Here’s news from SRS (also see this Akin Gump blog):
In a recent case in which Shareholder Representative Services is serving as the shareholder representative, the buyer in the underlying M&A transaction attempted to include SRS and the selling stockholders as defendants in a class action suit. Mercury Systems, Inc. v. Shareholder Representative Services LLC, et al., Action No. 13-11962-RGS, Dkt. #34 (D. Mass., February 14, 2014). A defendant class would have exposed individual stockholders to burdensome discovery obligations and added expensive complexity to the case. SRS opposed the inclusion of the stockholders, arguing that SRS was the only proper defendant. The judge quickly and vehemently agreed, calling “the common practice of appointing a shareholder representative…a helpful mechanism for resolving post-closing disputes efficiently and quickly.”
The decision reaffirms that shareholders of a target company can effectively remove the risk of being dragged into any deal-related litigation by not serving as the shareholder representative themselves. This is increasingly important to funds and individuals for a number of strategic reasons. Obviously, nobody wants to be a party to a lawsuit if they can avoid it. It can be time consuming and stressful. In addition, most funds have a strong desire to avoid being named an adverse party to a strategic or financial buyer they might see again on future deals. This is increasingly true as funds become more specialized and the universe of buyers in their industry narrows. Finally, most funds would like to avoid having to disclose any litigation when it comes time for fundraising.
SRS has managed more than a thousand indemnification, working capital and earnout claims over the nearly 600 transactions on which we have been engaged. On the vast majority of these, we are able to successfully resolve the issue with buyers without any need for the matter to rise to litigation. However, some claims do not settle and necessitate elevated methods of dispute resolution. To our knowledge SRS is the only professional representative that has been named a litigant on behalf of stockholders, and we’ve taken on this burden in dozens of cases. Any other alternative as a shareholder representative, whether a volunteer or outside source, may be going through the process for the first time,
When engaging SRS, shareholders are able to rid themselves of the risks and burdens of being a shareholder representative without giving up control of the process or any material decisions that need to be made. Our process allows stockholders to have the best of both worlds – control of the issues they care about while ridding themselves of the baggage they don’t want.
Recently, Harvard held a “Roundtable on Activist Interventions” – here are the course materials, freely posted. In particular, here is a piece from McKinsey entitled “Preparing for bigger, bolder shareholder activists” – and the transcript of an interview with McKinsey’s Larry Kanarek on the same topic…
Here’s news from the Delaware Law Weekly (also see this Delaware Online article and this Reuters article):
Delaware Supreme Court Justice Jack B. Jacobs has notified Gov. Jack Markell via a letter that he plans to step down from the bench in July. Jacobs wrote in his March 31 letter, a copy of which was obtained by Delaware Law Weekly, that he will step down July 4, one full year before his term is set to expire. He has served on the Supreme Court for 11 years and was also a Delaware Court of Chancery vice chancellor for 18 years. “No one can or should occupy these positions of trust for too long, however, and in my case, the time has now come to move on to the next phase of my life,” Jacobs said in the letter.
Ahead of our webcast today – “Rural/Metro and Claims for Aiding & Abetting Breaches of Fiduciary Duty” – I thought it would be good to report about how the case was discussed at last week’s M&A conference at Tulane. Here is a WSJ article with a recap:
A recent court ruling that put M&A bankers on high alert was the talk of the town as deal makers gathered in New Orleans this week–and it wasn’t all good talk. Lawyers and bankers spoke warily, and at times critically, of a decision that has landed RBC Capital Markets LLC on the hook for potentially millions of dollars in damages to shareholders of a company it advised on a 2011 buyout. Vice Chancellor J. Travis Laster found earlier this month that RBC’s desire to win fees both advising Rural/Metro Corp. and lending to its buyer, Warburg Pincus LLC, colored its advice to the board and shortchanged investors. RBC has defended its advice to the board and has said it is weighing its options.
The decision echoed loudly in New Orleans, where a few hundred lawyers, bankers, judges and advisers gathered this week at the Tulane Corporate Law Institute. One New York-based lawyer was distributing buttons with “Rural/Metro” encircled in a red “Ghostbusters” sign. On the sidelines, some advisers said quietly they hoped RBC would appeal. In particular, people pointed to the robustness of the auction–26 bidders were contacted; only Warburg submitted a final bid–and Mr. Laster’s decision to exclude from his analysis the fact that Rural/Metro filed for bankruptcy protection after Warburg bought it. “While no one would advocate bad behavior, the decision includes a number of novel applications of law that RBC can raise on appeal and that could result in a reversal,” said Kevin Miller of Alston & Bird LLP. Judges rarely find that boards failed to run a fair sales process. Rarer still is Mr. Laster’s ruling that a bank contributed to–in legal parlance “aided and abetted”–that failure. Because of a quirk of Delaware’s corporate law, directors themselves are typically immune from damages, while advisers can be targeted for millions of dollars.
Particularly troubling to some at Tulane was Mr. Laster’s description of banks in M&A deals as “gatekeepers” that have a duty to make sure boards are running good auctions. In his opinion, Mr. Laster fired a warning shot across the bow of other banks: Stay in bounds, or expect to get sued. “The threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs,” he wrote. “That’s a very striking point,” Paul Choi of Sidley Austin LLP said. “I’ve never read something like that in a Chancery Court opinion.”
Still, some said RBC’s actions as laid out by Mr. Laster were egregious. Last-minute changes to the bank’s fairness opinion had the effect of making Warburg’s offer look more fair, Mr. Laster found. One banker, when the bottom valuation range implied by a so-called discounted cash flow analysis fell above Warburg’s offer, wrote a colleague: “I thought we were going to try to reduce DCF?” “If they’re true, those are bad facts,” said one New-York based M&A lawyer.
They may be costly ones, too. Mr. Laster has not yet ruled on damages, but his opinion and subsequent court filings suggest Warburg may have underpaid by more than $200 million–an amount RBC could owe Rural/Metro’s former shareholders. RBC is likely to argue that the directors and Moelis & Co., which also gave a fairness opinion, are partly responsible, which could reduce RBC’s share of the payout.
And here’s a DealBook article about a Tulane panel on activists…
Tune in tomorrow for the webcast – “Rural/Metro and Claims for Aiding & Abetting Breaches of Fiduciary Duty” – to hear Kevin Miller of Alston & Bird; Brad Davey of Potter Anderson; Stephen Bigler of Richards Layton, Stephen Kotran of Sullivan & Cromwell and Bill Lafferty of Morris Nichols as they discuss a case expected to have a dramatic impact on the viability of claims for aiding and abetting breaches of fiduciary duty in connection with M&A transactions. Please print these course materials in advance…
In this Akin Gump blog, we learn that OFAC published notice that it was listing 11 named parties as “Foreign Sanctions Evaders,” underscoring the need for entities to add the FSE List to the collection of other restricted-party lists that must be covered and reviewed in diligence activities and other compliance screening. We’ll see if Russian entities start winding up on some of these restricted lists…
Below is an excerpt from this Hunton & Williams memo:
In one of his last bench rulings before becoming chief justice of the Delaware Supreme Court, Chancellor Leo E. Strine, Jr. recently refused to approve a “disclosure-only” settlement related to a merger in In re Medicis (See In re Medicis Pharm. Corp. S’holders Litig., Consol. C.A. No. 7857-CS, trans. ruling (Del. Ch. Feb. 26, 2014)). It is unusual for Delaware courts to reject settlements of M&A litigation, most of which are based on supplemental disclosures and do not involve an increase to the merger consideration or other changes to the terms of the merger agreement.
In Medicis, however, Chancellor Strine refused to approve the settlement because he believed the supplemental disclosures did not support the release of claims being given by the stockholder class. While this means that the plaintiff could proceed with the litigation, Chancellor Strine’s comments indicated that the plaintiff’s claims had little chance of success. This result is potentially frustrating to defendants, which frequently enter into disclosure-only settlements to avoid the nuisance costs associated with handling these lawsuits post-closing. But it may also signal increased judicial scrutiny over the proliferation of lawsuits challenging M&A transactions from the newest member of the Delaware Supreme Court.
We have posted the transcript for the recent webcast: “M&A Litigation: The View from Both Sides.”
Here’s news from this WSJ article:
The U.S. Supreme Court refused to revive a Delaware arbitration program in which sitting judges would handle corporate disputes confidentially. Lower-court decisions held that the state-sponsored program was unconstitutional on First Amendment grounds because its arbitration proceedings weren’t open to the public. In a brief order Monday, the high court without comment declined to review those decisions.
The Supreme Court’s order was a blow to Delaware officials who saw the arbitration program, adopted in 2009, as a way to further the state’s business-friendly reputation. Many companies have chosen to incorporate in Delaware because of its favorable corporate and legal climate. Businesses like arbitration because it often is faster and less expensive than fighting in court—and because it takes place behind closed doors.
The Delaware program had added advantages. It was run through the state’s Court of Chancery, whose judges are known for their expertise in corporate disputes. That meant sitting judges could preside over the proceedings instead of private arbitrators, so long as a corporate litigants were willing to pay a $12,000 filing fee and $6,000 a day in arbitration costs.
Business groups supporting Delaware’s program said confidentiality was a time-honored and common-sense aspect of arbitration that allowed companies to protect trade secrets and sensitive financial information. Critics said corporations shouldn’t be able to pay for the services of a judge in secret. The Delaware Coalition for Open Government, a public-interest group, sued to challenge the program, saying that the public should have access to the arbitrations because they essentially were civil-court proceedings, conducted in a state courthouse with state resources. Dow Jones & Co., the publisher of The Wall Street Journal, was among several media organizations that signed a brief supporting the challenge to the program in the lower courts.
Ruling against Delaware last year, the Third U.S. Circuit Court of Appeals said allowing access to the proceedings would give stockholders and the public a better understanding of how the state resolves business disputes. Openness also would discourage companies from misrepresenting their activities to the public, the appeals court said. After that ruling, the Chancery Court asked the Supreme Court to hear the case. The Delaware court said the public enjoys a constitutional right of access only for proceedings in which there is a long history of openness. “That history is completely absent here,” the Chancery Court said in a brief. The state court said invalidating its program could make Delaware a less attractive home for corporations.
“We believe that our nation and Delaware have lost an important opportunity to provide cost-effective options to resolve business-to-business disputes to remain competitive with other countries around the world,” said Andrew Pincus, a Mayer Brown LLP lawyer representing the Chancery Court. He said the state “will continue to look for ways to achieve the objectives of the program.” David Finger, a lawyer for the Delaware Coalition for Open Government, said invalidating Delaware’s program “prevents an erosion of the concept of what is a court in our society.” “If the Supreme Court took this case, it could have set back almost 40 years of legal advances in obtaining access to court proceedings,” Mr. Finger said.
In the wake of its battle with Carl Icahn, ebay has built a special site devoted to its campaign leading up to its annual meeting. In this 2-minute video, I analyze the design & usability of this new site (although I don’t analyze ebay’s IR web page itself – which oddly doesn’t seem to link to this annual meeting site. Neither does ebay’s blog.):