The Delaware Court of Chancery recently dismissed multiple counts alleging directors of Citigroup breached their fiduciary duties by failing to properly monitor the company’s exposure to the subprime mortgage crisis (In re Citigroup Inc. Shareholder Derivative Litigation, Civ. Action 3338-CC (Del. Ch. Feb. 24, 2009)). In dismissing the claims, Chancellor Chandler reaffirmed Delaware law relating to the business judgment rule and clarified the application of the rule in the context of directors’ duty of oversight of business risks.

Read the full alert here.

If you have questions regarding this alert, please contact—

• Gemma L. Descoteaux, 214.969.4783, Dallas
• Russell W. Parks Jr., 202.887.4092, Washington, D.C.
• C.N. Franklin Reddick III, 310.728.3204, Los Angeles
• Adam K. Weinstein, 212.872.8112, New York

What follows is an executive summary of a tax alert released today. Read the full alert here.

On October 3, 2008, new Section 457A was added to the Internal Revenue Code by the Emergency Economic Stabilization Act of 2008. As discussed in our client alert, “New Section 457A, Which Limits Deferral of Offshore Compensation, Is Signed into Law,” Section 457A imposes significant restrictions on the ability of U.S. taxpayers to defer compensation earned from certain tax indifferent parties, including managers of offshore hedge funds. Generally, under Section 457A, taxpayers are required to include in income compensation that is deferred under a “nonqualified deferred compensation plan” of an entity (including both domestic and foreign partnerships and foreign corporations) that is not subject to a general income tax regime (a “nonqualified entity”), provided that the compensation is not subject to a “substantial risk of forfeiture.”

On January 8, 2009, the IRS released Notice 2009-8, which provides interim guidance to assist taxpayers in complying with Section 457A while the Treasury Department and the IRS consider further guidance. The Notice states that any future guidance that would expand the coverage of Section 457A will be prospective.

If you have any questions regarding this alert, please contact—

• Patrick B. Fenn, pfenn@akingump.com, 212.872.1040, New York
• Stuart E. Leblang, sleblang@akingump.com, 212.872.1017, New York
• Bruce E. Simonetti, bsimonetti@akingump.com, 212.872.8023, New York
• Jessica Cherry, jcherry@akingump.com, 212.872.7437, New York
• Joshua R. Williams, jrwilliams@akingump.com, 212.872.8014, New York

The Securities and Exchange Commission (SEC) has taken steps to reassess and refine the application of “mark-to-market” rules, with plans to issue a complete study of fair value accounting practices on January 2, 2009. On December 8, SEC Chairman Christopher Cox shared some preliminary findings of the study, which indicated that fair value accounting measurements would likely be not suspended, despite significant criticism of the rules from many banks, financial regulators and economists.

Chairman Cox stated that, based on recent roundtables with market participants, investors benefited from transparent financial reporting of mark-to-market assets and that, to insure a healthy market, “the content provided to investors should not be compromised to meet other needs.” However, he recognized that fair value measurements of securities traded in inactive or illiquid markets pose a particular challenge to the financial institutions holding them, and that the SEC was investigating more robust guidelines for auditors and statement preparers to apply these rules.

Furthermore, on December 15, the Financial Accounting Standards Board announced that it is examining the possibility of broadly applying mark-to-market rules beyond securities to loans, bonds, derivatives and stocks to create more uniform accounting procedures.

The debate over mark-to-market has, on one side, critics who say this accounting approach ignores long-term values and creates write-down losses that deplete bank capital, while, on the other side, supporters say sufficient and clear information is necessary for investor confidence. In the nearly overnight collapse of insurance giant AIG, many critics faulted mark-to-market rules for quickly exaggerating the company’s unrealized losses and creating market volatility.  Rather than create balance sheets based on mark-to-market assets, financial institutions might value gains and losses over a multi-year period, a historical approach currently taken by pension funds and other conservative investment instruments.

If you have questions regarding the information in this post, please contact-

• Jim Benjamin, 212.872.8091, New York

The lawsuit volume related to the current market crisis has already surpassed the savings-and-loan cases of the early 1990s. An estimated 98 subprime and credit crisis related securities lawsuits were filed in 2008. We believe that securities litigation will continue to increase, as the successes of civil suits or government investigations and suits, coupled with subsequent public disclosure of financial services practices, spur further claims. With a stagnant economic climate, we believe that market participants will more actively seek to recoup their losses and regain profitability through litigation.

Similarly, the U.S. government could aggressively pursue securities litigation to recoup the taxpayer dollars put towards the Wall Street “bailout,” targeting companies whose investment practices or public statements may be seen as having contributed to the market crisis.

While shareholder suits against directors and officers made up the bulk of subprime litigation in the immediate wake of the collapse of Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch and AIG, a newer “wave” of credit crisis litigation may target companies outside the financial services sector. Investors have begun and may continue to sue companies that placed wrong-way bets on commodities futures or companies that have been undermined by their exposure to these failed financial institutions and to auction rate securities.

Several major lawsuits have already emerged against a diverse array of companies, including a chicken producer, a solar cell manufacturer, a wireless network and an energy holding group, all of which suffered significant losses after Lehman’s collapse; allegations include failure to disclose their heavy exposure to failed financial institutions, lack of diversification or high risk-taking practices, and issuance of materially false or misleading financial statements about their economic outlooks.

Plaintiffs, other than shareholders, may include securities issuers and underwriters, mortgage insurers, monoline insurers, credit default counter parties and collateralized debt obligations (CDO) service providers. Defendants to these cases may be CDO sponsors, mortgage lenders and brokers, asset managers, institutional trustees, credit default swap counterparties, insurers and rating agencies.

Rating agencies, such as Moody’s and Standard and Poor’s, could face a barrage of claims from both private financial entities and government regulators. Several securities class action cases by public retirement fund investors brought under the Securities Act of 1933 have included ratings agencies in their complaints, holding them liable for underwriting or appraising toxic mortgage-backed securities (MBS). Additionally, in a first-of-its-kind case, several community organizations in Los Angeles have brought a civil rights complaint against rating agencies for inflating ratings of mortgage bonds “designed to fail,” which, they claim, caused a disproportionate number of foreclosures in minority and low-income communities.

Investors in CDOs or MBS may bring claims against investment advisors for recommending unsuitable investments. Likewise, Employee Retirement Income Security Act (ERISA) claims against retirement fund managers who made allegedly risky investments with subprime exposure could create substantial litigation over fiduciary duties.

The financial crash has reminded many hedge funds of the importance of good legal counsel.  It’s a lesson some funds learned too late.   Camulos Capital LP, a Stamford, Connecticut-based hedge fund with approximately $2 billion in assets, was one of the lucky ones.  In late July, Camulos saw trouble looming…and reached out to Akin Gump Strauss Hauer & Feld partners Steve Vine and Eliot Raffkind for assistance.

Read the full article from the American Lawyer here.

What follows is the second part of an alert from Akin Gump’s corporate practice. See the first part here.

For more information regarding this alert, please contact—

• Mark Botti, 202.887.4202, Washington, DC
• Anthony Swisher, 202.887.4263, Washington, DC

Will the current distressed economic environment make securing antitrust approval for mergers or acquisitions easier than it otherwise might be?  We deal here with mergers between historically significant competitors that, under normal circumstances, might raise more than passing antitrust concern.  The short answer, as discussed below, is that antitrust principles will take into account the weakened financial condition of a merging party.  There is some precedent, in the form of the Depression-era Appalachian Coals[1] case, which supports the proposition that overall economic malaise might help a deal get through that would not otherwise pass muster.  A more predictable analysis, however, would focus on the condition of the individual firms involved in the merger or acquisition, as well as on the impact of the financial crisis on competition in the relevant market, not merely on the overall state of the economy.  The latter might perhaps make the enforcement agencies less skeptical in reviewing a claim that one of the companies is so distressed or the market so dysfunctional that a merger or acquisition cannot be anticompetitive.  However, the acknowledgment by the Federal Trade Commission or the Justice Department’s Antitrust Division that the country is in an overall economic crisis will not be a “get out of jail free” card for any particular merger.  Rather, economic distress will be taken into account (if at all) on an individualized basis under one of three related sets of principles:  (1) the failing firm defense, (2) the General Dynamics defense and (3) the flailing firm defense.

Failing Firm Defense. The financial distress of one party to a transaction most readily factors into the antitrust analysis under what is called the “failing firm” doctrine.  The Supreme Court’s decision in Citizen Publishing Co. v. United States, 394 U.S. 131, 136-38 (1969) provides a leading example of its application.  The court in Citizen held that a merger (through creation of a monopoly joint selling arrangement) between the only two daily newspapers in Tucson, Arizona would not be unlawful if one of the companies was “failing,” and satisfied the following criteria: (1) the company was in imminent danger of failure, (2) the failing company had no realistic prospect for a successful reorganization and (3) there was no viable alternative purchaser that posed a less anticompetitive risk.  The antitrust enforcement agencies have incorporated these considerations directly into their merger enforcement guidelines.  See U.S. Dept. of Justice and Federal Trade Commission, Horizontal Merger Guidelines ¶ 5-5.2 (1997 rev.).  The basic point of the failing firm analysis is that, if a company would exit the market but for its acquisition, stopping the acquisition will not protect any future competition.

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What follows is an alert from Akin Gump’s corporate practice. For information, please contact—

• Kerry Berchem, 212.872.1095, New York

The recent market downturn has forced some corporate insiders to involuntarily sell shares of their companies to satisfy margin calls or otherwise cover debts.  For example, the chairman and CEO of Chesapeake Energy was recently  forced to sell $569 million of Chesapeake securities to cover a margin call, while the co-founders of Boston Scientific were forced to sell $292 million of Boston Scientific securities that were pledged as collateral for a loan.   These forced sales have focused attention on whether or not companies should allow insiders to hold company securities in a margin account or to pledge company securities as collateral for a loan.  Recent forced sales have also highlighted the potential for insider trading and short swing profit liability resulting from such involuntary sales of company securities.  Each of these issues is discussed in more detail below.

Whether Pledging Company Securities Should be Allowed

Should a company allow its insiders to pledge company securities to secure a margin loan or to serve as collateral for another type of loan?  Some executives want this option because it allows them to borrow money to buy stock in the company.  Other executives may have significant holdings of company stock and want to use the shares as collateral for a loan.  On the one hand, the ability of an insider to use company securities to secure a margin loan may allow the insider to demonstrate his or her commitment to the company by buying company stock.  Most companies encourage their executives to buy stock in the company because such purchases by insiders can signal confidence in the company and possibly drive up the stock price.  On the other hand, particularly with the deflated stock prices in today’s market, these actions could subject the insider to insider trading or short swing profit liability if the insider is forced to make an involuntary sale.  Further, a major sale of company shares by an insider is likely to create a negative reaction by investors in the marketplace and drive down the company’s stock price.  Also, the board of directors could be placed in a difficult position if the insider asks the board for help to avoid a massive sell-off that could depress the company’s stock price.  Although companies are all over the map on whether or not to prohibit or allow insiders to pledge company stock, companies may want to revisit their corporate governance and insider trading policies in light of the current market situation in order to determine whether or not it is now prudent to prohibit their insiders from pledging company stock.

Insider Trading

An insider’s pledge of stock as security for a loan could subject the insider to insider trading liability.  For purposes of the antifraud provisions of the securities laws, the pledging of stock as collateral for a loan is equivalent to a “sale” of the stock to the pledgee.[1] Therefore, if the insider is in possession of material non-public information that is adverse to the company at the time the securities are pledged, the insider may be liable to the pledgee if the securities decline in value and the insider defaults on the loan.

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Tuesday, October 28:

Akin Gump Strauss Hauer & Feld LLP partners John M. Dowd and Andrew J. Rossman will be presenting a free webinar titled “Who’s Going to Court, Who’s Going to Jail?: Civil and Criminal Law Enforcement in the Wake of Financial Crisis.”  The program will address issues such as—

• assessing what laws, regulations and legal theories are available to federal and state law enforcement
• examining potential private litigation causes of action and the likely targets of such civil lawsuits
• evaluating the impact recent federal court rulings, such as Stoneridge, will have on civil litigation
• analyzing possible plaintiffs’ and defendants’ legal strategies in civil and criminal actions.

The live webinar takes place on Tuesday, from 10 a.m. to 11 a.m. EST.  To view the program, please go to the Washington Legal Foundation Web site at www.wlf.org.  The program will be recorded and available for later viewing on the Foundation’s Web site, as well.

Wednesday, October 29:

With credit tight, corporate managers are looking for other ways to grow their businesses.  Strategic partnerships fit the bill.  But corporate finance experts say such hook-ups—while often appealing—come with their own set of problems.

On Wednesday, October 29, Financial Week M&A reporter Tim Catts, along with Akin Gump Strauss Hauer & Feld LLP’s C.N. Franklin Reddick III and KPMG Corporate Finance LLC’s Cherie Smith Homa, will participate in a live Financial Week Webcast—”To Buy or Not to Buy? Why a Strategic Partnership May Be the Way to Go”-in which they will discuss the promise and perils of strategic partnering.

To register for this free webcast, visit the Financial Week Web site.

What follows is part one of a two-part post from Akin Gump’s antitrust practice.

For more information on this alert, please contact—

• Mark Botti, 202.887.4202, Washington, DC
• Anthony Swisher, 202.887.4263, Washington, DC

Introduction and Background

The recent worldwide financial turmoil and the still-uncertain aftermath of the Emergency Economic Stabilization Act of 2008 have sparked major  mergers and acquisitions (M&A) that need very rapid antitrust regulatory approval in order to calm distressed markets and salvage shareholder value.  More such M&A deals are surely coming.  Despite the normal 30-day waiting period under the Hart-Scott-Rodino (HSR) Act, deals can be done much more quickly under the right circumstances.

The HSR Act, Section 7A of the Clayton Act, 15 U.S.C. § 18a. is a “file and wait” statute.  Parties to proposed transactions meeting certain size thresholds must file notification with both the Federal Trade Commission (FTC) and the U.S. Department of Justice, Antitrust Division (DOJ).  They must also observe a mandatory waiting period prior to closing, generally 30 days, but  15 days in the case of a bankruptcy or cash tender offer.  If a transaction raises substantive antitrust issues requiring thorough investigation,, a so-called “Second Request” for information may be issued, typically causing the waiting period to be extended by many months.   Critically, however, the mandatory HSR waiting period can also be shortened through the discretionary grant of an “early termination.”   § 7A(b)(2).

Obtaining “early termination” for large transactions often requires a proactive approach.  Many significant transactions bog down early in the regulatory process as a result of an obscure first step in the agency review process known as “clearance.”  During the clearance stage, the FTC and DOJ decide between them which of the two is going to review the transaction.  Weeks, and in some unfortunate instances, months are sometimes lost during this clearance process, particularly when the agencies dispute which of them is going to review a transaction.  Parties can help the agencies cut through the clearance issues by engaging them actively even prior to making their filing.  Where necessary to move the matter forward rapidly, merging parties make presentations to both agencies rather than wait for clearance.  Most important, companies need to educate antitrust agency staff regarding key issues and communicate specific reasons underlying the need for expeditious review and approval.  Lastly, companies need to develop proactive pre- and post-filing strategies to quickly marshal information for staff, with the goal of securing prompt antitrust clearance.  A sure prescription for delay is simply to file the necessary documents and just sit back while the agencies do their work.

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What follows is an alert from Akin Gump’s investment funds practice.

If you have questions regarding this alert, please contact-

• Mark H. Barth, 212.872.1065, New York
• David M. Billings, 44.20.7012.9620, London
• Jan-Paul Bruynes, 212.872.7457, New York
• James A. Deeken, 214.969.4788, Dallas
• Patrick J. Dooley, 212.872.1080, New York
• Christopher M. Gorman-Evans, 44.20.7012.9656, London
• Barry Y. Greenberg, 214.969.2707, Dallas
• Ira P. Kustin, 212.872.1021, New York
• Arina Lekhel, 212.872.8018, New York
• Burke A. McDavid, 7.495.783.7835, Moscow
• Prakash H. Mehta, 202.887.4248, Washington, D.C.
• Lisa A. Peterson, 817.886.5070, Dallas
• Eliot D. Raffkind, 214.969.4667, Dallas
• Fadi G. Samman, 202.887.4317, Washington, D.C.
• William L. Sturman, 212.872.1035, New York
• Ann E. Tadajweski, 212.872.1087, New York
• Simon Thomas, 44.20.7012.9627, London
• Stephen M. Vine, 212.872.1030, New York

On October 14, 2008, and October 15, 2008, the Securities and Exchange Commission (SEC) adopted rules that continue the effectiveness of certain emergency orders issued by the SEC on September 17, 2008, and September 18, 2008.  The SEC’s new rules include (1) an interim final temporary rule that continues the requirement of persons filing Form 13Fs to report their short sales and short positions (the “Short Sale Reporting Rule”), (2) an interim final temporary rule to require the closing out of “failures to deliver” securities (the “Close-Out Rule”), (3) a final rule targeting deception of market participants about a seller’s intention or ability to deliver securities at settlement (the “Anti-Fraud Rule”) and (4) a final amendment to Rule 203 of Regulation SHO that eliminates the option market maker exemption from the requirement to close out failures to deliver in threshold securities.  The Short Sale Reporting Rule and the Close-Out Rule contain significant changes from the previously published emergency orders, which changes are described in more detail below.  The Anti-Fraud Rule and the elimination of the market maker exception are substantially similar to the previously published emergency orders.

The Short Sale Reporting Rule will be effective from October 18, 2008, to August 1, 2009.  The Close-Out Rule will be effective from October 17, 2008, until July 31, 2009.  The Anti-Fraud Rule and the elimination of the market maker exception will be effective on October 17, 2008, and extend indefinitely.

SHORT SALE REPORTING RULE

The Short Sale Reporting Rule, or Rule 10a-3T under the Securities Exchange Act of 1934, requires any person that files a Form 13F for the relevant calendar quarter, to file a Form SH on a weekly basis reporting any daily short sales and changes in short positions.  The SEC revised the Short Sale Reporting Rule included in the previous emergency orders and Form SH by, among other things, (1) changing the due date of Form SH, (2) eliminating certain reporting requirements from Form SH, (3) changing the de minimis exception, (4) eliminating the grandfather provision for short positions entered into prior to September 22, 2008, and (5) requiring the filing of Form SH in XML format.

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