John Grossbauer of Potter Anderson notes: Last week, Delaware Vice Chancellor Laster delivered this post-trial opinion in In re Trados Incorporated Shareholders Litigation. In his 114-page opinion, the Vice Chancellor finds that the entire fairness standard applied to the sale of Trados to SDL plc, in which the common stockholders received no consideration, meaning the defendants bore the burden of proving the fairness of the sale. The Vice Chancellor held that, “despite the directors’ failure to follow a fair process and their creation of a trial record replete with contradictions and less-than-credible testimony, the defendants carried their burden of proof on this issue” because the common stock had “no economic value before the merger.” Accordingly, the Vice Chancellor also held that the appraised value of the common stock was zero. The Vice Chancellor did grant the plaintiffs leave to file a petition asking for payment of their legal fees.

In this podcast, Matt Orsagh of the CFA Institute talks about the SEC’s recent enforcement case in which it charged and fined Revlon for misleading shareholders – as well as the company’s independent directors – as a result of a “going-private” transaction:

– What was the SEC’s recent Revlon enforcement action about?
– How can independent directors break down informational barriers during “going-private” transactions?
– Why are so many boards short-term focused – actively or passively?
– How should boards communicate with shareholders about these types of transactions?

The battle between Michael Dell and Carl Icahn for control of Dell over the past few months has been fascinating. As noted in this WSJ article, the Delaware Chancery Court is expected to rule today on how fast the case will move. Here’s an excerpt from the article:

A Delaware corporate-law tribunal is expected on Monday to fast-track Carl Icahn’s legal challenge to Michael Dell’s buyout deal for Dell Inc., setting up a potential showdown between the two billionaires over their competing visions for the computer giant.

Mr. Icahn has asked Chancellor Leo Strine of Delaware’s Court of Chancery to force Dell to hold simultaneous votes on the almost $24.8 billion buyout offer from Mr. Dell and Silver Lake Capital and on Mr. Icahn’s attempt to set the stage for a competing offer. The activist investor says Dell rigged the voting against his bid to replace Dell’s board with directors sympathetic to his proposal for a leveraged recapitalization of the computer maker.

Mr. Icahn is arguing that recent changes to voting rules have robbed the company’s shareholders of the right to choose between the dueling deals. Dell, meanwhile, says Mr. Icahn’s lawsuit is “just another soapbox” to publicize his fight with the special committee of the company’s board that is putting the offer from Mr. Dell and Silver Lake to a shareholder vote.

The issue up for decision Monday is how fast the case will move. With a shareholder vote set Sept. 12 on the buyout bid from Mr. Dell and Silver Lake, the financing for Mr. Icahn’s rival offer set to expire Sept. 30, and Dell’s board vote set for Oct. 17, Mr. Icahn argues that failure to get a speedy hearing on his challenge could be fatal his legal case.

Chancellor Strine could move the case along quickly or let the deal action play out and leave Mr. Icahn to pursue his remedies after the fact. Delaware courts are reluctant to interfere in shareholder votes, but the question of whether the shareholder-voting changes are fair is one the judge may want to tackle in advance, observers say. They also expect the market is right in betting that Mr. Dell’s deal for the computer company he founded will survive the legal attack, unless new facts turn up.

“When dealing with voting rights like this, I’d be stunned if [Chancellor Strine] didn’t just say, ‘Let’s cut to the chase and get this scheduled,'” said Lawrence A. Hamermesh, professor of corporate and business law at Widener University’s Institute of Delaware Corporate Law.

Here’s news from this Wachtell Lipton memo:

Last week, the Federal Trade Commission challenged a consummated acquisition by Solera Holdings that had been exempt from the reporting and waiting period requirements of the Hart-Scott-Rodino Act. Requiring a clean sweep divestiture of the acquired company’s assets, the FTC’s action highlights a trend at both antitrust agencies to seek out and challenge HSR-exempt transactions. During the Obama administration, the FTC and Department of Justice have already challenged 20 consummated deals (13% of all Obama-era merger challenges), compared with just 15 such challenges during the entire Bush administration. These challenges underscore the antitrust risk facing buyers that make non-reportable acquisitions.

Most challenged consummated deals were exempt because they fell below the HSR Act reporting thresholds (e.g., Solera involved an $8.7 million deal). Since relatively little is at stake in smaller deals, buyers may be willing to take on the risk of a post-closing challenge. Other HSR Act provisions, however, can exempt much larger transactions, where the impact on the buyer of a post-closing challenge would be substantial. In particular, certain acquisitions by banks (e.g., loan portfolios, servicing rights), insurance companies (e.g., renewal rights, reinsurance) and real estate firms may be non-reportable under the “ordinary course” exemption and other HSR rule interpretations, and certain joint ventures may not trigger the HSR Act. These deals can nonetheless raise substantive antitrust concerns.

In HSR-exempt transactions, parties may operate under the impression that antitrust concerns are moot and that there is no need to allocate antitrust risk between the parties in the acquisition agreement. In fact, ignoring the issue effectively transfers “hell-or-high water” antitrust risk to the buyer upon consummation of the deal. Buyers can try to reallocate this risk, but all such efforts have practical drawbacks and will be resisted by sellers.

For instance, parties can agree to notify the antitrust agencies of the prospective deal and to delay consummation, but this creates a potentially open-ended investigation, untethered by the normal constraints of the HSR process. Joint venture partners can seek a “business review” from the DOJ or an “advisory opinion” from the FTC, but these processes are similarly open-ended and are often impractical for other reasons. Finally, where the selling company continues to exist after closing, parties can define their respective pre- and post-closing obligations in their agreement, but the seller may resist such efforts given the hypothetical and open-ended nature of the risk.

In the face of seller resistance to these alternatives, buyers in non-reportable transactions frequently face the prospect of taking all the risk of a post-consummation challenge. Accordingly, before entering into such transactions, an acquirer should very thoroughly analyze the substantive antitrust issues raised by the transaction, the feasibility of remedies short of clean sweep divestitures, the practicality of unscrambling assets post-integration, and the impact on their business in the event of a future mandated divestiture. They should also estimate the likelihood that disappointed rival bidders for the target, disgruntled customers, or other media coverage will draw unwanted scrutiny to the consummated deal. Buyers should also be aware that the government will use post-merger actions, such as price increases, as evidence of a deal’s anticompetitive effects.

John Grossbauer of Potter Anderson notes: In SEPTA v. Volgenau, Delaware Vice Chancellor Noble granted summary judgment to defendants on all counts of a challenge to the acquisition of SRA International by Providence Equity Partners, in which the company’s controlling stockholder and founder. Dr. Ernst Volgenau, maintained a post-closing interest. The Court found that the business judgment rule was applicable here because the transaction was negotiated by a committee of disinterested directors and subject to the non-waivable approval of a majority of the minority shares of stock of SRA.

The Court cited In re MFW Shareholders Litigation with approval, but found that case not strictly applicable because the transaction did not involve a majority stockholder squeezeout, but rather a sale to a third party, albeit one in which the majority stockholder agreed to roll over a portion of his shares. The Court instead found In re John Q. Hammons Hotels to be the appropriate precedent. In that opinion, Chancellor Chandler noted his belief that business judgment would be the applicable standard of review in a transaction in which a controlling stockholder received differential consideration if the deal were subject both to majority of minority approval and was negotiated by independent directors. As in Hammons, the Vice Chancellor found that Dr. Volgenau did NOT stand on both sides of the transaction for purposes of invoking entire fairness review, because he had not initiated the transaction and was willing to sell to other bidders.

In making the determination that the procedural protections here were sufficient, the Court addressed a number of issues. He found that the fact the lead independent director sought, post-signing, an additional fee of $1.3 million, which would be donated to a charity, was not enough to compromise his independence. Similarly, the contingent fee paid to the bankers, and the bonus paid to the committee’s counsel, did not taint the advisers. He found, in regard to the latter, that failure to disclose the possibility of the additional counsel payment was not a material omission. Finally, the Vice Chancellor found that the differential consideration was permitted under the Class A/B charter structure at issue, given that the value of the consideration received by Mr. Volgenau and other stockholders was equal, and plaintiffs had not succeeded in creating a triable issue of fact to the contrary.

Here’s this Foley Hoag memo:

As part of recent amendments to the Delaware General Corporations Law (DGCL), two new sections were added to the DGCL to facilitate the ratification of so-called “defective corporate acts” that would otherwise be invalid due to improper corporate authorization. New Sections 204 and 205 of the DGCL (the Ratification Provisions), which go into effect on April 1, 2014, provide Delaware corporations the opportunity to undertake a more thorough “corporate clean-up” than is currently permitted under the DGCL.

Why Are Ratification Provisions Necessary?

The Ratification Provisions will allow a corporation to take measures to remove uncertainty surrounding its capital structure, which is particularly important when a corporation is the target of an acquisition or is in the process of conducting an initial public offering. During the course of an acquisition or IPO, a corporation − or more likely, its counsel − will typically conduct a thorough review of the corporate books and records and engage in a process to “clean up” any incorrect or incomplete records. The clean-up process often includes the adoption of resolutions by the corporation’s board of directors and stockholders ratifying certain past acts of the corporation.

However, under the DGCL, certain invalid corporate actions cannot be remedied through subsequent ratification. In particular, if a corporation issued shares of capital stock in excess of the number of shares of authorized stock at the time of such issuance (the Ratification Provisions call these over-issued shares “putative stock”), the issuance is void and cannot be ratified. Over-issues of stock can have far-reaching effects. For example, if the Company’s board of directors is elected by persons holding putative stock rather than valid stock, the board’s election is also invalid. The Ratification Provisions are primarily intended to address these situations, although they are also available to ratify any other type of corporate act that is void or voidable due to a failure of proper corporate authorization.

The Ratification Provisions establish a process for ratification of defective corporate acts or putative stock by a corporation itself (under Section 204), as well as validation of defective corporate acts or putative stock by the Delaware Chancery Court (under Section 205). Upon ratification or validation by either the corporation or the Court, the defective corporate act will be deemed retroactively effective and valid as of the time of the defective corporate act.

What Is the Process Under Section 204?

In order to ratify defective corporate acts or putative stock under Section 204:

– The board of directors must adopt a resolution ratifying the defective corporate act or putative stock, and containing certain other information about the defective corporate act.

– If the defective corporate act (such as an amendment to the corporation’s charter) would have required stockholder approval, the stockholders must also adopt the ratification resolution. The corporation must provide stockholders with 20 days’ notice of the meeting at which the resolution is to be adopted. This notice must go to holders of valid stock and putative stock, whether voting or nonvoting, both current and at the time of the defective corporate act. The notice must include a statement that any challenge to the ratification of the defective corporate act must be brought within 120 days of the effective time of the ratification.

– Once approved by the board and, if applicable, the stockholders, the corporation must file a “certificate of validation” with the Delaware secretary of state. This certificate is currently being developed by the secretary of state’s office − which is one reason for the delay in effectiveness of the Ratification Provisions to April of 2014.

– If stockholder approval was not required, the corporation must provide notice of the ratification to stockholders within 60 days’ of adoption of the ratification resolution by the board. This notice must go to holders of valid stock and putative stock, whether voting or nonvoting, both current and at the time of the defective corporate act. The notice must include a statement that any challenge to the ratification of the defective corporate act must be brought within 120 days of the effective time of the ratification.

If a corporation is unable (due to the lack of a properly authorized board, for example) or unwilling to undertake the process contained in Section 204, certain parties may directly petition the Delaware Chancery Court to validate independently any defective corporate act or putative stock. Section 205 also give the Court jurisdiction to hear challenges to the validity and effectiveness of any ratification undertaken by a corporation pursuant to Section 204.

The parties that can bring a claim under Section 205 include the corporation, any successor entity, any member of the board, any record or beneficial holder of valid stock or putative stock, any record or beneficial holder of valid or putative stock as of the time of a defective corporate act, or any other person claiming to be substantially and adversely affected by a ratification pursuant to Section 204. However, the timeline for a Section 204 challenge is fairly short, giving the corporation a measure of certainty. With some exceptions, any action requesting review of a Section 204 ratification must be brought within 120 days of the effective time of the certificate of validation.

Tune into our upcoming webcast – “Tender Offers Under the New Delaware Law” – to analyze the new Delaware law changes that take effect today regarding tender offers. There are other law changes too. Here are a few memos analyzing the changes:

– Dorsey & Whitney
– Paul Weiss
– Morris Nichols

And here are memos specifically about the changes that will impact tender offers…