Broc recently blogged about the 7th Circuit’s Walgreen decision, which endorsed Delaware’s “plainly material” approach to disclosure-only settlements announced in the Trulia case. The Walgreen case suggests that Trulia is gaining traction in other jurisdictions. Still, many commentators anticipate that one of the consequences of Delaware’s hard line in this area will be the migration of many M&A claims to jurisdictions that are friendlier to disclosure-only settlements.
But what if other jurisdictions must apply Trulia to those migratory Delaware cases? That’s the provocative question raised in this recent “Business Law Prof Blog.” Professor Ann Lipton noted that since Trulia addresses only the standard that applies to approval of settlements, its applicability in courts outside of Delaware is uncertain:
Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.” Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial. It is not the standard that an individual plaintiff would have to meet. It is only the standard for the settlement of a merger class action.
Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company? Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?
What’s the internal affairs doctrine? The Supreme Court described it in Edgar v. MITE:
The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.
If Trulia establishes a substantive rule of corporate law, then it implicates the internal affairs doctrine and courts in other jurisdictions applying conflicts principles generally would be obligated to follow it in cases involving Delaware corporations.
If that’s the right answer, then the forum-shopping game that many have predicted could end very quickly. Is it? The jury’s still out. Professor Lipton notes that the 7th Circuit’s opinion in Walgreen does not seem to view Trulia as involving internal affairs, but she points out that a recent New Jersey case – Vergiev v. Aguero – reached the opposite conclusion.
– John Jenkins
Here’s a memo from Schulte Roth that provides a reminder that you don’t actually have to purchase stock to run afoul of HSR’s notification and waiting period requirements:
On Aug. 10, 2016, Caledonia Investments agreed to settle FTC charges that Caledonia violated the premerger reporting requirements of the Hart-Scott-Rodino Act in connection with the vesting of RSUs in Bristow Group. Pursuant to the settlement, Caledonia agreed to pay $480,000 in civil penalties. According to the government’s complaint, the vesting of the Bristow RSUs was a reportable acquisition of voting securities for which a filing, and observance of the mandatory waiting period, was required.
HSR requires parties to acquisitions of voting securities, non-corporate interests and assets meeting certain annually adjusted thresholds to file notifications with the federal antitrust agencies and to observe a waiting period prior to consummation of the acquisition.
Acquisitions of non-voting securities or convertible securities are considered exempt transactions. However, the subsequent exercise, vesting or conversion into securities with the present right to vote for directors is a potentially reportable “acquisition” that may require that an HSR filing be made, and the waiting period observed, prior to such exercise, vesting or conversion. Failure to comply with HSR’s filing and waiting requirements when required can result in injunctive relief as well as civil penalties of up to $40,000 for each day during which any applicable person is in violation.
We have posted the transcript for our recent webcast: “How to Apply Legal Project Management to Deals.”
– John Jenkins
Here’s news from this alert from Cleary Gottlieb:
As a result of courts’ continued disfavor of disclosure-only settlements, more defendants have decided to issue supplemental disclosures that would unilaterally moot any disclosure claims brought by plaintiffs in merger challenges. In those instances, plaintiffs’ counsel may be entitled to seek a mootness fee for the “benefit” of supplemental disclosures that they obtained on behalf of stockholders.
Although the Court in Trulia held that supplemental disclosures must be “plainly material” in order to support a settlement and class wide release, Delaware Vice Chancellor Glasscock recently held that there is a lower standard in the mootness fee context. In that context, a merely “helpful” disclosure that “provides some benefit to stockholders” may support a mootness fee award, even if the disclosure is not material. In re Xoom Corp. Stockholders Litigation, C.A. No. 11263-VCG (Del. Ch. Aug. 4, 2016).
Vice Chancellor Glasscock explained that because there was no release of claims other than to the named plaintiffs, “there is no ‘give’ to balance against the disclosure ‘get’; the benefit is the ‘get’ of the disclosures, with no waiver of class rights to be set against that benefit.” Id. Former Vice Chancellor Noble also has held that Trulia “does not require a ‘plainly material’ inquiry in the mootness fee award context.” LAMPERS v. Black, C.A. No. 9410-VCN (Del. Ch. Feb. 19, 2016) (noting that “mootness dismissals do not pose the same sorts of systemic concerns as court-approved disclosure settlements”).
Nonetheless, the Court of Chancery will continue to carefully review applications for mootness fees to ensure that they do not simply replace disclosure-only settlements. For example, Vice Chancellor Glasscock determined in Xoom that plaintiffs’ requested mootness fee of $275,000 was not justified for the disclosures obtained, and reduced the award to only $50,000.
Furthermore, Chancellor Bouchard recently denied an application for a mootness fee award where the Court determined that the supplemental disclosures did not obtain any benefit for the stockholders, because the supplemental disclosures only confirmed things that had been previously disclosed. In re Keurig Green Mountain, Inc. Stockholder Litigation, C.A. No. 11815-CB (consol.), transcript (Del. Ch. July 22, 2016).
– Broc Romanek
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– “This is the Business We’ve Chosen…”
– Shareholder Votes & Standards of Judicial Review
– Schedule 13G “Passive” Investor Status: When Being a Little Active Is Still Passive!
– Delaware Upholds Decision on Mis-Valuation of Cancelled Stock Options
– A Primer on Private Equity: Basics for Counsel to Middle Market Companies
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online. Try a “Free for Rest of ’16” no risk trial now!
As noted in this blog by Steve Quinlivan, the SEC has approved – in this Order – a series of FINRA rules that are meant to simplify regulation of firms engaged as M&A brokers and those who conduct other limited activities…
Here’s an excerpt from this blog by Lane Powell’s Doug Greene:
If the disclosure-only door to resolving merger cases is shut, then more cases will need to be litigated post-close. That will make settlement more expensive. Plaintiffs lawyers are not going to start to settle for less money, especially when they are forced to litigate for longer and invest more in their cases. And in contrast to adjustments to the merger transaction or disclosures, in which 100% of the cash goes to lawyers for the “benefit” they provided, settlements based on the payment of cash to the class of plaintiffs require a much larger sum to yield the same amount of money to the plaintiffs’ lawyers. For example, a $500,000 fee payment to plaintiffs’ under a disclosure-only settlement would require around $2 million in a settlement payment to the class to yield the same fee for the plaintiffs’ attorneys, assuming a 25% contingent-fee award.
The increase in the cash outlay required for companies and their insurers to deal with post-close merger litigation will actually be much higher than my example indicates. Plaintiffs’ lawyers will spend more time on each case, and demand a higher settlement amount to yield a higher plaintiffs’ fee. Defense costs will skyrocket. And discovery in post-close cases will inevitably unearth problems that the disclosure-only settlement landscape camouflaged, significantly increasing the severity of many cases. It is not hard to imagine that merger cases that could have settled for disclosures and a six-figure plaintiffs’ fee will often become an eight-figure mess. And, beyond these unfortunate economic consequences, the inability to resolve merger litigation quickly and efficiently will increase the burden upon directors and officers by requiring continued service to companies they have sold, as they are forced to produce documents, sit for depositions, and consult with their defense lawyers, while the merger case careens toward trial.
Again, it’s hard to disagree with the logic and sentiment of these decisions, and the result may very well be more just. But this justice will come with a high practical price tag.
As noted in this Sheppard Mullin blog, the 7th Circuit’s recent Walgreen decision is the latest – and perhaps most significant – opinion in which a jurisdiction has adopted Delaware’s “plainly material” standard set forth in Trulia for evaluating disclosure-only settlements. As Alison Frankel recently reported in this Reuters blog:
There were two big takeaways from a new Cornerstone Research study of shareholder suits challenging big M&A announcements. First, Cornerstone confirmed what other analysts have previously reported: Plaintiffs’ lawyers are filing fewer cases in the wake of a 2015 crackdown on disclosure-only settlements by Delaware’s Chancery Court. The drop-off is dramatic (assuming that, like me, you accept the premise that the filing rate of shareholder M&A suits is the stuff of drama). At the 2013 peak of shareholder M&A litigation, plaintiffs’ lawyers sued to challenge 94 percent of announced deals valued at more than $100 million. In the first half of 2016, the rate was down to 64 percent – lower than we’ve seen since 2009.
Cornerstone’s second big finding is that when plaintiffs’ lawyers do sue over M&A transactions, they are much more likely to file cases outside of Delaware. In the first three quarters of 2015 – before Chancery Court judges began rejecting settlements that granted defendants broad releases in exchange for immaterial additional proxy disclosures – shareholders sued in Delaware in 61 percent of the M&A deals that prompted litigation. After the crackdown, only 26 percent of the deal challenges were filed in Delaware. Even when the acquired company is incorporated in Delaware, shareholders’ lawyers sued in Chancery Court in only 36 percent of all cases, compared to 74 percent in 2015. It is increasingly likely, in other words, that judges outside of Delaware Chancery Court will preside over shareholder M&A litigation.
In Walgreen, Judge Posner wrote:
In merger litigation the terms “strike suit” and “deal litigation” refer disapprovingly to cases in which a large public company announces an agreement that requires shareholder approval to acquire another large company, and a suit, often a class action, is filed on be-half of shareholders of one of the companies for the sole purpose of obtaining fees for the plaintiffs’ counsel. Often the suit asks primarily or even exclusively for disclosure of details of the proposed transaction that could, in principle at least, affect shareholder approval of the transaction. But almost all such suits are designed to end—and very quickly too—in a settlement in which class counsel receive fees and the shareholders receive additional disclosures concerning the proposed transaction. The disclosures may be largely or even entirely worthless to the shareholders, in which event even a modest award of attorneys’ fees ($370,000 in this case) is excessive and the settlement should therefore be disapproved by the district judge…
The disclosures agreed to in the settlement (the parties call these the supplemental disclosures, as shall we) represented only a trivial addition to the extensive disclosures already made in the proxy statement: fewer than 800 new words—resulting in less than a 1 percent increase—spread over six disclosures… [The court than goes on to explain why each of the six supplemental disclosures were worthless.]
The reorganization that ratified Walgreens Boots Alliance was approved by 97 percent of the Walgreens shareholders who voted. It is inconceivable that the six disclosures added by the settlement agreement either reduced support for the merger by frightening the shareholders or increased that support by giving the shareholders a sense that now they knew everything. This conclusion is supported by recent empirical work which shows that there is little reason to believe that disclosure-only settlements ever affect shareholder voting. Jill E. Fisch, Sean J. Griffith & Steven Davidoff Solo-mon, “Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform,” 93 Tex. L. Rev. 557, 561, 582–91 (2015). The value of the dis-closures in this case appears to have been nil. The $370,000 paid class counsel—pennies to Walgreens, amounting to 0.039 cents per share at the time of the merger—bought nothing of value for the shareholders, though it spared the new company having to defend itself against a meritless suit to void the shareholder vote…
The type of class action illustrated by this case—the class action that yields fees for class counsel and nothing for the class—is no better than a racket. It must end. No class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.
Delaware’s Court of Chancery sees many more cases involving large transactions by public companies than the federal courts of our circuit do, and so we should heed the re-cent retraction by a judge of that court of the court’s “willingness in the past to approve disclosure settlements of marginal value and to routinely grant broad releases to defend-ants and six-figure fees to plaintiffs’ counsel in the process.” The result has been to “cause deal litigation to explode in the United States beyond the realm of reason. In just the past decade, the percentage of transactions of $100 million or more that have triggered stockholder litigation in this country has more than doubled, from 39.3% in 2005 to a peak of 94.9% in 2014.” In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884, 894 (Del. Ch. 2016).
Here’s the intro from this blog by “The Activist Investor”:
Smart PMs learn from others, including other activist investors. To this end, previously we profiled the investment strategies of Carl Icahn, Nelson Peltz, and Bill Ackman. Jeff Ubben, founder of ValueAct Capital, also makes for a worthwhile subject. He’s had his share of news coverage, both recently (Valeant) and over the years (Microsoft). He became the subject of a high-profile and potentially precedent-setting antitrust lawauit. He’s also been the subject of extensive profiles, which provide all manner of interesting detail about his career and firm.
What we haven’t see yet is, an analysis of his investment strategy. We reviewed his 82 activist projects since founding ValueAct in 2000, from the invaluable SharkRepellent database, to develop some insights. We find an activist investing hedge fund that acts as much like a private equity fund as any other we’ve seen. ValueAct orchestrates deals behind the scenes, with targeted board membership through substantial ownership positions in portfolio companies.
In his blog, Steve Quinlivan of Stinson Leonard Street reviews recent SEC comments on merger proxy statements – he indicates many of the comments were typical, and some are variations on a theme. Here’s an excerpt:
– Rule 14a-6(a) requires that the form of proxy be on file for ten calendar days, yet no form of proxy appears to have been transmitted. Please amend the filing to include the form of proxy, or advise. In addition, please ensure that both the preliminary proxy statement and form of proxy are clearly marked as being preliminary. See Rule 14a-6(e)(1).
– We note the statement in the first sentence of the tenth paragraph of the opinion attached as Annex C that [the financial advisors] and Company’s opinion may not be used without its prior written consent. Please revise the disclosure in this section to state, if true, that [the financial advisor] and Company has consented to the use of its opinion in this document.
– We note the limitations on reliance by shareholders in the fairness opinion provided by the [financial advisor]. Specifically, we note the statements that the opinion is furnished for the use of the Special Committee and “may not be used for any other purpose without the [financial advisors] prior written consent.” Additionally, we have similar concerns with the statement that the opinion “should not be construed as creating any fiduciary duty on [the financial advisor’s] part to any party.” Please have the advisor revise the opinion to remove these limitations on reliance by shareholders. Alternatively, please disclose the basis for the advisor’s belief that shareholders cannot rely upon the opinion to support any claims against the [financial advisor] arising under applicable state law.
– We note the disclaimer [that the parties and their financial advisors] do not assume “any responsibility for the validity, accuracy or completeness” of the projections. Please revise to eliminate the statement that these parties do not bear any responsibility for disclosure that was prepared and included in this Schedule 14A.
– We note the disclosure on page X that ABC does not intend to revise its projections. Please revise this disclosure, as publicly available financial projections that no longer reflect management’s view of future performance should either be updated or an explanation should be provided as to why the projections are no longer valid.