I blogged last week about the Chancery’s decision in In re Xura Stockholders Litigation, (Del. Ch.; 12/18) in which the court held that the filing of an appraisal action didn’t preclude the plaintiffs from bringing fiduciary duty claims. As I mentioned in that blog, there’s a lot going on in the Xura case – and I want to circle back to how the court handled aiding & abetting claims brought against the buyer.
Last year, I blogged about an unusual situation in which an activist investor found itself liable for aiding & abetting its designated director’s breach of fiduciary duty. That decision notwithstanding, aiding & abetting claims remain mighty tough to prevail on in Delaware – and Xura illustrates just how high a mountain plaintiffs have to climb to make these claims.
In Xura, Vice Chancellor Slights denied the target CEO’s motion to dismiss breach of fiduciary duty claims premised on allegations that he tilted the playing field in favor of the private equity buyer that promised to retain him after the deal – while at the same time knowing that his head was potentially on the chopping block in the absence of a deal. However, the Vice Chancellor dismissed aiding & abetting claims against the buyer.
As this recent Cleary Gottlieb blog discussing the case points out, VC Slights dismissed the aiding & abetting claim notwithstanding a whole lot of “footsie” between the PE buyer & the target’s CEO:
Vice Chancellor Slights dismissed the plaintiff’s aiding and abetting claim against Siris, finding that the plaintiff failed to adequately allege that the acquiror knowingly participated in the breaches of fiduciary duty by Xura’s CEO. As noted above, the court reached this conclusion even though plaintiff alleged that (1) the acquiror knew the target CEO was favoring it over other potential bidders (because the complaint did not separately allege that the acquiror knew of the target CEO’s conflicted interests given his job situation); (2) the acquiror knew the target CEO was ignoring the target’s banker’s request to be included in communications with the acquiror (because the acquiror did not know that the target CEO’s refusal to include the financial advisor in such communications constituted a breach of fiduciary duty); and (3) the acquiror knew that the target was failing to disclose material information to its stockholders (because the acquiror did not facilitate those omissions).
The Vice Chancellor’s decision on this issue seemed to turn on the fact that while the buyer was aware of the laundry list of shenanigans laid out in the blog, there was no evidence that the CEO told the buyer that “he was in danger of losing his job if the Transaction fell through or that he was motivated to steer Xura into the Transaction for self-interested reasons.” As a result, the plaintiff couldn’t establish that the buyer “knowingly participated” in the breach.
Last year was action-packed when it came to developments relating to national security review of M&A. Several major transactions were scuttled due to national security concerns, and the enactment of FIRRMA and the implementation of a pilot program under the new statute dramatically enhanced CFIUS’ reach & the compliance burden that companies face.
So what’s next on the horizon? This Wilson Sonsini memo reviews CFIUS’ past & present, and provides some insights into coming attractions. This excerpt discusses the Commerce Department’s efforts to identify “emerging technologies” & the implications of that process for CFIUS review:
Most immediately, the Department of Commerce has initiated a process to designate “emerging technologies.” That process is important in the CFIUS context because “emerging technologies” is a subcategory of “critical technologies.” Foreign investments in any technology designated as an “emerging technology” (and therefore a type of “critical technology”) could trigger a mandatory CFIUS filing under the pilot program described above, and presumably under the final rules that will replace the pilot program.
The Commerce Department has requested input from the public on the effects of classifying technologies in 14 different categories, such as:
While this initial request for comments is only the first stage in developing a list of the “emerging technologies,” it is very likely that this process will result in far more transactions triggering mandatory CFIUS filings.
– Cross-Border Carve-Out Transactions
– The Odd Couple: Indemnification and R&W Insurance
– Fairness Opinions: How to Avoid Provider Conflicts
– Standards of Review: When the Controlling Shareholder Isn’t a Buyer
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Filing an appraisal action doesn’t necessarily put the kibosh on a shareholder’s ability to assert a fiduciary duty claim – or at least that’s what the Delaware Chancery Court held in In re Xura Stockholder Litigation(Del. Ch.; 12/18). Here’s an excerpt from this Shearman & Sterling blog summarizing Vice Chancellor Slights’ decision:
Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
Discovery conducted after filing the appraisal action led the plaintiff to assert the breach of fiduciary duty claim against the CEO. In upholding the plaintiff’s ability to make the claim, VC Slights distinguished the case from then Vice Chancellor Strine’s decision in In re Appraisal of Aristotle, (Del. Ch.; 1/12) – in which the Court refused to permit a plaintiff to tack on a disclosure-based fiduciary duty claim late in the appraisal process.
In Aristotle, VC Strine said that the plaintiff sought a quasi-appraisal remedy for its disclosure claim – which would provide it with the same relief as the underlying appraisal action. In contrast, VC Slights noted that the plaintiffs in Xura sought more traditional post-closing remedies for the alleged conflict-based breach, including rescissory damages and disgorgement. He concluded that Delaware law conferred standing on the plaintiff to bring both claims.
There’s a lot going on in this case – and I’ll blog about another aspect of it next week.
Among its many other dubious achievements, the government shutdown has thrown a monkey wrench into a lot of pending deals. Broc’s blogged several times about the shutdown’s impact on the SEC’s operations over on TheCorporateCounsel.net (here’s his most recent). Unfortunately, the SEC isn’t the only game in town – and the limited operations of other federal agencies during the pendency of our annual national dumpster fire are also causing headaches for dealmakers.
This Fried Frank memo addresses how federal agencies are being affected by the shutdown & what that may mean for your transaction. This excerpt deals with the antitrust regulators – and says that you may see more HSR second requests & can forget about early termination of your waiting period for the time being:
The Federal Trade Commission and the Department of Justice are continuing to accept Hart-Scott-Rodino filings during the shutdown. The applicable statutory HSR waiting periods will run, but early termination of the waiting period will not be granted during the shutdown. Second requests will continue to be issued. The agencies will perform certain critical functions with respect to time sensitive investigations and (if timing extensions or suspensions cannot be negotiated) pending litigation or new cases that “must be filed due to [HSR] or statute of limitations deadlines.”
Given the limited agency staff working during the shutdown, parties should expect delays. In particular, there may be additional need to pull and refile HSR filings to allow the agencies additional time to conduct preliminary reviews, with the goal of avoiding or narrowing the scope of in-depth Second Request investigations. In addition, resource constraints may prompt the agencies to issue more Second Requests than otherwise in order to allow additional time to complete their investigations. For transactions that present no substantive antitrust issues, without the possibility of early termination, parties will need to endure the full statutory waiting period (30 days for most transactions)
That’s nice. Anyway, the memo also touches on how the shutdown’s impacted the operations of other regulators you may interact with – including the SEC, FCC, CFIUS & bank regulators – as well as the federal courts.
With the explosive growth in Rep & Warranty insurance, people sometimes overlook the fact that D&O policies often come into play when dealing with claims arising out of a deal. This Woodruff Sawyer blog discusses the role that both types of coverage play in protecting a seller and its directors. This excerpt highlights a situation where the D&O policy provides a critical backstop to an R&W policy:
The predicate of this scenario is a serious breach of a representation given by the seller to the buyer.
It could be argued that some breaches of representations are the result of a lack of board-level oversight or even a pervasive cultural issue perpetrated by the board. Let’s say the board is revealed to have put pressure on managers to find the “cheapest” way to dump toxic waste; and that “cheapest way” was to just throw it in the sea. Could this action by the board also result in a claim under the sellers D&O policy?
First, one should expect the breach of the representation itself will inspire the buyer to sue the seller for the breach if not for actual fraud on the seller’s part. This difficult circumstance is actually fairly common, which is why an RWI policy is so useful. It’s also why the calibration of the limit and scope of the RWI policy is so important. The RWI policy is designed to respond in this situation and in the best case has been structured so that the buyer remains whole notwithstanding the breach. Put differently, up until the RWI policy is exhausted the buyer had not experienced any loss, making a suit against the seller’s directors and officers by the buyer unlikely.
However, let’s say the breach is so terrible that the RWI policy’s limit is exhausted without making the buyer whole. In this case the buyer might decide to sue the seller and the seller’s directors and officers. If the buyer sues the seller’s directors and officers for fraud, typically the seller’s D&O insurance to respond. If the regulators become involved as a result of the fraud and there is risk of fines or criminal prosecution against the seller’s directors and officers, it is likely that the seller’s D&O insurance policy will respond, particularly for the cost of an individual director’s or officer’s legal defense.
The blog points out that this kind of claim might well be brought after the seller’s D&O policy has expired – and illustrates the importance of purchasing tail D&O coverage to protect the seller’s directors from post-closing claims.
Section 14(e) is the Williams Act’s general anti-fraud provision, and prohibits misstatements or omissions in connection with tender offers. Last year, in Varjabedian v. Emulex, the 9th Circuit split with the other circuits that had addressed the issue & held that 14(e) liability may be based on negligence. Last week, the SCOTUS granted cert in the case – and this Wachtell memo says its decision could be an important one for M&A practitioners:
Emulex exemplifies a trend apparent since Delaware’s crackdown on the disclosure settlement racket: Deal disclosure cases have flooded into other states and into federal court. In deals involving tender offers, the legal vehicle of choice has been Section 14(e). If the Ninth Circuit’s decision endorsing a negligence standard is allowed to stand, the ongoing flood of tender-offer disclosure cases in to the federal courts could become a deluge. But if it is reversed, and depending on how, that flood could be slowed—or altogether stemmed.
This Wachtell memo provides an overview of the “state of play” for shareholder activism as of the end of 2018. The memo notes that the threat of activism remains high – and is a global phenomenon. Here are some of the other key takeaways:
– Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad. In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions.
– While the robust M&A environment of much of 2018 has recently subsided, deal-related activism remains prevalent, with activists instigating deal activity, challenging announced transactions (e.g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
– “Short” activists, who seek to profit from a decline in the target’s market value, remain highly aggressive in both the equity and corporate debt markets. In debt markets, we have also recently seen a rise in “default activism,” where investors purchase debt on the theory that a borrower is already in default and then actively seek to enforce that default in a manner by which they stand to profit.
While the memo says that there has been interest among institutional investors in initiatives to develop a governance framework focusing on creating long-term value and fighting short-termism, it also says that until such a framework is widely adopted, a decrease in activism is unlikely.
Speaking of a new governance framework, Wachtell recently updated its “New Paradigm” for corporate governance that the firm originally prepared in 2016 for the World Economic Forum.
The Delaware Court of Chancery, in Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), has declared “ineffective and invalid” provisions in three corporations’ certificates of incorporation that purported “to require any claim under the Securities Act of 1933 to be brought in federal court.” Ruling on cross-motions for summary judgment, the Court, by Vice Chancellor Laster, ruled that “[t]he constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law. In this case, the federal forum provisions attempt to accomplish that feat. They are therefore ineffective and invalid.”
Happy New Year everybody – and thanks for reading. I recently watched the 1976 film “Network” again, and like many others, I was struck by how prescient it was. For instance, I was reminded of the movie when I read this article in last Friday’s WSJ – which talks about antitrust regulators’ increasing concerns about mega-M&A deals creating “monopsony power” through the sheer scale of the companies involved.
As this excerpt explains, these rising concerns about monopsonies may result in a significant shift in the way regulators both in the US & abroad approach merger review when it comes to mega-deals:
Regulators are increasingly focusing on the power that these companies have over their workers and suppliers, and companies appear to be aware of the risk. This helps explain big wage increases this year by Walmart and Amazon, which boosted its minimum hourly rate to $15, following criticism that the retail giants use their scale to give staff a raw deal.
Both the Justice Department and the Federal Trade Commission are now looking more at labor issues in merger cases, according to David Wales, antitrust partner at Skadden, Arps, Slate, Meagher & Flom in Washington, D.C. “It has come up in a couple of pending investigations where the staff has asked the parties to answer questions about the impact of the merger on labor,” Mr. Wales said, adding this is the first time he’s seen this happen.
The main concern in antitrust cases has long been the impact of a deal on consumers. If there’s not evidence suggesting that prices will rise, then there typically hasn’t been much regulatory concern. In other words, the focus has been on the impact of a dominant seller (monopoly) and not a dominant buyer (monopsony).
But the size of today’s mega-corporations has resulted in growing concerns about monopsony power. Some have derided this new approach as “hipster antitrust,” but the article says that it is “a leading theme of the Federal Trade Commission’s current hearings on whether antitrust practice is working.” It also points out that hearings like these are rare – they last were held back in the mid-1990s.
Now, this is where Network comes in – because as Ned Beatty’s character Arthur Jensen so eloquently argued, one person’s monopsony is another’s beneficent “vast ecumenical holding company”:
“The world is a business, Mr Beale. It has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that … perfect … world in which there is no war nor famine, oppression or brutality. One vast and ecumenical holding company for whom all men will work to serve a common profit. In which all men will hold a share of stock. All necessities provided. All anxieties tranquilized. All boredom amused.”
Well, that’s one point of view. Anyway, here’s a pro tip: if you get caught up in merger review based on concerns about monopsony power, quoting Arthur Jensen to the DOJ or FTC is not likely your best play.