Last week, as noted in this memo, Representative Lloyd Doggett (D-Tex.) introduced a bill which would prospectively reverse controversial Internal Revenue Service Notice 2008-83. As noted in this blog, Notice 2008-83 provides that losses for loans or bad debt deductions recognized by U.S. banks and thrifts after an “ownership change” are not subject to the limitations in Section 382 of the Internal Revenue Code.
The Bill affirms that taxpayers may continue to rely on the notice for transactions completed (i) on or after the date of the issuance of the notice (i.e., September 30th) – but prior to the effective date of the Bill or (ii) pursuant to a binding written contract entered into during that same period.
From Linda DeMelis: Last week, the Department of the Treasury’s Committee on Foreign Investment in the United States (known as “CFIUS”) issued final regulations governing national security reviews of foreign investments in US companies. The new regulations – issued to implement amendments adopted by the “Foreign Investment and National Security Act of 2007″ – largely track the proposed regulations issued in April – and are the most significant changes to the CFIUS rules since their adoption in ‘91.
The new rules encourage parties to consult with CFIUS in advance of filing formal notification (an existing CFIUS “best practice”). Significantly, the new rules do not define “national security,” or what constitutes “control” by a foreign investor; nor do they provide special rules for sovereign wealth funds. CFIUS retains the flexibility to review each transaction on a case-by-case basis.
This November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
- Responding to Liquidity/Capital Constraints: The Joint Venture Decision Tree
- Breaking Up is Hard to Do – and Must Be Done Carefully
- Lessons from the Meltdown: Reverse Termination Fees
- Getting Engaged: When Hiring an M&A Financial Advisor, It’s All About the Contract
- Leveraging a Dealroom: A “How To” Guide
- Expanded Liability for Representations and Warranties: Limiting Survival Provisions
- Liquidity Facilities: The SEC Moves Towards Less Tender Offer Regulation
As all subscriptions are on a calendar-year basis, please renew now to receive the next issue. If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue (and the rest of ’08) for free.
Looking for a sophisticated discussion of Delaware law concerning the effect of shareholder ratification on breach of fiduciary duty claims? How about an in-depth analysis of the current state of Delaware law on disclosure of management projections in a merger proxy statement?
If so, then head to California.
Last Monday, the California Court of Appeal rendered its decision in Greenspan v. Intermix Media, No. B196434 (Nov. 10 2008), the latest chapter in ongoing litigation between Bruce Greenspan, the former CEO of Intermix Media, who oversaw the development of MySpace.com, and News Corp., which acquired Intermix in 2005. Mr. Greenspan and the other plaintiffs in the case brought a variety of fiduciary duty and tort claims in connection with News Corp.’s acquisition of Intermix. These claims generally arose out of alleged conflicts of interest among members of the Intermix board and flaws in the sale process that the plaintiffs contended violated the Intermix board’s fiduciary obligations under Delaware law.
The trial court ruled that the shareholders’ ratification of the transaction “vitiated the breach of fiduciary duty claims because there had been adequate disclosure of all material facts.” The Court of Appeal affirmed that ruling. More importantly for M&A lawyers, the court also provided a remarkably cogent discussion of the evolution and scope of Delaware’s shareholder ratification doctrine, as well as an equally impressive analysis and application of the Delaware courts’ take on some of the thorniest disclosure issues confronting M&A practitioners, including disclosure of management’s internal financial projections.
So many of Delaware’s doctrines evolve over time that it is sometimes difficult to piece them all together. Every now and again, it’s nice to see everything laid out in one spot, and the Court of Appeal did an impressive job of doing that in the Intermix case.
In County of York Employees Retirement Plan v. Merrill Lynch & Co., Inc., et al., (Del. Ch., Oct. 28, 2008), this 39-page Chancery Court decision addressed in a cursory but scholarly manner, several preliminary issues related to the recently announced merger of Merrill Lynch and Bank of America.
The opinion is a treasure trove of Delaware corporate law principles and practical corporate litigation tools that directly address the Delaware legal issues that have arisen in connection with the recent economic crisis of historic proportions. One indication of the seismic shifts we are witnessing is the comparatively large “two-inch high headlines” recently seen on the front page of The Wall Street Journal as formerly unthinkable “fire-sales” have been negotiated on more than one occasion “over a weekend” for blue chip companies that were formerly the 800-pound gorillas of industry (e.g., Merrill Lynch).
I am hoping that some of the corporate law professors who have their own blogs will add their scholarly analysis to this case, but for now I only have time to identify a few highlights. The court cursorily reviewed the following claims that were made about the transaction:
- self-interested directors (not a majority)
- duty of care
- deal protection claims
- irreparable harm (in connection with request for expedited proceedings)
- disclosure claims
- financial advisor compensation (and disclosure of same)
- chairman’s compensation package (and disclosure of same)
In this preliminary overview of certain issues, the court denied a motion to stay this Delaware case in favor of a related federal case in New York, and Chancery also granted expedited proceedings in this case (and explained why it did so).
The court addressed the criteria that will be applied to decide when an amended complaint will relate back to the date of the original complaint for purposes of determining if it was the “first-filed” complaint compared to a similar suit in another forum. In Delaware, this is known as a “McWane analysis”, after the Delaware Supreme Court decision of that name. In this regard, the court noted that if it is a “close call”, such as when two suits are filed within a day or so of each other, they may be considered as filed contemporaneously. When that occurs, the court observed as follows:
Under the McWane analysis, a court, in the exercise of its discretion, may stay an action “when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.” If the foreign action is not “first-filed,” the Court will pursue an inquiry “akin to a forum non conveniens analysis.”
Last week, the Washington Post ran this front-page article entitled “A Quiet Windfall for US Banks.” The article discussed Notice 2008-83 that the IRS issued back on September 30th. This Notice allows more effective use of unrealized losses in loans held by a bank following a change in ownership of the bank. Specifically, the Notice effectively suspends certain limitations that otherwise would apply under Section 382 of the Code. The Notice is not limited to government takeovers but also applies to changes in ownership arising from private investments.
As the article notes, this is groundbreaking – and surprising – stuff as the Notice may be significant not only in evaluating bank acquisitions but also in determining the consequences of new issuances of stock, either alone or when combined with other shifts in ownership. We have posted memos on this development in our “Tax” Practice Area.
Tune in Wednesday for this DealLawyers.com half-day video webconference: “Fundamentals of Investing in Public Companies.” Thanks to Kirkland & Ellis, we are providing this conference to DealLawyers.com members so that they can learn the basics – as well as some advanced – practice pointers about investing in public companies.
Kirkland spends a lot of time preparing for this conference and it’s a “high value” proposition. You’ll want to print the slides/course materials for each panel before you watch.
Act Now: Try a no-risk trial for 2009 and get access to DealLawyers.com for the “rest of ‘08” at no charge. Or since all memberships are on a calendar-year basis, renew for ’09 today.
There is some interesting shareholder litigation in North Carolina’s Superior Court over Wells Fargo’s pending acquisition of Wachovia Corporation. In Ehrenhaus v. Baker, 2008 WL 4787584 (N.C. Super. 2008), the plaintiff alleges that the Wachovia directors breached their fiduciary duties by entering into a merger agreement that did not contain an adequate fiduciary out clause, and by entering a lock-up agreement involving the issuance to Wells Fargo of shares representing almost 40% of the corporation’s voting power.
The plaintiff contends, among other things, that the merger agreement’s “fiduciary out” clause was inadequate because it merely permitted the board to change its recommendation, and did not give the board the right to terminate the merger agreement and accept a superior proposal. In addition, the plaintiff alleges that the share exchange agreement under which Wells Fargo obtained preferred stock representing approximately 39.9% of Wachovia’s voting power was a “draconian and unlawful” deal protection that rendered the shareholder vote on the merger essentially meaningless.
This is a fact pattern that the Delaware courts have dealt with quite extensively over the past decade. A series of cases beginning in 1999 culminated in the Delaware Supreme Court’s controversial decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003). In that case, the court held that voting agreements covering shares representing a majority of the total voting power of the corporation were impermissible when combined with a merger agreement provisions that did not permit the target’s board to terminate the deal and accept a superior proposal. Unlike Omnicare, Wells Fargo’s stake in Wachovia is not sufficient to guarantee approval of the merger absent an effective fiduciary out, it is certainly large enough to raise concerns about its potentially preclusive effect. See, for example, ACE Limited v. Capital Re, C.A. No. 17488 (Del. Ch. Oct. 25, 1999).
However, Delaware’s deal protection cases may ultimately prove to be of little relevance to the resolution of this case. That’s because, as Professor Steven Davidoff noted in a recent blog entry, the standard of review for deal protections in North Carolina appears to be very different – and much more director friendly – than the Unocal standard that applies in Delaware.
While Unocal places the burden on the board to establish that a defensive measure is reasonable and proportionate, North Carolina precedent suggests that the burden remains on the plaintiff to rebut the business judgment rule, and that “the court should not intervene unless the shareholder can rebut that presumption by clear and convincing evidence that the deal protection provisions were actionably coercive, or that the deal protection provisions prevented the directors from performing their statutory duties.” First Union Corp. v. SunTrust Bank (N.C. Super. 2001).
In ruling on the plaintiff’s motions for expedited discovery and expedited resolution of his motion for a preliminary injunction against the transaction, the court acknowledged that the plaintiff has alleged colorable claims concerning possible breaches of fiduciary duties. However, at the same time, the court noted that the plaintiff “may well be unable to overcome the high hurdle imposed upon him here by the business judgment rule.” In support of that statement, the court noted the board’s assertion that it needed to act quickly in order to avoid a liquidation of the company by its regulators, as well as the absence of a competing bid.
The court granted plaintiff’s request to rule on its motion on an expedited basis, and established a hearing date of November 24, 2008. It will be interesting to see how the court grapples with these issues in an analytical framework that employs a business judgment rule approach instead of Unocal.
On October 28th, the Superior Court of New Jersey – in In re: Datascope Shareholders Litigation – denied plaintiffs motion to preliminarily enjoin the closing of a first step tender offer pending, among other things, corrective disclosure in a Schedule 14D-9. We have posted the decision in our “M&A Litigation” Portal.
Plaintiffs alleged that Datascope’s 14D-9 was materially misleading because, among other things, it failed to fully and fairly disclose:
- Datascope’s management’s financial projections;
- The calculations used by Datascope’s financial advisor to compare the proposed transaction to other deals and to compare Datascope’s value to that of other companies; and
- The extent of Datascope’s financial advisor’s fee conflict.
Defendants noted that the price being offered was an all-time high for Datascope stock and that since the June 4th announcement of the transaction, the stock market had plummeted and credit availability had diminished – thus, absent the presence of a competing/topping bid, the imposition of a preliminary injunction posed greater threat of irreparable harm to shareholders.
Defendants also asserted that plaintiffs failed to demonstrate a probability of success on the merits because the auction process was exemplary and the diligence and loyalty of the directors had not been called into question. Among other things, the defendants noted the reluctance of Delaware courts to enjoin a cash merger offering a premium in the absence of a competing bid.
Under the circumstances presented, the Court agreed: “Also, considering the current economic crisis the Court is naturally hesitant to preliminarily enjoin a tender offer at a such a premium price. It is not without precedent that a court takes into account the current economic climate in making its decision, as the Delaware Chancery court recently declined to preliminarily enjoin a merger, considering the “decidedly unstable market.’” [citing Wayne County Employees" Ret. Sys. v. Corti (Del. Ch. 2008)].
1. With regard to defendants’ failure to disclose management’s projections, the Court followed CheckFree rather than Netsmart, distinguishing Netsmart on the basis that the Netsmart proxy disclosed an early version of management’s projections while in Datascope “the topic of projections was never “broached” [in the Schedule 14D-9].”
2. Similarly, with respect to the disclosure regarding the analyses of Datascope’s financial advisor, the court was equally skeptical.
Among other things, the Court noted that: “The discussion of [the financial advisor]‘s opinion (pages 12 to 18) consumes seven pages [of the 14D-9] and, among other things, summarizes each of the five lines of analysis undertaken by the investment bank.” Then the Court concluded that “the law is unsettled on [the board's duty to disclose its financial advisor's "black box" calculations]. . . . Accordingly, the Plaintiffs have failed to clearly and convincingly demonstrate a likelihood of success on the merits as to this aspect of their claim.”
Finally, with respect to Plaintiffs’ claim that the board violated its duty of disclosure by failing to disclose the amount of fees payable to its financial advisor contingent upon the consummation of the transaction, the Court noted that the 14D-9 disclosed the aggregate amount of the fees payable to the financial advisor [$6.9 million] and that a substantial portion of the fee was contingent upon completion of the proposed transaction. The Court found that such disclosure was adequate to inform shareholders of any attendant bias a shareholder might elect to infer.
Note that Schedule 14D-9 does not require long form disclosure of the analyses underlying a fairness opinion” and, despite the Delaware Chancery Court’s decision in Pure Resources, it is highly debatable that Delaware law (as held by the Delaware Supreme Court in Skeen) requires such disclosure.
As noted in this WSJ article, a Section 16(b) claim has been filed against the two hedge funds that were locked in a dispute with CSX Corp. earlier this year. A CSX shareholder has filed suit against The Children’s Investment Fund Management and 3G Capital Partners, seeking to recover (on behalf of CSX and its shareholders) alleged short swing profits arising from the funds’ transactions in CSX securities and derivatives. This could be a very interesting case, as was the earlier litigation, which focused attention on the funds’ use of derivatives in the contest for control of CSX. In his Section16.net Blog, Alan Dye provides further thoughts on this development.