February 23, 2007

By-Law Changes III: Allowing for Uncertificated Shares

My blogs on the Direct Registration System continue to generate a healthy dose of member feedback. Michael Kaplan of Davis Polk notes that there are some states (and countries) that don’t allow issuance of uncertificated securities – and some companies actually have charter provisions about this. For these companies, it seems that the exchanges will not require charter amendments – which would require a vote during this year’s shareholder meeting so long as the securities are DTC eligible. Michael also points out that IPO issuers should bear this in mind as they already are subject to the DRS eligible requirements of the exchanges.

Some members took the analysis a step further and asked why the exchanges were even bothering sending notices about uncertificated securities at all, as they view street name holders as essentially being in the same position vis a vis the company’s shareholder records. In their view, all that should matter is that the company has securities that are DTC eligible.

Highlighting that each state has a law that can be read differently, one member noted that I mentioned the language “each shareholder is entitled to a certificate” as potentially requiring certificates under a common sense reading. He notes that, under Ohio law, there is that specific “entitled to” language in the statute itself, which many companies repeat in their code of regulations (the Ohio equivalent of bylaws), yet language further in the statute specifically provides that, unless provided otherwise in their articles or regulations, a company can have uncertificated shares. So at least under Ohio law, the “entitled to” language shouldn’t be read to require certificated shares.

And Jane Whitt Sellers of McGuireWoods points out that Section 13.1-648 of the Virginia Code provides that, unless the articles or bylaws provide otherwise, the board may authorize the issuance of some or all shares without certificates. Jane believes that if you have a statute like Virginia’s that operates “subject to” whatever the bylaws or articles say, you must amend any existing provisions in bylaws or articles that require certificates before going to an uncertificated approach. And in our “Direct Registration” Practice Area, we have posted another sample by-law provision for those that may need to amend their by-laws.

An M&A Conversation with Chief Justice Myron Steele

We have posted the transcript from the webcast: “An M&A Conversation with Chief Justice Myron Steele.”

Chancellor Chandler Enjoins Caremark Special Meeting: Mailing Supplemental Disclosures

Last week, Chancellor Chandler of the Delaware Court of Chancery enjoined a stockholder vote on the pending merger between Caremark and Express Scripts until not earlier than March 9th. The Chancellor issued his decision because of the materiality of supplemental disclosures made by Caremark on February 12th, just 8 days before the stockholder vote scheduled for February 20th. We have posted a copy of the opinion in the “M&A Litigation” Portal.

Here is some analysis from Travis Laster of Abrams & Laster: The 8 days provided by Caremark was definitely towards the short end of the spectrum for supplemental disclosures, but it was not unprecedented. The Chancellor instead appears to have been influenced by the combination of the brief time period and the his view of the significance of the disclosures, which included “the revelation that Caremark has considered, on at least three separate occasions, potential transactions with Express Scripts.”

The Chancellor juxtaposed this disclosure with the Caremark board’s “present protestations that antitrust difficulties loom so large as to prevent the board of directors from even discussing an offer with an admittedly higher dollar value.” (Emphasis in original). The Chancellor also noted the materiality of Caremark’s disclosure that the CVS merger would extinguish stockholder standing to pursue derivative litigation regarding claims for stock option backdating. This statement comes on the heals of the Chancellor’s two recent and quite strong decisions criticizing stock option practices.

At 2 typed pages, the opinion is quite short and worth a first-hand read, particularly for deal counsel and litigators who frequently must consider whether – and when – to make supplemental disclosures.