DealLawyers.com Blog

Here’s the latest from “The Activist Investor”

Earlier we outlined how Valeant and Pershing Square (PS) planned to convene an unusual ‘meeting’ of Allergan shareholders. They sought to collect votes on a non-binding resolution urging Allergan leadership to negotiate with Valeant and PS on their pending bid to acquire Allergan. In the latest twist in this unique story, Valeant and PS withdrew its proposal for the ‘meeting’. The New York Times reported that Allergan shareholders view the ‘meeting’ as a “distraction” and worry that voting for the proposal would trigger Allergan’s poison pill.

Instead, PS now proposes an official special shareholder meeting. The agenda includes dumping six Allergan directors, and approving six new ones nominated by PS and Valeant. And, it features the exact same non-binding resolution that Valeant and PS originally proposed for the ‘meeting’, urging Allergan to negotiate a deal with Valeant and PS. Also, Valeant and PS boosted their offer for Allergan within days of proferring their original one.

The New York Times and Wall Street Journal think that Valeant and PS acted erratically. From the Times:”Yet in the last week, Valeant and [PS] have turned an already unusual deal into a one of the most confounding takeover attempts in recent memory. Their tactics have often departed from the established playbook, and at times have appeared counterproductive. And after they offered a succession of revised proposals, changed tactics and made public presentations, the fate of Allergan remained no more certain than it was in April, when the process began.” The Journal merely called it “zigging and zagging.”

We rather think Valeant and PS made some shrewd and sensible moves based on candid discussion with other investors. As they disclosed these discussions, it appears they responded to two critical developments:

– Investors signaled what deal structure would win their vote, hence the improved terms in a week’s time.

– Allergan showed zero inclination to respond to a non-binding resolution, even one with significant shareholder support.

It sounds like investors said, “Why bother with the referendum? As long as you respond to our economic needs, we’ll vote for a new BoD, and wait for the protracted special meeting process to work out.” Based only on what PS disclosed, Allergan should come to the table sooner rather than later. Last week, Valeant and PS met with investors representing at least 20% of the outstanding shares, which with their 10% gives them a dominant block. It takes 25% of the outstanding shares to call the special shareholder meeting, which seems very likely to take place.

Seems to us Allergan would almost certainly prefer to negotiate a deal in private, rather than attend a special shareholder meeting in public.

Here’s news from DealBook’s Steven Davidoff:

The hedge fund Merion Capital might have hit a roadblock in its multimillion-dollar appraisal proceedings involving the $1.6 billion buyout of Ancestry.com. And it’s a roadblock that just might slow the trend toward exercising appraisal rights. Appraisal rights allow shareholders in an acquisition to ask a court to assess the value of their shares. The idea is that if the buyer underpaid for the stock, shareholders have a remedy — namely going to court and having a judge determine the right price for the shares. While appraisal seems like an effective remedy, shareholders have been reluctant to exercise this right because the process can take years, shareholders have to pay legal fees and many state courts, including Delaware’s, can actually award less than the amount paid in the merger.

Enter the hedge funds. Merion is the largest of a number of funds that are now exercising appraisal rights as a business strategy. Merion has reportedly raised more than $1 billion and to date has exercised appraisal rights in nine different actions, including takeovers involving Dole Foods, BMC Software and Airvana. These funds have led to an upsurge in appraisal rights. According to a paper by two law professors, Minor Myers of Brooklyn Law School and Charles Korsmo of Case Western Reserve Law School, the value of appraisal claims was $1.5 billion last year, a tenfold increase from 2004.

In the case of Ancestry.com, which was bought by an investor group led by the European private equity firm Permira, Merion bought 1.225 million shares of its stock at the $32 cash buyout price, worth about $39 million. Merion is pursuing appraisal rights to obtain a higher dollar figure. It seems to be a strategy perfect for a hedge fund that is run by experienced lawyers and is designed to take risks. However, perfection may have run into reality in the Ancestry.com proceedings, which are taking place in a Delaware court. The combination of hedge funds and appraisal rights is new, and that means that the law governing it is still in flux.

Ancestry is opposing the appraisal rights petition, arguing that the price paid was fair value. Ordinarily this would lead to a trial where the court would determine who was correct. Courts have tended in the past to favor the party seeking appraisal, a fact that is underpinning Merion’s strategy. But Ancestry filed a brief two weeks ago on a novel legal point that may wipe out Merion’s case not only in its proceeding but possibly in others as well.
The issue is that in order to exercise appraisal rights in Delaware, a stockholder must not have “voted in favor” of the transaction. This makes sense, because if you are asking the court to give you more money in a takeover, then you should at least show you opposed the deal at the price you think is too low. It sounds like a simple rule, but it is complicated.

First, there is the issue that most shareholders don’t hold their shares directly in a company. They are merely beneficial owners. Actual record ownership of the shares is held through brokers and then through the share ownership company Cede & Company. Cede votes its shares as all the shareholders direct, but Cede votes these shares in the aggregate and does not allocate shares to each owner. Consequently, it is impossible for a beneficial owner to assert how their shares were voted and to know whether the appraisal requirement to not vote for the deal is met.

Second, for each shareholder vote there is a record date. The record date marks the date when shareholders are counted as eligible to vote. But shareholders can buy shares after that date and exercise appraisal rights. However, such a shareholder never votes on the transaction. Instead, the previous owners who held the shares on the record date may vote their shares for the deal. In this case, what happens if the previous owners voted for the transaction or their votes are unknown? It is this second problem that Merion faces. Merion bought all of its shares after the record date for the shareholder vote on the transaction.

In depositions by Ancestry’s counsel, Samuel Johnson, a portfolio manager at Merion said that he did not know how Merion’s shares were voted because they were bought after the record date. This would seem to doom Merion’s claim. But not entirely. In the case of Transkaryotic Therapies Inc., the court addressed the issue of whether a beneficial holder of shares who acquired shares after the record date was required to show that the previous owner did not vote for the transaction. In that case, the stockholders demanding appraisal had held their shares beneficially with Cede as the record-holder. The court held that in such a case, only the record-holder — Cede — had to show that there was not an affirmative vote. Because Cede had voted sufficient shares as record-holder against the transaction, the appraisal petition was sufficient.

This case made sense because the Delaware statute at the time permitted only a record-holder of stock to exercise appraisal rights. Cede also appears unable to retrace its shares and show how they were voted for its beneficial shareholders. If the court in Transkaryotic had required this, many shareholders would effectively lose their appraisal rights. Merion will no doubt argue this case applies here because it held its shares beneficially and not as record owners.

In the wake of Transkaryotic, however, the Delaware appraisal statute was amended to allow shareholders who own stock beneficially to exercise appraisal rights. Ancestry’s counsel is now arguing that this amendment requires that a beneficial owner show it did not vote in favor of the transaction. In its filing to the Delaware court, Ancestry stated that a “beneficial owner may now bring an appraisal action in its own name, without relying on Cede (or some other nominee) to vindicate its rights indirectly.” The beneficial holder thus now “assumes the statutory obligation to show that the shares it seeks to have appraised were not voted in favor of the merger.”

The case is not completely in favor of Ancestry, though. The section of the appraisal rights statute Ancestry is citing requires that the beneficial owner exercising appraisal rights set forth a statement of “the aggregate number of shares not voted in favor of the merger or consolidation.” But the amended statute does not state whether these shares are required to have not been voted for the transaction. Moreover, the statute itself when it refers to a shareholder defines it as a shareholder of record, meaning that the basis for Transkaryotic appears to remain despite this amendment. In its petition seeking appraisal, Merion said it had not voted in favor of the transaction. When asked at deposition about this, Mr. Johnson said that it was “boilerplate” and that Merion did not know how its shares were voted. In other words, Merion is relying squarely on the Transkaryotic opinion to win.

The question now is whether court views on appraisal rights are changing now that their exercise is more frequent.
Even if Merion wins, it might only be kicking the can down the road. In the appraisal proceedings for Dole, another action Merion is participating in, more shares are exercising appraisal rights than those that voted against the deal or abstained. This means that there are definitely stockholders exercising appraisal rights who hold shares that voted yes. It all means peril not just for hedge funds but for companies as they wait for the law to catch up and see whether their business strategies work. It’s a risky strategy, but then again that is what hedge funds specialize in.

On Monday, as noted in this article from “The Deal,” Bill Ackman abandoned his unorthodox referendum approach to have shareholders vote at a meeting set up outside of Allergan’s bylaws on a nonbinding proposal that would urge Allergan’s board to engage in “good faith” negotiations with Valeant – and instead is now waging a traditional proxy contest. Here are articles about Ackman’s initial approach:

– WSJ’s “Lawmaker Raises Concerns to SEC About Ackman’s Allergan Referendum”
– Representative Royce’s Letter to SEC asking for review of the innovative Pershing Square plan
– The Activist Investor’s “Annals of Investor Relations: What CEOs Really Think of Investors”
– DealBook’s “In Allergan Bid, a Question of Insider Trading”
– The Activist Investor’s “A Shareholder “Get Together”
– The Deal’s “Ackman pushes unorthodox shareholder proposal”

Here’s analysis from Cliff Neimeth of Greenberg Traurig:

Net/net, with respect to the facial validity of (non-fee shifting) exclusive forum bylaws (adopted unilaterally by the board) or exclusive forum Certificate of Incorporation provisions (approved and recommended by the board, with subsequent stockholder adoption), one of the key underpinnings of the Delaware Chancery Court in the Chevron decision was that such provisions address merely the “where” of the litigation and do not interfere with or unduly deter the “if, how, why and when” of the litigation. Whether that rationale is compelling or not, in other words (in the Court’s view), the former is merely procedural in nature and consistent with Delaware’s internal affairs doctrine and protecting Delaware corporation’s from the threat of duplicative litigation in non-Delaware jurisdictions where flawed interpretations of Delaware law could be made and inconsistent judgments could be rendered based on the same suite of facts arising out of the same transaction presented in multiple forums.

The latter context seemingly impacts the decision of whether, how and when to institute litigation, and the nature of the claims asserted and remedies sought, etc. Thus, the latter context may be considered more of an intrusion on the plaintiff’s substantive rights and, therefore, it is potentially preclusive. The goal of reducing and deterring strike suits and frivolous “shakedown” actions is obviously laudable and necessary (given how out of hand the situation has become every time, or 94% of the time to be exact, an M&A or other extraordinary corporate transaction is announced). However, the Delaware bar apparently does not believe that throwing the “baby out with the bath water” is a prudent or practical solution and a rush to adopt such provisions in the wake of the ATP Tour non-stock corporation case is a bit too much of a knee-jerk, check the box response. It is still possible (but not overly probable) that a compromise can be reached in the legislature to narrow the scope of such provisions so as to allow some level of private ordering in a permissible and practical form.

As in life, things are often a matter of degree. Sometimes a simple aspirin is needed to cure a headache and resorting to the guillotine is a disproportionate and unnecessary response. Although, to date, numerous Delaware stock corporations (and some corporations in Illinois, California, Maryland and several other jurisdiction) have adopted Chevron-type exclusive forum bylaws, there still remain certain issues regarding consent, personal jurisdiction and other mechanics.

That said, I would continue to recommend, in appropriate circumstances, the adoption of (non-fee shifting) exclusive forum bylaws for Delaware corporations. Interestingly, and importantly, despite ISS’ and Glass-Lewis’ less than enthusiastic response to such bylaw provisions, the reaction to date from a fair number of major index funds , regulated asset managers and other (non-union and non-hedge fund) institutions has been positive to neutral (even where the corporation does not have a perfect corporate governance scorecard and has not experienced material harm by reason of its previous involvement in multi-jurisdictional litigation involving the same claims and arising out of the same facts).

One last word of caution here. Facial validity is just that. “As applied” validity is a different matter. Although the adoption of a properly (and narrowly tailored) exclusive forum bylaw adopted in the cool of night may be valid on its face ab initio (under the DGCL or another state’s corporation laws) it’s use in a particular current or later-evolving context may be challenged on fiduciary (i.e., care and loyalty) and other grounds depending on the facts and circumstances. That which is valid as a matter of statute or organic authority does not mean its application in a given setting is fair, equitable or reasonable. Accordingly, directors need to weigh the risks and benefits of adoption carefully based on the best current information available to them and with the advice of capable professional advisors, and if a post hoc situation arises implicating such provisions, the directors need to consider whether to consent to multiple actions or to let the bylaws operate as intended.

Also see this blog by Keith Bishop entitled “Fee Shifting Bylaw Provisions May Face Constitutional Limitation”…

This May-June Issue of the Deal Lawyers print newsletter includes:

– Prospective Bidders: Will the Pershing Square/Valeant Accumulation of Allergan Lead to Regulatory Reform?
– Proposed Amendments to the Delaware General Corporation Law: Section 251(h) Mergers & More
– The Evolving Face of Deal Litigation
– Rural Metro: Potential Practice Implications Going Forward
– New Urgency for Corporate Inversion Transactions

If you’re not yet a subscriber, try a Half-Price for Rest of ’14 no-risk trial to get a non-blurred version of this issue on a complimentary basis.

Over on TheCorporateCounsel.net, I recently blogged about how the Delaware Supreme Court found that fee-shifting bylaws are permissible (there are numerous memos posted on that site about this case). As with exclusive venue bylaws, whether many companies decide to adopt these litigation-related bylaws will likely hinge on the reaction of the proxy advisors and major institutional investors. Here’s a nice article by David Marcus of The Deal about this case:

A recent decision from the Delaware Supreme Court has corporate lawyers and litigators pondering a potentially new way to curb shareholder litigation. On May 8, the court unanimously held legal under Delaware law a
corporate bylaw providing that a shareholder who sues the company unsuccessfully must pay it for the costs of defending the suit. Justice Carolyn Berger’s 14-page opinion in ATP Tour Inc. v. Deutscher Tennis Bund answered only the question of whether such bylaws are legal under Delaware statutory law and did not offer guidance on when a corporate board might be able to implement one consistent with its fiduciary duties. Combined with a 2013 decision in which then-Chancellor Leo E. Strine Jr., upheld a corporate bylaw that requires all fiduciary duty litigation against a company to be brought in the Delaware Court of Chancery, the ATP decision could give companies a powerful tool against insurgent shareholders. (Strine is now the chief justice of the state’s Supreme Court.)

Said one New York M&A lawyer, “This decision opens the door to adding these fee-shifting provisions on top of forum-selection bylaws, with the possibility that these fee-shifting provisions will be more effective in deterring
frivolous shareholder litigation altogether with the forum selection bylaws only effective in eliminating duplicative litigation outside Delaware.”

The ATP case originated not in Delaware state court but in federal court. The Deutscher Tennis Bund and the Qatar Tennis Foundation sued the ATP in U.S. District Court in Delaware after the organization downgraded the tournament played in Hamburg, which the DTB and the QTF own and operation. The plaintiffs claimed that the ATP — a Delaware membership corporation to which both entities belong — violated its fiduciary duties and U.S. antitrust laws with the downgrade. The federal district court found for ATP, which moved to recover its legal fees from DTB and QTF based on a provision in its bylaws. The district court certified the question of the bylaw’s legality to the Delaware Supreme Court.

Berger held that fee-shifting bylaws are “facially valid” under Delaware law but cautioned, “Whether the specific ATP fee-shifting bylaw is enforceable, however, depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose.”

Companies may adopt a fee-shifting bylaw to deter litigation, Berger held, because the intent to do so “is not invariably an improper purpose. Fee-shifting provisions, by their nature, deter litigation. Because fee-shifting provisions are not per se invalid, an intent to deter litigation would not necessarily render the bylaw unenforceable in equity.”

The ruling was greeted with hearty approval by corporate lawyers, several of whom said that the ATP ruling should be applicable to stock corporations even though the decision involved a non-stock or membership organization. But that doesn’t mean corporations will start adopting such bylaws immediately, since proxy advisory firms and some institutional shareholders would likely oppose them vociferously and the bylaw would need to be appropriately tailored to a company’s specific situation. “In appropriate circumstances, such as the commencement of a sale process, the value of the bylaw could outweigh the negative consequences,” the lawyer said.

In a memorandum to clients, Wilson, Sonsini, Goodrich & Rosati PC said that boards of Delaware companies should “seriously consider” adopting such bylaws. The best time to do so would be “on a ‘clear day,’ when a board is not facing threatened or pending derivative litigation.” The optimal clear day might even be before a company goes public. The Wilson memo noted several caveats to the adoption of a fee-shifting bylaw. First, shareholders always retain the right to amend corporate bylaws and might well try to amend one that provides for fee shifting of litigation costs. Second, as Berger noted in the opinion, a Delaware court might hold that the board use of such a bylaw in a given situation might constitute a breach of fiduciary duties. Finally, the memo noted, other states might not honor fee-shifting bylaws. “The issue will likely be the subject of a lot of debate in the boardroom in the coming months as the recent Delaware decisions signal that companies may consider a variety of ways to control or limit the costs of frivolous litigation,” said Katherine Henderson, a partner in Wilson’s San Francisco office.

A. Thompson Bayliss, a partner at Abrams & Bayliss LLP in Wilmington, said that the ATP decision could encourage other kinds of bylaws designed to curb stockholder litigation. He suggested a bylaw that would opt out of the so-called corporate benefit doctrine, which allows stockholders to recover attorneys’ fees from the corporation if they confer a benefit on the corporation. At least in some instances, that type of bylaw would require suing stockholders to bear the costs of the litigation they bring, rather than imposing the costs on the corporation (and indirectly on the entire stockholder base). That could have a chilling effect on stockholder strike suits, but the widespread adoption of such bylaws remains a long way off, Bayliss said.

Here’s news from Davis Polk:

As expected, Senator Carl Levin and thirteen other Democratic Senators yesterday introduced a bill that would significantly limit, for a two-year period, the ability of U.S. corporations to engage in the type of acquisitive “inversion” transactions that have been increasingly completed or proposed by many U.S. corporations, particularly in the pharmaceutical sector.1

The typical acquisitive inversion transaction involves (i) putting a newly-formed non-U.S. holding company on top of the existing U.S. corporation, with the shareholders of the U.S. corporation becoming shareholders of the non-U.S. holding company, in conjunction with (ii) the acquisition by the non-U.S. holding company of a foreign target corporation, in a transaction in which the former shareholders of the foreign target corporation receive more than 20% of the stock of the non-U.S. holding company. The transaction avoids the most detrimental aspects of current U.S. “anti-inversion” rules (Section 7874 of the Internal Revenue Code), which would otherwise generally treat the non-U.S. holding company as a U.S. tax resident corporation if the former shareholders of the existing U.S. corporation received 80% or more of the stock of the non-U.S. holding company in the transaction. In many of these transactions, the executive officers and senior management of the existing U.S. corporation became the executive officers and senior management of the non-U.S. holding company and remained located substantially in the United States, a fact that is not relevant for purposes of the current anti-inversion rules.

Effective for acquisitions completed after May 8, 2014 and before May 9, 2016, the Levin bill would amend Section 7874 as follows:2

– The required stock ownership of the non-U.S. holding company by the former shareholders of the foreign target corporation would be increased from more than 20% to at least 50%.
– Even if the stock ownership requirement is met, the non-U.S. holding company would still be treated as U.S. tax resident corporation if (i) “management and control” of the non-U.S. holding company group occurs, directly or indirectly, primarily within the United States, and (ii) the group has significant U.S. business activities.3
– At a minimum, management and control of the group would be treated as occurring, directly or indirectly, within the United States if “substantially all” of the executive officers and senior management of the group (regardless of title) who exercise “day-to-day” responsibility for making decisions involving “strategic, financial and operational policies” of the group are based or primarily located in the United States.
– A group would have significant U.S. business activities if at least 25% (or such lower percentage as may be specified in regulations) of the group’s employees (by headcount or compensation), assets or income is located or derived in the United States, as determined by reference to existing regulations under Section 7874.
– If the bill is enacted, and a U.S. corporation undergoes an inversion transaction that meets the new ownership requirement but would otherwise be caught by this new management and control test, the bill may have the effect of forcing a substantial portion of the executive officers and senior management of an inverting U.S. corporation to relocate outside the United States.

After May 9, 2016, the amendments made by the Senate bill would no longer be in effect and the current anti-inversion rules would come back into force for transactions occurring after that date. Senator Levin has indicated that the temporary nature of the amendments made by the bill is intended to effectively place a temporary “moratorium” on typical inversion transactions while Congress works on corporate tax reform, and is an attempt to make the bill more palatable to those members of Congress who would prefer corporate tax reform as a permanent solution to the inversion “problem.” However, the fact that the bill has to date attracted only Democratic co-sponsors in the Senate is indicative of the difficulties that proponents of the bill may have in getting the bill passed in both the Senate and the Republican-controlled House of Representatives.

1. Representative Sander Levin introduced a substantially identical bill in the House of Representatives, with nine other House Democrats, although the House bill did not contain the two-year sunset provision.
2. The following discusses only the provisions of the bill that relate to the types of inversion transactions described above. The bill would also make other, more technical changes to the existing anti-inversion rules that could affect other types of transactions.
3. This amendment to Section 7874 would generally apply to any non-U.S. corporation that acquires, directly or indirectly, substantially all of a U.S. corporation or a domestic partnership of any size or in any type of transaction, including an all-cash acquisition. This provision could apply, for example, to a foreign corporation that was the result of a prior inversion transaction that subsequently acquires another U.S. corporation, or even a foreign corporation, if the foreign target had a U.S. subsidiary.

As I blogged last month, William Ackman’s Pershing Square Capital has teamed up with Valeant to make a hostile bid for Allergan as part of a new paradigm of a hedgie and corporate teaming up. Allergan has formally rejected any overtures so far.

Last week, Pershing Square Capital filed this preliminary proxy statement so that Allergan shareholders could attend a “meeting” of sorts (in person or by proxy) solely to cast a non-binding vote on whether Allergan should negotiate with Valeant on a deal. This straw poll is another novelty of this deal. Here’s some articles about this tactic:

– Reuter’s “No downside in Allergan ‘meeting'”
– The Activist Investor’s “A Shareholder ‘Get Together'”
– WSJ’s “Pershing Square Wants Allergan Holders to Push for Merger Talks”

Here’s news from Lisa Stark of Berger Harris:

In Southern Pennsylvania Transportation Authority (“SEPTA”) v. Volgenau, C.A. No. 461, 2013 (Del. May 13, 2014), the Delaware Supreme Court affirmed a Chancery Court decision holding that a sale of a controlled corporation to an unaffiliated third party, in which a controller (while not on both sides of the transaction) was alleged to have used his position to compete with the minority for merger consideration, would be reviewed under the deferential business judgment standard of review if the transaction is (1) recommended by a disinterested and independent special committee and (2) approved by stockholders pursuant to a non-waivable vote of the majority of all the minority stockholders.

Sales of Controlled Corporations to Unaffiliated Third Parties

The Delaware Supreme Court did not issue a written opinion in connection with this en banc ruling. However, the decision to affirm the Chancery Court decision in SEPTA is significant because it confirms the standard of review applicable to transactions in which the controller is alleged to have used its power to disproportionally divert portions of the merger consideration to be paid by an unaffiliated, third-party acquirer to the minority if the controlled target deploys robust procedural protections. In the 2009 Chancery Court decision in In re John Q. Hammons Hotels Inc. Shareholder Litig., the Court of Chancery held that the business judgment rule would apply to such a situation only if the merger was subject to (1) a non-waivable vote of a majority of the minority stockholders, and (2) a recommendation by a disinterested and independent special committee. In In re John Q. Hammons Hotels Inc. Shareholder Litig., the Court found the transaction at issue to be subject to entire fairness review because, although the transaction was subject to a majority of the minority vote, the special committee could waive the condition and the vote only required a majority of the minority voting on the matter, not a majority of the outstanding minority stockholders.

Subsequent Chancery Court decisions, such as Frank v. Elgamal, reaffirmed that, absent the procedural protections of a special committee and a majority of the minority vote, the Court of Chancery would apply the entire fairness standard of review to mergers of controlled corporations to an unaffiliated third party if the controller is alleged to have used its power to unfairly extract merger consideration from the minority or otherwise to have dictated certain aspects of the negotiations contrary to the interests of the minority.

SEPTA v. Volgenau

Unlike MFW, which involved a controlling stockholder on both sides of the transaction, SEPTA involved a merger between a third-party and a company with a controlling stockholder. Specifically, this action involved claims arising from the buy-out of defendant SRA International, Inc. (“SRA”) by Defendants Providence Equity Partners LLC  and its related entities. See SEPTA. v. Volgenau, C.A. No. 6354-VCN (Del. Ch. Aug. 31, 2012). As a public company, SRA had two classes of common stock: Class A and Class B. Holders of Class A stock were entitled to one vote per share, while holders of Class B stock were entitled to ten votes per share. However, SRA’s certificate of incorporation required the Class A and Class B common stock be treated equally in the event of a merger. As part of the transaction, SRA’s founder, Ernst Volgenau, who controlled SRA through his ownership of Class B shares, received a minority interest in the merged entity, a non-recourse note, a continuing role in the merged entity, and, in exchange for fifty-nine percent of his Class B shares, $31.25 per share in cash. Minority stockholders, who held Class A Shares, received $31.25 per share.

In this action, plaintiff contended that Volgenau received greater consideration in the merger than did the minority stockholders and that the board breached its fiduciary duties by failing to attempt to adhere to the charter’s equal treatment provision. However, because the transaction had been approved by a special committee comprised of independent and disinterested directors, and a fully informed, non-waivable majority of the minority vote, the Court reviewed the allegations under the deferential business judgment standard of review.

The decision to uphold the application of the business judgment rule to sales of controlled corporations to unaffiliated third parties where the transactions are subject to the same procedural protections at issue in MFW makes sense. In theory, transactions in which the controller is not on both sides of the deal present less potential for the controller to exert influence to the detriment of the minority stockholders.

Here’s news from ISS’ Chris Cernich:

On Friday, May 9, TIG Investors, a 9.5 percent holder of Zale Corp, filed preliminary soliciting materials and an investor presentation urging other shareholders to resist what it called an “undervalued” sale of the company. TIG points out that, while Zale shareholders are getting almost $300 million in premium – that’s 40 percent – the buyer’s shareholders got a $1.4 billion premium from the market when the deal was announced. This indicates that the value being created by the combination is not being appropriately shared between buyer and seller. TIG proposes that the company renegotiate to include a stock component as well as cash – its proposal would be worth about $28.50, versus the current $21 per share cash offer – which would allow Zale shareholders to participate in the upside of the combined company.

There are signs of growing support among other Zale shareholders, including about a 5 percent rise in Zales share prices, to $22, though no other shareholders have yet gone public. The Zale meeting will be held May 29.

There has also been progress, of a sort, in the Pershing Square/Valeant Pharmaceuticals unsolicited bid for Allergan. As expected, the Allergan board on Monday turned down the bid as undervalued. And, also as expected, Pershing Square and Valeant began taking their case directly to shareholders.

What wasn’t expected, however, was the tactic; Pershing Square is calling a sort of town hall, in lieu of an actual Special Meeting of shareholders, to create a referendum on whether the Allergan board should negotiate with Valeant in good faith. It’s not as strong a move as proposing a dissident slate of directors; but, since Allergan’s bylaws don’t allow for proposals at a special meeting which repeat business on which shareholders have already voted in the past year, it seems unlikely Pershing Square and Valeant can actually run a contest for board seats before May of 2015. As this plebiscite tactic is not an official corporate meeting, it is unclear whether “voting” would be required under ERISA.