Here is news from Potter Anderson’s John Grossbauer: On Monday, Delaware Vice Chancellor Laster delivered this opinion in Olson v. eV3, in which he awarded $1.1 million in fees to a plaintiff who challenged a top-up option. The Vice Chancellor found the most viable claim to be the technical invalidity claim as to how the option consideration was determined and approved, rather than the “appraisal dilution” claim that has been much discussed. The opinion provides the Court’s view of best practices in the top-up arena, including requiring express board approval for the terms of the top-up.
Here is news from this Wilson Sonsini memo: On February 3rd, the General Office of the State Council of China promulgated the Circular on Formalizing Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Circular No. 6), which clarifies the mechanisms and procedures for China’s national security review of foreign investments. In this memo, we discuss the scope of and process for China’s national security review as described in Circular No. 6 and the implications for certain foreign investments and cross-border transactions in China.
Cliff Neimeth of Greenberg Traurig notes (here are memos regarding this case):
As expected, on Tuesday, Delaware Chancellor William Chandler upheld the Airgas rights plan using a traditional Unocal/Unitrin analyses (and a DGCL 141 director-stockholder balance of power policy analyses) to assess the validity of maintaining the Airgas pill in place to block consummation of Air Product’s fully financed, non-coercive tender offer which all three of Airgas’ financial advisors deemed inadequate.
The decision in Air Products and Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC has various unique (and outcome determinitive) facts – chief among them that each of the three members of the Airgas Board who recently won election in last year’s Air Product’s short-slate proxy fight determined that Air Products $70 “final and best” offer price was clearly inadequate (by at least $8 per share).
The decision is careful not to suggest that “just say no” or “say never” is indefinitely sustainable by a target Board. But, as always is the case with Delaware’s highly context-specific decisions, the (modern pill) fact pattern has not yet presented itself where the Court of Chancery actually orders redemption in a circumstance where the target Board and management offer no meaningful strategic or financial value maximizing alternative to an unsolicited offer, and a substantial majority of stockholders have tendered into such fully financed, “financially fair” and non-coercive offer which has remained open for a protracted time period.
The last time a redemption order was “threatened” by the Delaware Court of Chancery was a few years ago when VC Strine encouraged Oracle and People Soft to settle the pill and related litigation after a protracted takeover battle and numerous increases to the tender offer price where a majority of stockholders had tendered their shares. We’ll have to wait a bit longer to see the “say yes”- pill redemption order case.
Here is news repeated from this Richards Layton memo:
In In re Del Monte Foods Company Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011), the Court of Chancery found on a preliminary record that a proposed $5.3 billion cash merger (including assumption of debt) with a group of private equity buyers was potentially tainted by alleged misconduct by the target banker, with the alleged knowing participation of the buyers. The Court preliminarily enjoined the defendants from proceeding with a stockholder vote on the proposed transaction for a period of twenty days and further enjoined the defendants from enforcing certain deal protection measures in the merger agreement (including no solicitation, termination fee and matching right provisions), pending the stockholder vote.
Under the terms of the merger agreement, a private equity group consisting of Kohlberg Kravis Roberts & Co., Vestar Capital Partners, and Centerview Partners would acquire all outstanding shares of Del Monte common stock for $19 per share. The Court expressed that, on the preliminary record, the Del Monte board appeared to have “sought in good faith to fulfill its fiduciary duties” and predominantly made decisions that ordinarily would be regarded as falling within the range of reasonableness for purposes of Revlon enhanced scrutiny. The Court found, however, that the Board “was misled by Barclays” Capital, its financial advisor, and that Barclays “secretly and selfishly manipulated the sale process.”
In particular, the Court noted that (1) Barclays “crossed the line” in seeking permission from Del Monte to provide buy-side financing before a price was agreed to between KKR and Del Monte while failing to disclose to the Board the fact that Barclays had intended to seek to provide buy-side financing since the beginning of the process; and (2) Barclays had paired Vestar with KKR in violation of existing confidentiality agreements and then concealed the fact of the pairing from the Board for several months. According to the Court, the pairing of KKR and Vestar materially reduced the prospect of price competition for Del Monte. Further, the Court found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that the Board, despite not knowing the extent of Barclays’ behavior, failed to act reasonably in ultimately acceding to Barclays’ request to provide buy-side financing and Barclays’ recommendation to permit Vestar to participate in KKR’s bid, and by then permitting Barclays to run the go-shop process. The Court also found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that KKR “knowingly participated” with Barclays in these self-interested activities.
The Court concluded that loss of “the opportunity to receive a pre-vote topping bid in a process free of taint from Barclays’ improper activities” constituted irreparable injury to the Del Monte stockholders. The Court held that the imprecision of a potential post-closing monetary remedy weighed in favor of injunctive relief, as did the powerful defenses available to the director defendants (including exculpation under Section 102(b)(7) and reliance on the advice of experts selected with reasonable care under Section 141(e) of the General Corporation Law of the State of Delaware).
Finally, regarding the balance of the hardships, the Court considered that an injunction could jeopardize the stockholders’ ability to receive a premium for their shares and pose difficult questions regarding the parties’ contract rights under the merger agreement. The Court also recognized that the deal had been subject to a 45-day go-shop period and to a continuing “passive market check” for several more weeks. Ultimately, however, the Court concluded that enjoining the deal protection devices was appropriate because “they are the product of a fiduciary breach that cannot be remedied post-closing after a full trial,” and a twenty-day injunction would “provide ample time for a serious and motivated bidder to emerge.” The Court conditioned the injunction on plaintiff posting a bond in the amount of $1.2 million.
Ken Adams has been sharing his contract interpretation wisdom with us for some time. So I was excited to see that he has packaged his knowledge into a new PDF-only book entitled, “The Structure of M&A Contracts.” Here is an excerpt that deals with the phrase “double materiality”:
Another issue related to materiality is “double materiality.” It ostensibly arises when a materiality qualification is included in the bringdown condition to one party’s obligation to close as well as in one or more representations of the other party. The concern is apparently as follows: If the bringdown condition to the buyer’s obligation to close incorporates a materiality qualification, then to determine whether that condition has been satisfied you apply a discount to the accuracy required for any given seller representation to be accurate. If a seller representation itself includes a materiality qualification, the same discount is also applied to the representation, with the result that the level of accuracy required to satisfy the bringdown condition is further reduced. Consequently, the buyer could be required to close even if a seller representation was on the date of the agreement, or is at closing, materially inaccurate.
It’s common practice for drafters to seek to neutralize double materiality. To do so, either they incorporate in the bringdown condition a materiality qualification only with respect to those representations that do not themselves contain a materiality qualification, as in [12f], or for purposes of the bringdown condition they strip out materiality qualifications from those representations that have them and apply instead a materiality qualification across the board, as in [12g].
But such contortions are unnecessary. If material conveys the “affects a decision” meaning (see 2.77)–and using the proposed definition of Material and Materially would make it clear that that’s the case (see 2.86)–then materiality qualifications are not in fact equivalent to an across-the board discount on accuracy, and materiality on materiality isn’t equivalent to a discount on a discount. Instead, for purposes of determining both accuracy of a representation subject to a materiality qualification and satisfaction of a bringdown condition subject to a materiality qualification, one would consider the same external standard–whether the representation inaccuracy in question would have affected the buyer’s decision to enter into the contract or would affect the buyer’s decision to consummate the transaction. Because the same standard applies in both contexts, for purposes of determining satisfaction of the bringdown condition it’s irrelevant whether the representation too contains a materiality qualification.
So the notion of double materiality is based on a misunderstanding of how materiality operates in M&A contracts. It should come as no surprise that caselaw makes no mention of double materiality–it’s a figment of practitioner imagination.
West is new to ebooks, so for the moment the book is available only by calling West at (800) 308-1700. It only costs $25! The first chapter is available for free to give you more of a taste. Learn more about the book.
– by Tom Bayliss, Abrams & Bayliss LLP
On January 28th, the Delaware Supreme Court issued a decision in King v. VeriFone Holdings, Inc., No. 330, 2010. The twenty-four page opinion reverses a Court of Chancery decision dismissing a books and records suit under 8 Del. C. § 220 because the stockholder plaintiff had previously initiated a derivative action in California. The Supreme Court’s opinion is important because it rejects a bright-line rule that would require stockholders seeking books and records to demand them first, before filing corresponding derivative litigation.
Take Aways:
1. In the opinion, Vice Chancellor Strine articulated several policy reasons for imposing a rule requiring the submission of a books and records demand before the initiation of derivative litigation. Writing for the Court en banc, Justice Jacobs acknowledged the legitimacy of these policy concerns but determined that a bright-line rule was inconsistent with the results reached in Disney, McKesson HBOC and CNET — three cases which allowed § 220 inspections despite the plaintiff’s prior initiation of derivative litigation. Ironically, practitioners have generally viewed Disney, McKesson, HBOC and CNET and their tortured histories (including failed attempts to plead demand futility) as examples of what not to do as a plaintiff when pursuing derivative claims against a Delaware corporation.
2. Read broadly, the result in VeriFone suggests that stockholders of Delaware corporations may simultaneously pursue corporate books and records under § 220 and derivative claims against the corporation’s directors and officers. This timing issue is critical, because under prior law (at least as it was understood by the Court of Chancery), derivative plaintiffs had to elect whether to (a) seek books and records and then follow with a detailed, fact laden derivative complaint or (b) file suit quickly without seeking books and records to maximize the chance of winning the race to the courthouse (and capturing lead plaintiff status).
3. Anecdotal evidence suggests that under the prior rule, most derivative plaintiffs chose to forego § 220 inspections, win the race to the courthouse and then fight dismissal on typically weak pleadings drafted without the benefit of access to the corporation’s books and records. VeriFone appears to allow stockholders who win the race to the courthouse to avail themselves of the benefit of § 220 after having captured lead plaintiff status (once they know whether the investment in time and resources is likely to pay off). This may lead to more § 220 inspections and better derivative pleadings in the long run, but it undercuts the incentive to conduct pre-suit § 220 inspections, something the Delaware Supreme Court and the Court of Chancery have long encouraged.
4. The result in VeriFone seems to cut against the result contemplated by Court of Chancery Rule 23.1 and analogous rules in other jurisdictions (including Federal Rule 23.1) which have been interpreted to bar discovery until a derivative plaintiff satisfies its substantial pleading burdens. VeriFone appears to envision a regime in which a stockholder can seek indirectly — through a books and records inspection — precisely the type of information that the stockholder cannot seek directly in the pending derivative action before surviving a motion to dismiss. If VeriFone allows this end run around federal pleading requirements, it could reinvigorate pre-emption arguments that, at least until now, have made little headway in § 220 cases.
5. Future litigants will dispute whether VeriFone should be limited to its facts. The stockholder in VeriFone had brought derivative litigation in the United States District Court for the Northern District of California. The federal court had dismissed the stockholder’s suit without prejudice and suggested that the stockholder “engage in further investigation to assert additional particularized facts” by filing a Section 220 action in Delaware. It is unclear whether the federal court’s instruction played a critical role in the Supreme Court’s decision-making process.
6. Future litigants may also dispute whether some form of dismissal is required before the holding in VeriFone becomes applicable. However, it is not entirely clear why the opinion should be limited in that way. The plaintiff in VeriFone filed an amended derivative complaint in federal court during the pendency of the § 220 proceeding. Thus, the Supreme Court’s decision appears to validate the use of a § 220 proceeding to support a pending derivative action regardless of a prior dismissal order.
7. In the opinion, the Supreme Court emphasizes that filing a derivative suit first and then seeking books and records is “ill-advised” and “may well prove imprudent and cost-ineffective.” However, the powerful incentives that drive the race to the courthouse will likely overwhelm these warnings, particularly if a books and records inspection is available after the commencement of a derivative suit. Because of this dynamic, VeriFone may reduce the number of pre-suit § 220 demands (and increase the number of post-suit § 220 demands) served on Delaware corporations.
8. The result in VeriFone may increase the likelihood that corporate defendants will face two suits filed by the same plaintiff in different jurisdictions – one seeking books and records and another seeking damages and other relief against the corporation’s officers and directors. A representative plaintiff may be better off filing its books and records suit and its derivative suit in different jurisdictions to avoid arguments that the books and records demand constitutes impermissible backdoor discovery prohibited by Court of Chancery Rule 23.1 or the analogous rule in the applicable forum. However, VeriFone could be interpreted to allow this backdoor discovery as matter of right.
9. The result in VeriFone may widen a chink in the armor of corporate defendants that are otherwise protected by the automatic discovery stay in the Private Securities Litigation Reform Act. Derivative actions have always represented a potential vulnerability to these defendants, but the high pleading burdens associated with those derivative actions have typically served as a formidable barrier. VeriFone may presage a new breed of derivative litigation that involves complaints armed with details from post-suit books and records inspections.
10. The Supreme Court emphasizes that “[i]f relief under Section 220 is to be restricted in the manner adjudicated by the Court of Chancery, any such restriction should be imposed by the General Assembly, not decreed by judicial common law decision-making.” It is unclear whether the General Assembly will respond to this invitation.
11. The VeriFone decision may not have any effect on the parties to that action. In a footnote, the Supreme Court acknowledges that the federal district court had dismissed the stockholder plaintiff’s derivative suit with prejudice during the pendency of the appeal. The Supreme Court refused to find that this development mooted the dispute because the Court of Chancery’s decision announced a principle of Delaware law “that could have significant impact in future cases… and should be subject to appellate review before it becomes operational prospectively.”
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– How to Respond to Shareholder Proposals Seeking Board Declassification
– The ABCs of Board De-Staggering
– Acquiring US Companies with Foreign Subsidiaries: Relevant Issues
– The Window Closing Pill: One Response to Stealth Stock Acquistions
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