From Kevin Miller of Alston & Bird: A few weeks ago – in Gantler v. Stephens – Vice Chancellor Parsons granted defendants’ motion to dismiss claims alleging that certain directors and officers of First Niles Financial breached their fiduciary duties by:
– sabotaging the due diligence process in connection with a board authorized sales process; rejecting a solicited merger proposal that First Niles’ financial advisor deemed acceptable; and terminating the sales process;
– submitting a materially false and misleading proxy to First Niles’ shareholders in connection with soliciting their approval for a subsequent reclassification that would, among other things, (i) reclassify shares of common stock held by holders of 300 or less shares into shares of preferred stock and (ii) effect a deregistration and delisting of First Niles common stock; and
– effecting the reclassification (in breach of their duty of loyalty).
The court held that:
– Plaintiffs failed to allege specific facts or argument as to how causing a delay of a matter of days, or at most a couple of weeks, conceivably could be a breach of fiduciary duty to the company;
– Plaintiffs had not alleged sufficient facts to overcome the presumption of the business judgment rule with respect to the Board’s decision to reject the merger proposal and terminate the sales process; and
– Although a majority of the Board may have been interested in the reclassification or not independent, a majority of the unaffiliated shareholders of the company – those not defendants in the case – ratified the reclassification with sufficient disclosure to revive the business judgment rule as the appropriate standard of review.
This case is likely to receive substantial attention as a result of its holding that the business judgment rule is the legal standard generally applicable to a board’s decision not to pursue a merger. However a potentially more interesting issue relates to whether the reclassification was ratified by a sufficient number of shareholders of the company to revive the business judgment rule as the appropriate standard of review.
Last week, the Nasdaq Stock Market issued this proposal to create new listing standards that will relate to special purpose acquisition companies. Previously, even if a SPAC met Nasdaq’s market and financial initial listing standards, Nasdaq would not list the SPAC. These determinations were based on concerns about the underwriters of some of the earlier deals and because a SPAC is a “shell company” that does not have current business operations.
Under the Nasdaq’s proposal, Nasdaq would seek to list SPACs (whose listings are dominated by AMEX, according to this WSJ article) – albeit under more stringent listing standards compared to operating companies, including the following criteria:
– Gross proceeds from the initial public offering (IPO) must be deposited in an escrow account maintained by an insured depository institution as defined by the Federal Deposit Insurance Act or in a separate bank account established by a registered broker or dealer.
– Within 36 months of the effectiveness of its IPO registration statement, the company must complete one or more business combinations using aggregate cash consideration equal to at least 80% of the value of the escrow account at the time of the initial combination.
– So long as the company is in the acquisition stage, each business combination must be approved both by the company’s shareholders and by a majority of the company’s independent directors. Following each business combination, the combined company must meet all of the requirements for initial listing.
Speaking of SPACs
Recently, there have been a flurry of articles in the mainstream media about SPACs, including this article from the Washington Post – and this article from the WSJ.
Last week, the US Court of Appeals for the Seventh Circuit – in The HA2003 Liquidating Trust v. Credit Suisse Securities – affirmed the decision of US District Court for the Northern District of Illinois absolving Credit Suisse of liability relating to the rendering of a fairness opinion. Kevin Miller of Alston & Bird notes that this succinct – 8 pages, single column – and extremely well-written decision by Chief Judge Easterbrook evidences a clear understanding of the terms of the contracts pursuant to which fairness opinions are rendered. Here is a copy of the opinion.
Although the opinion is worth reading in its entirety, highlights include:
– “CSFB did not write an insurance policy against managers’ errors of business judgment.”
– “In the end, the Trust wants us to throw out the detailed contract that HA-LO and CSFB had negotiated and to make up a set of duties as if this were tort litigation. That would be a mistake.”
– “The engagement contract says that CSFB has no duty to doublecheck the predictions about [the Target]’s future revenues and no duty to update its opinion. CSFB did what it was hired to do. The Trust’s belief that CSFB should have been hired to do something different is not a basis of liability.”
In his blog, Professor Steven Davidoff has a few words on this opinion too.
Kevin Miller of Alston & Bird notes: Last Thursday, a class action complaint was filed in the US District Court for the District of Massachusetts against 16 private equity funds. The complaint alleges violations of the Sherman Act and the Clayton Act – in particular, a conspiracy amongst the defendant private equity firms to:
– rig bids,
– restrict the supply of private equity financing,
– fix transaction prices, and
– divide up the market for private equity services in LBOs.
The complaint further alleges that Clayton, Dubilier & Rice and various other persons not named as defendants, including investment banks, have participated as co-conspirators and aided and abetted the conspiracy. Specifically, the complaint alleges that the defendant private equity firms and their investment bank co-conspirators conspired to rig the purchase prices in at least seven LBOs.
The following quotes from the complaint illustrate the ways that investment banks are alleged to have played a critical role in the conspiracy:
– “Investment banks steer their clients to private equity firms rather than corporate/strategic buyers because LBOs produce much larger advisory and future debt underwriting fees – and often a cut of the deal for the investment banks’ private equity affiliates.”
– “When a bidding club is formed, the bidding club will try to tie up numerous investment banks and potential sources of capital to create an additional barrier to entry for other potential buyers.”
– “Private equity firms exert control over the investment capital markets by aligning with particular investment banks and executing exclusivity deals which tie up these banks and prevent them from financing other potential bidding companies.”
– “The investment banks also participate in the scheme to earn substantial fees post acquisition…for underwriting secondary bond placements …[and advising on the divestiture of assets]”
– “Certain investment banks, including Merrill, Goldman, Credit Suisse, Citigroup, and Morgan, also have private equity arms that participate directly in parts of bidding clubs. This crates a situation ripe for the sharing of competitive information and self-dealing. One hand washes the other, as the investment bank lines up capital and debt financing for its fraternal private equity firm who in turn pays the bank substantial fees along each step in the deal.”
– “The line between investment bank and private equity firms is further blurred, if not erased, by bank investments with funds managed by private equity firms.”
– “Because the investment banks play both sides of the table, information regarding pending and future deals flows freely between investment banks and private equity firms.”
Kaja Whitehouse of the WSJ wrote this article on Saturday: “Efforts by activist investors to fight for board seats, oppose mergers and otherwise shake up companies are on track to beat last year’s record levels, contrary to expectations that activity would dry up because of unstable market conditions.
There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial Corp. to New York Times Co. Last year, when shareholder activism hit record levels, there were just 54 campaigns waged over the same time period, according to FactSet SharkWatch, which tracks proxy contests and corporate-takeover defenses.
Hedge funds continue to be big participants. More than half, or 38, of the campaigns so far this year were initiated by hedge funds, compared with 21 during last year’s period, according to FactSet SharkWatch.”
MAC Clauses: All the Rage
Join us Thursday for the webcast – “MAC Clauses: All the Rage” – to hear from the experts on how “material adverse change” provisions are under more scrutiny than ever, causing some deal practices to change. These changing practices not only impact how lawyers negotiate deals, but they entail wide-ranging ramifications for dealmakers. The panel includes:
– Professor Steven Davidoff of Wayne State Law School and founder of the “M&A Law Prof” Blog
– John Grossbauer, Potter Anderson & Corroon
– Travis Laster, Abrams & Laster
– Patrick Lord, Dechert
– Derek Winokur, Dechert
From Kevin Miller of Alston & Bird: For those unfamiliar with the “Forthright Negotiator Principle” referred to in the URI decision, I came across the following in re-reading the In re: IBP, Inc. Shareholders Litigation decision:
“The record therefore reveals that Tyson’s negotiators knew that Hagen believe that Schedule 5.11 covered the DFG items discussed at the December 29 call. Reasonable and forthright negotiators for Tyson would – and I find did – understand Hagen as expressing her view that the Schedule ensured that Tyson was accepting the fully disclosed risk that IBP would recognize additional charges because lf the accounting improprieties at DFG and that such additional charges would not give Tyson a right to walk away. [citation to Restatement (Second) of Contracts Section 201(2)] to the extent that Tyson negotiators had a question whether Hagen’s carve-out was intended to permit IBP to recognize these additional charges resulting from past accounting practices by way of a restatement of the Warranted Financials, they should have spoken up. The current, hairsplitting interpretation that Tyson advances was never voiced to Hagen at the time, and I don not think that the Tyson negotiators embraced that interpretation at the time.” (emphasis added)
The ‘Former’ SEC Staff Speaks
We have posted the transcript from our recent webcast: “The ‘Former’ SEC Staff Speaks.”
Recently we have seen a number of cases in which buyers have alleged that they are not obligated to close an M&A transaction because of a MAC or MAE. A complaint filed last week by Solutia in the US Bankruptcy Court for the SDNY (here is the motion to expedite the hearing on the merits) alleges that the lenders for Solutia’s bankruptcy exit financing have breached their financing commitments by refusing to fund as a result of a market MAC. Solutia seeks specific performance or, in the alternative, $2.25 billion in damages.
Please note that the following is based on the complaint and an answer refuting these allegations has not yet been filed. Solutia has been in bankruptcy for over four years, leading up to the fifth amended plan of reorganization that Solutia filed in October 2007 to enable its emergence from chapter 11.
On October 25, 2007, the Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P., Deutsche Bank Securities Inc., and Deutsche Bank Trust Company Americas (collectively, the “Commitment Parties”) executed a firm commitment to fund a $2 billion long-term exit financing package for Solutia. On November 20, 2007, the Bankruptcy Court approved the exit financing package. Nine days later the Court found the plan to be feasible and confirmed the plan.
The complaint alleges that:
“The Commitment Parties, however, now cite a so-called “market MAC” provision in their commitment letter and assert that there has been a change in the markets that excuses them from funding. Their reliance on this clause, which they downplayed from the outset, is utterly without basis in the midst of a tumultuous market that was not only foreseeable, but had long existed when they signed on to the firm commitment. The banks should be held to the promise that they made, and for which Solutia agreed to pay handsomely, and fund Solutia’s exit from bankruptcy….If the Commitment Parties can invoke the “market MAC” provision as an excuse for not funding, it is clear that they intended from the outset to rely on that “market MAC” clause to evade any funding obligation absent an upturn in the market and a successful syndication. In that event, the Commitment Parties always intended the firm commitment reflected in the commitment letter to be no more than a “best efforts” obligation. Their representations that (a) absent successful syndication, they would take the loans on their own books, and (b) the “market MAC” provision was no more than never-used boilerplate dictated by bank policy, were simply fraudulent statements made by the Commitment Parties to induce Solutia to engage them for the exit financing. The Commitment Parties should then be held to account for that fraudulent conduct – which impacts the company, its employees, its 20,000 retirees, its creditors, and other parties in interest – by paying compensatory and punitive damages to Solutia. . . .The Commitment Parties seek to excuse their failure to fulfill their firm contractual commitment by asserting that there has been an adverse change in the credit and syndication markets since October 25, 2007 that materially impairs their ability to syndicate the exit financing package. The Commitment Parties rely on this assertion even though: (a) there has been no material adverse change to Solutia’s business, operations, properties, prospects, or financial condition; (b) there is no information about Solutia now available that is inconsistent with information known and disclosed at the time the Commitment Parties entered into the Commitment Letter; and (c) there has been no adverse change since the execution of the Commitment Letter in the loan syndication, financial, or capital markets”
The complaint seems clearly aimed at language from In re IBP in which VC Strine of the Delaware Chancery Court, applying New York law, stated that:
“Practical reasons lead me to conclude that a New York court would incline toward the view that a buyer ought to have to make a strong showing to invoke a material Adverse Effect exception to its obligation to close. Merger contracts are heavily negotiated and cover a large number of specific risks explicitly. As a result, even where a material Adverse Effect condition is as broadly written as the one in the Merger Agreement, that provision is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.”
Here is some analysis of a recent Delaware case from Davis Polk & Wardwell:
In light of surging shareholder activism, boards and issuers may be interested in a recent decision handed down recently in the Delaware Chancery Court. In Portnoy v. Cryo-Cell International, Inc. C.A. No 3142-VCS (Del. Ch. January 15, 2008), Vice Chancellor Strine blessed an agreement by management to accommodate a dissident shareholder by including him on the management slate in exchange for his agreement to vote for the incumbent board. Drawing a distinction between this type of accommodation and a traditional case of vote-buying, Vice Chancellor Strine refused to apply the heightened standard of review applicable under some Delaware cases to a compromise among candidates about the shape of a board slate.
Even though the Vice Chancellor ultimately decided the case for plaintiffs (ordering a re-vote due in part to a lack of disclosure regarding a second voting arrangement), the opinion makes clear that a voting arrangement to accommodate board service that is subject to an informed shareholder vote will not be presumed to be unfair, but rather is subject to a determination that the parties’ subjective motives were fair.
The court reached a different conclusion, however, with regard to a second bargain involving a promise by the board to give the dissident shareholder a second board seat if the management slate won. Vice Chancellor Strine based his conclusion on the fact that “… it was a very material event that was not disclosed to the Cryo-Cell stockholders.” In addition, unlike the prior arrangement, which was subject to the approval of an informed shareholder vote, this second arrangement was not.
In deciding the appropriate framework of review, the court distinguished “give and take” arrangements such as the one previously described from the more “traditional” vote-buying arrangements that involve the misuse by management of a corporate asset to secure a vote for itself (such as a promise by the board to continue a strategic relationship with a shareholder in exchange for support).
A conclusion that one may draw from this ruling is that an issuer should consider providing shareholders with full and fair disclosure of voting arrangements whenever possible, absent other circumstances. For example, had full disclosure been provided regarding the arrangement for a second board seat, the arrangement would have likely passed muster under Vice Chancellor Strine’s analysis.
The ruling also underscores a reluctance on the part of Vice Chancellor Strine to have courts interfere in the area of director elections. This wariness was also on display in Mercier v. Inter-Tel, 929 A.2d 786 (Del. Ch. 2007) where the Vice Chancellor upheld a decision by the board to postpone a merger vote under a more relaxed reformulation of the standard of review adopted in Blasius. While the case is interesting for both its result and reasoning, it is by no means clear whether the Chancery Court more broadly, or a higher court, will agree with the line of reasoning adopted by Vice Chancellor Strine in these cases.
From Kevin Miller of Alston & Bird: A couple of weeks ago, Vice Chancellor Lamb of the Delaware Chancery Court ruled on a Motion to Schedule a Preliminary Injunction Hearing and for Expedited Discovery. Here is a copy of the ruling.
Background: Respironics engaged in a sale process last fall following which it agreed to be acquired by Koninklijke Philips Electronics N.V. for $66 in cash per share or aggregated consideration of approximately $5.1 billion – a 30% to 48% premium over the preceding market price, depending on the time period used as the base.
As part of the sales process, 8 potential buyers were contacted, five signed confidentiality agreements and two provided indications of interest. In contrast to Netsmart, where the company only contacted financial buyers, all of the potential buyers that were approached by Respironics were strategic buyers. In the course of negotiations Philips raised its bid from $60 to $64 and then to $66.
Towards the end of the negotiations, Philips insisted on speaking with senior management to ensure that, even though the two most senior officers would be receiving $30 million and $13 million, respectively, in the event the transaction closed, they would be willing to enter into employment agreements to facilitate post transaction integration.
The proposed merger was announced on December 21, 2007 and structured as a two step transaction, a first step tender offer commenced on January 3, 2008 and scheduled to close on February 1, 2008, followed by a second step merger.
Apparently, the plaintiff shareholders alleged that the directors of Respironics violated their Revlon duties by not contacting financial buyers (turning Netsmart on its head) and permitting the two most senior officers of the company to lead negotiations with Philips while they were negotiating their retention employment agreements. They also alleged disclosure violations.
Selected Comments from the Ruling:
VC Lamb denied plaintiffs motion and refused to schedule a preliminary injunction application. The following are selected comments from the ruling:
1. I am forced to agree with the defendants, that there is really no colorable claim asserted in the complaint or discussed in the plaintiff’s papers. And there is also, I think, certainly on the Revlon claim, no likelihood that the Court would seriously consider or entertain the idea of entering an injunction.
2. Now that we are here in January of 2008, as everyone knows, the period of intense activity by private equity companies in taking a company private, in transactions in which the company managers often were significant participants in the equity of the surviving entity, seems to have come to a screeching halt.
3. Yet, when I read the complaint and the papers that the plaintiffs submitted, the arguments advanced really are sort of weak echos of concerns the court has expressed in connection with the private equity transactions.
4. The complaint turns those concerns right on their heads, in advancing arguments that at least to my mind don’t really make sense.
5. For example, the complaint alleges, and the argument is made, that the process followed was flawed because…[the financial advisors] didn’t — or at least didn’t appear to have contacted private equity buyers, but rather, concentrated their efforts on strategic buyers. The inverse of that argument is one that had some currency and made some sense when the transactions being done were ones where the only contacts made were with private equity buyers.
6. Dealing exclusively with strategic buyers assuages, rather than heightens, concerns about managers’ conflicts of interest.
7. I also note that there is no competing offer. It’s also a third-party transaction at a substantial premium to the preexisting market price.
8. Thus, there is essentially no likelihood, on Revlon grounds, that I would ever enjoin the transaction and, by doing that, threaten the stockholders with the loss of what appears to be a very valuable opportunity.
9. [O]n the dislcosure issues, there is nothing in the complaint that suggests or alleges that the disclousre materials are materially false and misleading.