DealLawyers.com Blog

Tune in tomorrow for the webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Brian Breheny of Skadden Arps, Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.

Recently, the Economist ran this article about how regulators should make it easier – not harder – for activists. Also see this 1-minute video I just made:

Here’s news from Kevin Miller of Alston & Bird:

Recently, a number of investors as well as certain hedge funds have adopted a strategy of seeking an appraisal of the fair value of their shares in a target corporation acquired via merger merely to earn the currently very attractive statutory rate of interest on the appraised value of those shares from date the merger closes to the date of payment of the judicially appraised value. In the current low interest rate environment, the relatively high statutory interest rate of 5% above the Fed. Reserve Discount Rate may generate an attractive return even if the appraised value is less than the merger consideration.

In a new case – Huff Fund Investment Partnership v. CKx, Civil Action No. 6844-VCG (Del Ch; 2/12/14) – the respondent target corporation valiantly but unsuccessfully attempted to stop interest from accruing at the overly generous statutory rate on that portion of the value of its shares that it was not challenging in the appraisal proceeding and was willing to pay immediately. Here is an excerpt:

The Respondent requests that I order the Petitioner to accept an unconditional tender of $3.63 per share, which represents its expert’s base case scenario for valuing CKx, plus accrued interest. In other words, the Respondent agrees that under no circumstances could CKx be valued at less than $3.63 per share, and it is willing to tender that amount to stop the accrual of interest on that payment, which interest is currently accruing at five and three-quarters percent, five percent above the Federal Reserve discount rate. In effect, the Respondent seeks the equitable analog of an offer-of-judgment rule, which allows Superior Court, but not Chancery, litigants the ability to limit the adverse effects of a verdict.

In addition to agreeing that the Petitioner would not be required to return the tendered amount to the Respondent, the Respondent has offered to indemnify the Petitioner for any negative tax consequences incurred as a result of accepting a partial payment—an offer conditioned on the Petitioner turning over certain tax decisions to the discretion of the Respondent. Despite those concessions, the Petitioner continues to reject the Respondent’s offer, and for the reasons explained below, I deny the Respondent’s request for an order requiring the Petitioner to accept it. . . .

I am aware that equitable principles may support such a tolling of interest, in certain situations. However, where the General Assembly has provided a specific standard governing interest awards, such a statutory directive must trump those considerations.

This decision makes it clear that the Delaware legislature needs to act – hopefully sooner rather than later – to address the issues created by an overly generous statutory interest on the appraised value of shares. Otherwise, given the current low interest rate environment, we will continue to see a large number of long, drawn-out appraisal claims burdening the Delaware courts.

This interesting Laurel Hill blog about the Herbalife saga led me to create this 50-second video:

In this chart from SharkRepellant, over the past decade, you can determine how many proxy fights were won by management or dissidents, how many were settled and how many were withdrawn or pending…

I have posted the transcript for our recent webcast: “How to Sell a Division: Nuts & Bolts.”

In this Akin Gump blog, Daniel Fisher weighs in on two new Delaware cases:

Last week, in American Capital Acquisition Partners, LLC v. LPL Holdings, Inc. (February 3, 2014), the Delaware Court of Chancery, in connection with a disputed earnout provision, allowed a claim for breach of the implied covenant of good faith and fair dealing to survive a motion to dismiss. In taking this relatively rare step, the court showed a willingness to fill a ‘gap’ in contractual drafting with an obligation to act in good faith, and deal fairly, with respect to a matter the parties did not focus on in negotiations. Specifically, the claims that survived were based on allegations that clients, personnel and opportunities of the acquired company were actively diverted post-closing to another subsidiary of the buyer, thereby impeding the acquired company’s ability to meet the performance guidelines that would have entitled the sellers (plaintiffs) to certain contingent payments (both under the Stock Purchase Agreement (SPA) and their employment agreements).

On the other hand, the court dismissed the claims alleging breach of those implied covenants by the buyer in failing to make technological adaptations to help increase profitability because the plaintiffs anticipated, but failed to bargain for, such an obligation in the SPA.

Interestingly, this case also involved a non-reliance issue, and since the SPA included both an integration clause and a provision disclaiming reliance on extra-contractual representations, the court did not allow the sellers’ fraudulent inducement claim. Here’s the language:

“Non-Reliance. Except for the representations and warranties by the Company in this Agreement, Buyer and Seller each acknowledge and agree that no Person is making, and Buyer nor Seller is not relying on, any representation or warranty of any kind or nature, express or implied, at law or in equity, or otherwise, in respect of the Company, the Business, the Sellers or the Buyer, including in respect of the Company’s Liabilities, operations, assets, results of operations or condition.”

On a related topic, in the recent case of Blaustein v. Lord Baltimore Capital Corp. (January 21, 2014), the Delaware Supreme Court held that the directors of a closely held corporation do not have a fiduciary duty to consider buying out minority stockholders. Instead, stockholders should rely on contractual protections to facilitate liquidity. The court also affirmed that, based on the repurchase provisions in the relevant stockholders agreement, the implied covenant of good faith and fair dealing did not create a duty to negotiate a reasonable repurchase price for the shares.

Very shortly after I blogged the below, I became aware that Broadridge reversed it’s position with this note: “Upon further internal review, Broadridge will not be implementing the change announced last week. Both sides of a proxy contest will continue to receive interim voting updates for their own and each other’s ballot.” Thanks to Sabastian Niles of Wachtell for the heads up!

This was my early morning blog: In this Davis Polk blog, Ning Chiu reports:

Broadridge has announced a new policy that during proxy contests, each party will only receive the interim results of votes cast for its own proxy card, reports the WSJ. Companies and dissidents can share voting information if both sign confidentiality agreements. This new policy could make it more difficult for solicitations, including determining whether an investor has not voted at all, or has instead voted for the other side.

A possible effort by the ABA to ask the SEC to shorten the period required to conduct broker search cards could also impact proxy contests. Currently, SEC Rule 14a-13 requires issuers to notify or “search” the banks and brokers at least 20 business days prior to the record date. A petition may seek to shorten that time to five days. Some argue that the lengthy period does not account for technological advancements, and a shorter period would facilitate the process for voting on major transactions and allow for a shorter period before annual meetings take place. Others, however, contend that the compressed broker search period would affect the time for activists and others aligned with their views to invest in the stock prior to the record date, or permit a competing offer for transactions.

With SEC Chair Mary Jo White recently recognizing “shareholder activism” as something different than what has been perceived in the past, the debate over whether activism is a “good thing” or not has never been hotter. Check out this new paper by Professors Rose & Sharfman entitled “Shareholder Activism as a Corrective Mechanism in Corporate Governance“…

In this blog, Ethan Mark of Stinson Leonard Street provides recent examples of merger agreements that deal with privilege in the wake of the Great Hill decision…