From John Grossbauer of Potter Anderson: The Delaware Supreme Court’s recent Central Mortgage opinion addressed the implied covenant of good faith and fair dealing. Applying New York law, which governed the contract at issue, the Supreme Court clarified that a claim for breach of the implied covenant had to be based on different factual allegations than the contract breach claims, and could not be “duplicative of a breach of contract claim.”
Using this standard, the Court found that Central Mortgage, a mortgage servicer, stated a valid claim for breach of the implied covenant by alleging that actions taken by Morgan Stanley, the seller and wholesaler of the mortgages, deprived it of the benefit of its bargain and “engaged in a ‘bait and switch’ by inducing CMC to buy servicing rights to its detriment.” The Supreme Court also clarified the standard for use by the Court of Chancery in deciding a motion to dismiss, saying that the traditional Delaware “conceivability” standard had not (at least yet) been modified to be consistent with the “plausibility” standard articulated by the US Supreme Court in Ashcroft v. Iqbal. The Supreme Court found that Central Mortgage’s contract breach claims survived under the more lenient Delaware standard.
From John Grossbauer of Potter Anderson: In Amirsaleh v. Bd. of Trade of the City of New York, No. 75, 2010 (Del. Aug. 16, 2011) (en banc), the Delaware Supreme Court reversed the Chancery Court, finding that a former New York Board of Trade (NYBOT) member whose election to receive stock in a merger of NYBOT with Intercontinental Exchange (ICE) should have had his stock election recognized under the circumstances present there. Applying contract law, the Supreme Court found that NYBOT and its merger partner, ICE, had waived their originally imposed election deadline, and did not properly communicate to plaintiff the revised deadline for accepting elections. Because it utilized a waiver analysis, the Court did not address the implied covenant of good faith and fair dealing issue the parties had briefed and argued in the Court of Chancery and in the Supreme Court.
Professor Coates of Harvard Law has written an interesting paper analyzing how a set of contract terms manages potential disputes. The professor reviewed a group of deal agreements and their dispute provisions to find how they correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. His paper summary notes:
For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases.
A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
I saw this on “Harvard’s Corporate Governance Blog” from Klaus Riehmer and Laurent Alpert of Cleary Gottlieb and thought their deck was very useful:
In spite of the crisis relating to state debt in certain European countries, 2011 has so far been a year that has seen a resurgence in the field of mergers and acquisitions in Europe. The proposed merger of the NYSE and Deutsche Börse, Volkswagen’s bid for MAN SE, LVHM’s tender offer for jewel company Bulgari and Stanley Black & Decker’s acquisition of Niscayah are just a few of the more publicized deals that have dominated the headlines of the European financial press in 2011. In a world where most of the transactions are cross-border mergers and may touch various juridictions, it is increasingly imperative that legal professionals engaged in these transactions possess the information to quickly access the required legal information in the respective countries.
Our memorandum, “Preparing for Increased Takeover Activity in Europe – Overview of Key Legal Parameters,” seeks to provide the M&A practitioner (and the M&A academic) with a basic overview, on a country-by-country basis, of the rules pertaining to takeovers in Belgium, France, Germany, Italy, the UK, the Netherlands and Russia. The specific questions addressed are set forth below:
Can we talk to target without triggering disclosure obligations?
Stake building – can we buy stock on market?
Deal certainty – can we lock in reference shareholders? Can we get exclusivity from target?
Can we make public statements about a possible bid?
What must we bid for?
What sort of consideration can we offer?
Can we make our bid conditional? Is a MAC clause permissible?
Can we otherwise walk away once we have announced?
Offer document – how detailed and time consuming is this?
What’s the regulator and how long does it take to get it approved?
Can we go hostile?
What sort of defenses can a target put up? How effective are they?
May we squeeze-out residual minority? What’s the threshold?
How do we get target delisted?
While a more in-depth analysis of the particular issues touched upon in this memorandum must be sought from qualified legal counsel of each respective jurisdiction, we hope that this overview will provide the fundamental tools necessary for the cross-border M&A practitioner to begin to assess the intricacies and challenges surrounding takeovers in the jurisdictions covered.
From Ted Allen of ISS: The Dodd-Frank Act also requires companies to hold separate shareholder votes on “golden parachute” arrangements when they seek approval for mergers, sales, and other transactions. However, the SEC rules on this mandate did not take effect until April 25, so less than a dozen companies have held parachute votes this year.
As of Aug. 7, seven Russell 3000 companies had reported the results of golden parachute votes, and five earned more than 89 percent support. These results suggest that investors will tend to support a company’s golden parachute payments if they believe that the overall transaction has merit.
There have been two exceptions so far. On July 26, MedCath Corp. received almost unanimous support for two asset sales, but just 82.6 percent support on its severance arrangements. At SAVVIS, the sale of the company to CenturyLink earned nearly unanimous investor approval on July 13, but the severance arrangements received just 70 percent support. It appears that SAVVIS investors had concerns over $3.9 million in potential tax gross-up payments for CEO James Ousley.
Two companies have yet to report vote results, and six more severance votes are scheduled for the next two months.
Equilar has released its latest study, comparing change-in-control strategies in the Fortune 100 between 2008 and 2010. As regulation increases, companies are modifying their change-in-control policies, often making the provisions for payment stricter. Some of our findings:
– Cash multipliers for CEOs are decreasing in size. 2x cash multipliers for F100 CEOs rose in prevalence, from 18.2% in 2008 to 34.9% in 2010, while 3x cash multipliers decreased from 65.9% to 44.2%.
– Over 40% of CEOs receive a cash payment for a change-in-control related termination. 45.3% of F100 CEOs have such a payment in place.
– The majority of terminations require a double trigger. 97.7% of companies that give cash payments upon a termination related to change in control required a double trigger; the remaining 2.3% required a modified trigger.
In this podcast, Matt Orsagh of the CFA Institute talks about reverse mergers for some Chinese companies that have implications for investors:
– What has the PCAOB said about Chinese reverse mergers?
– What do you think is the biggest risk for investors in these companies?
– How should investors go about analyzing these companies?
Here’s news from Potter Anderson’s John Grossbauer: Recently, Delaware Vice Chancellor Parsons delivered this opinion – in Roseton OL, LLC v. Dynegy Holdings – declining to enjoin the restructuring of Dynegy Holdings on the grounds that it violated a transfer restriction in a parent company guarantee in a sale-leaseback transaction or, alternatively, constituted a fraudulent conveyance. The court discusses the narrow scope of the guarantee as drafted, focusing on the language prohibiting transfer by Dynegy of “its” assets, which did not occur in the case of the challenged internal restructuring. Also, because the assets that were transferred were transferred into bankruptcy remote subsidiaries, from which Dynegy would continue to receive dividends, and not outside the Dynegy corporate structure, the court found the applicable fraudulent conveyance tests were not met.
In two weeks, check out this “Mock Proxy Battle” Conference being held in DC (co-hosted by the NIRI and Society of Corporate Secretary’s local chapters). The morning session of the conference features the mock proxy battle in which you play the role of a board member of a firm facing a nasty proxy fight. Here’s the letter from the activist shareholder. The afternoon session includes a series of panel discussions that will delve into the key themes surrounding shareholder activism and feature leading experts as well as corporate executives who have been involved in activist campaigns.