DealLawyers.com Blog

Here’s an excerpt from this article by David Marcus in “The Deal” based on a recent speech by Delaware VC Travis Laster about three relatively recent Delaware Supreme Court decisions – all written by Chief Justice Strine:

The Delaware vice chancellor argued that Chief Justice Leo E. Strine Jr.’s opinions in Corwin v. KKR Financial Holdings LLC and the stockholder suits arising from the sales of Cornerstone Therapeutics Inc. and C&J Energy Services Inc. show the state’s high court has adapted to an era in which there is a much more active, effective and sophisticated stockholder electorate than ever before by showing greater deference to an informed stockholder vote. Because stockholders can be expected and relied upon to make decisions for themselves, Laster said, there is less need for judicial involvement. Laster began his analysis with a capsule history of M&A oversight by both Delaware courts and the Securities and Exchange Commission, which first regulated takeovers via the Williams Act in 1968. But the U.S. Supreme Court held in the 1977 case Santa Fe Industries Inc. v. Green that federal regulation of tender offers could not supersede state corporate law.

The Delaware Supreme Court cited Santa Fe in its 1977 decision in Singer v. Magnavox Co., where the court set out the business purpose test, under which a merger could only be done for a valid business purpose. The doctrine lasted only six years, but was in effect replaced by substantive fairness review. In the 1980s, the SEC and the Delaware courts collaborated and competed in regulating M&A. Laster pointed to the Delaware Supreme Court’s 1985 ruling in Revlon Inc. v. MacAndrews & Forbes Holdings Inc., where the court barred Revlon from selling to Forstmann, Little & Co. in the face of a hostile bid from MacAndrews & Forbes. In the Revlon decision, Laster said, the court placed the emphasis on fiduciary principles rather than private contract deal. The court rejected Revlon’s agreement to sell a key asset to Forstmann if that deal fell through and issued “a specific, targeted injunction” with “no grounding in stockholders’ ability to vote down the deal.”

Revlon remained a pillar of Delaware M&A law, which for years thereafter reflected the approach taken in the case even as the SEC largely receded from takeover regulation and left the field to Delaware. “On the whole,” he said, “we see less deference to market forces and primary emphasis on board behavior with respect to the deal at issue. The analysis is driven less by the stockholder vote than by the board’s fulfillment of its fiduciary duty to stockholders.” He said, in the late 1990s and early 2000s, the premise that target stockholders need to be protected began to erode in the Chancery Court. Instead, Laster posited, there was a renewed focus on the buyer’s contractual rights and a renewed interest on the systemic effects of rulings. That change came as the court saw far fewer cases in which a hostile bidder opposed a target board’s decisions and far more in which a target stockholder sued to challenge a friendly deal.

A “key case in this regard,” Laster said, is Strine’s 2005 decision in stockholder litigation arising from the $6.6 billion sale of Toys ‘R’ Us Inc. to KKR, Bain Capital and Vornado Realty Trust. The opinion runs to 88 pages, but Laster noted several key elements of the ruling. Strine rejected a request for a targeted injunction in part based on the contractual rights the buying group gained when it signed a merger agreement with Toys. He declined to reform the merger agreement and emphasized that stockholders could protect themselves by voting the deal down. The Toys case brought Laster back to the three Supreme Court decisions with which he began the speech. C&J Energy, Laster said, “is effectively Toys in a Supreme Court decision” because it emphasizes the contractual rights of the buyer and the ability of the stockholders to vote the deal down. C&J also showed “bigger picture thinking” by considering the systemic effects of the decision rather than focusing on the deal at issue in the case.

We’ve posted the transcript for our recent webcast: “An M&A Conversation with Myron Steele & Jack Jacobs.”

The Delaware Chancery Daily reports that the plaintiff’s in Zale have appealed the Court Chancery’s dismissal (on reconsideration following the Delaware Supreme Court’s opinion in Corwin v KKR) of their aiding and abetting breach of fiduciary duty claims against a financial advisor in In re Zale. The outcome of this appeal will test how broadly or narrowly the Delaware Supreme Court’s opinions in Corwin and Rural/Metro should be read and will have significant implications for pending and future aiding & abetting claims against financial advisors…

We’re posting memos on the Delaware Supreme Court’s Rural/Metro decision in our “Financial Advisors” Practice Area…

On TheCorporateCounsel.net, I’ve updated our “Corp Fin Org Chart” to reflect the coming return of Ted Yu, who will replace Michele Anderson as Chief of Corp Fin’s Office of Mergers & Acquisitions in early January. Michele recently was promoted to Associate Director and oversees that office among others. And Ted had left Corp Fin about 11 months ago to join Skadden…

Yesterday, the Delaware Supreme Court handed down this decision on the Rural/Metro appeal, affirming the Chancery Court decision. Here’s an excerpt from this Reuters article (we’ll be posting memos in our “Financial Advisors” Practice Area):

The Delaware Supreme Court on Monday upheld a $76 million damage award against RBC Capital Markets for its role in the 2011 sale of ambulance company Rural/Metro but described its closely watched decision as a narrow one. The opinion’s language should temper fears on Wall Street that affirming a 2014 ruling by the Court of Chancery could expose financial advisers on merger deals to potential liability if a board mishandled the sale of a company. The lower court found RBC was liable for convincing the board of Scottsdale, Arizona-based Rural/Metro to rush into a $438 million buyout led by private equity firm Warburg Pincus. RBC, a unit of Royal Bank of Canada, was found by the lower court to have concealed that it was also trying to win the more lucrative role of providing financing to Warburg. “We are disappointed with the court’s determination but respect its decision,” said RBC in a statement.

One law professor said while the Delaware Supreme Court upheld one of the largest judgments of its kind against a financial adviser, it also made clear Rural/Metro was an exceptional case. The ruling “sends a powerful message to disloyal investment banks, but also provides investment banks with great comfort provided they act transparently,” said Andrew Tuch of the Washington University School of Law in St. Louis.

The opinion warned against reading the ruling broadly. “Our holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial adviser to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting a breach of the duty of care,” said the 105-page opinion. The opinion was written by Justice Karen Valihura. The opinion also said shareholders must prove a financial adviser acted with intent, which the court said makes the claim “among the most difficult to prove.”

On Friday, the Treasury Department & IRS issued Notice 2015-79 announcing that they intend to issue regulations that will address inversion transactions and certain post-inversion transactions, expanding on guidance previously issued in Notice 2014-52. The widely anticipated “earnings stripping” guidance is absent from this Notice and continues to be pending, but Treasury – in this fact sheet – appears to indicate that it could be issued in the “coming months.” The Notice leaves the “Below-60” Transactions unaffected – but imposes greater adverse consequences for “60-80” Transactions. We are posting memos in our “Tax” Practice Area.

Here’s a Reuters article – and here’s the press release below:

Vice Chancellor John W. Noble has informed Gov. Jack Markell of his intention to retire from the Court of Chancery effective Feb. 26, 2016. “It has been an honor and a privilege to serve the people of the State of Delaware for fifteen years, but, for me, it is now time to move on to whatever life will bring next” wrote Vice Chancellor Noble in his letter to the Governor dated Nov. 18, 2015.

Vice Chancellor Noble has not announced his specific plans following his retirement from the bench. Chancellor Andre G. Bouchard issued the following statement on behalf of the Court of Chancery: “During his fifteen year tenure on the Court of Chancery, John has displayed consummate skill and a natural sense of equity and fairness as a judge. Known for his wry wit and calm demeanor, John has been a pleasure for litigants to appear in front of, and a fabulous colleague to work with. The judges and staff of the Court of Chancery will miss him dearly, but extend our sincerest thanks and congratulations to him for all he has done for the Court and our State.”

Delaware Supreme Court Chief Justice Leo E. Strine, Jr., who served with Vice Chancellor Noble on the Court of Chancery, joined Chancellor Bouchard in thanking Vice Chancellor Noble for his years of service: “It was my privilege to serve longer on the Court of Chancery with John than anyone. John never had a case he did not take seriously, and he applied his considerable intellect and instinctive sense of equity to every case, whether it was the largest corporate merger, a neighborhood dispute, or a guardianship case. All of us in the Judiciary will miss him enormously, and wish him and Nadine all the best as they embark on the next stages of their lives together.”

Gov. Markell, in accepting the Vice Chancellor’s letter, also added his thanks and well wishes: “During his fifteen years on the Court of Chancery, John Noble exhibited all the traits that make the Court the nation’s most respected forum for corporate litigation. Vice Chancellor Noble’s expertise, integrity, humility and impartiality furthered the Court’s reputation for excellence, predictability and fairness. I greatly appreciate his service to the State of Delaware.”

Vice Chancellor Noble was first appointed to the Court of Chancery in 2000 by Gov. Tom Carper and reappointed by Gov. Jack Markell in 2012. Vice Chancellor Noble holds a B.S. in Ch.E., magna cum laude, from Bucknell University and a J.D., cum laude, from the University of Pennsylvania Law School. Following law school, he served as a federal district court law clerk and then practiced with Parkowski, Noble & Guerke, P.A., in Dover, Delaware.

Here’s an excerpt from this blog by Kevin LaCroix:

At least based on the evidence that The Chancery Daily compiled, the plaintiffs’ lawyers have been paying attention. At least according to The Chancery Daily, fewer merger objection lawsuits are now being filed. In order to track these trends, The Chancery Daily compiled a list of all merger objection suits filed in the Delaware Chancery Court between January 1 and November 15, 2015. The fewest number of merger objection suits filed in any month took place in October, when there were only 16 suits filed. Tellingly, there were 14 filed in the first half of October and only two in the second half. During the first half of November, there were only five. The significance of these lower numbers can be seen by considering the number of merger objection lawsuit filings as a percentage of all corporate and commercial lawsuit filings; the Chancery Daily found that year-to-date lows of 23% and 18% in October and the first half of November, respectively.

The Chancery Daily also took into account the possible effect of difference in merger transaction activity. Between January and September 2015, the ratio of the number of merger objection lawsuits to the number of merger transactions with a value of over $100 million was over 1.0 (meaning there were more merger objection lawsuits than mergers). However, in October, there were 16 merger objection lawsuits and 24 merger announcements, for a ratio of .69 (a figure that may not fully reflect the sharp drop off in the second half of October, after Vice Chancellor Laster’s opinion in the Aruba case).

The Chancery Daily summarized its findings by saying that “While not conclusive, the decline in class action filings in October and the first half of November in the absence of corresponding declines in total filings or deal volume is consistent with plaintiffs’ reluctance to file in Delaware following the Aruba holding.”

Here’s news from this Wachtell Lipton memo:

On Friday, shareholders of Perrigo Company plc convincingly rejected Mylan N.V.’s hostile takeover attempt, with holders of over 60% of Perrigo’s shares refusing to tender into what was the largest hostile offer in history to go to the very end. The outcome demonstrates that a well-articulated strategy and proven record of performance, and concerns about the corporate governance of a bidder offering stock, resonate with long-term shareholders as against a premium bid of questionable merit, even in the absence of transaction alternatives.

Mylan announced its unsolicited proposal in April 2015, which Perrigo’s board rejected as undervaluing the company. Because Perrigo had become an Irish company in a prior inversion transaction, it was prevented from adopting typical defenses, such as a rights plan, by a prohibition on the taking of “frustrating actions” against Mylan’s offer. The saga took numerous twists and turns over the following months, with Teva Pharmaceuticals Industries Ltd. announcing its own bid for Mylan shortly thereafter, which it later withdrew in favor of an alternative deal after facing fierce resistance from Mylan; proceedings before courts and regulators on three continents; and extensive public and investor relations campaigning and shareholder outreach.

Perrigo consistently emphasized its own long track record of substantial shareholder returns and growth, consistently high trading multiple and shareholder-focused corporate governance. These were contrasted with Mylan’s relatively weaker historical performance and significant governance concerns, demonstrated by its use of extreme defenses, such as a self-perpetuating board structure and the issuance of 50% of Mylan’s voting power to a Dutch trust, to fend off Teva’s 48% premium bid. Perrigo also repeatedly criticized the low premium being offered, Mylan’s weak growth prospects, and the substantial dilutive effect of the transaction on Mylan’s EPS, raising questions about the value of the Mylan shares being offered.

Along the way, much was discussed about whether merger arbitrageurs seeking short-term gains, who had acquired almost 25% of the shares, would be able to deliver Perrigo into Mylan’s hands. Much was also made about the fact that Perrigo did not agree to sell to a “white knight” or to do large acquisitions of its own, raising questions about whether a premium offer, even a questionable one, had put Perrigo on a “shot clock” to do the least bad deal that it could find. It did not. Perrigo’s long-term shareholders also accepted the judgment of the Perrigo board that Mylan’s offer was too low to serve as a basis for discussion, rejecting the often-asserted notion that a board is obliged to negotiate with any bidder who offers a premium. Friday’s result shows that a target company can win a takeover battle and defeat short-term pressures by pursuing a shareholder-focused stand-alone strategy of value creation, especially where it fights for and wins the backing of its long-term shareholders.

This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:

– Projections in Public Company M&A
– The Folly of Battling Activist Investors
– The $148M In re Dole Price Tag: Proper Processes for Going Private Transactions
– Countering Activists Who Use Options Trading to Avoid Detection
– Survey: Vast Majority Provide Enhanced Severance Benefits Below NEO Level in Change-in-Control
– Game Over? Delaware Rejects Disclosure-Only Settlement in H-P/Aruba Networks

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