Delaware Chancery Court Suggests That Reverse Triangular Mergers May Trigger Anti-Assignment Provisions

In April the Delaware Chancery Court refused to grant plaintiff’s motion to dismiss in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), finding that, as a matter of law, a reverse triangular merger may trigger anti-assignment provisions. The decision casts doubt on the widely held belief amongst practitioners that a reverse triangular merger is not a form of assignment, and thus does not trigger anti-assignment provisions in contracts. The decision is likely to add uncertainty as to the implications of a reverse triangular mergers.

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Flexible Purpose Corporation: California’s New Corporate Form

Beginning January 1, 2012, California will be the first state in the country to authorize Flexible Purpose Corporations (FPC)— a new corporate form that will allow a corporation to integrate the for-profit philosophy of the traditional corporation with a special purpose mission that is similar to a charitable purpose.  As authorized through the Corporate Flexibility Act of 2011 (SB 201), California companies will have greater flexibility to combine profitability with a broader social or environmental purpose.  Entrepreneurs and investors will have the opportunity to organize a company to pursue both economic and social objectives, allowing investors to have multiple or blended objectives. (more…)

Three Is The Magic Number: District Court Preserves Tax-Prep Triumvirate, Permanently Enjoins H&R Block Merger

The Justice Department’s antitrust division has prevailed in its first trial opposing a merger since its defeat by Bay Area giant Oracle in 2004.  In an order issued on October 31, D.C. District Court Judge Beryl Howell granted the government’s motion to enjoin H&R Block’s $287.5 million acquisition of 2SS Holdings Inc., the maker of TaxAct, a popular do-it-yourself (“DIY”) software program.

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Op-Ed: Why Corporations Should Think Twice About Plans To Lower Taxes

At first blush, advocating for lower corporate taxes like Republican candidates Herman Cain and Rick Perry looks like the kind of policy that corporations would salivate over. As conservative pundits like to point out, the United States already has the second-highest statutory corporate tax rate of all developed countries and that it stands alone in its attempt to impose taxes on the global income of its own corporations. The complexities of our tax code also encourage American multinational companies to shift more of their business abroad. And as businesses move away, American jobs move with them. Lowering corporate taxes would keep those jobs here at home and invigorate our economy. Everyone would win, right?

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Seasoning Requirements: Regulating Chinese Companies And Reverse Mergers

On October 26th the SEC closed debate on a proposal to adopt “seasoning” requirements for companies listed on public exchanges, such as NASDAQ and NYSE. The proposed seasoning requirements aim to protect investors from a rash of accounting scandals perpetrated by companies that have avoided normal reporting and auditing requirements through the strategic use of reverse mergers. Many of the companies that have been engaging in reverse mergers and perpetrating these accounting scandals have been based in China, which have caused US investors to flee from Chinese equities.

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The Network Lecture Series: Carl E. Walter’s Do China’s Stock Markets Matter?

On November 1st, 2011, Carl E. Walter delivered a lecture titled “Do China’s Stock Markets Matter?” at the U.C. Berkeley School of Law. The lecture addressed the role and significance of stock markets in China, and described the influence of western legal, accounting and financial concepts on the Chinese economic landscape.

Mr. Walter was one of the first students to go to China when the border opened in 1979. He has spent a large part of his career working in the financial sector in China and is a co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise”. After living in China for 20 years, Mr. Walters recently returned to the U.S.

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FTC Revisits Online Privacy Rules For Businesses Targeting Children

Appealing to children can help to ensure lifetime brand loyalty, as well as provide a fairly direct means of accessing parents’ disposable income.  But the interactive environment of the internet creates incentives for businesses not only to transmit messages to children, but also to collect information from them.  To counteract the perceived threat to the privacy of children targeted by commercial sites, Congress enacted the Children’s Online Privacy Protection Act (COPPA) in 1998.  Now, the FTC is revisiting the Rule implementing the Act, accepting public comment on the proposed changes until November 28, 2011.

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Europe’s Debt Crisis – Reasons, Solutions, Perspectives

Parallel to the downgrade of America’s credit rating and its aftermath, there has been another predominant topic in the recent economic news: the European sovereign debt crisis. What appeared to be an internal Greek problem at first glance in early 2010 has now transformed into a serious European issue calling out for a diligent denouement. Considering that continental boundaries are not an obstacle to the spread of a financial crisis, the effects of Europe’s recent struggle on the U.S economy should be considered. (more…)

The Pursuit of Negligent Brokers: the SEC Lowers Its Burden For Bringing Civil Actions

SEC officials say they are going to start filing more civil suits against securities brokers based on claims of negligence only. This would be a significant deviation from their current practice of primarily suing firms for intentional fraud, which often carries steeper penalties, but also has a significantly higher burden of proof.

The SEC’s typical enforcement strategy is to file suits for intentional fraud against firms, rather than individual brokers. While the SEC often settles for claims of negligence, it rarely sues for negligence only.  For instance, during the week of September 25th, the SEC News Digest reported updates on 29 of its enforcement proceedings, only one of which was for a suit based primarily on negligence. In addition, most of the SEC’s lawsuits resulting from the financial crisis, including its suits against Goldman Sachs and Bank of America, have been for intentional fraud and have not included penalties for any individual broker or executive. Moreover, individual brokers or company executives who participate in the alleged misconduct are often not named in the lawsuits or avoid being named as part of the settlement.

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Update: 298 Page Volcker Rule Proposal Leaves Much To Be Desired (And Decided); Issue #1: Market Making

On October 12th the Federal Reserve, FDIC, Office of the Comptroller of the Currency, and SEC submitted the long-awaited proposal for implementation of Section 619 of the Dodd-Frank Act, widely referred to as the “Volcker Rule.” Legislators included this section in the Dodd-Frank Act in order to divide commercial banking and depository functions, which are federally insured, from banks’ investment activities (commonly referred to as “proprietary trading”). Given the fact that many large commercial banks, such as Bank of America and JP Morgan Chase, derive a significant portion of their revenue (8% and 9%, respectively) from their trading desk, the details of the rule could have enormous implications for the future financial strength and stability of depository institutions.

The proposal has several large exceptions to its prohibition on proprietary trading in order to allow banks to continue to provide important financial services to their customers. One of the largest exceptions is for market making. Market making can involve a number of activities, but at its core it consists of financial institutions accepting client requests to purchase (or sell) any given security without that financial institution immediately going out into the market and finding a seller (or buyer). In order to facilitate this process, financial institutions involved in market making may maintain a stock of various securities that they buy and sell to clients as needed to meet client demand. Under the new proposal, banks would be allowed to purchase and sell securities under the premise of market making so long as: a.) the bank “holds itself out” as being willing to buy and sell those securities to and/or from clients, b.) the purchases or sales do not exceed “reasonably expected near term demands” of clients, c.) the activities are primarily intended to generate income from fees, commissions, and bid-ask spreads (as opposed to appreciation or depreciation in the securities themselves), and d.) the compensation arrangements of employees engaged in market making is not designed to reward large returns that may result from the appreciation or depreciation of the securities themselves.

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