A few days ago, the IRS issued Revenue Procedure 2013-32 to announce a new “no-rules” policy that impacts spin-offs and reorganization. Effective for ruling requests received after August 23rd, the IRS will no longer rule on whether a transaction qualifies for nonrecognition treatment under sections 332, 351, 355, 368 and 1036 of the Internal Revenue Code in an effort to conserve resources. Instead, the IRS will rule only on “significant issues” arising under these provisions. Learn more in the memos posted in our “Tax” Practice Area.
Monthly Archives: June 2013
In its latest string of recent impact decisions, the Delaware Court of Chancery significantly “advanced the ball” in an effort to redress the cost-inefficiencies, management and board distraction, and potentially inconsistent judicial results, of defending against (duplicative) multijurisdictional litigation arising from the same suite of facts and circumstances in a single challenged transaction. Chancellor Strine, in his judgment on the pleadings, upheld the facial validity of exclusive Delaware forum selection bylaws adopted by unilateral board action on a contractual (i.e., organic instruments) and statutory (i.e., DGCL) basis. He likened the authority of Delaware directors to adopt such bylaws to the authority of Delaware directors to unilaterally adopt a stockholder rights plan (or” poison pill”) as a reasonable response to a perceived threat to corporate policies and effectiveness. (The threat here being the consequences and potential damage to the corporation of the aforementioned redundant multi-forum litigation).
Typically, these exclusive forum bylaws (which have been adopted by several hundred corporations over the past few years) address actions brought by stockholders in their capacity as such in derivative litigation, breach of fiduciary duty litigation, actions brought under and involving interpretations of the DGCL, and litigation concerning Delaware’s “internal affairs doctrine”
Chancellor Strine’s validation of these bylaws as a proper exercise of the Board’s authority will neither preclude nor deter contextual litigation challenges alleging that the board breached its fiduciary duties of care and loyalty or that the board’s unilateral adoption, use or application of such bylaws in a given circumstance is fundamentally unreasonable, disloyal, unfair or inequitable.
Moreover, It is not entirely certain how, on appeal, the Delaware Supreme Court may rule. However, Chancellor Strine’s decision and analyses are likely drawn narrowly enough to be left unaltered on appeal. It is also possible that the Delaware legislature could pick up the gauntlet on this subject in the future (but not in time for the August 1, 2013 effective date of this year’s DGCL amendments).
To the extent that certain institutional investors believe that the unilateral adoption and use of exclusive forum bylaws are inappropriate, they can always avail themselves of the proxy machinery to seek to implement organic change (e.g. repeal or amendment of the bylaws or a precatory proposal to amend the certificate of incorporation) or board compositional change.
Despite the decision, ISS will continue to review exclusive forum bylaws on a case-by-case basis taking into account specific corporate governance features of the issuer in question (i.e., the absence of a classified board and poison pill, and majority voting in the election of directors) and whether the issuer suffered past material damage as a result of defending multijurisdictional litigation; whereas Glass-Lewis will continue to recommend against such provisions and recommend “withhold authority” against the Chairman of the Corporate Governance Committee or the Board Chairman in the case of bylaw amendments adopted by unilateral board action.
We have posted the transcript for our recent webcast: “Conflicts of Interest: How to Handle in Deals.”
Yesterday’s NY Times ran this article describing a novel process in the Dell going private transaction, in which shareholders have the ability to sell their shares even if they seek appraisal rights – as part of a trust arrangement established by Gary Lutin.
The IRS recently finalized regulations under Internal Revenue Code Section 336(e) that will permit taxpayers to elect to treat taxable spin-offs as asset sales for tax purposes with the result that the spun-off corporation will generally obtain a stepped-up basis in its assets. This election can be used proactively to reduce the net tax cost of a taxable spin-off by generating compensatory additional deductions offsetting the tax on the spin-off. It can also be used protectively to mitigate net tax cost in the event a hoped-for tax-free spin-off is determined to be taxable. These planning issues are discussed in our prior memo regarding the IRS’s 2008 proposed version of the regulations.
The final regulations address a quirk in the application of the proposed regulations to spin-offs that could have made the election impractical. Specifically, the new regulations permit losses to be recognized up to gains, while the proposed regulations disallowed recognition of losses altogether in the case of a spin-off. Thus, a spun-off corporation with more gains than losses in its assets can readily avail itself of the election, whereas under the proposed regulations, the inability to recognize losses to offset gains could have rendered the election unduly expensive.
Taxpayers should consider making the election protectively in any case of a spin-off that is intended to be tax-free. If the spin-off is in fact tax-free, the election has no effect.
Taxable sales, as distinguished from spin-offs, of corporate subsidiaries and taxable sales of S corporations are also potentially eligible for the new election. While taxable sales of corporate subsidiaries and S corporations have long been eligible for a similar election under Internal Revenue Code Section 338(h)(10), the new rules are, in some cases, simpler to satisfy, especially as they relate to partnership buyers or sellers. Thus, the new election may significantly simplify acquisitions by private equity funds.
Yesterday, as noted in this press release, the SEC settled charges with Revlon that it misled shareholders during a “going private transaction.” The company paid $850k. The SEC’s said that Revlon did not want to disclose the third-party financial adviser’s view on the adequacy of the transaction’s consideration. Here is an article and DealBook piece about the settlement…
Tune in today for the webcast – “Conflicts of Interest: How to Handle in Deals” – to hear Steven Haas of Hunton & Williams, Mike Reilly of Potter Anderson and Melissa Sawyer of Sullivan & Cromwell discuss how boards deal with conflicts of interests in the wake of El Paso, Del Monte and Southern Peru, including in relation to stapled financing.
Last week, as noted in this Bingham alert, the SEC’s Division of Trading & Markets has granted no-action relief – in Roland Berger Strategy Consultants (5/28/13) – to a non-US financial advisor if, after making contact with one or more potential US Targets, the non-US financial advisor engages in certain activities described in the no-action letter in situations where it interacts with either:
(1) a U.S. Target that is using internal or group level personnel with relevant M&A \experience (via in-person meetings or through other direct contacts) to negotiate a transaction, provided that non-US financial advisor personnel engaged in any contacts with U.S. Targets in the United States are limited to persons whom the non-US financial advisor would have determined satisfy the requirements for “foreign associated persons” in Rule 15a-6(a)(3)(ii)(B); or
(2) a U.S. Target that is using the services of an external advisor, such as a broker-dealer, attorney or other professional with relevant experience.
In furtherance of its request, the non-US financial advisor stated that (1) it would not receive, acquire or hold funds or securities in connection with any transaction it engages in with a U.S. Target in reliance on the requested no-action relief; (2) it would not represent or advise the U.S. Target in any regard with respect to the proposed transactions; and (3) the granting of the requested noaction relief would not relieve the non-US financial advisor of any obligations it has to comply with the antifraud provisions ofthe U.S. securities laws.
The activities described in the letter included:
– Identifying potential target buyers or sellers and making an initial contact with the targets to assess interest in a proposed transaction. Such contacts would include, for example, telephone calls, emails, and related mailings of general pitch materials regarding the proposed transaction.
– As part of its process of contacting potential target buyers or sellers in connection with M&A transactions, contacting one or more U.S.-based entities or non-U.S.-based entities that have U.S.-based parents involved in investment decisions of the non-U.S. entity (each such U.S.-based entity and each U.S.-based parent, a “U.S. Target”).
– If a potential buyer or seller becomes interested in a transaction with a Non-U.S. Client, the non-US financial advisor would develop and manage the data room and the information process, conduct negotiations on behalf of the Non-U.S. Client and advise the Non-U.S. Client on the terms of the transaction.
Importantly, the non-US financial advisor represented that any U.S. Target approached on behalf of its Non-U.S. Client would fall within the meaning of the term “Major U.S. Institutional Investor” as defined in Rule 15a-6(b)(4) under the Exchange Act.
We have posted the transcript for the webcast: “FCPA Issues in Deals Today.”