Most advance notice bylaws establish a deadline of between 60 – 120 days before an annual meeting for director nominations – and prescribe detailed informational requirements that must be complied with by any shareholder nominee.  This Kirkland & Ellis memo describes an activist hedge fund’s recent attempt to skirt those provisions through the use of “placeholder” nominees.  Here’s what the hedge fund did:

With an impending deadline for nominations under the bylaws, the hedge fund announced that it would nominate 10 of its own employees to stand for election. These nominees were described as “placeholders” until the fund could identify qualified candidates ahead of the annual meeting. The hedge fund’s nominees, if elected, would commit to resign immediately following their election and replace themselves with the qualified independent candidates that are identified in the intervening months.

The hedge fund’s use of placeholders has not been tested in court – but companies should include language in their advance notice bylaws requiring a shareholder nominee to represent that the individual currently intends to serve out their full term if elected.

– John Jenkins

This Stanford Law Review article discusses current market practices for deal protections – and highlights four areas in which those protections have evolved over the past decade:

1. Termination fee “creep,” which was pervasive in the 1980s and 1990s, seems to have gone away by the 2000s

2. Match rights, which were unheard of in the 1990s, have become ubiquitous by the 2010s

3. Asset lockups, which disappeared from the landscape for thirty years, have re-emerged (though in a “new economy” variation)

4. Implementing side agreements to the deal that have a commercial purpose along with a deal protection effect

– John Jenkins

This Gibson Dunn memo reviews the state-of-play in activism for the first half of 2016.  Here are the highlights:

-Changes in board composition (73.3%), and M&A related activities (53.3%), remained the most common areas of focus for activist investors.

-Mid & smaller cap companies were the targets of a majority of public activist actions, as 55.3% of the companies targeted had equity market capitalizations below $5 billion.

-The percentage of publicly-filed settlement agreements providing for strategic initiatives – replacement of management, spin-off company governance, etc. – has increased (82.4% in 2016 vs. 58.8% in 2014 and 2015).

– John Jenkins

Two recent Delaware Chancery Court opinions indicate that the court is taking last year’s Corwin decision to heart, while a third suggests that there’s still room for debate on the scope of the decision.  As this Morris James blog explains:

Larkin v. Shah is one of two recent Court of Chancery decisions explaining that the Corwin case really does mean that there is an “irrebuttable business judgment rule” that bars challenges to a merger approved by a majority of the fully-informed, disinterested and uncoerced stockholders, in the absence of a conflicted controlling stockholder.

Thus, along with In re Volcano Corporation Stockholder Litigation at least two members of the Court of Chancery will allow only a well-pleaded claim for waste to survive dismissal in such circumstances.  It is less clear that the Chancellor agrees with the word “irrebuttable” in those circumstances, however.  See City of Miami v. Comstock, C.A. 9980-CB (Del. Ch. Aug. 24, 2016) (applying Corwin but still examining whether the plaintiffs had alleged a basis for entire fairness review).

We’re posting memos in our “Fiduciary Duties” Practice Area.

– John Jenkins

In the latest chapter of the Rural/Metro saga, the SEC announced yesterday that RBC had consented to a $2.5 million settlement in order to resolve allegations of deficiencies in the bank’s fairness opinion presentation to Rural/Metro’s board, and in the description of that opinion in the company’s proxy materials.

The SEC said that its investigation found that RBC’s presentation contained materially false and misleading statements which made the buyer’s bid look more attractive, and caused that information to be included in the proxy statement filed in connection with the deal.  Here are some of the issues cited by the SEC:

– The SEC found that RBC’s presentation described one of its valuations as being based on Wall Street analysts’ “consensus projections” of Rural/Metro’s 2010 adjusted EBITDA, a pretax earnings figure. In fact, the valuation did not reflect analysts’ research or a “consensus” view, but was Rural/Metro’s actual 2010 adjusted EBITDA of $69.8 million.

– Rural/Metro’s proxy statement included a summary of RBC’s valuation analysis, which falsely stated that RBC used “Wall Street research analyst consensus projections” for 2010 “consensus” adjusted EBITDA. The SEC order found that in addition to being false, the proxy statement was misleading because shareholders would be led to believe the analysis reflected the “consensus” calculation of $76.8 million.

– The SEC also found that RBC caused the proxy statement to include a misleading disclosure that suggested RBC had relied on another valuation analysis in its fairness presentation to Rural/Metro’s board when, in fact, RBC did not rely on the analysis for valuation purpose.

– John Jenkins