This Fried Frank memo reviews Vice Chancellor Laster’s recent decision in Columbia Pipeline Group, Inc. Stockholder Litigation (Del. Ch.; 3/17) – which held that the ability to “cleanse” transactions through a fully informed stockholder vote extends to transactions involving alleged director self-interest. Here’s an excerpt summarizing the Vice Chancellor’s decision:
The plaintiffs alleged that all of the Columbia Pipeline directors and certain officers had breached their duty of loyalty by having engineered a self interested plan (when they were directors and officers of the company’s former parent) to spin the company off and then to sell the post-spin company in order to trigger their change-in-control benefits.
In what has become an increasingly familiar pattern for disposition by the Court of Chancery of post-closing challenges to M&A transactions (not involving a controller who has extracted a personal benefit), the court: (i) found that the stockholders had approved the transaction in a fully informed vote; (ii) held that, as a result, under Corwin, the business judgment rule standard of review applied; and (iii) dismissed the case.
The Vice Chancellor also spoke to the nature of the disclosure required in order to “fully inform” shareholders about alleged self interest – and said it didn’t require “self-flagellation.” Instead, it’s enough if the proxy disclosure provides information sufficient to allow investors to “stitch together” facts sufficient to draw an inference of self-interest.
This is the fifth time since the Corwin decision that the Chancery Court has allowed a transaction alleged to involve duty of loyalty issues to be cleansed through a fully informed stockholder vote. The path to business judgment rule review that Corwin mapped out for post-closing damage actions is proving to be very wide indeed.
This Dentons memo reviews the outlook for inbound US M&A for 2017, and concludes that the glass is half full:
With 2016’s roaring inbound M&A market in mind, what can we expect in terms of inbound M&A in 2017? For now, most analysts are predicting that the US’s crossborder M&A market will cool considerably in this new year, possibly slipping by 35 percent from the previous year. However, this level of M&A activity would still be an impressive figure overall and is indicative of the strong growth the global M&A market has seen over the preceding two to three years.
Although acknowledging the uncertainties associated with the Trump Administration and potential restrictions on outbound Chinese M&A, the memo expresses optimism about the long-term outlook for inbound US deals:
In sum, the outlook for foreign investors (particularly those in China) looking to engage in M&A in the US is murky. Industry prognosticators often repeat the old adage that “if there’s one thing investors hate, it is uncertainty.” In this instance, given the directions the market could swing, foreign investors could simply choose to remain cautious when approaching crossborder M&A in the US, which could result in a cooling in the marketplace.
Despite this uncertainty, however, we remain confident in the US market’s current robustness. With a stable and growing US economy, an administration committed to increasing US jobs and investing in the country’s infrastructure, and the strength of the global M&A market over the past several years, the stage is set for such optimism.
This Simpson Thacher memo reports that a recent Fed order approving a proposed acquisition by Peoples United Financial contains good news for many future bank deals. That’s because the order expanded the presumptive safe harbors that the Fed applies when reviewing bank M&A proposals for risks to U.S. financial stability. Here’s an excerpt:
Since 2012, the Federal Reserve has presumed that a proposal that involves an acquisition of less than $2 billion in assets or that results in a firm with less than $25 billion in total assets does not raise material financial stability concerns, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross -border activities, or other factors.
In the People’s United Order, the Federal Reserve said that its “experience has shown that proposals involving an acquisition of less than $10 billion in assets, or that result in a firm with less than $100 billion in total assets, are generally not likely to create institutions that pose systemic risks.”
Accordingly, the Federal Reserve will now presume that a proposal does not raise material financial stability concerns if it involves the acquisition of less than $10 billion in assets or results in a firm with less than $100 billion in total assets, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other factors.
For deals that qualify under the revised safe harbor, this change will substantially reduce the need to provide information relating to financial stability risk & may accelerate the Fed approval process.
This Cooley blog says that 2017 should see continued growth in rep & warranty insurance outside of the traditional private equity market:
As the underwriting process has streamlined, and premiums have come down in the US, R&W insurance has secured a significant position in the M&A toolbox for middle-market M&A nationwide (outside of the PE context). Most financial buyers and now many strategic buyers increasingly use these policies as a means to manage risk and to help facilitate a deal.
With the underwriting process now shortened to about a week and policy negotiations standardizing, R&W insurance is poised to become more mainstream in non-private equity deals.
Although it is too early to tell whether the volume of claims will make these policies sustainable – or whether strategic buyers will agree to buy R&W insurance considering their relative leverage in most transactions – targets and buyers alike should be prepared to discuss insurance as a component of any private deal.
This Woodruff-Sawyer blog provides additional insight from the underwriters’ perspective into how the market for R&W insurance is evolving.
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.
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.
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.
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.
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.
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.