DOC Calls It Fair

Notes on the Facebook fairness hearing

At the conclusion of a hearing held yesterday morning, the Department of Corporations approved the acquisition of Instagram, Inc. by Facebook, Inc.  Technically, the Department approved the issuance of a permit to offer and sell the securities.  The hearing was was held pursuant to Corporations Code Section 25142.  See A Program Guide To The Facebook Fairness Hearing.  Below are some observations concerning the proposed transaction and the hearing.

  • According to the notice of hearing, all unexpired, unexercised and outstanding Instagram stock options will be cancelled.  I don’t know whether Instagram has granted any stock options but I couldn’t find any notices of exemption filed with the Department of Corporations on Cal-EASI database or the Securities and Exchange Commission on the EDGAR database.  Filings with the Department are not immediately available on Cal-EASI and it is possible that Instagram has filed notices of exemption that are not yet available on the system. 
  • The notice of the hearing refers only to appraisal rights under Delaware law.  Instagram is a Delaware corporation.  However, California’s dissenters’ rights law (Chapter 13 of the Corporations Code) applies to foreign corporations that meet the tests in Section 2115. I don’t know whether Instagram meets those tests. 
  • $30 million in cash and 2,299,941 shares of Facebook stock will be placed in escrow for 12 months and 30 days.
  • Facebook entered into an agreement to acquire Instagram in April before Facebook’s initial public offering in May.  The registration statement mentions the acquisition numerous times and the SEC staff even commented on Facebook’s disclosures regarding Instagram.  However, the acquisition agreement was not filed as an exhibit to Facebook’s registration statement.
  • Pursuant to Corporations Code Section 25164(c), the permit issued to Facebook is permissive only and does not constitute a recommendation or endorsement of the securities proposed to be offered and sold.

 Ninth Circuit upholds determination of “responsible connection” to subsidiaries

A case decided earlier this week by the Ninth Circuit Court of Appeals caught my eye because it involved the application of “Chevron deference” in a corporate setting.  The law involved was the Perishable Agricultural Commodities Act, 7 U.S.C. § 499a et seq. (“PACA”).  This 1930′s era legislation was intended, at least in part, to ensure that farmers get paid for their produce.  Under PACA, penalties may be imposed on a person who was  “responsibly connected” to a person whose license under the act has been revoked or suspended or who has been found to have committed any flagrant or repeated violation.  In Perfectly Fresh Farms, Inc. v. U.S. Dept. of Agriculture, 2012 U.S. App. 18209 (Aug. 28, 2012), one of the issues on appeal was an administrative judicial officer’s determination that two individuals were “responsibly connected” to the corporations in which they served as officers, directors and stockholders.  The Ninth Circuit determined that the judicial officer’s interpretations of PACA were entitled to deference under Cheveron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), a case that we covered yesterday in my Administrative Law class at the University of California, Irvine School of Law.