Monthly Archives: May 2017

May 31, 2017

Controlling Shareholders & the “Known Looter” Doctrine

Under Delaware law, controlling shareholders are generally free to dispose of their shares as they see fit. This Morris James blog notes that the Chancery Court recently addressed an exception to that general rule in Ford v. VMware (Del. Ch.; 5/17):

Generally speaking, controllers can sell their stock to whoever they want. After all, why be a controller unless you have the right to exercise control free from liability for doing so. But, as this decision points out, there are limits, such as selling to a known looter who in fact ends up looting the company. Along the same lines, directors may be liable for failing to protect the company against a controller’s sale to a known looter.

This excerpt from Vice Chancellor Laster’s opinion lays out the elements of a “known looter” claim :

To state a claim under the “known looter” doctrine, a complaint must allege facts supporting a reasonable inference that the seller (i) knew the buyer was a looter or (ii) was aware of circumstances that would “alert a reasonably prudent person to a risk that his buyer [was] dishonest or in some material respect not truthful.” Harris, 582 A.2d at 235; accord Abraham, 901 A.2d at 758. The complaint also must allege that the buyer subsequently looted the corporation, thereby inflicting injury. Abraham, 901 A.2d at 758. If the feared or threatened looting never occurred, then there is no harm to remedy and no ripe claim to address.

In this case, the Vice Chancellor determined that the derivative plaintiff’s allegations did not state a claim. However, the opinion provides a detailed overview of the “known looter” doctrine and the circumstances under which it may apply to controlling shareholders & directors.

John Jenkins

May 30, 2017

Activism: B Corps Aren’t Immune

This BloombergBusinessWeek artlcle discusses Etsy’s recent travails with activist investors.  Etsy is a “certified B corporation,” which means that it is committed to social responsibility and considers the interests of its workers, communities and the environment in conducting its business. Despite its idealistic goals, Etsy recently learned the hard way that its B corp status does not exempt it from Wall Street’s version of the “Golden Rule” –  as in “the one with the gold makes the rules.”

Led by Seth Wunder of Black-and-White Capital, activist investors have pushed Etsy to improve its performance. The article points out that those efforts came to a rather dramatic head in early May, with the board’s decision to replace CEO Chad Dickerson:

In March, Wunder laid out his thinking in a letter to Etsy’s board requesting a meeting about the declining stock price and “what appears to be a lack of cost discipline at the company.” A second letter, in early April, made reference to a private conversation between Wunder and Fred Wilson, in which Wilson, co-founder of Union Square Ventures and Etsy’s longest-serving board member, had shared a “frank, private opinion” on an unspecified matter.

In early May, just hours before Etsy was slated to report earnings, Wunder went public, releasing the letters on the web and publishing a press release that accused Dickerson and the board of overspending and of failing to take investors’ concerns seriously. It suggested that Etsy drastically cut costs and remove Dickerson as chairman, often a precursor to firing a CEO. It also suggested that Etsy “begin evaluating any and all strategic alternatives for creating shareholder value,” or, in English, consider selling itself.

Hours later, Etsy announced that it was laying off 80 employees—about 8 percent of its staff—and that Dickerson had been fired by the board.

What about Etsy’s B corp status? In order to maintain its certification, Etsy needs to formally reincorporate under a state benefit corporation statute this summer. The article says that even before the events of the past month, that was unlikely to happen.

John Jenkins

May 25, 2017

Antitrust: Will DOJ “Dawn Raids” Become More Common?

The DOJ’s Antitrust Division has traditionally used civil processes (subpoenas & CIDs) to gather evidence. However, this Clifford Chance memo says that 2 recent “dawn raids” may signal a change in tactics:

On May 2, 2017, the DOJ raided the Michigan corporate offices of Perrigo. The Ireland headquartered generic drug manufacturer stated that the inspection was associated with an ongoing investigation regarding drug pricing in the pharmaceutical industry. Just two months earlier, in March 2017, the DOJ raided a meeting in San Francisco of the world’s largest container shipping operators as part of an ongoing investigation into the shipping industry. These mark a decided uptick in the number of antitrust-related dawn raids by the DOJ, which traditionally conducted only a handful every few years.

The memo discusses what to expect with a dawn raid & what to do if you’re on the receiving end of one.

John Jenkins

May 24, 2017

National Security: CFIUS Overview

Potential national security issues that might be raised by a cross-border transaction are becoming matters of increasing concern to dealmakers. This Latham memo provides an overview of CFIUS, the interagency group charged with conducting a national security review of potential deals involving foreign buyers.  Here’s the intro:

This guide provides an overview of the Committee on Foreign Investment in the United States (CFIUS or the Committee) — a US federal, interagency group with authority to review certain foreign investments in US businesses to determine whether such transactions threaten to impair US national security — and the process through which CFIUS reviews proposed transactions subject to its jurisdiction.

Topics covered include CFIUS’s composition & structure, the scope of its jurisdiction, factors to consider in deciding whether to submit a deal for review, the review process, and alternatives for mitigating national security risks identified in the review process.

John Jenkins

May 23, 2017

More Fake News: Fitbit’s “Unreal” Tender Offer

If you’re a regular reader of “ Blog,” you know that nothing excites me more than when someone fools the SEC’s Edgar & makes a fake filing! A little drool perhaps. Plug the term “fake” into the search box of that blog & you’ll see plenty of fake filings coverage.

The latest involves the filing of a fake Schedule TO-C, making it look like Fitbit was in play (here’s an article from back when that happened). The SEC brought a civil case; the DOJ brought a criminal one. And this dude went through all this trouble – and got into so much trouble – for a measly $3k in profit! Dummy.

Here’s an excerpt from the SEC’s press release:

According to the SEC’s complaint, Robert W. Murray purchased Fitbit call options just minutes before a fake tender offer that he orchestrated was filed on the SEC’s EDGAR system purporting that a company named ABM Capital LTD sought to acquire Fitbit’s outstanding shares at a substantial premium. Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Murray sold all of his options for a profit of approximately $3,100.

The SEC alleges that Murray created an email account under the name of someone he found on the internet, and the email account was used to gain access to the EDGAR system. Murray then allegedly listed that person as the CFO of ABM Capital and used a business address associated with that person in the fake filing. The SEC also alleges that Murray attempted to conceal his identity and actual location at the time of the filing after conducting research into prior SEC cases that highlighted the IP addresses the false filers used to submit forms on EDGAR. According to the SEC’s complaint, it appeared as though the system was being accessed from a different state by using an IP address registered to a company located in Napa, California.

Broc Romanek

May 22, 2017

Appraisal Rights: Chancery Clarifies Basis for “Quasi-Appraisal”

Earlier this month, in In re Cyan Stockholders Litigation, Delaware Chancellor Bouchard dismissed post-merger fiduciary duty and quasi-appraisal claims arising out of Ciena’s 2015 acquisition of Cyan in a primarily stock-for-stock transaction.

As this Wilson Sonsini memo notes, the Chancellor rejected the plaintiffs’ fiduciary duty claims based on fully-informed, un-coerced shareholder approval of the deal.  He also declined to endorse the use of a “quasi-appraisal” claim as an end-run around applicable limits on duty of care claims:

Because the court had already rejected the plaintiffs’ disclosure claims and concluded that the plaintiffs failed to allege a non-exculpated breach of fiduciary duty, Count Two was barred by Cyan’s exculpatory charter provision adopted pursuant to Section 102(b)(7). The court held, “When the cause of action supporting plaintiffs’ request for a quasi-appraisal remedy is for breach of a fiduciary duty, plaintiffs cannot circumvent the protection afforded in Cyan’s certificate of incorporation through artful pleading.”

The memo also points out that the decision shows that post-closing disclosure claims require plaintiffs to identify material omissions, and not “laundry lists of disclosure violations that aren’t material or that are of the ‘tell me more’ variety.”

John Jenkins

May 19, 2017

Proxy Advisors: Shareholders Approve Deal Despite “No” From ISS

This Wachtell memo discusses the recent shareholder vote on the pending merger between US-based PrivateBancorp & Canada’s CIBC – which received support from over 80% of PrivateBancorp’s shareholders despite a negative recommendation from ISS.

The deal’s path to a vote was disrupted by the spike in US bank stocks following the election. Canadian bank stocks didn’t experience a comparable rise in price.  Since the deal had a large stock component, its value took a hit. This resulted in a decision to delay the vote, prompted further discussions between the parties and extensive shareholder engagement.  Negotiations resulted in two price increases that improved the merger’s value substantially before it was ultimately presented to shareholders.

The memo discusses these efforts to address the impact of stock market volatility on the deal – and throws some shade at ISS:

Conventional wisdom would hold that a proxy adviser observing a deliberate and lengthy Board process, two price bumps, no competing offer and a market that trades at a customary discount would promptly recommend the deal.

That is exactly what occurred with two competitor firms, Glass Lewis and Egan Jones. On the contrary, ISS decided to play fundamental financial analyst and substituted its judgment for that of the Board and an efficient market, based on speculation about tax reform, the future value of U.S. regional bank stocks and the housing market in Canada. Notably, in coming up with its radical recommendation ISS did not engage with PrivateBancorp after the second price increase, and declined offers from senior executives of CIBC to speak about their company and the Canadian markets. A fundamentally flawed process leads to a flawed result.

The memo also notes that many institutions that typically follow ISS opted to reject its recommendation and vote in favor of the merger.

John Jenkins

May 18, 2017

Due Diligence: Key M&A Cybersecurity Issues

Cybersecurity is becoming an increasingly important part of M&A due diligence, & this Skadden memo provides guidance about key cyber-related issues to consider as part of the due diligence process.  This excerpt discusses evaluating a target company’s network security:

If the target has never engaged a third-party forensic firm to conduct vulnerability assessments and penetration testing — a scenario that is becoming less common in many industries — the acquirer may want to retain a firm to undertake its own testing on the target company’s network and perhaps even conduct searches on the dark web (the part of the internet that may only be reached with anonymization tools and where many hackers sell their spoils) to see whether the target’s customer data or intellectual property is already compromised and available for sale. The acquirer should be aware,however, that the target will likely opt to conduct its own testing and provide a report rather than allow the acquirer to do so.

In an extreme scenario, the diligence investigation may uncover hackers lurking in the target company’s network, but more likely the result will be a risk calculation based on the target company’s governance and the administrative, technical and physical information security controls it uses to protect digital assets.

Other areas addressed in the memo include the target’s compliance with industry standards for cybersecurity, the use of deal terms to both verify the target’s statements about its cybersecurity and to allocate liability risks, and the role of due diligence in obtaining cyber-risk insurance on favorable terms.

John Jenkins

May 17, 2017

Post-Merger Standing: Chancery Court Dismisses “Viable” Caremark Claim

Breaches of a director’s oversight responsibilities implicate the duty of loyalty, but these so-called “Caremark” claims are notoriously difficult to make. This Paul Weiss memo reviews In re Massey Energy Company (Del. Ch.; 5/17), where Chancellor Bouchard said that the plaintiffs made a viable Caremark claim against the company’s directors – but held that they lacked standing due to the company’s merger with a buyer.

The case arose out of the worst US mining disaster in 40 years, in which 29 Massey employees lost their lives. Governmental investigations established that the incident resulted directly from Massey’s willful & systematic violations of safety rules. Several company executives – including its former Chairman & CEO – were convicted of criminal wrongdoing.

Massey was acquired shortly thereafter, and the shareholder plaintiffs filed a derivative action. The memo notes that while Chancellor Bouchard believed the shareholders stated a Caremark claim, they no longer had standing to bring it:

It is well-settled Delaware law that, subject to two limited exceptions, under the so-called “continuous ownership rule,” shareholders of Delaware corporations must hold shares not only at the time of the alleged wrong, but continuously thereafter throughout the litigation in order to have standing to maintain derivative claims, and will lose standing when their status as shareholders is terminated as a result of the merger.  Here, the plaintiffs lost their shares as a result of the Massey-Alpha merger, and therefore lost standing to bring their derivative claim.

A Caremark claim requires the plaintiff to show a conscious failure to act on the part of directors after being alerted to “red flags” of illegal conduct.  It has been called “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Despite its ultimate outcome, this case is worth reading as an illustration of the kind of egregious conduct that is necessary to make a viable Caremark claim.

John Jenkins

May 16, 2017

May-June Issue: Deal Lawyers Print Newsletter

This May-June Issue of the Deal Lawyers print newsletter includes (try a no-risk trial):

– Tax Reform: Transaction Strategies for Uncertain Times
– Coming to Grips With Appraisal
– Purchase Price Adjustments for Tax Benefits

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 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 will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – 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.

John Jenkins