Key Takeaways

  1. The Non-Compete Rule is set to take effect on September 4, 2024. On July 3, a US district court in Texas, however, preliminarily enjoined the Federal Trade Commission (the “FTC”) from implementing or enforcing the Non-Compete Rule against the specific plaintiffs who challenged the Rule in that case. The court held that these challengers are likely to succeed on the merits because the FTC lacks the statutory authority to promulgate the non-compete rule and because the rule’s overbreadth renders it “arbitrary and capricious.”
  2. The court intends to issue a final ruling on the merits on or before August 30, 2024. Given the court’s preliminary ruling, it is likely to rule in plaintiffs’ favor again. The open issue is whether the court will prevent the FTC from enforcing the Rule in any context or will limit the final relief to the specific plaintiffs. Either order will be subject to appeal to the Court of Appeals for the Fifth Circuit (likely an unfavorable forum for the FTC) and ultimately to the Supreme Court of the United States. Whether and when the rule might take effect thus remains an open question.
  3. Use of non-compete agreements continues to carry risks. The FTC remains free to target non-competes but will have to adjudicate the merits of individual non-competes on a case-by-case basis. State law also remains a source of limitations.
  4. Employers should evaluate existing and future non-competes and ask whether: (1) a non-compete agreement is necessary to protect legitimate business interests; and (2) if so, the agreement is sufficiently narrow in scope, time and geography. Employers also should continue monitoring compliance with the changing landscape of applicable state laws, including laws that prohibit non-compete restrictions on low-wage or non-executive earners.

Continue Reading UPDATE: Slow Down, You Move Too Fast: The FTC Non-Compete Ban May Not Last

Activist Settlements and A Proposed Amendment to the DGCL 

Perhaps the most fundamental expectation of public company investors is the expectation of investing in a company run by a board of directors – a board elected by stockholders and charged with managing the corporation on behalf of all stockholders. Delaware seems primed to upset that expectation. Continue Reading Contracting Out of Corporate Law: Should Public Company Boards Be Allowed to Delegate Governance to a Single Stockholder?

Summary

Founders and controlling stockholders often seek to retain control over their companies even after taking them public, typically via high-vote share classes or, as was at issue in this case, via stockholder agreements granting the pre-IPO owners broad governance rights.

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, the Delaware Court of Chancery recently held that a “new wave” stockholder agreement between Moelis & Company (the “Company”) and its founder, CEO, and board chairman, Ken Moelis was invalid under Section 141(a) of the Delaware General Corporation Law (the “DGCL”) because it contained  “pre-approval rights” over a number of corporate actions, required the board to recommend individuals designated by Moelis for a majority of directorships and fill committee positions and board vacancies with Moelis designees, impermissibly constraining the board’s ability to manage the business and affairs of the company—powers the statute does not allow the board to delegate via contract.[1]

Moelis is a strong reminder that the foundation of the corporate form in Delaware is the independent authority of a board of directors, elected by stockholders and entrusted to manage the business and affairs of the corporation as fiduciaries. Delaware will not permit this foundation to be eroded through contractual arrangements with stockholders. Continue Reading Delaware Court of Chancery Rejects Validity of “New Wave” Stockholder Agreement Terms that Constrain Traditional Board Authority

This is the price paid for allowing our hopes, rather than established law, to guide public merger agreement drafting for the last 18 years.  Con Edison v Northeast Utilities[1], a 2005 Second Circuit decision regarding a New York law governed merger agreement, found that, absent clear contractual language to the contrary, a target company could not collect lost shareholder premium as damages for the breach of a merger agreement. ConEd caused quite a stir in public M&A circles, with some asserting that it caused every public merger agreement to be converted into a mere option agreement, where, if the buyer did not wish to close, it had only to pay the target’s out-of-pocket costs. This may have been a bit extreme, but given how infrequently specific performance has been ordered to remedy a failure to close, it probably was not far off the mark.

Continue Reading ConEd Is Not Dead In Delaware

On November 2, 2023, the New York Appellate Division, First Department held for the first time that New York state courts hearing claims under the Securities Act of 1933 are required to stay discovery pending resolution of a motion to dismiss under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).[1]

Continue Reading New York Appellate Division, First Department Holds That PSLRA Discovery Stay Applies to State Court Actions

Alea iacta est

Boards often settle actual or threatened proxy fights by trading away board seats to activists. Delaware courts will analyze this trade as a defensive device, much like greenmail, where the board trades away something valuable to avoid a battle for corporate control.  It follows that, like greenmail or a poison pill, this defensive device would be subject to scrutiny under the Unocal standard[1].  Yet boards in general seem to be remarkably lax in analyzing whether they have fulfilled their fiduciary duties in making such a trade. Below are questions boards should be able to answer before awarding partial control of their company to an activist. Continue Reading Activist Settlements: Fiduciary Questions for Boards

On May 12, 2023, the Delaware Court of Chancery reaffirmed a key principle for transactions involving interested directors: process is everything. Vice Chancellor Sam Glasscock III, in his opinion in In re Oracle Corporation Derivative Litigation, provides reassurance that the Court will not rush to second-guess board decisions involving conflicted transactions as long as adequate safeguards are present.

Continue Reading Delaware Chancery Court Finds for Defendant Director, CTO and Founder of Oracle, Larry Ellison, in Derivative Suit Involving Conflicted Transaction

On March 28, 2023, the U.S. Securities and Exchange Commission reached a $55.9 million settlement with Vale S.A., a NYSE-traded mining company, to resolve allegations that Vale committed securities fraud by presenting intentionally misleading information in its annual Sustainability Reports and investor presentations. The SEC’s enforcement action against Vale was brought by the agency’s Climate and ESG Task Force, which was created to “proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment.”  For companies seeking to highlight ESG and sustainability goals and progress, this case serves as an important reminder of the need to ensure the accuracy of these public statements, lest they too end up in the crosshairs of government regulators. 

Continue Reading Misleading Public Company ESG Disclosure Results in SEC Enforcement Action – and $55.9 Million Settlement

UNIVERSAL PROXY AND “HORIZONTAL” CONFLICTS – FILLING IN THE (LARGE) DISCLOSURE GAPS

There is reason to believe the SEC’s new universal proxy Rule 14a-19 will result in more stockholder nominees being elected to the boards of public companies. 

Continue Reading MORE CHOICE REQUIRES MORE INFORMATION

On September 1, 2022, new universal proxy rules adopted by the Securities and Exchange Commission (“the SEC”) formally went into effect. These rules mandatorily apply to public company director elections held after August 31, 2022. This post summarizes the key provisions of Rule 14a-19 of the Securities Exchange Act of 1934, as amended (“Rule 14a-19”), and provides recommendations for potential corporate bylaw amendments.

Continue Reading Bylaw Amendments to Address Universal Proxy Rules