December 7, 2015

VC Laster Speaks on Evolving Views on M&A Litigation

Here’s an excerpt from this article by David Marcus in “The Deal” based on a recent speech by Delaware VC Travis Laster about three relatively recent Delaware Supreme Court decisions – all written by Chief Justice Strine:

The Delaware vice chancellor argued that Chief Justice Leo E. Strine Jr.’s opinions in Corwin v. KKR Financial Holdings LLC and the stockholder suits arising from the sales of Cornerstone Therapeutics Inc. and C&J Energy Services Inc. show the state’s high court has adapted to an era in which there is a much more active, effective and sophisticated stockholder electorate than ever before by showing greater deference to an informed stockholder vote. Because stockholders can be expected and relied upon to make decisions for themselves, Laster said, there is less need for judicial involvement. Laster began his analysis with a capsule history of M&A oversight by both Delaware courts and the Securities and Exchange Commission, which first regulated takeovers via the Williams Act in 1968. But the U.S. Supreme Court held in the 1977 case Santa Fe Industries Inc. v. Green that federal regulation of tender offers could not supersede state corporate law.

The Delaware Supreme Court cited Santa Fe in its 1977 decision in Singer v. Magnavox Co., where the court set out the business purpose test, under which a merger could only be done for a valid business purpose. The doctrine lasted only six years, but was in effect replaced by substantive fairness review. In the 1980s, the SEC and the Delaware courts collaborated and competed in regulating M&A. Laster pointed to the Delaware Supreme Court’s 1985 ruling in Revlon Inc. v. MacAndrews & Forbes Holdings Inc., where the court barred Revlon from selling to Forstmann, Little & Co. in the face of a hostile bid from MacAndrews & Forbes. In the Revlon decision, Laster said, the court placed the emphasis on fiduciary principles rather than private contract deal. The court rejected Revlon’s agreement to sell a key asset to Forstmann if that deal fell through and issued “a specific, targeted injunction” with “no grounding in stockholders’ ability to vote down the deal.”

Revlon remained a pillar of Delaware M&A law, which for years thereafter reflected the approach taken in the case even as the SEC largely receded from takeover regulation and left the field to Delaware. “On the whole,” he said, “we see less deference to market forces and primary emphasis on board behavior with respect to the deal at issue. The analysis is driven less by the stockholder vote than by the board’s fulfillment of its fiduciary duty to stockholders.” He said, in the late 1990s and early 2000s, the premise that target stockholders need to be protected began to erode in the Chancery Court. Instead, Laster posited, there was a renewed focus on the buyer’s contractual rights and a renewed interest on the systemic effects of rulings. That change came as the court saw far fewer cases in which a hostile bidder opposed a target board’s decisions and far more in which a target stockholder sued to challenge a friendly deal.

A “key case in this regard,” Laster said, is Strine’s 2005 decision in stockholder litigation arising from the $6.6 billion sale of Toys ‘R’ Us Inc. to KKR, Bain Capital and Vornado Realty Trust. The opinion runs to 88 pages, but Laster noted several key elements of the ruling. Strine rejected a request for a targeted injunction in part based on the contractual rights the buying group gained when it signed a merger agreement with Toys. He declined to reform the merger agreement and emphasized that stockholders could protect themselves by voting the deal down. The Toys case brought Laster back to the three Supreme Court decisions with which he began the speech. C&J Energy, Laster said, “is effectively Toys in a Supreme Court decision” because it emphasizes the contractual rights of the buyer and the ability of the stockholders to vote the deal down. C&J also showed “bigger picture thinking” by considering the systemic effects of the decision rather than focusing on the deal at issue in the case.