From Kevin Miller of Alston & Bird, a member of our Advisory Board:
On March 4th, the Delaware Chancery Court (VC Noble) issued an injunction prohibiting Atheros from holding a meeting of its stockholders to vote upon a merger agreement with Qualcomm pursuant to which Atheros would be acquired by Qualcomm for $3.1 billion in cash in In re: Atheros Communications. Based on a preliminary record, the Court enjoined the stockholder vote pending the distribution of curative disclosures regarding (i) the fees to be paid to Atheros’ financial advisor and (ii) the timing and extent of discussions with the President and CEO of Atheros with respect to his future employment by Qualcomm.
“Stockholders should know that their financial advisor, upon whom they are being asked to rely, stands to reap a large reward only if the transaction closes and, as a practical matter, only if the financial advisor renders a fairness opinion in favor of the transaction. . . .Defendants point out that contingent fees are customary. As set forth above, they are. Defendants argue that there is no magic contingent percentage that mandates something more than a disclosure that a “substantial portion” of the fee is contingent. Defendants are correct in this assertion as well. The Court, however, need not, in its current effort, draw any bright line. That fixing such a line might be difficult, if perhaps impossible, does not necessitate a conclusion that disclosure of the contingency percentage is always immaterial and of no concern. . . . coupled with the contingent fee concerns set forth above, the stockholders should be afforded an opportunity to understand fully the nature and means by which Atheros will compensate [its financial advisor]. Thus, that would include the amount of the fee as well.”
The Court rejected claims that the proxy statement relating to the merger contained material omissions regarding (i) the use of street forecasts rather than financial projections prepared internally by Atheros and (ii) the discount rate utilized in the discounted cash flow analysis performed by Atheros’ financial advisor. Here’s the proxy supplement.
“[Atheros’ financial advisor] decided that, under the methodology it employed, the internal projections were not useful because they would not allow for an “apples to apples” comparison with the information available for comparable transactions. Thus, it instead used only the Street Projections in its valuation analysis. The Plaintiffs may disagree with that decision, but, as the Court has observed, “[t]here are limitless opportunities for disagreement on the appropriate valuation methodologies to employ, as well as the appropriate inputs to deploy within those methodologies. Considering this reality, quibbles with a financial advisor’s work simply cannot be the basis of a disclosure claim.” [quoting In re 3Com]
The Court also rejected plaintiff’s request for an injunction based on allegations that the Board breached its fiduciary duties by implementing an inadequate sales process resulting in an unfair price.
“On the whole, there is nothing in the record to indicate that the Board acted unreasonably. It was an independent board with deep knowledge of the Company’s industry and it employed a robust and sophisticated process. As a result, the Court will not second-guess the Board’s conduct, and the Plaintiffs have failed to demonstrate any reasonable probability of success on the merits of their price and process claims.”
Tune in tomorrow for the webcast – “3rd Annual Public Company M&A Nuggets” – to hear Jim Griffin of Fulbright & Jaworski, Keith Flaum of Dewey & LeBeouf, Hal Leibowitz of WilmerHale and Claudia Simon of Paul Hastings engage in a lightning round of practical advice, covering all the hot M&A issues you are grappling with today, including the latest on tricky deal provisions and the ultimate list of “do’s” and “don’ts” during deal negotiations.
In his “Delaware Corporate & Commercial Litigation Blog,” Francis Pileggi writes: The tenure of Chancellor William B. Chandler, III on the Court of Chancery since 1989 is the topic of a retrospective article on Boardmember.com. The article describes the importance of the Court in the world of corporate law, and reviews the impact that the Chancellor has had on the Court, with quotes from the Chancellor in response to written questions. At the end of the article is a link to a list of seven cases selected as key opinions of the Court issued during His Honor’s time on the bench.
We have posted the transcript for our recent webcast: “Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics.”
Here is news from Potter Anderson’s John Grossbauer: On Monday, Delaware Vice Chancellor Laster delivered this opinion in Olson v. eV3, in which he awarded $1.1 million in fees to a plaintiff who challenged a top-up option. The Vice Chancellor found the most viable claim to be the technical invalidity claim as to how the option consideration was determined and approved, rather than the “appraisal dilution” claim that has been much discussed. The opinion provides the Court’s view of best practices in the top-up arena, including requiring express board approval for the terms of the top-up.
Here is news from this Wilson Sonsini memo: On February 3rd, the General Office of the State Council of China promulgated the Circular on Formalizing Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Circular No. 6), which clarifies the mechanisms and procedures for China’s national security review of foreign investments. In this memo, we discuss the scope of and process for China’s national security review as described in Circular No. 6 and the implications for certain foreign investments and cross-border transactions in China.
Tune in tomorrow for the webcast – “Developments in Debt Restructurings & Debt Tender/Exchange Offers” – to hear Casey Fleck of Skadden Arps, Ward Winslow of Jones Day, Jay Goffman of Skadden Arps and Richard Truesdell of Davis Polk discuss how to conduct debt tender and exchange offers and restructure debt – including how these deals have changed in the current economic climate.
Cliff Neimeth of Greenberg Traurig notes (here are memos regarding this case):
As expected, on Tuesday, Delaware Chancellor William Chandler upheld the Airgas rights plan using a traditional Unocal/Unitrin analyses (and a DGCL 141 director-stockholder balance of power policy analyses) to assess the validity of maintaining the Airgas pill in place to block consummation of Air Product’s fully financed, non-coercive tender offer which all three of Airgas’ financial advisors deemed inadequate.
The decision in Air Products and Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC has various unique (and outcome determinitive) facts – chief among them that each of the three members of the Airgas Board who recently won election in last year’s Air Product’s short-slate proxy fight determined that Air Products $70 “final and best” offer price was clearly inadequate (by at least $8 per share).
The decision is careful not to suggest that “just say no” or “say never” is indefinitely sustainable by a target Board. But, as always is the case with Delaware’s highly context-specific decisions, the (modern pill) fact pattern has not yet presented itself where the Court of Chancery actually orders redemption in a circumstance where the target Board and management offer no meaningful strategic or financial value maximizing alternative to an unsolicited offer, and a substantial majority of stockholders have tendered into such fully financed, “financially fair” and non-coercive offer which has remained open for a protracted time period.
The last time a redemption order was “threatened” by the Delaware Court of Chancery was a few years ago when VC Strine encouraged Oracle and People Soft to settle the pill and related litigation after a protracted takeover battle and numerous increases to the tender offer price where a majority of stockholders had tendered their shares. We’ll have to wait a bit longer to see the “say yes”- pill redemption order case.
Here is news repeated from this Richards Layton memo:
In In re Del Monte Foods Company Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011), the Court of Chancery found on a preliminary record that a proposed $5.3 billion cash merger (including assumption of debt) with a group of private equity buyers was potentially tainted by alleged misconduct by the target banker, with the alleged knowing participation of the buyers. The Court preliminarily enjoined the defendants from proceeding with a stockholder vote on the proposed transaction for a period of twenty days and further enjoined the defendants from enforcing certain deal protection measures in the merger agreement (including no solicitation, termination fee and matching right provisions), pending the stockholder vote.
Under the terms of the merger agreement, a private equity group consisting of Kohlberg Kravis Roberts & Co., Vestar Capital Partners, and Centerview Partners would acquire all outstanding shares of Del Monte common stock for $19 per share. The Court expressed that, on the preliminary record, the Del Monte board appeared to have “sought in good faith to fulfill its fiduciary duties” and predominantly made decisions that ordinarily would be regarded as falling within the range of reasonableness for purposes of Revlon enhanced scrutiny. The Court found, however, that the Board “was misled by Barclays” Capital, its financial advisor, and that Barclays “secretly and selfishly manipulated the sale process.”
In particular, the Court noted that (1) Barclays “crossed the line” in seeking permission from Del Monte to provide buy-side financing before a price was agreed to between KKR and Del Monte while failing to disclose to the Board the fact that Barclays had intended to seek to provide buy-side financing since the beginning of the process; and (2) Barclays had paired Vestar with KKR in violation of existing confidentiality agreements and then concealed the fact of the pairing from the Board for several months. According to the Court, the pairing of KKR and Vestar materially reduced the prospect of price competition for Del Monte. Further, the Court found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that the Board, despite not knowing the extent of Barclays’ behavior, failed to act reasonably in ultimately acceding to Barclays’ request to provide buy-side financing and Barclays’ recommendation to permit Vestar to participate in KKR’s bid, and by then permitting Barclays to run the go-shop process. The Court also found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that KKR “knowingly participated” with Barclays in these self-interested activities.
The Court concluded that loss of “the opportunity to receive a pre-vote topping bid in a process free of taint from Barclays’ improper activities” constituted irreparable injury to the Del Monte stockholders. The Court held that the imprecision of a potential post-closing monetary remedy weighed in favor of injunctive relief, as did the powerful defenses available to the director defendants (including exculpation under Section 102(b)(7) and reliance on the advice of experts selected with reasonable care under Section 141(e) of the General Corporation Law of the State of Delaware).
Finally, regarding the balance of the hardships, the Court considered that an injunction could jeopardize the stockholders’ ability to receive a premium for their shares and pose difficult questions regarding the parties’ contract rights under the merger agreement. The Court also recognized that the deal had been subject to a 45-day go-shop period and to a continuing “passive market check” for several more weeks. Ultimately, however, the Court concluded that enjoining the deal protection devices was appropriate because “they are the product of a fiduciary breach that cannot be remedied post-closing after a full trial,” and a twenty-day injunction would “provide ample time for a serious and motivated bidder to emerge.” The Court conditioned the injunction on plaintiff posting a bond in the amount of $1.2 million.
Ken Adams has been sharing his contract interpretation wisdom with us for some time. So I was excited to see that he has packaged his knowledge into a new PDF-only book entitled, “The Structure of M&A Contracts.” Here is an excerpt that deals with the phrase “double materiality”:
Another issue related to materiality is “double materiality.” It ostensibly arises when a materiality qualification is included in the bringdown condition to one party’s obligation to close as well as in one or more representations of the other party. The concern is apparently as follows: If the bringdown condition to the buyer’s obligation to close incorporates a materiality qualification, then to determine whether that condition has been satisfied you apply a discount to the accuracy required for any given seller representation to be accurate. If a seller representation itself includes a materiality qualification, the same discount is also applied to the representation, with the result that the level of accuracy required to satisfy the bringdown condition is further reduced. Consequently, the buyer could be required to close even if a seller representation was on the date of the agreement, or is at closing, materially inaccurate.
It’s common practice for drafters to seek to neutralize double materiality. To do so, either they incorporate in the bringdown condition a materiality qualification only with respect to those representations that do not themselves contain a materiality qualification, as in [12f], or for purposes of the bringdown condition they strip out materiality qualifications from those representations that have them and apply instead a materiality qualification across the board, as in [12g].
But such contortions are unnecessary. If material conveys the “affects a decision” meaning (see 2.77)–and using the proposed definition of Material and Materially would make it clear that that’s the case (see 2.86)–then materiality qualifications are not in fact equivalent to an across-the board discount on accuracy, and materiality on materiality isn’t equivalent to a discount on a discount. Instead, for purposes of determining both accuracy of a representation subject to a materiality qualification and satisfaction of a bringdown condition subject to a materiality qualification, one would consider the same external standard–whether the representation inaccuracy in question would have affected the buyer’s decision to enter into the contract or would affect the buyer’s decision to consummate the transaction. Because the same standard applies in both contexts, for purposes of determining satisfaction of the bringdown condition it’s irrelevant whether the representation too contains a materiality qualification.
So the notion of double materiality is based on a misunderstanding of how materiality operates in M&A contracts. It should come as no surprise that caselaw makes no mention of double materiality–it’s a figment of practitioner imagination.
West is new to ebooks, so for the moment the book is available only by calling West at (800) 308-1700. It only costs $25! The first chapter is available for free to give you more of a taste. Learn more about the book.