Last week, the Delaware Supreme Court affirmed the Chancery Court’s decision in In re Volcano (Del. Ch.; 6/16) – which held that Corwin’s path to business judgment rule review for post-closing merger claims applied to two-step transactions under Section 251(h) as well. This K&E memo summarizes the effect of the decision. Here’s an excerpt:
The Delaware Supreme Court in a one-sentence decision upholding the Chancery decision in Volcano provided welcome clarity on Delaware’s Corwin doctrine. In Corwin, the Supreme Court decided that the deferential business judgment rule should be the standard of review in post-closing damages cases in mergers (other than those subject to entire fairness review) that have been approved by a fully informed majority of disinterested stockholders.
In Volcano, the Chancery Court for the first time addressed the question of whether the Corwin doctrine applied to transactions completed under Delaware’s 251(h) tender offer structure or whether it was limited to so-called “one-step” mergers involving a stockholder vote. The Chancery Court held that a tender by the majority of Volcano’s stockholders was the equivalent of a majority vote of stockholders for purposes of the cleansing effect embodied by Corwin (a holding repeated in a subsequent Chancery decision in Auspex).
In affirming this ruling, the Supreme Court provides dealmakers with confidence that choosing a tender offer structure, which may be favored by parties because of potential speed advantages, will not deprive the target board of the litigation benefits of a fully informed approval by stockholders.
This Orrick memo discusses the new edition of the IRS’s “Golden Parachute Audit Techniques Guide” – a reference tool for its auditors to use in their review of compliance with the golden parachute rules. A couple of the “new additions” to the document caught my eye:
The 2017 ATG expands and updates the list of documents for IRS examiners to review in connection with a golden parachute examination. The additional documents include:
– Information Statements (Schedules 14A and 14C). The schedules disclose information regarding golden parachute payments in connection with the solicitation for shareholders’ approval. Additionally, any parachute payments actually made upon a change in control must be reported.
– Registration Statements (Forms S-4 and F-4). The Forms are used to provide information to investors when registering securities, and provide information related to mergers, acquisitions, or when securities are exchanged between companies.
Seriously? You mean IRS auditors weren’t already being told to look at these? There’s a vast amount of information about change-in-control payments in merger proxies & S-4 registration statements. It’s kind of astonishing that the IRS doesn’t seem to have told its auditors to look at any of that stuff before now.
In fairness, this guide hasn’t been updated since 2005 – before the SEC adopted its current golden parachute disclosure requirements – so maybe the IRS is just catching its guidance documentation up with actual practice. I wonder though. . .
For more details on this new Golden Parachute Audit Techniques Guide, check out Mike Melbinger’s blog on CompensationStandards.com.
This K&L Gates blog reviews the Delaware Chancery Court’s recent decision in In re Merge Healthcare Inc. Stockholders Litigation (Del. Ch.; 1/17). The Court’s decision further clarifies when a fully informed stockholder vote will result in application of the business judgment rule to post-closing claims:
The plaintiffs argued that a well-pled entire fairness case bars cleansing under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304, 313–14 (Del. 2015). The Court reached a different conclusion, relying on the Chancery Court’s exposition of the cleansing doctrine in Larkin v. Shah, 2016 WL 4485447 (Del. Ch. Aug. 25, 2016).
Under Larkin, the trigger for entire fairness is not “the mere presence” of a controlling stockholder “per se,” but when a controlling stockholder engages in a conflicted transaction, by sitting on both sides of the deal or competing with common stockholders for consideration. In such conflicted transactions, the Court writes, coercion is “deemed inherently present” and cannot be cleansed by a stockholder vote. But without a controlling stockholder pursuing personal gain, cleansing remains available and the business judgment rule applies, even if individual directors face conflicts that would ordinarily warrant entire fairness review.
The Court held that the plaintiffs failed to plead facts that showed the target’s alleged controlling stockholder extracted personal benefits from the transaction, & therefore could not rebut the cleansing effect of an un-coerced shareholder vote.
Last year, in In re: Trulia, the Chancery Court adopted a hard line on disclosure-only settlements – requiring supplemental disclosures to be “plainly material” in order to support a broad release & fee award. Since that time, a few other courts have decided to toe Delaware’s line – most notably the 7th Circuit with its decision in the Walgreen case. However, disclosure-only settlements continue to be approved by courts in a number of other jurisdictions.
This Orrick memo highlights what appears to be the first state appellate court decision addressing disclosure-only settlements post-Trulia. In Gordon v. Verizon, New York’s 1st Dept. parted company with Delaware’s rejection of disclosure-only settlements. The lower court rejected the settlement, citing Trulia – but the Appellate Division reversed:
As an initial matter, the Appellate Division found that because the parties included a New York choice-of-law provision in the settlement agreement, New York law would apply (an implicit rejection of the trial court’s frequent citation to Chancery precedent). Although Verizon is a Delaware corporation, it does not have a Delaware forum-selection clause in its corporate bylaws and the Appellate Division did not evaluate whether the internal affairs doctrine required application of Delaware law.
Since the Court held that New York law applied, it looked to New York’s test for approving the settlement of merger litigation – which is more lenient toward disclosure-only settlements than Delaware’s.
What’s the key takeaway for Delaware corporations? Adopt an exclusive forum bylaw if you don’t already have one:
Verizon’s lack of a Delaware forum selection bylaw allowed the Gordon shareholder-plaintiffs to file suit in New York and thereby evade recent Delaware precedent regarding merger settlements. In light of the precipitous decline in merger litigation filed in Delaware post-Trulia, it is fair to wonder whether the Gordon plaintiffs would have brought suit at all if the matter was required to proceed in Chancery Court. Consequently, Delaware corporations should consider whether the adoption of an exclusive forum bylaw would be beneficial to reduce frivolous merger-related suits.
New York’s more lenient approach may make it a more popular venue for merger litigation, which is sort of a double-edged sword. New York’s approach might encourage the filing of more frivolous suits, but it may also facilitate settlement of lawsuits for companies looking for a quick resolution to claims surrounding a deal.
Late last year, CFIUS got dealmakers’ attention when it recommended that President Obama block a Chinese investment fund’s pending purchase of a US-based semiconductor business. As I blogged at the time, the President’s decision to block the deal represented only the third time that an American president had blocked a transaction on national security grounds.
This Winston & Strawn memo reviews CFIUS’ recent actions & offers up some thoughts on the role it may play during the current year. This excerpt highlights the possibility that CFIUS review may serve as a bargaining chip for the Trump Administration’s trade & investment initiatives:
President Trump has stated an intention to revisit U.S. trade practices. There has been speculation in media sources that CFIUS, although it looks at foreign investment, may be a tool that the administration uses in this regard. This is in part because the President’s national security authority is broad and practically unchallengeable in this circumstance. Potential developments include an enhanced use of mitigation agreements to obtain promises regarding U.S. production and jobs. The process may also become more politicized if the President uses it for leverage in other negotiations.
The memo raises specific issues that ought to be considered in acquisitions involving a foreign buyer – but notes that despite the changing environment, the vast majority of foreign investments in the US will continue to receive approval.
This Jones Day memo addresses the implications of the Chancery Court’s recent decision in Chicago Bridge & Iron v. Westinghouse, (Del. Ch.; 12/16), in which the Court held that under the plain language of a purchase agreement, post-closing purchase price adjustment disputes were subject to mandatory arbitration by an independent accountant.
While parties generally consider post-closing working capital adjustments to be a process for “truing up” the purchase price after the deal, in Chicago Bridge, the stakes were much higher. The “textbook” purchase price adjustment provision in the Chicago Bridge agreement said that the purchase price was to be adjusted based upon a comparison of closing net working capital to a specified target net working capital amount ($1.174 billion). The seller calculated an estimated closing net working capital amount of approximately $1.601 billion, which would have resulted in a $428 million payment from the buyer. Following the closing, the buyer recalculated closing net working capital as negative $976 million, which would have resulted in a $2.15 billion payment from the seller to the buyer.
How did the gap between the parties become so wide? Here’s an excerpt with the explanation:
The buyer went beyond challenging the underlying calculation and, instead, used its proposed adjustments to challenge whether the seller’s calculations were GAAP compliant. Specifically, based on the facts described in the opinion and pleadings, in three of the four adjustments, the buyer appeared to apply its own, different accounting estimates and judgments to project costs for nuclear plant construction.
The memo uses the Chicago Bridge case as the starting point for a wide-ranging discussion of purchase price adjustment provisions in acquisition agreements, and offers up a number of tips to keep in mind when drafting & negotiating them. Here’s an excerpt on language in the agreement about the consistent application of accounting principles:
The purchase agreement should clarify that a target’s past accounting practices, and the same accounting principles, estimates, judgments, methodologies, policies, and the like—including judgments as to loss and gain contingencies and materiality determinations—used to prepare the target’s financial statements should be respected in calculating the closing statement. Conversely, if representing a buyer, consider permitting use of prior principles only if in compliance with GAAP, and enabling the buyer to correct errors and omissions and to take into account all accounting entries regardless of their amount.
Any accounting formula contained in the purchase agreement should also list its specific components, & refer to line items on a referenced balance sheet or general ledger. The memo points out that referring simply to “net working capital,” “current assets,” “current liabilities,” or similar broad categories creates ambiguity as to what’s in and what’s out of the calculation.
This Wachtell memo discusses the establishment of the “Investor Stewardship Group” – a formidable coalition of institutions that have agreed on stewardship principles to combat activist pressure to focus on short-term results. Here’s an excerpt discussing the principles underlying ISG’s Framework for US Stewardship & Governance:
Focused explicitly on combating short-termism, providing a “framework for promoting long-term value creation for U.S. companies and the broader U.S. economy” and promoting “responsible” engagement, the principles are designed to be independent of proxy advisory firm guidelines and may help disintermediate the proxy advisory firms, traditional activist hedge funds and short-term pressures from dictating corporate governance and corporate strategy.
Importantly, the ISG Framework would operate to hold investors, and not just public companies, to a higher standard, rejecting the scorched-earth activist pressure tactics to which public companies have often been subject, and instead requiring investors to “address and attempt to resolve differences with companies in a constructive and pragmatic manner.” In addition, the ISG Framework emphasizes that asset managers and owners are responsible to their ultimate long-term beneficiaries, especially the millions of individual investors whose retirement and long-term savings are held by these funds, and that proxy voting and engagement guidelines of investors should be designed to protect the interests of these long-term clients and beneficiaries.
The ISG Framework also sets forth a corporate governance framework for public companies. The governance principles incorporated into the ISG Framework include board accountability, proportionate voting rights, independent board leadership and incentive structures that align with long-term strategy.
US institutions that have signed on to ISG’s Framework include BlackRock, Vanguard, State Street, T. Rowe Price, CALSTRs, Florida State Board of Administration & The Washington State Investment Board. Foreign institutions include Singapore’s Sovereign Wealth Fund & The Royal Bank of Canada. Ultimately, ISG seeks to have “every institutional investor and asset management firm investing in the U.S.” sign the framework and incorporate the stewardship principles in their proxy voting, engagement guidelines and practices.
The ISG Framework is intended to apply to the 2018 proxy season, but Wachtell recommends that companies incorporate its themes into their investor communications and benchmark their disclosures and practices to the Framework now.
This Nixon Peabody blog reviews the results of various M&A surveys on anticipated 2017 activity, & predicts that the upcoming year will see a high-level of activity & a more buyer-friendly market – subject to one big uncertainty:
Donald Trump’s election is shaping up to be a wild card for M&A activity in 2017. The key question is whether President Trump’s populist campaign rhetoric will result in economic policies that could have a chilling effect on markets in general, or if the Trump administration will be willing and able to work with the Republican leadership in Congress to advance a more traditional conservative economic policy.
Cuts in corporate tax rates, regulatory rollbacks & infrastructure spending could have a huge, positive impact on M&A – but if Trump & the Washington establishment (both Republicans and Democrats) end up at each other’s throats, a focused pro-business agenda is unlikely to materialize.
Delaware encourages derivative plaintiffs to seek books and records under Section 220 before bringing a lawsuit, but that takes time. A plaintiff in another jurisdiction might simply file a lawsuit right away, and if that suit is dismissed, the dismissal can preclude the Delaware plaintiff– which only gives the Delaware plaintiff less incentive to seek books and records in the first place.
Well, until now. In Cal. State Teachers Ret. Sys. v. Alvarez, (Del. 2017), that exact scenario occurred in the long-running action against Wal-Mart for violations of the foreign corrupt practices act in Mexico. While the Delaware plaintiffs sought books and records to bolster a derivative claim, federal plaintiffs in Arkansas ploughed ahead using public information, only to see their suit dismissed for failure to plead demand futility. And Delaware Chancery concluded that the Arkansas ruling was res judicata against the Delaware plaintiffs.
The Supreme Court expressed concern that constitutional due process required that – until demand futility is established – any single group of plaintiffs represents only their own interests, & not the interests of the corporation. The Court remanded the case back to the Chancery Court to consider the issue that it raised in its order – whether due process prohibits the pre-demand futility dismissal of a derivative claim from being res judicata with respect to subsequent plaintiffs.