Most advance notice bylaws establish a deadline of between 60 – 120 days before an annual meeting for director nominations – and prescribe detailed informational requirements that must be complied with by any shareholder nominee. This Kirkland & Ellis memo describes an activist hedge fund’s recent attempt to skirt those provisions through the use of “placeholder” nominees. Here’s what the hedge fund did:
With an impending deadline for nominations under the bylaws, the hedge fund announced that it would nominate 10 of its own employees to stand for election. These nominees were described as “placeholders” until the fund could identify qualified candidates ahead of the annual meeting. The hedge fund’s nominees, if elected, would commit to resign immediately following their election and replace themselves with the qualified independent candidates that are identified in the intervening months.
The hedge fund’s use of placeholders has not been tested in court – but companies should include language in their advance notice bylaws requiring a shareholder nominee to represent that the individual currently intends to serve out their full term if elected.
– John Jenkins
This Stanford Law Review article discusses current market practices for deal protections – and highlights four areas in which those protections have evolved over the past decade:
1. Termination fee “creep,” which was pervasive in the 1980s and 1990s, seems to have gone away by the 2000s
2. Match rights, which were unheard of in the 1990s, have become ubiquitous by the 2010s
3. Asset lockups, which disappeared from the landscape for thirty years, have re-emerged (though in a “new economy” variation)
4. Implementing side agreements to the deal that have a commercial purpose along with a deal protection effect
– John Jenkins
This Gibson Dunn memo reviews the state-of-play in activism for the first half of 2016. Here are the highlights:
-Changes in board composition (73.3%), and M&A related activities (53.3%), remained the most common areas of focus for activist investors.
-Mid & smaller cap companies were the targets of a majority of public activist actions, as 55.3% of the companies targeted had equity market capitalizations below $5 billion.
-The percentage of publicly-filed settlement agreements providing for strategic initiatives – replacement of management, spin-off company governance, etc. – has increased (82.4% in 2016 vs. 58.8% in 2014 and 2015).
– John Jenkins
Two recent Delaware Chancery Court opinions indicate that the court is taking last year’s Corwin decision to heart, while a third suggests that there’s still room for debate on the scope of the decision. As this Morris James blog explains:
Larkin v. Shah is one of two recent Court of Chancery decisions explaining that the Corwin case really does mean that there is an “irrebuttable business judgment rule” that bars challenges to a merger approved by a majority of the fully-informed, disinterested and uncoerced stockholders, in the absence of a conflicted controlling stockholder.
Thus, along with In re Volcano Corporation Stockholder Litigation at least two members of the Court of Chancery will allow only a well-pleaded claim for waste to survive dismissal in such circumstances. It is less clear that the Chancellor agrees with the word “irrebuttable” in those circumstances, however. See City of Miami v. Comstock, C.A. 9980-CB (Del. Ch. Aug. 24, 2016) (applying Corwin but still examining whether the plaintiffs had alleged a basis for entire fairness review).
We’re posting memos in our “Fiduciary Duties” Practice Area.
– John Jenkins
In the latest chapter of the Rural/Metro saga, the SEC announced yesterday that RBC had consented to a $2.5 million settlement in order to resolve allegations of deficiencies in the bank’s fairness opinion presentation to Rural/Metro’s board, and in the description of that opinion in the company’s proxy materials.
The SEC said that its investigation found that RBC’s presentation contained materially false and misleading statements which made the buyer’s bid look more attractive, and caused that information to be included in the proxy statement filed in connection with the deal. Here are some of the issues cited by the SEC:
– The SEC found that RBC’s presentation described one of its valuations as being based on Wall Street analysts’ “consensus projections” of Rural/Metro’s 2010 adjusted EBITDA, a pretax earnings figure. In fact, the valuation did not reflect analysts’ research or a “consensus” view, but was Rural/Metro’s actual 2010 adjusted EBITDA of $69.8 million.
– Rural/Metro’s proxy statement included a summary of RBC’s valuation analysis, which falsely stated that RBC used “Wall Street research analyst consensus projections” for 2010 “consensus” adjusted EBITDA. The SEC order found that in addition to being false, the proxy statement was misleading because shareholders would be led to believe the analysis reflected the “consensus” calculation of $76.8 million.
– The SEC also found that RBC caused the proxy statement to include a misleading disclosure that suggested RBC had relied on another valuation analysis in its fairness presentation to Rural/Metro’s board when, in fact, RBC did not rely on the analysis for valuation purpose.
– John Jenkins
Broc recently blogged about the 7th Circuit’s Walgreen decision, which endorsed Delaware’s “plainly material” approach to disclosure-only settlements announced in the Trulia case. The Walgreen case suggests that Trulia is gaining traction in other jurisdictions. Still, many commentators anticipate that one of the consequences of Delaware’s hard line in this area will be the migration of many M&A claims to jurisdictions that are friendlier to disclosure-only settlements.
But what if other jurisdictions must apply Trulia to those migratory Delaware cases? That’s the provocative question raised in this recent “Business Law Prof Blog.” Professor Ann Lipton noted that since Trulia addresses only the standard that applies to approval of settlements, its applicability in courts outside of Delaware is uncertain:
Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.” Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial. It is not the standard that an individual plaintiff would have to meet. It is only the standard for the settlement of a merger class action.
Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company? Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?
What’s the internal affairs doctrine? The Supreme Court described it in Edgar v. MITE:
The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.
If Trulia establishes a substantive rule of corporate law, then it implicates the internal affairs doctrine and courts in other jurisdictions applying conflicts principles generally would be obligated to follow it in cases involving Delaware corporations.
If that’s the right answer, then the forum-shopping game that many have predicted could end very quickly. Is it? The jury’s still out. Professor Lipton notes that the 7th Circuit’s opinion in Walgreen does not seem to view Trulia as involving internal affairs, but she points out that a recent New Jersey case – Vergiev v. Aguero – reached the opposite conclusion.
– John Jenkins
Here’s a memo from Schulte Roth that provides a reminder that you don’t actually have to purchase stock to run afoul of HSR’s notification and waiting period requirements:
On Aug. 10, 2016, Caledonia Investments agreed to settle FTC charges that Caledonia violated the premerger reporting requirements of the Hart-Scott-Rodino Act in connection with the vesting of RSUs in Bristow Group. Pursuant to the settlement, Caledonia agreed to pay $480,000 in civil penalties. According to the government’s complaint, the vesting of the Bristow RSUs was a reportable acquisition of voting securities for which a filing, and observance of the mandatory waiting period, was required.
HSR requires parties to acquisitions of voting securities, non-corporate interests and assets meeting certain annually adjusted thresholds to file notifications with the federal antitrust agencies and to observe a waiting period prior to consummation of the acquisition.
Acquisitions of non-voting securities or convertible securities are considered exempt transactions. However, the subsequent exercise, vesting or conversion into securities with the present right to vote for directors is a potentially reportable “acquisition” that may require that an HSR filing be made, and the waiting period observed, prior to such exercise, vesting or conversion. Failure to comply with HSR’s filing and waiting requirements when required can result in injunctive relief as well as civil penalties of up to $40,000 for each day during which any applicable person is in violation.
We have posted the transcript for our recent webcast: “How to Apply Legal Project Management to Deals.”
– John Jenkins
Here’s news from this alert from Cleary Gottlieb:
As a result of courts’ continued disfavor of disclosure-only settlements, more defendants have decided to issue supplemental disclosures that would unilaterally moot any disclosure claims brought by plaintiffs in merger challenges. In those instances, plaintiffs’ counsel may be entitled to seek a mootness fee for the “benefit” of supplemental disclosures that they obtained on behalf of stockholders.
Although the Court in Trulia held that supplemental disclosures must be “plainly material” in order to support a settlement and class wide release, Delaware Vice Chancellor Glasscock recently held that there is a lower standard in the mootness fee context. In that context, a merely “helpful” disclosure that “provides some benefit to stockholders” may support a mootness fee award, even if the disclosure is not material. In re Xoom Corp. Stockholders Litigation, C.A. No. 11263-VCG (Del. Ch. Aug. 4, 2016).
Vice Chancellor Glasscock explained that because there was no release of claims other than to the named plaintiffs, “there is no ‘give’ to balance against the disclosure ‘get’; the benefit is the ‘get’ of the disclosures, with no waiver of class rights to be set against that benefit.” Id. Former Vice Chancellor Noble also has held that Trulia “does not require a ‘plainly material’ inquiry in the mootness fee award context.” LAMPERS v. Black, C.A. No. 9410-VCN (Del. Ch. Feb. 19, 2016) (noting that “mootness dismissals do not pose the same sorts of systemic concerns as court-approved disclosure settlements”).
Nonetheless, the Court of Chancery will continue to carefully review applications for mootness fees to ensure that they do not simply replace disclosure-only settlements. For example, Vice Chancellor Glasscock determined in Xoom that plaintiffs’ requested mootness fee of $275,000 was not justified for the disclosures obtained, and reduced the award to only $50,000.
Furthermore, Chancellor Bouchard recently denied an application for a mootness fee award where the Court determined that the supplemental disclosures did not obtain any benefit for the stockholders, because the supplemental disclosures only confirmed things that had been previously disclosed. In re Keurig Green Mountain, Inc. Stockholder Litigation, C.A. No. 11815-CB (consol.), transcript (Del. Ch. July 22, 2016).
– Broc Romanek
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– “This is the Business We’ve Chosen…”
– Shareholder Votes & Standards of Judicial Review
– Schedule 13G “Passive” Investor Status: When Being a Little Active Is Still Passive!
– Delaware Upholds Decision on Mis-Valuation of Cancelled Stock Options
– A Primer on Private Equity: Basics for Counsel to Middle Market Companies
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