This Cleary memo recapping its recent “M&A, Antitrust & the Board Room in 2017” event included a discussion of director independence issues in light of Sandys v. Pincus and identified the following practice points for assessing independence:
– At least annually, have directors complete questionnaires drafted in manner that is sufficient to permit an objective assessment of director independence, and consider re-circulating these questionnaires off-cycle if the company has a material transaction on the horizon.
– If these questionnaires reveal relationships and interests that may implicate independence, the inhouse legal department should be asking follow up questions to determine more information about these relationships and interests. It will be important to be obtain information that will permit the board’s evaluation of independence to be sensitive to nuances – e.g., going golfing a few times a year is a different relationship than renting vacation homes together.
– Expect plaintiffs’ counsel to use internet search engines to check for indicia of a lack of independence. Corporations should do the same as a secondary way to check whether directors have relationships and interests that merit further consideration.
– Be willing to have hard conversations with people who have been on the board together a long time to determine whether they can still be independent.
– Consider whether it might be appropriate to set up a standing litigation committee consisting of independent directors to avoid the situation faced in Sandys v. Pincus.
– John Jenkins
This blog from Kevin LaCroix at The D&O Diary summarizes a recent study examining the impact of the significant changes in Delaware’s approach to merger litigation over the past two years. That study says the results have been dramatic:
The impact of the Delaware’s legislative and judicial actions has been to decrease the volume of merger litigation; to increase the number of cases that are dismissed; to shift the number of cases that are filed from Delaware’s courts to other states’ courts and to federal courts, and to reduce the size of attorneys’ fee awards.
The authors found that “the 2016 filing numbers show the immediate impact of Trulia and its cohort.” The authors found while merger objection transaction litigation peaked in 2013 with an “astounding” 96% of all transactions attracting at least one lawsuit, the number of deals attracting litigation has dropped since then. In 2016, the number of transactions attracting at least one lawsuit fell to 73% of all completed deals.
Perhaps even more significantly, the number of deals attracting a lawsuit in Delaware fell from 61% in 2015 to 32% in 2016.
The decline in Delaware lawsuit filings has been mirrored by a dramatic increase in filings in other states – these filings increased from 51% in 2015 to 65% in 2016. Federal court filings also saw a jump – growing from 20% of filings in 2015 to 37% of filings in 2016.
Kevin summarizes a number of other findings from the study – perhaps the most striking of which is the decline in Delaware settlements over the past two years:
The analysis shows that these Delaware settlements represented only 5% of all settlements in 2016, compared to 55% in 2014 and 40% in 2015. This drop, the authors suggest, shows that “plaintiffs’ attorneys are avoiding Delaware for their settlements and dispositive litigation.”
The long-term effects of the shift in Delaware’s approach to merger litigation remains uncertain – but it is clear that in the short-term at least, plaintiffs have proven themselves adaptable and able to respond quickly to changes in the litigation environment.
– John Jenkins
This Richards Layton memo reviews this year’s proposed amendments to the Delaware General Corporation Law. Here’s the intro:
Legislation proposing to amend the General Corporation Law of the State of Delaware (the “DGCL”) has been released by the Corporate Council of the Corporation Law Section of the Delaware State Bar Association and, if approved by the Corporation Law Section, is expected to be introduced to the Delaware General Assembly.
If enacted, the amendments will, among other things, (i) provide statutory authority for the use of “blockchain” or “distributed ledger” technology for the administration of corporate records, (ii) dispense with the requirement that stockholder consents be individually dated, thereby eliminating a common “foot fault” for the validity of stockholder consents, (iii) update and harmonize the various provisions of the DGCL dealing with the authorization and accomplishment of mergers and consolidations involving different types and forms of entities, and (iv) make other clarifying technical changes.
– John Jenkins
This Sheppard Mullin blog discusses the Chancery Court’s recent decision in Wiengarten v. Monster Worldwide – which held that the language of Section 220(c) of the DGCL does not provide a stockholder with inspection rights following cancellation of the stockholder’s shares in a merger. This excerpt summarizes the court’s analysis:
Section 220(c) requires that that the stockholder establish that “(1) such stockholder is a stockholder; (2) such stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents; and (3) the inspection is for a proper purpose.” If the stockholder can establish those three things, then the corporation has the burden to show the purpose was not proper in order to prevent inspection of the books and records.
In construing the statute, the Court hewed closely to the plain meaning of the text to “give effect to the expressed intent of the legislature.” The Court first agreed that petitioner had satisfied the Section 220(b) requirement, permitting him to seek relief under Section 220(c). However, the Court found that Weingarten could not meet the requirements of 220(c). Calling the language of the statute “plain and unambiguous,” the Court emphasized that the statute requires a plaintiff “to demonstrate that it ‘has’ — past tense — complied with the demand requirement and ‘is’ a stockholder . . . .”
The Court concluded through the use of past and present tense, the legislature “made clear” that only stockholders at the time of filing have standing to pursue a Section 220(c) action. The Court then distinguished cases where a plaintiff loses his or her stock in a merger during the pendency of the action, pointing out that at the time of filing, unlike here, such plaintiffs were then-present stockholders. Because petitioner was not a stockholder as defined by Section 220 when he commenced his action, he did not have standing.
– John Jenkins
According to this CNBC article, Leo Strine – Delaware’s “secretly powerful” Chief Justice – says that hedge funds are “wolves” who damage ordinary investors. Here’s an excerpt:
Strine’s main argument is that the “current corporate governance system … gives the most voice and the most power to those whose perspectives and incentives are least aligned with that of ordinary Americans.”
That has allowed such investors to act and manipulate decisions by corporations that often are not in the long-term best interest of average shareholders, he said. He points to the “continuing creep toward direct stock market control of public corporations,” which he says bears no accountability toward human investors.
Strine’s ideas are laid out in an upcoming Yale Law Journal article, and are consistent with his prior writings expressing concern about whether financial intermediaries appropriately represent the interests of the people whose money they invest.
The Chief Justice’s hedge fund critics have responded to his most recent volley by saying that a justice should not be on the record “condemning a group of people who tend to litigate in his court and the lower Delaware courts,” and that he doesn’t offer much in terms of a fix for what he sees as a flawed system. None of these critics would agree to be quoted – “fearing retribution from Strine.”
Strine doesn’t condemn all hedge funds – his argument is a little more nuanced than that, and focuses on the need to take consider the impact of short-term activist strategies on the lives of the human beings institutions purport to represent. He also speaks well of an alternative approach that at least one leading hedge fund has already adopted:
Evidence suggests that hedge fund activism is perhaps most valuable when it involves a somewhat rougher form of relationship investing of the kind for which Warren Buffet is known. The activist may need to knock a bit loudly, but once let in, assumes the duties and economic consequences of becoming a genuine fiduciary with duties to other stockholders and of holding its position for a period of five to ten years, during which it is a constructive participant in helping the rest of the board and management improve a lagging company. Nelson Peltz and his Trian Fund Management might be thought of in this manner.
Chief Justice Strine’s an intimidating guy – but he’s hardly the first Delaware judge to use his position as a “bully pulpit.” Members of the Chancery Court have often written and spoken outside of the courtroom during their tenure – including current Vice Chancellor Travis Laster & former Chancellor William Allen. That’s just how they roll in Delaware. Other litigants don’t appear to have been too daunted by the scholarship of these “secretly powerful” figures.
– John Jenkins
After a DC federal court blocked the proposed merger between health insurance giants Cigna & Anthem, Cigna gave notice of termination of the merger agreement and filed a declaratory judgment action in the Delaware Chancery Court seeking a determination that its termination of the deal was lawful. Cigna is also seeking payment of a $1.85 billion reverse termination fee and $13 billion in damages to its stockholders resulting from Anthem’s alleged breaches of the merger agreement.
This Gibson Dunn memo discusses the case and some of lessons about termination fees & their interplay with contractual termination rights that can already be drawn from it. Here are some of the memo’s conclusions:
– Exceptions to a termination fee for “willful breach” can easily lead to litigation, regardless of how “willful breach” is defined. This diminishes the utility of the termination fee, which is often included to minimize the possibility of litigation.
– If a willful breach exception is included, it is a good idea to include a specific definition of willful breach.
– If a willful breach exception is included, consider adding provisions that encourage the parties to take the termination fee, rather than suing for damages. For example, consider providing that (a) a party is not entitled to recover both the termination fee and also damages on top of the fee, (b) if a party sues for damages, that party cannot later recover the termination fee if its lawsuit is unsuccessful, and (c) the loser pays the winner’s legal fees in any suit for damages.
– Provisions that condition a party’s right to terminate on that party’s compliance with its covenants can inject significant uncertainty as to whether or not a party actually has the right to terminate. Thus, consider whether it is preferable to allow the parties to terminate (even if in breach), and then sue each other for damages post termination. Such a construct would not avoid litigation, but would avoid the uncertainty as to whether or not the parties were still obligated to complete the transaction.
– John Jenkins
This Akin Gump memo addresses recent action by CFIUS that effectively ended US based lighting & semiconductor maker Cree’s proposed sale of a division to a German company. Cree terminated the $850 million deal shortly after announcing that CFIUS raised objections to the deal & that the parties were working to address them.
The memo speculates that it was concerns over the Cree division’s silicon carbide technology – which is used in compound semiconductors – that may have prompted CFIUS to act. Other deals involving similar technology have also received a “thumbs down” from CFIUS. Here’s an excerpt summarizing the conclusions to be drawn from this most recent action:
This transaction highlights CFIUS’ focus on deals involving sensitive technology, particularly in the semiconductor sector. Since 2016, CFIUS or the President has effectively blocked a number of other transactions in the semiconductor industry involving Chinese buyers, including Aixtron-Fujian Grand Chip, GCS-San’an and Lumileds-GO Scale. With this latest outcome, CFIUS has indicated that these potential national security concerns are not limited to Chinese buyers and can arise in transactions with companies from closely allied countries.
– John Jenkins
This Cooley M&A blog is part of a series addressing M&A trends for 2017. It focuses on public company sellers’ heightened concerns about certainty during periods of regulatory & economic uncertainty. Here’s an excerpt discussing what those concerns may mean for 2017 deals:
Defining what constitutes a “material adverse change” that will let a buyer walk away from a signed deal may be subject to more negotiation than ever before. In addition to the “no MAC” out, parties are likely to focus on antitrust or other covenants relating to a party’s required efforts to obtain regulatory approvals, including through litigation and other affirmative “fix” obligations such as divestiture. Termination rights (and fees) tied to a party’s inability to obtain required approvals will also likely be more tailored and scrutinized.
Parties should pay more attention to these deal certainty provisions, particularly if potential changes in laws or regulations could undermine the economic rationale for the transaction.
The M&A Law Prof Blog discusses the growth of appraisal litigation in recent years as a result of both appraisal arbitrage & cases like Corwin that make it increasingly difficult to obtain a damages remedy for fiduciary duty claims. As a result, the stakes in appraisal cases have become higher – and in its review of Chancellor Bouchard’s DFC Global decision, the Delaware Supreme Court may soon decide how to approach determining “fair value” in appraisal proceedings.
Since the Court’s decision may strongly influence the direction of deal litigation for years to come, it’s attracted a lot of interest – not just from practitioners, but from some of the nation’s top academics. Here’s an excerpt:
In the last couple of years, at the Chancery Court, chancellors have started moving away from the view that the court will determine fair value without regard to the merger price. Now, in certain circumstances (where the deal price is a product of a competitive or robust sales price) chancellors may consider merger price as one of the relevant factors for purposes of determining fair value.
Now this question has found its way to the Delaware Supreme Court and the parties are lining up on both sides. There are even amici! Two sets of amici have rolled up: on the one side there are law professors arguing that the court should be able to presumptively rely on merger price to determine fair value in an appraisal proceeding unless that price does not result from arm’s length bargaining (DFC Holdings – Bainbridge, et al). On the other are law professors arguing requiring a court to rely on merger price to determine fair value would run counter to the language of the statutory appraisal remedy and also not always reflect fair value (DFC Holdings – Talley, et al).
– John Jenkins
Last month, I blogged about the SEC’s recent enforcement action against CVR Energy. That proceeding focused on the level of detail provided by CVR Energy about the circumstances under which a success fee could become payable to its financial advisor. This Dechert memo reviews the CVR Energy proceeding & recent Delaware case law – and notes a trend toward insisting on more details about investment banker fees and conflicts.
Here’s an excerpt summarizing the memo’s highlights:
– CVR Energy allegedly violated the tender offer rules by failing to properly disclose all material terms of its arrangements with investment banks advising CVR in connection with a hostile tender offer. Potential conflicts of interest that arose from the fee structure were not disclosed to CVR shareholders, including that the financial advisors could receive sizable “success” fees even if the hostile bidder prevailed despite the rejection of the offer by the CVR board.
– This enforcement action follows recent guidance by the SEC Staff that general disclosure that financial advisors are entitled to “customary fees” is usually insufficient and that disclosure should typically include a discussion of the fee structure, including the types of fees and circumstances that will trigger payment of the fees.
– These developments are consistent with a general trend in Delaware case law to require more specific disclosure of financial advisor fees, conflicts and other arrangements in M&A transactions.
– John Jenkins