DealLawyers.com Blog

Tune in tomorrow for the webcast – “Deals: The Latest Delaware Developments” – to hear Rick Alexander of Morris Nichols, Stephen Bigler of Richards, Layton & Finger and Kevin Shannon of Potter Anderson discuss all the latest from the Delaware courts and legislature.

Subodh Mishra of ISS’s Governance Exchange reports:

The primary association for hedge funds, the London-based Alternative Investment Management Association, released new guidance on May 31 that includes recommendations on ways hedge funds can better govern themselves in line with institutional investor expectations. “A Guide to Institutional Investors’ Views and Preferences Regarding Hedge Fund Operational Infrastructures” was drafted by members of the investor community and encompasses five discrete sections covering governance, risk, investments, capital, and operations.

The governance section was authored by Luke Dixon of the Universities Superannuation Scheme and outlines the “fundamental importance of good governance, key constitutional documents and the role of boards of directors.” Kurt Silberstein of the California Public Employees’ Retirement System authored the section on investments, which discusses performance reporting, terms and conditions, control of assets, and transparency.

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

– Appraisal Rights: The Complicated World of Corporate Law’s Consolation Prize
– The Deal Lawyer’s Guide to Hidden Employee Benefit Issues: An Update Regarding Successor Liability
– Delaware Case Highlights Need for Additional Due Diligence in Merger Acquisitions
– The Art of Written Consent Solicitations
– Helping Parties to Mergers Assess Risk and Negotiate Smarter Deals
– Proposed Reform of U.K. Takeover Regulation

If you’re not yet a subscriber, try a “half-price for rest of ’11” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

Yes, breaking news. Delaware Chancery Court VC Leo Strine tapped as the new Chancellor and Sam Glasscock, a long-time court master, nominated for Strine’s VC slot. They now need to be confirmed by the Delaware State Senate. Here’s articles from:

– Delaware Online

– Bloomberg

– WSJ Law Blog

– NY Times Dealbook

From Steven Haas of Hunton & Williams:

Last Friday, the Court of Chancery issued an interesting decision in Goggin v. Vermillion, Inc. applicable to shareholder proposals and annual meetings. In denying a motion to enjoin a stockholders meeting, the court enforced an advance notice requirement for shareholder proposals that was set forth in the company’s 2010 proxy statement rather than its bylaws.

By way of background, the company’s 2010 proxy materials mailed last October provided that the advance notice deadline for shareholder proposals at the 2011 annual meeting was January 1, 2011. At the time, however, it wasn’t clear when the company’s 2011 annual meeting would be held. While the company traditionally had held its annual meetings in June of each year, it had filed for bankruptcy in 2009 and decided to hold its 2010 meeting in December–just weeks before the January 1, 2011, advance notice deadline disclosed in the proxy materials.

In February 2011, more than a month after the advance notice deadline had passed, the company announced that its 2011 annual meeting would be held on June 7, 2011. As a result, the January 1 deadline resulted in a 150-day advance notice requirement for the 2011 meeting–far more than the typical 90 or 120-day requirements found in many bylaws of Delaware corporations.

The court observed that Delaware law does not require that shareholders provide advance notice of proposals or of director nominations to be raised at an annual meeting. It also acknowledged that the company didn’t have an advance notice bylaw, although it had since adopted one applicable to its 2012 stockholders meeting. Nevertheless, the court held that “the Company set forth its notice requirement for the 2011 Meeting in the October 20, 2010 proxy and that the plaintiff was unlikely to prevail on the merits by showing that the advance notice requirement was unreasonably long or unduly restrictive of [his] franchise rights.”

The court seems to have been strongly influenced by the fact that 5 of the 6 directors were independent and there were no clear signs of entrenchment motives (e.g., the plaintiff did not signal his dissatisfaction with management until after the advance notice deadline had passed). Thus, the deadline was established on the “proverbial clear day” and conformed to the company’s pre-bankruptcy practices.

Still, many observers may be surprised to see the court enforce an advance notice provision that was not set forth in the company’s governing documents. It also is notable that shareholders had approximately 2½ months notice of the pending deadline (i.e., the time in between the mailing of the October 2010 proxy statement and the January 1, 2011, deadline), and that the deadline turned out to be 150 days before the then-unknown meeting date. In contrast, many advance notice bylaws provide that, if the date of an annual meeting significantly deviates from the prior year’s meeting date, shareholders can provide notice of proposals or director nominations within 10 days after the announcement of the meeting date.

John Laide of FactSet notes that “Lone Pine Resources went public recently. Lone Pine is a subsidiary of Forest Oil Corp. that is based in Canada but is incorporated in Delaware. Lone Pine is the first U.S. incorporated company to IPO with a poison pill in place since 2007. It used to not be uncommon for companies to go public with a pre-adopted poison pill – but no company had done so since Ulta Salon, Cosmetics & Fragrance in October 2007.”

Here’s analysis from Chris Cernich of ISS’s M&A Edge Research: According to activists and advisors, the amount of activist activity is robust, but many potential proxy contests are being settled before they ever go definitive. There isn’t great visibility into these proxy challenges until the hostilities go public, but historically, a little more than 60 percent of the contentious situations have settled before they got to an ISS recommendation.

This year, the number of operating/governance proxy contests going to a shareholder vote is substantially below even last year’s numbers, and last year was a four-year low. Assuming the one contest slated for June doesn’t get resolved between now and then, there will be nine contests in the first half of this year. That compares to 14 in the first half of last year, and 25 in the first half of 2009.

There is some suggestion that the activist energy is going into contested M&A transactions–in some cases agitating against agreed deals in the belief that there is more value in the recovery on fundamentals than in the negotiated price. The proxy contests at Fisher Communications and at Mentor Graphics went to a vote earlier this month. Icahn Associates won all three contested seats at Mentor Graphics by “a meaningfully high margin.” Mentor’s shares went up 7 percent on the news–Icahn was running on a “sell the company” platform, so there may now be some arbitrageur presence in the stock as a result of his win.

At Fisher, FrontFour Capital won two of four seats. Fisher’s corporate governance allows for cumulative voting, and FrontFour–which owned a 3.5 percent stake–was publicly backed by a 27 percent shareholder, so it was guaranteed at least one seat. In an M&A proxy contest on May 18 at Pulse Electronics–where Bel Fuse was running two directors, after Pulse rejected Bel’s offer to buy the company–the incumbent slate won reelection with more than 87 percent of votes cast.

Here’s news from Cooley’s Cydney Posner through this memo:

Nasdaq has proposed additional listing requirements for companies going public through reverse mergers. The more onerous requirements were triggered by reports in recent months of fraud allegations regarding operating companies that went public through reverse mergers. Concerns have also been raised that “certain individuals who aggressively promote these transactions have significant regulatory histories or have engaged in transactions that are disproportionately beneficial to them at the expense of public shareholders.”

In addition, the PCAOB has identified issues relating to the audits of these companies, resulting in an “Audit Practice Alert.” Nasdaq also sites attempts at price and other types of manipulation aimed at artificially satisfying the Nasdaq listing requirements. As a result, in addition to heightened review procedures, Nasdaq is proposing to impose “seasoning” requirements designed to allow FINRA more time to view trading patterns and uncover potentially manipulative trading, to develop a more bona fide shareholder base and to assure that the $4 bid price was not satisfied through a “quick manipulative scheme.” The requirement for additional SEC filings is intended to improve the reliability of the reported financial results, given the opportunity for auditor and audit committee review of several quarters, as well as the possible corrective effect of internal controls.

Under the proposal, a company formed by a combination between a private operating company and a public shell would be eligible to apply for initial listing only after the combined entity:

– Has traded for at least six months in the over-the-counter market, on another national securities exchange or on a listed foreign market, following the filing with the SEC or other regulatory authority of audited financial statements for the combined entity; and

– Has maintained a bid price of $4 per share or higher on at least 30 of the 60 trading days immediately preceding the filing of the initial listing application.

The listing application would be approved following the business combination only if the company has timely filed: (i) in the case of a domestic issuer, at least two required periodic financial reports with the SEC or other regulatory authority; or (ii) in the case of a foreign private issuer, one or more reports including financial statements for a period not less than six months. This new rule would not apply if the company listed in connection with a firm commitment, underwritten public offering.

We have posted the transcript from the webcast: “Nuts & Bolts of Bank M&A.”

Here’s news culled from this Wachtell Lipton memo:

The Delaware Court of Chancery last week provided fresh guidance on the standards of director conduct applicable to part-cash, part-stock mergers and reaffirmed the rules of the road for board process and deal protection provisions in strategic mergers. In re Smurfit-Stone Container Corp. S’holder Litig., C.A. 6164-VCP (May 20, 2011).

In a merger agreement announced on January 23, Smurfit-Stone, a leading containerboard manufacturer, agreed to merge with Rock-Tenn Corporation. The agreement provides that Smurfit-Stone stockholders will receive consideration valued at $35.00 per share as of the date of the merger agreement, representing a 27 percent premium over the stock’s pre-announcement trading price, with 50 percent of the consideration payable in cash and the other 50 percent payable in Rock-Tenn common stock. Shareholder plaintiffs sought to enjoin the deal, alleging that the Smurfit-Stone board had improperly failed to conduct an auction and that the deal protection provisions in the merger agreement were impermissible as a matter of Delaware law.

Vice Chancellor Parsons denied the injunction motion. In a matter of first impression, the Court ruled that the so-called Revlon standard would likely apply to half-cash, half-stock mergers, reasoning that enhanced judicial scrutiny was in order because a significant portion “of the stockholders’ investment [] will be converted to cash and thereby deprived of its long-run potential.” The Court twice noted, however, that the issue remains unresolved by the Delaware Supreme Court, and that the “conclusion that Revlon applies [to a mixed-consideration merger] is not free from doubt.”

The Court went on to rule that the shareholder plaintiffs had not shown a likelihood of prevailing on their claims under any standard. Rejecting plaintiffs’ contention that the Smurfit-Stone board had insufficiently managed the merger process, the Court noted with approval that the Smurfit-Stone board “took firm control over the sales process,” “asserted its control over the negotiations” with both a private equity bidder and Rock-Tenn, and “engaged in real, arm’s-length dealings with potential acquirors.”

Vice Chancellor Parsons also rejected plaintiffs’ contention that Smurfit-Stone should have conducted a broad market check before signing the Rock-Tenn merger agreement. Crediting the board’s knowledge of the merger market and its concerns that a broad market check could lead to a damaging leak, the Court reaffirmed that a Delaware company can agree to a merger, even in Revlon mode, without a broad market check, provided that the merger agreement permits the emergence of a higher bid after signing.

Finally, the Court ruled that the deal protection provisions in the merger agreement – including a 3.4% termination fee, customary no-shop provisions with a fiduciary out, and market-standard matching rights – were “relatively standard in form and have not been shown to be preclusive or coercive, whether they are considered separately or collectively.”

The Smurfit-Stone decision suggests that deal planners should expect that any merger including a significant amount of cash consideration is likely to be subject to “intermediate” judicial review under Revlon. At the same time, the decision confirms that Delaware continues to afford informed and well-advised independent directors wide latitude to customize a merger or sales process in the best interests of a target company and its stockholders.