The US Court of Federal Claims awarded damages of more than $206 million to Plaintiffs/applicants in a case with respect to the cash grant under Section 1603 of the American Recovery and Reinvestment Act of 2009 (Public Law 111-5). In its opinion, which was unsealed on Monday, October 31, the court held that the US Department of the Treasury had underpaid the Section 1603 Grants arising from projects in the Alta Wind Energy Center because it had incorrectly reduced Plaintiffs’ eligible basis in the projects. In a separate case in the Section 1603 Grant context, the court awarded $450,000 to GUSC Energy, Inc. in connection with a combined heat and power biomass facility.

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In May, the Federal Trade Commission (FTC) required Hikma Pharmaceuticals PLC to divest its 23 percent interest in Unimark Remedies, Ltd. and its US marketing rights to a generic drug under manufacture by Unimark as a condition to allowing Hikma to complete its acquisition of Roxane Laboratories. The FTC was concerned that Hikma’s continued holding of a 23 percent interest in Unimark after consummation of its proposed acquisition of Roxane would create the incentive and ability for Hikma to eliminate future competition between Roxane and Hikma/Unimark in the sale of generic flecainide tablets (a drug used to treat abnormally fast heart rhythms) in the United States.

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McDermott Will & Emery has released the October 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries. Articles in this issue include:

The Use of Alternative Credit in Europe
As a result of the reduced availability of conventional credit from lending institutions in the wake of the financial crisis of 2008, Europe has been eager to develop an alternative credit market to unlock the demand for money from small and medium sized enterprises (SMEs).
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Buying and Selling a Craft Brewery in the United States
The craft beer business has never been hotter, with market share now approaching 8 per cent by volume in the United States and margins that have attracted the attention of private equity and venture capital investors, and even large brewers.
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International companies with operations in France, or those that conduct regular business with French commercial partners, should be aware that their longtime French commercial partners could be entitled to claim compensation for the termination of the contractual relationship well beyond the scope of the original contractual provisions.

However, recent decisions of the French Supreme Court suggest that judges increasingly take into consideration the existence of economic difficulties as acceptable justification for the termination.

The French Commercial Code provides that the total or partial termination of any kind of longstanding commercial relationship may be qualified as abusive if insufficient notice of termination is given to the contractual partner.  This law, considered as a mandatory public policy statute, applies to all existing commercial relationships.  As a result, a company that terminates a contractual relationship with a French commercial partner must not only consider the contractual notice period, but must also take into account the notion of “reasonable” notice and the criteria developed by the French courts to be able to fully gauge any potential future claims for compensation against it.

In deciding what the appropriate duration of a “reasonable” notice is and the resulting adequate compensation for the terminated party, French case law provides a rule of thumb: three months is usually acceptable when the commercial relationship between the two companies lasted between two and three years; six months in cases in which the contractual relationship between the commercial parties was longer; and even longer notice periods exceeding 12 months can be accepted under French case law when the terminated party was financially dependent on its terminated partner.  Courts then assess the amount of damages based on the loss of profit that the terminated party should have made during the missing months of the “reasonable” notice period.

How can foreign companies mitigate this risk?  To mitigate the risk of a contractual termination being considered as abusive by French courts, companies should try to manage the expectations of their commercial partners and inform them of any potential complete or partial termination of their commercial relationship in writing, well before the contemplated date of termination.  By providing its commercial partner with such information in advance, it will serve to weaken any potential claims for compensation brought by the French commercial partner that was terminated.

If the termination results from the closure of a site, the timing for providing such information is, however, limited by French employment law, which requires a consultation of employee representatives before the decision to close facilities may be made.  Accordingly, it is highly advisable for an international company to consult with legal counsel to ascertain the best approach for handling such a situation.

Nevertheless, the French Supreme Court seems to be increasingly aware that companies face economic circumstances beyond their control, which make terminating the commercial relationship imperative.  As a result, under the recent case law of the French Supreme Court, a termination subsequent to a substantial decrease in the volume of orders may not be considered as abusive if the terminating party is able to provide sufficient evidence of a diminished commercial activity and if the external reasons bring about such a decrease in the volume of orders.

Accordingly, if the termination of the commercial relationship results from the closure of a site, which itself is due to economic difficulties, the international company should make clear in the notice it sends to its commercial partner, that the termination was not a deliberate choice but was necessary due to external economic conditions.

McDermott Will & Emery has released the October 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries. Articles in this issue include:

Proposed EU Merger Review of Non-Controlling Minority Shareholding Acquisitions: Challenges and Opportunities for Private Equity
A recently proposed plan to reform EU Merger Regulation could expand the scope of transactions subject to prior notification. For the first time, minority shareholding acquisitions that do not lead to a change in control could be subject to prior notification to the European Commission. The proposed expansion of the Merger Regulation’s jurisdiction could significantly impact businesses.
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IPO Market Offers Attractive Exit Alternative for Sponsor-backed Companies
The strong IPO market offers private equity sponsors an attractive alternative to the sale of a portfolio company. However, the IPO process is complex, and must be structured properly at the outset. This article discusses some of the most significant structural considerations sponsors must consider in order to be in the position to obtain the maximum benefit from an IPO.
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Learn how corporate counsel should (and are) adopting new tools and technologies resulting in significant efficiencies in legal project management. Byron Kalogerou, a Corporate partner in McDermott’s Boston office and co-chair of the Legal Project Management Task Force of the M&A Committee of the Business Law Section of the American Bar Association, explains why the “old way” no longer works and how legal project management is being utilized for M&A transactions. 

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McDermott Will & Emery has released the July 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries.  Articles in this issue include:

Latin American Private Equity on the Rise
Favorable macroeconomic trends and positive regulatory developments continue to make Latin America an attractive destination for private equity investors looking for acceptable returns in relatively stable emerging markets. Not surprisingly, some challenges remain for foreign private equity investors entering the region, but most of these risks should be manageable for investment teams and advisors with sufficient experience in those jurisdictions.
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Tax Considerations When Acquiring Non-U.S. Portfolio Companies—Mitigating Subpart F Inclusions
Subpart F income can diminish returns for investors acquiring non-U.S. portfolio companies by increasing tax cost. The article discusses pitfalls to be avoided and strategies for mitigating this cost.
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Private Equity Funds at Higher Risk of Antitrust Fines
Recent developments in competition law enforcement in Europe mean that private equity funds are increasingly exposed to potential liabilities for alleged infringements of their portfolio companies. In this article, we look at how private equity funds investing in Europe can take practical steps to mitigate this risk.
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McDermott Will & Emery has released the April 2014 issue of Focus on Private Equity, which provides insight on issues surrounding private equity transactions and the investment life cycle across industries.  Articles in this issue include:

Private Equity Firms Face Potential Liability Under Plant Closing Laws
Private equity firms risk potential liability for Worker Adjustment and Retraining Notification Act violations. Case examples demonstrate the need for proactive activity management, including observing corporate formalities, establishing and filling the director and officer positions of all entities, permitting the operating company management to make the decisions regarding employment terminations and plant closings, and clearly communicating and documenting these activities, to help avoid or quickly exit litigation.
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Incentivising Management Across the Pond
U.S. private equity investors are increasingly looking outside the domestic market and into the United Kingdom and Europe to deploy dry powder.  As the buy-out market in the United Kingdom heats up, U.S. private equity investors should be aware of tax-efficient structures to deliver equity incentives to U.K. resident management teams in order to maintain a competitive edge. In this article, we’ll explore the significant negative consequences of issuing U.S.-style stock options to U.K. resident management teams and the significant tax savings that can be obtained with restricted stock, enterprise management incentive options and structuring incentive equity to obtain Entrepreneurs’ Relief.
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It is quite common during the course of legal due diligence to discover that a target company has issued more stock than it had legally authorized through its certificate of incorporation.  Many companies, particularly emerging growth companies, are often too preoccupied with ambitious growth plans and raising critical private capital and overlook basic corporate housekeeping.  Or they dole out lots of equity to employees and business partners in order to conserve much needed cash, but forget that there is actually a legal limit to the number of shares they can grant.  These and other legal flaws, or “defective corporate acts,” can exist undetected for years in privately held companies, but they come to light at the worst possible time – when the company is being sold or when a significant capital raise is being undertaken.  Previously, the lawyers would advise that these past errors placed a troublesome legal cloud over the company that presented risks that could not be eliminated, which often resulted in potential acquirors or investors simply abandoning a proposed transaction.

Fortunately, beginning April 1, 2014, new Sections 204 and 205 of the Delaware General Corporation Law (DGCL) will provide corporations with two clear mechanisms to rectify defective corporate acts. New Section 204 sets forth “self-help” procedures for corporations to ratify defective corporate acts, and new Section 205 vests the Court of Chancery with jurisdiction to hear and determine the validity of any potentially defective corporate act.  These two provisions make it so that no defective corporate act will be potentially invalid “solely as a result of a failure of authorization,” if the act is ratified in accordance with Section 204 or validated by the Court of Chancery in a proceeding brought under Section 205.

The new law will apply to all corporate acts that are within a corporation’s power under the DGCL, but that are defective, whether due to a failure to obtain the requisite authorization, or a violation of the corporation’s certificate of incorporation, bylaws or any contract to which the company was a party, and where such failure or violation renders the act potentially invalid under Delaware law.

Section 204

In order to ratify a defective act under Section 204, a company’s board of directors must adopt a resolution that includes, among other things: (i) the time of the defective act; (ii) the nature of the failure of the authorization; and (iii) approval by the board of the ratification of the defective act.  If the defective act relates to the unauthorized issuance of stock (putative stock), the resolution must also specify the number and type of shares of putative stock issued and the date or dates when the shares were purported to have been issued.  If stockholder approval was originally required under the DGCL, the company’s certificate of incorporation or bylaws, or by contract, then the board must submit the ratifying resolutions to the stockholders for approval.  Section 204 also sets forth the notice, quorum and approval requirements for the stockholder vote.

Once the applicable approvals are obtained, if the original act would have required a filing under the DGCL (e.g., a certificate of amendment or certificate of designations), then the corporation must make a new filing called a “certificate of validation” with the Delaware Secretary of State, which will provide a public record that the corporation has ratified the defective act pursuant to Section 204.  In addition, the corporation must provide notice of any ratification effected without stockholder approval to all then-current holders of valid and putative stock and all holders of valid and putative stock as of the date of the defective corporate act to be ratified (to the extent such holders can be determined from corporate records).


Unless the ratification is challenged in court, following these procedures will magically erase the legal flaw and (i) each defective act ratified will be deemed effective retroactively to the time of the original defective corporate act, and (ii) each share of putative stock issued pursuant to a ratified defective act will be deemed to be an identical share of outstanding stock as of the time it was issued.

Section 205

Ratification under Section 204 may not always be available.  For example, if a board of directors was elected with putative stock, then the election could be invalid and the board could be acting outside the scope of its proper authority.  In such a case, the company can turn to the Court of Chancery for ratification of the putative stock and affirmance of the board’s authority.  Under new Section 205, the Court of Chancery is vested with broad authority to determine the validity and effectiveness of any corporate act or transaction and any stock rights or options to acquire stock.  These claims may be brought by the corporation (or its successor entity), a director, any record or beneficial owner of valid or putative stock (including those holding stock at the time of the defective corporate act), among others.

In sum, these two provisions in the DGCL will provide a clear pathway out of what otherwise could be deal-killing legal mess.  Corporations, and the attorneys asked to render opinions on the validity of past corporate actions, can take comfort that there exists now statutory mechanisms to avert a historically troublesome area of corporate law.