Rory K. Schneider is a Partner and Colin O. Lubelczyk is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Schneider, Mr. Lubelczyk, Martha E. McGarry, Andrew J. Noreuil, and Camila Panama and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates, IV.
There are several contractual provisions that sellers often use to limit their liability for post-closing claims brought by a buyer in the context of a private company purchase agreement. Reliance disclaimers, non- survival of representations and warranties, exclusive remedy, and no-recourse provisions in their typical forms, however, only go so far in court. Even where there is no explicit carve-out for fraud claims, as a matter of “public policy,” Delaware courts have generally not enforced contract provisions that prevent a buyer from asserting fraud claims against sellers and/or their affiliates for making false representations and warranties or knowing that representations and warranties made by other seller parties were false.
A consequence of this judicial approach is that it has exposed limited partners and selling shareholders to derivative unjust enrichment claims, of which there have been an increasing number of cases over the last several years. These unjust enrichment claims have proven difficult to dismiss at the pleading stage, thereby exposing affiliates to precisely the type of protracted litigation that, in many cases, the contracting parties agreed that seller affiliates should not have to face. In light of this, sellers and their counsel should consider adding contractual language to specifically preclude unjust enrichment claims that are not dependent upon any proof of wrongdoing. The law in Delaware remains unsettled on the extent to which explicit protections against such claims would result in their prompt dismissal, but at the least, their inclusion may make buyers less apt to file the claims in the first place and make courts more willing to reject them.
The SEC Revolving Door and Comment Letters
More from: Michael Shen, Samuel Tan
Michael Shen is an Assistant Professor of Accounting at NUS Business School, National University of Singapore, and Samuel T. Tan is an Assistant Professor of Accounting at the School of Accountancy, Singapore Management University. This post is based on their recent paper, forthcoming in The Journal of Accounting and Public Policy.
The revolving door between the Securities and Exchange Commission (SEC) and the private sector has been the subject of a great deal of scrutiny in recent years. The SEC regulates, and enforces laws concerning, public companies, with a mission that includes “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation“. However, SEC employees who leave the agency regularly find themselves aiding the very corporations the SEC is regulating, and working against the SEC’s regulatory activities. Between 2001 and 2010, over 400 former SEC employees filed statements that they intended to represent an external party before the SEC.
In our study, forthcoming at the Journal of Accountancy and Public Policy and available at SSRN, we examine the impact of the revolving door on the SEC’s comment letter process, a crucial process by which the SEC exercises its regulatory mission.
The Sarbanes-Oxley Act of 2002 requires the SEC to review companies’ filings at least once every three years, and the SEC sends comments to the company when SEC staff believe that the disclosures in its filings can or should be improved. This review process leads to a dialogue between the firm and SEC staff, in which the SEC may make requests of the firm, for example to amend one or more past filings, and in which the firm may negotiate for more desirable outcomes, for example to simply revise future filings. Firms often involve external lawyers in this conversation with the SEC, and these lawyers may have formerly been employed by the SEC.
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