Tune in today for the webcast – “M&A Deal Protections: The Latest Developments and Techniques” – to hear Greenberg Traurig’s Cliff Neimeth; Potter Anderson’s John Grossbauer; and Richards Layton’s Ray DiCamillo discuss the latest in “deal protection” techniques.
Monthly Archives: September 2012
John Grossbauer of Potter Anderson notes: In Septa v. Volgenau, Delaware Vice Chancellor Noble granted a motion to dismiss a claim that a completed going private merger violated the terms of a charter provision requiring equal treatment of 2 classes of common stock by allowing the rollover of equity of the target company’s alleged controlling stockholder, but permitting a breach of fiduciary duty claim based on that alleged invalidity to survive. The Court cited DGCL Section 124 in finding that the stockholders lost the right to challenge the validity of the merger. Section 124 limits the ultra vires doctrine, providing that no corporate act will be invalid by reason of the lack of corporate power to do the act. Section 124 (1) permits such a challenge to be made “by a stockholder against the corporation to enjoin the act.” (The corporation itself may have standing to challenge certain acts for the purpose of obtaining recovery form responsible directors or officers, and the Delaware Attorney General may assert the lack of power in an action to enjoin the transaction or to dissolve the corporation.)
Because the plaintiff did not seek to enjoin the merger, it lost standing to challenge the validity of the merger when it closed. However, the plaintiff was permitted to pursue a damages claim against the individual directors for allegedly causing the corporation to violate its certificate of incorporation. The Court could not rule out, at this stage, the possibility that a non-exculpated breach of duty occurred in connection with the approval of a merger that allegedly violated the certificate of incorporation.
Interesting news from this Reuters article about how Goldman Sachs was not paid the $20 million fee it billed for advising El Paso Corp on its more than $20 billion sale to Kinder Morgan after the investment bank was accused of a conflict of interest in the sale.
This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Dealing With Activist Hedge Funds
– A Year-End Rush for the Exit? Tax Uncertainty and Transactional Planning
– Shareholder Activism Via Board Control Often Requires Long Range View
– The Nuts & Bolts of NDAs
– Asset Acquisition Due Diligence: Search for Hidden Unclaimed Property Liabilities Required
If you’re not yet a subscriber, try a “Free for Rest of ’12” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Here’s a Wachtell Lipton memo I received while I was out on vacation:
On Wednesday, Forest Laboratories’ shareholders reelected nine out of ten incumbent director nominees, while rejecting three out of dissident Carl Icahn’s slate of four directors, despite ISS’s recommendation in favor of two of Icahn’s nominees. These results, along with the recent victory by AOL against Starboard (see our memo, AOL Shareholders Reject ISS Supported Activist Hedge Fund), represent an important reminder that companies under attack by dissidents have a chance to defend themselves with a well-crafted message that articulates a strategy for long-term success, notwithstanding strong activist pressure with backing from ISS.
This week’s contest was round two between Forest and Carl Icahn, who owns nearly 10% of the pharmaceutical company. In 2011, Icahn sought to place four directors on Forest’s board, but was rebuffed by shareholders, who elected all ten of the Company’s nominees instead. Icahn promoted a short slate again this year, attacking the Company for what he perceived to be failures in governance practices and performance. In response, the Company made a compelling case for its business strategy and recent governance reforms. In addition, the Company pointed out that two of Icahn’s nominees suffered from potential conflicts: in one case, an unusual contractual arrangement based upon Icahn’s profits, which incentivized the nominee to “swing for the fences” during a 30 month period; and in the second case, a contingent value right related to one of Forest’s products, which could lead that nominee to favor just a single product. Notably, Glass Lewis supported Forest’s slate and explicitly noted these potential conflicts. And while ISS decided to recommend two (but not four) of Icahn’s nominees, it did not support either of the two candidates with potential conflicts, both of whom were defeated. Moreover, Forest argued that a third Icahn nominee, who is an Icahn senior executive, could not be expected to represent the interests of all shareholders and that he was “overboarded.” He too was defeated, despite an ISS recommendation in favor. Forest also resisted Icahn’s broad books and records request under Delaware § 220, substantial parts of which were refused in court.
The results at the Forest meeting hold important lessons. First, in many cases a company can overcome even a contrary ISS recommendation with a resolute defense of its governance story and long-term plans. The best defense will be made directly to its shareholders with the participation of independent directors and will be most likely to succeed when there has been an ongoing dialogue on key issues long before any activists surface. Second, companies may resist overly broad fishing expeditions into corporate records, even if it means going through litigation. Finally, the identity and incentives of the dissident slate does matter. In the case of Forest, the Company was able to argue that two of the four nominees had potential conflicts, and that a third was overly close to Icahn and served on too many other boards. In the end, the only dissident nominee elected by shareholders was an independent outsider without prior ties to Icahn.
Interesting piece in NY Times’ DealBook yesterday entitled “When Fairness Opinions Are Used Outside of Mergers.”
John Grossbauer of Potter Anderson notes: In re Synthes, Inc. Shareholder Litigation, Chancellor Strine dismissed with prejudice claims challenging the sale of Synthes to Johnson & Johnson. The plaintiffs had alleged that the controlling stockholder was conflicted due to his desire for liquidity, and that the directors of Synthes were similarly responsible for an alleged flawed sales process and for allegedly permitting the controlling stockholder to block consideration of a possibly more favorable private equity bid that would have required the controller to roll over a “substantial” portion of his shares. There is a great deal of interesting discussion of the duties of controlling stockholders in the context of a sale. Among other things, the Chancellor states that a controlling stockholder who takes the same consideration as other stockholders is afforded a “safe harbor” from loyalty claims.
The Chancellor also discusses in a lengthy footnote the Supreme Court’s McMullin decision, and posits the types of circumstances in which the controlling stockholder’s preference for cash might rise to the level of a breach of duty. The Chancellor also discusses Revlon, finding it inapplicable here because the consideration paid was 65% stock, citing In re Sante Fe as binding precedent on the issue. He declined to rely on “transcript dictum” to apply Revlon because the deal was an “end stage” transaction. The Chancellor also cited his Lear opinion for the proposition that enterprise value may be an appropriate metric to use in evaluating the preclusive affect of a termination fee on a competing bidder.