DealLawyers.com Blog

Here’s news from yesterday’s “Delaware Law Weekly“:

Supreme Court Justice Carolyn Berger, Superior Court President Judge James T. Vaughn Jr., Superior Court Judge Jan R. Jurden and Court of Chancery Chancellor Leo E. Strine Jr. are the four applicants to become Delaware’s next Supreme Court chief justice, according to sources familiar with the process. All applications for the chief justice opening had to be filed with Delaware’s Judicial Nominating Commission by noon today.

Supreme Court Justice Jack B. Jacobs, who was said to be applying as recently as last week, did not apply, according to sources. Justices Randy J. Holland and Henry duPont Ridgely, who were both considered early favorites to for the opening, also did not submit applications. The JNC will undergo the process of reviewing the four applications and will likely begin checking references later this week, according to sources.

Strine is viewed as an early favorite because of his impeccable corporate law background. He was appointed Chancery Court chancellor in 2011 after serving as a vice chancellor for 13 years. He also serves as the special judicial consultant to the American Bar Association’s corporate laws committee. Strine was a corporate litigator at Skadden, Arps, Slate, Meagher & Flom and was counsel to former Gov. Thomas R. Carper.

Gov. Jack Markell is also said to be favorable to Jurden because of the diversity she would bring to the court as both a female and open lesbian. Berger also has a strong corporate law background, having served on the Chancery Court from 1984 until her appointment to the Supreme Court in 1994. She also served as an associate at Skadden Arps and a deputy attorney general for the Delaware Department of Justice.

Here’s news from this Wachtell Lipton memo:

In a thoughtful and well-reasoned decision, the Delaware Court of Chancery held last week that the merger price produced by a “throrough, effective” sales process, “free from any spectre of self-interest or disloyalty,” can be the most reliable indicator of the value of shares in an appraisal proceeding. Huff Fund Investment Partnership v. CKx, Inc., No. 6844-VCG (Del. Ch. Nov 1, 2013).

CKx was a publicly traded corporation with interests in iconic entertainment properties, including the American Idol television show, Elvis Presley Enterprises, and Muhammad Ali Enterprises. In 2011, following an attempted go-private transaction and faced with uncertainty related to the network renewal of American Idol, CKx received several unsolicited bids to purchase the Company for cash. The CKx board retained an independent financial advisor and conducted an expedited process to explore a sale of the Company. Interested bidders were given three weeks to conduct diligence and negotiate a transaction. The Company ultimately received an offer of $5.50 per share from Apollo and an offer of $5.60 from a competing private equity firm. The $5.60 bid, while nominally higher, was not supported by financing commitments and the bidder refused to provide documentation that would have allowed CKx to verify its representations as to financing. In light of the uncertainty surrounding the $5.60 bid, CKx accepted the offer from Apollo notwithstanding its nominally lower purchase price.

After the merger closed, a large stockholder challenged the transaction and exercised its rights under Section 262 of the Delaware General Corporation Law to seek an appraisal of its shares. The Court of Chancery conducted a three-day trial, received expert testimony, post-trial briefing and post-trial oral arguments. In determining the appraised value, the Court reviewed all relevant factors and determined that DCF analyses, comparable companies analyses and comparable transaction analyses were in this case either unreliable or unavailable given the uncertainties surrounding the American Idol renewal negotiations. The court determined that the arms-length sale price – exclusive of synergies – generated by the conflict-free auction was the most relevant indicator of value.

The CKx case reaffirms that a board can conduct a thorough and effective process in a compressed period of time and that accepting the nominally highest price is not always required or in the best interests of shareholders. The decision is also a reminder to stockholders considering appraisal that such actions carry significant risk that after costly litigation they may be left with nothing more (or even potentially less) than the deal consideration.

As noted in this WSJ article, Carl Icahn has launched a website – “Shareholders’ Square Table” – to discuss information about his investment firm and other issues with the public. This ties into my periodic warnings about how activists will really start to leverage the Web and social media. Carl’s first target is Apple, as noted in this article.

Carl undoubtedly is emboldened by the huge success of his recent entree onto Twitter, which has generated much press and earned him 100k followers within four months. Not sure how long all this social media activity by Carl will last given the relatively short life of his “Icahn Report” Blog that launched in late ’08 and died six months later. But I do think it will accelerate the overall trend to use online platforms to pressure management…

Tune in tomorrow for the webcast – “Tender Offers Under the New Delaware Law” – during which the primary drafters of the new Delaware law that facilitates the use of more efficient tender offer structures – Potter Anderson’s Mark Morton and Morris Nichols’ Eric Klinger-Wilensky – along with Latham & Watkins’ Brad Faris will help us understand how it should be best interpreted as well as describe the early experience under the new statute.

As noted in this chart from The Conference Board, during the first half of 2013, activists engaged in more proxy contests and set their sights on larger companies. For the January–June period, the number of proxy contests launched against management of Russell 3000 companies rose to 35, up from 24 during the same period in 2012. There were five contests against S&P 500 companies, which are traditionally less exposed to proxy contests, up from two during the first half of 2012.

As noted in these memos posted in our “Antitrust” Practice Area, the European Commission recently published a consultation paper about a proposal that would allow review of the acquisition of non-controlling minority shareholdings. The proposed reform could have a huge impact on many corporate transactions. Read the memos for more…

This blog by Allen Matkin’s Keith Bishop parses a number of blogs that have weighed in on Delaware Vice Chancellor Travis Laster’s denial of a proposed stipulated consolidation and scheduling order because the proposed order directed that the consolidated cases be captioned “In re Astex Pharmaceuticals, Inc. Shareholders Litigation.” The objection is over the use of “Shareholders” in the caption rather than “Stockholder”…

Here’s news from Steven Haas of Hunton & Williams:

Yesterday, the Delaware Supreme Court ruled from the bench and reversed the Chancery Court in the Activision Blizzard litigation. As previously reported on this blog, the Court of Chancery enjoined a transaction last month in which Activision Blizzard was to repurchase shares and certain tax assets from its controlling stockholder. The Court of Chancery ruled that the transaction was a “merger, business combination or similar transaction” under the company’s certificate of incorporation that required stockholder approval.

The Delaware Supreme Court’s unanimous order reversing the lower court’s decision stated that “there is no reasonable possibility of success on the merits” and that the “Stock Purchase Agreement here contested is not a merger, business combination or similar transaction.” It also indicated that a written opinion would follow.

Here’s news from Chris Cernich, ISS’ Head of Mergers, Acquisitions, and Proxy Contests Research:

The post-crisis resurgence of contested elections, which began last year, continued into the 2013 proxy season. Proxy solicitations to replace some or all incumbent directors, which had fallen to a total of just nine in the first half of 2009, rose to 19 in the first six months of 2012, and 24 in the first half of 2013. The median market capitalization of the targeted companies also increased substantially from a five-year low of $24 million in 2012 to $141 million in 2013.

This $141 million median in 2013 was half again as high as the median of $94 million in 2009 – the record year for contested elections in the U.S.–suggesting that, in the current resurgence, activists are targeting larger companies than they did even at the recent height of the activism cycle. Activists did in fact target significantly more large companies in the first half (1H) of 2013 than in the same period in prior years; eight of 24 contests for board seats, or 33 percent, were at companies with a market cap greater than $1 billion. In the same period of 2012 and 2011, by contrast, only two targets had market caps of greater than $1 billion, and even in 1H 2009 only three targeted companies were larger than $1 billion market cap. Large, well-known activist names such as Pershing Square, Elliott, or Jana Partners, for example, have continued to engage their portfolio companies over the past several years, but had generally been able to win concessions or settlements without going all the way to a contested election.

In 2013, by contrast, many of the activist situations which in previous years might have settled simply did not take that path – or settled at the 11th hour, sometimes on the eve of the annual meeting itself. Some of the activists leading these campaigns had prior experience in large-cap activism – and generally settled at the last minute. TPG-Axon, for example, which ran a consent solicitation to replace the entire board at Sandridge Energy, ultimately settled for four seats on an expanded board of nine and a commitment to fire the CEO within three months. Elliott Associates, on the eve of the shareholder meeting, settled for three of the five seats it sought at Hess. Others – such as Ader Investment Management, which won one of three contested seats at International Game Technology – were newer funds with no activism track record.

Perhaps the most challenging of these large contests was led by a newer fund, Corvex, whose founder was formerly an executive under Carl Icahn. Corvex reportedly received written consent from 70 percent of outstanding shares to replace the entire board of Commonwealth REIT. None of its nominees has yet been seated, however, because the Commonwealth board adopted a defensive bylaw requiring a shareholder own at least 3 percent of shares for a minimum of three years to be eligible to run a consent solicitation. The governing documents also require any shareholder disputes be settled through binding arbitration, however – a Maryland judge rejected Corvex’s attempt to challenge it in the courts – and the three-member arbitration panel has not yet issued its final verdict on the legitimacy of the consent solicitation.

The striking difference in 2013, however, is not just the unusual number of large target companies, but the paucity of targets in what had previously been the “sweet spot” for U.S. activists: targets with market caps between $100 million and $1 billion. In 2009, 39 percent of targets were in this range; in 2010 and 2011, as the number of total contests began to fall, the concentration of targets in this range increased to 50 percent and 78 percent, respectively.

In 1H 2013, however, only four contests–17 percent of the total–targeted firms in this range, and none of those four contests was near the upper end of the range. Instead, building on a trend which began in 2012, the largest cluster of contests was at tiny companies with market caps of less than $25 million. In 1H 2013, nine of 24 contests–38 percent of the total–were at companies worth $25 million or less. The activists in these situations tended to be smaller funds or individuals, though some, such as Stilwell Group, have run a number of contests at microcaps in recent years.

The dissident “win rate,” defined as the percentage of situations in which dissidents won or settled for at least part of the seats they sought, jumped significantly in 2013. In 1H 2011 the dissident win rate was 56 percent; in 1H 2012 it fell to 43 percent. In 1H 2013, however, dissidents achieved as least part of their objectives in 70 percent of contests for board seats. The rate was slightly lower, 64 percent, at very small companies (market caps of less than $100 million), and slightly higher, 75 percent, at companies larger than $100 million, perhaps reflecting the smaller concentration of institutional shareholders (who generally vote in all elections) among the smallest of companies. At each size range of targets, however, the dissident “win rate” jumped significantly from 2012 levels, and nearly doubled at the largest tier, targets with market caps greater than $1 billion.

Contested Mergers

1H 2013 also saw the return of the contested merger. Shareholders rebelled against a number of proposed transactions, particularly in the tech sector, on both valuation and strategy. In most cases the opposition was overcome with a small bump in offer price, generally around 10 percent. Several saw competing bidders ignite a price war.

In five situations, however, the bidder was an insider, situations which present particularly thorny principal/agent complications for investors. At Clearwire, the bidder, Sprint, was both the controlling shareholder with unusual governance rights to thwart other bidders and a strategic investor with urgent need of the wireless spectrum which represented the company’s most valuable asset. The other four were leveraged buyouts involving or led by executives; the largest of these, at Dell Inc., has seen its shareholder meeting adjourned or delayed multiple times, and the price bumped twice at the last minute, for a total of 2.3 percent, amid sustained public opposition from a number of investors already deeply convinced by and committed to the transformational plan the company has already been pursuing.

This blog is derived from ISS’ 2013 Proxy Season Review – United States, which can be found on Governance Exchange.

We have posted the transcript for our recent webcast: “The Use of Social Media in Deals.”