In the new “AG Deal Diary,” Akin Gump’s Thomas Yang and Matt Zmigrosky have penned this blog about Winshall v. Viacom International, in which the Delaware Supreme Court applied the “reasonable conceivability” standard to a motion to dismiss and addressed the earn-out and indemnification provisions in a merger agreement.
We have posted the transcript for our recent webcast: “Tender Offers Under the New Delaware Law.”
Here’s news from Richards Layton:
In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013), the Court of Chancery interpreted Section 259 of the General Corporation Law of the State of Delaware to hold that all privileges–including the attorney-client privilege–pass in a merger from the acquired corporation to the surviving corporation.
Specifically, the Court held that, without a contractual provision to the contrary, even the seller’s pre-merger attorney-client communications with respect to the merger itself would pass to the surviving corporation. The Court suggested that parties concerned about this issue should “use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own.”
Last week, as noted in this Reuters article and this memo, Delaware Vice Chancellor Sam Glasscock ruled that Apollo Tyres. didn’t breach its merger agreement with Cooper Tire by failing to reach a new labor deal with a union. VC Glasscock rejected the argument that Apollo was trying to string out negotiations with the United Steelworkers in an attempt to keep the merger from closing.
Recently, Dykema posted the survey results from a group of senior executives and advisors about the deal outlook. Here are some of the key findings:
– A positive outlook. In 2012, only 25 percent thought the U.S. economy would look positive over the next 12 months compared to 50 percent of respondents in this year’s survey.
– Room for improvement. In 2012, only 30 percent thought the economy would improve in the next 12 months when comparing it to the prior 12 months. That number rose to 54 percent this year.
– Continued uneasiness. When rating the most common obstacles experienced in deals within the past 12 months, financing went from the second most common to the fourth most common from 2012 to 2013. Uncertainty in the economy remained at the top spot.
This November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– M&A Communications in a Web 2.0 World
– Traps to Consider: Delaware’s Merger Statute & Ratification Amendments
– That Grant Could Cost More Than You Think: HSR Application to Officer & Director Compensation
– New Reg D: Implications for Offering Publicly-Traded Securities as Consideration in Private Acquisitions
– A Dozen Take-Aways: In Re: Trados
If you’re not yet a subscriber, try a “Free for Rest of ’13” no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Remember the hubbub a few months ago regarding Broadridge providing “interim voting results” to shareholder proponents relating to a JP Morgan annual meeting. This led Broadridge to change its policy about providing preliminary vote totals (and I believe Broadridge is still discussing what to do with a task force of interested parties). What if the disclosure of preliminary results was unintentional and not made by Broadridge?
Here’s news on that front from Delaware, courtesy of this Paul Weiss memo:
In Red Oak Fund, L.P. v. Digirad Corp, the Delaware Court of Chancery held that the Digirad board of directors did not breach its fiduciary duties or create an unfair election process where: (i) preliminary election results that showed the incumbents in the lead were accidentally disclosed to a large stockholder; (ii) certain preliminary proxy reports inaccurately reported a large lead by management; (iii) the company delayed disclosure of negative financial results until after the election; and (iv) management proxy materials did not disclose that the board was considering a stockholder rights plan (a “poison pill”).
Plaintiff, owner of 5.6% of Digirad’s outstanding common stock, nominated a slate of five directors to replace the company’s incumbent board, but lost the ensuing proxy contest. Plaintiff filed suit, alleging that the incumbent directors breached their fiduciary duties and created an unfair election process.
The court found no breach of fiduciary duties and no valid claim of an unfair election process, holding that:
– Disclosure of informal preliminary vote tallies was not materially misleading – The company’s proxy solicitor, erroneously believing that an analyst was an agent of the company, shared informal estimates of vote predictions with the analyst, who then shared the information with a large stockholder. The plaintiff alleged that this action improperly swayed the election, particularly since Digirad is a microcap company. The court found these disclosures immaterial and not intended to mislead stockholders since the proxy solicitor had no indication that the information would be shared with stockholders.1
– No duty to correct third party proxy report – The company mistakenly voted treasury stock held in the company’s name for the incumbents, resulting in inaccurate third party proxy reports. The plaintiff contended that had it known of the mistake, it would have changed its strategy because, in fact, the vote was much closer. The court found that the board had not created an unfair election process because the voting was accidental and the plaintiff failed to show that the information would have been material to a reasonable stockholder.
– No duty to disclose preliminary quarterly financial results showing declining performance – Although the board knew before the election that impending financial results were negative, the court held that the board did not have an affirmative duty to finalize the quarterly financial statements or release preliminary information before required to do so by the federal securities laws.
– No duty to disclose contemplation of a poison pill – Even if the board began to consider implementing a poison pill before the election, this information was the “kind of inner workings and day-to-day functioning that are not the proper subject of disclosure.”
1The decision did not address the question of whether the disclosure of the preliminary proxy results could be viewed as a violation of Rule 14a-9, which identifies “Claims made prior to a meeting regarding the results of a solicitation” as potentially misleading statements within the meaning of that provision (although the determination that the disclosure was not material argues against such a finding).
Here’s news from yesterday’s “Delaware Law Weekly“:
Supreme Court Justice Carolyn Berger, Superior Court President Judge James T. Vaughn Jr., Superior Court Judge Jan R. Jurden and Court of Chancery Chancellor Leo E. Strine Jr. are the four applicants to become Delaware’s next Supreme Court chief justice, according to sources familiar with the process. All applications for the chief justice opening had to be filed with Delaware’s Judicial Nominating Commission by noon today.
Supreme Court Justice Jack B. Jacobs, who was said to be applying as recently as last week, did not apply, according to sources. Justices Randy J. Holland and Henry duPont Ridgely, who were both considered early favorites to for the opening, also did not submit applications. The JNC will undergo the process of reviewing the four applications and will likely begin checking references later this week, according to sources.
Strine is viewed as an early favorite because of his impeccable corporate law background. He was appointed Chancery Court chancellor in 2011 after serving as a vice chancellor for 13 years. He also serves as the special judicial consultant to the American Bar Association’s corporate laws committee. Strine was a corporate litigator at Skadden, Arps, Slate, Meagher & Flom and was counsel to former Gov. Thomas R. Carper.
Gov. Jack Markell is also said to be favorable to Jurden because of the diversity she would bring to the court as both a female and open lesbian. Berger also has a strong corporate law background, having served on the Chancery Court from 1984 until her appointment to the Supreme Court in 1994. She also served as an associate at Skadden Arps and a deputy attorney general for the Delaware Department of Justice.
Here’s news from this Wachtell Lipton memo:
In a thoughtful and well-reasoned decision, the Delaware Court of Chancery held last week that the merger price produced by a “throrough, effective” sales process, “free from any spectre of self-interest or disloyalty,” can be the most reliable indicator of the value of shares in an appraisal proceeding. Huff Fund Investment Partnership v. CKx, Inc., No. 6844-VCG (Del. Ch. Nov 1, 2013).
CKx was a publicly traded corporation with interests in iconic entertainment properties, including the American Idol television show, Elvis Presley Enterprises, and Muhammad Ali Enterprises. In 2011, following an attempted go-private transaction and faced with uncertainty related to the network renewal of American Idol, CKx received several unsolicited bids to purchase the Company for cash. The CKx board retained an independent financial advisor and conducted an expedited process to explore a sale of the Company. Interested bidders were given three weeks to conduct diligence and negotiate a transaction. The Company ultimately received an offer of $5.50 per share from Apollo and an offer of $5.60 from a competing private equity firm. The $5.60 bid, while nominally higher, was not supported by financing commitments and the bidder refused to provide documentation that would have allowed CKx to verify its representations as to financing. In light of the uncertainty surrounding the $5.60 bid, CKx accepted the offer from Apollo notwithstanding its nominally lower purchase price.
After the merger closed, a large stockholder challenged the transaction and exercised its rights under Section 262 of the Delaware General Corporation Law to seek an appraisal of its shares. The Court of Chancery conducted a three-day trial, received expert testimony, post-trial briefing and post-trial oral arguments. In determining the appraised value, the Court reviewed all relevant factors and determined that DCF analyses, comparable companies analyses and comparable transaction analyses were in this case either unreliable or unavailable given the uncertainties surrounding the American Idol renewal negotiations. The court determined that the arms-length sale price – exclusive of synergies – generated by the conflict-free auction was the most relevant indicator of value.
The CKx case reaffirms that a board can conduct a thorough and effective process in a compressed period of time and that accepting the nominally highest price is not always required or in the best interests of shareholders. The decision is also a reminder to stockholders considering appraisal that such actions carry significant risk that after costly litigation they may be left with nothing more (or even potentially less) than the deal consideration.