From Brad Aronstam of Connolly Bove Lodge & Hutz: Last week, Vice Chancellor Noble of the Delaware Court of Chancery rendered this short opinion – in Henkel Corp. v. Innovative Brands Holdings – in which he addressed the issue of when a would-be acquirer must assert a claimed material adverse effect in declining to complete an agreed upon acquisition.
In short, VC Noble held that the parties’ failure to specify in the merger agreement a particular timetable for the acquirer to claim an asserted MAE precluded the Court, on the pending motion to dismiss before it, from concluding as a matter of law that the acquirer was not entitled to make its MAE election in the future. It bears noting that the Court reached this decision notwithstanding the acquirer’s argument that the seller remained subject to a no-shop clause in the merger agreement which effectively precluded the seller from seeking other purchasers.
Last Friday, Vice Chancellor Noble of the Delaware Chancery Court issued a letter opinion in Ryan v. Lyondell, in which he denied the interlocutory appeal by the defendants – but did dismiss Lyondell as a nominal defendant. Here is commentary from Professor Larry Ribstein, Professor Gordon Smith and Professor Eric Chiappinelli.
Francis Pileggi provides analysis of this development in his “Delaware Corporate and Commerical Litigation” Blog, an excerpt is repeated below:
– The Chancery Court emphasized that: “the reports of the death of Section 102(b)(7) (and the consequent possibility for the “resuscitation” of a Van Gorkom-esque liability crisis) in Delaware law are greatly exaggerated both with regard to the application of Lyondell’s exculpatory charter provision in this case, and certainly with regard to the application of a Section 102(b)(7) provision defense in any other case.” ( my italics)
– The Court went out of its way to repeatedly emphasize the restricted procedural posture of its decision and the circumscribed nature of the meager–and by definition incomplete–record in the context of the summary judgment motion that was presented. (see, e.g., footnotes 13 and 14.)
– The Court emphasized the following five facts that were key to its conclusion:
1. The directors knew that the company was “in play” (although noting that the filing of a Schedule 13D will not always trigger Revlon duties.)
2. According to the Court, the directors did little or nothing to develop a strategy pursuant to Revlon to maximize shareholder value in connection with the possible sale of the company.
3. The Court held that the directors did little or nothing pre-signing to confirm that a better deal could be obtained.
4. The directors, the Court held, did little or nothing to negotiate the offer they did receive.
5. The directors, in the Court’s view, did little or nothing post-signing to verify that a better deal could have been obtained.
– The Court went to great lengths to explain why it did not conflate the duty of care with the duty of good faith component of the duty of loyalty. One might write an entire law review article based on the court’s explication of the finer points of these concepts but for now I can only refer you, for example, to footnotes 26 to 33 and related text. Footnote 26 provides in part as follows:
“the Court decided that there were material fact questions that raised an issue of whether the directors’ failure to act in the face of a known duty to act amounted to something more than a simple violation of the duty of care (i.e., gross negligence). In other words, this is an instance where issues of care and loyalty (good faith, in this context) bleed together under the facts presented in the summary judgment record, and, therefore, the Court was unable to ascertain, at least at this point, the ultimate effect of Lyondell’s exculpatory charter provision in this context. The Court was careful to explain, however that, ultimately, a determination that the directors’ failed to act in “good faith” could result in liability only because in that instance the directors will have violated their duty of loyalty. Opinion at 54-56. Thus, the Court did not conflate good faith into a theory that would result in legal liability for a breach of only the directors’ duty of care, notwithstanding a Section 102(b)(7) charter provision. Unfortunately, at this preliminary stage of this case, it is difficult to frame the issue in a manner that does not, to some extent, track closely with those facts suggesting only an apparent failure to act with appropriate care; it remains to be seen whether the directors’ acts (or failure to act) reach into the realm of non-exculpable bad faith. See, e.g., Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007).”
– At pages 12 to 14 of the letter decision, the court described the “three points in the spectrum of fiduciary conduct deserving of the “bad faith” pejorative label”. The Court’s description could be the topic of an entire separate article.
– Another key point: the Court explained that: “when one views the totality of the directors’ conduct on this record, that leads the Court to question whether they [the directors] may have disregarded a known duty to act and may not have faithfully engaged themselves in the sale process in a manner consistent with the teachings of Revlon and its progeny.” ( Slip op. at page 19).
Now that the Delaware Supreme Court has affirmed the Chancery Court’s decision in Jana Partners (as well as the holdings in the Office Depot and CSX cases), as noted in this article, a number of companies are now crafting bylaws designed to flush out the actual size of activist stakes.
In the article, Professor Charles Elson notes that he wouldn’t be surprised if more than half of all US companies revise their advance notice bylaws in time for the 2009 proxy season. Tune in on Thursday for this webcast – “How to Change Your Advance Notice Bylaws” – so that you will be able to fully evaluate what you should be doing now.
This webcast is important because advance bylaw provisions are not boilerplate. Even if two companies have identical language in their advance notice bylaws, they may operate differently because companies in their shark repellent arsenal may (or may not) allow shareholders to call special meetings or act by written consent, etc., and because many companies have adopted a majority voting standard.
Here are a dozen questions that the panelists will be addressing during the webcast:
– Should companies that have their bylaws tied to the mailing of the prior year’s proxy statement consider revising their bylaws?
– What do the Delaware cases say about how long the advance notice period can be?
– How should companies deal with the interplay between Rule 14a-8 and their advance notice bylaws?
– In the wake of the CNET and CSX cases, are companies starting to incorporate the concept of “cash-settle only” and similar derivative instruments into their advance notice bylaw provisions?
– If so, how broadly are such concepts applied in their bylaws?
– Are you seeing companies incorporate the swap and derivatives concept into their poison pills?
– Are there any loopholes in these organic shark repellent provisions that the courts have not addressed?
– Are you seeing hedge funds and their investment banking and other institutional counterparties starting to shy away from total return swaps and similar derivatives arrangements in view of the CSX case?
– Apart from the recent judicial decisions, what mistakes do targets sometimes make with respect to their advance notice bylaws?
– What are the SEC Staff’s views on what is happening?
– At the end of the day, are the decisions in Openwave, C-Net and Office Depot contract construction and drafting error cases – or do they speak more broadly to Delaware corporate policy?
– Are folks over-reacting to all of this?