Monthly Archives: November 2017

The Art of Drafting Milestones for an Earn-Out

Barbara Borden and Jamie Leigh are partners and Mutya Harsch is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Borden, Ms. Leigh, Ms. Harsch, Rama Padmanabhan, Al Browne and Steve Tonsfeldt, and is part of the Delaware law series; links to other posts in the series are available here.

Former stockholders of SARcode Bioscience were recently denied a claim that they were entitled to be paid $425 million in milestone payments under a merger agreement. The decision provides an anecdotal lesson in drafting milestones and suggests that the more technically prescribed milestones may be more difficult to meet, even though the development of the drug is ultimately successful.

In Fortis Advisors v. Shire, the Delaware Court of Chancery granted Shire’s motion to dismiss a complaint filed by the stockholder representative of the former stockholders of SARcode Bioscience seeking the payment of two milestones totaling $425 million. The first milestone related to the outcome of a Phase 2 clinical trial of the drug in development to treat dry eye disease. It required the occurrence of an “achievement date,” which the merger agreement defined as the receipt of audited final tables, figures and listings from an OPUS-2 Study demonstrating that both components of the co-primary efficacy endpoints of the study, as specified in an attached OPUS-2 Study Protocol, was achieved. The definition also required that a specified safety standard (not relevant to the dispute) was also achieved. At the time of the acquisition, the Phase 2 clinical trial was ongoing. The second milestone was payable upon receipt of regulatory approval for the drug, contingent on the occurrence of the achievement date milestone.


An Empirical Study of Special Litigation Committees: Evidence of Management Bias and the Effect of Legal Standards

C.N.V. Krishnan is Professor of Banking and Finance at Case Western Reserve University Weatherhead School of Management; Steven Davidoff Solomon is Professor of Law at University of California Berkeley School of Law; and Randall S. Thomas is John S. Beasley II Chair in Law and Business at Vanderbilt Law School. This post is based on their recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Special litigation committees (SLCs) are controversial. They are supposed to dispassionately consider the merits of derivative litigation brought by shareholders against the company and some of its officers/directors, but they are composed of board members from the same company/board that is being sued. As a result, some shareholders and academics complain that these SLCs always seek to dismiss the shareholders’ cases and operate solely to protect directors from liability.

In An Empirical Study of Special Litigation Committees: Evidence of Management Bias and the Effect of Legal Standards, we empirically test the effectiveness and use of SLCs, the recommendations that they make in their reports, and how legal rules on the judicial review of those report affect case outcomes. We do so using a hand collected final sample of 384 publicly available SLC events spanning the 26-year period Jan 1, 1990 through Dec 31, 2015. In our analysis we find consistent evidence of pro-management SLC bias. We also find that the law and judicial oversight matters. In cases litigated in Delaware, or in courts applying Delaware law to matters involving Delaware companies, the courts tend to exercise their own business judgment and be less deferential to SLCs, while cases in certain states with more deferential legal standards governing court scrutiny of SLCs are more likely to favor management interests.


House Bill 4015 and the Proposed Regulation of Proxy Advisors

Dimitri Zagoroff is a Senior Proxy Research Analyst at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Zagoroff.

Regulation of proxy advisors is back on the U.S. legislative agenda. If enacted, the proposed rules could create delays to the delivery and threats to the independence of proxy research, with investors footing the bill.

Introduced October 11, House Bill 4015 is mostly a resubmission of last year’s HR 5311—mostly. The proposed compliance regime is unchanged. Proxy advisors would be required to register with the SEC, meet extensive disclosure requirements relating to methodologies and conflicts of interest, and hire an ombudsperson to handle complaints. However, HR 4015 includes additional detail on how the bill’s thorniest provision would work in practice: allowing companies to vet proxy advisor’s recommendations, including access to analysts, before they are released to investors. The new bill would give companies three days to review draft analysis and submit a response to the proxy advisor’s ombudsperson; if they are “unable to resolve such complaints prior to voting” (whether to the ombudsperson’s satisfaction or the company’s remains unclear), the company would be given space to set out their case within the proxy report distributed to investors.


EU Financial Market Benchmark Regulation and US Impact

Martin Liebi is a Director and Alexandra Balmer is a Consultant at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Liebi and Ms. Balmer.

The new EU Benchmarks Regulation (BMR) was published in June 2016 and most rules will apply as of 1 January 2018. The BMR introduces new compliance requirements for benchmark administrators, contributors, and users, with regard to interest rate, foreign exchange, security, commodity, and other benchmarks used in financial transactions. The BMR was enacted in response to public pressure resulting from the aftermath of the LIBOR scandals and follows the recommendations of the IOSCO and ESMA EBA Principles. Like many EU financial services regulations does also the BMR have an extraterritorial reach and apply to US based benchmark providers and contributors. This post will give an overview about how US based financial market participants will be affected by the BMR.


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