Federal Securities Law Source

Tag Archives: Corporate Governance

The impact of efforts clauses in transactional documents

Most transactional documents include effort clauses as covenants to require a party to perform a certain act or acts to achieve a stated goal. These terms generally include the following:

  • Best efforts
  • Reasonable efforts
  • Commercially reasonable efforts

There are no universally accepted definitions or standards for interpreting these terms. As a result, their use can create ambiguity and uncertainty when a dispute arises, making it difficult to predict an outcome.

When a court evaluates whether a party has exerted the necessary effort standard, the court generally first examines the business contract for a definition of the efforts term. If the business contract contains such a definition, the court will apply that standard. If the business contract is silent, the court has discretion to interpret an efforts clause or term by considering the business contract’s facts and circumstances.

In the absence of a definition, a court will impose standards of:

  • Good faith, which requires honesty and fairness from the acting party
  • Reasonableness, which requires diligence from the acting party and is often a more demanding standard than good faith

Lessons from In re Trados: Conflicting Interests of Preferred and Common Stockholders

In our previous post about In re Trados, we provided some background on the facts, outcome and usefulness of the Trados case. In this installment, we will discuss the conflict of interest between the preferred stockholders and the common stockholders of Trados and the related analysis conducted by the Delaware Court of Chancery.

Divergence in Interests of Preferred and Common Stockholders

Due to the liquidation preference of preferred stock, preferred stockholders and common stockholders can have diverging interests in exit transactions. “Because of the preferred shareholders’ liquidation preferences, they sometimes gain less from increases in firm value than they lose from decreases in firm value. This effect may cause a board dominated by preferred shareholders to choose lower-risk, lower-value investment strategies over higher-risk, higher-value investment strategies.1…

Fiduciary Duties in M&A Exit Transactions: Lessons from In re Trados

On Aug. 16, 2013, the Delaware Court of Chancery issued an opinion1 finding that the directors of TRADOS Inc. (Trados) did not breach their fiduciary duties in deciding to sell Trados despite the common stockholders receiving no sale consideration; (ii) a majority of the directors approving the transaction having a conflict of interest; (iii) the court’s review under the entire fairness standard; and (iv) the directors’ failure to follow a fair process, because the common stockholders received a fair price (i.e. the value of the common stock immediately prior to the merger was zero and the common stockholders received zero in the merger).

Though In re Trados is not groundbreaking in the sense that it does not present any novel legal issues, it nonetheless serves as an important illustration of common conflict of interest and fiduciary duty issues that arise in a typical exit transaction fact pattern, particularly for venture capital or private equity backed companies. Through the next several weeks, we will discuss in more detail some of the important takeaways from In re Trados in a series of blog posts.…

Are You Sure You’re S-3 Eligible? A Reminder to Disclose the Board’s Decision Regarding Frequency of Say-on-Pay Vote on Form 8-K

Though most reporting companies conducted their first say-on-pay vote in 2011 and disclosed the shareholder voting results on Form 8-K, some companies overlooked the additional requirement to disclose the board of directors’ decision (in light of the shareholders’ advisory vote) regarding the frequency that the company will conduct say-on-pay votes. A company’s failure to file this Form 8-K regarding the board’s decision on the say-on-pay vote frequency could result in the company being an untimely filer and ineligible to use Form S-3. Fortunately, the SEC staff indicated in its 2012 “SEC Speaks” conference that it will likely grant waivers to companies if:

  1. they file an amended Form 8-K indicating the board’s decision on the say-on-pay vote frequency; and
  2. the board’s decision on say-on-pay vote frequency followed the shareholder’s recommendation.

However, anecdotal conversations with the SEC staff have indicated that:

  • waivers are not always granted;
  • the board’s decision on say-on-pay vote frequency must match the board’s recommendation in addition to matching the shareholder’s recommendation for a waiver to be granted; and
  • the SEC does not intend to grant waivers forever.
LexBlog