DealLawyers.com Blog

Recently, Frederic W. Cook & Co. issued this report that examines change-in-control trends over the three year period, 2007-2010. It shows that practices are evolving as multiples come down and double-triggers become more popular, as well as gross-ups going the way of the Dodo…

We have posted the transcript from our recent webcast: “Dissecting the Modern Poison Pill.”

– by George Bason, Joseph Rinaldi, Justine Lee of Davis Polk

The Delaware Chancery Court recently upheld the validity of a bylaw amendment adopted by the stockholders of Airgas, Inc. at its September 2010 annual meeting that accelerates the date of Airgas’s next annual meeting to January 2011, barely four months after its 2010 annual meeting was held. The bylaw amendment was proposed by Air Products and Chemicals, Inc., which is aggressively pursuing a $5.5 billion hostile bid for Airgas. At the September 2010 annual meeting, Air Products successfully obtained all three board seats that were up for election on Airgas’s nine-member classified board. With the bylaw amendment, Airgas will have the opportunity to elect three more directors to the Air Products board much earlier than it otherwise would have been able to.

The decision turns on the fairly typical wording of the annual meeting and staggered board provisions in Airgas’s charter and bylaws. Airgas has appealed the ruling to the Delaware Supreme Court, but unless it is overturned or companies are able to modify their charter or bylaw provisions to address this issue, Chancellor Chandler’s decision may substantially weaken the defenses of a number of companies with classified boards–a practice by which only one third of the members of the board of directors is elected at each annual meeting and directors cannot be removed except for cause.

The significance of the bylaw amendment in Airgas’s situation is accentuated by the fact that the 2010 Airgas meeting was held late in the proxy season, making the proposed January 2011 meeting only four months away. As a practical matter, a similar bylaw amendment would present less of an issue for companies with classified boards that hold their annual meetings in the spring, since an accelerated January annual meeting would still be seven to eight months away, and, applying Chandler’s textual analysis (as discussed below), a court is less likely to uphold an amendment that would cause the company to hold its next annual meeting in the same calendar year.

Annual means “once a year,” not “separated by approximately twelve months”

At the heart of the Airgas dispute is whether the company’s annual meetings must be held one year apart or once a year, and, if once a year, whether that refers to a calendar or fiscal year. Neither “annual” nor “year” is defined in Airgas’s charter or bylaws.

Airgas argued that the bylaw amendment, which received the approval of 51% of the votes cast (representing 45.8% of the shares entitled to vote), was invalidly adopted because it conflicted with the director terms set forth in Article III of the Airgas bylaws and therefore needed the approval of at least 67% of the shares entitled to vote. Article III sets forth the classes and terms of the classified board. It provides that each class of directors shall “hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election” (emphasis added). Article III is protected by a supermajority vote provision in the Airgas charter, which requires that any amendment or repeal of Article III, or the adoption any provision inconsistent therewith, must be approved by the affirmative vote of at least 67% of the outstanding shares. Airgas argued that moving up the 2011 annual meeting would impermissibly shorten the terms of the directors up for election and therefore needed such supermajority approval.

Reasoning that “the operative provisions of Airgas’s bylaws and charter in dispute here contain language that may fairly be read to have more than one meaning,” and that he must therefore construe the ambiguous terms “in favor of the shareholder franchise” (i.e., in such a way as to support the shareholder-approved bylaw amendment), Chancellor Chandler interpreted Article III to provide that the class of Airgas directors who were elected in 2008 will have their terms expire in 2011– i.e., in the “third year” following their election and not “three years” after their election.

Chancellor Chandler went on to hold that by defining the director terms by reference to their expiration “in the third year” following their election, the drafters of the charter opted not to specify a 36-month or 3-year term, and that therefore the bylaw amendment did not cut short their respective terms.

In response to Airgas’s argument that the bylaw amendment would require the 2010 and 2011 meetings to occur in the same fiscal year, Chancellor Chandler held that “under the ‘rule of construction in favor of franchise rights,’ I cannot read the word ‘fiscal’ into the charter, and must instead construe the ambiguous terms against the board, which leads to my conclusion that Airgas’s annual meeting cycle can validly run on a calendar year basis and still be consistent with the charter.”

The court adopted a similar approach to statutory interpretation in analyzing whether the bylaw amendment violated Delaware law, holding that “the default rules in Delaware do not require waiting a ‘year’ or ‘twelve months’ or any set amount of time from one annual meeting to the next.” Noting that DGCL §211(c) explicitly permits the court to require annual meetings to be held within 13 months of the last annual meeting, Chancellor Chandler emphasized that it does not address whether the annual meeting interval may be shortened by any amount of time.

Companies with classified boards should review the specific wording of their relevant charter and bylaw provisions

We would advise all companies with staggered boards to review closely the text of their charter and bylaw provisions, with a view to assessing their potential exposure on this issue and determining whether revisions to address the decision are possible.

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

– Drafting Board Minutes for M&A Transactions: Tips and Pitfalls
– The Lessons Learned: Poison Pills Post-Barnes & Noble
– Ripe for Disclosure? A 1933 and 1934 Act Analysis: Disclosure of Merger Negotiations
– DOJ and FTC Issue Revised Horizontal Merger Guidelines

If you’re not yet a subscriber, try a “Rest of ’10 for Free” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

Here is news from Richards Layton:

Yesterday, the Delaware Supreme Court issued an opinion affirming the Court of Chancery’s decision in Selectica, Inc. v. Versata, Inc., C.A. No. 4241-VCN, 2010 WL 703062 (Feb. 26, 2010), which upheld a board’s adoption of a poison pill rights plan with a 4.99% triggering threshold, designed to protect the usability of the corporation’s net operating losses (“NOLs”), and a special committee’s subsequent decision (following a deliberate trigger of the pill) to deploy the exchange mechanism in the rights plan to dilute the triggering stockholder. The Supreme Court largely affirmed the reasoning employed by the Court of Chancery, and held that the board of directors had met its burden under the Unocal standard. Here is a discussion of the facts of the case.

The Supreme Court upheld the Vice Chancellor’s post-trial rulings that the board of directors had reasonable grounds to believe that the triggering stockholder’s purchases threatened the corporation’s NOLs and that the NOLs were corporate assets worth protecting. The Supreme Court further held that the NOL pill was nonpreclusive and within the range of reasonableness under the circumstances. The Court noted that the preclusion test enunciated in Unitrin, focusing on whether a defensive device renders a bidder’s attempt to wage a proxy contest and gain control “either mathematically impossible or realistically unattainable,” is analytically speaking a single test, because mathematical impossibility is “subsumed within the category of preclusivity described as ‘realistically unattainable.'”

The Court also reiterated that the Unocal review is context-specific, and emphasized that its ruling should not be taken as “generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.” The Court also emphasized that a potential future decision by the board to retain the NOL pill in the face of another threat would be subject to fresh evaluation under the Unocal standard at that time.

Cliff Neimeth of Greenberg Traurig notes: One thing we didn’t get a chance to mention on our webcast last week is that drafters of rights agreements should consider footnote 244 in VC Strine’s Yucaipa decision. He suggests that in an NOL rights agreement (where the pill trigger is 4.99%) the definition of “beneficial ownership” should be drafted more narrowly than the expansive “13D definition” commonly used in traditional pills.

He suggests that only economic ownership (outright purchases of the company’s stock) and not voting agreements and arrangements should determine “beneficial ownership” because the NOL pill is designed for a very narrow and specific purpose – the preservation of a material corporate asset – the loss of which is measured, for Internal Revenue Code purposes, by actual purchases and sales among 5%(+) holders for purposes of IRC section 382. Whereas, a traditional pill is designed to protect the company from a broader array of change-in-control threats that may be occassioned by more garden variety 13D group type acquisition activities, and the traditional pill trigger customarily will be set at the 20% (i.e., ISS recommended) 15% level. Strine, in fact, suggests a dual definition of beneficial ownership where an NOL pill feature is combined with a traditional pill in the rights agreement.

In that Selectica is on appeal to the Delaware Supreme Court it will be interesting to see if Strine’s message is acknowledged. In any case, it signals the Delaware Court of Chancery’s thinking on the subject and should not be ignored by drafters of future NOL pills.

Tune in tomorrow for the webcast – “Dissecting the Modern Poison Pill” – to hear Rick Alexander of Morris Nichols, David Katz of Wachtell Lipton and Cliff Neimeth of Greenberg Traurig examine the use of poison pills and how they are constructed in the wake of Selectica, Yucaipa and Barnes & Noble, including factors you should consider when devising a pill. If you are not yet a member, try a 2011 no-risk trial and get the rest of 2010 for free (including access to this program).

Courtesy of The Deal, here is a podcast wtih Phillip Mills of Davis Polk regarding how reverse termination fees have increased in size since the financial crisis, the different types of present-day reverse termination fees, and the adaptability of private equity buyers in today’s changed environment.

Here is news culled from this Gibson Dunn memo:

In-house counsel in the EU will continue to be denied the protection of legal professional privilege after the Court of Justice of the European Union (‘ECJ’) unambiguously reaffirmed the limited scope of the doctrine under EU law. The appeal arose from an action for the annulment of a European Commission decision to seize documents during a “dawn raid” on the offices of a subsidiary of Akzo Nobel under competition enforcement powers. Akzo Nobel disputed the finding of the Commission (upheld on appeal to the EU’s General Court) that the seized documents were not protected by legal privilege since they were prepared by in-house lawyers.

On September 14th, in Case C-550/07 P, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v. European Commission, the ECJ reaffirmed the criteria for legal privilege laid down in 1982 in Case 155/79, AM&S Europe Ltd. v. Commission. As such, the European Courts have accepted the existence of privilege only with respect to documents which, firstly, have been prepared for the purposes and in the interests of a client’s rights of defence and, secondly, which have been prepared by an independent lawyer who is a member of an EU Bar Association.

The appeal in Akzo Nobel turned on whether in-house counsel can be deemed to be independent, though they are bound to their clients by a contract of employment. In rejecting the appeal, the ECJ held that in-house lawyers’ economic dependence and their close ties with their employers mean that they cannot attain a level of independence comparable with that of an external lawyer, even though they may be regulated members of a Bar Association of a European Union Member State. The Court rejected the claim that the changed “landscape” of EU competition law, in particular with the passage of Regulation 1/2003 and the accession of new Member States, warranted a departure from the strict position laid down in the AM&S jurisprudence.

The ECJ judgment adheres closely to Advocate General Kokott’s Opinion of 3 May 2010 in its emphatic rejection of privilege protection for advice from in-house counsel. It, nonetheless, importantly differs in its silence on the status of non-EU qualified lawyers. Advocate General Kokott had expressed her view that the extension of privilege to lawyers who are members of a Bar or Law Society in a third country “would not under any circumstances be justified”. Despite this, and despite the intervention of several European and international Bar Associations, the ECJ declined to rule explicitly on the question. This leaves the pre-existing position unchanged, meaning that advice from lawyers qualified outside of the European Union cannot be assumed to benefit from legal professional privilege.

Here is news from William Savitt and Ryan McLeod of Wachtell Lipton:

The Delaware Court of Chancery last week refused to block a proposed merger in a decision highlighting the importance of careful process in structuring a corporate sale. In re Dollar Thrifty S’holder Litig., C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010).

From 2007 through 2009, Dollar Thrifty had engaged in unsuccessful negotiations with both Hertz and Avis. Following a turnaround effort led by a new CEO, the Dollar Thrifty board decided to re-engage with Hertz, and, after months of bargaining, Dollar Thrifty agreed to be acquired for $41 per share. This consideration represented a 5.5% premium over Dollar Thrifty’s market price, but the merger agreement also included a robust reverse termination fee and bound Hertz to make substantial divestitures if necessary to secure antitrust approval. Following the announcement, Avis objected that had not been invited to bid and made an offer at a higher dollar value–$46.50–but its offer lacked the deal certainty of the Hertz contract.

Avis did not did sue, but shareholder plaintiffs did, attacking the market premium as insufficient and seeking an order requiring Dollar Thrifty to open discussions with Avis. Beginning with the premise that “when the record reveals no basis to question the board’s good faith desire to attain the proper end, the court will be more likely to defer to the board’s judgment about the means to get there,” the Court of Chancery denied the injunction.

The Court first held that the board’s decision to negotiate only with Hertz was proper, squarely rejecting the claim that a board is required to conduct a pre-signing auction. Vice Chancellor Strine instead credited the board’s well-informed determination that Avis lacked the resources to finance a deal, that a potential deal with Avis was subject to greater antitrust risk, and that Hertz might have withdrawn from the process if it faced “pre-signing competition.”

The Court also refused to accept the argument that a 5.5% market premium is insufficient. Drawing deep into economic theory, the Vice Chancellor held that the board reasonably focused on the “company’s fundamental value” rather than a spot market price in considering a sale of control. Delaware “law does not require a well-motivated board to simply sell the company whenever a high market premium is available (such as selling at a distress sale) or to eschew selling when a sales price is attractive in the board’s view, but the market premium is comparatively low.” Finally, the Court upheld the merger agreement’s 3.9% termination fee, noting that it was neither preclusive nor coercive, as evidenced by the fact that Avis had made a topping bid in excess of the fee and that the shareholders of Dollar Thrifty remained free to reject the Hertz deal without penalty. Indeed, Vice Chancellor Strine lauded the features of this merger agreement, noting that “the deal protections actually encourage an interloper to dig deep and to put on the table a clearly better offer rather than to emerge with pennies more.”

The Dollar Thrifty decision represents another marker in a long line of cases endorsing the primacy of corporate directors’ strategic decisions. The courts remain ready to respect a sales process, even a limited one, that is structured in good faith by an independent and well-informed board.