On October 28th, the Superior Court of New Jersey – in In re: Datascope Shareholders Litigation – denied plaintiffs motion to preliminarily enjoin the closing of a first step tender offer pending, among other things, corrective disclosure in a Schedule 14D-9. We have posted the decision in our “M&A Litigation” Portal.
Plaintiffs alleged that Datascope’s 14D-9 was materially misleading because, among other things, it failed to fully and fairly disclose:
– Datascope’s management’s financial projections;
– The calculations used by Datascope’s financial advisor to compare the proposed transaction to other deals and to compare Datascope’s value to that of other companies; and
– The extent of Datascope’s financial advisor’s fee conflict.
Defendants noted that the price being offered was an all-time high for Datascope stock and that since the June 4th announcement of the transaction, the stock market had plummeted and credit availability had diminished – thus, absent the presence of a competing/topping bid, the imposition of a preliminary injunction posed greater threat of irreparable harm to shareholders.
Defendants also asserted that plaintiffs failed to demonstrate a probability of success on the merits because the auction process was exemplary and the diligence and loyalty of the directors had not been called into question. Among other things, the defendants noted the reluctance of Delaware courts to enjoin a cash merger offering a premium in the absence of a competing bid.
Under the circumstances presented, the Court agreed: “Also, considering the current economic crisis the Court is naturally hesitant to preliminarily enjoin a tender offer at a such a premium price. It is not without precedent that a court takes into account the current economic climate in making its decision, as the Delaware Chancery court recently declined to preliminarily enjoin a merger, considering the “decidedly unstable market.'” [citing Wayne County Employees” Ret. Sys. v. Corti (Del. Ch. 2008)].
1. With regard to defendants’ failure to disclose management’s projections, the Court followed CheckFree rather than Netsmart, distinguishing Netsmart on the basis that the Netsmart proxy disclosed an early version of management’s projections while in Datascope “the topic of projections was never “broached” [in the Schedule 14D-9].”
2. Similarly, with respect to the disclosure regarding the analyses of Datascope’s financial advisor, the court was equally skeptical.
Among other things, the Court noted that: “The discussion of [the financial advisor]’s opinion (pages 12 to 18) consumes seven pages [of the 14D-9] and, among other things, summarizes each of the five lines of analysis undertaken by the investment bank.” Then the Court concluded that “the law is unsettled on [the board’s duty to disclose its financial advisor’s “black box” calculations]. . . . Accordingly, the Plaintiffs have failed to clearly and convincingly demonstrate a likelihood of success on the merits as to this aspect of their claim.”
Finally, with respect to Plaintiffs’ claim that the board violated its duty of disclosure by failing to disclose the amount of fees payable to its financial advisor contingent upon the consummation of the transaction, the Court noted that the 14D-9 disclosed the aggregate amount of the fees payable to the financial advisor [$6.9 million] and that a substantial portion of the fee was contingent upon completion of the proposed transaction. The Court found that such disclosure was adequate to inform shareholders of any attendant bias a shareholder might elect to infer.
Note that Schedule 14D-9 does not require long form disclosure of the analyses underlying a fairness opinion” and, despite the Delaware Chancery Court’s decision in Pure Resources, it is highly debatable that Delaware law (as held by the Delaware Supreme Court in Skeen) requires such disclosure.
As noted in this WSJ article, a Section 16(b) claim has been filed against the two hedge funds that were locked in a dispute with CSX Corp. earlier this year. A CSX shareholder has filed suit against The Children’s Investment Fund Management and 3G Capital Partners, seeking to recover (on behalf of CSX and its shareholders) alleged short swing profits arising from the funds’ transactions in CSX securities and derivatives. This could be a very interesting case, as was the earlier litigation, which focused attention on the funds’ use of derivatives in the contest for control of CSX. In his Section16.net Blog, Alan Dye provides further thoughts on this development.
In Joyce v. Morgan Stanley, 538 F.3d 797 (7th Cir. 2008), the Seventh Circuit recently held that, under the circumstances of that case, the investment bank did not owe a fiduciary duty to the company’s shareholders and could not be liable to them for its services as the board’s financial advisor, despite the bank’s provision of a fairness opinion that was provided to shareholders. Here is a copy of the court’s opinion.
Lawyers for investment banks spend a lot of time worrying about the possibility that bankers may face liability to third parties with whom they did not contract, such as a corporate client’s shareholders, in connection with an M&A engagement. That concern is heightened if the investment bank renders a fairness opinion that is furnished to shareholders as part of a proxy statement soliciting their approval of a proposed deal. That’s because sharing a fairness opinion with shareholders as part of the proxy materials facilitates a claim that the bank had undertaken an obligation to the shareholders.
That was the claim made by the shareholders in Joyce. In rejecting it, the court relied heavily upon disclaimer language contained in the investment bank’s fairness opinion. This is an area where the SEC has taken a hard line, generally objecting to disclaimers that directly or indirectly suggest that shareholders do not have a right to rely on the fairness opinion. In the Staff’s view, these disclaimers are “inconsistent with the balance of the registrant’s disclosure addressing the fairness to shareholders of the proposed transaction from a financial perspective.” (See p. 12 of the Division of Corporation Finance’s Current Initiatives and Rulemaking Projects dated November 14, 2000.)
In response to the SEC’s concerns, lawyers for investment banks devoted quite a bit of time to coming up with alternative disclaimer language acceptable to the staff. While this language has become fairly standardized over the past decade, the extent to which this modified disclaimer provided the bank with any real protection against third party claims remained uncertain. That is because the only disclaimers that proved acceptable to the SEC were those that merely indicated to whom the opinion was directed and went on to disclaim making any particular recommendation concerning the transaction.
The Joyce decision addressed one fairly common disclaimer formulation that the SEC finds acceptable:
It is understood that this letter is for the information of the Board of Directors of the Company, except that this opinion may be included in its entirety in any filing required to be made by the Company in respect of the Merger… In addition, this opinion does not in any manner address the prices at which the RCN Common Stock will trade following announcement or consummation of the proposed Merger, and Morgan Stanley expresses no opinion or recommendation as to how the holders of the 21st Century Common Stock should vote at the shareholders’ meetings held in connection with the Merger.
The highlighted language, together with language in the investment bank’s engagement letter indicating that it would serve as an independent contractor with duties solely to 21st Century, lead the court to conclude that it could see “no way that the Shareholders can show that their relationship with Morgan Stanley possessed the ‘special circumstances’ necessary to give rise to an extra-contractual fiduciary duty.”
While this is not likely to be the last time that the adequacy of an SEC acceptable disclaimer will be tested in court, it is useful to note that despite being watered down from what the investment bank would have likely preferred to have said, the disclaimer in this case was sufficient to prevent a claim that the bank owed a fiduciary duty to its client’s shareholders.
By the way, this is the second important fairness opinion decision to come out of the Seventh Circuit this year. In February, the court decided The HA2003 Liquidating Trust v. Credit Suisse, which Broc blogged about a while back.
Last week, the FASB agreed at its board meeting to provide guidance on the soon-to-be-effective FAS 141R, Business Combinations by issuing a proposed FASB Staff Position regarding assets and liabilities arising from contingencies in a business combination. The FSB will likely become final around mid-January. We have posted a memo on this development in our “Accounting” Practice Area.
A while back, I blogged that the recently-formed International Working Group of Sovereign Wealth Funds would soon be issuing a set of Generally Accepted Principles and Practices (GAPP). These “Santiago Principles” have now been issued – and we have posted memos analyzing them in our “Sovereign Wealth” Practice Area.
The Rise of Sovereign Fund Investing
We have posted the transcript from our webcast: “The Rise of Sovereign Fund Investing.”
In July 2007, Hexion Specialty Chemicals, a portfolio company of private equity firm Apollo Management, agreed to acquire Huntsman Corporation for $10.6 billion (including assumed debt). Following the signing of the merger agreement, Huntsman’s financial results began to sour. In June 2008, Hexion sought a declaratory judgment from the Delaware Court of Chancery that Huntsman had suffered a “material adverse event” due to, among other things, the deterioration in its financial results.
A finding of an MAE would have permitted Hexion to terminate without paying the $325 million termination fee. In the alternative, Hexion alleged the banks would not fund under their debt commitments because the combined Hexion/Huntsman entity would be insolvent. Even though there was no “out” for a financing failure, if Hexion failed to close under such circumstances, it would only be liable for the $325 million termination fee.
Last month, as we blogged, the Delaware court issued its much anticipated decision, holding among other things that Huntsman had not suffered an MAE, and that Hexion must specifically perform its obligations under the merger agreement. The court noted that the issue of the solvency of the combined entity was not yet ripe. We have posted many memos on this decision in our “MAC Clauses” Practice Area.
Last week, as noted in this WSJ article, the parties received a much-anticipated opinion that the combined company would be a solvent entity. But now the deal has hit another snag. Two of the financiers of the deal, Credit Suisse and Deutsche Bank, told Hexion Monday night that they don’t believe the opinion meets the condition of the deal.
The parties are still trying to close the deal. But it would be ironic indeed if, after Hexion had spent so much time and legal effort trying to get out of the deal, the transaction failed because of a lack of financing.
Steven Davidoff of the “Deal Professor” writes that the financing issues in the Hexion/Huntsman transaction are part of a larger trend of M&A transactions running into financing difficulties.
Recently, FINRA issued Regulatory Notice 08-54, which provides guidance on the structure, trends and broker/dealer conflicts of interest associated with SPACs. The Notice discusses broker/dealer suitability and disclosure obligations in connection with a SPACs initial public offering, after-market trading and any subsequent acquisitions. The Notice also refers to compliance with NASD Rule 2720, the NASD conflict-of-interest rule, in connection with an acquisition by a SPAC.
Recently, the Corp Fin Staff acted on a no-action letter to Procter & Gamble. It builds upon the prior letters in the area of formula pricing in the exchange offer context. Prior letters such as McDonald’s, Weyerhaeuser, TXU and Lazard set the groundwork for this letter. In the P&G situation, they have three companies involved, but they are using the common stock trading price of one (ie. Smucker) to determine the consideration offered.
I don’t think this is moving the needle much as it’s the same basic philosophy on formula pricing, where there is an objective formula that everyone can follow, understand and is objectively applied. Still it’s worth noting each incremental step because that’s what us lawyers do…
Note that you will need your Conference ID and password to access the course materials (if you’ll be in New Orleans, a set will be handed out to you). It’s not too late to register!
Instructions for Those Watching Online Next Week: Come to the home page on the day of the Conference and click the prominent link that will be posted that day. Watch the Conference live by clicking a video link that will be on the Conference page that matches the type of player installed on your computer (ie. Windows Media Player or Flash) and the speed of the connection that you have. Panels will be archived a day after they are shown live.
While the Treasury Department’s Troubled Assets Relief Program – know as “TARP” – does not directly address any state corporate law issues, if history is any guide, it’s probably a safe bet that this dramatic new federal initiative is going to have a significant influence on state law conceptions about what is necessary in order for a director to fulfill his or her fiduciary obligations.
One of the really interesting things about American federalism is the way that actions at the federal level influence what happens at the state level. When it comes to corporate law, the different results in two Delaware cases addressing the issue of director oversight decided a generation apart are perhaps the classic example of how federal actions influence state law requirements.
In Graham v. Allis Chalmers, 188 A.2d 125 (Del. 1963), the Delaware Suprme Court held that “absent cause for suspicion there is no duty upon directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists.” While acknowledging that precedent, Chancellor Allen nevertheless decided in 1996 that a “director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists.” In re Caremark Derivative Litigation, 698 A.2d 959, 967 (Del. Ch. 1996):
What happened in between these two decisions? Most notably, the U.S. Sentencing Commission adopted organizational sentencing guidelines that provided strong incentives for companies to implement corporate compliance programs designed to detect and report violations of law.
More recently, we’ve seen Delaware and other courts grapple with the fallout from Sarbanes-Oxley and other federal reactions to the corporate scandals of the early part of this decade. Unlike the situation with the sentencing guidelines, the reaction by the Delaware courts to the corporate governance crisis was immediate and dramatic. During the first year after Sarbanes-Oxley’s passage, the Delaware Supreme Court addressed six cases involving alleged breaches of fiduciary duties by corporate directors, and the director defendants lost each and every one of them.
Since that time, directors have fared much better in the Delaware courts, but to this observer, it seems that those courts remain less willing to defer to board decisions and more willing to countenance plaintiffs’ allegations of director misconduct than they were in the past, at least during the early stages of litigation. The post Sarbanes-Oxley era has also seen the emergence of “good faith” based litigation, which has been the subject of two Delaware Supreme Court decisions (In re The Walt Disney Company Derivative Litigation and Stone v. Ritter) and which has produced this past summer’s most controversial chancery court decision. Ryan v. Lyondell Chemical Company, (Del. Ch., July 29, 2008).
How will TARP influence corporate law? At this point, it seems that the program could well result in changes in the way courts look at the board’s compensation decisions. Section 111 of the Emergency Economic Stablization Act of 2008 (the TARP program’s enabling legislation) imposes several compensation-related obligations on companies receiving federal assistance, including a prohibition on golden parachutes and an open-ended requirement obligating companies to impose limits on compensation that “exclude incentives for senior executive officers of a financial institution to take unnecessary and excessive risks that threaten the value of the financial institution.”
What is intriguing about this provision is that much of corporate law, including bedrock concepts like the Business Judgment Rule, have developed in part to encourage companies to take risks, because that presumably is what equity holders want. Obviously, the situation is a little different in the context of troubled financial institutions receiving a massive infusion of taxpayer money, and the events of recent months make it very clear why Congress would want to require companies to focus on the relationship between corporate risk and executive incentives. Nevertheless, this kind of focus is a marked departure from the approach that corporate law has traditionally taken, and its implications could be quite profound if it influences how courts look at compensation decisions under corporate law generally.