Last week, I blogged about new proposed legislation that would direct the SEC to amend the Section 13(d) reporting rules – including shortening the filing window of a 5% stake from 10 days to 2 business days and requiring the reporting of significant “short” positions. This piece by Senator Tammy Baldwin provides some background on the genesis of the legislation (also see this Cooley blog).
As noted in these memos, many in the corporate community have been pushing for changes in the Schedule 13D area for quite some time. On the other hand, some believe that the cows are out of the barn – and that any tweaks to the timing of 13D filings or disclosure will not change the playing field much nor stop takeovers from occurring every day.
Weigh in with your thoughts via this anonymous poll…
Here’s the intro from this Cleary Gottlieb blog by Ethan Klingsberg and Rob Gruszecki:
Companies based in the People’s Republic of China have committed to over $100 billion of overseas acquisitions since January 1, 2016, including a number of high profile targets in the United States and Europe. The ties of these buyers to governmental entities in the PRC, coupled with the unpredictability of the PRC government, and the challenges that a non-PRC counterparty faces when seeking to enforce contractual obligations and non-PRC judgments in PRC courts has led practitioners to implement an array of innovative provisions in M&A Agreements.
Yesterday, Corp Fin issued this CDI 301.01 about how a proxy card should “clearly identify and describe the specific action on which shareholders will be asked to vote” for both management & shareholder proposals. The CDI provides six examples of what not to do. This is one of those examples that doesn’t satisfy Rule 14a-4(a)(3): it would not be appropriate to describe a shareholder proposal to amend a company’s bylaws to allow shareholders holding 10% of the company’s common stock to call a special meeting as “a shareholder proposal on special meetings.” The CDI doesn’t clarify whether it applies to VIFs – but it likely does. Here’s an excerpt from this Gibson Dunn blog:
The CD&I does not indicate that a shareholder proponent’s title or description of its own proposal is necessarily determinative of how that proposal should be identified on the company’s proxy card. For example, if a shareholder captions her proposal as “Proposal on Special Meetings,” that description presumably still may not satisfy Rule 14a-4(a)(3). Thus, a company remains ultimately responsible for determining how a shareholder proposal is described on the company’s proxy card.
Because the Staff’s interpretation was based on Rule 14a-4, it applies only to how proposals are addressed on a company’s proxy card. Nevertheless, we would expect the Staff to hold similar views in interpreting the requirement under Rule 14a-16(d)(6) that a company’s Notice of Internet Availability contain a “clear and impartial identification of each separate matter intended to be acted on.” Similarly, to the extent that companies are involved in reviewing and commenting on the form of voting instruction card that is distributed to street name shareholders, best practice is to conform the descriptions of proposals on the voting instruction card to the descriptions on the company’s proxy card. Companies also are subject to the general standard of avoiding misleading statements when identifying or describing proposals within the body of the proxy statement.
Notably, the SEC does not have a rule on the form and content of the state law notice that appears at the front of companies’ proxy statements. Thus, if a company has determined that a generic description of shareholder proposals is sufficient for the notice page of the proxy statement under state law, such as stating that the shareholder meeting agenda includes a “shareholder proposal, if properly presented,” the C&DI does not prevent that practice. As a result, the description (if any) of those proposals on the notice page may differ from how each proposal is identified on the proxy card.
Coincidentally, this follows my blog on TheCorporateCounsel.net last week about this topic…
Here’s news from Tom Bayliss of Abrams & Bayliss (with help from Matt Miller & Alex Krischik):
In a pair of recent bench rulings, the Delaware Court of Chancery rejected the contention that allegedly colorable disclosure claims brought by stockholder plaintiffs challenging mergers risked irreparable harm sufficient to warrant expedited injunction proceedings. The two attached rulings by Vice Chancellor J. Travis Laster – Johnson v. Driscoll, C.A. No. 11721-VCL (Del. Ch. Feb. 3, 2016) (transcript) and Chester County Retirement System v. Collins, C.A. No. 12072-VCL (Mar. 14, 2016) (transcript) — reflect continued evolution in the Court of Chancery’s treatment of disclosure claims and may represent a shift that will have a major impact on M&A litigation. In these rulings, Vice Chancellor Laster:
– Holds that certain, allegedly material omissions in pre-merger disclosures did not warrant pre-closing expedited proceedings because the disclosure claims raised purely legal issues that could be resolved after closing;
– Implies that even critical disclosure violations may not give rise to irreparable harm sufficient to warrant expedition or deal-blocking injunctive relief;
– Envisions a regime in which at least one category of disclosure claims will only result in relief if stockholder plaintiffs demonstrate both that the disclosures were inadequate and that the transaction was mispriced; and
– Signals distaste for “creat[ing] a system where we substitute ritualized litigation leading to disclosure-only settlements and replace that with ritualized litigation leading to mootness fee buy-offs.”
The Court’s determinations regarding irreparable harm depart from longstanding Delaware precedent indicating that the omission of material information prior to a stockholder vote risks harm sufficient to warrant expedited proceedings and potentially injunctive relief.
Driscoll and Collins signal that plaintiffs and defendants may no longer be able to rely on pre-closing feedback from the Court of Chancery regarding the strength of certain types of disclosure claims. This dynamic could increase the pressure on lawyers for both sides to predict the Court of Chancery’s views on materiality in a post-closing environment when the Court will have the benefit of full briefing and more time to come to a conclusion about materiality. Perhaps most importantly, the Court’s comments about the need to show not only a disclosure violation but also damages could sap the incentive of plaintiffs’ lawyers to challenge disclosures accompanying deals they determine are well-priced.
Johnson v. Driscoll: Transaction and Litigation
On October 28, 2015, Diamond Foods announced that it had agreed to sell itself to wholly owned subsidiaries of Snyder’s-Lance in a mixed cash and stock transaction valued at approximately $1.91 billion. Stockholders of Diamond sued to enjoin the merger. The stockholder plaintiffs initially alleged that Diamond’s board of directors breached its fiduciary duties through a defensive merger process and selective and materially incomplete disclosures, and that Snyder aided and abetted those breaches. Plaintiffs sought expedited discovery and a preliminary injunction hearing prior to the stockholder vote on the merger.
By the time the Court ruled on plaintiffs’ motion to expedite, plaintiffs were only pressing for expedition on their claim that Diamond’s proxy statement omitted material information regarding management projections, the sales process, potential conflicts of interest, confidentiality agreements, and Diamond’s financial advisor’s analysis of and valuation metrics for the transaction. On February 3, 2016, the Court denied plaintiffs’ motion for expedited proceedings on the grounds that the plaintiffs failed to show a risk of irreparable harm. According to the Court, the disclosure claims could be resolved post-closing.
The Rationale for Delaying Resolution of Disclosure Claims
The Court identified several reasons to defer consideration of the disclosure claims. First, the Court emphasized that the parties disputed pure questions of law regarding the materiality of omissions rather than questions of fact conceivably warranting discovery. Second, the Court noted that deferring consideration of the disclosure claims would allow the Court to address the claims after closing with the benefit of full motion to dismiss briefing and argument. Third, if the Court resolved the disclosure claims at the motion to dismiss stage and an appeal followed, the Delaware Supreme Court would have the benefit of a trial court opinion on materiality rather than “musings and transcript rulings and probabilistic determinations” from hearings on requests for interim relief. Fourth, the Court implied that deferring consideration of the disclosure claims would impose “a gut check on the plaintiffs as to whether they actually think that this deal is underpriced and that the people they are representing have suffered harm, or whether this is just some type of . . . setup to a disclosure-only settlement.” Fifth, the Court intimated that if plaintiffs succeeded in later demonstrating that their disclosure claims were meritorious and that the transaction was underpriced, they would be able to obtain money damages – “far more meaningful relief than a little more information now.”
The Ability to Moot But the Danger of Mootness Fees
The Court noted that, through their complaint and the motion to expedite process, plaintiffs had “made their pitch” in attempting to demonstrate the materiality of the alleged disclosure omissions and that it was now “in the court of the defendants and their counsel” to determine whether supplemental disclosures were desirable. The Court further recognized that, if defendants believed plaintiffs’ disclosure claims had merit, or that “prudence outweighs the risk,” defendants could supplement their public filings prior to the stockholder vote.
The Court warned, however, that it did not “want to create a system where we substitute ritualized litigation leading to disclosure-only settlements and replace that with ritualized litigation leading to mootness fee buy-offs.”
Chester County Retirement System v. Collins: Transaction and Litigation
On December 10, 2015, Blount International announced that it would sell itself to a buyout group consisting of its second largest stockholder and a private equity firm for approximately $482.5 million. Stockholders sued to enjoin the merger. They alleged fiduciary duty breaches by Blount’s directors and officers, various aiding and abetting claims, and claims against other necessary parties or beneficiaries to the challenged transaction. Plaintiffs anchored their claims on alleged sales process problems and a number of alleged disclosure violations, including Blount’s alleged failure to disclose adequately: engagement terms or fees with various financial advisors, relationships between financial advisors and the buyout group, Blount’s Special Committee’s bases for understanding Blount’s value, and certain options granted to Blount’s officers in the post-closing company.
Blount filed an amendment to its preliminary proxy statement and later a definitive proxy statement. Defendants argued that these supplemental disclosures were unnecessary but, in any event, mooted all of plaintiffs’ disclosure claims. Plaintiffs argued that material omissions remained.
The Process Claims
Vice Chancellor Laster found that plaintiffs’ alleged process deficiencies failed to give rise to irreparable harm. The Court emphasized that plaintiffs’ claims arose in a “post-C&J” world, where a process-based injunction would not issue unless the deal as a whole was being enjoined, “which will really only exist if there is a topping bid in the offing.” See C & J Energy Service, Inc. v. City of Miami Gen. Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014).
The Rationale for Delaying Resolution of Disclosure Claims
Consistent with Driscoll, the Court found that the disclosure claims identified alleged omissions that raised legal issues that should be addressed post-closing, with the “benefit of full briefing from both sides” “rather than in the context of a quick motion to expedite, or even in the context of a moderately less quick preliminary injunction.” The Court noted that defendants may have mooted some or all of plaintiffs’ disclosure claims and that defendants could act to moot any remaining claims.
The Court emphasized that a post-closing determination that plaintiffs had identified material omissions would have “have consequences.” The Court noted that disclosure violations could shift the standard of review and might give rise to quasi-appraisal and other remedies.
Take-Aways & Further Thoughts
1. Driscoll and Collins represent a significant departure from precedent suggesting that colorable disclosure claims challenging pre-transaction disclosures nearly always threaten irreparable harm sufficient to warrant expedition and potentially injunctive relief. Prior precedent depended on the sensible conclusion that disclosure claims are better addressed pre-closing when they can be remedied by supplemental disclosures, at least in part because of the difficulty of assessing what would have happened had the disclosures been adequate. This precedent also suggested that irreparable harm existed because a Section 102(b)(7) provision would eliminate the availability of post-closing damages for deficient disclosures in most circumstances.
2. The Court’s willingness to challenge settled expectations regarding irreparable harm demonstrates that the Court of Chancery’s adjustment to the perceived abuses of the “disclosure settlement industry” and strike suit M&A litigation extends beyond its new approach to disclosure-only settlements.
3. Driscoll and Collins depend on the idea that the Court can remedy meritorious disclosure claims post-closing through a damages award. But the Court signaled that damages would only be available in mispriced deals, and that will only be true when 102(b)(7) provisions are inapplicable. Thus, cases involving well-priced deals accompanied by deficient disclosures may not be worth pursuing because plaintiffs’ attorneys will lack sufficient upside. Even mispriced, misdisclosed deals may not be worth pursuing if defendants will likely qualify for 102(b)(7) or 141(e) protection. This dynamic could also sap the incentive for defendants to moot disclosure claims in a wide variety of circumstances.
4. The Court’s suggestion that quasi-appraisal can serve a post-closing remedy for disclosure violations refreshes pre-existing questions about the nature of that remedy. If inadequate disclosures prevent a fully-informed decision about whether or not to seek appraisal, should a stockholder class be able to pursue a quasi-appraisal remedy? Against whom? The Court of Chancery has indicated that Section 102(b)(7) protects qualifying directors from quasi appraisal claims, and disclosure deficiencies typically arise out of negligence, so the likelihood of a quasi-appraisal remedy against directors seems remote in most circumstances. Would a quasi-appraisal remedy lie against the surviving corporation? If not, would stockholders who failed to receive material information bearing on whether or not to seek appraisal lack a remedy?
5. Vice Chancellor Laster appears to have been motivated by concern that the Court’s prior willingness to address colorable disclosure claims on an expedited basis contributed to a regime where the Court and the parties made interim assessments of materiality in a context where they lost sight of whether the alleged disclosure deficiencies might have an impact on deal pricing. By deferring consideration of the disclosure claims in Driscoll and Collins until post-closing, the Court eliminated the pressure of pre-closing expedited proceedings (that often set up disclosure settlements) and signaled that plaintiffs will only be able to recover if they can both (a) identify a disclosure flaw and (b) tie it to some mispricing that gives rise to a viable damages claim. In the Court’s words: “[L]et’s find out if these things are really material or not.”
6. The Court took pains to emphasize that it was addressing situations where plaintiffs had identified alleged omissions that raised purely legal questions regarding materiality. It is unclear whether the Court of Chancery will apply the same approach in situations where plaintiffs identify alleged misstatements or omissions that raise questions of fact. It is also unclear whether the Court will adopt this approach where the alleged omissions relate to “plainly material” topics.
7. The Court’s historical willingness to address the materiality of disclosure claims at the motion to expedite and preliminary injunction phases of deal litigation gave both plaintiffs and defendants the benefit of the Court’s interim views on the viability of the disclosure claims. A regime that declines to address materiality on a preliminary basis in certain circumstances will deprive both plaintiffs and defendants of that preliminary insight. This could raise the stakes for plaintiffs’ lawyers, who will not only need to handicap the strength of their disclosure claims but also the likelihood they can prove the deal is mispriced before investing the time and energy on dismissal practice.
8. The Driscoll and Collins approach to deal litigation could also raise the stakes for the defendants’ lawyers. A wrong decision on disclosure will prevent favorable treatment under Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) (holding that fully-informed stockholder vote has defendant-friendly standard of review shifting and/or claim extinguishing effects) and result in intermediate scrutiny where Revlon or Unocal apply. Moreover, a disclosure problem might result in a dangerous quasi-appraisal claim.
9. Vice Chancellor Laster rejected the suggestion that expedition was necessary in part because pre-closing litigation (including pre-closing expedited discovery) performs a valuable “tire-kicking function.” He suggested that well-motivated plaintiffs could seek books and records under 8 Del. C. § 220 in stock deals or during the pre-closing period in cash deals.
10. Increasingly, the Court appears to be encouraging litigants to employ appraisal in lieu of or in addition to traditional representative litigation challenging acquisitions. But appraisal is only available in limited circumstances, and Delaware’s legislature appears poised to adopt a de minimis exception that will further restrict its application.
Here’s news from this Wachtell Lipton memo:
Legislation introduced yesterday in Congress calls for substantial steps to be taken towards increasing transparency and fairness in the public equity markets. If adopted, the Brokaw Act would direct the Securities and Exchange Commission to amend the Section 13(d) reporting rules. The proposed amendments would include shortening the filing window applicable to the acquisition of a 5% stake in an equity security from ten days to two business days and requiring the public reporting of significant “short” positions. The legislation would also broaden the scope of the rules by recognizing that possession of a pecuniary interest in a security constitutes beneficial ownership, and by specifically targeting the covert collusion of activist “wolf packs.”
Regardless of who may have sponsored the Brokaw Act, modernizing these rules should appeal to those across the political spectrum who support the efficient and transparent functioning of our equity markets and wish to further the original Congressional intent of the beneficial ownership reporting rules. The financial markets and investors in publicly traded enterprises depend on a well-functioning, efficient market and are not well-served by permitting a small number of large, sophisticated fund managers to manipulate the markets in order to extract short-term gains to the detriment of investors generally. At a time when the SEC and other market actors are requiring greater transparency from public companies, boards and executives, the same policy concerns demand greater transparency with respect to the acquisition of equity securities of public companies by third parties.
The legislation comes at a time when the largest institutional investors are increasingly emphasizing the need for responsible development of long-term, sustainable value by U.S. corporations. In contrast, examples abound in recent years of activist shareholders accumulating large positions by stealth, demanding actions designed to boost short-term returns, and effectively forcing companies to cripple their long-term growth prospects as a result. These same activist investors may not even be economically aligned with other shareholders during the period of their investment, due to the use of derivative arrangements. As we recently discussed, increased transparency and effective action will be critical for companies seeking to earn the support of the responsible, long-term institutional investor community and decrease their vulnerability to these activist attacks. Fixing the antiquated 13(d) reporting regime is another key piece of this puzzle, and action is long overdue. Sensible modernization of these rules can curb abuses (including those evidenced by reports of activist “tipping” prior to filing a Schedule 13D) while still permitting robust shareholder activism to continue.
We have long advocated that the SEC take steps to modernize the existing reporting regime, which is ripe for abuse and is routinely exploited. Sophisticated investors are able to use long reporting delays and the narrow definition of beneficial ownership to great advantage, at the direct expense of other market participants. Our prior rulemaking petition to the SEC similarly called for a shortened filing window (one business day) and an expanded definition of beneficial ownership, and further suggested the imposition of a “cooling-off period” prohibiting additional investment until proper disclosures have been made.
While the Brokaw Act takes a somewhat different approach to addressing certain of the same concerns, it would represent significant progress towards fairer and more efficient equity markets and strike a blow against short-termism and market abuses. This initiative merits bipartisan support and prompt consideration.
Here’s a blog by Keith Bishop of Allen Matkins:
Corporations Code Section 313 generally provides that a contract, note or other instrument will not be invalidated as to a corporation by any lack of authority if it is signed by the corporation’s chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer. See If You’re Relying On The Signature Of Two Officers, You May Want To Think Again. It is important to note that Section 313 is a validating statute. Thus, the statute does not invalidate contracts that are not signed by the specified pairing of officers.
The California General Corporation Law does, however, require that one type of agreement be signed by a specific brace of officers. Section 1102 specifically requires that each corporation sign an agreement of merger by both the corporation’s: (i) chairman of the board, president or a vice president; and (ii) secretary or assistant secretary.
This may be a statute that you want to keep in mind if giving a legal opinion that an agreement of merger has been “duly executed”. Oddly, neither Section 313 nor Section 1102 are mentioned in the 2005 Report of The Corporations Committee of the Business Law Section of the State Bar of California on Legal Opinions in Business Transactions.