Monthly Archives: September 2008

September 29, 2008

Interesting Times, Huh?

John Jenkins, Calfee, Halter & Griswold LLP

As the financial markets careen from one crisis to another, it’s hard to find any good news to report about the deal economy. M&A volume is down, and it’s down a lot. According to data from Dealogic quoted in the Wall Street Journal’s Deal Journal blog, the volume of M&A deals plummeted by 63% in August, led by a whopping 77% decline in U.S. deal volume. For the year to date, global deal volume is off 29%. While August is usually a slow month, it is worth noting that the Dealogic data indicates that August 2008 deal volume was 31% lower than that recorded in August 2007

If you’re looking for a ray of sunshine, here’s the best I can do – although middle market activity isn’t as robust as it has been in recent years, conditions don’t appear to be as bad as they are in the large cap M&A market. I spoke with Dave Dunstan, a managing director at Cleveland’s Western Reserve Partners and an experienced M&A investment banker.

Dave and his colleagues point out that while middle-market M&A is clearly softer than during 2006 and 2007, it is still happening at a level comparable with earlier years, and the further on down the food chain you get, the more robust activity becomes.

For example, based on an extrapolation of the first seven months of 2008, Western Reserve expects that slightly less than 900 transactions in the under $75 million segment of the market will be completed during the current year. While that number would be down more than 20% from the 1,137 transactions completed during 2007, it would be roughly comparable to the 924 transactions completed during 2006 and significantly higher than the 517 transactions completed in 2005.

In Western Reserve’s view, the lower end of the middle market’s resilience is due to the fact that despite the credit crunch, there’s still $400 billion of financial sponsors’ committed capital that needs to get put to work. The current credit environment has helped direct this money into smaller deals. Putting together bank syndicates has become a very dicey proposition, so private equity sponsors and foreign buyers have increasingly looked to smaller deals, where bank syndicates are not necessary.

Whether activity in smaller deals holds up in the face of the current crisis is anyone’s guess, but the relative resilience of the smaller end of the M&A marketplace is an encouraging sign in a year that hasn’t given anyone involved in the deal market much to smile about.

September 26, 2008

Noncontrolling Investments in Banking Organizations

On Monday, as Morgan Stanley and Goldman Sachs were being reorganized into bank holding companies, the Board of Governors of the Federal Reserve System issued a new policy statement on equity investments in banks and bank holding companies to liberalize which investments are deemed “noncontrolling” (and thus don’t subject investors to the Bank Holding Company Act of 1956).

As a Sullivan & Cromwell memo notes: the areas of liberalization include ownership of voting shares, director representation, total equity investment and convertible securities. The policy statement does not, however, deal with two other key, and arguably more important, issues: “club” investments and “silo” funds. Consequently, it remains to be seen whether the policy statement will facilitate substantial additional private equity investments in banks. In addition, the policy statement may facilitate shareholder activism.

A Gibson Dunn memo summarizes the policy’s changes as follows:

1. Director Representation – An investor may have at least one representative on a BHC’s board of directors. It may also have two representatives “when the investor’s aggregate director representation is proportionate to its total interest in the banking organization [that is, the greater of the investor’s voting interest or total equity in the organization], but does not exceed 25 percent of the voting members of the board, and another shareholder of the banking organization is a [BHC] that controls the banking organization under the BHC Act.” (footnotes omitted).

2. Increased Maximum Investment – An investor may own “a combination of voting and nonvoting shares that, when aggregated, represents less than one-third [33%] of the total equity of the organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting shares held by the investor) and does not allow the investor to own, hold or vote 15 percent or more of any class of voting securities of the organization.”

3. Enhanced Consultations with Management – An investor may communicate and advocate with management for changes in a BHC’s policies or operations such as policies related to mergers, management changes, dividends, debt or equity financing, new business lines, and subsidiary divestitures. An investor may not make explicit or implicit threats to dispose of shares in the BHC or to sponsor a proxy solicitation as a condition of action or non-action by the BHC or its management in connection with these policy discussions.

We have posted memos on this development in our “Bank M&A” Practice Area.

September 23, 2008

A Year After the Credit Crunch: Selected US Merger Statistics

Here is a recent survey that looks at some interesting comparisons of mergers in the US between the two 12-month periods of August 2006/July 2007 and August 2007/July 2008. No big surprises, but useful – deal activity is trending down…

Posted: The SEC’s Adopting Release for Cross-Border Deals

The SEC has finally posted its adopting release for cross-border deals. We have started to post memos analyzing these rule changes.

Establishing GAPP: Principles for Sovereign Wealth Funds

The recently-formed International Working Group of Sovereign Wealth Funds announced that it has reached a preliminary agreement on a draft set of Generally Accepted Principles and Practices (GAPP), otherwise known by the catchier name of the “Santiago Principles.” The IWG was set up back in May to establish a set of voluntary standards for governance, accountability and investment practices of sovereign wealth funds. Now, the group has come up with principles and practices that the group says will “promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”

As noted in this transcript of the press conference announcing the Santiago Principles, the governance and accountability arrangements are geared toward providing comfort that sovereign wealth funds are separate from their owners, and that “the investment policies and risk management together with other things are intended to make it clear that sovereign wealth funds act from a commercial motive and not other motives.”

The GAPP will be presented to the Internal Monetary Fund’s International Monetary and Financial Committee on October 11th, once the respective governments with funds making up the IWG have had a chance to consider the preliminary recommendations. After that, the group expects to make the principles publicly available.

Tune into the upcoming webcast – “The Rise of Sovereign Fund Investing” – on October 2nd to find out about the latest strategies and investment techniques used by sovereign funds, as well as the latest issues raised in doing these types of deals.

September 19, 2008

Will Uncle Sam be a Controlling Stockholder with Fiduciary Duties at AIG?

Here is a guest blog from Steven Haas of Hunton & Williams:

The bailout of AIG gave the Federal Reserve a warrant to obtain 79.9% of the company’s outstanding shares. Since AIG is a Delaware corporation, it would appear the Fed would then owe fiduciary duties to AIG’s minority stockholders. In theory, all of this could mean that any subsequent transaction between AIG and the Fed could be reviewed for entire fairness under Delaware law. Of course, there’s also Delaware case law stating that a controlling stockholder can exercise its rights in its capacity as a creditor without self-sacrifice. And I’ll leave it to the Con law experts to consider sovereign immunity and other federal issues. Nevertheless, I’m sure there’s some plaintiffs lawyers dreaming right now, and we’re all waiting with curiosity to see the Fed file a 13D…

[Note that yesterday, I also blogged on unrelated issues regarding the 79.9% stake in AIG on (eg. Section 16 reporting by the Fed).]

September 18, 2008

Ninth Circuit Limits Survival Clause in Deal Governed by California Law

As noted in this memo, in what the court described as “an issue of first impression” – in Western Filter Corporation v. Argan (CD Cal.; 8/08) – the Ninth Circuit Court of Appeals applied California law and narrowly construed a stock purchase agreement provision that purported to limit the survivability of representation and warranty claims.

As noted in the memo, “The court held that the provision did not limit the time to bring claims for breaches of representations and warranties, but only determined the period during which “a breach of the representations and warranties may occur,” effectively negating the provision. As a result of the ruling, limited survivability provisions in M&A transactions governed by California law may not be effective unless carefully and properly drafted.”

September 16, 2008

RiskMetrics Begins Advising on Tender Offers

Last Friday, RiskMetrics’ ISS Division broke with tradition and advised its clients not to tender Longs Drug Stores’ shares into CVS’ tender offer. Historically, RiskMetrics has only made recommendations on shareholder votes and left tender offers alone. So changing the structure of a deal from a merger to a tender offer will no longer have the incidental effect of removing RiskMetrics from the equation…

Yes, I know the world is falling apart and I’m not blogging about it. Too depressing to face the music. I do note that there is plenty of solid commentary out there – for example, “The Deal Professor” blog with its latest installment garnering over 200 comments and “The D&O Diary” blog which is following AIG closely and linking to many other notables.

September 15, 2008

The Original Go-Shop?

Here is a guest blog from Steven Haas of Hunton & Williams: Travis Laster and I recently co-authored an article in the July 2008 issue of Insights entitled “Relearning M&A Lessons: A Reprise of the 1980s.” The gist of our piece is that the 2007 Delaware decisions in Netsmart, Topps and Lear applied basic principles found in several decisions from the 1980s LBO wave.

One of our points is that, while go-shops proliferated during the recent M&A wave, they weren’t an entirely new innovation. Lots of commentary last year focused on Topps and Lear as being the first judicial blessings of go-shops, but the Court of Chancery had already recognized a go-shop in In re Formica Corp. Shareholders Litigation, 1989 WL 25812 (Del. Ch.; Mar. 22, 1989)—although it was known simply as a post-signing market check. In Formica, a special committee negotiated for a 47-day period in which it could conduct a “post-agreement auction” and “actively solicit higher bids” before it closed an all-cash offer from a management-led buyout group.

Then-Vice Chancellor (now Justice) Jacobs compared the merger agreement with the no-shop provision and fiduciary-out that was validated in Fort Howard. He wrote that “[i]n this case the facts are more compelling than in Fort Howard. Here the market is being actively explored by [the investment bankers], who contacted 125 potential bidders and currently is engaged in discussions with 4 of them. In Fort Howard, by way of contrast, the corporation was not permitted to solicit potential acquirers, but could negotiate only with interested parties who contacted the company.”

I’m not sure if go-shops were used elsewhere in the 1980s, but I thought Formica was an interesting case that’s gone relatively unnoticed.

September 12, 2008

Delaware Chancellor Dismisses Claim that Directors Sold Subsidiary in Bad Faith

From Travis Laster: In McPadden v. Sidhu, Delaware Chancellor Chandler recently granted a motion to dismiss claims against the outside directors of i2 Corporation for allegedly selling a significant subsidiary in bad faith. The decision merits close attention both substantively for what the Chancellor views as exculpated conduct under Section 102(b)(7) and procedurally for its approach to Rule 23.1.

The Facts

According to the allegations of the complaint, the directors of i2 approved the sale of one of i2’s subsidiaries, TSC, to Anthony Dubreville, an officer of i2, for $3 million. Six months later, Dubreville received a third party offer for TSC for $18.5 million. Two years later, Dubreville sold TSC for $25 million. The board delegated to Dubreville the task of running the sale process for TSC despite knowing that he was interested in acquiring TSC via an MBO. The Board relied on Dubreville to convey information about TSC to potential purchasers, and also relied on him for information about expressions of interest. No business broker or investment banker was hired. At the time of the purchase, a competitor allegedly had expressed interest in acquiring TSC for $25 million.

Taking these allegations as true for purposes of his ruling, the Chancellor first denied the defendants’ motion to dismiss pursuant to Rule 23.1, finding that “plaintiff has pleaded a duty of care violation with particularity sufficient to create a reasonable doubt that the transaction at issue was the product of a valid exercise of business judgment.” (17). Under the second prong of Aronson, therefore, demand was futile. The Court observed that it was grossly negligent for directors to task Dubreville with leading the sale process when the board knew he was interested in buying the subsidiary. The board then “engaged in little or no oversight of that sale process, providing no check on Dubreville’s half-hearted (or, worse, intentionally misdirected) efforts in soliciting bids for TSC.” (19).

Dubreville did not contact natural buyers, such as TSC’s competitors, and he did not contact the party that had expressed interest in a purchase for $25 million. The board was provided with information about the selective process and knew what Dubreville had done, but did nothing to remedy the situation. Instead they approved a sale to Dubreville. The directors also did not take into account the fact that the sale price was below the range of fair value calculated using projections prepared for potential buyers in January 2005, and only barely within the range of fairness based on revised projections prepared by Dubreville’s buy-side management team in February 2005. Based on all of these issues, the Chancellor found it “obvious” that the directors were grossly negligent. (22).

Despite denying the Rule 23.1 motion, the Chancellor dismissed the claims against the outside directors for failure to state a claim in light of the Section 102(b)(7) provision in i2’s charter. The plaintiff argued that the allegations regarding the directors’ conduct were sufficient to state a claim for breach of the duty of loyalty based on action taken in bad faith. The Chancellor, however, interpreted the Delaware Supreme Court’s holding in Stone v. Ritter as holding that bad faith requires some form of intentional action, namely “the intentional dereliction of duty or the conscious disregard for one’s responsibilities.” (25). This left conduct that involves “reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason” as falling under the heading of gross negligence and hence involving only a care breach. (24). The Chancellor held that the defendant directors’ actions “are properly characterized as either recklessly indifferent or unreasonable.” (26). Such conduct, however, gave rise to a breach of the duty of care and was exculpated under Section 102(b)(7).

The Chancellor then turned to Dubreville himself. He first held that “an officer owes to the corporation identical fiduciary duties of care and loyalty as owed by directors.” (27). Officers, however, are not protected by Section 102(b)(7). The Chancellor held that the complaint “more than sufficiently alleged a breach of fiduciary duty.” (28). The Chancellor also held that the plaintiff had adequately alleged that Dubreville had been unjustly enriched by his misconduct.


Several aspects of McPadden are noteworthy. First, as a substantive matter, the outcome in McPadden contrasts sharply with the recent decision in Lyondell, where Vice Chancellor Noble denied a motion for summary judgment and permitted a case to go to trial after finding triable issues of fact over whether the directors acted in bad faith. In Lyondell, the outside directors relied on the CEO to orchestrate and run a sale process, and the Court credited for purposes of summary judgment the plaintiffs’ assertion that the directors sufficiently abdicated their duties to permit an inference of bad faith.

The facts as alleged in McPadden appear more egregious: the transaction was a sale to an insider, and the directors knew about Dubreville’s conflict and the problems with the sale process yet went forward anyway. Under Vice Chancellor Noble’s approach in Lyondell, the McPadden complaint would seem to have stated a claim because of a permissible inference of bad faith. The Chancellor reaches a different result by reading Stone v. Ritter as requiring intentional dereliction of duty and moving recklessness into the category of gross negligence.

Stone v. Ritter involved a Caremark claim based on the lack of a reporting system to ferret out wrongdoing. It is not clear to me that Stone‘s comments on bad faith in that context apply broadly to all types of bad faith. Indeed, Stone’s language on the nature of bad faith is drawn from Walt Disney, in which the Supreme Court described its definitions of bad faith as illustrative and not exhaustive. When director action is involved, it seems to me that recklessness of the type described in McPadden, involving the knowing delegation of duties and reliance on a conflicted fiduciary, could fall within the ambit of bad faith.

It also seems to me that in a Revlon context like Lyondell or the Revlon-like context of selling a significant subsidiary, recklessness could qualify as bad faith. Given the still evolving nature of the law in this area, Lyondell was the more conservative decision. McPadden represents a much stronger and more pro director-defendant interpretation of Stone and what “good faith” means. Directors and practitioners who reacted negatively to Lyondell can take comfort in McPadden. In the long run, however, a legal system that regularly exculpates the type of reckless conduct alleged in McPadden and does so at the pleadings stage risks having investors turn elsewhere for protection.

Second, the clear holding that officers have the same duties as directors is a welcome clarification of Delaware law. Although other decisions had hinted at this or assumed it to be true, we now have a decision that says it. Even without this holding, I do not see how Dubreville would have qualified for exculpation given his personal financial interest in the deal.

Third, as a procedural matter, the Chancellor declined to apply Section 102(b)(7) in the context of Rule 23.1 and instead held that an exculpated care claim was sufficient to merit denial of a Rule 23.1 motion under the second prong of Aronson. From a practitioner perspective, this means that defendants who wish to invoke Section 102(b)(7) must make both a Rule 23.1 motion and a Rule 12(b)(6) motion. This is not overly difficult and in Delaware can be accomplished via the same motion and supporting brief.

Nevertheless, it could easily be overlooked because Rule 23.1 generally applies a stricter standard and is typically the dispositive motion. In addition, in the context of Rule 23.1 motions under Rales v. Blasband, which applies when the demand futility evaluation focuses on a new board, Section 102(b)(7) is applied directly at the Rule 23.1 stage to determine whether or not the directors have a reasonable fear of liability. Practitioners therefore should be careful not to overlook the need to make a Rule 12(b)(6) motion in the Aronson context.

September 10, 2008

Interview with Delaware Chief Justice Steele

Below is a fine interview conducted by Professor J.W. Verret on “The Conglomerate” Blog:

I am pleased to welcome Chief Justice Steele to the Conglomerate today. I got to know him when I was clerking for Vice Chancellor Noble in Delaware. When I told him about my interest in writing about corporate law he agreed to co-author a paper with me for which I will always be grateful. You can read our article, Delaware’s Guidance: Ensuring Equity for the Modern Witenagemot, here. We explore a controversial issue: Delaware’s use of dicta, speeches, and articles to offer insight to practitioners.

Imagine being just out of law school, trying to remember how many prongs there are to Aronson and what 102(b)(7) means, and getting a chance to co-author with the same person whose opinions you got cold-called about in corporations class the year before. I was in over my head, certainly not for the first time, but what a great learning opportunity it was.

I caught up with the Chief Justice via telephone today during a short break in his docket and I thought I would share our discussion to give our readers some insight into what goes on behind the curtain of the Delaware Judiciary.

Verret: Welcome to the Conglomerate, Chief Justice.

Chief Justice Steele: Good to be here.

Verret: Our readers don’t know it, but you were immortalized into bobblehead form for a recent anniversary by your former clerks. How long have you served in the Delaware Judiciary?

Chief Justice Steele: In May I celebrated my twentieth anniversary on the bench. I was first appointed to the Delaware Superior Court at the age of 43 as an Associate Judge and later as Resident Judge, where I served for 6 years. I then served in the Delaware Court of Chancery for 6 years as a Vice Chancellor. I was then appointed to the Delaware Supreme Court in 2000, and also appointed as Chief Justice in 2004.

Verret: I know that the former law clerks, interns, and fellows who have spent time working for you are affectionately known as the “knuckleheads.” The knuckleheads practice in Delaware, New York, and all over the country. How many knuckleheads are there these days?

Chief Justice Steele: I am proud to say that we have an alumni group of over 60 knuckleheads.

Verret: What did you do before you were appointed to the Court?

Chief Justice Steele: I practiced at a firm that is now called Prickett, Jones and Elliott. I was recruited by Rod Ward to work in their Dover office. Rod’s family owned the Corporation Services Company, which is still today the leading provider of incorporation services to attorneys and businesspeople. The Dover office was temporarily opened to accommodate a partner who was elected to the General Assembly and I was recruited to head up the Dover office to build a permanent presence for the firm downstate.

Verret: How did you first become interested in corporate law?

Chief Justice Steele: I first became interested in the subject when I studied under Ernie Folk at the University of Virginia. I took every one of Professor Folk’s courses. Prof. Folk authored the leading treatise on the DGCL, which Rod inherited after Folk passed away, and Professor Folk was also the primary author of the first major re-codification of the Delaware General Corporation Law in 1967. There is no doubt in my mind that Professor Folk’s recommendation was instrumental in getting me the job at Prickett.

Verret: That’s quite a Delaware/UVA connection. Why is that?

Chief Justice Steele: A number of Delaware lawyers are UVA graduates, due in no small part to Professor Folk’s enduring influence. There is even a faculty chair in corporate law endowed by the Delaware bar at UVA.

Verret: What sort of work did you focus on in your practice?

Chief Justice Steele: I practiced general litigation and represented local hospitals. This involved a great deal of exposure to corporate governance issues. I also spent a year on loan from my firm to the Delaware Attorney General’s office to work as a prosecutor.

Verret: What would you say is so unique about Delaware’s approach to corporate law?

Chief Justice Steele: There are three things I would highlight. First, our specialized Court of Chancery. This is a collegial Court of five experienced lawyers who engage in efficient fact finding and issue opinions promptly. I should add that our 5-member Supreme Court is made up 3 former Vice Chancellors. Our non-jury equity jurisdiction ensures that the complex and highly technical questions of finance and governance that are at the heart of the disputes are ably resolved. Second, the General Assembly engages in a deliberative and open process to consider changes to the Corporate Code. Our Committee on Corporate Laws issues recommendations to the General Assembly after an open comment process that includes, and is informed by, comments from all interested parties, from the Business Roundtable to the Council of Institutional Investors. Finally, the complementary aspects of common law and equitable principles have a uniquely symbiotic relationship in our law. The incremental growth of common law and equitable principles offer a foundation for predictability and consistency in our law. The DGCL is informed by a principle of enablement, and is supplemented by the flexibility of judges to craft remedies afforded by equity jurisdiction.

Verret: I understand that you are a three time UVA grad, including an LLM completed while serving on the bench, and that your thesis was recently published (see here). Tell us more about that.

Chief Justice Steele: This began with a case I was assigned while on the Court of Chancery, Gotham v. Hallwood. In the opinion I noted that there was no affirmative mandate in the Delaware General Corporation Law for a default application of corporate fiduciary principles to alternative entities. After I was elevated to the Supreme Court, Vice Chancellor Strine was assigned to the case and issued a decision that included similar language. On appeal, in a decision from which I was recused of course, the Supreme Court included language in its opinion stating that the freedom of contracting parties in alternative entities to opt-out of fiduciary duty principles from corporate law was limited, and that fiduciary duties in alternative entities could not be eliminated.

This motivated my research on the article, in which I argue that the alternative entity statute was intended to allow the crafters of those entities to modify their fiduciary duties as their business needs required. Just after my thesis was completed, it turned out that the Delaware Legislature amended the DGCL to explicitly recognize the right of alternative entities to opt-out of fiduciary duty application. The implied covenant of good faith and fair dealing still applies to alternative entity formation, just as in any contractual relationship, but is a less rigorous review than fiduciary duty application and is typically seen in employment law cases.

Verret: I also understand that you recently served on the faculty of DirectWomen. Tell us about that experience.

Chief Justice Steele: DirectWomen is an initiative of the Business Law Section of the ABA to train female lawyers and prepare them to serve on Boards of Directors, as well as help them get placed on Boards. I became involved at the suggestion of Linda Hayman from Skadden and Professor Sale of Iowa Law School. It was a privilege to work with that group.

Verret: I understand that you are working on a new book with Professor Ann Conaway, and also teaching a class this semester at the University of Pennsylvania Law School?

Chief Justice Steele: Professor Conaway and I are drafting a text that will be a comparative work designed to contrast corporate structures to LLCs, LPs, and other alternative entities. It should be an effective teaching aid for courses in basic business associations, corporations, and alternative entities. I am also co-teaching a course at Penn with Mark Morton of Potter, Anderson called “Advising the Corporate Director.”

Verret: Sounds like it’s going to be a busy year. One last question: if you had to pick one recent opinion to add to business organization textbooks, what would it be?

Chief Justice Steele: The AFSME v. CA opinion. (Note, for more on the opinion, see here and here.) This case reaffirms important principles of federalism in corporate law, and ultimately reaffirms our respect for the shareholder’s right to vote, while at the same time clarifying the proper scope of shareholder proposed bylaws.

Verret: This was fun. Thanks for joining us here at The Conglomerate, we enjoyed the visit.

Chief Justice Steele: It was my pleasure.

September 9, 2008

VC Strine Validates Naked No-Vote Termination Fee

Here is a guest blog from Steven Haas of Hunton & Williams:

Last Tuesday, Delaware Vice Chancellor Leo Strine upheld a “naked no-vote termination fee” in the Lear litigation (2008 WL 4053221). Lear involved a renegotiated merger agreement whereby Carl Icahn agreed to increase his bid to acquire Lear Corporation by $1.25 per share (or 3.5%) in exchange for a $25 million termination fee (or 0.9% of total deal value) payable if the stockholders rejected the agreement–which happened in July 2007. The plaintiff claimed that the directors breached their duty of loyalty because they knew the merger wasn’t going to be approved when they amended the merger agreement to include the naked no-vote termination fee.

VC Strine’s opinion was driven largely by the fact that independent and disinterested directors were advised by competent outside advisors: “Where, as here, the complaint itself indicates that an independent board majority used an adequate process, employed reputable financial, legal, and proxy solicitation experts, and had a substantial basis to conclude a merger was financially fair, the directors cannot be faulted for being disloyal simply because the stockholders ultimately did not agree with their recommendation.”

He gave zero weight to the plaintiff’s argument that the demands for higher consideration made by certain stockholders and proxy advisory firms proved to the board that the merger was doomed:

These pled facts reflect uncertainty in an ongoing game of financial chicken. Institutional investors do not have to be sworn as witnesses and give their reservation prices to merger targets soliciting proxies. They can and do play it cagey and attempt to extract value.

Firms like MacKenzie are paid to peer into this murk and make sense of it, so as to estimate what it will ultimately take to get the votes. And the incentives of a firm like ISS also give it reason to play coy. In order to demonstrate its value and clout to its customers, ISS has an incentive to act as a quasi-negotiator, using the proxy solicitation process as a way to encourage a higher bid, and using its recommendation tool to extract value.

VC Strine also picked up where he left off in Mercier v. Inter-Tel (2007), making clear that directors have broad latitude in pursuing corporate objectives, including change-of-control transactions, even when stockholders and other observers seemingly disagree:

Directors are not thermometers, existing to register the ever-changing sentiments of stockholders. Directors are expected to use their own business judgment to advance the interests of the corporation and its stockholders. During their term of office, directors may take good faith actions that they believe will benefit stockholders, even if they realize that the stockholders do not agree with them. In the merger context, directors are free to adopt a merger agreement and seek stockholder approval if they believe that the stockholders will benefit upon adoption, even if they recognize that securing approval will be a formidable challenge.

It would be inconsistent with the business judgment rule for this court to sustain a complaint grounded in the concept that directors act disloyally if they adopt a merger agreement in good faith simply because stockholders might (?), were likely (?), or were almost certain (?) to reject it. This sort of speculative second-guessing may be good fun for sports talk shows or political pundits, but it is not the stuff of which duty of loyalty case law is made.

The court concluded by calling plaintiff’s waste claim “frivolous” and finding that the directors were not guilty of even “simple negligence,” let alone gross negligence or bad faith.