In In re TerraForm Power, Inc. Stockholder Litigation, (Del. Ch.; 10/20), the Chancery Court refused to dismiss claims alleging that a company’s board & controlling shareholder breached their fiduciary duties by engaging in a private placement of stock to the controller at an inadequate price.
The plaintiffs’ allegations arose out of the company’s issuance of stock to the controlling stockholder in a private placement. The offering was conducted in order to finance an acquisition proposed by the controller, and was allegedly underpriced. The controller’s ownership interest in the company increased from 51% to just over 65% as a result of the transaction. The plaintiffs were minority shareholders and originally asserted both direct & derivative claims, but the derivative claims were dismissed after the controlling shareholder acquired the company’s remaining shares in a merger.
Vice Chancellor Glasscock’s decision in this case addressed the direct claims. This excerpt from a recent Shearman blog on the case discusses his reasoning:
The Delaware Supreme Court’s decision in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), generally sets the framework for distinguishing between “derivative” and “direct” claims. That decision held that the determination “must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” In order to plead a “direct” claim under Tooley, a “stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”
Thus, as Vice Chancellor Glasscock explained, claims that the corporation improperly transferred value to a third party are “not regarded as direct” because the dilution of value of the corporation’s stock “merely” reflects the “reduction in the value” of the entire corporation itself.
According to the Vice Chancellor, “[t]his rationale extends even where a controlling stockholder allegedly causes a corporate overpayment [to itself] in stock and consequent dilution of the minority interest.” This is because “the worth of the stockholder’s interest is reduced to the extent the entity was harmed.” In other words, “[t]he harm is suffered by the entity, and restoring value to the entity would make both it and, derivatively, its stockholders, whole.” Therefore, under the “classic” Tooley framework, the claims alleged by plaintiffs in this case would be “derivative”—rather than “direct”—and thus subject to dismissal for lack of standing.
Nevertheless, the Vice Chancellor denied the motion to dismiss because the Delaware Supreme Court upheld nearly identical claims in Gentile, which was decided two years after Tooley. Specifically, in Gentile, the Delaware Supreme Court found that breach of fiduciary duty claims for the alleged issuance of stock to a controlling stockholder for inadequate value could be maintained by former stockholders as “direct” claims even though they no longer had standing to assert “derivative” claims.
The Vice Chancellor Glasscock noted that Gentile v. Rossette has been subject to a great deal of criticism, but said that as a trial court judge, he was bound by the Delaware Supreme Court’s precedent & that, as such, Gentile required him to conclude that the direct claims in this case must survive the motion to dismiss.
But that may not be the end of the standing issue in this case. That’s because the Vice Chancellor followed up his opinion with a letter opinion granting a motion for an interlocutory appeal to the Delaware Supreme Court. As this excerpt notes, the issue to be addressed in the appeal is whether Gentile continues to be good law:
Again, in light of case law questioning the continued vitality of Gentile at the trial court level, and in light of criticism at the Supreme Court level, I find it in the interest of justice that the matter be available for review by the Supreme Court at this Motion to Dismiss stage.
Part of the fallout from the pandemic has been an acceleration of a global trend toward tighter regulation of foreign direct investments. This Simpson Thacher memo highlights the latest example of this trend – pending legislation in the U.K. that would ratchet up that nation’s regulatory scrutiny of FDI. Here’s the intro:
On November 11, 2020, the Parliament of the United Kingdom (“U.K.”) introduced the National Security and Investment Bill of 2020 (the “NSI Bill”) to modernize the U.K.’s foreign direct investment (“FDI”) screening process and strengthen its ability to investigate and intervene in transactions targeting U.K. businesses. The NSI Bill imposes mandatory notification requirements to the U.K. Department of Business, Energy and Industrial Strategy (“BEIS”) for transactions involving investments in U.K. businesses operating in certain strategic sectors, a regime that will apply to investors from any foreign country.
In the broader context, the NSI Bill is reflective of a global trend of tightening FDI screening in many major economies, including the United States, European Union member states, and Australia, among others. Particularly in the era of COVID-19, numerous countries around the world have implemented or expanded national security-focused FDI regimes designed to protect domestic businesses involved in sectors affecting national security and public order. International investors, including private equity sponsors and multi-national corporations engaged in cross-border transactions, should consider and analyze as part of their routine transaction diligence the plethora of new obligations arising pursuant to these changes, and in particular, the forthcoming rules in the United Kingdom.
Chancellor Bouchard’s recent decision in In re Baker Hughes Inc. Merger Litigation, (Del. Ch.; 10/20), illustrates the potential hazards faced by corporate officers due to the fact that, under Delaware law, exculpatory charter provisions apply to directors only. In this case, that resulted in the target’s CEO being the sole remaining defendant in a lawsuit in which fiduciary duty and aiding & abetting claims against the target’s board and the buyer were dismissed.
The case arose out of the 2017 merger of Baker Hughes and General Electric’s oil & gas business. The plaintiffs alleged that Baker Hughes’ directors and officers breached their fiduciary duties and that GE aided and abetted that breach. The plaintiffs also alleged that the Corwin doctrine should not apply to the lawsuit due to the target’s failure to disclose in its proxy statement the unaudited financial information about GE’s oil & gas business that the board relied upon in authorizing the transaction.
Chancellor Bouchard agreed with the plaintiffs’ contention that the unaudited financials should have been disclosed in the proxy statement, and that Corwin therefore did not apply. However, he nevertheless dismissed fiduciary duty claims against the Baker Hughes’ board premised on allegations that they failed to satisfy their obligations under Revlon, as well as aiding and abetting claims against GE.
The claim against the target’s CEO, however, was a different story. The Chancellor noted that the plaintiffs’ alleged that the CEO breached his duty of care in preparing the proxy statement, noting that the CEO signed both the proxy statement & the buyer’s Form S-4 registration statement. He concluded that this allegation was sufficient to permit the plaintiffs’ claim to survive a motion to dismiss:
Although not overwhelming, this allegation is sufficient to support a reasonably conceivable claim that Craighead breached his duty of care with respect to the preparation of the Proxy he signed as Baker Hughes’ CEO. This is so, in my view, given the importance of the Unaudited Financials—the only source of GE O&G historical financial information available to Baker Hughes before it signed the Merger Agreement—and given the categorical obligation in Section 5.04(c) of the Merger Agreement to attach the Unaudited Financials to the Merger Agreement.
Chancellor Bouchard observed that further discovery might demonstrate that the failure to attach the unaudited financials to the proxy statement was inadvertent or handled by advisors upon whom the CEO reasonably relied, but that these factual questions could not be resolved on the pleadings.
This isn’t the first case in which directors were able to avoid fiduciary duty claims – despite the inapplicability of Corwin – due to charter provisions eliminating their liability for breaches of the duty of care.
Over on TheCorporateCounsel.net, I recently blogged about the SEC’s enforcement action against Andeavor LLC, which arose out of the company’s implementation of a stock buyback at a time when was about to resume negotiations with a potential buyer. This Goodwin memo discusses what the proceeding has to say about when merger negotiations may constitute material nonpublic information, and says that the SEC’s cease & desist order in the case provides some helpful guidance on this topic. Here’s an excerpt:
The question of whether merger discussions or other circumstances constitute MNPI is always a facts and circumstances assessment, so this case is not dispositive of that question under other sets of facts. But the SEC’s cease and desist order offers important lessons for assessing whether a company is in possession of MNPI in the context of ongoing M&A discussions.
First, the order highlights the importance of the process used to determine the existence of MNPI. The SEC found that the target had used an “abbreviated and informal process” that “did not require conferring with the persons reasonably likely to have potentially material information regarding significant corporate developments.” While the order does not detail steps that the target did take, it highlights that the target’s process took at most one day and did not include discussing the likelihood of a transaction with the target’s CEO, who was the “primary negotiator” of the transaction.
The SEC’s position is that a company should employ a formal process that includes “conferring with persons reasonably likely to have potentially material information regarding significant corporate developments” and yields “an accurate and complete understanding of the facts and circumstances necessary to determine whether [the company is] in possession of material non-public information.”
Second, the order highlights certain considerations relevant to determining whether a potential M&A transaction is sufficiently likely as to constitute MNPI. The SEC criticized the target’s failure “to appreciate that the probability of [a transaction] was sufficiently high as to be material to investors.” Citing Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the SEC noted that “an acquisition need not be more likely-than-not to occur for it to be material” to investors.
The order identifies a number of factors that the memo suggests were relevant to the SEC’s determination that the probability of a transaction was high enough to conclude that the resumption of negotiations was MNPI. These include, among other things, the duration of the pre-“pause” negotiations & the resolution of the issues that prompted the pause; the sharing of information under a confidentiality agreement & the drafting of a merger agreement.
This Morgan Lewis “white paper” takes a deep dive into what companies should be preparing for when it comes to shareholder activism during the 2021 proxy season. Here’s the intro:
The shock, turmoil, uncertainty, and lack of visibility that followed the immediate onset of the coronavirus (COVID-19) pandemic in March 2020 were significant factors accounting for why shareholder activism was relatively subdued during the 2020 proxy season. However, given that activist investors have now had more than eight months to acquire their “sea legs” and recalibrate their playbook for the evolving “new normal,” it is likely that, even as the COVID-19 pandemic shows no signs of abating, activist investors will be less reluctant to wage an activism campaign in whatever “new normal” we find ourselves in during the 2021 proxy season.
Notably, unlike with respect to the 2020 proxy season, activist investors currently planning for the 2021 proxy season are making those plans aware of the existence of the COVID-19 pandemic and its evolving implications and having to anticipate and incorporate into their plans the possibility that, even if the current COVID-19 case surge is reversed and further extended lockdowns are avoided, the COVID-19 pandemic is not likely to materially subside between now and the end of the 2021 proxy season.
In addition, as we will discuss below, we are likely at a point where the COVID-19 pandemic may be more of a catalyst for shareholder activism than an inhibitor. Accordingly, companies should not expect that shareholder activism during the 2021 proxy season will be as subdued as it was in 2020.
The white paper reviews how activism was impeded by Covid-19 during 2020, and also addresses the factors that may result in the pandemic become a catalyst for shareholder activism during the 2021 proxy season. It also lays out other forces that could drive activism this year, how Covid-19 may have created vulnerabilities for companies, what to expect from activists during the upcoming proxy season, and how companies can avoid being “sitting ducks” for activists.
– Duty of Loyalty Issues for Designated Directors and the Boards of Portfolio Companies
– Conflicted CEO Tilts Company Sale in PE Firm’s Favor
– SBA Announces New Guidance on Consent Requirements for PPP Borrower Changes of Ownership
– Court Rejects Challenge to M&A Transaction Despite Activist Pressure
– Do Reps and Warranties Policies Actually Pay Claims?
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By now, you’ve probably heard the news that Simon Properties & Taubman Centers have agreed to settle their dispute and move forward with a deal at a purchase price of $43 per share. That’s a pretty substantial haircut from the $52.50 that Simon originally agreed to pay, so what did Taubman get in return?
The press release announcing the deal said that in addition to revising the purchase price, other provisions of the agreement were amended to “reduce closing conditionality.” A review of Taubman’s Form 8-K filing on the terms of the revised deal and the amended & restated merger agreement reveals some of the key changes that the parties negotiated to their original original merger agreement in order to enhance deal certainty. These include:
– Amending definition of the term “Material Adverse Effect” contained in Section 9.03 to, among other things, provide a carve-out for “any effect, change, event or occurrence disclosed in any of the [Taubman] SEC Documents filed prior to the date of this Agreement, any written communications delivered by the [Taubman] Parties to the Simon] Parties pursuant to the Original Merger Agreement or referred to in any of the [Simon] Parties’ or the [Taubman] Parties’ filings, written submissions or written correspondence in connection with the Merger Litigation.”
– Tightening Simon’s closing condition in Section 7.02(a) tied to the accuracy of Taubman’s reps and warranties by, among other things, including language providing that this condition won’t apply to “any failure of any representation or warranty of the [Taubman] Parties to be true and correct that was Known to the [Simon] Parties prior to the date of this Agreement (or based on any fact or circumstance Known to the [Simon] Parties prior to the date of this Agreement),” and also excluding any such failure that occurs “primarily as a result of or in connection with exogenous events that were beyond the reasonable control of any of the Taubman Parties.”
– Including a provision in Section 9.10 similar in concept to the one in the LVMH/Tiffany agreement to the effect that, in the event of certain litigation brought prior to the closing to enforce Simon’s obligations under the agreement, the amount of the merger consideration will be the $52.50 per share amount set forth in the original agreement.
Unlike LVMH and Tiffany’s amended deal, this one didn’t originally have a standalone MAE condition. The parties didn’t need to carve out the pandemic from the MAE definition in the revised agreement, because that carve was already contained in the original deal. That feature of the deal is one of the reasons academics & others who write about M&A for a living are disappointed that this case ultimately won’t be litigated. Personally, I’m conflicted – the case would have been great blog fodder, but the deal lawyer in me joins with the parties & their lawyers in their sighs of relief.
As you may recall, Simon’s lawsuit was scheduled for trial this week in a Michigan state court. The parties apparently decided that they’d prefer a more traditional venue in the event they end up in litigation over the revised deal, because Section 9.08 of the revised agreement changes the law governing the agreement from Michigan to Delaware, and provides that the Delaware courts would be the exclusive forum for any litigation arising out of the deal.
Tune in tomorrow for the webcast – “Doing Deals Remotely” – to hear Joseph Bailey of Perkins Coie, Murad Beg of Provariant Equity Partners and Avner Bengara of Hughes Hubbard & Reed discuss adjusting to doing deals remotely, including lessons learned and emerging best practices for completing a successful transaction in this strange new environment.
This Woodruff Sawyer blog addresses the importance of “tail” coverage for the seller’s directors in an M&A transaction. Here’s an excerpt:
In M&A, the D&O insurance policy that responds to a claim is the policy that is in place at the time the claim is made. So, for example, if in 2020 a set of actions took place that is later challenged in 2021, it’s the 2021 policy that would respond, assuming you still have an active insurance policy in place.
This is where a D&O tail policy is crucial. A tail policy covers what would otherwise be a gap in coverage for directors and officers after the sale of a company. The gap exists because the D&O policy of the acquiring company will typically not respond on behalf of the selling company’s directors and officers for claims that arise post-closing that relate to pre-closing activities.
When a tail policy is purchased, the insurance carrier for the selling company agrees to hold open the D&O insurance policy for a specified period past the policy’s normal expiration date. In the United States, six years is the standard.
In other words, if a claim arises within six years after a company is sold, the selling company’s directors and officers will be covered under their original D&O insurance policy.
Another benefit of a tail policy is that it’s generally non-cancelable. This feature guarantees that the seller’s former directors and officers will not run the risk of the acquiring company cancelling the policy in order to get back the cash paid for the policy.
The blog addresses a number of related issues, including who should purchase the policy, when it should be purchased and – last but not least – how to go about purchasing tail coverage.
The Delaware Supreme Court’s recent decision in the Jarden appraisal proceeding appears to have given new life to the use of a target stock’s “unaffected market price” as a valuation metric in appraisal. However, this Cadwalader memo says that the Court’s decision last month in Brigade Lev. Cap. Fund, et. al. v. Stillwater Mining Co., (Del.; 10/20), confirmed that deal price remains the most reliable indicator of fair value if the seller runs a sound, conflict-free sales process:
The Delaware Supreme Court’s decision in Stillwater confirms—with caveats—pre-Jarden speculations that transaction price will often be found to provide the most reliable indicator of fair value. Unlike the deficient sale in Jarden, the Delaware Supreme Court agreed with Vice Chancellor Laster that Stillwater’s sale process presented “objective indicia” to support the conclusion that the merger consideration reliably indicated fair value in this instance.
In affirming, the Delaware Supreme Court observed that the lower court had discretion in selecting the valuation model best tailored to the circumstances. Quoting Jarden, it stated that “‘[i]n the end, the trial judge must determine fair value, and fair value is just that, fair. It does not mean the highest possible price that a company might have sold for.’” However, this was the Court’s only mention of Jarden, suggesting that the facts there that led the Court to reject merger consideration as evidence of fair value were not present in Stillwater.
The memo reviews the Jarden and Stillwater decisions, and identifies key takeaways as to the current state of appraisal litigation in Delaware. It notes that the decisions provide a reminder that “the judicial valuation process demands a case-specific inquiry in which a single factor, such as a deficient sales process, can be outcome determinative,” and that the decisions also confirm that the Delaware courts continue to look to market-based factors as the best indicators of fair value.