADV for affiliated advisers that participate in a single advisory business, and (3) impose several new disclosure and recordkeeping obligations on advisers.

The SMA-related amendments include the following additional disclosure items:

  • Approximate percentage of SMA regulatory assets under management (“RAUM”) that are invested in 12 broad asset categories;
  • For advisors with at least $500 million in RAUM attributable to SMAs, the amount of RAUM attributable to SMAs and the dollar amount of borrowings attributable to those assets; and
  • Certain information about custodians that account for 10 percent or more of the adviser’s aggregate RAUM attributable to SMAs.

The umbrella registration-related amendments essentially modernize Form ADV to accommodate this form of registration and streamline the registration process consistent with the SEC’s position in the recent American Bar Association, Business Law Section, SEC Staff Letter (Jan. 18, 2012).  Note that these amendments do not extend to exempt reporting advisers and that certain conditions must be met in order for registered advisers to utilize umbrella registration, including:

  • The filing adviser and each relying adviser must advise only private funds and separately managed accounts in which the clients are “qualified clients”;
  • The relying advisers must be subject to examination by the SEC; and
  • The filing adviser and the relying advisers must operate under a single code of ethics and a single set of written compliance policies, and the procedures must be administered by a single CCO.

Separately, the amendments to Form ADV will call for new disclosures about advisers’ social media accounts, offices, and outsourced chief compliance officers (an area of recent focus by the SEC), among other things.

In conjunction with the amendments to Form ADV, the SEC also revised the books and records rule to require that advisers retain materials that demonstrate the calculation of performance or rates of return in any communications distributed to any person, as well as to maintain originals of all written communications received or copies of all written communications sent that relate to the performance or rate of return of managed accounts or securities recommendations.  Note that emails constitute “written communications” for these purposes.

Although the amendments to Form ADV and the revisions to the books and records rule do not go into effect until October 1, 2017, private fund advisers should consider what steps they should be taking now in order to be in a position to comply with these new requirements before the time comes.

The final rules are available here.