This recent memo from Goodwin’s Sean Donahue takes a look at some of the lessons learned from the first proxy contest conducted after the effective date for the universal proxy rules. The contest pitted activist investor Land & Buildings against Apartment Invesment and Management. L&B nominated two directors, and one was elected to the Aimco board. Sean points out that ISS’s recommendation that shareholders vote for one of L&B’s two nominees may have played a significant role in the outcome – that candidate received twice as many votes as the company’s nominee.
Many have predicted that proxy advisors will become more influential under the new regime, so it wouldn’t be surprising if ISS’s recommendation proved decisive. But not everything went as observers may have expected. For instance, many have predicted that it may be possible to conduct a proxy contest “on the cheap” under the new rules. The memo says that wasn’t the case with this fight:
Many observers have asserted that the universal proxy regime would significantly reduce the cost of proxy contests. We have been skeptical of this view as a shareholder still has to prepare an advance notice of nomination, file a proxy statement, and furnish a proxy statement and proxy card to shareholders having at least 67% of the voting power. We also believe that economic activists will conduct meaningful solicitation efforts that go beyond the SEC’s minimum solicitation requirements as their goal is to be victorious.
In the Aimco proxy contest, according to L&B’s proxy statement, it estimated that the cost of the proxy contest would be $1,000,000. Notably, at the time it filed its definitive proxy statement, it disclosed that it had only spent $200,000 on the proxy contest meaning that most of its costs were back-end loaded.
The memo goes on to note that, by way of comparison, L&B ran a proxy contest earlier this year before universal proxy kicked in & estimated that the cost of that proxy contest would be $1,200,000, of which $500,000 was spent prior to filing the definitive proxy statement.
Unless Delaware overrules Revlon or something equally significant happens next week, this will my final blog of the year. Thanks so much to everyone for reading my ramblings and passing on your suggestions and comments. Merry Christmas & Happy Hanukkah to everyone who celebrates those holidays, and best wishes for a healthy and prosperous New Year to all! I hope to see everyone back here in 2023.
Debevoise recently issued this list of FAQs on universal proxy & contested director elections. The memo walks through the various topics covered by the rule, but it also covers a few areas that aren’t addressed. This excerpt includes a couple of those:
Q: Are there any specific rules that govern a registrant’s engagement with a dissident stockholder?
A: No. If the registrant is content to allow the dissident’s nomination to proceed, the registrant should solicit a completed “director and officer questionnaire” and other information that it deems necessary to allow its nominating committee or board of directors to make a determination as to whether to support the nominee. In the alternative, the registrant may seek a settlement with the dissident with the objective of avoiding a contested director election.
Q: Does the dissident stockholder have a legal right to speak at the meeting?
A: No. While it is customary to allow stockholders to speak at meetings of stockholders, there is no statutory requirement. The chairperson of the meeting may acknowledge the nomination as part of the annual meeting script, rather than allowing the stockholder to present the nomination.
Other FAQs covered by the memo include, among other things, notice and disclosure obligations of registrants and dissidents, responding to statements made by the dissident in its proxy materials, and preliminary proxy filing obligations for contested elections.
As discussed in yesterday’s blog, the Delaware Supreme Court’s majority decision in Bandera focused primarily on the terms of the MLP’s partnership agreement and the appropriate way to interpret those terms under Delaware’s version of the Revised Uniform Limited Partnership Act. In her concurring opinion, Justice Valihura focused on the Chancery Court’s approach to the legal opinion delivered to the general partner in satisfaction of the call right’s opinion condition.
In the Chancery Court, Vice Chancellor Laster conducted a detailed review of the process by which the law firm came to render the legal and was sharply critical of that process, but Justice Valihura’s concurring opinion said that it was the Vice Chancellor’s decision to engage in that kind of review that got him off-track. She went on to explain that under Delaware law, courts should take a more deferential approach focusing on whether the lawyers were acting in good faith when they rendered the opinion. The concurring opinion found ample evidence of that good faith effort, and concluded that the Chancery Court erred in deciding otherwise:
In sum, I believe that the trial court erred in holding that the Opinion was rendered in bad faith. Under existing Delaware law, opinions of counsel are entitled to deference. It is not the place of a trial court, or this Court, to substitute our own judgment for that of the lawyers who are asked to render legal opinions. Although lawyers should always strive to reach the legally correct answer, the law does not require that opinions of counsel be substantively correct.
What the law requires is that lawyers undertake a good faith effort. Such good faith effort is entitled to deference. Although there are, for sure, outer limits to this deference, this case does not push beyond that boundary in my view. Because the trial court’s findings of bad faith are inextricably intertwined and dependent upon this legal error, I would reverse. In the aggregate, the record rather supports the conclusion that Baker’s Opinion was rendered in good faith and, at a minimum, was not rendered in bad faith.
Yesterday, the Delaware Supreme Court issued its decision in Boardwalk Pipeline Partners v. Bandera Master Fund, (Del. 12/22). The Court reversed a 2021 Chancery Court decision which found that the general partner of a Master Limited Partnership (“MLP”) was liable for nearly $700 million in damages as a result of a breach of the partnership agreement involving willful misconduct that left the general partner exposed to unexculpated claims under the terms of that agreement.
The Supreme Court’s decision is likely to be an important one, both as a result of its deferential approach to a partnership agreement’s language conveying broad discretionary authority to the general partner, and because of a concurring opinion addressing the standard of review that Delaware courts should apply to a law firm’s legal opinion.
The case involved the permissibility of a general partner’s decision to exercise a contractual call right on the limited partners ownership interests provided under the terms of a MLP partnership agreement. The exercise of that right was conditioned upon the general partner’s receipt of a legal opinion concerning the impact of pending regulatory action by the Federal Energy Regulatory Commission on the company’s oil & gas pipeline business. Under the terms of the partnership agreement, exercise of the call right was also conditioned upon the general partner’s determination that the opinion of its counsel was acceptable. In order to assist in that determination, the general partner retained another law firm to shadow that counsel’s work and provide its own opinion on the reasonableness of relying on the first counsel’s opinion.
The plaintiffs alleged, among other things, that the general partner breached its obligations under the partnership agreement when it exercised the call right. After surviving a motion to dismiss, the case went to trial., and Vice Chancellor Laster ultimately held that the general partner breached the agreement because it did not satisfy the opinion-related conditions to the exercise of the call right. He held that the legal opinion did not reflect a good faith effort on the part of counsel to discern the relevant facts and apply professional judgment. Furthermore, because the determination that the opinion was acceptable was made by the general partner and not the MLP’s board, he concluded that it did not comply with the terms of the agreement.
The Vice Chancellor also found that general partner engaged in willful misconduct when it exercised the call right, and that the exculpatory provisions in the partnership agreement didn’t protect the general partner from liability for its actions.
The Supreme Court disagreed. The majority focused on the terms of the MLP agreement, and in particular the broad discretionary authority provided to the general partner. After rejecting the Chancery Court’s conclusion that the opinion should have been directed to the MLP board, it addressed the general partner’s right to rely on that opinion.
In particular, the Supreme Court noted that Section 7.10(b) of the agreement provided that the general partner was “conclusively presumed” to have acted in good faith when it relies on advice of counsel “as to matters that the General Partner reasonably believes to be within [counsel’s] professional or expert confidence.” The Court held that in the context of the broad powers given to an MLP’s sponsor under the Delaware Revised Uniform Limited Partnership Act and the clear disclosure provided to investors in the MLP concerning the authority of the general partner, that language meant exactly what it said:
Unlike a rebuttable presumption, Section 7.10(b)’s conclusive good faith presumption is, as its name denotes, conclusive. Interpreting a nearly identical provision in Gerber, this Court explained that “Section 7.10(b) is a contractual provision that establishes a procedure the general partner may use to conclusively establish that it met its contractual fiduciary duty.” In other words, once Section 7.10(b) is validly triggered through reliance on expert advice, good faith is “conclusively establish[ed]” and no longer subject to challenge.
Here, the Sole Member Board received the Skadden Opinion, followed its advice that it would be reasonable to accept the Baker Botts Opinion, and caused the call right exercise. The conclusive presumption was triggered and therefore required a finding of good faith by the Sole Member Board. In turn, the Sole Member Board’s good faith actions on behalf of the General Partner exculpate the General Partner from damages.
Earlier in what’s become an alarmingly lengthy blog, I mentioned that the concurring opinion addressed the Chancery Court approach to the legal opinion provided to the general partner. I can feel your eyes glazing over, so I think I’ll save that part of the decision for tomorrow.
The November-December Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Universal Proxy Puts Directors on Notice
– Controlling Stockholders: Managing Liquidity Conflicts and Other Special Benefits
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at firstname.lastname@example.org or call us at 800-737-1271.
This Freshfields blog reviews the FTC & DOJ’s merger enforcement litigation efforts during 2022 and provides some suggestions about actions companies thinking about current and future transactions should take to enhance their position. The entire blog is worth reading, but one section that caught my eye addresses how companies are adapting to the new environment:
First, we are seeing parties to transactions prepare rigorously, both in their initial risk assessments and anticipating probes based on innovative and ambitious theories of harm, for example to counter alleged market definitions that are inconsistent with how the industries operate in practice and with verifiable facts.
Second, we are increasingly seeing parties contemplate “fix-it-first” or “litigate the fix” strategies, whereby parties attempt to remedy potential anticompetitive effects on their own—sometimes before filing for merger clearance when “fixing it first,” or after an investigation in the case of “litigating the fix.”
Third, we observe parties planning for longer timelines in deal documents, with long stop dates that extend for up to 24 months to account for in-depth investigations in both the US and globally, and for litigation. And finally, on the topic of litigation, we see companies not only accept the possibility of merger litigation but also account for it as part of their clearance strategy.
After reviewing 2022 case law, the blog concludes that while the antitrust agencies have taken an aggressive and often innovative approach, courts continue to demand that the agencies convincingly substantiate their allegations of competitive harms, and also continue to uphold established merger control precedents in response to the novel theories advanced by the FTC & DOJ.
Prior business dealings between a company’s controlling stockholder and members of a special committee evaluating a transaction with that controller can call into question the committee’s independence. But the Chancery Court’s recent decision in Ligos v. Tsuff, (Del. Ch.; 12/22) illustrates that prior relationships don’t inevitably result in a conclusion that a director is independent.
The case arose out of a going private transaction in which the target was acquired by an affiliate of its controlling stockholder. The plaintiff challenged the special committee’s independence based on the members ties to the controller and the mere presence of a controlling stockholder. As this excerpt from Shearman’s blog on the case indicates, Vice Chancellor Glasscock rejected those allegations and dismissed the claims against the special committee members:
After concluding that the Company’s Certificate of Incorporation exculpated the Special Committee members from all claims other than for breach of the duty of loyalty, the Court held that Plaintiff failed to assert facts suggesting that any of the Special Committee Defendants were interested in the Transaction. First, the Court rejected the notion that the mere presence of a controlling shareholder was sufficient, noting that the Special Committee members would cease to be directors after the merger closed.
The Court next concluded that Plaintiff failed to allege that any material or beneficial relationship existed between the controller and any Special Committee member. Finally, the Court found that Plaintiff failed to meet the high pleading standard to allege bad-faith conduct, finding no indication of an “intentional dereliction of duty.” Thus, even though the Court agreed that the final outcome in the transaction was “not great,” the Court found that the Special Committee Defendants had “acted vigorously” in negotiating the merger.
In concluding that no material relationship existed between the controller and any special committee member, Vice Chancellor Glasscock said that the relationships alleged by the plaintiff were attenuated. In that regard, the most significant relationship that the plaintiff alleged was one in which a director had been a long-term employee of another business owned by the controller. However, that employment relationship had terminated more than 20 years ago, and the only relationship that had continued since that time was his continuing service on the target’s board.
The relationships alleged with respect to the other special committee members were much weaker, and were essentially premised on their status as long-serving members of the target’s board. Under the circumstances, the Vice Chancellor concluded that the failure to allege that the members of the special committee had any expectations of future business dealings made the plaintiff’s argument about their lack of independence based on these ties unconvincing.
I recently blogged about the dust-up in Chancery Court between Masimo Corporation & Politan Capital Management over some aggressive amendments to Masimo’s advance notice bylaw adopted in response to Politan’s activist campaign. This Sidley memo takes a deep dive into the issues associated with the amendments adopted by Masimo, and offers the following guidance:
– Companies should not lose sight of the desirability of adopting or amending advance notice bylaws on a “clear day.” Adopting on a “rainy day” invites the specter of enhanced scrutiny review. Defensive bylaws adopted in the context of an activist campaign are more susceptible to review under a heightened degree of scrutiny.
– Adopting bylaw amendments that frustrate or preclude altogether shareholders’ ability to run a proxy contest increases the likelihood of this more onerous standard of review. The Delaware courts have stated that the clearest set of cases providing support for enjoining an advance notice bylaw involves a scenario in which a board, aware of an imminent proxy contest, adopts an advance notice bylaw so as to make compliance impossible or extremely difficult.
– When adopting advance notice bylaws, engage counsel with experience amending corporate bylaws for advance notice provisions. The considerations for the adoption of various bylaw provisions are rapidly evolving and will continue to do so for the foreseeable future.
Masimo’s bylaw amendments were adopted in response to the exigencies of a specific activist campaign, and at this point, there doesn’t appear to be much interest among S&P 500 companies in adopting similar changes to their own bylaws. Companies considering amendments to advance notice bylaws should be aware of the potential legal and investor relations downsides associated with an approach that might be deemed too aggressive by courts and investors.
According to this PitchBook article, the cooling M&A market has resulted in more extensive due diligence and, as this excerpt explains, a bit of a comeback for indemnity arrangements and meaningful escrows in PE deals:
Buyers have been taking more time to dig into a target’s financial standing and, in some cases, have been negotiating stronger indemnity provisions to protect themselves against downside risks facing the assets they are looking to buy, lawyers involved in private equity deals said.
In recent months, investors have been more often advocating for provisions to indemnify themselves from losses that could arise from specific liabilities discovered during the negotiation and due diligence process.
To backstop these indemnities, sellers sometimes set up a separate escrow to withhold proceeds from the sale for a set period of time. The funds in the escrow could amount to between 7.5% to 12.5% of the purchase price, according to Morley Fortier III, a partner at law firm Reed Smith. In the case when the seller is an operating business and has sufficient assets to cover the liability, the buyer may not require a separate escrow.
The article notes that in recent years, it has become very unusual for buyers participating in a competitive process to require an indemnity provision seeking recourse from a PE seller, according to Fortier. Buyers in those deals have typically been limited to recovery under the RWI policy. However, as the market cools, buyers are becoming more attuned to risk allocation during the negotiation process, and that is being reflected in the indemnity and escrow arrangements they’re negotiating.
Several recent Delaware decisions have addressed the potential liability of third parties for aiding & abetting breaches of fiduciary duties, but in Atlantic NWI v. The Carlyle Group, (Del. Ch.; 10/22), the Chancery Court addressed the distinction between the elements of an aiding & abetting claim and the elements of another claim sometimes asserted against third parties in M&A transactions – tortious interference with a contract.
The case arose out of an alleged breach of a joint venture agreement entered into by the plaintiff with an entity called REDCO Fund 1 Manager. Under the terms of the JV, which took the form of a jointly owned LLC, REDCO agreed to seek out exclusive real estate investment opportunities for the plaintiff, but the plaintiff alleged that REDCO was presenting competing opportunities to Carlyle. As a result, the plaintiff (which settled its claims against REDCO), sued Carlyle for tortious interference and for aiding and abetting REDCO’s purported breach of fiduciary duty under the LLC agreement.
Vice Chancellor Glasscock dismissed the aiding & abetting claim, but allowed the tortious interference claim to move forward. This excerpt from Sidley’s recent blog on the decision explains the Vice Chancellor’s reasoning:
Tortious Interference. Atlantic claimed Carlyle interfered with the joint venture agreement by contracting with and providing material consideration to REDCO to receive real estate opportunities, causing REDCO to breach. The Vice Chancellor permitted this claim to go forward. Tortious interference with a contractual relationship requires a showing of five elements: (a) the existence of a contract, (b) that the defendant knew about, (c) an intentional act by defendant that is significant in causing its breach, (d) without justification, and (e) which causes injury. Atlantic needed only to “aver[ ] generally” that Carlyle acted with knowledge in the pleading stage under this “liberal knowledge standard,” and the complaint alleged facts from which the Vice Chancellor could infer that Carlyle knew REDCO would breach its contract by working with Carlyle.
Aiding and Abetting the Breach of a Fiduciary Duty Through the same actions, Atlantic claimed Carlyle aided and abetted REDCO’s breach of its duty of loyalty to the joint venture. Aiding and abetting the breach of a fiduciary duty requires that (a) a fiduciary relationship existed, (b) the fiduciary breached its duty, (c) the non-fiduciary knowingly participated in that breach, and (d) damages to the plaintiff resulted from the concerted actions of the defendant and the fiduciary. The knowledge standard is a “stringent” one, requiring the plaintiff to allege specifics facts demonstrating the defendant had actual or constructive knowledge of the specific fiduciary duties, and the Vice Chancellor found it had not been adequately alleged here.
The Vice Chancellor explained that the differing knowledge standards applicable to the claims arise out of policy considerations relating to which party was in the best position to prevent their own breach. When it comes tortious interference, once the third party knows about the contract, it can decide on its own whether to take actions that interfere with it. In contrast, the person in the best position to know what fiduciary duties require is the person subject to those duties.
This case gives me flashbacks to all that “cheapest cost avoider” stuff that we all heard about ad nauseam in law school. I’m sure all the law & economics profs can’t wait to dig into this one!