October 21, 2016

Delaware: Mootness Fee for Repeal of Misleading Bylaw

This Fox Rothschild blog discusses the Chancery Court’s decision in Frechter v. Cryo-Cell International, where it awarded a “mootness” fee in a case involving faulty language about removal of directors in a corporate bylaw. This excerpt summarizes the issue:

The bylaw provision at issue indicated that directors could be removed “for cause” at a “special meeting” of stockholders.  The plaintiff asserted that under Section 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause, and thus the provision was unlawful.

After a motion for summary judgment was filed, the company amended its bylaws to remove the language, which mooted the case.  The court found that the bylaw was misleading – but since the potential harm was mostly theoretical & there was no proxy contest pending, the court awarded a fee of only $50,000.

In recent years, many public companies have moved from staggered boards – where removal only for cause is okay under Delaware law – to a single class of directors, where it’s not.  It was only in 2015 that the Chancery Court  invalidated bylaw provisions like the one at issue here, so the case is a reminder for companies that recently de-classified their boards to check their bylaws.  It’s also a reminder that it will be cheaper to address any flawed provisions that companies find before they’re in the heat of a proxy contest.

John Jenkins

October 20, 2016

Universal Ballots: SEC to Propose Next Wednesday

Yesterday, the SEC posted a Sunshine Act notice for an open Commission meeting to propose universal proxy ballots next Wednesday, October 26th. This controversial rulemaking has been in the works for years, with the House of Representatives going so far to vote a few months ago to stop the rulemaking. Check out this piece on page 5 of the November-December 2014 issue of the Deal Lawyers print newsletter entitled “The Quest for Universal Ballots: Might Boards Benefit Too?”…

In addition, the SEC will vote to adopt rules to facilitate intrastate & regional offerings (amendments to Rule 147 & 504) – and to repeal Rule 505 of Regulation D…

Broc Romanek

October 19, 2016

Antitrust: “Decline in Innovation” as Competitive Harm

This Cooley blog notes that the FTC & DOJ are increasingly challenging mergers on the theory that they may harm innovation. Here’s an excerpt:

Most recently, Lam and KLA-Tencor abandoned their proposed $10.6 billion merger which would have combined a manufacturer of machines used to inspect circuitry on computer chips and the largest maker of machines that etch away materials on silicon wafers used to make computer chips in the face of DOJ pressure. DOJ said in a press release that the proposed transaction presented “concerns about the ability of the merged firm to foreclose competitors’ development of leading edge fabrication tools and process technology on a timely basis.”

Potential loss of innovation was also a major focus of the DOJ in its lawsuit challenging the $34 billion Halliburton-Baker Hughes merger, which the companies ultimately abandoned.

John Jenkins

October 18, 2016

In re OM Group: Another Notch in Corwin’s Belt

This Morris James blog notes the Delaware Chancery Court’s recent decision in In re OM Group Stockholders Litigation – the latest in a series of decisions interpreting the Corwin standard.  Here’s a excerpt:

Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper. Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.

Vice Chancellor Slights rejected each of the alleged disclosure violations – and explained when proxy disclosures are sufficient to invoke Corwin. He held that Corwin applied & that the board’s decision was protected by the business judgment rule.

John Jenkins

October 17, 2016

Delaware: Control Means Never Having to Say “I’ll Sell”

This Cleary blog discusses a recent Delaware case – In re: Books-a-Million Stockholders Litigation – involving a sale of a company to its controlling stockholder (we’re posting memos on this case in our “Fiduciary Duties” Practice Area). The deal was structured to comply with MFW’s standard for business judgment rule review, but the plaintiffs contended that the special committee’s actions made MFW inapplicable. Here’s an excerpt describing the gist of the allegations:

The plaintiffs alleged that the committee’s decision to recommend the transaction was irrational and in bad faith because (i) a third party had indicated an interest in acquiring BAM at a price higher than that offered by the family, (ii) the committee determined that pursuing the third party offer was not feasible because the family (as is normal in these types of situations) indicated it was unwilling to sell its controlling interest in BAM and (iii) the committee nonetheless proceeded to negotiate with the family and ultimately recommend that the family’s offer be accepted even though the offered price was less than that proposed by the third party.

Vice Chancellor Laster rejected these arguments & applied MFW to the board’s decision.  He reiterated Delaware’s long-standing position that a controlling stockholder is under no obligation to sell – and doesn’t breach any duty by offering a buyout at a lower price than a third party might offer.

John Jenkins

October 13, 2016

Court Won’t Dismiss CVR “Efforts Clause” Claim

This Cooley blog notes that a federal court recently refused to dismiss claims that a buyer breached its obligations to use “diligent efforts” to hit milestones for payment of “contingent value rights” issued to an acquired company’s shareholders. The blog also flags an important issue for sellers to keep in mind if earn-outs – or CVRs – are part of the deal:

According to recent case law in Delaware, buyers do not have an independent obligation under the implied covenant of good faith and fair dealing to try to maximize value or pay an earn-out if a contract’s plain language does not require it to do so, which suggests that well-advised sellers should include express efforts covenants in the acquisition agreement.

John Jenkins

October 12, 2016

What If Deal Protections Were Illegal? Ask the UK

The United Kingdom prohibited “deal protections” in M&A transactions in 2011. Before that time, termination fees of up to 1% of transaction value were permitted and there were no restrictions on other protection devices such as “no-shops” and “force the vote” clauses. A new study on the results of that prohibition comes to some interesting conclusions:

– M&A deal volumes in the UK declined significantly in the aftermath of the prohibition, relative to deal volumes in the European G-10 countries.

– There were no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids.

– Completion rates and deal jumping rates also remained unchanged.

– Before the prohibition on deal protections, approximately 50% of all deals in the sample involved targets from the UK. After the ban, this proportion fell to approximately 34%.

– In addition, the authors estimate $19.3 billion in lost deal volumes per quarter in the UK relative to the control group due to the prohibition on deal protections, implying a quarterly loss of $3.2 billion for shareholders of UK companies.

The results suggest that deal protections provide “an important social welfare benefit by facilitating the initiation of M&A deals.”

John Jenkins

October 11, 2016

Heads Up! Immediate Change to HSR Threshold Calculation

This Goodwin Procter memo notes that last week, the FTC announced an immediate change in the way debt is addressed in calculating whether the HSR filing threshold as been crossed.  As a result of this change, that deal you thought was exempt from filing may no longer be.  Here’s an excerpt:

Under the HSR Act, a pre-closing filing may be required if the deal value – or the “size of transaction” – is more than $78.2 million. A basic principle has always been that only debt which is taken on by a buyer (or any entity that is controlled by the buyer, such as a newly formed acquisition vehicle) to finance a transaction is included in the size of transaction.

Until yesterday, the FTC was of the view that new debt which is taken on by the target to help finance a transaction would be specifically excluded from the size of transaction. The FTC announced on October 6th that this old rule is no longer applicable – and the change in the treatment of debt is effective immediately.

Effective October 7, 2016, all new debt – whether it is taken on by the buyer or the target – must be taken into account in determining whether the $78.2 million size of transaction test is met.

John Jenkins

October 7, 2016

Canada: M&A Tips For Foreign Buyers (& Happy Turkey Day)

It looks like attendance at my Sunday morning hockey game this week is going to be pretty light – several of my fellow skaters are heading home for Canadian Thanksgiving, which takes place on Monday.  So I thought this might be a good time to wish a “Happy Thanksgiving” to North America’s designated driver & to point out this recent Blakes memo – which provides practical tips for foreign buyers looking to acquire a private company in Canada.

John Jenkins