Here’s news from Carla Hine from McDermott Will & Emery:
Although the analysis of whether a transaction may be anti-competitive typically focuses on price, privacy is increasingly regarded as a kind of non-price competition, like quality or innovation. The FTC has indicated that it can challenge mergers it believes will result in a substantial lessening of competition on the basis of privacy – for example, lower quality of privacy for consumers. During a February 26th symposium on the parameters and enforcement reach of the FTC Act, Deborah Feinstein, the director of the FTC’s Bureau of Competition, noted that privacy concerns are becoming more important in the agency’s merger reviews. Specifically she stated, “Privacy could be a form of non-price competition important to customers that could be actionable if two kinds of companies competed on privacy commitments on technologies they came up with.”
While the FTC has not yet challenged a transaction because of privacy, parties can expect it to closely assess the transaction’s impact on consumer privacy. The FTC’s review of mergers between entities with large databases of consumer information may focus on: (1) whether the transaction will result in decreased privacy protections, i.e., lower quality of privacy; and (2) whether the combined parties achieve market power as a result of combining their consumer data. Companies in data-rich industries who are considering merging with or acquiring a competitor should expect privacy to play a prominent role in the antitrust review of their proposed transaction. Companies should undertake due diligence of a target’s privacy practices, talk with key IT and business personnel and consider hiring economic consultants to analyze the competitive impact of the merger on privacy impacts.
I’ve been posting memos about Delaware’s proposed amendments about fee-shifting & exclusive bylaws. Professor John Coffee recently penned this blog – “Delaware Throws a Curveball” – which bears reading. Here is the intro:
Since the Corporation Law Council of the Delaware State Bar Association announced earlier this month that it was recommending statutory amendments to prohibit “loser pays” fee shifting bylaws and charter provisions (and thus overrule the Delaware Supreme Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund[1]), a predictable reaction has followed. Plaintiff’s attorneys and most academics applauded the decision, fearing that the alternative would be the death knell of private enforcement. In contrast, conservatives have attacked the proposed legislation, seeing it as the end of Delaware’s position as the champion of “enabling” corporate legislation and predicting that Delaware would lose market share to other, more permissive jurisdictions in the market for corporate charters. Although the Corporation Law Council usually dictates corporate law legislation in Delaware, lobbyists are at work on both sides, and the outcome is uncertain.
Yet, even with a battle brewing, no one seems to have read the statute closely. Had these commentators focused on the actual language of the proposed legislation, they would have discovered that the legislation does not quite do what either side in this debate thinks it does. Perhaps it is too late in the day to expect legal academics to actually read legislation before turning to economics or political theory, but this instance is especially symptomatic. Outdated as my “old school” approach may be, I will begin with the proposed statutory language. The Corporation Law Council (a 22 member body) has proposed changes to Sections 102 and 109 of the Delaware General Corporation Law (“DGCL”), which provisions regulate the contents of the certificate of incorporation and the bylaws, respectively. The proposed legislation will provide that neither the certificate of incorporation nor the bylaws may contain a provision that “imposes liability on a stockholder for the attorney’s fees or expenses of the corporation or any other party in connection with an intracorporate claim.”[2] As later stressed, this would represent only a partial repeal of the ATP Tour decision’s broader acceptance of the theory that the bylaws are a contract that can bind shareholders retroactively, and it still leaves open the ability of board-approved bylaws to impose liability on shareholders in other contexts. But, at first glance, the above language may indeed seem to preclude “loser pays” fee-shifting provisions.
Also see this Akin Gump blog…
Here’s the intro from this Cooley blog (also see this memo):
In a case just decided, Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch. Mar. 16, 2015), the Delaware Chancery Court addressed the issue of whether the timing of adoption affects the enforceability of a unilaterally adopted fee-shifting bylaw against former stockholders. While it appears that, in light of potential action by the Delaware legislature, the continued viability of fee-shifting bylaws in Delaware is somewhat tenuous, the case may also have application to the enforceability of other bylaw provisions to former stockholders.
This March-April issue of the Deal Lawyers print newsletter includes articles on:
– Five Day Tender Offers: What Can Market Participants Expect?
– Five Day Tender Offers: Conditions and Timelines
– Wake-Up Call for Private M&A Deal Structuring
– Courts Increasingly Skeptical of the Value of Disclosure-Only Settlements
– Transaction Costs: Negotiating Their Tax Benefit
– Food for Thought: Conflicting Views on the “Knowing Participation” Element of Aiding & Abetting Claims
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Here’s a blog by Stinson Leonard Street’s Steve Quinlivan:
Occasionally we see interesting uses of social meeting in M&A transactions (See the SEC position here, and prior examples here). Some more recent examples are:
From Zillow’s acquisition of Trulia:
– Fun pushing social media and investor relations envelope
– Shareholder vote complete. Deal approved by more than 99%. More info in 8-K later
In Mitel’s acquisition of Mavenir, almost 30 tweets and retweets were disclosed in a single 425 filing (scroll to the end), including the following:
– Mitel announces definitive agreement to acquire Mavenir. $MITL $MVNR #Mitel http://ow.ly/3xqJLw
– .@MItel & @Mavenir -Strategic Winning Combination for #Wireless #Cloud #UCOMS Leadership #MWC15 $MITL $MVNR #NewMitel http://bit.ly/1wCrwY3
– RT @JonBrinton: .@Mitel & @Mavenir creates a powerful new value proposition for enterprises & mobile service providers—Rich McBee http://t.co/7NbHN8Bk0r
One would expect to see more uses like the above, but usage seems scant. It’s possible my searches do not find everything. One likely explanation is by the time you get to public announcement, the team is suffering from deal fatigue. It’s complicated enough to explain the usual rules regarding filing of SEC communications without another layer of complexity, and there is all the other important announcement matters going on.
But it really shouldn’t be that hard. A number of tweets can be drafted and approved in advance, just like shareholder and employee FAQs. One problem is a 425 filing can’t be finalized until the hyperlinks are known, but it should easy enough to circle back later in the day and complete the filing.
OMG! This motion to amend the complaint in Chen v Howard-Anderson (“aka Occam”), CA No. 5878-VCL (Del. Ch.) is sure to raise eyebrows as it indicates a willingness to bring aiding & abetting claims against company counsel and not just financial advisors and counterparties – something rarely seen before in the public company M&A context. The oppositions to the motion filed on March 4th were filed confidentially. Argument on the motion to add company counsel is being held on March 17th.
In light of the prisoner dilemma type incentives created by the Delaware Uniform Contribution Among Tort-feasors Law (DUCATL) – as interpreted by the Delaware Chancery Court in Rural/Metro – several commentators have suggested that defendants are increasingly likely to break ranks rather than present a united front in defense of aiding & abetting claims. This likely will contribute to a rise in company counsel appearing as defendants, if not initially included in the complaints filed or in cross-claims filed by co-defendants seeking to preserve and maximize rights of contribution or credit for settlements under DUCATL. This could get real messy.
Like Rural/Metro, the motion to amend the complaint adds new defendants to an action in which discovery is well advanced if not substantially complete, potentially requiring the new defendants – at least Jefferies (like RBC in Rural/Metro) – to go to trial based on a record, particularly discovery – that they may have had little if any role in creating. See paragraph 7 of the motion acknowledging that it is being filed four years after the hearing on a preliminary injunction in the matter.
On the heels of the SEC’s February roundtable on universal proxy ballots, CII sent this letter last week pressing the SEC to propose rules regarding universal proxies in contested director elections. This follows a January 2014 rulemaking petition from the SEC on the same topic. The new letter argues:
– The inability of investors to choose from among all individuals nominated from all parties limits shareowner choice and diminishes director accountability by precluding shareowners from choosing the best candidates amongst all of those who have been duly nominated. This limitation weakens the overall quality of corporate governance in the United States.
– Universal proxies would lessen investor confusion. The current proxy rules are the real source of complexity. The commission’s complex explanation of the steps a shareholder must take to vote for management nominees using a shareholder proponent’s proxy in a contest for a minority of the board proves this.
– Universal proxies would lower the substantial costs that investors currently face if they wish to exercise their full voting rights by picking and choosing among all the candidates who are duly nominated in a proxy contest. As for the costs to companies, experience in Canada shows that implementation of a universal ballot regime is cost effective.
– Whether universal proxies would favor shareowner-proponent nominees over company-nominees should be irrelevant. The more relevant question for the commission is whether universal proxies would provide investors, its primary constituents, with the ability to more fully exercise their fundamental right to vote for the election of directors in a proxy contest.
Meanwhile, in this letter, DuPont rejected Trian’s request to use a universal ballot. And check out this blog for some examples of what a universal ballot looks like…
Here’s news from Kevin Miller of Alston & Bird:
As some of you will recall, in OTK v Friedman (aka Morgans Hotel), C.A. No. 8447-VCL (Del. Ch. April 17, 2013)(Letter Ruling on Motion to Compel), Delaware Vice Chancellor Laster held that where a stockholder has the right to appoint a person to the board of a company, that right gives the stockholder the right to board-level information about the company (“When a director serves as the designee of a stockholder on the board, and when it is understood that the director acts as the stockholder’s representative, then the stockholder is generally entitled to the same information as the director”).
Following the Morgans Hotel ruling and subsequent public comments reiterating that approach, a number of commentators questioned that interpretation of Delaware law and expressed the view that a more appropriate and consistent approach would be that a so-called blockholder does not generally have any right to the information provided to the director serving as the designee of such blockholder except and to the extent such rights are set forth in an agreement between the blockholder and the company giving the blockholder the right to appoint its designee as a director (e.g., in the investment agreement pursuant to which the blockholder makes a significant investment in the company and obtains the right to appoint one or more directors).
Such a default approach gives the company the opportunity to insist on confidentiality and use restrictions in exchange for access to such information and the ability to seek injunctive relief and damages for breaches of the confidentiality and use restrictions. In the absence of such an agreement, the director representative of the blockholder shares board-level information with the blockholder at its and the blockholder’s peril in the event that the company believes it has been damaged by the actions of the director (i.e., a breach of fiduciary duty) or the blockholder (i.e., aiding and abetting a breach of fiduciary duty).
The fact that the a blockholder director might often share information with the blockholder without damage to the company and that, in the absence of harm to the company, the company might turn a blind eye to such sharing of information would not impair the ability of the company to seek appropriate relief in the event it determined it had been harmed just as the failure of the police to ticket every driver exceeding the speed limit does not impair the ability of the police to ticket drivers dangerously exceeding the speed limit.
One of the principal concerns with the Morgans Hotel approach raised by some commentators was the potential lack of any remedy against the blockholder for using board-level information in a manner detrimental to the company. In the absence of an independent fiduciary or contractual duty to the company with respect to the use of such information, the company might be limited to a breach of fiduciary duty claim against the director representative of the blockholder if the director knew the information would be misused by the blockholder to whom the information was provided – a problematic remedy to the extent that the company would be required to prove “knowledge” by the director and the director does not have adequate financial resources to pay any resulting damages.
Nevertheless, VC Laster has reiterated his view in a recent article he co-authored in “The Business Lawyer.” In the article, the authors address the concerns regarding the availability of remedies against the blockholder head-on, though I suspect in a manner that will come as a surprise to many private equity investors and other large stockholders with the ability to appoint one or more directors (but less than a majority). According to the article, the director’s sharing of board-level information with the blockholder results in the blockholder being deemed a constructive insider who can be held accountable through a common law claim under Brophy if the stockholder uses the information for the stockholder’s private benefit even if there is no harm to the company. Harm to the company is not an essential element and under Kahn v KKR disgorgement is an available remedy.
To reiterate, the ability of a blockholder director to convey information to the stockholder that placed him on the board does not mean that the fund or investor obtains the unfettered right to use the information in whatever manner it sees fit. Given the affiliation between the blockholder director and the stockholder and the understanding that information will flow from the blockholder director to the stockholder, the stockholder will be treated as a constructive insider for the purpose of the common law limitations on insider trading. [Citing Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949)] The corporation also could have a cause of action against the stockholder for any further disclosure of confidential information that inflicted harm on the corporation. In other words, the director can share with his stockholder affiliate, but the ability to share within the silo does not permit sharing outside of the silo ”
According to the article:
The Court of Chancery first recognized a fiduciary duty claim for insider trading in a case called Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949). In that case, a stockholder brought a derivative action against the directors of Cities Service Company and Thomas Kennedy, described as a “confidential secretary” to a director and officer of the company. The plaintiff stockholder alleged that, during the course of his employment, Kennedy had obtained knowledge of non-public information regarding the company’s plans to buy back its own shares. The plaintiff stockholder also alleged that Kennedy took advantage of that non-public information and bought a large block of the company’s shares in the market. After the corporation’s planned purchases raised the market price of its stock, Kennedy resold his recently acquired shares to the corporation at a profit. Kennedy moved to dismiss the complaint, contending that no cause of action could be stated against him because he was not a fiduciary to the corporation and the corporation had not suffered any actual harm.
The court disagreed and held the complaint stated a valid derivative claim for breach of the fiduciary duty of loyalty against Kennedy based upon his alleged purchase and sale of company stock. The court’s holding was based on the Delaware public policy, announced most famously 10 years earlier by the Delaware Supreme Court in the seminal case of Guth v. Loft, that “corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests.” Thus, despite not being an officer or director of the corporation, the court found Kennedy occupied a position of trust and confidence within the corporation and deemed his position to be analogous to that of a fiduciary. With respect to Kennedy’s argument that the corporation had suffered no harm, the court held that as a matter of equity, where the claim is that a fiduciary abused a position of trust for personal gain, actual harm to the corporation is not required. “
[. . . ]
“Pfeiffer’s near-elimination of disgorgement as a remedy pursuant to a Brophy claim was soundly rejected by the Delaware Supreme Court in Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011). In Kahn, the state supreme court considered the appeal of the Court of Chancery’s decision regarding the viability of a Brophy claim against defendant Kolberg Kravis and Roberts & Co., L.P. (KKR). KKR was the majority stockholder of nominal defendant, Primedia, Inc. The Primedia stockholder plaintiffs alleged, among other things, that KKR obtained non-public company information through its board designees and used that information to purchase company preferred stock it later sold at a substantial profit. During the pendency of the case in the Court of Chancery, Primedia formed a special litigation committee that investigated and ultimately sought the dismissal of the plaintiffs’ claims, including the Brophy claim. In the proceedings below, the Court of Chancery found that while the Brophy claim stated a valid cause of action, the potential damages available to the company – which would not include disgorgement per Pfeiffer – were insubstantial and the special litigation committee was thus justified in seeking to dismiss this claim rather than recommending that the company pursue it.
Plaintiffs appealed the Primedia court’s decision to the Delaware Supreme Court. While reciting with approval the Pfeiffer court’s holding that Brophy remained good law, the Delaware Supreme Court, relying on Guth, overruled Pfeiffer’s holding that disgorgement was generally not a permissible remedy in the Brophy context except in limited circumstances. Rather, the Supreme Court found “no reasonable policy ground to restrict the scope of disgorgement remedy in Brophy cases – irrespective of arguably parallel remedies grounded in federal securities laws.” The Supreme Court also took the occasion to overrule Pfeiffer’s holding that a Brophy claim exists to remedy harm to the corporation and specifically held that harm to the corporation is not a required element to pleading a Brophy claim.
In a later, related proceeding, In re Primedia, Inc. Shareholders Litigation, 67 A.3d 455 (Del. Ch. 2013), the Court of Chancery again considered the merits of the Brophy claim against KKR. The court again found that the Brophy claim was a viable cause of action and would survive a motion to dismiss. The court also explained that, even though the value of the claim was no longer relevant to its analysis, had it considered full disgorgement of KKR’s gains as a potential remedy, it would have denied the special litigation committee’s motion to dismiss as the potential recovery would have risen from approximately $1.5 million to $150 million.”
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Query: Suppose you learn through your director representative on the Six Flags board that Six Flags is going to build a new theme park on land Six Flags owns in Texas and you buy a privately owned hotel nearby that Six Flags has no interest in buying but whose value quadruples when Six Flags announces its theme park plans. Under Brophy, it appears Six Flags (or a stockholder derivatively on its behalf) could sue you for disgorgement of the private benefit you obtained from investing in the hotel based on inside information and the hotel quadrupling in value – disgorgement is an available remedy. Under Brophy, no proof of damages to Six Flags is required and even if Six Flags decided not to pursue such claim, stockholders might allege demand futility and seek to pursue the claim derivatively.
Takeaway: Under the Morgans Hotel approach, there would likely be numerous opportunities for Brophy claims alleging that a blockholder was deriving private benefits from its access to board-level information and the company might find itself frequently having to address such claims through special litigation committees or otherwise. On the other hand, the alternative default approach advocated by some commentators would limit claims by the company or by stockholders derivatively on its behalf to those circumstances in which the company or stockholders suing on its behalf could demonstrate that the contractual restrictions on disclosure and use had been breached and actual damages to the company had resulted.
While many private equity and large stockholders with the ability to appoint directors may have initially applauded the holding in Morgans Hotel, they may now find that potentially having to face serial Brophy claims makes the alternative default approach advocated by some commentators more appealing.
[Note: Prior to the Morgans Hotel ruling and absent the Business Lawyer article, a blockholder would not necessarily have a common law right to board level information or be deemed a constructive insider for Brophy claim purposes. In Primedia, KKR was a majority stockholder and in Brophy, Kennedy was a confidential secretary to a director.]