This Skadden memo discusses several recent Delaware Chancery Court cases interpreting Corwin’s path to business judgment rule review for post-closing damage claims. Here are some of the key takeaways:
In Larkin, Vice Chancellor Slights interpreted Corwin to hold that “[i]n the absence of a controlling stockholder that extracted personal benefits, the effect of disinterested stockholder approval of the merger is review under the irrebuttable business judgment rule, even if the transaction might otherwise have been subject to the entire fairness standard due to conflicts faced by individual directors”.
In reaching that conclusion, the court read Corwin to hold that “the only transactions that are subject to entire fairness that cannot be cleansed by proper stockholder approval are those involving a controlling stockholder.” The Larkin court’s formulation of Corwin seems to place a higher barrier to plaintiffs in post-closing merger litigation than in other recent cases such as Comstock. Because the case law is still evolving, it remains worthwhile to monitor closely how the Court of Chancery applies Corwin to noncontroller transactions going forward.
While Comstock suggests that disclosure claims may be considered post-closing as part of the Corwin analysis, other recent decisions from the Court of Chancery strongly indicate that disclosure claims should be brought before the stockholder vote when the purported harm of an uninformed vote may still be remedied. Accordingly, stockholder plaintiffs may not be able to seek tactical gain by deferring disclosure claims until after stockholders vote and the disclosures can no longer be supplemented.
– John Jenkins
As Broc blogged yesterday on TheCorporateCounsel.net, National Fuel Gas responded to GAMCO’s attempt to use its proxy access bylaw by rejecting its nominee. This Cleary blog asks the larger question – is this situation really what proxy access advocates had in mind? GAMCO is hardly the proxy access prototype:
GAMCO is indeed a long-term and significant holder of NFG stock – currently holding with its affiliates over 7% of NFG’s common stock. But keep in mind that GAMCO is not necessarily your typical long-term passive investor of legend. In fact, GAMCO has launched more than 20 proxy fights, and, in the case of NFG, made a stockholder proposal in support of the spin-off of NFG’s utility business. The twist is the GAMCO stockholder proposal received the support of only 18% of NFG’s shareholders. So NFG was handily winning the battle with GAMCO as activist. Now they need to win the battle with GAMCO as long-term shareholder.
GAMCO’s gambit raised the possibility that proxy access could provide a “halo” around the nominee of an activist whose prior efforts were rejected by shareholders. Is that what this is supposed to be about?
For now, it looks like this is an academic issue. Cydney Posner notes that GAMCO filed a 13D/A yesterday in which it said that its nominee had decided to withdraw, and that GAMCO would no longer pursue proxy access.
– John Jenkins
On Friday, as noted in this Bryan Pitko blog & Cydney Posner blog, Corp Fin published seven new Tender Offers & Schedules CDIs. The first two (new CDIs 159.01 & 159.02) address disclosures about the retention & compensation of a target board’s financial advisors. The remaining CDIs address interpretive issues relating to abbreviated debt tenders (new CDIs 162.01 – 162.05), which Broc blogged about last year when the Staff issued a no-action letter permitting them.
This Gibson Dunn blog summarizes the new CDIs – & also discusses remarks made by Ted Yu, head of Corp Fin’s Office of Mergers & Acquisitions, during Friday’s ABA meeting in Washington. Here’s an excerpt:
Later in the day on November 18, the Chief of OM&A, Ted Yu, speaking at an ABA meeting in Washington, D.C., noted that Senior Special Counsel Nicholas Panos in OM&A recently completed an extensive review of all Schedule 14D-9s filed over the past 15 years. The results of the survey revealed that although more than two-thirds of the 14D-9 filings had very detailed disclosures, there was still a significant number of filings containing the objectionable “customary compensation” language, prompting issuance of the interpretations.
Separately, the Staff addressed certain timing and structural issues that have come up since the 2015 no-action letter was granted. The C&DIs clarify that foreign issuers may commence their abbreviated debt tender offers by furnishing a press release on Form 6-K before noon (Eastern) – similar to the Form 8-K requirement for domestic issuers commencing such tender offers. In addition, the Staff clarified that issuers making abbreviated debt tender offers may:
– include a “minimum tender” condition in such offers;
– calculate the amount of cash offered to non-QIBs (in an exchange offer limited to QIBs and non-U.S. persons) by reference to a fixed spread to a benchmark, provided the calculation is the same as the calculation for QIBs and non-U.S. persons;
– rely on Section 3(a)(9) for an exemption from Section 5 when offering “qualified debt securities” in an exchange offer; and
– announce their offer at any time, provided that they delay commencement until ten business days following the first public announcement or consummation of any purchase, sale, or transfer of a material business or amount of assets that would otherwise require disclosure of pro forma financials under Article 11 of Regulation S-X.
– John Jenkins
This Schulte Roth study reports the results of a survey of activist investors about their experience with shareholder activism & their expectations for activity in the next 12 months. The survey asked a number of provocative questions – including “Is the age of the settlement over?” “Who’s vulnerable?” and “What defenses work?”
One conclusion seems clear – activism no longer has an off-season:
Fading are the days of the “activist season” – the predictable six-month stretch between the time when activists build their stakes and submit notice of their proposals to companies and when annual meetings are held in May and June. A significant number of activists have turned to post-annual meeting tactics, such as the use of special meetings, consent solicitations and simple public campaigns, to exact corporate change. Thus, not only should we expect activism to continue to thrive, we should expect it to become an ever-present activity in the marketplace seeking to unlock value and hold managements accountable.
– John Jenkins
This Andrews Kurth Kenyon memo discusses cybersecurity due diligence in energy sector M&A. This excerpt explains how the oil & gas industry’s investments in digital technologies have raised the profile of cybersecurity issues for dealmakers:
To weather the plunge in prices, many oil companies have sought out new innovations to reduce the cost of extraction and exploration. Investments in digital technologies will likely only increase—a 2015 Microsoft and Accenture survey of oil and gas industry professionals found that “Big Data” and the “Industrial Internet of Things” (IIoT) are targets for greater spend in the next three to five years. Cybersecurity threats were perceived in the survey as one of the top two barriers to realizing value from these technologies.
Companies considering a sale would be well advised to consider a buyer’s likely cybersecurity concerns:
On the target side, energy companies should prepare (in turn) for more scrutiny over their data security and privacy practices. Among other benefits to “knowing thyself,” getting ahead of this process should offer targeted companies a better negotiating position. It would also allow them to take a more proactive role in defining the policies of the combined company post-merger. At the very least, these efforts could help avoid the kind of hiccups and uncertainties that lead to undervaluation. In any event, poor cybersecurity practices can give an impression that a target lacks risk management in other areas—not an ideal pose to strike in any bargain.
Tune in tomorrow for the webcast – “This Is It! M&A Nuggets” – to hear Weil Gotshal’s Rick Climan, Kaye Scholer’s Joel Greenberg and McDermott Will’s Wilson Chu impart a whole lot of practical guidance!
– John Jenkins
In an appraisal case decided just last week, the Delaware Chancery Court provided another reminder that – even with Corwin providing a path for post-closing business judgment review – process still matters. In Dunmire v. Farmers & Merchants, Chancellor Bouchard was skeptical about the seller’s process:
To start, the Merger was not the product of an auction. No third parties were solicited and no confidential information was disseminated to any other potential buyer. F&M explored the Merger at the instance of the Snyder family, which controlled both F&M and NexTier at the time of the Merger and stood on both sides of the transaction. Although a Special Committee of the F&M board was formed for the ostensible purpose of establishing an independent group to negotiate on behalf of F&M’s minority stockholders, the record does not inspire confidence that the negotiations were truly arms-length.
The Chancellor identified shortcomings in both the composition and functioning of the Special Committee, and noted that the transaction was not subject to a majority of the minority condition. As a result of these & other process flaws, Chancellor Bouchard gave no weight to the $83 merger price in the appraisal proceeding – and awarded the dissenting shareholders $91.90 per share.
– John Jenkins
Acquisitions can have a significant impact on a company’s direct and indirect cost rates, and on the cost of performing its contractual obligations. This Shepard Mullin blog discusses the challenges that companies face when it comes to the allocation & allowability of M&A costs under government contracts. Here’s an excerpt:
The regulations applicable to the allowability and allocability of costs under government contracts include specific requirements regarding the treatment of costs that are likely to arise from mergers and acquisitions. The requirements are scattered throughout the Federal Acquisition Regulation (“FAR”) Cost Principles and the Cost Accounting Standards (“CAS”). Some are complex. Others are impenetrable. Government auditors are instructed and trained to scrutinize these costs with a critical eye.
Failure to appropriately navigate this regulatory thicket can result in consequences ranging from disallowance of costs to False Claims Act investigations.
– John Jenkins
Earlier this year, some commentators questioned whether the Delaware Chancery Court’s traditional use of letter opinions to address preliminary and procedural matters was being gradually jettisoned in favor of greater reliance on oral “bench rulings” – which are in turn becoming increasingly substantive.
The M&A Law Prof Blog summarized media reports about the potential shift:
For many years the courts have admonished us all not to pay attention to transcript rulings as they do not create precedent. Sure, that makes sense if the rulings are off the cuff rulings from the bench. But there appears to be “an increasingly structured approach by the Court in rendering oral rulings, including recitations of underlying facts and explicit citation to legal authorities — and may even resolve legal questions that are more than simply ministerial, or intended to keep litigation moving forward.”
There’s no denying that bench rulings have become more substantive in recent years — for example, see this White & Williams memo on the chancery court’s 2014 bench ruling in Swomley v. Schlecht — but why we should care? Here’s one reason:
One has to pay for transcripts while letter opinions and memo opinions are free as part of the public record. Also, transcripts don’t get hoovered up in many of the electronic legal databases.
This suggests that the increased use of bench rulings could make the already “inside baseball” world of Delaware corporate litigation even more insular. Is this kind of a shift happening? Well, if changes in the number of letter opinions are a fair barometer, I think the jury’s still out. I recently visited the Chancery Court’s website, and – based on a word search for “letter opinion” – here’s what I found:
– 58 letter opinions were issued through September 30, 2016, compared to 78 through the same date last year.
– An average of 92 letter opinions per year were issued from 2009 through 2015. In 2016, the Court is on a pace to issue 77 letter opinions.
That looks like a pretty dramatic drop. But the analysis isn’t as straightforward as these numbers make it appear.
There’s a lot of volatility year-to-year in the number of letter opinions that the Chancery Court issues, so a single year’s drop – even a significant one – isn’t necessarily predictive. For example, in 2012, it issued only 70 letter opinions, while that number jumped to 122 the following year.
Furthermore, from 2009 – 2015, letter opinions comprised between 35% and 45% of the total opinions & orders the Court issued each year. Although 2016 has seen a sharp drop in the number of letter opinions, total opinions & orders are down sharply as well. As a result, letter opinions still represent 41% of the total opinions & orders issued through September 30, 2016 – well within historical averages.
There’s a very significant missing piece to the analysis – what I don’t have any data on are the number of bench rulings themselves. But overall written opinions are down significantly, and bench rulings might be taking up some of the slack.
– John Jenkins
This Fox Rothschild blog flags the Delaware Chancery Court’s opinion in the latest iteration of the Dell appraisal case – & says that it may serve as a roadmap for determining fee awards in future appraisal proceedings. Here’s an excerpt:
In re Appraisal of Dell Inc. provides a useful discussion of the Court of Chancery’s calculation of a fee award in an appraisal case based on the benefit conferred to the dissenting stockholders. The decision discusses when expenses should be deducted from the benefit conferred before calculating the fees, and other issues of import. This opinion will undoubtedly serve as a roadmap for future fee awards granted in appraisal cases.
– John Jenkins