DealLawyers.com Blog

Here’s the intro of this Reuters article:

Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell Inc by about 22 percent and may have to pay tens of millions to investors who opposed the deal for the computer maker, a Delaware judge ruled on Tuesday. The ruling, which applies to about 5.5 million Dell shares, is a victory for the specialized hedge funds that have increasingly tried to squeeze more money from mergers using a type of lawsuit known as appraisal. The lawsuits allow investors who oppose a deal, such as the bitterly contested Dell buyout, to sue and ask a Delaware judge to determine a fair deal price.

Activist investor Carl Icahn urged Dell shareholders to vote down the deal and take their case for fair value to court. Initially appraisal was sought for about 40 million shares, but the bulk was removed for procedural reasons. In Tuesday’s ruling, Vice Chancellor Travis Laster said fair value was $17.62 per share, not the $13.75 per share deal price. With interest, investors who sought appraisal will collect about $20.84 per share. The Dell investors presented evidence that fair value was $28.61 per share, which would have cost Michael Dell and Silver Lake hundreds of millions of dollars. The buyers contended that fair value was $12.68.

Here’s the summary of this Fried Frank memo:

The Delaware Court of Chancery’s decision in Chelsea Therapeutics Stockholder Litigation (May 20, 2016) underscores the benefits of disclosure to stockholders with respect to a board’s decision—in valuing the company in connection with a sales process—to not take into account (or to modify or revise) projections prepared by management. It should be noted that the court’s discussion highlights that, as reflected in the trend of Delaware decisions over the past couple of years, as a practical matter, the only viable path to liability of directors in a post-closing damages action—absent egregious facts—is a claim that the directors were conflicted (i.e., that the directors were not independent and disinterested).

Here’s the intro for this Orrick memo:

On May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election. Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016). The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.

We have posted the transcript for our recent webcast: “M&A Research: Nuts & Bolts.”

In this 101-page study, SRS Acquiom analyzes the deal terms of 735 private-target acquisitions valued at $137 billion, to assist you in deal structuring and negotiation and bring you a robust view of the private-target M&A landscape…

Here’s the summary of this Goodwin Procter memo:

In yet another example of the Obama Administration’s continued vigorous enforcement of the antitrust laws, the Federal Trade Commission successfully sued and ultimately blocked the acquisition of Office Depot, Inc. by Staples, Inc. This litigation provides another reminder to potential merging entities that a careful assessment of the antitrust risks is an essential component to any transaction and that closing is by no means guaranteed, especially where the merging parties are close competitors and where the parties’ defenses are predicated closely on concepts of new and disruptive entrants. In this alert, we provide a detailed overview of the litigation itself, as well as some key takeaways for clients considering their own transactions.

Here’s the intro from this Richards Layton memo:

In In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 11, 2016), the Court held that fourteen mutual funds sponsored by T. Rowe Price & Associates, Inc. (“T. Rowe”) as well as institutions that relied on T. Rowe to direct the voting of their shares (the “T. Rowe Petitioners”) were not entitled to an appraisal of their shares of Dell Inc. in connection with Dell’s go-private merger, because the record holder had voted the shares at issue in favor of the merger, thus failing to meet the “dissenting stockholder” requirement of Section 262 of Delaware’s General Corporation Law. The T. Rowe Petitioners held their shares through custodians. The custodians, however, were not record holders of the shares; they were participants of the Depository Trust Company, which held the shares in the name of its nominee, Cede & Co., which, for purposes of Delaware law, was the record holder. As the record holder, Cede had the legal right to vote the shares on the Dell merger and to make a written demand for an appraisal of the shares.

Here’s the intro from this blog by Kevin LaCroix:

When Delaware Chancellor Andre Bouchard rejected the proposed disclosure-only settlement in the litigation arising out of Zillow’s acquisition of Trulia, there was some belief that his decision represented the death knell for these kinds of settlements in merger objection lawsuits. There is indeed some evidence that the number of merger objection lawsuits filed has declined. However, as discussed in a Washington Legal Foundation article by attorneys Anthony Rickey and Keola R. Whittaker, “Delaware’s sister courts continue to approved disclosure only settlements and award six-figure attorneys’ fees.” As discussed below, the net effect of Delaware’s hostility to disclosure only settlements may not necessarily be that fewer of these kinds of cases get filed, it may be that weaker cases are “driven to other jurisdictions.”

There’s some interesting stats in this article from “The Street” including the proportions of deals challenged by the DOJ and FTC over time…

Here’s news from this Cleary Gottlieb memo (we’re posting memos in our “Financial Advisors” Practice Area):

On May 6, the Delaware Supreme Court issued an Order that sets forth concisely the contours of the defendant-favorable standards for determining liability of directors and their advisors following the closing of sales of control of companies. These standards are available, however, only following an uncoerced and informed approval of the sale by the target stockholders, including a majority of the disinterested holders. Thus, while the Order clarifies a roadmap (set forth recently in Corwin v. KKR) for obtaining easy dismissal of post-merger damages claims against directors and advisors, the need for directors and their advisors to avoid, or at least ferret out and disclose, any deficiencies in sales processes remains as strong as ever. Only if these deficiencies are avoided or uncovered and disclosed in advance of the shareholder approval will the lower courts be able to rely on these defendant-favorable standards to dismiss claims.

The Supreme Court issued this Order upon reviewing the Chancery Court’s dismissal of post-closing damages claims against the board of Zale and its financial advisor. As discussed previously, the claims by the shareholder plaintiff were based on the alleged failure of the Zale board to make sufficient advance inquiries into, and the alleged delay by the board’s financial advisor to notify the Zale board of, the financial advisor’s conflicts. The lower court found that the shareholders, including a majority of the disinterested holders, approved the sale of Zale after the disclosure in the proxy statement of these alleged shortcomings and therefore concluded that this fully informed shareholder approval required the court to find that no breach of duty occurred unless a director’s conduct failed to satisfy the gross negligence standard (i.e., a “wide disparity” between the process used and the process that “would have been rational”). The Supreme Court agreed with this reasoning, including the decision of the Chancery Court to dismiss the claims, except the Court clarified that the gross negligence standard is not defendant-favorable enough after there has been an informed shareholder approval. The proper standard following informed shareholder approval is whether there has been “waste,” which occurs only if “no person of ordinary or sound business judgment” could have found the transaction to be fair. The Supreme Court noted strongly that there is “little real-world relevance” to “the vestigial waste exception” when there has been an informed shareholder approval, since informed shareholders cannot be presumed to be irrational, and therefore dismissal on the pleadings is appropriate in these instances where the only issue is whether waste occurred.

This Order in the Zale case is good news for target boards that either have well-run sale processes or, if their process had any deficiencies, have adequately disclosed these deficiencies in advance of obtaining shareholder approval of the transaction. But where does this leave target boards’ financial advisors, which, as occurred in the Zalesuit, are named from time to time as co-defendants alongside the target directors? Does dismissal of the claims against the directors similarly merit dismissal of the post-closing damages claims against their advisors for aiding and abetting breaches of duty by the directors?

Per the Supreme Court Order in Zale, the answer is yes, with one exception. The exception arises only in a scenario that turned out not to be determinative in the Zalecase: Where the court dismisses the claims against the directors not under the rule of Corwin, which provides for the applicability of the director-friendly “waste” standard following informed shareholder approval, but under the rule of In re Cornerstone, which confirms that exculpatory provisions in charters mandate dismissal of damages claims against directors who acted in good faith no matter what the context, even those contexts involving conflicts where heightened “entire fairness” review applies. If the dismissal of the claims against the directors is the result of the directors’ having relied in good faith on their advisors, who were in turn “intentionally dup[ing]” or perpetrating a “fraud on the board,” then the dismissal of the claims against the directors does not merit dismissal of the claims against the advisors for aiding and abetting. But even in these instances, the Supreme Court stresses, if the advisors acted without scienter—i.e., without knowledge—then the claims for aiding and abetting must be dismissed. Moreover the Supreme Court highlights its “skeptic[ism] that the supposed instance of knowing wrongdoing—the late disclosure of a business pitch that was then considered by the board, determined to be immaterial, and fully disclosed in the proxy—produced a rational basis to infer scienter.” Still, determinations of whether or not scienter existed are fact-specific and the easier path to dismissal of aiding and abetting claims is the path used in the Zalecase: dismissal of the claims against the financial advisors, together with the claims against the director defendants, as a result of the informed shareholder approval.

To sum up:

1. After an uncoerced, informed shareholder approval that includes a majority of the disinterested holders, lower courts should dismiss on the pleadings all post-closing damages claims against directors for breaches of duty and against advisors for aiding and abetting. The only claims that theoretically survive this shareholder approval are those for “waste,” which are typically not tenable following an informed shareholder approval.

2. In the absence of such a shareholder approval:

– Post-closing damages claims against directors for breach of duty should be evaluated under the gross negligence standard (i.e., a “wide disparity” between the process used and the process that “would have been rational”) in addition to being subject to the exculpatory provisions of charters that mandate dismissal of damages claims where the directors acted in good faith.
– Post-closing damages claims against advisors for aiding and abetting must establish both scienter (i.e., knowledge) and a predicate breach by the directors. Even though breach of duty of care claims against directors acting in good faith will be dismissed if the charter has an exculpatory provision, that breach can still be the basis of an aiding and abetting claim where the advisor knowingly provided “misleading or incomplete advice tainted by the advisor’s own knowing disloyalty.”

3. As a practical matter, the path to dismissal described in item 1 is much more efficient. Thus, well-run board processes, including advance inquiries into and consideration of advisor conflicts, and adequate disclosure of any flaws in these processes is now of more value than ever to directors and their advisors.