CORPORACORPORACORPORACORPORACORPORATE COUNSEL PROFILETE COUNSEL PROFILETE COUNSEL PROFILETE COUNSEL PROFILETE COUNSEL PROFILEAn Interview With Todd Suko of

United Agri Productspage 1page 1page 1page 1page 1

BOARD CORNERBOARD CORNERBOARD CORNERBOARD CORNERBOARD CORNERWhen Comp is King: New Headaches for

Public Company Directorspage 4page 4page 4page 4page 4

Recent Litigation Aims forDirectors’ Wallets

page 7

CORPORACORPORACORPORACORPORACORPORATETETETETEImproving Shareholder Communications:

What’s the Word on the Street?page 9page 9page 9page 9page 9

FIRM NEWSFIRM NEWSFIRM NEWSFIRM NEWSFIRM NEWSpage 1page 1page 1page 1page 122222

CORPORACORPORACORPORACORPORACORPORATE TE TE TE TE (continued)Antitrust Thresholds Climb for

Merger Dealspage 1page 1page 1page 1page 177777

VENTURE CAPITVENTURE CAPITVENTURE CAPITVENTURE CAPITVENTURE CAPITALALALALALRecent Guidance on Down, Pay-to-Play

and Inside Roundspage 1page 1page 1page 1page 188888

ENVIRONMENTENVIRONMENTENVIRONMENTENVIRONMENTENVIRONMENTALALALALALSupreme Court Shakes Up

Superfund Lawpage 2page 2page 2page 2page 211111

WWW.FAEGRE.COMMINNESOTA l COLORADO l IOWA l ENGLAND l GERMANY l CHINA

TRENDS® is published bi-monthly bythe law firm of Faegre & Benson LLP.Further details are necessary for acomplete understanding of the subjectscovered by this newsletter. For thisreason, the specific advice of legalcounsel is recommended before actingon any matter discussed within.

For the latest legal news, or copies ofany article in this newsletter,visit Faegre & Benson online atwww.faegre.com.

For address and other changes, contactdkill@faegre.com.

© 2005

All Rights Reserved.

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corporate counsel profile

Todd Suko is Vice President, General Counsel,and Secretary of United Agri Products, which isthe largest independent distributor of agricul-tural and non-crop inputs in the United Statesand Canada, including crop protectionchemicals, seeds, and fertilizers.

In the last 18 months, UAP has gone throughtwo major corporate transactions: its sale byConAgra Foods to the Apollo investment groupand its subsequent initial public offering in late2004. In this interview with TRENDS, Sukodiscusses the challenges of managing legal riskthrough a period of significant corporate change.

TRENDS: UAP is a $2.5 billion dollarcompany, and you have two lawyers on staff.Do you ever sleep?

SUKO: Well, we do spend a lot of time inthe office. But this is really the best job anylawyer could have. Every day is a newchallenge. If I didn’t love it, I couldn’t do it.

We also have a hard-working and highlyexperienced support staff. We try to hirepeople who are the best in the industry.That’s essential. Our legal administrator, forexample, is not just an experienced paralegal,but an expert in legal administration,including setting up systems. When weneeded a new IT system, she drove that wholeprocess.

TRENDS: Obviously, you’re as much amanager as a lawyer. How do you managethe legal and regulatory challenges of a largecompany with business interests throughoutNorth America, when the actual inside legalteam is quite small?

SUKO: When I arrived here four years ago,it was clear that we had to streamlineprocesses and make things more efficient.The first thing I did, for example, was put

Corporate Counsel Profile:An Interview with Todd Suko

of United Agri Products

more controls on the contracting process,creating form agreements and standardizedterms, adopting policies and procedures.Standardized processes and proceduresenhance control and allow you to operatemore efficiently.

Today, in addition to legal, I oversee ourenvironmental and regulatory services,insurance and risk management, DOTcompliance, safety, security, and flightoperations. Combining functions with legaland regulatory exposure under one umbrellahas allowed us to better integrate ourapproach to managing risk and assuringregulatory compliance. For example,Homeland Security is an issue that impactsboth our transportation operations and the

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way we manage physical security at ourfacilities. Also, our department is more thanjust two lawyers – we have talented profes-sionals with specific regulatory expertiseworking in each of these areas.

TRENDS: Tell me about how you buildpartnerships with outside counsel. What areyour key expectations from the outsidelawyers you work with?

SUKO: When I arrived, we were using a lotof different lawyers and firms. We had manygood lawyers, but the depth of knowledgethat any one firm had was limited. That’s nota very efficient way of doing business.

We have a complex business model. I tried tofind firms with whom we could partner whowere both knowledgeable about our industryand willing to learn our business. Today,Faegre & Benson is one of two primary firmswe use. They’ve really been the model for apartnership with outside counsel. They’veinvested the time to learn our business, andthey do a lot of work behind the scenes to geteveryone on the same page – and we don’t getcharged for that time. They understand whatI want and expect, and I don’t have to explainmyself every time. We get better service, andFaegre gets a loyal client.

TRENDS: You’ve recently gone through thepublic offering process at UAP. From amanagement perspective, how did you get thecompany and its people ready for the legal andregulatory challenges of an IPO?

SUKO: The process was really already inplace. When I took over as General Counselin 2002, one of my goals was to enhancecompliance and review every process we had.I’m not sure there’s anything we did to preparefor the IPO that we wouldn’t otherwise havedone. Measuring and managing risk, havinggood controls in place, that ’s all part ofrunning a good company.

We were subject to a lot of due diligenceduring the acquisition by Apollo, and I thinkthey found things were in good shape.

TRENDS: How is life different now as apublic company? What changes have you

seen in how you have to manage not only thelegal team, but also the various operations ofthe company?

SUKO: As a public company, we have addedissues like Sarbanes-Oxley. And we don’thave support from ConAgra the way we didin the past.

We spend a lot more time on regulatoryfilings. I’m also Corporate Secretary andserve on a number of internal committees.All those things are new. Either we didn’thave them before, or they were handled at acorporate level at ConAgra. So everyonehere has had to pick up a lot of work withouta lot of new resources.

TRENDS: What advice would you give toa company that ’s looking down the road to anIPO?

SUKO: No one should wait until the publicoffering process to start worrying about it.Sarbanes-Oxley has specific requirements,but the basic components of adequatecontrols are things you should be doinganyway. The more you think like a publiccompany, the better you’ll do as a privatecompany.

I didn’t think the public offering wouldhappen as quickly as it did. But you have toseparate the forest from the trees and thinkabout what you’re really trying to accomplish,which is to reflect your corporate ethics inthe execution of your business.

TRENDS: You also went through a majorsale at UAP within a year prior to the IPO,when the company was sold by ConAgra.How would you compare the challenges ofthe two transactions?

SUKO: When Apollo was buying us, therewas a ton of due diligence. They had tounderstand us. We were going through lotsof audits – environmental issues, contracts,etc. Then once we closed, we immediatelyturned around and did two major bondofferings. We went from getting the dealdone and negotiating contracts in New Yorkto getting prospectuses done for the bondofferings. It was a blur.

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corporate counsel profile

Just a few months later, we filed for an initialpublic offering of Income Deposit Securities,although we eventually did a regular commonstock IPO instead. Despite the distractionand extra work associated with these deals,management and our employees stayedfocused on running the business. Theperformance of the company continued toimprove, and that accelerated the timeline ofthe public offering. It was an effect of whatwe were doing.

TRENDS: All in all, it’s been a year ofremarkable organizational change.

SUKO: I’m not sure we can operate anyother way. We completed 15 major corporateprojects over 18 months, plus implementing awhole new core IT system. Thankfully, mybackground was as a litigator, so I’m used toliving in a state of chaos.

TRENDS: You were also a Navy pilotoperating off an aircraft carrier. Whatmanagement lessons did you take away fromthat experience?

SUKO: Yes, I was a bombardier-navigator.A navy squadron operating off a ship is leanand mean. You get used to working in a leanenvironment. When it’s night and you’retrying to get back aboard the carrier – andthere’s a problem – nobody else is going tohelp you. You have to prioritize and decidewhat’s really important. You have to beconfident. You have to make good decisionsquickly. That’s a good lesson for any manager.

I also learned a lot about working with people.That was the foundation for my managementphilosophy and how I operate today. I was 22and a junior officer. I got to make a lot ofmistakes and not get fired for them. Usually,people don’t get to manage people until muchlater in life, and they can’t afford to makemistakes.

TRENDS: Connect the dots for us. Howdid you get from the Navy to where you arenow?

SUKO: I was stationed on an aircraft carrierin the Adriatic Sea in 1993. But the Navywas downsizing in the early 1990s. I applied

for law school and took the LSATs on theship. One day I was flying missions overBosnia, and a couple weeks later, I was takingclasses in Charlottesville.

After law school, I moved to DC and workedas a litigator at McKenna & Cuneo. Ienjoyed my experience in Washington, but Iwanted to move west, and I wanted to getinvolved in the business side. This opportu-nity came up, and I never looked back. Iliked the idea of a down-to-earth business –no pun intended.

TRENDS: A lot of lawyers crash and burntrying to make the transition from privatepractice. What does it take for someone in alaw firm to succeed on the business side ofthe aisle?

SUKO: You have to realize they’re twocompletely different jobs. If you’re goinginto a large company with limited internallegal resources, your role is to manage theprocess. And you have to learn the business.You can’t underestimate the importance ofthat.

You need to get to know the people. I’vespent a lot of my time building relationships.When you transition from private practice,you have to leave your ego at the door. You’rea support function. You work for the rest ofthe business. Your client is everyone in thecompany.

TRENDS: How do you find the balancebetween managing risk and maintaining anentrepreneurial approach to your market?

SUKO: I’ve found the most successful way isto educate the business people and help themunderstand risk. We have a very entrepre-neurial culture, and at the end of the day,managers can choose to take risks. But I helpthem understand what can go wrong and howto minimize the risks. We used to have a lotof contract litigation, for example, and nowwe’ve had hardly any in the last three years.People call the legal department first now.They’ve learned it’s a lot cheaper to call foradvice on the front end. We try to be a

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When Comp is King: New Headachesfor Public Companies and Their Directors

By Steven Kennedy and Morgan Burns

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When shareholders sued Disney directors torecover the $100 million-plus severancepackage paid to former president MichaelOvitz, most of the headlines focused on thegossipy testimony that exposed personalityclashes between company insiders. Despitethese headlines, the real story for directors isthe threat of personal liability over acompensation decision that involved no self-dealing or other fraudulent behavior. Inletting the case go forward, the Delawarejudge ruled that the directors’ actions inapproving the package and allowing itsexercise only 14 months after Ovitz joined thecompany, would (if proved in court)constitute a lack of “good faith” for whichthey enjoyed no shield from liability.

The judge’s theory has yet to be tested inhigher courts. However, the idea of a “goodfaith” duty that goes beyond the traditional

duties of care and loyalty has provoked awave of unease among directors. Undercurrent law, directors generally cannot beheld personally liable for negligent or evengrossly negligent behavior, as long as theiractions do not feather their own nests. Thealleged facts in the Disney case, however,prompted the judge to opine that the typical“business judgment rule” protection doesn’tapply when directors fail to use anyjudgment whatsoever.

Regardless of how the new implied duty of“good faith” ultimately fares in the courts,the Disney case is symptomatic of a newwillingness by shareholders to challengeboard-level decisions and to go after thedirectors’ own pocketbooks if necessary –particularly in connection withcompensation decisions. After several years

Steven Kennedy and Morgan Burns represent publiccompanies on securities law matters and corporategovernance. They may be reached atskennedy@faegre.com or mburns@faegre.com.

critical part of the team, not an impedimentto getting business done.

TRENDS: Tell me a little bit about howyou build relationships with the variouscompany managers.

SUKO: You have to understand that these

are the people who make our companywork, who sell our product. They’reexceptional people. You can’t go in andassume you have all the answers. You haveto listen and then work with them to findsolutions. That’s the key point.

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Corporate Counsel Profile continued from page 3

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of focus on the audit committee, scrutiny byshareholders and regulators appears to haveshifted to the compensation committee in anattempt to rein in outsized executive paypackages and hidden compensation. As aresult, directors must now confront new rulesregarding deferred compensation and stockoptions, increased SEC reportingresponsibilities, and the constant threat ofcourt actions or governance challenges. Everycompensation decision is being put under themicroscope.

More Scrutiny

Popular discontent over executive pay hasbeen bubbling for years, but the nine-figurepayday for Ovitz seemed to crystallizeshareholder sentiments against compensationpackages that appeared to have no reasonableconnection to performance. This groundswellis triggering a series of new governance risksfor companies and their Board members.

If the ultimate judgment of the Delawarecourts goes against Disney, its directors maybe protected by insurance, which will foot thebill for any damages awarded in the litigation.In that event, however, public companies arelikely to face an even more restrictive andexpensive environment for D&O insurance inthe future, as insurance companies concludethat plaintiffs’ attorneys have found a wayaround the legal protections for directors.Although we all thought the market forD&O insurance could not get any worse afterEnron, we may not have seen the bottom.

There is also often a “regulatory snowball”effect in high-profile litigation. As theDisney lawsuit garnered media attention, theSEC took a closer look at the company anddiscovered that some children of directorswere working for Disney – a fact that lookedto regulators like a special perk that had neverbeen publicly disclosed as required by currentrules. The company was hit with a cease-and-desist order. The lesson for public companies:bad news has a way of breeding more badnews.

Pay package scrutiny is not limited to thecourtroom or the offices of the SEC.

Institutional Shareholder Services, anorganization representing the interests ofmany powerful institutional shareholders, isalso keeping a close eye on executivecompensation. ISS can wield a big stick if itfeels that a package is out-of-line. It canrecommend that shareholders not approvethe plan, or (more dramatically) it can adviseshareholders to withhold re-election votes formembers of the compensation committee.The consequences of withhold votes will begreatly increased if the SEC follows throughand adopts its currently proposed rules thatwould provide shareholders with amechanism for directly nominating directorsin the event more than thirty percent ofshareholders follow ISS’ advice.

Taking Stock

Accounting and tax rules for executivecompensation are also becoming morecomplicated.

After years of debate, the FinancialAccounting Standards Board, with theblessing of the SEC, took the expected stepin December 2004 of requiring publiccompanies to expense the “fair value” of stockoptions on the income statement. Thechange begins to take effect in July andmoves this change from a footnote disclosureburied in the back of the financial statementsto an item that directly hits net income.

Investors had sought the revised rule for yearsas a way to increase the transparency offinancial statements, but many companies(particularly in the tech sector) had resistedfiercely, arguing that expensing optionswould suppress job growth and make itharder for cash-strapped growing companiesto lure talent by using options as a carrot.Congress even weighed in recently on theside of these companies but the FASB wouldnot back down. The fact that investorsemerged as the winner in this argument isanother example of the growing shift in thebalance of power between companies andtheir shareholders.

The new rule for options comes on the heels

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By Aaron Van Oort

of significant changes in the tax treatmentof nonqualified deferred compensationarrangements that took effect in January.The changes in tax law create substantialnew complications for a wide range ofcompensation arrangements and maydiscourage the use of some popularcompensation structures altogether, becauseof negative tax implications for thecompany and the employee. Not only aretraditional deferred compensationarrangements covered, but otherarrangements, such as below market stockoptions, are also swept in. The penalties forbeing wrong under this new law are severe:any deferred income that does not meet thenew standards becomes immediatelytaxable, plus interest and a 20 percentpenalty. (For more information on the newdeferred compensation rules, seewww.faegre.com.)

8-K Krazy

The pace of regulatory filings has alsoaccelerated, thanks to new SEC rules thatrequire immediate disclosure for a broadrange of corporate actions. Leading theway: decisions related to compensation.

Previously, the SEC required publiccompanies to file an immediate Form 8-K(in addition to its usual quarterly andannual reports) only in the event of certainmajor corporate actions, such as buying orselling a significant business. Now, theSEC has dramatically broadened the rangeof events that trigger a required 8-K filing,including any contracts related tocompensation of executive officers ordirectors. The deadline for making thefiling is just four business days.

If you adopt a bonus plan without finalizingspecific criteria for when the bonus applies,that triggers an 8-K. If you then adoptcriteria, that triggers another 8-K. If youmake a discretionary payment on apreviously adopted plan, that triggers an8-K again. The SEC has made clear inrecent guidance that this trigger applieswhether the contract is a twenty page

written agreement or merely a handshake.The result is that companies that previouslywould file only a few 8-Ks a year now findthemselves going 8-K Krazy. (For moreinformation on the new 8-K rules, seewww.faegre.com.)

Duty Calls

Put it all together, and there is a clearmessage for directors: comp is king. Moreand more public company disputes, whetherat annual meetings or in courtrooms, arelikely to center on compensation.Compensation plans have grown morecomplicated and expensive, and Boarddecisions with regard to compensation areunder intense scrutiny by investors andregulators. All of it is being conducted inthe public eye. There is also a higher riskthat directors could find themselves on thehook personally if a pay dispute blows up.

The lessons for directors in the wake of theDisney litigation and other compensationtrends are clear. First, get informed and stayinformed. The alleged facts that allowedthe Disney litigation to go forward arosenot from making an informed but flawedchoice, but from the perception that thecompany’s directors allowed an inflatedcompensation package to proceed withoutproper diligence and oversight.

For compensation committee members inparticular, this means getting informationon proposed bonuses and compensationpackages well in advance of calendardeadlines – not waiting until there is notime to do anything but a cursory review. Inmany cases, it may also be desirable to hireoutside experts to help in craftingcompensation packages, providingcompetitive data on the compensationmarket, and establishing viable linksbetween pay and performance.

Finally, directors need to know when to say,“Stop!” The expectation today is thatdirectors will ask the hard questions of theexecutive staff and put the brakes on an ill-advised compensation plan.

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Recent Litigation Aims forDirectors’ Wallets

The risks of serving as a corporate directormay just have gotten higher. In two securitiesfraud settlement agreements that wereannounced this January, outside directorsagreed to dig into their own pockets to pay aportion of the settlement costs. Thesettlement agreements are extremely unusualin that directors and officers usually rely oninsurance to cover all of the costs associatedwith securities cases and settlements.

In the securities fraud class action spawned bythe collapse of WorldCom, Inc., ten formerWorldCom outside directors agreed topersonally pay $18 million as part of a $54million settlement of their portion of thecase. The settlement collapsed a month laterwhen the judge rejected a provision of thedeal that relates to how much the remainingdefendants in the suit might have to pay ifthey lose the case. The termination of thesettlement was not related to the personalpayments by the directors, but they must nowrenegotiate the deal or go to trial along withthe other defendants.

WorldCom collapsed and declaredbankruptcy in 2002 after it announced that ithad overstated its earnings by billions ofdollars over a four year period. According tonews reports, the plaintiff, the New YorkState Common Retirement Fund, insistedthat the WorldCom directors pay asignificant portion of the settlement fromtheir personal assets to send a message to

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corporate boards that they must be vigilantguardians for the shareholders they represent.The $18 million that the former directorsagreed to pay represents at least 20% of theircombined individual assets, excluding theirprimary residences, retirement accounts andcertain joint marital assets not available tosatisfy a judgment. The settlement wouldhave resolved claims against the outsidedirectors under Sections 11 and 15 of theSecurities Act of 1933, which impose liabilityfor misrepresentations and omissions inregistration statements, and Section 20(a) ofthe Securities Exchange Act, which imposesliability on “control persons” of those engagedin primary securities fraud. Claims ofprimary securities fraud against the outsidedirectors under Section 10(b) of theSecurities Exchange Act had previously beendismissed by the court.

The announcement of the WorldComsettlement was followed by an agreement inthe Enron Corporation securities fraudlitigation that settled claims against eighteenformer Enron directors in exchange forpayment of $168 million. Ten of the settlingdirectors agreed to contribute $13 million oftheir own money to the settlement, a sumequal to ten percent of their pretax gainsfrom Enron stock sales. As was the case inthe WorldCom litigation, the Section 10(b)securities fraud claims against the directors

By Ahna Thoresen

Ahna Thoresen practices in securities-related andcommercial litigation. She may be reached atathoresen@faegre.com.

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had been dismissed by the court. Theremaining claims involved allegations ofmisrepresentations and omissions in Enron’sregistration statements, and claims under theTexas Securities Act.

The long-term impact of these settlementagreements remains to be seen. Theunraveling of the WorldCom agreementcertainly limits its utility as a model forplaintiffs in other cases. Moreover, theWorldCom and Enron implosions may be sounusual and their directors’ inattention soegregious that most directors need not worrythat their personal wealth may be vulnerableto lawsuits. WorldCom’s 2002 bankruptcywas the largest in U.S. history, and thecompany’s books were reportedly off by $11billion. In the Enron case, federalprosecutors charged over 30 people withcriminal wrongdoing.

The Enron and WorldCom cases also differfrom some securities fraud class actions inthat Enron and WorldCom were sellingsecurities to investors when the alleged fraudwas occurring. That permitted plaintiffs tobring claims under Section 11, which differsfrom Section 10(b) in that it does not requireproof of fraudulent intent. It is likely thatthe plaintiffs’ reduced burden of proof gavethe directors an impetus to settle.

Despite the unique circumstances of theEnron and WorldCom settlements, however,the plaintiffs’ bar and shareholder activistshave been quick to claim that payments bydirectors are the new trend. It is certainlypossible that other securities fraud plaintiffsand their counsel will follow the lead of theNew York State Common Retirement Fundand insist on personal contributions fromsettling directors and officers. As a result, atleast in high-profile cases, directors shouldnot assume that insurance will shield themfrom personal liability.

So what is a well-meaning director to do tomanage the liability risks presented by the

WorldCom and Enron cases? Althoughrecent corporate scandals may have increasedscrutiny on corporate boards, directorliability still turns on the same basicprinciples. The best way for a director toreduce litigation and avoid liability is byfulfilling his or her fiduciary obligation toact on an informed basis, in good faith, andin the honest belief that his or her actions arein the best interests of the corporation.Obviously that precludes outright fraud andinsider trading in company stock. At a morebasic level, however, directors should do theirhomework and ask questions withconstructive skepticism until they fullyunderstand what they are asked to do.Directors should also take care that there aresystems in place to ensure that they receivemeaningful, independent informationregarding the operation of the company.Although the vast majority of corporatemanagers may be competent and ethical, theWorldCom and Enron cases illustrate thedangers of passive board acquiescence inmanagement decisions.

Director due diligence is particularlyimportant when a corporation is issuingsecurities, as was the case for Enron andWorldCom. Section 11 claims formisstatements in a registration statement donot require the plaintiff to plead or prove thedefendants’ fraudulent intent. In order toavoid liability under Section 11, a directormust establish that he or she had reasonableground to believe, after a reasonableinvestigation, that the registration statementwas true.

Diligence and good faith cannot immunizedirectors and their companies againstsecurities fraud suits. Nevertheless, well-informed decision-making and goodcorporate governance practices are theboard’s best means of preventing the sort ofmassive accounting manipulations andmassive liability seen in the WorldCom andEnron cases.

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corporate

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It was not so long ago that the onlyparticipants in the stock market were wealthyindividuals who hired brokers to managetheir accounts. Over recent years, however,the stock market has become more accessibleto the average retail investor. This shift isdue in large part to the increased level ofinformation available to the public – throughpress releases, electronic SEC filings andcompany websites. Information is nowavailable to enable the average investor toconduct research and make his or her owndecisions about investment alternatives.However, many companies’ shareholdercommunication practices have not kept pacewith these changes, and now is a good timeto review your company’s practices.

Basic communicationprinciples

The primary goal of communicating withinvestors is to inform. And, most companieswould probably say that avoiding liability inthe process is a close second priority. Howdo companies balance these two objectives?

Tell it like it is. A primary objective ofshareholder communications is to build trust.As a result, it is important to be honest andaccurate and not to overstate the good newsor underplay the bad news. If your

disclosures are found to be misleading, yourcompany’s credibility with investors may belost (and, worse yet, regulators andplaintiffs’ lawyers may come knocking).

Tell the truth – the whole truth. Forget thesaying you learned in kindergarten that “ifyou don’t have anything nice to say, don’t sayanything at all.” That policy doesn’t workwhen it comes to communicating with yourshareholders – and, inevitably, sometimesyou will have bad news to report. Instead,you should follow the golden rule ofcommunicating with investors: “Eachdisclosure must be accompanied by allmaterial information necessary to make thedisclosure, in light of the circumstances, notmisleading.” For example, suppose thatyour company enters into a new contractwith an important customer that agreed topurchase 100,000 widgets from yourcompany each year for the next five years.But, in order to close the deal, yourcompany had to agree to sell the products ata lower price than usual, which you expectwill adversely impact your margins. It maybe misleading to disclose only the fact thatthe contract was signed without furtherexplaining the negotiated price terms.

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Improving ShareholderCommunications:

What’s the Word on the Street?By Amy C. Seidel

Amy Seidel practices in the corporate group at Faegre & Benson.She may be reached at aseidel@faegre.com.

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Use ‘plain English.’ The form of yourdisclosures can be just as important as thecontent. A few simple formatting featurescan make your disclosure a lot easier to read.For example, consider the following:

■ Use bullets and tables to arrange text

■ Keep sentences simple

■ Use sub-headings

■ Consider using a Q&A format

■ Select user-friendly methods, likeHTML and PDF

This Q&A style has become more popularover the years. For example, you might draft aForm 8-K disclosing a new credit agreementin the following manner: “Why did we enterinto a new credit facility? We entered into anew credit facility because our old facility wasscheduled to expire within the next year andwe determined that we could obtain morefavorable terms with a different syndicate oflenders. What is the impact of the new creditfacility on the company? The new creditfacility allows us to borrow the same amountthat we could borrow under the old creditfacility, but the interest rate is lower and thecovenants are less restrictive. As a result, weexpect that the new credit facility will help usreduce our interest expense without reducingour ability to access capital.” Drafting in aQ&A format helps the company think likethe investors who will be reading the Form 8-K and it provides the information in an easy-to-read format.

Know your audience. After you’ve decidedwhat you are required to disclose about acertain matter, ask the next question – “Whatelse would I want to know about this if I werean investor?” All shareholder communications- from annual reports to investor relationswebsites - should be directed at the investoraudience. Put on your investor hat or, betteryet, ask persons who are less involved in day-to-day operations, such as members of yourboard of directors or your outside advisors, totell you what questions come to their mindswhen they read the disclosure.

Be prepared. Companies need to prepare forseveral steps in the process – especially intoday’s environment, which allows for fastdissemination of information. Have a processin place to identify events that requiredisclosure. Establish a disclosure committeethat can convene quickly to determine thedisclosure requirements and select from theavailable disclosure tools the method orcombination of methods for communicatingthe information. Prepare your IR team forquestions they might get after the news hitsthe streets. While you should strive toprovide the information in a clear, completeand understandable format that will minimizefollow-up questions, you are still likely to geta few questions from analysts or shareholdersand your response team needs to know howthey can and should respond.

Tools of the trade

When deciding how to inform shareholdersabout an event, companies should look at thecommunication tools available:

■ SEC periodic reports (Forms 10-K and10-Q, glossy annual reports and proxystatements)

■ Current reports on Form 8-K

■ Press releases

■ Prepared oral statements to the press

■ Publicly-accessible conference calls or(carefully scripted) webcasts

■ Q&A sessions after conference calls

■ Direct outreach (analysts, shareholders,regulatory agencies)

■ Employee letters/customer letters

■ Investor relations (IR) website

■ Saying nothing

Just because the company might be requiredto disclose the information in one place, suchas an SEC filing, it doesn’t mean that thecompany can’t also use additionalcommunication tools to communicate themessage more effectively. For example,

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corporate

many companies that are required to discloseinformation about a material transaction,such as a merger or acquisition, also hold apublicly accessible conference call to giveinvestors and analysts an opportunity to askadditional questions.

Emergingcommunications trends

Technology has influenced both the methodsof communicating and the speed at whichcompanies can provide information to theinvesting public. Two trends in shareholdercommunications include the requirement todisclose more information on Form 8-Ksand the use of IR websites forcommunicating with investors.

Reporting current eventson Form 8-K

In August 2004, new rules became effectivethat require public companies to disclosemany more events on Form 8-K within 4business days of the event. The types ofevents triggering disclosure include enteringinto or terminating a material contract,electing a new director, hiring a newexecutive, recording a material impairmentcharge and many others. As a result, mostcompanies are finding that the number ofForm 8-Ks they file in a year is nearly twicethe number they filed previously. Companieshave also found that Form 8-K filings get alot of attention from investors and the pressbecause they generally signal importantevents. Form 8-Ks are designed to discloseone or a few events; however, rarely do theseevents occur in isolation. Companies shouldavoid the urge to disclose only the bareminimum and should seek to providedisclosure that puts the event in context. Forexample, if your company adopts a newexecutive bonus program that needs to bedisclosed, consider disclosing more than justthe basic terms of the program. Considerexplaining how the new program fits into thecompany’s overall executive compensationstrategy.

Investor relations websites

The internet provides a fast, cheap and easyway to provide information. Mostcompanies have expanded their websites toprovide a variety of information toinvestors. The SEC is looking morefavorably on the use of company websites toprovide access to the company’s financialreports and information about thecompany’s corporate governance practices.Today, many IR web pages include some orall of the following:

■ List of directors and officers, includingbiographies and pictures

■ Information about directors, includingboard committee composition,independence determinations andmethods for shareholders tocommunicate with directors

■ Links to SEC filings, including aninteractive annual report that allowsinvestors to use hyperlinks to navigatethrough the annual report

■ Links to key corporate governancedocuments, such as articles, bylaws,board committee charters, governanceguidelines and codes of ethics

■ Shareholder services information, suchas dividend policies and transfer agentcontact information

■ Frequently Asked Questions byshareholders about corporategovernance and social responsibilitymatters

Companies should review their IR websitesfrom time to time and consider whetheradditional information is required to beincluded by SEC or stock exchange rules,and whether additional information may behelpful to investors. The IR website is agood place for companies to answer thequestions that shareholders pose frequentlyabout corporate governance or shareholderservices matters. For example, if yourcompany has a poison pill or classified

c o n t i n u e d on page 16 ➲

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firm news

In January, Des Moines-based Meredith Corporation announced an agreement to publish aChinese edition of its popular Better Homes and Gardens magazine, beginning later in 2005. Themagazine will be produced by Chinese publisher SEEC Media Group under an exclusivelicensing agreement with Meredith.

Faegre & Benson served as outside counsel to Meredith in negotiating and drafting the licensingagreement and counseling the company on its legal and business strategy. The firm used a team ofcorporate and intellectual property lawyers from its offices in Des Moines, Shanghai, andColorado.

“Better Homes and Gardens is the ‘crown jewel’ among our many well-known media brands,” saidJohn Zieser, Vice President, Corporate Development, General Counsel & Secretary of Meredith.“Our expansion in the Chinese market is a pivotal step in leveraging that brand in newinternational markets. We selected Faegre & Benson to help us manage this very importanttransaction, because we needed their unique combination of on-the-ground experience in theChina market and U.S.-based lawyers who understand the business risks and opportunities ofmanaging global brands.”

“As we go around the world,” Zieser added, “we look forward to having Faegre & Benson atour side.”

Faegre & Benson has handled matters for clients in more than 60 countries. More than tenpercent of its lawyers are located internationally at its offices in Shanghai, London, andFrankfurt. The firm has represented numerous multinationals in China, including Archer DanielsMidland, Cargill, Carlson Companies (Radisson and Regent Hotels and TGI Friday’s), GeneralMills, Owens-Corning, Mattel, Sprint, Target, and many others.

“We’re delighted to be partnering with a leading Iowa company like Meredith on its globalneeds,” said Kim Walker, a partner in the firm’s Des Moines office. “This transaction was anothergreat example of how our attorneys work as a team across offices and time zones.”

Faegre & Benson Helps MeredithTake Better Homes and Gardens to China

Firm Again Ranked Among Top 20 U.S. Law Firmsas IP Counsel to Fortune 250

A survey in the December 2004 issue of IP Law & Business magazine has again rankedFaegre & Benson among the top 20 U.S. law firms in serving Fortune 250 companies as primaryIP litigation counsel or primary patent prosecution counsel. The firm was listed among thenation’s leading IP firms in a similar survey in 2003.

Faegre & Benson was the only Minnesota-based firm, and the only firm with a substantialpresence in Colorado, included in the list.

The firm offers one of the largest teams of intellectual property lawyers in the central UnitedStates, with experience handling complex litigation and transactions for clients ranging frommulti-national corporations to high-technology entrepreneurs. The firm’s IP team includes morethan 70 lawyers in the U.S., Europe, and Asia, including 20 registered patent attorneys.

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In its December 2004 edition, AmLaw Tech magazine again ranked Faegre & Bensonamong the top law firms in the U.S. in its use of technology. The rankings rated thefirm as the #1 law firm in the country in terms of the quality of its firm technologyand #2 in the country in its technology to help clients.

Based on all factors, including training and support, the firm ranked #6 overall out ofmore than 150 firms listed in the survey.

The rankings are based on the annual survey of mid-level associates conducted byThe American Lawyer magazine.

This is the second year in a row that the firm has ranked among the top firms in thenation in use of technology. A 2003 survey by BTI Consulting also named Faegre &Benson as one of the country’s most tech-savvy law firms, and the firm’s web site atwww.faegre.com has been named the nation’s #1 law firm web site three years in a row.

Firm’s Technology Takes #1 Ranking inAmLaw Tech Survey

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On January 24, 2005, the United States Court of Appeals for the Eighth Circuit affirmed theOctober 2, 2003 order of the United States District Court for the District of Minnesota ( JudgeJoan Ericksen) in favor of Wyeth, one of the world’s largest pharmaceutical manufacturers, inWyeth v. Natural Biologics.

The Court found that Minnesota-based Natural Biologics had misappropriated Wyeth’s tradesecrets for the billion dollar drug Premarin. The case, which commenced in the fall of 1998 andtried in the fall of 2002, involved a large litigation team managed by Win Rockwell. Cal Litseyargued the appeal in the Eighth Circuit, assisted by trial team and appellate team partners BruceJones and John Connelly.

The trial lawyers on Wyeth’s successful team were partners David Gross, Cal Litsey, and KaraBenson, and associates Jim Poradek and Michelle Paninopoulos. Other lawyers who playedcritical roles include Mary Yeager, Bill Roberts, and Randy Kahnke.

In a 2004 survey conducted by Corporate Counsel magazine, Faegre & Benson was listed aspreferred counsel by more members of the Fortune 250 than any major Minnesota or Coloradolaw firm. The firm received the same recognition in a similar survey by the magazine in 2003.

Companies named Faegre & Benson as preferred counsel in each of the four practice areas listedin the survey, including litigation, corporate, labor and employment and intellectual property.

The firm’s principal clients among the Fortune 250 include Target, Wells Fargo, AmericanExpress, Archer Daniels Midland, Principal Financial Group, and General Mills.

Eighth Circuit Affirms Trial Victoryin Wyeth Trade Secret Case

Faegre & Benson Again Named Among Leading FirmsRepresenting Fortune 250

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firm news

The Business Journal published its annual list of top Minnesota business stories on December 31,and Faegre & Benson played a major role in each of the top three deals from 2004.

Topping the rankings was the sale by Target Corporation of its Marshall Field’s and Mervyn’sretail stores. The combined sales prices of the separate transactions totaled nearly $5 billion.Faegre & Benson served as primary outside counsel on the deals.

The second and third top stories of 2004 involved the merger of insurance giants St. PaulCompanies and Travelers and the sale of International Multifoods to J.M. Smucker, respectively.Faegre & Benson served as primary outside counsel on the International Multifoods sale and aslead Minnesota counsel on the St. Paul Travelers transaction.

Faegre & Benson Tops List of 2004 Minnesota Deals

In January, Phil Garon was named president of the United States Law Firm Group(USLFG) by its Board of Trustees. The USLFG is a network of 19 established lawfirms headquartered in major cities throughout the U.S. Phil will remain a partnerwith Faegre & Benson in addition to his volunteer responsibilities with the USLFG.

Phil became a trustee of the USLFG in 2001 and was previously Faegre & Benson’srepresentative on the group’s Corporate and Securities Committee. As president,

Phil will plan and chair the trustees meetings, which convene three times a year to discussmanagement and operational matters. He will oversee the 19 committees of the USLFGestablished to discuss legal and practice developments in specific areas of law and will alsorecommend and review possible USLFG policy changes.

Phil is the past chairman of the management committee at Faegre & Benson and is the firm’ssenior mergers and acquisitions partner. He was lead outside counsel in 2004 in the multi-billiondollar sales of Marshall Field’s and Mervyn’s by Target Corporation.

Phil Garon

Phil Garon Named New President of theU.S. Law Firm Group

Dr. Laurenti B. Kiszczuk has joined Faegre & Benson as a partner in the Frankfurt office. He isa veteran of German corporate transactions and has been ranked for years among the top lawyersfor venture capital matters in Germany by the well-known JUVE directory.

Laurenti is experienced in both domestic German and cross-border M&A deals and has been apioneer of private equity work since it emerged on a large scale in Germany in the mid-1990s.He represents several of the leading private equity firms in the country.

“We are delighted to welcome Laurenti to our team in Frankfurt,” said Horst Daniel,administrative partner of the firm’s Frankfurt office. “He adds strength and depth to our existingcorporate practice and will work closely with our lawyers in intellectual property, employment,litigation, and real estate.”

Laurenti has practiced in Germany at international law firms in Frankfurt and Berlin for morethan a decade. He publishes and speaks regularly on German corporate law matters. His nativelanguages are German and Ukrainian, and he also speaks English and Russian fluently.

Faegre & Benson offers a dozen lawyers at its Frankfurt office, which the firm established in1991. For more information, consult either the firm’s English-language web site atwww.faegre.com or our domestic German web site at www.faegre.de.

Experienced Corporate PartnerJoins Frankfurt Office

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Veteran Tax Lawyer Joins Faegre & Benson

Ken Levinson, a 29-year veteran of tax practice, has joined the law firm of Faegre& Benson as a partner in the Tax group in the Minneapolis office. He will focus onglobal tax planning issues for multinational businesses and on tax planning in thecaptive insurance company area.

Levinson was previously Managing Director in the Midwest Region in the CaptiveInsurance and Warranty Practice of KPMG. He has worked at the Office of ChiefCounsel of the Internal Revenue Service, Northwest Airlines (with executive

responsibilities as Vice President for the Corporate Tax and Risk Management Departments),and Marriott Corporation. In addition to nearly three decades of tax experience, he offers nearly15 years of risk management and insurance experience and 12 years of airline experience, havingbeen elected by his peers in the industry to chair several national and international airlinecommittees in tax and insurance.

Levinson has also led project finance transactions worth hundreds of millions of dollars in Europeand Asia. He has his LLM degree in taxation from Georgetown University Law Center, wherehe was an Adjunct Professor teaching the international tax course in the graduate law programfor 9 years, and his JD degree from George Washington University’s National Law Center.

“Ken is a very experienced tax lawyer, across a number of industries and disciplines,” said JohnSteffen, head of the firm’s Tax group. “He has tremendous depth in complex tax issues and has atrue global focus. We are adding strength to strength, by adding Ken’s experience to the firm’ssophisticated practice in tax planning and tax litigation.”

KenLevinson

Oil & Gas LawyersJoin Faegre & Benson’s Energy Group

Robert G. Lewis and Jeffrey A. Beuche have joined Faegre &Benson’s Energy group in the Denver office. Rob has joined the firmas partner and will head the Energy Group’s Oil & Gas practice. Jeffhas joined the firm as an associate.

Rob brings over 20 years of legal experience in the oil and gas industryto the firm. He represents independent oil and gas companies in theRocky Mountain region and throughout the Western United States

and has extensive experience in both domestic and international energy transactions.

Jeff is experienced in mergers and acquisitions and securities laws. He has represented clients in abroad range of industries and has substantial energy experience, including production loans,acquisitions and project finance.

Rob and Jeff represent many independent oil and gas companies including Crimson ResourceManagement, Armstrong Oil & Gas LLC and Savant Resources.

John Shively, the firm’s Colorado Managing Partner, said, “Rob and Jeff bring over 25 years ofcombined oil and gas and energy law experience and expertise to the firm, and Faegre is nowbetter able to serve the specific needs of the energy industry.”

RobertLewis

JeffreyBeuche

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board in place as an anti-takeover measure,you might want to use your IR website as aplace to explain why you think these measuresare appropriate for your company. Or, if youfind that your investor relations departmentgets a lot of questions from shareholdersabout your dividend reinvestment plan or whatto do if a shareholder loses his or her stockcertificate or changes his or her address, youmight want to post those questions and theanswers on your website. A periodic review ofthe website will also ensure that theinformation is current – much of theinformation on IR websites changesperiodically. It is a good idea to conduct areview both for accuracy of content and legalcompliance of your IR website on a quarterlybasis.

Regulation FD reminder

No discussion about shareholdercommunications would be complete without areminder about Regulation FD. Reg FDprohibits public companies from selectivelydisclosing material, non-public information toanalysts, shareholders or others withoutsimultaneously disclosing the information tothe entire investing public. Disclosures madein widely-distributed press releases, filingswith the SEC and publicly-accessibleconference calls constitute broad, publicdisclosure that complies with Reg FD.However, any shareholder communicationsthat occur in a non-public forum, such as one-on-one discussions with shareholders oranalysts, can lead to Reg FD violations. It isimportant that any company representativewho is speaking to shareholders or othermarket participants in a non-public forumcarefully prepare for the meeting, speak froma script to the extent possible and consult withlegal counsel to discuss the implications ofReg FD. Also, the SEC has stated that

posting material information on thecompany’s website is not sufficient toconstitute broad, public distribution. If thecompany wants to post material informationthat is not yet public on its website, it shouldfirst issue a press release announcing thematerial information and refer investors to thewebsite for more details.

Shareholder CommunicationsChecklist

A few questions to ask yourself in connectionwith each disclosure to the market:

1. Did we disclose everything required to bedisclosed by applicable laws andregulations?

2. Did we disclose enough information toput the message in context?

3. Have we selected a communication tool(or combination of tools) that fulfills ourlegal obligations and our investorrelations objectives?

4. Is the disclosure clear and easy tounderstand?

5. Is the disclosure formatted in a way thatis visually appealing?

6. Is our disclosure true, accurate andcomplete?

7. Have we anticipated the questions thatinvestors are likely to ask about thisinformation?

8. If the information is material, are wedisclosing it through means that ensurebroad public access?

9. Are we prepared to respond to anyquestions that we get from shareholdersor analysts about this information?

Improving Shareholder Communicationsstory continuted from page 11

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corporate

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On January 25, 2005, the Federal TradeCommission announced changes to increasethe jurisdictional thresholds for the Hart-Scott-Rodino Antitrust Improvements Actof 1976, as amended (the “Act”). The newrules become effective March 2, 2005. Theincrease is required by the Act and will occurannually based on changes in the U.S. grossnational product.

The Act requires that certain acquisitions ofstock or assets and certain joint venturetransactions be reported to both theDepartment of Justice Antitrust Division andthe Federal Trade Commission prior tocompletion. Reportable transactions cannotbe consummated for a certain period of timefollowing notification (typically 30 days, butsometimes less depending on certaincircumstances). The Act is intended to giveFederal regulators time in which to analyzeplanned transactions prior to theirconsummation for any anti-competitiveeffects.

The existing thresholds, which will besuperceded on March 2, were nice roundnumbers. The new thresholds are not sosimple to remember. Conforming changeswill also be made to the rules promulgatedunder the Act. The filing fee amounts willnot change, though the new thresholds willapply to the different filing fee tiers, asnoted below.

Under the new thresholds, in a transactioninvolving consideration of $212.3 million(previously $200 million) or less, thereporting requirements of the Act applyonly if three threshold jurisdictional tests aremet and no exemption is available:

(1) Commerce Test: Either the acquiringperson or the acquired person is engaged inUnited States commerce or in some activityaffecting United States commerce;

(2) Size of the Parties Test: Either (i) a personwith total assets or net sales of $106.2million (previously $100 million) or more isacquiring voting securities or assets of aperson with total assets, or net sales if amanufacturer, of $10.7 million (previously$10 million) or more, or (ii) a person withtotal assets or net sales of $10.7 million(previously $10 million) or more is acquiringvoting securities or assets of a person withtotal assets or net sales of $106.2 million(previously $100 million) or more; and

(3) Size of the Transaction Test: As a result ofthe acquisition, the acquiring person willhold voting securities or assets of theacquired person valued at $53.1 million(previously $50 million) or greater.

In a transaction involving consideration inexcess of $212.3 million (previously $200million), the reporting requirements of theAct apply if the Commerce Test alone is

Antitrust Thresholds Climbfor Merger Deals

Andy Ritten practices in corporate law and mergers andacquisitions. He may be reached at aritten@faegre.com.

By Andy Ritten

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met; the Size of the Parties test isdisregarded.

For reportable transactions involvingconsideration of less than $106.2 million(previously $100 million), the filing fee is$45,000. For transactions involvingconsideration between $106.2 million(previously $100 million) and $530.7million (previously $500 million), the

By Jim Carroll and Lucie Smolikova

Recent Guidance on Down,Pay-to-Play and Inside Rounds

For start-up companies, cash is life and a lackof cash often means death. When thingsdon’t go well at a start-up, the critical nextround of financing usually comes mostly (orentirely) from the company’s existing or“inside” investors.

Inside financing rounds can raise a thicket oflegal and practical issues, including claims ofself-dealing or breach of fiduciary duty,because the inside investors typically haveseats on the company’s board and often havemajority control of the board. Those issuescan be especially acute when the insidefinancing is a “down round” or if it includes a“pay-to-play” feature that adversely affects

any stockholders who do not participate inthe proposed deal.

Two court decisions from Delaware,WatchMark Corp. (2004) and BenchmarkCapital (2002), provide some helpfulguidance to companies trying to securefinancing in an inside round. Those decisionsare also a cautionary note to venturecapitalists and other investors who might beopposed to a particular inside, down or “pay-to-play” round.

The WatchMark and Benchmark cases bothinvolved similar situations:

cont inued ➲

filing fee is $125,000. For transactionsinvolving consideration of $530.7 million(previously $500 million) or higher, thefiling fee is $280,000.

Questions on the Act and the abovechanges may be directed to Andy Rittenor Dave Vander Haar in Minneapolis orNancy Dickinson in Denver.

Antitrust Thresholds Climb for Merger Dealsstory continued

Jim Carroll and Lucie Smolikova practicein corporate and venture capital law atFaegre & Benson. They may be reached at

jcarroll@faegre.com andlsmolikova@faegre.com.

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venture capital

■ A venture-backed start-up desperatelyin need of capital.

■ Certain existing investors propose aninside round in the form of a new,senior series of preferred stock.

■ The proposed financing includes a “pay-to-play” feature that penalizes anyexisting investors who do not partici-pate in the new round.

■ The company offers all existinginvestors the opportunity to participatein the proposed round.

■ The proposed financing requires anamendment to the company’s charter.

■ The proposed financing is opposed bycertain of the existing investors whoseconsent is required to amend thecharter.

■ Unable to amend the charter, thecompany authorizes a parent/subsidiarymerger which is an indirect way toaffect the proposed financing.

■ Stockholders sue to enjoin the merger,which has the same economic effect asthe charter amendment which could notbe approved directly.

In both WatchMark and Benchmark, theDelaware court permitted the transactions toproceed despite the fact that the sole purposeof the merger was to circumvent the consentrights of the opposing stockholders. Thesecases offer the following lessons to venture-backed companies and venture investors:

1. Charters Need to be Drafted Carefully.

Venture capital investors desiring protectionthrough charter provisions must make surethat those provisions are drafted carefullyand very clearly. WatchMark reaffirmedBenchmark’s holding that Delaware courtswill interpret charter language strictly andagainst the drafter.

In both cases, the charter clearly required theconsent of the opposing stockholders toamend its terms as contemplated by theproposed financing. Those charters,

however, did not require the same level ofapprovals for mergers. The WatchMark andBenchmark courts permitted the companiesto achieve, indirectly via a merger, some-thing that they were prohibited from doingdirectly. To avoid this result, those chartersshould have specifically prohibited changesto preferred stock terms “whether affected,directly or indirectly, by means of anamendment, merger, consolidation orotherwise.”

WatchMark and Benchmark both involved aparent/subsidiary merger being used toavoid the consent requirements applicable toa charter amendment. The need for carefuldrafting, however, is not limited to thatparticular context. All rights in preferredstock provisions, even if considered standardor customary, must be “expressly and clearlystated.” Courts in Delaware will not implyor presume meaning or language from otherprovisions of the charter.

2. That Applies to No-ImpairmentClauses Too.

Most preferred stock charters contain a so-called “no-impairment” clause. Such clausesare catch-all provisions which generallyprohibit a company from seeking to avoidor impair the rights of the preferred stock.Since the Benchmark charter did not havesuch a general clause, that case left open aquestion as to how much protection ageneral no-impairment clause mightprovide. The WatchMark case, though, didaddress the meaning of a general no-impairment clause.

WatchMark’s no-impairment clause statedthat the rights of the preferred stock couldnot be “impaired” without the consent ofthe preferred stockholders and that thecompany must enter into potentialtransactions “in good faith, and not for thepurpose of avoiding the observance orperformance of any terms of the charter.”The court found that “no independent right”sprang from the no-impairment provision,so that the no-impairment clause merelystood for the proposition that when the

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company engaged in a particular transaction,such as a merger, it had to act in good faithand adhere to the relevant charter provisions,including the voting requirements. Since theno-impairment clause (like the charteramendment clause) did not specifically applyto mergers, the court permitted the proposedtransaction to proceed.

WatchMark makes clear that no-impairmentclauses, like other preferred stock provisions,will be interpreted very strictly. A catch-all“no-impairment” clause will not make up forcareless drafting.

3. Endorsement of Participation Rightsand Pay-to-Play Fairness.

For some time, practitioners have recom-mended granting rights to participate forinside financings as a means to addresspotential claims of unfairness, discriminationor self-dealing. Although frequently used, theprecise legal effect of offering participationrights has been somewhat uncertain.WatchMark provides a specific example of howimportant the rights offering technique can be.

In considering the fiduciary and self-dealingclaims, the WatchMark court repeatedlystressed the significance of the fact that thecompany had given all preferred stockholdersthe right to participate in the financing.Because of such participation right, the courtwas able to characterize the negative conse-quences flowing from the down round and thepay-to-play feature not as a breach of fiduciaryduty or self-dealing, but instead as eachstockholder’s free choice. “Only if a preferredstockholder chooses, of its own volition, not toparticipate in the new [financing] will its

[existing preferred] shares be converted intocommon. Any disparate treatment betweenthe preferred stockholders is therefore a self-imposed consequence and not the result ofany self-dealing.”

After WatchMark, we would expect rightsofferings to become even more of a standardfeature in down, inside or pay-to-playfinancing rounds. In addition to grantingparticipation rights, it is also important tostructure the pay-to-play feature so that itappears to be even-handed rather thanpunitive or favoring one particular stock-holder group. The WatchMark court found itquite important that the pay-to-play feature(i.e. the conversion of the non-participatinginvestor’s preferred stock to common) appliedto investors “only to the pro rata extent ofnon-participation.”

4. The Importance of a Good Record.

As is often the case in Delaware corporatelaw case decisions, WatchMark highlights theimportance of making board decisions in theright way and carefully documenting thisprocess for the record.

In negotiating and recommending theproposed financing and merger, the boardwent through a process that the WatchMarkcourt described as informed, careful anddeliberate. That process included consider-ation of other financing alternatives. Basedon its careful process and absent any indica-tion of self-dealing or disparate treatment (asevidenced by the grant of participationrights), the court found the company’sdecision to pursue the merger and thesubsequent financing as being protected bythe business judgment rule.

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By Delmar Ehrich and Eric Triplett

Supreme Court Shakes UpSuperfund Law

A recent United States Supreme Courtdecision, Cooper Industries, Inc. v. AviallServices, Inc.1 may have broad implicationsfor parties seeking to recover environmentalcleanup costs under the ComprehensiveEnvironmental Response, Compensation,and Liability Act (CERCLA). In CooperIndustries, the Court held that a party whohas not been subject to a civil action underCERCLA may not seek contribution under§ 113(f )(1) of the law for environmentalcleanup costs. This overturns a widely heldassumption and generates a host ofunresolved legal questions, including themeaning of the term “civil action.” Inparticular, by preventing parties undertakingvoluntary cleanup activities from obtainingcontribution under CERCLA, the decisionmay stifle state and federal voluntary cleanupinitiatives.

Recovering Costs UnderCERCLA

CERCLA provides two ways in whichparties may recover costs from responsibleparties (RPs). The “cost recovery” provision(section 107) allows certain parties to seekfull cost recovery, jointly and severally, fromRPs. The “contribution” provision (section113) allows RPs to seek contribution from

other RPs in accordance with each party’sdegree of liability. Section 113(f )(1)expressly states that any person may seekcontribution from any RP “during orfollowing any civil action.” In its decision,the Court primarily focused on this “duringor following” language in evaluating the scopeof contribution under this provision

Factual and Legal Background

In Cooper Industries, Aviall Servicesdiscovered contamination on properties thatit had purchased from Cooper Industries andreported its findings to the Texas NaturalResources Conservation Commission(TNRCC). Although neither the state norfederal government took any “judicial oradministrative measures to compel” Aviall toremediate the properties, TNRCC “directedAviall to clean up the site.” Under TNRCC’ssupervision, Aviall remediated the propertyand later sought to recover its costs fromCooper Industries. The United StatesDistrict Court for the District of Texas aswell as the United States Court of Appealsfor the Fifth Circuit (prior to an en bancrehearing) held that Aviall could not recoverunder § 113(f )(1) because it had not beensued. On rehearing (en banc), the FifthCircuit reversed, holding that a party may

cont inued ➲

Delmar Ehrich and Eric Triplett practice inenvironmental and Superfund litigation. Theymay be reached at dehrich@faegre.com andetriplett@faegre.com.

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seek contribution even though it has not beensued, based in part on the language in§ 113(f )(1)’s saving clause (“[n]othing in thissubsection shall diminish the right of anyperson to bring an action for contribution inthe absence of a civil action”).

The Court’s Decision

The Supreme Court overruled the FifthCircuit and held that a party who has not beensubject to a civil action may not seekcontribution under § 113(f )(1) forenvironmental cleanup costs. The Courtreasoned that had Congress intended to allowcontribution suits at any time, it would nothave included the “explicit ‘during’ or‘following’ condition” in § 113(f )(1), and thatto read otherwise would “render part of thestatute entirely superfluous.” The Court alsofound that reading the “saving clause” to allow§ 113 contribution actions at any time would“again violate the settled rule that we must, ifpossible, construe a statute to give every wordsome operative effect.”

The degree to which Cooper Industries trulyaffects a party’s ability to recoverenvironmental cleanup costs under § 113 maylargely depend on the interpretation of theterm “civil action.” Since the Supreme Courtdid not provide any guidance on this criticalissue, it is unclear what forms ofadministrative orders would enable an RP toseek contribution. If the term “civil action” islimited to its traditional meaning (i.e., “alawsuit brought in federal court”), § 113(f )(1)contribution claims involving only unilateraladministrative orders and administrativeorders on consent would be barred. However,if the term is defined broadly, it mayencompass these types of orders.

The initial Fifth Circuit opinion (prior torehearing en banc) interpreted the term “civilaction” broadly, stating that the “language andstructure of the statute suggest that thedefinition of the word ‘action’ under§ 113(f )(1) includes abatement orders.”Unfortunately, the meaning of the term “civilaction” in §113 has been largely unexplored byother federal courts. However, numerous

courts have taken the approach that§ 113(f ) should be read broadly, and ittherefore seems unlikely that these courtswould read the term “civil action” narrowly,preventing parties subject to unilateraladministrative orders and administrativeorders on consent from seekingcontribution under § 113(f )(1).

Even if a narrow reading of the term “civilaction” prevents parties subject to unilateraladministrative orders and administrativeorders on consent from obtainingcontribution under § 113(f )(1), parties whoentered into judicial consent decrees cancontinue to seek contribution from otherRPs since these decrees fall within thetraditional definition of a “civil action.” Inaddition, parties subject to administrativeorders on consent would still be entitled torecovery under § 113(f )(3) for responseaction costs that have been resolved withfederal and/or state governments2 however,RPs could only recover costs expended inconformance with CERCLA and thoseresolved with the federal and/or stategovernments. One outcome of CooperIndustries may be that parties subject tounilateral administrative orders will bebarred from seeking contribution under§ 113 and therefore may attempt to converttheir unilateral orders into judicial consentdecrees or into administrative orders onconsent. Such a conversion, however, mayraise questions regarding the RP’s ability toseek costs expended under the unilateraladministrative order.

A narrow reading of Cooper Industrieswould also likely lead to several undesirableresults such as stifling voluntary cleanupprograms and potentially rewarding partieswho do not cooperate with the federalgovernment. One could argue that limiting§ 113 in such a manner would be contraryto the CERCLA objectives of promptremediation, litigation reduction, andensuring that RPs are responsible for their“share” of cleanup costs. Parties will likelybe more reluctant to enter into voluntarycleanup arrangements if they will be barredfrom seeking contribution under

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§ 113(f )(1); in fact, parties may avoidvoluntary cleanup in order to preserve theircontribution rights. If Cooper Industriesprevents parties who undertake voluntarycleanups from seeking contribution, manyRPs could escape liability.

Other Potential Vehicles foran RP to Seek Contribution

It is possible that RPs seeking contributionunder CERCLA may rely on § 107 even if§ 113(f )(1) is unavailable to them. Althoughthe Supreme Court majority in CooperIndustries refused to address this issue, thedissenting judges cited Key Tronic Corp. v.United States3 for the proposition that animplicit contribution right exists for RPs in§ 107. Although most federal Courts ofAppeals have concluded that § 107 isunavailable to RPs, Cooper Industries’ relianceon express statutory language may providethese Courts of Appeals with the rationale toallow RPs to use § 107. Even if these courtsdo not reverse their § 107 holdings, it ispossible that the Supreme Court willeventually do so using the logic in CooperIndustries. An express reading of § 107would allow RPs to recover costs from anyother CERCLA responsible parties.However, allowing RPs to use § 107 mayraise several additional problems, such as: (1)the effect that actions under § 107 wouldhave on contribution protections afforded by§ 113; (2) the availability of joint and severalliability to RPs suing under § 107; and (3) thestatute of limitations period conflict between§ 107 and § 113. In addition, the ability touse § 107 could chill the desire of parties toenter into § 113 settlements.

State contribution and common law mayprovide another possible remedy for RPsseeking contribution for cleanup costs.However, only approximately two-thirds ofthe states have some form of cost recoverylaws available to RPs, and these laws couldnot be used to pursue federal agency RPs. Inaddition, although other state common lawremedies such as nuisance, trespass, andunjust enrichment may provide a vehicle forcontribution, they may also have limitations

affecting a plaintiff ’s ability to recovercleanup costs. For all of these reasons, it ispossible that Cooper Industries mayencourage states to create or modifycontribution or voluntary cleanup laws toallow RPs to recover cleanup costs.

Although the citizen suit provision of theResource Conservation and Recovery Act(RCRA) likely does not provide a methodfor RPs to seek cost recovery orcontribution from other RPs, it is possiblethat it could be used to compel other RPs toundertake cleanup activities, therebyreducing future expenditures. However, theusefulness of this provision in a CERCLAcleanup scenario is unclear since, amongother things, a cleanup mandated underRCRA would likely not have to complywith the National Contingency Plan.Although there are many issues surroundingthe potential use of the citizen suit provisionin a CERCLA cleanup context, it is likelythat the boundaries of RCRA will beexplored by RPs given the Cooper Industriesholding.

Retroactivity and Impactsfor RPs Currently IncurringCleanup Costs Voluntarilyor Under UnilateralAdministrative Orders

Although the Supreme Court did notaddress the effects of its decision on pendinglitigation, Cooper Industries will likely applyretroactively as did the Court’s decision inUnited States v. Bestfoods4. Defendants insuch litigation will likely use CooperIndustries in an attempt to dismiss § 113claims, and plaintiffs may resort to the typesof alternative remedies discussed above. Inaddition, parties that are currently incurringcleanup costs voluntarily or under unilateraladministrative orders may face challenges inrecovering costs incurred to date. Aspreviously mentioned, parties subject tounilateral administrative orders may attemptto have these orders converted into judicialconsent decrees or administrative orders onconsent, allowing for recovery under § 113.

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In addition, parties engaging in voluntarycleanups may request administrative orderson consent or known “civil actions” to protecttheir contribution rights. However, even ifsuch requests are granted, questions may ariseregarding their ability to recover prior costs.Parties seeking to recover these costs mayattempt to resort to the types of remediesdiscussed in the previous sections.Regardless, parties currently incurringcleanup costs may wish to reevaluate theirstatus to ensure that they may seekcontribution in light of Cooper Industries.

Conclusion

In the immediate future, Cooper Industrieswill likely send shockwaves through theenvironmental community. Until themeaning of the term “civil action” is clearlydefined in the context of § 113, a great dealof uncertainty will exist regarding the typesof actions and administrative orders thatpermit a party to pursue a contribution claim.States may reevaluate the adequacy of theirvoluntary cleanup programs, EPA mayreevaluate its approach to CERCLAenforcement, and parties may reevaluate theirdesire to initiate voluntary cleanup activities.In addition, Congress may amend CERCLAto redress Cooper Industries, given that it

undermines CERCLA’s purposes and willlikely have a negative impact on voluntarycleanup initiatives. In the short-term, agreat deal of litigation will certainly arise.Cooper Industries has opened the door tomany creative legal arguments and strategiesfor RPs seeking costs for environmentalremediation.

Footnotes1 543 U.S. (2004)

2 The government, participating as amicuscuriae in the Cooper Industries case,suggested this approach in oral argument,stating: “[Section 113(f )] does allowcontribution in the case of anadministrative settlement. So if, forinstance, the Government issues anadministrative order and the party agreesto comply with that administrative orderthrough an administrative order onconsent, that would entitle the party tocontribution.” Transcript of OralArgument before the U.S. Supreme Court,Cooper Industries, Inc. v. Aviall Services, Inc.,No. 02-1192, October 6, 2004, at 24, lines7-12.

3 511 U.S. 809 (1994).

4 524 U.S. 51 (1998)

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Last Word: Trusts and EstatesA gradual phase out of the federal estate tax has been underway since Congress passed theEconomic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”). While it is likelythat Congress will make changes to the Act over the next several years, the federal estate taxexemption amount is currently scheduled to increase to 3.5 million by 2009, with a repeal ofthe estate tax scheduled for 2010. (However, the entire bill will expire on December 31,2010, with the estate tax and related exemptions reinstated to 2001 levels on January 1,2011.) The important numbers for 2005, effective January 1, are as follows:

■ The federal estate tax exemption amount remains $1.5 million.

■ The generation skipping transfer tax exemption amount remains $1.5 million.

■ The top estate tax rate has decreased from 48% to 47%.

■ The annual gift tax exclusion amount remains $11,000.

■ The lifetime gift tax exemption amount remains $1 million.

In addition, states that have “decoupled” or separated from the federal tax system may havetheir own estate tax exemption amounts. As with the federal exemption amount, thesenumbers may change from year to year. For example, as of January 1, 2005, Minnesota’sestate tax exemption amount increased from $850,000 to $950,000.

Given these changes, we recommend that you contact an attorney in our Trusts and EstatesGroup to discuss your particular situation and determine if your estate plan is in need ofupdating.

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