In this decision – Fox v. CDX Holdings – the Delaware Court of Chancery was extremely critical of the valuation work of two valuation firms working on behalf of the seller. Significantly, this litigation relates to the sale of a private company – David Halbert, the founder of Caris, owned 70.4% of its fully diluted equity and JH Whitney VI, L.P. (“Fund VI”), a private equity fund, owned another 26.7%. Most of the remaining approximately 2.9% of Caris‘s fully diluted equity took the form of stock options that were cancelled in connection with the Merger. The plaintiff, Kurt Fox, sued on behalf of a class of option holders.
This decision highlights the potentially significant commercial, reputational and – if they had been named as defendants – legal and financial risks that financial advisors/valuation firms can face even when advising privately held companies with only a small percentage of the equity held by persons outside the control group. Luckily for the valuation firms, because the plaintiffs were option holders and not stockholders, this was a contract claim and Delaware law does not recognize a claim for aiding and abetting a breach of contract.
Separately, the opinion contains interesting dicta regarding providing aggressive projections (as opposed to fraudulent projections):
“During a sales process, a company may provide optimistic or bullish projections to bidders, even ‘extremely optimistic valuation scenarios for potential buyers in order to induce favorable bids.”16 There is an important line, however, between responsibly aggressive projections and outright falsehoods: “Pushing an optimistic scenario on a potential buyer is to be expected; shoveling pure blarney at that stage is another.”
Pennaco Energy, 787 A.2d at 713. “An optimistic prediction regarding a company‘s future prospects” may rise to the level of a “falsehood” if accompanied by “evidence that it was not made in good faith (i.e., not genuinely believed to be true) or that there was no reasonable foundation for the prediction.”
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16 In re Pennaco Energy, Inc., 787 A.2d 691, 713 (Del. Ch. 2001) (Strine, V.C.) (citations and internal quotation marks omitted); see also In re Topps Co. S’holders Litig., 926 A.2d 58, 76 (Del. Ch. 2007) (Strine, V.C.) (“[O]ne of the tasks of a diligent sell-side advisor is to present a responsibly aggressive set of future assumptions to buyers, in order to extract high bids.”).
As noted in this Reuters article, last month, nearly 60% of Rite Aid shareholders supported a non-binding shareholder proposal at the company’s annual meeting that asks that the company to limit the CEO’s golden parachute. This is a rare case of a rebuke of a golden parachute as similar measures at other companies only garnered an average of 33% support this proxy season…
This July-August issue of the Deal Lawyers print newsletter was posted a few weeks ago – & also sent to the printers – and includes articles on:
– Reflections on the DuPont Proxy Contest: What Happens Next?
– Finding the Antidote: Addressing Poison Put Provisions in Debt Instruments
– “Exclusive Forum” Bylaws: Fast Becoming a New Item on Deal Checklists
– Integration Clauses & Letters of Intent
– Joint Venture Agreements: An Interview
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Tune in tomorrow for the webcast – “Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties” – to hear Greenberg Traurig’s Cliff Neimeth, Richards Layton’s Ray DiCamillo and Richards Layton’s Mark Gentile analyze the legal and commercial parameters of what you can – and can’t do (or should and shouldn’t do) – when shopping and agreeing to sell control of a public company are evolving due to judicial decisions, legislative developments and market conditions.
In a decision with the potential for immediate impact on stockholders’ access to appraisal rights, Delaware Vice Chancellor Laster, in In re Appraisal of Dell (July 13, 2015), held that the funds seeking appraisal of their Dell shares (acquired by them after announcement of the Dell going-private transaction) had not met the “Continuous Holder Requirement” of the appraisal statute. Ruling that the funds had therefore lost their right to appraisal, the Vice Chancellor granted summary judgment in favor of Dell.
After the appraisal petition had been filed, The Depository Trust Company (DTC), following standard procedure, had transferred the shares owned by the funds to the funds’ custodial banks. As is not uncommon, the banks changed the name of the record holder of the shares from Cede & Co. (DTC’s nominee) to the banks’ nominees. The Vice Chancellor ruled that the name change caused a change in the record ownership of the shares. The Vice Chancellor characterized the result as not reflecting the “reality” that the beneficial owners of the shares had remained unchanged and should have been entitled to appraisal rights.
The result was compelled, however, according to the Vice Chancellor, by Delaware Supreme Court precedent that, under these circumstances, treats Cede for all purposes as the record holder (without “looking through” Cede or considering the beneficial owner’s custodial bank as being in the same position as Cede), as well as the Supreme Court’s emphasis on the need for “strict construction” of the appraisal statue requirements. Companies, stockholders, and custodial banks and brokers should evaluate the impact of the decision on their current situations.
In the pending case of In Re Riverbed Technology, Fordham Professor Sean Griffith has filed an objection to a disclosure only settlement and the payment of plaintiffs’ attorney fees on the basis that the disclosures really aren’t worth anything. While Delaware VC Laster has become increasingly critical of proposed settlements involving claims with little or no merit (eg. Raymond Acevedo v. Aeroflex Holding, C.A. No. 9730-VCL, hearing (Del. Ch.; 7/8/15) and Haverhill Retirement System v. Omar Asali and Harbinger Group, C.A. No. 9474-VCL, transcript (Del. Ch.; 6/8/15)) – and VC Noble recently was critical & withheld judgment over a settlement for similar reasons (In Re InterMune Stockholder Litigation, C.A. No. 10086-VCN (consol.) hearing (Del. Ch.; 7/8/15)) – this objection by an actual stockholder, albeit a law professor, may provide the Chancery Court with a significant opportunity to crack down on such settlements.
While shareholders have occasionally filed objections to settlements, few have appeared in court to object – and none have argued the merits of their objection as thoroughly and cogently as Prof. Griffith.
The upside is that increasing scrutiny of settlements may reduce the incentives for plaintiffs’ counsel to file complaints over virtually every merger assuming that, at a minimum, they will ultimately be able to collect $400-$500k for a “disclosure only” settlement and a bit more for a “disclosure plus” settlement. The downside for defendants is that the inability to get such settlements approved will limit the ability of defense counsel to obtain broad global releases unless they bump the price or otherwise materially amend the terms of the deal (i.e. reduce deal protections in a manner reasonably likely to increase the likelihood of a topping bid).
Here’s the latest set of league tables from MergerMarket listing the law firms that most often represent companies in deals, broken out on a global and regional basis…
As a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter, we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.