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John Grossbauer of Potter Anderson notes: In SEPTA v. Volgenau, Delaware Vice Chancellor Noble granted summary judgment to defendants on all counts of a challenge to the acquisition of SRA International by Providence Equity Partners, in which the company’s controlling stockholder and founder. Dr. Ernst Volgenau, maintained a post-closing interest. The Court found that the business judgment rule was applicable here because the transaction was negotiated by a committee of disinterested directors and subject to the non-waivable approval of a majority of the minority shares of stock of SRA.

The Court cited In re MFW Shareholders Litigation with approval, but found that case not strictly applicable because the transaction did not involve a majority stockholder squeezeout, but rather a sale to a third party, albeit one in which the majority stockholder agreed to roll over a portion of his shares. The Court instead found In re John Q. Hammons Hotels to be the appropriate precedent. In that opinion, Chancellor Chandler noted his belief that business judgment would be the applicable standard of review in a transaction in which a controlling stockholder received differential consideration if the deal were subject both to majority of minority approval and was negotiated by independent directors. As in Hammons, the Vice Chancellor found that Dr. Volgenau did NOT stand on both sides of the transaction for purposes of invoking entire fairness review, because he had not initiated the transaction and was willing to sell to other bidders.

In making the determination that the procedural protections here were sufficient, the Court addressed a number of issues. He found that the fact the lead independent director sought, post-signing, an additional fee of $1.3 million, which would be donated to a charity, was not enough to compromise his independence. Similarly, the contingent fee paid to the bankers, and the bonus paid to the committee’s counsel, did not taint the advisers. He found, in regard to the latter, that failure to disclose the possibility of the additional counsel payment was not a material omission. Finally, the Vice Chancellor found that the differential consideration was permitted under the Class A/B charter structure at issue, given that the value of the consideration received by Mr. Volgenau and other stockholders was equal, and plaintiffs had not succeeded in creating a triable issue of fact to the contrary.

Here’s this Foley Hoag memo:

As part of recent amendments to the Delaware General Corporations Law (DGCL), two new sections were added to the DGCL to facilitate the ratification of so-called “defective corporate acts” that would otherwise be invalid due to improper corporate authorization. New Sections 204 and 205 of the DGCL (the Ratification Provisions), which go into effect on April 1, 2014, provide Delaware corporations the opportunity to undertake a more thorough “corporate clean-up” than is currently permitted under the DGCL.

Why Are Ratification Provisions Necessary?

The Ratification Provisions will allow a corporation to take measures to remove uncertainty surrounding its capital structure, which is particularly important when a corporation is the target of an acquisition or is in the process of conducting an initial public offering. During the course of an acquisition or IPO, a corporation − or more likely, its counsel − will typically conduct a thorough review of the corporate books and records and engage in a process to “clean up” any incorrect or incomplete records. The clean-up process often includes the adoption of resolutions by the corporation’s board of directors and stockholders ratifying certain past acts of the corporation.

However, under the DGCL, certain invalid corporate actions cannot be remedied through subsequent ratification. In particular, if a corporation issued shares of capital stock in excess of the number of shares of authorized stock at the time of such issuance (the Ratification Provisions call these over-issued shares “putative stock”), the issuance is void and cannot be ratified. Over-issues of stock can have far-reaching effects. For example, if the Company’s board of directors is elected by persons holding putative stock rather than valid stock, the board’s election is also invalid. The Ratification Provisions are primarily intended to address these situations, although they are also available to ratify any other type of corporate act that is void or voidable due to a failure of proper corporate authorization.

The Ratification Provisions establish a process for ratification of defective corporate acts or putative stock by a corporation itself (under Section 204), as well as validation of defective corporate acts or putative stock by the Delaware Chancery Court (under Section 205). Upon ratification or validation by either the corporation or the Court, the defective corporate act will be deemed retroactively effective and valid as of the time of the defective corporate act.

What Is the Process Under Section 204?

In order to ratify defective corporate acts or putative stock under Section 204:

– The board of directors must adopt a resolution ratifying the defective corporate act or putative stock, and containing certain other information about the defective corporate act.

– If the defective corporate act (such as an amendment to the corporation’s charter) would have required stockholder approval, the stockholders must also adopt the ratification resolution. The corporation must provide stockholders with 20 days’ notice of the meeting at which the resolution is to be adopted. This notice must go to holders of valid stock and putative stock, whether voting or nonvoting, both current and at the time of the defective corporate act. The notice must include a statement that any challenge to the ratification of the defective corporate act must be brought within 120 days of the effective time of the ratification.

– Once approved by the board and, if applicable, the stockholders, the corporation must file a “certificate of validation” with the Delaware secretary of state. This certificate is currently being developed by the secretary of state’s office − which is one reason for the delay in effectiveness of the Ratification Provisions to April of 2014.

– If stockholder approval was not required, the corporation must provide notice of the ratification to stockholders within 60 days’ of adoption of the ratification resolution by the board. This notice must go to holders of valid stock and putative stock, whether voting or nonvoting, both current and at the time of the defective corporate act. The notice must include a statement that any challenge to the ratification of the defective corporate act must be brought within 120 days of the effective time of the ratification.

If a corporation is unable (due to the lack of a properly authorized board, for example) or unwilling to undertake the process contained in Section 204, certain parties may directly petition the Delaware Chancery Court to validate independently any defective corporate act or putative stock. Section 205 also give the Court jurisdiction to hear challenges to the validity and effectiveness of any ratification undertaken by a corporation pursuant to Section 204.

The parties that can bring a claim under Section 205 include the corporation, any successor entity, any member of the board, any record or beneficial holder of valid stock or putative stock, any record or beneficial holder of valid or putative stock as of the time of a defective corporate act, or any other person claiming to be substantially and adversely affected by a ratification pursuant to Section 204. However, the timeline for a Section 204 challenge is fairly short, giving the corporation a measure of certainty. With some exceptions, any action requesting review of a Section 204 ratification must be brought within 120 days of the effective time of the certificate of validation.

Tune into our upcoming webcast – “Tender Offers Under the New Delaware Law” – to analyze the new Delaware law changes that take effect today regarding tender offers. There are other law changes too. Here are a few memos analyzing the changes:

– Dorsey & Whitney
– Paul Weiss
– Morris Nichols

And here are memos specifically about the changes that will impact tender offers…

Here’s news from Subodh Mishra of ISS’s Governance Exchange: The Council of Institutional Investors is considering changes to its governance policies to support the use of a universal ballot in proxy fights. The proposed addition of language backing the use of a universal ballot in proxy contests to the Council’s director election policy is meant to support the perspective that “the shareholder voting franchise will be enhanced only if proxy contest participants are allowed to circulate a proxy card with all candidates with equal prominence on a single card.” The Council contends that effective circulation and execution of a universal proxy in a 2012 proxy contest involving Canadian Pacific “suggests that reform in this area may be easier to implement than previously understood.”

John Grossbauer of Potter Anderson notes: Last week, Delaware Chancellor Strine delivered this opinion – in In re Morton’s Restaurant Group Shareholders Litigation – granting defendants’ motion to dismiss post-closing litigation challenging the sale of Morton’s to Landry’s. The Chancellor referenced various materials incorporated by the plaintiffs into their complaint, recognizing the discovery that had occurred in the pre-closing phase of the litigation as well as the public filings be Morton’s. He found the business judgment rule would apply, both in light of the independence of a majority the Board and the extensive market check, as well as his finding that, even assuming the former 27.7% stockholder was a controlling stockholder, the fact it did not drive the process to a quick conclusion and shared consideration equally with the other stockholders invoked the “safe harbor” he had referenced in the Synthes decision.

We have posted the transcript for the recent webcast: “Post-Closing Claims: What Really Happens.”

John Grossbauer of Potter Anderson notes: Last week, the Delaware Supreme Court affirmed the decision of the Court of Chancery in Viacom v. Winshall. That decision confirmed a decision by BDO LLP as Resolution Accountants concerning earn-out payments from Viacom arising from the sale of Harmonix Music Systems. The Court broadly construed the authority of the accountants acting as arbitrators to determine the scope of matters the accountants were to resolve. The decision emphasizes the finality of post-closing accounting determinations and the care that must be taken in drafting and following them.

As explored in this article about how Carl Icahn’s tweet in the midst of the Dell deal costs him $2k to make corrective SEC filings, taking to social media when a deal is pending must be done cautiously. In our upcoming webcast – “The Use of Social Media in Deals” – we will be analyzing the parameters, as well as going over examples where social media was leveraged to help deals go through…

This July-August issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– The Merger Tarantella: Considerations in Post-Merger Corporate Governance
– The In-House Perspective: Post Merger Governance
– Activist Shareholders in the U.S.: A Changing Landscape
– Appraisal Rights: The Next Frontier in Deal Litigation?
– The Standard of Review in Going Private Transactions: Delaware’s Long Awaited Clarification

If you’re not yet a subscriber, try a “Rest of ’13 for Half-Price” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

John Grossbauer of Potter Anderson notes: Last week, Delaware Vice Chancellor Parsons issued this opinion in Merion Capital v. 3M Cogent. The Court in this case awarded petitioners $10.87 per share as the fair value determined under Section 262, compared with a merger price of $10.50. Petitioners had argued for a value of $16.26, and the company had argued for a value of $10.12. In the opinion, the Vice Chancellor gave no weight to the negotiated merger price, citing the Supreme Court’s Golden telecom opinion and the relevant facts. He also gave no weight to the company’s comparable transactions and comparable companies analyses, finding them unreliable here given, among other things, small sample sizes. He then engaged in a detailed and substantive analysis of the competing DCF analyses. Among other things, he discussed the use of management projections, finding them more reliable here than plaintiff’s proffered cash flow numbers. Finally, the Court rejected the argument that interest should not be awarded because petitioners bought their shares after the announcement of the merger and because of alleged delay in prosecution of the appraisal action.