DealLawyers.com Blog

Here’s news from this article in the Delaware Law Weekly entitled “Disappointment in Chief Justice Process Led to Resignation Decision, Berger Says”…

Here are the documents filed so far in the appeal of the “contribution” issue in the Rural Metro case that was decided in March (here’s the transcript from our webcast analyzing that decision):

– RBC Capital Markets’ Reply Brief in Further Support of Its Post-Trial Contribution Brief
– RBC Capital Markets’ Post-Trial Contribution Brief
– Plaintiff’s Post-Trial Answering Brief on Contribution
– Granted Stipulation & Order of Briefing and Oral Argument on Contribution (ie. schedule of appeal process)

A lot of movement on the Delaware Supreme Court these days. The latest is that Delaware Governor Jack Markell has nominated Skadden’s Karen Valihura to replace Jack Jacobs. Meanwhile, Delaware Supreme Court Justice Carolyn Berger announced that she will retire from the September 1st…

In this podcast, Andy Jones, President of PEI Services, discusses his company – an online information services company providing up-to-date & accurate information about financial buyers to the middle market investment banking community and associated M&A service providers, including:

– What is PEI Services generally & who are the intended users?
– Can you describe your research database?
– How do you source your data and ensure data quality?
– Do you license your data for use within internal CRM systems, or as a plug-in to other corporate data systems?

We have posted the transcript for our recent webcast: “Appraisal Rights: A Changing World.”

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.