June 2010
Authors: Irwin A. Kishner, Daniel A. Etna
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Supreme Court: NFL Teams' Licensing JV Engaged in Concerted Action
The U.S. Supreme Court unanimously held that NFL teams acting through a single licensing entity, National Football League Properties ("NFLP"), were still subject to antitrust scrutiny under Section 1 of the Sherman Act, which prohibits concerted, anticompetitive action.
A sportswear manufacturer brought an antitrust challenge against NFLP for granting Reebok an exclusive license to produce NFL member team-branded headwear. The sportswear manufacturer had formerly produced branded headwear for NFLP, but its license was not renewed because of the new Reebok exclusivity deal.
The NFL argued that they did not violate the Sherman Act because, in acting through NFLP, the NFL and its member teams were acting as a "single" entity, incapable of conspiracy or concerted action with any other party. The trial court agreed and the Seventh Circuit Court of Appeals affirmed. On appeal, the Supreme Court reversed the decision, holding that concerted action does not hinge simply on "whether the parties involved are legally distinct entities." Instead, there must be a "functional consideration" of how the parties have acted in substance rather than form. For there to be concerted action, there must be "separate economic actors pursuing separate economic interests…[i.e.] diversity of entrepreneurial interests" resulting in deprivation of actual or potential competition in the marketplace.
The Supreme Court noted that NFL member teams have many distinct interests, including intellectual property licensing activities. However, in remanding the case to the lower court and discussing whether the conduct at issue violated the Sherman Act, the Supreme Court acknowledged that factors related to the NFL's collective nature (e.g., shared interest in fostering a profitable league or cooperation in coordinating schedules) may lead the lower court to find that the exclusive license was not an unreasonable restraint of trade under the "rule of reason" (i.e., an analysis of whether combinations and contracts "unreasonably" restrain trade, resulting in liability under the Sherman Act).
Though the case involved a unique situation where the parties comprising the single joint venture entity were competitors in other respects, joint venturers should consider the court's decisionwhen structuring commercial transactions.
American Needle, Inc. v. Nat'l Football League, et al., No. 08-661 (U.S. Sup. Ct. May 24, 2010).
American Jobs and Closing Tax Loopholes Act Proposes to Tax Carried Interest at Ordinary Income Tax Rates
Congress is considering the American Jobs and Closing Tax Loopholes Act of 2010, which includes a provision to tax carried interest as ordinary income rather than capital gains. The House of Representatives passed legislation in December 2009 that would tax 75% of carried interest as ordinary income and 25% as capital gains. An amendment proposed in the Senate is more favorable to the investment management industry—proposing to tax 65% of carried interest as ordinary income and 35% of carried interest as capital gains. The Senate amendment also provides that for assets held longer than seven years prior to sale, the percentage of carried interest subject to ordinary income tax would be reduced to 55% and the remaining 45% would be taxed as capital gains. If enacted, the new provisions would apply to tax years ending after the effective date of the Act.
Delaware Chancery Court Rules on Standards Governing Controlling Stockholder Tender Offers
Courts usually defer to a corporation's management when making business decisions—a deference known as "the business judgment rule." But in certain kinds of transactions, courts hold management to a higher standard, known as "the entire fairness standard." Which applies in a unilateral tender offer followed by a short-form merger (a two-step freeze-out)? The Delaware Chancery Court recently ruled that the entire fairness standard applies, unless: the tender offer (the first step in a minority squeeze-out transaction) is both (1) recommended by a special committee of independent directors with the authority to negotiate with the controlling stockholder, and (2) approved by a majority of the unaffiliated stockholders. In determining whether a special committee has authority to negotiate with the controlling stockholder, the court considered whether the special committee was empowered to (i) explore alternatives to the offer, (ii) litigate against the controlling stockholder and (iii) implement a rights plan.
In re CNX Gas Corp. Shareholders Litig., C.A. No. 5377-VCL (Del. Ch. May 25, 2010).
New FINRA Guidance on Regulation D Private Placements
FINRA has issued guidance outlining FINRA-registered broker-dealers' responsibilities in private placements of securities under Regulation D of the Securities Act of 1933. These guidelines are a result of FINRA's recent enforcement actions and investigations exposing compliance breakdowns in registered broker-dealers' private placement activities.
Regulation D provides a safe harbor for issuers from the registration requirements under the Securities Act of 1933 and sets forth specific requirements for qualifying offerings, including investor qualifications and offering size. FINRA-registered broker-dealers that recommend securities offered under Regulation D must meet suitability requirements and advertising and supervisory rules that FINRA and the SEC set forth.
The new guidance reminds broker-dealers of their obligation to conduct a reasonable investigation of any security they are recommending, as well as a reasonable investigation of the issuer and its claims regarding the security. This duty emanates from a broker-dealer's special relationship to its customers, and that by recommending a security, a broker-dealer is leading its customers to believe that it has conducted reasonably thorough due diligence on the offering.
In satisfying its due diligence obligations, a broker-dealer should consider certain factors, including the nature of its recommendation to customers, its knowledge of and relationship to the issuer, and its role in the transaction. FINRA's new guidance outlines a number of specific issues relating to a broker-dealer's responsibilities in Regulation D offerings, including a broker-dealer's duty to follow-up on "red flags" uncovered through its due diligence and its obligation to ensure that any affiliation between it and an issuer does not compromise its independence. The new guidance also sets forth an overview of reasonable investigation practices, including with respect to a broker-dealer's review of an issuer's management, business prospects and assets.
FINRA Regulatory Notice 10-22.
Guidance for Public Companies Regarding Forward-Looking Statements Safe Harbor
The Private Securities Litigation Reform Act ("PSLRA") enacted in 1995 provides a safe harbor from Rule 10b-5 fraud claims for forward-looking statements accompanied by meaningful cautionary statements. The Second Circuit has now provided guidance on what "meaningful" means.
A public company filed a quarterly report that disclosed losses from its high-yield debt investments but stated that the company expected losses from those investments to be substantially lower for the remainder of the year. Several pages after this statement, the report warned that it "contain[ed] forward-looking statements, which are subject to risks and uncertainties" and that "[f]actors that could cause actual results to differ materially from these forward-looking statements include . . . potential deterioration in the high-yield sector, which could result in further losses." An investor brought suit against the company, alleging that the statement was materially misleading and that the company was aware its losses would likely be higher, not lower, for the rest of the year.
The Court found that the cautionary statement was not "meaningful." To be meaningful, the cautionary statement "must be substantive and tailored to the specific projections, estimates or opinions" expressed, instead of "vague and general" statements that do not "disclose specific risk and their magnitude." The public company had not tailored the language to the specific projections and the language was the same that appeared in earlier filed reports (i.e., the language remained the same while circumstances and problems changed).
Slayton v. Amer. Express Co. et al., No. 08-5442-cv (2nd Cir. 2010).
Delaware Supreme Court Upholds Merger Settlement
The Delaware Supreme Court has upheld the settlement among Countrywide Financial Corp. stockholders, Countrywide directors and Bank of America relating to Countrywide's merger with Bank of America.
Certain Countrywide stockholders argued that the court should have protected the value of their derivative claims by placing a portion of the merger consideration in a constructive trust. The lower court denied this objection since Delaware's corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting.
Arkansas Teacher Retirement System, et al. v. Caiafa, No. 530, 2009 (Del. S. Ct. May 21, 2010).
New York Court Applies Out-of-Pocket Rule as Measure of Damages
The Appellate Division of the New York Supreme Court upheld the dismissal of a foundation's fraudulent inducement claim that it was induced to set an excessively high "floor price" for the sale of its stock based on the issuer's misrepresentations regarding the level of risk associated with its credit default swap ("CDS") portfolio. The foundation further alleged that but for these misrepresentations it would have set a lower floor price for the stock, allowing it to divest all of its stock within two weeks.
The foundation sought to recover the difference between the hypothetical value it would have realized by selling its 15.5 million shares in the fall of 2007 had the issuer accurately disclosed the risk of its CDS portfolio, and the stock's value after the alleged fraud ceased in early 2008. In affirming the dismissal, the court cited New York's longstanding out-of-pocket rule under which "the loss of an alternative contractual bargain…cannot serve as a basis for fraud or misrepresentation" because that loss is "undeterminable and speculative." Rather, "[t]he true measure of damages [for fraud] is indemnity for the actual pecuniary loss sustained as the direct result of the wrong." These damages are intended to compensate plaintiffs for what they lost due to the fraud, not for what they might have gained.
Starr Foundation v. Amer. Int'l Group, Inc., No. 601380/08 (N.Y. App. Div. 1st Dep't May 27, 2010).
For more information please contact Irwin A. Kishner at (212) 592-1435 or ikishner@herrick.com or Daniel A. Etna at (212) 592-1557 or detna@herrick.com.
Copyright © 2010 Herrick, Feinstein LLP. Corporate Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.
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