"Material Adverse Change"
Clauses Added to Business Contracts. Last month, we reported that the
"war clause" of many mergers contracts was being scrutinized
in the wake of the attacks, to see if the clauses could or should
be invoked to stop mergers where one of the parties had been
affected by the attacks. The Wall Street Journal now reports
that business lawyers are now routinely adding "material
adverse change" clauses to all manner of business contracts,
to give their clients an opt-out in the event of future attacks,
or to prevent the other party from doing so. (The Wall Street
Journal is available online only to subscribers.)
Insurers Increase Premiums,
Limit Coverage.
Last month, we reported that many insurers were hard hit, including
Lloyd's of London. But the insurers have rallied, viewing the
attacks as a "historic
opportunity" to make money. Premiums have increased
by 40% or more, and insurance coverage of terrorist attacks is
being strictly curtailed in newly issued policies. The insurers
are also writing new policies to cover terrorism losses, but
at a hefty premium. Look for renewing Comprehensive General Liability
CGL policies to contain exclusions for terrorist attacks.
Anti-Terrorism Legislation
Passed by Congress. HR
3162, known as the USA Patriot Act of 2001, has now become
Public
Law 107-56. Reportedly, the legislation will permit law enforcement
officials "to conduct searches, detain or deport suspects,
eavesdrop on Internet communication, monitor financial transactions
and obtain electronic records of individuals." Surveillance
of wire, oral and electronic transmissions, land-based and wireless
telephone calls has been enhanced. Meanwhile, businesses are
re-examining
their privacy policies, fearful that they may have violated
their own privacy policies by turning over information to law
enforcement authorities.
Senate About to Pass Extension
of Net Tax Moratorium? After the Internet Access Tax moratorium
expired on October 21, 2001, the National Conference of State
Legislatures wrote to the Senate, urging it to enact the two-year
extension previously voted by the House. However, reportedly,
the states are more concerned with the larger economic issue
of taxing e-commerce transactions, and agree that to do so, the
states will need to simplify their disparate tax systems.
Controversial W3C Patent
Proposal Under Fire.
The World Wide Web Consortium (W3C)
works with software developers and others to set standards
which can be used by everyone to create compatible web software.
But now the body is considering a new and controversial
patent policy proposal that developers fear could permit
companies to claim patent rights and demand royalties on standards
authorized by that body. These web standards, which, up to now
have
been free, would become subject to patent rights, so that
their owners could charge for their use.
No "Gun-Jumping"
Permitted; Potential Merger Partners Must Compete Until Merger
Contract is Signed. Warning that "gun-jumping"
- limiting competition between potential merger partners during
the pre-merger review period violates the Sherman Act, the Department
of Justice filed suit against Computer Associates International,
and Platinum Technology International concerning their 1999 merger.
At issue were the "extraordinary conduct of business restrictions"
on the seller, preventing the companies from competing while
regulators reviewed the deal.
Arbitration Decision Upheld
Though "Incomprehensible."
Reasoning that the Federal Arbitration Act gave him no choice,
Judge Richard Posner of the 7th Circuit Court of Appeals has
affirmed the decision of the arbitrator in IDS
Life Ins. Co. v. Royal Alliance Associates, No. 00-2009,
7th Cir.Ct.App. (September 12, 2001). Reporting that "arbitration
was conducted in 154 sessions over a period of 14 months beginning
in January of 1997, resulting in an award so incomprehensible
that three years later the judges and the parties are still trying
to figure it out," Posner nevertheless affirmed the Order,denying
Plaintiff's petition that the Court void the order because it
was not sufficiently mutual and final. Noting that "the
requirements of finality and definiteness are ones more of form
than of substance. The Seventh Circuit no longer permits deep
linking. To view the case, go to the Seventh Circuit website,
and input case # 00-2009.
IOLTA Plans Violate Fifth
Amendment, Fifth Circuit Rules.
Ruling on the Texas State IOLTA
plan, whereby interest on lawyer trust accounts is used to
pay for legal services for the poor, the Fifth Circuit Federal
Court of Appeals has found the plan to be constitutionally unsound,
in that it violates the Fifth Amendment prohibition on government's
taking property without just compensation. The ruling casts doubt
on the viability of similar programs nationwide. Washington Legal Foundation v. Texas Equal Access
To Justice Foundation, No. 00-50139, 5th Cir.Ct.App. (October 15, 2001).
the Fifth Circuit permits searches by date rather than name,
so search for 10-15-2001.
"Business Judgment Rule
Alive and Well": Delaware.
Affirming the dismissal
of two shareholder suits on the pleadings, the Delaware Supreme
Court found that neither suit had met the threshold standards
necessary to proceed to discovery and trial. The two cases involved
different complaints: White v. Panic, 2001 Del. Lexis
421, is a derivative action involving sexual harassment claims
against the founder of ICN Pharmaceuticals Inc. of Costa Mesa,
Calif. Malpiede v. Townson, 2001 Del. Lexis, 371, involves
a challenge to a merger of Los Angeles-based Frederick's of Hollywood
into Knightsbridge Capital Corp. Since most major corporations
are incorporated under Delaware law, the case is seen as a favorable
indicator to business, and another example of the developing
trend to curtail shareholder suits. (See our October, 2001 issue.)
Pennsylvania Sets New Standard
for "Known-Loss" Doctrine in Insurance Cases.
In a case of first impression in Pennsylvania, and one that has
been closely watched by the insurance industry, a divided Supreme
Court upheld the ruling of a lower court broadly interpreting
the known loss doctrine, and dismissing
a $21 million judgment in favor of the insured. The "known
loss" doctrine, adopted by many states, requires that an
applicant for insurance disclose any material information affecting
the insurer's risk which is known to the applicant. But the Pennsylvania
Court set the standard higher, requiring the insurance applicant
to report a loss about which it "should have known."
Rohm
& Haas Co. v. Continental Casualty Co, J-147-00, Sup.Ct.Penn,
Eastern District (October 18, 2001).