Leo Strine was sworn in as Delaware’s Chief Justice earlier this week – here is a video of the swearing-in ceremony, courtesy of Delaware Online. Meanwhile here’s my own 1-minute video showing how Strine adds pizzazz to the bench:
Here’s news from Tom Bayliss of Abrams Bayliss:
On February 28th, the Delaware Court of Chancery issued In re Orchard Enterprises, Shareholder Litigation, C.A. No. 7840-VCL. In the ninety-page opinion on competing motions for summary judgment, Vice Chancellor J. Travis Laster:
- Rejects the argument that damages claims founded on disclosure violations were extinguished at closing under In re Transkaryotic Therapies, 954 A.2d 346 (Del. Ch. 2008);
- Holds that the entire fairness standard will apply at trial because the controlling stockholder failed to agree up front that its proposed transaction would only proceed with (a) the affirmative recommendation of a special committee of independent and disinterested directors and (b) the affirmative vote of the holders of a majority of the stock unaffiliated with the acquirer;
- Finds that the defendants must bear the burden of proof at trial because of material questions of fact regarding the independence and adequacy of the target’s special committee;
- Declines to hold that the Court of Chancery’s determination in a prior appraisal proceeding that the fair value of the target’s common stock was more than double the transaction price warranted a determination at summary judgment that the transaction was unfair; and
- Leaves open the possibility that the Court could award rescissory damages, quasi-appraisal damages or other relief if the plaintiffs ultimately prevail at trial.
The Orchard opinion will likely generate extensive commentary from practitioners and academics on the issues highlighted above and others, including the relationship between appraisal claims and fiduciary duty litigation and the breadth of remedies available to the Court of Chancery when assessing alleged breaches of the duty of loyalty.
Takeaways & Further Thoughts:
1. Orchard confirms that damages claims founded on disclosure violations will survive closing if they raise loyalty issues.
a. Under well-settled Delaware precedent, a breach of the duty of disclosure in connection with a request for stockholder action gives rise to a threat of irreparable harm sufficient to warrant an injunction.
b. In Transkaryotic, the Court identified an implicit corollary to this concept of irreparable harm: when stockholders “have voted without complete and accurate information – it is, by definition, too late to remedy the harm. If the Court could redress such an informational injury after the fact, then the harm, by definition, would not be irreparable, and injunctive relief would not be available in the first place.”
c. After Transkaryotic, practitioners wondered whether the Court’s language could be interpreted to mean that the Court would never award damages for disclosure violations. They also wondered whether stockholders needed to raise all disclosure claims pre-closing. Many doubted that a broad interpretation of Transkaryotic would survive a case in which the Court confronted egregious disclosure violations that had not been raised pre-closing but that might have misled stockholders about whether to vote down the deal or seek appraisal.
d. In several transcript rulings, Vice Chancellor Laster has expressed the view that at least in some circumstances, stockholders can obtain post-closing relief for disclosure violations. Chancellor Chandler noted the same possibility in a footnote in Hammons.
e. Orchard is now the clearest statement yet on the subject.
2. Instead of interpreting references to “irreparable harm” in pre-closing injunction rulings to mean that no remedy exists if stockholders raise disclosure claims after closing, Orchard interprets references to “irreparable harm” as acknowledgements that post-closing remedies are a “less perfect substitute.” The Orchard opinion notes that pre-closing remedies for disclosure violations are “superior and preferable,” but it rejects the notion of a post-closing “remedial impasse.”
3. The Court emphasizes the possibility of significant damages awards for disclosure violations. According to the Court, with the benefit of “full disclosure, [Orchard’s] stockholders could have voted against the merger, stopped the transaction and remained holders of equity in a going concern.” The Court reasons that, “if a stockholder has been deprived of property (shares) because of false or misleading disclosures, a court can compensate stockholders with the monetary value of the lost property (the fair value of the shares less the merger consideration).”
4. The prospect of significant damages awards for disclosure violations could potentially trigger a shift in strategy among stockholder plaintiffs who have overwhelmingly focused on bringing pre-closing disclosure claims and applications for injunctive relief. But several factors indicate that any potential shift will only be incremental.
a. First, Orchard’s holding only extends to disclosure claims that raise loyalty issues. The opinion is unlikely to have an immediate impact on challenges to disclosures in third-party deals.
b. Second, Transkaryotic and other rulings suggest that the Court will continue to dismiss damages claims for disclosure violations that should have been identified and challenged pre-closing. The Court could easily apply the laches analysis it routinely applies in other contexts to reach this result.
c. Third, any stockholder plaintiff seeking to recover damages for disclosure violations under Orchard will continue to confront significant obstacles, including exculpatory charter provisions and the requirement that they prove causation and damages. For example, it is unclear how a stockholder could prove that a particular disclosure violation caused other stockholders to vote for a deal they would have otherwise opposed or somehow dissuaded stockholders from seeking appraisal.
d. Fourth, the availability of expedited discovery and the hydraulic pressure created by deal timelines will continue to make pre-closing litigation an attractive environment for stockholder plaintiffs seeking to extract settlements.
5. Orchard confirms that, under In re MFW, a controlling stockholder can obtain business judgment review of a squeeze-out transaction only if the controller conditions its proposal on the recommendation of a disinterested, independent and fully-empowered special committee and the affirmative vote of a majority-of-the-minority stockholders before negotiations begin.
6. The result in Orchard demonstrates how difficult it can be for defendants to obtain burden-shifting under the procedural framework established in Americas Mining/Southern Peru. In Americas Mining, the Delaware Supreme Court held that the burden-shifting benefit of (a) employing a disinterested, independent and fully-empowered special committee or (b) conditioning the transaction on a majority-of-the-minority vote would only apply if the defendant established the effectiveness of one of those mechanisms at summary judgment. Thus, a stockholder plaintiff can defeat burden-shifting simply by raising questions of fact. This dynamic reduces the incentive to employ any burden-shifting mechanism in the first place.
7. The Orchard Court finds that plaintiffs raised a question of fact about the effectiveness of the Special Committee by presenting evidence challenging the independence of one member (Donahue) of a five-member committee. The Court’s ruling emphasizes that Donahue was the chair of the committee, acted as the principal point person in negotiations, and was alleged to have extensive ties to Dimensional. The Court does not address the potential argument that the roles of the other four Special Committee members cleansed Donahue’s conflict.
8. The Court’s refusal to grant summary judgment on “fair price” despite a prior appraisal decision resulting in a “fair value” determination of more than twice the transaction price seems generous to defendants. This component of the ruling is easier to understand as a practical ruling given the anticipated need to assess witness credibility at trial even if plaintiffs prevailed on this point.
9. The Court’s holding that incorrect statements in statutorily-required disclosures are material per se is an important reminder that an error in a disclosure mandated by the Delaware code can trigger seemingly disproportionate consequences.
10. The Orchard Court discusses “quasi-appraisal” damages at length. According to the Court, “quasi-appraisal” damages consist of the fair value of the applicable stock less the price paid for it in the transaction. The Court indicates that “quasi-appraisal damages” are simply one of many different measures of damages (including “reliance damages, expectancy damages, rescissory damages, disgorgement and punitive damages”) and are available in and outside the short-form merger context. Critically, this conception of “quasi-appraisal” (as a measure of damages) is far different from the concept of a “quasi-appraisal proceeding” that mimics the appraisal process and requires defendants to pay the difference between fair value and the deal price regardless of fault or culpability.
11. The Orchard Court carefully distinguishes between two often-conflated legal concepts: the “fair price” prong of entire fairness analysis and the appropriate measure of damages in an entire fairness case. The Court emphasizes that courts apply the “fair price” prong of the entire fairness test to determine liability. Once courts determine liability, they choose from a menu of potential remedies, one of which could be a “quasi-appraisal” damages award that would likely track the court’s analysis of fair price.
12. Orchard indicates that “when a case involves a controlling stockholder with entire fairness as the standard of review, and when there is evidence of procedural and substantive unfairness, a court cannot summarily apply Section 102(b)(7) on a motion for summary judgment to dismiss facially independent and disinterested directors.” Although this holding can be read to conflict with others in similar contexts, it is not new law, and it reflects how even completely disinterested and independent directors can be swept towards trial by the rigors of entire fairness scrutiny.
13. The Orchard Court’s refusal to rule out the possibility of rescissory damages was not academic. The opinion references the fact that Orchard merged with an affiliate of Sony Music pursuant to an agreement executed on March 3, 2012. If the Court grants rescissory damages, it could award the minority stockholders the value of their stock as of the date of judgment (presumably at or near the value implied by the Sony transaction).
14. The transaction challenged in Orchard involved at least two unusual features. The first was a go-shop feature (employed despite the existence of a controlling stockholder). The Court recognized that the efficacy of any go-shop in that context would turn on whether and under what circumstances the controller would be willing to sell. The second feature was a “flip” provision that required Dimensional to share the proceeds if it sold 80% or more of Orchard’s equity or assets within six months after the merger. One wonders whether the existence of the flip provision raised questions about the Special Committee’s confidence in its own sale process.
Tune in today for the webcast – “M&A Litigation: The View from Both Sides” – to hear Robbins Geller’s Randy Baron, Wilson Sonsini’s David Berger, Grant & Eisenhofer’s Stuart Grant and Morris Nichols’ Bill Lafferty analyze the latest wave of M&A litigation that has permeated nearly all deals. This program features two lawyers from the plaintiff’s side – and two from the defense perspective.
Here’s news from this blog by Davis Polk’s Ning Chiu:
While notices of exempt solicitations are becoming more common, they usually do not involve a proponent’s tweets about the company, as is the case with Carl Icahn and the Apple annual meeting proxy statement. Icahn and affiliates submitted an advisory proposal that Apple commit to completing not less than $50 billion of share repurchases during its 2014 fiscal year.
Since then, the proponent has filed notices of exempt solicitations, located on Apple’s SEC Edgar site, that include tweets such as: “Bought another $500mil of $AAPL tday, bringing our total to 3.6 billion. If board doesn’t see AAPL’s ‘no brainer’ value we sure do.” and “We feel $APPL board is doing great disservice to shareholders by not having markedly increased its buyback. In-depth letter to follow soon.” Most recently, a new notice included just this tweet: “Just bought $500 mln more $AAPL shares. My buying seems to be going neck-and-neck with Apple’s buyback program, but hope they win that race.”
It has also been reported that Icahn sent eBay a shareholder proposal seeking a non-binding vote on whether the company should spin off PayPal, its electronic-payments business. While this type of proposal is unusual, with less than 10 since 2005, a similar proposal to Timken from Relational and Calstrs in 2013 passed, as we discussed here, and led to the company agreeing to spin off its steel unit.
Less noticed was a proposal at Hamden Bancorp’s November 2013 annual meeting in connection with a proxy contest led by Clover Partners, asking that the company’s board explore enhancing shareholder value through an extraordinary transaction, including selling or merging the company. The SEC staff declined to permit the proposal to be excluded due to vagueness or ordinary business grounds, and the proposal ultimately received 48% support. In a press release announcing the results, the company indicated that it retained an investment bank to help it identify and evaluate various strategic and/or operating scenarios intended to maximize shareholder value.
Meanwhile, here’s an excerpt from this blog by “The Activist Investor”:
Late last month we considered why Carl Icahn might get mixed up with non-binding (precatory) proposals at Apple and eBay. We speculate that he studied the strategy that Ralph Whitworth at Relational Investors and CalSTRS undertook at Timken, where a non-binding proposal probably helped speed along the decision to spin-off its steel business. We conclude Icahn may do this because starting this year, shareholder proposals can pressure corporations in new ways.
It seems Jeff Smith at Starboard Value studied the same strategy. This week Starboard announced its plan to submit a non-binding resolution opposing Darden Restaurants’ announced spin-off of its Red Lobster business. And, Starboard intends to call a special shareholder meeting for the sole purpose of voting on that resolution. In addition to presenting some interesting strategic choices, it seems that Starboard may not have any other option for opposing the spin-off.
It comes down to winning the hearts and minds of other investors. The extent of support for resolution and special meeting constitute an early sign of what other investors think about the Starboard and Darden plans for the company.
A few days ago, FINRA proposed a new regulatory regime – through Regulatory Notice 14-09 – for firms that limit their activities to advising companies and private equity funds on M&A, capital raising and corporate restructuring. This proposal fits with the SEC’s new position that private M&A brokers are not required to register as brokers (see the memos posted on this).
As noted in this memo by DLA Piper’s Ed Johnsen:
Many firms limit their business to corporate advisory services, but this nevertheless can fall within the broad definition of broker-dealer activity. Such firms advise companies on mergers and acquisitions, assist them in raising capital in private placements to institutional investors and/or help them assess strategic and financial options.
The SEC and FINRA (and, from time to time, the courts) have taken the position that such firms must register as broker-dealers because they are involved in key points in the distribution of securities. This is especially true when such firms receive transaction-based compensation for their services.
Realizing that such firms do not engage in most of the activities typically associated with broker-dealers, FINRA is proposing a bespoke set of rules for what they now refer to as “limited corporate financing brokers.”
In this podcast, Matt Little of PKWARE explains how his software enables lawyers and other deal participants to securely access and share files without using a data room, including:
- What can happen if practitioners don’t address data security issues if they aren’t using a traditional or virtual data room?
- Minimum someone should do to address data security challenges?
- What Viivo is, and how it’s used in the context of a deal?
- What factors should be considered in determining whether to use a product like Viivo vs. a data room?
- What are some success stories?
As noted in this article from The Deal, Delaware Vice Chancellor Travis Laster was at his most aggressive in a Friday order where he asked probing questions of the shareholders and lawyers who brought a fiduciary duty lawsuit challenging the $68 million sale of Theragenics to Juniper Investment. Here is an excerpt from the article:
Laster directed several questions to the Theragenics shareholder plaintiffs Leslie Baker and Julia Davis. He wanted to know their economic interest in the company at the time the complaint was filed and the date of settlement; “a description of the plaintiff’s investment portfolio sufficient to determine the materiality of the plaintiff’s economic interest in the issuer;” and “a description of the plaintiff’s investment strategy.”
Laster also asked a series of questions designed to reveal the relationships between shareholders and their counsel. Laster queried how the plaintiff came to hire Rigrodsky, “including whether counsel advertised for potential plaintiffs; how plaintiff came into contact with counsel; whether plaintiff contacted any other law firms; any referral process among counsel; [and] whether the plaintiff has any other relationships with counsel.” He requested a table of “representative actions filed by the plaintiff within the last five years” including the counsel retained, venues in which the matters were filed, outcomes, and any “compensation that the plaintiff received.”
Finally, Laster directed a pointed question at Rigrodsky. Counsel for shareholders generally work on a contingency basis, but Laster asked the law firm how many times in the last year it’s been hired by the hour “together with an estimate of the percentage of total firm revenues represented by such engagements.” Corporate lawyers complain that firms such as Rigrodsky do nothing but file form complaints designed to induce a quick settlement and accompanying fee. Laster wants to know how much of Rigrodsky’s business is comprised of those cases.
Corporate lawyers and litigators have asked similar questions — and cynically theorized answers — for many years. They view most M&A-related shareholder litigation as an unwarranted tax on dealmaking. Delaware judges have often agreed with that critique but said they were unable to curb strike suits because of the problem of multijurisdictional litigation. Plaintiffs’ lawyers bring M&A-related class action suits in multiple state courts, and defendant companies seek global settlements rather than fight dubious suits because of the cost of defending the matters and the risk of an adverse decision. But many Delaware corporations have in recent years adopted forum selection bylaws or charter provisions that require all fiduciary duty litigation to be brought in Delaware.
Tune in tomorrow for the webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Brian Breheny of Skadden Arps, Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
Here’s news from Kevin Miller of Alston & Bird:
Recently, a number of investors as well as certain hedge funds have adopted a strategy of seeking an appraisal of the fair value of their shares in a target corporation acquired via merger merely to earn the currently very attractive statutory rate of interest on the appraised value of those shares from date the merger closes to the date of payment of the judicially appraised value. In the current low interest rate environment, the relatively high statutory interest rate of 5% above the Fed. Reserve Discount Rate may generate an attractive return even if the appraised value is less than the merger consideration.
In a new case – Huff Fund Investment Partnership v. CKx, Civil Action No. 6844-VCG (Del Ch; 2/12/14) – the respondent target corporation valiantly but unsuccessfully attempted to stop interest from accruing at the overly generous statutory rate on that portion of the value of its shares that it was not challenging in the appraisal proceeding and was willing to pay immediately. Here is an excerpt:
The Respondent requests that I order the Petitioner to accept an unconditional tender of $3.63 per share, which represents its expert’s base case scenario for valuing CKx, plus accrued interest. In other words, the Respondent agrees that under no circumstances could CKx be valued at less than $3.63 per share, and it is willing to tender that amount to stop the accrual of interest on that payment, which interest is currently accruing at five and three-quarters percent, five percent above the Federal Reserve discount rate. In effect, the Respondent seeks the equitable analog of an offer-of-judgment rule, which allows Superior Court, but not Chancery, litigants the ability to limit the adverse effects of a verdict.
In addition to agreeing that the Petitioner would not be required to return the tendered amount to the Respondent, the Respondent has offered to indemnify the Petitioner for any negative tax consequences incurred as a result of accepting a partial payment—an offer conditioned on the Petitioner turning over certain tax decisions to the discretion of the Respondent. Despite those concessions, the Petitioner continues to reject the Respondent’s offer, and for the reasons explained below, I deny the Respondent’s request for an order requiring the Petitioner to accept it. . . .
I am aware that equitable principles may support such a tolling of interest, in certain situations. However, where the General Assembly has provided a specific standard governing interest awards, such a statutory directive must trump those considerations.
This decision makes it clear that the Delaware legislature needs to act – hopefully sooner rather than later – to address the issues created by an overly generous statutory interest on the appraised value of shares. Otherwise, given the current low interest rate environment, we will continue to see a large number of long, drawn-out appraisal claims burdening the Delaware courts.