A Delaware judge awarded $25 million to plaintiffs’ lawyers who successfully sued investment bank RBC Capital Markets LLC over buyout advice it gave a client, but he declined to assess the fees on top of the payout to shareholders. The ruling by Vice Chancellor J. Travis Laster came during a court hearing Thursday, according to people involved in both sides of the case. A written order wasn’t immediately available.
Mr. Laster in October ordered the bank, part of Royal Bank of Canada, to pay about $76 million to former shareholders of Rural/Metro Corp., finding that the bank’s desire to win fees on both sides of the transaction–as an adviser to the company and a lender to the private-equity firm that bought it–tainted its boardroom advice and wasn’t adequately disclosed to the company or its shareholders.
Plaintiffs’ lawyers had sought fees over and above that amount–an unusual request, as attorneys fees are typically taken out of damages awards, not added on top. They argued RBC bankers had “lied repeatedly” during the trial, and that the bank’s court papers included statements it knew were false. Delaware judges can impose legal fees on top of client awards if they find a party acted in bad faith. Mr. Laster on Thursday said RBC made representations that were “problematic,” but said they didn’t merit imposing legal fees on top of the damages award, according to the people. The ruling saves RBC tens of millions of dollars.
With interest, the bank owes about $93 million as of Thursday, the people said. RBC has defended its actions and is expected to appeal. The ruling was the first in Delaware to hold a bank liable for merger advice, and is seen as opening the door to other such cases. Currently several Wall Street banks are facing suits over their roles on recent transactions.
As Canadian banks have expanded into the U.S. they have met their share of regulatory actions and litigation. RBC in December was ordered to pay a $35 million penalty for allegedly engaging in illegal futures trading with itself over a three-year period. The case, one of the biggest of its kind, was brought by the Commodity Futures Trading Commission. RBC had earlier denied the allegations and didn’t admit or deny them as part of the settlement.
Here’s a blog by Stinson Leonard Street’s Steve Quinlivan:
In Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC et al, the Delaware Court of Chancery explained the operation of Section 8106(c) of the Delaware statutes for the first time. The results are surprising to many, as the new statute can apply to M&A agreements executed years ago. Section 8106(c), which became effective on August 1, 2014, provides as follows:
Notwithstanding anything to the contrary in this chapter (other than Section 8106(b)) or in § 2-725 of Title 6, an action based on a written contract, agreement or undertaking involving at least $100,000 may be brought within a period specified in such written contract, agreement or undertaking provided it is brought prior to the expiration of 20 years from the accruing of the cause of such action.
According to the court, Section 8106(c) was intended to allow parties to contract around Delaware’s otherwise applicable statute of limitations for certain actions based on a written contract, agreement or undertaking. By stating that the written contract, agreement, or undertaking could refer to a “period specified,” Section 8106(c) created a flexible framework for defining the time in which suit can be brought. If the contract specified an indefinite period, then the action nevertheless must be brought “prior to the expiration of 20 years from the accruing of the cause of such action.”
The court explained that Delaware precedent explains that a modification of a limitations period is a procedural matter affecting remedies rather than a change in substantive law. Ordinary presumptions against retroactivity do not apply, and the modification applies to ongoing suits absent a showing of manifest injustice. If the Delaware legislature chooses to alter the statute of limitations, then the change applies not only to future claims, but also presumptively governs existing claims.
A court may limit the retroactive application of a change in the statute of limitations where retroactive application would cause injustice. According to the court, there was no injustice here. The defendants did not assert a timeliness defense until two years after the dispute arose, including after the parties had engaged in a lengthy meet-and-confer process that contemplated resolving loan disputes on their merits. During the meet-and-confer process, the defendants never argued that the Trustee’s claims were untimely. In addition, the case was still pending when the Delaware legislature enacted Section 8106(c) and when the statute became effective, so the amendment addressed live claims. It did not have the effect of reviving extinguished claims.
Turning to the purchase agreement used in connection with the securitization, the court observed the agreement contained provisions designed to modify the statute of limitations for purposes of claims for breaches of representations and warranties. Under Section 8106(c), those provisions are valid and effective. Analogizing to a real estate agreement, the court stated “Absent contract language providing to the contrary, pre-closing representations about the acquired property interest become ineffective post-closing.”
Once a transaction agreement provides for representations to survive closing, the next question is how long they can survive. Before the effectiveness of Section 8106(c), the maximum survival period was three years, because of certain Delaware decisions which held that parties could shorten but not lengthen a statute of limitations. But with the effectiveness of Section 8106(c), parties can now extend the statute of limitations up to a maximum of twenty years.
The court interpreted this purchase agreement to provide the defendant had 20 years to discover the breach under the new Delaware statute. Because this structure of the purchase agreement did not specify an outside date for bringing claims, it is subject to the 20 year statutory maximum in Section 8106(c).
The upshot of the decision is most parties will likely want to specificy a time certain for brining claims. Language such as “indefinite survival” should no longer be used if it can be avoided. M&A agreements should also explicitly provide that representations and warranties survive closing.
In this blog, Francine McKenna parses a new study – “Shared Auditors in Mergers and Acquisitions” – that documents a novel auditor conflict of interest. As Francine notes, data suggests that when an acquiring company and its target share the same auditor, the audit firms favor acquirers at the expense of audit clients who are M&A targets. These findings also strongly suggest that auditors prioritize their own self-interest and larger clients over smaller ones, and their public duty, when an M&A opportunity forces a choice between audit clients in the firm’s client portfolio.
As noted in this press release, shareholder activism grew significantly in 2014, with the number of companies targeted worldwide reaching 344, compared to 291 in 2013, according to “The Activist Investing Annual Review 2015,” published by Activist Insight, in association with SRZ. This Bloomberg article highlights the investors most likely to support activists. Other highlights from the review:
– Shareholder activists were more active than ever in 2014, based on the number of companies targeted and number of activists active. In fact, the number of targeted companies with no prior run-ins with activists over the last five years also increased, from 210 to 249.
– The number of activists running a public campaign, such as a demand for board representation or strategic alternatives, rose for its fifth consecutive year in 2014, to 203. In 2013, 160 activists ran a public campaign, up from 150 in 2012.
– Activists increasingly sought to push companies into M&A activity. Proactive M&A campaigns, where activists seek to push companies to acquire other firms or sell themselves, nearly doubled from 36 to 68 instances between 2013 and 2014. Reactive M&A, typified by opposition to deals or their terms, more than halved from 26 to 12 over the same period.
The “Activist Top Ten 2014” are:
1. Starboard Value LP
2. Third Point LLC
3. JANA Partners LLC
4. Icahn Enterprises LP
5. GAMCO Investors Inc.
6. Elliot Management
7. Pershing Square Capital Management LP
8. Trian Partners
9. ValueAct Captial
10. Corvex Management LP
Tune in tomorrow for the webcast – “Rural/Metro & the Role of Financial Advisors” – to hear Steve Haas of Hunton & Williams, Kevin Miller of Alston & Bird and Blake Rohrbacher of Richards Layton discuss a whole host of topics, including the viability of claims for aiding and abetting breaches of fiduciary duty in connection with M&A transactions as well as the widely-talked about paper from Delaware Chief Justice Leo Strine about “documenting the deal.”
The Delaware Court of Chancery today issued its post-trial decision in the appraisal of Ancestry.com, rejecting claims brought by hedge funds seeking an award substantially in excess of the merger price. In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. Jan. 30, 2015). The decision confirms that the merger price resulting from a comprehensive, arm’s-length sales process will be accorded substantial weight in Delaware appraisal proceedings.
In recent years, transaction parties have faced an increased level of post-merger appraisal litigation. Much of this litigation has been brought by hedge funds pursuing an investment strategy known as appraisal arbitrage, where the funds take significant share positions following the announcement of a merger solely for the purpose of bringing an appraisal action. The appraisal here followed this pattern. Appraisal arbitrage funds took substantial positions in Ancestry following the announcement of Ancestry’s proposed acquisition by Permira, and brought appraisal proceedings immediately after completion of the transaction. At trial, petitioners presented an expert’s discounted cash flow analysis purporting to show that the value of the company was more than $42 per share, well in excess of the $32 per share merger price.
The Court rejected the opinion of petitioners’ expert and found that the merger price was the best indication of Ancestry’s fair value. The Court noted that Ancestry had conducted a “robust” auction, involving contacts with over a dozen parties, that had produced a “motivated buyer.” The Court concluded that this robust sales process was “unlikely to have left significant stockholder value unaccounted for.” The Court did conduct its own discounted cash flow analysis, which resulted in a value slightly below the merger price, but ultimately concluded that fair value was “best represented by the market price.” The Court’s opinion reflects the understanding that a price set by the market reflects assessments about value by buyers with real money at stake. As the Court explained, “it would be hubristic indeed to advance my estimate of value over that of an entity for which investment represents a real—not merely an academic—risk, by insisting that such entity paid too much.”
The recent arbitrage-fuelled surge in appraisal litigation is likely to continue. But the Court’s decision in Ancestry confirms that the market still matters in appraisal proceedings, sometimes conclusively, and that appraisal arbitrage is not without risk. Appraisal arbitrageurs must tie up substantial capital for long periods and incur substantial litigation costs, but can still end up with nothing more than the deal price.
This Bloomberg article does a nice job providing the backstory behind how 18 law firms came together with the Corp Fin Staff to get this no-action relief on debt tender offers out there. Here’s an excerpt:
Jim Clark, a partner at Cahill Gordon & Reindel LLP, headed the efforts to come up with a workable recommendation to amend Rule 14e-1(a) under the Securities Exchange Act of 1934. His goal was to come up with proposals that would satisfy the lawyers, as well as the investment banks and representatives of the Credit Roundtable, a group of large institutional fixed-income managers, involved.
What they finally agreed on, after months of conference calls and “many, many drafts,” was an eight-page letter to the SEC trying to establish guidelines for short-term debt tender offers in situations that don’t involve a change of control, or a company that is about to go bankrupt or other coercive situations, Clark said.
With the changes included in the SEC’s Jan. 23 no-action letter, many of these tender offers are now subject to a rule requiring them to remain open for only five business days as long as certain conditions are met. The SEC hadn’t addressed the guidelines — including how long a tender offer for debt had to remain open — since the mid-1980s, Clark said. In 1986, the tender-offer period was reduced from 20 business days to seven calendar days for some offers for investment-grade debt, but the application of the guidelines was neither consistent nor had they been updated to reflect the prevalence of high-yield debt, he explained.
I recently asked my good friend Jim Brashear of Zix Corporation this question: “are lawyers are still sending confidential deal documents via unencrypted email?” I asked Jim since he’s an expert in that area (Zix is an email encryption service provider). Here is Jim’s response:
Do I think deal lawyers are still sending confidential docs via email? Yes. It happens all the time. State bar opinions from the 1990’s that allow the use of email are misinterpreted by lawyers who think they allowed carte blanche use of unencrypted email. The law firms try to strike the appropriate balance between data security when transmitting files and personal convenience. However, convenience – for the lawyer – almost universally wins (most lawyers don’t even bother to ask the client). Cost is a factor. There are other considerations too, such as what happens if multiple clients insist the lawyer use client-specified secure communications methods.
A related topic is the indefensible distinction that the state bar opinions make about the use of Cloud services versus email. I’ve blogged about this on our company website: “Lawyer Use of Cloud Services Versus Email – An Ethical Distinction Without a Practical Difference.” Recent ethics opinions ask lawyers to jump through diligence hoops before using Cloud services. No similar mandates exist for email, even though email is a Cloud service and provides essentially the same functionality as file transfer services (internet transmission, remote file storage). Moreover, remember that email is insecure.
Some lawyers misidentify the issue as whether attorney-client privilege is maintained if data security is breached. They justify lax data security by noting that inadvertent disclosure is not necessarily a waiver of privilege. That is, however, a separate issue from the ethical obligation to maintain client confidentiality. The privilege question is essentially limited to a litigation context. A judge can decide, as a matter of evidentiary law, whether or not the privilege is preserved in a particular case where data security was compromised. Confidentiality, on the other hand, is lost once client data is disclosed; and a judge cannot unring that bell.
The ethics opinions actually require lawyers making data security decisions to examine the circumstances and assess the risks. The ethics guidance is that lawyers must take data security measures that are reasonable in the circumstances. Below is a checklist of some relevant factors:
– Client’s instructions
– Degree of sensitivity of the information
– Possible client impact from disclosure
– Data breach laws
– Likelihood of disclosure
– Inherent level of security
– Reasonable steps to increase security
– Cost of additional safeguards
– Urgency of the situation
– Legal ramifications of unauthorized interception, access or use
Nobody (including data security vendors) is saying that every email (or every file shared via Box, Dropbox, etc.) that contains information relating to the representation of a client must be encrypted. And certainly nobody is saying that lawyers must have a separate encryption key for each client or “circumstances” (much less, one committed only to one attorney’s memory). The issue is whether the lawyer’s reliance on a third-party’s data security is reasonable.
On the flip side, however, there is no authority that every email with client information can be sent unencrypted. The ethics opinions are also quite clear that using unencrypted email is not appropriate in some situations. I often recommend that law firms insert into their engagement agreements a paragraph that states something like the following:
“We will typically use email to communicate with you. Unencrypted email is subject to risks of interception by third parties. If you are concerned about those risks in particular circumstances (for example, because of the sensitivity of the information involved or because of an enhanced risk that a third party may gain access to the information), please advise us of those concerns so that we can discuss with you more secure means of communicating.”
Tune in tomorrow for the webcast – “Proxy Solicitation Tactics in M&A” – to hear Okapi Partners’ Chuck Garske, Alliance Advisors’ Waheed Hassan, Managing Director and Innisfree’s Scott Winter discuss the latest techniques used to sway opinion and bring in the vote – including social media – as well as how traditional tactics have evolved.
Today, January 23, 2015, the Division of Corporation Finance (the “Staff”) granted a no-action letter that was submitted on behalf of a consortium of law firms, including Gibson Dunn, whereby the Staff agreed to not recommend Enforcement action when a debt tender offer is held open for as short as 5 business days. This letter builds upon an evolving line of no-action letters granted over the past three decades that have addressed not only the overall duration of debt tender offers (typically the rules require a minimum of 20 business days), but also formula pricing mechanisms (that allow a final price to be announced several days prior to expiration).
Following an extensive dialogue with members of the bar and numerous market participants, including issuers, investment banks and institutional investors that began several years ago, the Staff is now opening up the relief that it previously limited to “investment grade” debt securities. Under the no-action letter, “non-investment” grade debt securities are now eligible to be purchased on an expedited basis. In order to take full advantage of this relief, issuers will need to disseminate their offers in a widespread manner and on an immediate basis. This should enable more security holders to quickly learn about the offer and permit holders to receive the tender consideration in a shorter timeframe. In addition, the abbreviated offering period will allow more issuers to better price their tender offers with less risk posed by fluctuating interest rates and other timing and market concerns related to the offer.
Previously, the Staff limited “abbreviated” debt tender offers (i.e., seven to ten calendar days) to “all-cash” offers seeking to purchase investment grade debt securities where the offering materials were disseminated in hard copy by expedited means such as overnight delivery. The relief granted today enables issuers to conduct their offers for both investment grade and non-investment grade debt securities on a similarly short time-frame (i.e., five business days) so long as the offer is open to “any and all” of a series of non-convertible debt securities and the issuer widely disseminates its offer notice to investors and provides them with immediate access to the offering materials.
More importantly, the letter opens up the door to five business day exchange offers, provided that the offer is exempt from the ’33 Act registration requirements and the securities sought are “Qualified Debt Securities.” This term is generally defined as “non-convertible debt securities that are identical in all material respects . . . to the debt securities that are the subject of the tender offer except for the maturity date, interest payment and record dates, redemption provisions and interest rate.” Such exchange offers would need to be limited to QIBs and/or non-U.S. persons under Regulation S, with non-eligible exchange offer participants concurrently provided with the option of receiving a fixed cash amount that reasonably approximates the value of the Qualified Debt Securities.
While there are a handful of detailed conditions that an issuer must follow in order to qualify for the relief granted today, key amongst the conditions are that all five day offers must be announced by press release through a widely disseminated news or wire service disclosing the basic terms of the offer and an active hyperlink to the instructions or documents relating to the tender of securities. The press release must be issued no later than 10:00 a.m. (Eastern time) on the first business day of the offer. Public reporting companies must furnish the press release in a Form 8-K filed no later than 12:00 p.m. on the first business day of the offer. With respect to fixed spread tender offers that are tied to a benchmark such as Treasury or LIBOR, as well as exchange offers, the exact consideration offered (including the principal amount and interest rate of any Qualified Debt Securities offered) must be disclosed no later than 2:00 p.m. on the last business day of the offer. Also, the offer may expire as early as 5:00 p.m. on the last business day, which is significantly earlier than what prior Staff interpretations allowed, which required an offer to remain open until midnight for that day to count as a full business day.
Of course, some offers are explicitly precluded from taking advantage of the relief. Most notably offers involving a consent solicitation may not be conducted on a five business day time-frame. Similarly, the relief would not extend to, among other things: partial tender offers, third-party tender offers, waterfall debt tender offers, offers made when there is a default or event of default under the indenture or other material credit agreement, when the issuer is the subject of a bankruptcy or insolvency proceeding, or offers made in anticipation of or in response to a change of control or other extraordinary transaction such as a merger or other tender offer.