Debt Dialogue: April 2017

This month’s issue of Debt Dialogue addresses issues of disclosure and contract interpretation, enforcement in the muni bond space, accounting for trustee fees, and more.

Topics covered in this issue include:

• Anti-Fraud Liability for a Violation of Duty to Disclose Trends Heads to the Supreme Court
  Item 303 of Regulation S-K requires issuers to disclose in their annual reports on Form 10-K and quarterly reports on Form 10-Q “known trends or uncertainties.” Last year, the Second Circuit held that the alleged failure to comply with this item could support an anti-fraud claim under Rule 10b-5. The Supreme Court has granted certiorari in the case, and its decision will undoubtedly affect disclosures of reporting issuers in the gray area of trending events.
• The ‘Commercially Reasonable Efforts’ Standard as Defined by the Delaware Supreme Court
  In its recent decision in The Williams Cos. Inc. v. Energy Transfer Equity L.P., the Delaware Supreme Court offered guidance on the interpretation of the “commercially reasonable efforts” standard in a merger agreement. The relevance of the decision is not limited to the merger context. Following the decision, parties should focus on whether the actions and conduct of the performing party conform to those of an “enthusiastic partner” in pursuit of accomplishing the applicable objective.
• SEC Action Against Underwriter Illustrates Enforcement of Disclosure Violations in the Muni World
  The Securities and Exchange Commission recently settled an administrative enforcement action against a municipal bond underwriter accused of turning a blind eye to bond issuers’ failure to file annual financial information. The action affords a useful primer on the roles of underwriters and dealers in the municipal bond reporting regime. It also demonstrates why enforcement in the municipal bond arena is largely the province of the SEC, where private actions have historically been hard to find.
• Exemptions from HSR Filing Requirements in a Bankruptcy Reorganization
  The Hart-Scott-Rodino Act requires parties to an acquisition of voting securities or assets to file a report form with the Federal Trade Commission and Department of Justice, and to observe a waiting period, before the transaction is consummated. Although various filing exemptions are available, creditors must timely focus on whether a filing will be required as they prepare to receive voting securities of reorganized debtors upon emergence from bankruptcy.
• Minnesota Appeals Court Addresses Accounting for Trustee’s Fees and Expenses
  The Court of Appeals of Minnesota recently addressed a challenge to the award of trustee fees and legal expenses brought by a municipal bondholder. The court held that a single bondholder had standing to challenge the accounting on behalf of the entire trust estate and that heavily redacted statements of counsel were insufficient to support payment as reasonable expenditures of the trustee. The case should inform the conduct of trustees seeking judicial approval of their fees and expenses.
• Creditor Barred from Bringing a Derivative Action Against an Insolvent Delaware Limited Liability Company
  In a recent ruling, the Delaware Chancery Court held that a creditor cannot bring a derivative action against a Delaware limited liability company, even where the company is clearly insolvent. In the well-known case of North American Catholic Educational Programming Foundation Inc. v. Gheewalla, the Delaware Supreme Court held that a derivative action was available to creditors of an insolvent Delaware corporation. The Delaware Legislature may have to step in to harmonize this inconsistency.