Delaware Court of Chancery Issues Post-Trial Decision in Trados

By David J. Berger, Steven Guggenheim, Elizabeth Saunders, and Herb Fockler | Posted on

[Editor’s Note: The following update is authored by Wilson Sonsini Goodrich & Rosati]

On August 16, 2013, the Delaware Court of Chancery issued a much-anticipated post-trial decision in In Re Trados Incorporated Shareholder Litigation, holding that the sale of Trados to SDL was entirely fair to the Trados common stockholders and that the Trados directors had not breached their fiduciary duties in approving the transaction.1 The case involved a common fact pattern: the sale of a venture-backed company where (1) the holders of preferred stock, with designees on the board, receive all of the proceeds but less than their full liquidation preference, (2) the common stockholders receive nothing, and (3) members of management receive payments under a management incentive plan.

Background

In 2005, the board of directors of Trados, a translation software company, approved the sale of Trados to SDL plc through a merger. In the four years leading up to the transaction, Trados had received multiple rounds of venture capital financing and issued several series of preferred stock. Shortly before the sale, Trados was sharply in need of capital, due to significant downturns in its business. Its venture capital investors were unwilling to inject more cash into the business, so Trados obtained an infusion of venture debt, adopted a management incentive plan (MIP) so that it could recruit and retain new management, and hired a new management team, including a new CEO and CFO. Trados also hired an investment banker to explore strategic alternatives and shopped the company to several possible buyers. Trados’ new management was able, at least in the short term, to “clean up” the business, beating budget estimates and increasing revenue, while also exploring strategic alternatives for the longer term. Trados was ultimately able to negotiate a sale to SDL on terms deemed favorable by the Trados board. In the sale to SDL, Trados received $60 million. The first 13 percent of the merger consideration, or $7.8 million, went to management under the MIP. The remaining $52.2 million was distributed to holders of the company’s preferred stock—less than their total liquidation preference of $57.9 million, although some of the preferred stockholders received some gain on their initial capital investment. The holders of common stock received nothing.

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Funding Portals Required to Register with the SEC

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

The SEC is beginning to consider future, customized regulation of funding portals pursuant to the JOBS Act.  Some commentators suggest that work on regulating funding portals “may illuminate potential ‘customized’ registration regimes for other firms and individuals that function in a limited broker-dealer capacity,” for example finders.  As a result, funding portals are required to register with the SEC and the FIRA, but will be subject to a simplified registration regime.  (more…)

D.C. Circuit’s Rail Freight Decision Reflects Greater Scrutiny of Antitrust Class Certification in the Wake of Supreme Court’s Comcast Ruling

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following update is authored by Arnold & Porter LLP]

Earlier this month, the influential U.S. Court of Appeals for the D.C. Circuit issued an important decision on the standards for certifying antitrust class actions. Taking its cue from the Supreme Court’s decision this past March in Comcast Corp. v. Behrend, the D.C. Circuit vacated a lower court decision certifying a class of shippers in an antitrust case against railroads alleging collusion on fuel surcharges. The ruling in In re: Rail Freight Fuel Surcharge Antitrust Litigation is significant as the first known decision to apply Comcast to reject a proposed antitrust class. Companies facing overreaching class action suits may be able to take comfort that, after a few lower court decisions sidestepping Comcast, the principles set forth in that decision are now catching on in the lower courts. (more…)

New Guidance on Advisers Act Custody Rule Treatment of Certain Private Certificated Securities

By Goodwin Procter LLP | Posted on

[Editor’s Note: The following post is authored by Goodwin Procter LLP]

The staff of the SEC’s Division of Investment Management provided guidance allowing certain certificated privately offered securities held by private funds to be treated in the same manner as uncertificated privately offered securities they hold.  The guidance describes conditions under which an adviser would not have to maintain with a qualified custodian an instrument evidencing ownership of a privately placed security (a “private stock certificate”) held by a pooled investment vehicle (a “pool”) in order to comply with Rule 206(4)-2 under the Investment Advisers Act of 1940 (generally referred to as the “custody rule”).  As a general matter under the custody rule, an adviser that has custody (as defined by the rule) of a pool’s funds and securities must maintain them with a qualified custodian.  However, if the pool meets the conditions described in paragraph (b)(4) of the rule regarding the distribution of its audited annual financial statements, the rule already provides an exception to the qualified custodian requirement with respect to certain uncertificated privately offered securities (“Exempt Privately Offered Securities”).  The custody rule provides that to be an Exempt Privately Offered Security, the security must: (more…)

The Conflict of Interest Inherent in A Corporation Paying for Its Employee’s Counsel: A Better Model for Preventing and Addressing Corporate Crime

By Josephine Sandler Nelson, Esq., B.A. Yale University, J.D. Harvard Law School, Former Supreme Court Co-Chair of the Harvard Law Review, Co-author of the forthcoming article in the Berkeley Business Law Journal, “Protecting Employee Rights and Prosecuting Corporate Crime: A Proposal for Criminal Cumis Counsel.” | Posted on

[Editor’s note: This post is part of our ongoing series from authors in the forthcoming edition of the Berkeley Business Law Journal.]

Although the U.S. Supreme Court as far back as the 1981 case of Wood v. Georgia[1] identified the inherent conflict of interest that exists when an employer controls its employee’s counsel, until now, no uniform solution has existed to protect the employee’s rights in these situations.

Currently, a single attorney, as in Wood, may often represent both the corporation[2] and the corporation’s employees.  The employer can control the employee’s defense because agency law recognizes only that the interests of the principal—the employer—are at stake.[3]  Under agency law, the employer controls the defense because it may ultimately be liable for payments to a third party on the employee’s behalf.[4]

But a corporation’s control over its employee’s defense creates conflict of interest problems for the attorney representing both entities.  Under Rule 1.7 of the ABA’s Model Rules of Professional Conduct, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” [5] This Rule, however, is too often and too easily waived with a corporation and its employee in the perceived interest of economies of scale and ease of representation.  And, until now, there has been no good test for exactly when the attorney’s conflict of interest between the corporation and the employee comes to a head.

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U.S. Sanctions and Export Controls Update: Amended Regulations Expand Opportunities for Companies to Export and Reexport to Syria and Iran

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following update is authored by Kirkland & Ellis LLP]

At the end of July, U.S. administering authorities for economic sanctions and export control regulations took actions to expand the potential for U.S. and other companies to export and reexport certain items to Syria and Iran. Such actions are particularly notable in the current political environment in which U.S. authorities have continuously expanded sanctions and other restrictions with regard to exports and other transactions related to these two countries. U.S. authorities, however, have described the recent liberalization as consistent with U.S. national security and other policy aims. These actions are intended to allow the provision of important assistance to the ordinary people of these countries who have suffered under the current governmental regimes, which are primary targets of U.S. punitive international trade measures. U.S. and other companies in numerous sectors have the potential to benefit from these latest actions. (more…)

SEC Adopts Amendments to Broker-Dealer Financial Responsibility, Reporting and Audit Requirements

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following update is authored by Davis Polk & Wardwell LLP]

The SEC recently adopted amendments to its financial responsibility, reporting and audit rules applicable to registered broker-dealers.  While some of the amendments will affect all firms, the amendments are particularly significant for those that carry customer accounts or act as clearing brokers.

The amendments to the broker-dealer financial responsibility rules (the “Financial Responsibility Rules Amendments”) were originally proposed in March 2007, prior to the financial crisis. The amendments address a number of technical issues, including protections associated with “sweep programs” for customer free credit balances, proprietary accounts of broker-dealers that are held at other broker- dealers and limitations on banks eligible to hold special reserve accounts.

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CFTC Compliance Obligation Harmonization

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Yesterday the CFTC adopted final regulations harmonizing the compliance obligations of registered investment companies (RICs) that are also required to register as commodity pool operators (CPOs).  Harmonization of the CFTC’s regulatory regime with that of the SEC is “grounded in the concept of substituted compliance” in that “CPOS or RICs that maintain compliance under the SEC regime would be deemed to fulfill their obligations” under CFTC regulations.  Harmonization eliminates discrepant reporting instructions and reduces unnecessary costs for investors.  (more…)

New Government Cybersecurity Standards Could Impact Many Companies

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following update is authored by Arnold & Porter LLP]

The National Institute of Standards and Technology (NIST) is not a household name, particularly outside the I-495 Beltway surrounding Washington, D.C., but companies across the country may soon be impacted by NIST’s growing role in cybersecurity. President Obama has charged NIST, an agency in the Department of Commerce, with developing a new Cybersecurity Framework for private sector owners and operators of critical infrastructure and new Senate legislation would cement NIST’s cybersecurity role. On August 6, 2013, the White House released a list of potential incentives the government may offer to encourage companies to adopt NIST’s Cybersecurity Framework, including liability protections, cybersecurity insurance, and cybersecurity conditions in government grants. (more…)

European Regulatory Snapshot: Remuneration in the Financial Services Industry

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following update is authored by Davis Polk & Wardwell LLP]

Introduction

The move toward stricter regulation of remuneration in the financial services industry in the European Union has resulted in a confusing web of overlapping European Directives and local EU Member State law and regulation, each of which seeks to place limits on remuneration. This client memorandum aims to assist in navigating the new European labyrinth by providing a snapshot of the three main European Directives that regulate remuneration:

  • Capital Requirements Directive IV (CRD IV)
  • Alternative Investment Fund Managers Directive (AIFMD); and
  • Fifth Undertakings for Collective investment in Transferable Securities Directive (UCITS V).

In addition, this memorandum discusses the European Securities Market Authority’s (ESMA) recent Markets in Financial Instruments Directive (MiFID) Guidelines on remuneration policies and practices. The memorandum then considers the additional requirements on remuneration that the UK is planning to impose in relation to the financial services industry. (more…)