SHANDLER v. DLJ MERCHANT BANKING, INC. – Delaware Court offers insight into What an Independent Director Should Not Do/Be

July 26, 2010, Court of Chancery of Delaware

In this recently released decision, although not rendered in the context of an ESOP company, the Delaware Court of Chancery offered some insight into conduct by a supposedly independent director that it found lacking. The case involves a situation where an investment bank, having acquired a controlling interest in a public Delaware corporation, decided that the best financial move was to spin-off a division by selling it to an affiliate. It should be noted that this court ruling arose in the context of a motion to dismiss prior to trial, in which the court assumed that the facts pleaded by the plaintiffs were true – something that may or may not be sustained after a full trial. As alleged in the pleadings filed by the plaintiff, directors appointed by the investment bank in essence negotiated and structured the preliminary terms of a transaction, engaged an independent law firm and financial advisor, whereupon the board then appointed an independent director who, within the span of 5 days, reviewed the transaction, retained the “independent” law firm and “independent” trustee selected by the board, and then blessed the transaction with the support of a fairness opinion rendered by the financial advisor. While many of the plaintiff’s claims in this case were dismissed, and the remaining claims may ultimately be dismissed, the courts observations about the speed and alleged lack of independent diligence by the alleged independent director and others offer an example of “what not to do” for the independent director, trustee, or other fiduciary involved in an ESOP transaction. The court observed that “As to defendant Ashton, the circumstances of his behavior and interests are sufficiently unusual as to raise an inference that his willingness to jump in as a new board member and
to ratify an interested transaction within five [italicized in court ruling] days of being seated was influenced by his relationships with DLJ. That oddly rapid action may turn out to be evidence merely of an incisive and decisive mind, quick to grasp all material facts and come to a wise decision. But, it may also be evidence of a mindset well captured by Chancellor Allen in his 1990 article in The Business Lawyer about the need for special negotiating committees to act with genuine vigor and independence if they are to fulfill their intended purpose. In that regard, I note that the complaint alleges that Ashton allowed himself to be named by a resolution that simply indicated he had no material relationship with DLJ, while failing to state that he had previously served as the CEO of a private equity portfolio company that a DLJ-related company
controlled.”

The lesson for those involved as fiduciaries in an ESOP transaction is that even though a transaction may be explored, structured, and preliminarily negotiated by the interested parties, when a independent trustee, director, and other financial and legal advisors are brought in, they should not confine their activities to a cursory review and approval, but must take (and be allowed to take) the time and effort necessary to undertake a diligent and independent investigation of the transaction and its terms. These activities can seldom be completed within 5 days (or even a few weeks), thus the parties to such a transaction must either expect an appropriately longer period, or bring these parties into the discussions and negotiations at an earlier stage.

The IRS issued final regulations regarding Section 108 - Reduction of Tax Attributes for S Corporations, and the IRS preamble to the final regulations confirms that disallowed losses and deductions under section 1366(d)(1) of a shareholder that is an employee stock ownership plan (ESOP) are included in the S corporation’s deemed NOL. The IRS stated position is that Section 108(d)(7)(B) provides that any loss or deduction that is disallowed for the taxable year of the discharge under section 1366(d)(1) is treated as a deemed NOL of the S corporation. Accordingly, section 108(d)(7)(B) applies to any shareholder, including an ESOP shareholder, that has disallowed losses and deductions for the taxable year of the discharge under section 1366(d)(1).

April 30, 2009
ESOP.US launches ESOP Connections - Networking for the ESOP Community

ESOP.US, the website for the ESOP community is pleased to announce the launch of “ESOP Connections.” ESOP Connections is an online business and social networking service for the ESOP community that functions in a manner similar to other popular internet social networking services such as My Space, Face Book, and Linked-in, but with a specific focus upon the ESOP Community – Companies with employee stock ownership plans, ESOP employees and participants, and the professionals who advise them. To use this feature, users must first register as a website user – a free service. Once registered, a user may then create a profile, and then they may use the features of this service to form networking groups, share pictures, news, videos, and audio files. Users may invite your co-workers and others to join. Features of the service allow users to establish both public a private networking groups – for example, a group of employees of an ESOP company may establish a private group to share and discuss your company's ESOP, or they may form a public group and share ideas and debate issues with employee owners of other firms. This feature, along with other features available through ESOP.US enables members of the ESOP community to share knowledge and understanding of employee ownership and to engage in dialogue with other members of the community.

The 2009 Employee Ownership Conference, presented by the NCEO and the Beyster Institute, will take place in Portland, Oregon, on April 22-24, 2009 at the Hilton Portland and Executive Towers. We hope to see you there!

What to Expect: The conference provides learning and networking opportunities plus the flexibility to choose sessions from a wide range of subjects and levels of complexity. Daily general sessions draw attendees together for informative and inspiring updates on the world of employee ownership, but the rest of the program is up to you!

Who Should Attend? Anyone interested or involved in equity sharing as an effective business strategy will benefit from attending this event, including company presidents, owners, CEOs, executives, directors, managers, investors, employee owners, and employee ownership professionals. Packed with insights from the nation's leading service providers, presentations by company leaders, and opportunities to network with your peers, this conference will keep you at the forefront of the employee ownership field.

A Practical and Cost-Effective Conference: Widely known as a dynamic forum for learning about employee ownership, this conference emphasizes practical techniques for operating employee-owned businesses successfully. This year, look for tips on how to harness the motivational power of employee ownership to see your company through the current economic challenges. The 2009 Employee Ownership Conference offers the highest value at the lowest price of any employee ownership conference in America.



Visit the NCEO website for details and to register!

The Department of Labor released Field Assistance Bulletin 2008-4 on November 25, 2008 to provide guidance on ERISA Fidelity Bonding Requirements. This Bulletin provides guidance, in a question and answer format, concerning the application of ERISA�s bonding requirements and the Pension Protection Act changes. As of January 1, 2006, the maximum required bond ceiling was increased to $1,000,000. A full copy of the Bulletin is available via the downloads section of www.ESOP.US