Category — Corporate

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

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.

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 from Akin Gump’s corporate practice. Download a PDF of the full document here.

For questions, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

As the credit crisis continues to roil the markets, companies and individual investors alike are fleeing to the relative safety of cash.  We say “relative” safety, because recent events have made clear that not all cash investments are alike.  Many investors who placed their cash in money market funds were stunned by the announcement on September 16 that the $62 billion Reserve Primary Fund had “broken the buck,” i.e., its net asset value per share had dipped below $1.00.  Keeping cash at a bank, on the other hand, also began to look risky, especially after the spectacular failures of Washington Mutual and IndyMac, the two largest bank failures in U.S. history.

In response to these events, the U.S. Treasury Department announced that it would temporarily guarantee funds held in money market funds.  In addition, the Emergency Economic Stabilization Act of 2008, which was signed into law on October 3, 2008, temporarily raises the amount of insurance provided by the Federal Deposit Insurance Corporation (FDIC) from $100,000 to $250,000 per insured depositor.  Also, on October 14, 2008, the FDIC announced a new temporary guarantee program that, among other things, guarantees interbank borrowings and provides unlimited coverage for non-interest bearing deposit transaction accounts.  In this alert, we answer some of the most frequently asked questions about money market funds and bank accounts, the Treasury’s guarantee program for money market funds, and the FDIC insurance and guarantee programs for bank accounts.

MONEY MARKET FUNDS AND BANK ACCOUNTS

What is a money market fund?

A money market fund is a mutual fund that invests in high-quality, short-term debt instruments, such as government securities, certificates of deposit, commercial paper and bank notes.  Although money market funds are not required by law to maintain a $1.00 net asset value, they are required by Securities and Exchange Commission (SEC) rules to be managed to maintain a stable net asset value.  Among other things, SEC rules regulate the credit quality, maturity and diversification of investments held by a money market fund.

• Credit quality. A money market fund may invest only in U.S. dollar denominated securities that the fund’s board of directors determines present “minimal credit risks.” In addition, at least 95 percent of the assets of a taxable money market fund must consist of securities that are rated in the highest short-term rating category by two nationally recognized rating agencies (or from one such agency if only one agency has rated the security) or securities determined by the fund’s board of directors to be of comparable quality. Up to five percent of a taxable money market fund’s investments may be in securities that are in the second-highest short-term rating category or of comparable quality.
• Maturity. Money market funds are generally permitted to invest only in securities that have a remaining maturity of 397 days or fewer and must maintain a weighted average portfolio maturity of 90 days or fewer.
• Diversification. Money market funds generally may invest not more than five percent of their assets in the securities of a single issuer.[1]

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In light of the recent flurry of SEC actions and related guidance, we offer the following summary of the SEC releases along with links to the full text of the documents.

See client alerts summarizing the recent SEC Emergency Orders here and here.

We are continually monitoring the SEC’s regulatory actions and its staff’s interpretations and will update this quick links table as necessary.

If you have questions regarding this alert, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

Order / Release No. and Description

1.  34-58774: Final “Naked” Short Selling Anti-Fraud Rule (October 14, 2008) — Final rule that continues the effect of Rule 10b-21 (the “Naked” Short Selling Anti-fraud Rule) indefinitely.  Rule 10b-21 will be added to the Exchange Act.

a. 34-57511: Proposed “Naked” Short Selling Anti-fraud Rule (as of Mar. 30, 2008)—Proposing release for the anti-fraud rule.

b. 34-58572: Naked Short Selling Order (Sept. 17, 2008) - Emergency order to curb “naked” short selling of securities. Extended until 11:59 p.m. E.D.T. on October 17, 2008 by Order No. 34-58711.

c. Loaned Securities Guidance: Staff Guidance Regarding Sale of Loaned But Recalled Securities (as of September. 29, 2008).  Guidance clarifying that a sale of a loaned security is not a short sale, so long as a bona fide recall is initiated within two business days after the trade date.

2.  34-58773: Interim Final Temporary “Close-Out” Rule (October 14, 2008) - Interim final temporary rule that continues the effect of Rule 204T (the “close out” rule) beyond the October 17, 2008 expiration of the extended Naked Short Selling Order.

a. Rule 204T FAQs: Staff Guidance Regarding the Naked Short Selling Order (as of Sept. 22, 2008) — Question and answer guidance regarding the adoption of Rule 204T (the “close-out” rule).

b. 34-58572: Naked Short Selling Order (Sept. 17, 2008) - Emergency order to curb “naked” short selling of securities. Extended until 11:59 p.m. E.D.T. on October 17, 2008 by Order No. 34-58711.

c. Loaned Securities Guidance: Staff Guidance Regarding Sale of Loaned But Recalled Securities (as of September. 29, 2008).  Guidance clarifying that a sale of a loaned security is not a short sale, so long as a bona fide recall is initiated within two business days after the trade date.

3.  34-58775: Final Rule Eliminating the Market Maker Exception (October 14, 2008) - Final rule that continues the elimination of the market maker exception from Rule 203 indefinitely.

a. 34-58572: Naked Short Selling Order (Sept. 17, 2008) - Emergency order to curb “naked” short selling of securities. Extended until 11:59 p.m. E.D.T. on October 17, 2008 by Order No. 34-58711.

b. Loaned Securities Guidance: Staff Guidance Regarding Sale of Loaned But Recalled Securities (as of September. 29, 2008).  Guidance clarifying that a sale of a loaned security is not a short sale, so long as a bona fide recall is initiated within two business days after the trade date.

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

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

Certain public companies may need to enhance their upcoming quarterly management’s discussion and analysis (MD&A) disclosure in light of recent Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) guidance regarding fair value accounting.

In March 2008, the SEC’s Division of Corporation Finance sent letters to certain public companies, in which it highlighted certain disclosure issues relating to fair value measurements.  In September 2008, the division sent a supplemental letter, reiterating the points set forth in the March letter and providing additional suggested disclosure items.  The letters generally invite public companies to evaluate whether or not they could provide, in their MD&A, clearer and more transparent disclosure relating to their fair value measurements. The March letters provide insight into the level of detail the SEC expects from companies that may be required to apply management judgments in using unobservable inputs to determine the fair value of assets and liabilities.  The September letters supplement the March letters and further invite public companies to disclose, among other things, the way in which credit risk is incorporated into the valuation of assets or liabilities; the impact of the lack of market liquidity on fair value determination of financial instruments; and the extent to which brokers or pricing services were used to assist in fair value determination.

• The March letter is available here.
• The September letter is available here.

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The Securities and Exchange Commission (SEC) recently issued a manual from its Division of Enforcement and a request for public comment on fair value accounting, both of which may clarify the Commission’s actions and decisions.

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

Enforcement

• Jim Benjamin, 212.872.8091, New York

Fair Value Accounting

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

The SEC Division of Enforcement published its first manual to codify its practices and procedures for investigations. While intended as an internal staff reference, the document will offer insight on how the Commission operates in enforcement matters and what it expects in its requests for information.

The full manual can be found here.

The SEC is also requesting public comment until November 13 on fair value (or “mark-to-market”) accounting, for its study mandated by the Emergency Economic Stabilization Act of 2008. The Commission also welcomes public comments on the issues, point-of-view, research and opinions it should consider in conducting the study.

More information on submitting public comments can be found here.

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After meeting to discuss the public comments received on FSP FAS 157 on Fair Value Accounting, the Financial Accounting Standards Board (FASB) issued staff guidance on the scope of the FSP. The FASB affirmed its decision that the FSP should be limited to financial assets and will be effective upon issuance for third quarter financial statements.

Statement 157 was amended to include an illustrative example of how to determine fair value when a market is not active.  The staff position may be found here.