Entire Fairness or Business Judgment? It’s Anyone’s Guess
January 09, 2015 —
Maurice Pesso, Greg M. Steinberg and Christopher J. Orrico – White and Williams LLPIn lawsuits challenging the validity of business transactions and combinations, the most significant issue is often which standard of review the court applies: the defense-friendly “Business Judgment Rule” or the more stringent “Entire Fairness Standard.” The standard utilized by the court – or more often times the standard which the parties think the court will apply – can drive decisions on motion practice, settlement discussions, and resolution strategy. Under the Business Judgment Rule, directors are presumed to have acted in good faith and their decisions will only be questioned when they are shown to have engaged in self-dealing or fraud. However, if a “Controlling Shareholder” stands on both sides of the transaction, the court will often scrutinize the transaction under the more plaintiff-friendly “Entire Fairness Standard.”
So, what constitutes a “Controlling Shareholder?” If the party in question owns more than 50% of a company’s equity, the answer is clear-cut. However, for cases involving stockholders who own less than 50% of a company’s equity and stand on both sides of the disputed transaction, the answer is not so simple. This uncertainty was highlighted in back-to-back decisions by the Delaware Chancery Court in November 2014. On November 25, 2014, the court granted the defendants’ motion to dismiss a derivative lawsuit alleging breach of fiduciary duty in In Re Sanchez Energy Derivative Litigation (“Sanchez”). Vice Chancellor Glasscock held that the complaint failed to plead facts sufficient to raise an inference that two directors with a collective 21.5% equity interest in the company were Controlling Shareholders. The very next day, in In Re Zhongpin Inc. Stockholders Litigation (“Zhongpin”), the Delaware Chancery Court denied the defendants’ motion to dismiss breach of fiduciary duty claims against an alleged “Controlling Shareholder” and members of the company’s board. In Zhongpin, Vice Chancellor Noble held that sufficient facts were plead to raise an inference that a CEO with a 17.5% equity was a “Controlling Shareholder.”
Reprinted courtesy of White and Williams LLP attorneys
Maurice Pesso,
Greg M. Steinberg and
Christopher J. Orrico
Mr. Pesso may be contacted at pessom@whiteandwilliams.com
Mr. Steinberg may be contacted at steinbergg@whiteandwilliams.com
Mr. Orrico may be contacted at orricoc@whiteandwilliams.com
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Mitigation, Restructuring and Bankruptcy: Small Business Tools in the Era of COVID-19
June 08, 2020 —
Hannah Kreuser - Porter Law GroupThe impact of the COVID-19 pandemic has been sudden and severe. Worldwide, populations are dealing with a public health crisis, which has abruptly impacted the economy. As cases continue to increase across the United States, both the federal government and state governments, including California, are directing people to “shelter in place” and “socially distance” from each other in an attempt to curb the spread of the virus. These orders have generally shut down daily life except for “essential” businesses. As a direct result, the economy has come to an abrupt halt and many businesses have been forced to close or significantly reduce their operations.
Concern for this economic impact is, in part, due to the speed and severity with which it has affected so many industries. With the current economic conditions, there is much speculation that bankruptcy filings, among not only individuals, but small businesses, will see a sudden increase in the coming months. Experts agree that filings will increase, the only question is when.
Because of COVID-19’s economic impact, it is important that businesses make an assessment now, regarding their needs, assets, and liabilities, so they can best prepare to survive COVID-19, or to take proactive steps in preparing to enter bankruptcy or wind down. In making this assessment, one of the questions to ask is whether the business can survive with quick financing, to help bridge the gap between the current operating conditions and their return to normal.
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Hannah Kreuser, Porter Law GroupMs. Kreuser may be contacted at
hkreuser@porterlaw.com
Building Resiliency: Withstanding Wildfires and Other Natural Disasters
September 25, 2023 —
Bill Creedon - Construction ExecutiveAccording to the National Fire Protection Association, between 2016 and 2020 an estimated average of 4,300 fires per year plagued structures under construction, adding up to about $376 million in annual property damage. More recently, the National Centers for Environmental Information reported that wildfires accounted for more than $3.2 billion in damages across the United States. These figures alone point to the heightened awareness that all companies—particularly construction companies—should maintain surrounding the unique challenges and risks that wildfires can present and how they could potentially impact the integrity of projects and the associated safety of their workers.
As North America grapples with the increasing frequency and severity of wildfires, hurricanes and additional severe weather events, numerous industries have had to adapt and implement proactive measures to minimize their risks and associated exposures. The impact of these natural disasters on the construction industry is indisputable, necessitating proactive measures that construction companies should seriously consider adopting to effectively mitigate those risks, efficiently navigate insurance complexities and seamlessly integrate data-driven solutions alongside modern tools like AI and predictive modeling.
Reprinted courtesy of
Bill Creedon, Construction Executive, a publication of Associated Builders and Contractors. All rights reserved.
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Mr. Creedon may be contacted at
bill.creedon@wtwco.com
Emergency Paid Sick Leave and FMLA Leave Updates in Response to COVID-19
April 06, 2020 —
Yvette Davis & Kyle R. DiNicola - Haight Brown & BonesteelThe Families First Coronavirus Response Act (“FFCRA”) was signed by the President on March 18, 2020 and will become effective no later than April 2, 2020. The law contains numerous updates to the country’s employment regulations in response to the Coronavirus pandemic of which employers should be familiar.
Of particular note, the FFCRA makes limited amendments to the Family and Medical Leave Act. Now, pursuant to the Emergency Family and Medical Leave Expansion Act (“EFMLEA”) employees may take up to 12 weeks of family and medical leave after having worked with the employer for 30 calendar days if the employee is unable to work (or telework) due to the employee’s need to care for a son or daughter under 18 years of age due to the child’s school closure or unavailability of a childcare provider due to a public health emergency, i.e., COVID-19. Unlike the FMLA, which does not apply to many small employers, this requirement applies to any employers with 500 or fewer employees. No mileage radius requirement exists under the EFMLEA.
When an employee utilizes leave pursuant to EFMLEA, the first 10 days of that leave may consist of unpaid leave, but the employee may elect to substitute any accrued paid vacation leave, personal leave, or medical or sick leave, including the Emergency Paid Sick Leave provided for by the Act and described below). All subsequent days of leave taken by the employee after the tenth day must be paid by the employer at a rate of not less than two thirds of the employee’s regular rate of pay and the number of hours the employee would otherwise normally be scheduled to work. The cap is $200 per day or $10,000 in the aggregate.
Reprinted courtesy of
Yvette Davis, Haight Brown & Bonesteel and
Kyle R. DiNicola, Haight Brown & Bonesteel
Ms. Davis may be contacted at ydavis@hbblaw.com
Mr. DiNicola may be contacted at kdinicola@hbblaw.com
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Balestreri Potocki & Holmes Attorneys Named 2020 Super Lawyers and Rising Star
July 06, 2020 —
Balestreri Potocki & HolmesThe law firm of Balestreri Potocki & Holmes is pleased to announce that Shareholders
Thomas A. Balestreri, Jr. and
Joseph P. Potocki have been selected as 2020 Super Lawyers and Associate
Robin H. Smith has been named a 2020 Rising Star.
Each year no more than 5 percent of the lawyers in the state are selected to receive the honor of being included in the Super Lawyers list and no more than 2.5 percent of the lawyers are selected to the Rising Stars list.
Balestreri has been selected to the Super Lawyers list in the areas of Construction Litigation. Balestreri has dedicated most of his 30 plus years in practice to the representation of developers, property owners, and general contractors in litigation, negotiations, and risk management. A seasoned trial lawyer, he has tried a number of high exposure cases with great success.
Selected as a Super Lawyer in the area of Construction Litigation, Potocki’s practice concentrates on litigation, transactional matters and construction contract drafting and negotiation. His extensive litigation experience involves high-value disputes relating to a wide variety of issues in the real estate, business and construction arenas.
Smith has been named a Rising Star by Super Lawyers in the area of Civil Litigation. In her varied litigation practice, Smith represents individuals and business entities in complex catastrophic personal injury matters. She also represents employers in labor and employment matters and a variety of businesses, including automobile dealers, in breach of contract, unfair competition, unfair business practices, defamation, and consumer claims.
Super Lawyers, a Thompson Reuters business, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys.
Balestreri Potocki & Holmes is headquartered in San Diego, California. The firm provides comprehensive counsel to large and small companies across a wide range of established and emerging industries. Balestreri Potocki & Holmes is located in downtown San Diego at 401 B Street, Suite 1470. More information about the firm can be found at: www.bph-law.com.
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Balestreri Potocki & Holmes
Killer Subcontract Provisions
January 20, 2020 —
Patrick McNamara - Porter Law GroupWe are frequently requested by subcontractor clients to review the subcontract that has been prepared by the prime contractor, before our client signs it. While no two agreements are identical, there are a number of problematic contract provisions that appear in many agreements. Here is a list of ten such provisions (and their variations) that are potential “deal breakers”:
- PAY IF/WHEN PAID (e.g. “Contractor shall have the right to exhaust all legal remedies, including appeals, prior to having an obligation to pay Subcontractor.”) “Pay-if-paid” provisions (“Receipt of payment from Owner shall be a condition precedent to Contractor’s duty to pay Subcontractor”) are illegal in California. However, the only legal limit on “Pay-When-Paid” provisions is that payment must be made “within a reasonable time.” The example above, as written, essentially affords the prime contractor a period of several years following completion of the project before that contractor has an independent duty to pay its subcontractors – not a “reasonable” amount of time, to those waiting to be paid. A compromise is to provide a time limit, such as 6 months or one year following substantial completion of the project.
- CROSS-PROJECT SET-OFF (e.g. “In the event of disputes or default by Subcontractor, Contractor shall have the right to withhold sums due Subcontractor on this Project and on any other project on which Subcontractor is performing work for Contractor.”) Such provisions are problematic and likely unenforceable, as they potentially bar subcontractors’ lien rights. Such provisions should be deleted.
- CONTRACTOR/SUBCONTRACTOR RESPONSIBILITY FOR DESIGN QUALITY (e.g. “Subcontractor warrants that the Work shall comply with all applicable laws, codes, statutes, standards, and ordinances.”) Unless a subcontractor’s scope of work expressly includes design work, this provision should either be deleted or modified, with the addition of the following phrase: “Subcontractor shall not be responsible for conformance of the design of its work to applicable laws, codes, statutes, standards, and ordinances.”
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Patrick McNamara, Porter Law GroupMr. McNamara may be contacted at
pmcnamara@porterlaw.com
Airbnb Declares End to Party!
January 27, 2020 —
Patrick J. Paul - Snell & Wilmer Real Estate Litigation BlogAs municipalities around the country evaluate changes to their respective codes in an effort to exert greater control over bad actors in the vacation rental market, Airbnb announced on November 2nd that it is banning party houses. The move comes in response to the shooting deaths of five people at a Halloween party hosted at an Airbnb rental house in Orinda, CA. CEO Brian Chesky announced on Twitter that starting November 2, Airbnb would ban “party houses” and redouble the company’s efforts to “combat unauthorized parties and get rid of abusive host and guest conduct.” twitter.com/bchesky
The four-bedroom rental reportedly had been rented on Airbnb by a woman who advised the owner her family members had asthma and needed to escape smoke from a wildfire burning in Sonoma County about 60 miles north of Orinda earlier in the week. Nevertheless, the homeowner was suspicious of a one-night rental on Halloween and reminded the renter that no parties were allowed. Having received complaints from neighbors and witnessing some party activity via his camera doorbell, the homeowner called police who were en route to the home, but arrived after the shooting. The Halloween party apparently was advertised on social media as an “Airbnb Mansion Party,” with an admission fee of $10 per person.
Independently owned vacation rentals are currently growing at a faster rate than hotels or motels, and in some instances are owned by out-of-state investors seeking not only a real estate return on investment, but also a return on investment associated with revenue streams generated by “pay to play” parties promoted on social media.
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Patrick J. Paul, Snell & WilmerMr. Paul may be contacted at
ppaul@swlaw.com
M&A Representation and Warranty Insurance Considerations in the Wake of the Coronavirus Pandemic
April 06, 2020 —
Lori Smith & Patrick Devine - White and Williams Taking Care of Business BlogIncreasingly, M&A transactions are using representation and warranty insurance (RWI) to bridge the gap between a buyer’s desire for adequate recourse to recover damages arising out of breach of representations in the purchase agreement and a seller’s desire to minimize post-closing risk and holdbacks or purchase price escrows traditionally used as the means to satisfy such obligations. When it works, RWI provides a significant benefit to both parties: it mitigates the buyer’s risk in the event that the seller’s representations and warranties prove untrue, and it permits the seller to reduce the portion of the purchase price that it would otherwise have to leave in escrow to cover future claims for breach of those representations and warranties. However, as the coronavirus pandemic ravages the global economy, insurers are now expressly adding COVID-19 exclusions to their RWI policies. If RWI insurers decline coverage for these losses, the allocation of risk in the representations and warranties (and related indemnity provisions) will be more critical than the parties contemplated when they negotiated the transaction documents.
Unlike in the case of a natural disaster, insurers cannot quantify the economic fallout that may result from the coronavirus pandemic. This uncertainty breeds systemic concern about the number of insurance claims that covered parties of all varieties will bring, which in turn creates an industry-wide reluctance to cover the claims. Based on discussions with market participants, we understand that, at the present time, 70% to 80% of RWI insurers are broadly excluding losses resulting from COVID-19 and similar viruses, epidemics, and pandemics (including government actions in response thereto), 5% to 10% are narrowly excluding specific coronavirus-related losses that are more likely to be implicated in a particular transaction (e.g., losses caused by business interruption), and 10% to 15% may be willing to narrow their exclusions upon completion of the underwriting process, depending on their comfort level after conducting rigorous and heightened diligence. Insurers’ concerns are wide-ranging, but the representations and warranties causing the greatest distress appear to be those regarding customer retention, supply chain matters, undisclosed liabilities, and the absence of changes between the date of the seller’s most recent financial statements and the transaction closing date.
Reprinted courtesy of
Lori Smith, White and Williams and
Patrick Devine, White and Williams
Ms. Smith may be contacted at smithl@whiteandwilliams.com
Mr. Devine may be contacted at devinep@whiteandwilliams.com
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