DealLawyers.com Blog

Here’s news from Cliff Neimeth of Greenberg Traurig:

With these proposed amendments, the Delaware legislature is prepared to act over organic fee-shifting and exclusive venue provisions and to consider amending Delaware’s appraisal statute. The proposed amendments – new DGCL Sections 102(f) and 109(b) – would, if adopted, preclude the adoption of fee-shifting bylaws and C-of-I provisions in the case of Delaware stock corporations.

As you recall, the ATP decision involved a non-stock association and its purported (broader) application outside that context has been vehemently criticized by numerous constituents. Several public companies have adopted such bylaws in the wake of the ATP decision and were forced (with considerable embarrassment) to reverse such adoption when they realized that their reading of ATP was a stretch or at least premature, and also due to institutional stockholder backlash and proxy advisor “withhold vote” policies effectively opposing such provisions implemented by unilateral board action.

Here are a few random thoughts on the proposed amendments:

– In the case of exclusive venue bylaws (now commonplace for hundreds of public companies in Delaware and in at least four other jurisdictions), the proposed amendments – DGCL Section 115 – would statutorily validate such provisions on a facial basis. Meaning, they still can be subject to challenge “as applied” given a particular set of facts and circumstances (e.g., adoption after the commencement of subject litigation or in some other context constituting a breach of fiduciary duty).

– The Delaware Court of Chancery recently upheld the adoption by a Delaware corporation of bylaws selecting North Carolina as the exclusive venue for intra-corporate disputes. The proposed amendments to the DGCL would permit such foreign jurisdiction selection so long as the organic language does not 100% foreclose such actions in Delaware courts.

– Under the proposed amendments, stockholder agreements containing such provisions that bind the contracting parties would, however, remain permissible.

– The personal jurisdiction issue raised in the commentary is easily addressed by adding consent to jurisdiction and other language in the relevant bylaw or charter provision. These provisions also are written subject to waiver by the corporation so that there is a “fiduciary out” in the case of a potential “as applied” challenge.

– The initiative to amend Section 262 is in response to the increasing practice of merger arbs and hedge funds to purchase shares post-record date (for the vote on the merger agreement) and assert appraisal rights so long as it can be demonstrated that the record date holder (e.g, CEDE & Co.) holds more shares that were not voted for the merger agreement than the number of shares for which the beneficial owner (the fund) is seeking appraisal. Because Cede & Co. holds shares in fungible bulk for its participant and customer accounts, that condition can be readily satisfied.

– Recent Delaware decisions (Ancestry.com and Merion Capital) have confirmed that the beneficial owner does not need to demonstrate that it’s specific shares were not voted for adoption of the merger agreement.

– In that statutory interest for properly perfected appraisal shares is 500 bps above the prevailing federal discount rate, even if the Delaware Court of Chancery were to determine that the fair value of the appraisal shares was the merger deal price (which a couple of recent cases in fact held), the arb still makes a tidy profit because of the statutory interest rate spread.

– Various inconsistencies in DGCL 262 regarding the procedures for beneficial owners and record date holders to perfect appraisal are the subject of potential legislative clarification.

As always, all remains to be seen, but it is expected that the proposed fee-shifting and exclusive venue amendments will be adopted substantially as proposed.

Here’s news from this blog by Steve Quinlivan (also see this memo):

In Halpin et al v. Riverstone National, the Delaware Court of Chancery found that invoking drag-along rights against minority stockholders after a merger did not waive appraisal rights under the facts of the case before the court.

Here, the drag-along right did not include a specific waiver of appraisal rights. It only provided that upon advance notice, minority shareholders would vote in favor of a change-in-control-transaction.

Delaware courts have never addressed whether a common stockholder can waive appraisal rights in advance. The court discussed In re Appraisal of Ford Holdings, Inc. That case found that a preferred stockholder may waive its right to appraisal. According to the case, “[s]ince Section 262 represents a statutorily conferred right, it may be effectively waived in the documents creating the security only when that result is quite clearly set forth when interpreting the relevant document under generally applicable principles of construction,” and ultimately held that the indirect language in the relevant documents was “too frail a base upon which to rest the claim that there has been a contractual relinquishment of rights under Section 262″.

For purposes of the Halpin opinion, the court assumed that common stockholders may waive appraisal rights in advance of a transaction. Here the court found construction of the unambiguous contract provision does not clearly demonstrate that the company is entitled to force a waiver of appraisal. The court found the contract demonstrated the opposite—under the circumstances, the minority stockholders did not breach the stockholders agreement by seeking appraisal.

The court assumed, as argued by the company, that the only purpose of the drag-along was to waive the minority stockholders’ appraisal rights. However, rather than explicitly waiving appraisal rights, the parties opted instead to contract for acts by the minority stockholders that would have the effect of waiving appraisal rights–either a forced tender or vote in favor of a transaction.

But the company’s argument failed because it did not exercise the drag-along rights before the merger. The actual vote on the merger occurred by written consent of the controlling stockholder, before the drag-along rights were exercised. Simply put, the drag-along rights did not require the minority stockholders to consent to a transaction that had already taken place.

The court rejected the notion that the minority stockholders waived their appraisal rights because of the implied covenant of good faith and fair dealing. The company and the minority stockholders were sophisticated parties, and both were charged with knowledge as to the various ways the company could have carried out a merger under Delaware law, including by written consent pursuant to Section 228 of the DGCL. Yet, with full awareness that it could consummate a merger by written consent, without the minority stockholders’ knowledge or involvement, the company agreed to drag-along rights that by their unambiguous terms did not apply to this retrospective scenario.

Here’s an excerpt from this FactSet infographic on poison pills:

An analysis of last year’s U.S. poison pill adoptions reveals that companies continue to primarily adopt them for a specific reason, including in response to unsolicited acquisition offers and activist investors as well as protecting net operating loss (NOL) carryforwards. In 2014, 57 poison pills were adopted by 54 distinct U.S. incorporated companies. Only 13 of the companies adopted what we would categorize as a routine adoption: those adopted before any publicly disclosed threat has emerged or for the specific purpose of protecting tax assets. NOL protective poison pills represented the largest proportion of 2014 adoptions.

The 18 NOL poison pills adopted in 2014 is a three-year high and are tied for the third most such adoptions in any year since 1998, the first year in which we are aware of any U.S. company adopting a poison pill in order to preserve NOLs. Poison pills adopted in response to the company being approached by an activist investor or a rapid share accumulation represented over a quarter of all adoptions.

Tune in tomorrow for the webcast – “Merger Filings with the SEC: Nuts & Bolts” – to hear Dennis Garris of Alston & Bird, Laurie Green of Holland & Knight and Jim Moloney of Gibson Dunn discuss the nuts & bolts of preparing disclosure documents that are filed with the SEC, including practical guidance into what should be disclosed (or not disclosed) to minimize litigation risk – as well as how to handle common Corp Fin comments.

We have posted the transcript for our recent webcast: “Proxy Solicitation Tactics in M&A.”

This Reuters article provides an interesting summary of some of the issues relating to the proposed settlement – and the expected objection – in the In re Activision Blizzard settlement announced last November. In addition to an objection by a shareholder, other notables include:

– Plaintiffs’ attorneys fee request of $72.5 million, which I believe would be the second largest (at least M&A) fee award by the Delaware Chancery
– Per the proposed settlement, the addition of two independent directors to Activision’s board
– An objection to the settlement being filed by another plaintiffs attorney firm seeking to require that a portion of the $275 million settlement be dividended out to Activision’s stockholders

Tune in tomorrow for the webcast – “Private M&A Wake-Up Calls: Conflicted Board Risks, Post-Closing Unenforceability & Shareholder Approval/Duty of Care Traps” – to hear Cleary Gottlieb’s Ethan Klingsberg, Wilson Sonsini’s Marty Korman, Fenwick & West’s Andrew Luh and Morris Nichols’ Jeff Wolters cover the private M&A waterfront as new developments have shaken up this rapidly-evolving area.

Here’s an excerpt from this blog by Kevin LaCroix of the D&O Diary:

It is now well-established that pretty much every M&A deal attracts at least one lawsuit from a shareholder objecting to the transaction. According to research by Notre Dame business professor Matthew Cain and Ohio State law professor Steven Davidoff, 97.3% of all takeovers in 2013 with a value of over $100 million experienced at least one shareholder lawsuit. The lawsuits usually are filed almost immediately after the transaction is announced. Whether or not all of the transactions actually warrant litigation is a topic worthy of a separate blog post, but the fact is that in each case at least one shareholder is prepared to allow his or her name to be put on the lawsuit — which in turns raises the question of how it comes about that the shareholders in whose name the lawsuits are filed become plaintiffs in these cases.

The role of the named plaintiffs in these cases is an interesting one, and anyone interested in the topic will want to review Reuters reporter Tom Hals’ February 18, 2015 Special Report entitled “TV Stock Picker Leads Onslaught of Class Action Suits.” In his article, Hals take a close look at the M&A litigation blitz that has been waged in the name of Hilary Kramer, an investment newsletter author who has published a number of financial books and articles and who appears on Fox Business News.

Here’s a trend – law firms multi-purposing the content they prepare for speaking engagements. Pillsbury does this nicely by having Allison Leopold Tilley tape a 2-minute recap of takeaways from a M&A panel she did (see the vid on the right side of her bio). If you speak on a panel, let me know as I have other ideas of things you can do with the talking points and materials that you prepared…

We have posted the transcript for our recent webcast: “Rural/Metro & the Role of Financial Advisors.”