From Travis Laster: In McPadden v. Sidhu, Delaware Chancellor Chandler recently granted a motion to dismiss claims against the outside directors of i2 Corporation for allegedly selling a significant subsidiary in bad faith. The decision merits close attention both substantively for what the Chancellor views as exculpated conduct under Section 102(b)(7) and procedurally for its approach to Rule 23.1.
The Facts
According to the allegations of the complaint, the directors of i2 approved the sale of one of i2’s subsidiaries, TSC, to Anthony Dubreville, an officer of i2, for $3 million. Six months later, Dubreville received a third party offer for TSC for $18.5 million. Two years later, Dubreville sold TSC for $25 million. The board delegated to Dubreville the task of running the sale process for TSC despite knowing that he was interested in acquiring TSC via an MBO. The Board relied on Dubreville to convey information about TSC to potential purchasers, and also relied on him for information about expressions of interest. No business broker or investment banker was hired. At the time of the purchase, a competitor allegedly had expressed interest in acquiring TSC for $25 million.
Taking these allegations as true for purposes of his ruling, the Chancellor first denied the defendants’ motion to dismiss pursuant to Rule 23.1, finding that “plaintiff has pleaded a duty of care violation with particularity sufficient to create a reasonable doubt that the transaction at issue was the product of a valid exercise of business judgment.” (17). Under the second prong of Aronson, therefore, demand was futile. The Court observed that it was grossly negligent for directors to task Dubreville with leading the sale process when the board knew he was interested in buying the subsidiary. The board then “engaged in little or no oversight of that sale process, providing no check on Dubreville’s half-hearted (or, worse, intentionally misdirected) efforts in soliciting bids for TSC.” (19).
Dubreville did not contact natural buyers, such as TSC’s competitors, and he did not contact the party that had expressed interest in a purchase for $25 million. The board was provided with information about the selective process and knew what Dubreville had done, but did nothing to remedy the situation. Instead they approved a sale to Dubreville. The directors also did not take into account the fact that the sale price was below the range of fair value calculated using projections prepared for potential buyers in January 2005, and only barely within the range of fairness based on revised projections prepared by Dubreville’s buy-side management team in February 2005. Based on all of these issues, the Chancellor found it “obvious” that the directors were grossly negligent. (22).
Despite denying the Rule 23.1 motion, the Chancellor dismissed the claims against the outside directors for failure to state a claim in light of the Section 102(b)(7) provision in i2’s charter. The plaintiff argued that the allegations regarding the directors’ conduct were sufficient to state a claim for breach of the duty of loyalty based on action taken in bad faith. The Chancellor, however, interpreted the Delaware Supreme Court’s holding in Stone v. Ritter as holding that bad faith requires some form of intentional action, namely “the intentional dereliction of duty or the conscious disregard for one’s responsibilities.” (25). This left conduct that involves “reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason” as falling under the heading of gross negligence and hence involving only a care breach. (24). The Chancellor held that the defendant directors’ actions “are properly characterized as either recklessly indifferent or unreasonable.” (26). Such conduct, however, gave rise to a breach of the duty of care and was exculpated under Section 102(b)(7).
The Chancellor then turned to Dubreville himself. He first held that “an officer owes to the corporation identical fiduciary duties of care and loyalty as owed by directors.” (27). Officers, however, are not protected by Section 102(b)(7). The Chancellor held that the complaint “more than sufficiently alleged a breach of fiduciary duty.” (28). The Chancellor also held that the plaintiff had adequately alleged that Dubreville had been unjustly enriched by his misconduct.
Analysis
Several aspects of McPadden are noteworthy. First, as a substantive matter, the outcome in McPadden contrasts sharply with the recent decision in Lyondell, where Vice Chancellor Noble denied a motion for summary judgment and permitted a case to go to trial after finding triable issues of fact over whether the directors acted in bad faith. In Lyondell, the outside directors relied on the CEO to orchestrate and run a sale process, and the Court credited for purposes of summary judgment the plaintiffs’ assertion that the directors sufficiently abdicated their duties to permit an inference of bad faith.
The facts as alleged in McPadden appear more egregious: the transaction was a sale to an insider, and the directors knew about Dubreville’s conflict and the problems with the sale process yet went forward anyway. Under Vice Chancellor Noble’s approach in Lyondell, the McPadden complaint would seem to have stated a claim because of a permissible inference of bad faith. The Chancellor reaches a different result by reading Stone v. Ritter as requiring intentional dereliction of duty and moving recklessness into the category of gross negligence.
Stone v. Ritter involved a Caremark claim based on the lack of a reporting system to ferret out wrongdoing. It is not clear to me that Stone‘s comments on bad faith in that context apply broadly to all types of bad faith. Indeed, Stone’s language on the nature of bad faith is drawn from Walt Disney, in which the Supreme Court described its definitions of bad faith as illustrative and not exhaustive. When director action is involved, it seems to me that recklessness of the type described in McPadden, involving the knowing delegation of duties and reliance on a conflicted fiduciary, could fall within the ambit of bad faith.
It also seems to me that in a Revlon context like Lyondell or the Revlon-like context of selling a significant subsidiary, recklessness could qualify as bad faith. Given the still evolving nature of the law in this area, Lyondell was the more conservative decision. McPadden represents a much stronger and more pro director-defendant interpretation of Stone and what “good faith” means. Directors and practitioners who reacted negatively to Lyondell can take comfort in McPadden. In the long run, however, a legal system that regularly exculpates the type of reckless conduct alleged in McPadden and does so at the pleadings stage risks having investors turn elsewhere for protection.
Second, the clear holding that officers have the same duties as directors is a welcome clarification of Delaware law. Although other decisions had hinted at this or assumed it to be true, we now have a decision that says it. Even without this holding, I do not see how Dubreville would have qualified for exculpation given his personal financial interest in the deal.
Third, as a procedural matter, the Chancellor declined to apply Section 102(b)(7) in the context of Rule 23.1 and instead held that an exculpated care claim was sufficient to merit denial of a Rule 23.1 motion under the second prong of Aronson. From a practitioner perspective, this means that defendants who wish to invoke Section 102(b)(7) must make both a Rule 23.1 motion and a Rule 12(b)(6) motion. This is not overly difficult and in Delaware can be accomplished via the same motion and supporting brief.
Nevertheless, it could easily be overlooked because Rule 23.1 generally applies a stricter standard and is typically the dispositive motion. In addition, in the context of Rule 23.1 motions under Rales v. Blasband, which applies when the demand futility evaluation focuses on a new board, Section 102(b)(7) is applied directly at the Rule 23.1 stage to determine whether or not the directors have a reasonable fear of liability. Practitioners therefore should be careful not to overlook the need to make a Rule 12(b)(6) motion in the Aronson context.
I am pleased to welcome Chief Justice Steele to the Conglomerate today. I got to know him when I was clerking for Vice Chancellor Noble in Delaware. When I told him about my interest in writing about corporate law he agreed to co-author a paper with me for which I will always be grateful. You can read our article, Delaware’s Guidance: Ensuring Equity for the Modern Witenagemot, here. We explore a controversial issue: Delaware’s use of dicta, speeches, and articles to offer insight to practitioners.
Imagine being just out of law school, trying to remember how many prongs there are to Aronson and what 102(b)(7) means, and getting a chance to co-author with the same person whose opinions you got cold-called about in corporations class the year before. I was in over my head, certainly not for the first time, but what a great learning opportunity it was.
I caught up with the Chief Justice via telephone today during a short break in his docket and I thought I would share our discussion to give our readers some insight into what goes on behind the curtain of the Delaware Judiciary.
Verret: Welcome to the Conglomerate, Chief Justice.
Chief Justice Steele: Good to be here.
Verret: Our readers don’t know it, but you were immortalized into bobblehead form for a recent anniversary by your former clerks. How long have you served in the Delaware Judiciary?
Chief Justice Steele: In May I celebrated my twentieth anniversary on the bench. I was first appointed to the Delaware Superior Court at the age of 43 as an Associate Judge and later as Resident Judge, where I served for 6 years. I then served in the Delaware Court of Chancery for 6 years as a Vice Chancellor. I was then appointed to the Delaware Supreme Court in 2000, and also appointed as Chief Justice in 2004.
Verret: I know that the former law clerks, interns, and fellows who have spent time working for you are affectionately known as the “knuckleheads.” The knuckleheads practice in Delaware, New York, and all over the country. How many knuckleheads are there these days?
Chief Justice Steele: I am proud to say that we have an alumni group of over 60 knuckleheads.
Verret: What did you do before you were appointed to the Court?
Chief Justice Steele: I practiced at a firm that is now called Prickett, Jones and Elliott. I was recruited by Rod Ward to work in their Dover office. Rod’s family owned the Corporation Services Company, which is still today the leading provider of incorporation services to attorneys and businesspeople. The Dover office was temporarily opened to accommodate a partner who was elected to the General Assembly and I was recruited to head up the Dover office to build a permanent presence for the firm downstate.
Verret: How did you first become interested in corporate law?
Chief Justice Steele: I first became interested in the subject when I studied under Ernie Folk at the University of Virginia. I took every one of Professor Folk’s courses. Prof. Folk authored the leading treatise on the DGCL, which Rod inherited after Folk passed away, and Professor Folk was also the primary author of the first major re-codification of the Delaware General Corporation Law in 1967. There is no doubt in my mind that Professor Folk’s recommendation was instrumental in getting me the job at Prickett.
Verret: That’s quite a Delaware/UVA connection. Why is that?
Chief Justice Steele: A number of Delaware lawyers are UVA graduates, due in no small part to Professor Folk’s enduring influence. There is even a faculty chair in corporate law endowed by the Delaware bar at UVA.
Verret: What sort of work did you focus on in your practice?
Chief Justice Steele: I practiced general litigation and represented local hospitals. This involved a great deal of exposure to corporate governance issues. I also spent a year on loan from my firm to the Delaware Attorney General’s office to work as a prosecutor.
Verret: What would you say is so unique about Delaware’s approach to corporate law?
Chief Justice Steele: There are three things I would highlight. First, our specialized Court of Chancery. This is a collegial Court of five experienced lawyers who engage in efficient fact finding and issue opinions promptly. I should add that our 5-member Supreme Court is made up 3 former Vice Chancellors. Our non-jury equity jurisdiction ensures that the complex and highly technical questions of finance and governance that are at the heart of the disputes are ably resolved. Second, the General Assembly engages in a deliberative and open process to consider changes to the Corporate Code. Our Committee on Corporate Laws issues recommendations to the General Assembly after an open comment process that includes, and is informed by, comments from all interested parties, from the Business Roundtable to the Council of Institutional Investors. Finally, the complementary aspects of common law and equitable principles have a uniquely symbiotic relationship in our law. The incremental growth of common law and equitable principles offer a foundation for predictability and consistency in our law. The DGCL is informed by a principle of enablement, and is supplemented by the flexibility of judges to craft remedies afforded by equity jurisdiction.
Verret: I understand that you are a three time UVA grad, including an LLM completed while serving on the bench, and that your thesis was recently published (see here). Tell us more about that.
Chief Justice Steele: This began with a case I was assigned while on the Court of Chancery, Gotham v. Hallwood. In the opinion I noted that there was no affirmative mandate in the Delaware General Corporation Law for a default application of corporate fiduciary principles to alternative entities. After I was elevated to the Supreme Court, Vice Chancellor Strine was assigned to the case and issued a decision that included similar language. On appeal, in a decision from which I was recused of course, the Supreme Court included language in its opinion stating that the freedom of contracting parties in alternative entities to opt-out of fiduciary duty principles from corporate law was limited, and that fiduciary duties in alternative entities could not be eliminated.
This motivated my research on the article, in which I argue that the alternative entity statute was intended to allow the crafters of those entities to modify their fiduciary duties as their business needs required. Just after my thesis was completed, it turned out that the Delaware Legislature amended the DGCL to explicitly recognize the right of alternative entities to opt-out of fiduciary duty application. The implied covenant of good faith and fair dealing still applies to alternative entity formation, just as in any contractual relationship, but is a less rigorous review than fiduciary duty application and is typically seen in employment law cases.
Verret: I also understand that you recently served on the faculty of DirectWomen. Tell us about that experience.
Chief Justice Steele: DirectWomen is an initiative of the Business Law Section of the ABA to train female lawyers and prepare them to serve on Boards of Directors, as well as help them get placed on Boards. I became involved at the suggestion of Linda Hayman from Skadden and Professor Sale of Iowa Law School. It was a privilege to work with that group.
Verret: I understand that you are working on a new book with Professor Ann Conaway, and also teaching a class this semester at the University of Pennsylvania Law School?
Chief Justice Steele: Professor Conaway and I are drafting a text that will be a comparative work designed to contrast corporate structures to LLCs, LPs, and other alternative entities. It should be an effective teaching aid for courses in basic business associations, corporations, and alternative entities. I am also co-teaching a course at Penn with Mark Morton of Potter, Anderson called “Advising the Corporate Director.”
Verret: Sounds like it’s going to be a busy year. One last question: if you had to pick one recent opinion to add to business organization textbooks, what would it be?
Chief Justice Steele: The AFSME v. CA opinion. (Note, for more on the opinion, see here and here.) This case reaffirms important principles of federalism in corporate law, and ultimately reaffirms our respect for the shareholder’s right to vote, while at the same time clarifying the proper scope of shareholder proposed bylaws.
Verret: This was fun. Thanks for joining us here at The Conglomerate, we enjoyed the visit.
Here is a guest blog from Steven Haas of Hunton & Williams:
Last Tuesday, Delaware Vice Chancellor Leo Strine upheld a “naked no-vote termination fee” in the Lear litigation (2008 WL 4053221). Lear involved a renegotiated merger agreement whereby Carl Icahn agreed to increase his bid to acquire Lear Corporation by $1.25 per share (or 3.5%) in exchange for a $25 million termination fee (or 0.9% of total deal value) payable if the stockholders rejected the agreement–which happened in July 2007. The plaintiff claimed that the directors breached their duty of loyalty because they knew the merger wasn’t going to be approved when they amended the merger agreement to include the naked no-vote termination fee.
VC Strine’s opinion was driven largely by the fact that independent and disinterested directors were advised by competent outside advisors: “Where, as here, the complaint itself indicates that an independent board majority used an adequate process, employed reputable financial, legal, and proxy solicitation experts, and had a substantial basis to conclude a merger was financially fair, the directors cannot be faulted for being disloyal simply because the stockholders ultimately did not agree with their recommendation.”
He gave zero weight to the plaintiff’s argument that the demands for higher consideration made by certain stockholders and proxy advisory firms proved to the board that the merger was doomed:
These pled facts reflect uncertainty in an ongoing game of financial chicken. Institutional investors do not have to be sworn as witnesses and give their reservation prices to merger targets soliciting proxies. They can and do play it cagey and attempt to extract value.
Firms like MacKenzie are paid to peer into this murk and make sense of it, so as to estimate what it will ultimately take to get the votes. And the incentives of a firm like ISS also give it reason to play coy. In order to demonstrate its value and clout to its customers, ISS has an incentive to act as a quasi-negotiator, using the proxy solicitation process as a way to encourage a higher bid, and using its recommendation tool to extract value.
VC Strine also picked up where he left off in Mercier v. Inter-Tel (2007), making clear that directors have broad latitude in pursuing corporate objectives, including change-of-control transactions, even when stockholders and other observers seemingly disagree:
Directors are not thermometers, existing to register the ever-changing sentiments of stockholders. Directors are expected to use their own business judgment to advance the interests of the corporation and its stockholders. During their term of office, directors may take good faith actions that they believe will benefit stockholders, even if they realize that the stockholders do not agree with them. In the merger context, directors are free to adopt a merger agreement and seek stockholder approval if they believe that the stockholders will benefit upon adoption, even if they recognize that securing approval will be a formidable challenge.
It would be inconsistent with the business judgment rule for this court to sustain a complaint grounded in the concept that directors act disloyally if they adopt a merger agreement in good faith simply because stockholders might (?), were likely (?), or were almost certain (?) to reject it. This sort of speculative second-guessing may be good fun for sports talk shows or political pundits, but it is not the stuff of which duty of loyalty case law is made.
The court concluded by calling plaintiff’s waste claim “frivolous” and finding that the directors were not guilty of even “simple negligence,” let alone gross negligence or bad faith.
From Brad Aronstam of Connolly Bove Lodge & Hutz: Last week, Vice Chancellor Noble of the Delaware Court of Chancery rendered this short opinion – in Henkel Corp. v. Innovative Brands Holdings – in which he addressed the issue of when a would-be acquirer must assert a claimed material adverse effect in declining to complete an agreed upon acquisition.
In short, VC Noble held that the parties’ failure to specify in the merger agreement a particular timetable for the acquirer to claim an asserted MAE precluded the Court, on the pending motion to dismiss before it, from concluding as a matter of law that the acquirer was not entitled to make its MAE election in the future. It bears noting that the Court reached this decision notwithstanding the acquirer’s argument that the seller remained subject to a no-shop clause in the merger agreement which effectively precluded the seller from seeking other purchasers.
– The Chancery Court emphasized that: “the reports of the death of Section 102(b)(7) (and the consequent possibility for the “resuscitation” of a Van Gorkom-esque liability crisis) in Delaware law are greatly exaggerated both with regard to the application of Lyondell’s exculpatory charter provision in this case, and certainly with regard to the application of a Section 102(b)(7) provision defense in any other case.” ( my italics)
– The Court went out of its way to repeatedly emphasize the restricted procedural posture of its decision and the circumscribed nature of the meager–and by definition incomplete–record in the context of the summary judgment motion that was presented. (see, e.g., footnotes 13 and 14.)
– The Court emphasized the following five facts that were key to its conclusion:
1. The directors knew that the company was “in play” (although noting that the filing of a Schedule 13D will not always trigger Revlon duties.)
2. According to the Court, the directors did little or nothing to develop a strategy pursuant to Revlon to maximize shareholder value in connection with the possible sale of the company.
3. The Court held that the directors did little or nothing pre-signing to confirm that a better deal could be obtained.
4. The directors, the Court held, did little or nothing to negotiate the offer they did receive.
5. The directors, in the Court’s view, did little or nothing post-signing to verify that a better deal could have been obtained.
– The Court went to great lengths to explain why it did not conflate the duty of care with the duty of good faith component of the duty of loyalty. One might write an entire law review article based on the court’s explication of the finer points of these concepts but for now I can only refer you, for example, to footnotes 26 to 33 and related text. Footnote 26 provides in part as follows:
“the Court decided that there were material fact questions that raised an issue of whether the directors’ failure to act in the face of a known duty to act amounted to something more than a simple violation of the duty of care (i.e., gross negligence). In other words, this is an instance where issues of care and loyalty (good faith, in this context) bleed together under the facts presented in the summary judgment record, and, therefore, the Court was unable to ascertain, at least at this point, the ultimate effect of Lyondell’s exculpatory charter provision in this context. The Court was careful to explain, however that, ultimately, a determination that the directors’ failed to act in “good faith” could result in liability only because in that instance the directors will have violated their duty of loyalty. Opinion at 54-56. Thus, the Court did not conflate good faith into a theory that would result in legal liability for a breach of only the directors’ duty of care, notwithstanding a Section 102(b)(7) charter provision. Unfortunately, at this preliminary stage of this case, it is difficult to frame the issue in a manner that does not, to some extent, track closely with those facts suggesting only an apparent failure to act with appropriate care; it remains to be seen whether the directors’ acts (or failure to act) reach into the realm of non-exculpable bad faith. See, e.g., Desimone v. Barrows, 924 A.2d 908, 935 (Del. Ch. 2007).”
– At pages 12 to 14 of the letter decision, the court described the “three points in the spectrum of fiduciary conduct deserving of the “bad faith” pejorative label”. The Court’s description could be the topic of an entire separate article.
– Another key point: the Court explained that: “when one views the totality of the directors’ conduct on this record, that leads the Court to question whether they [the directors] may have disregarded a known duty to act and may not have faithfully engaged themselves in the sale process in a manner consistent with the teachings of Revlon and its progeny.” ( Slip op. at page 19).
Now that the Delaware Supreme Court has affirmed the Chancery Court’s decision in Jana Partners (as well as the holdings in the Office Depot and CSX cases), as noted in this article, a number of companies are now crafting bylaws designed to flush out the actual size of activist stakes.
In the article, Professor Charles Elson notes that he wouldn’t be surprised if more than half of all US companies revise their advance notice bylaws in time for the 2009 proxy season. Tune in on Thursday for this webcast – “How to Change Your Advance Notice Bylaws” – so that you will be able to fully evaluate what you should be doing now.
This webcast is important because advance bylaw provisions are not boilerplate. Even if two companies have identical language in their advance notice bylaws, they may operate differently because companies in their shark repellent arsenal may (or may not) allow shareholders to call special meetings or act by written consent, etc., and because many companies have adopted a majority voting standard.
Here are a dozen questions that the panelists will be addressing during the webcast:
– Should companies that have their bylaws tied to the mailing of the prior year’s proxy statement consider revising their bylaws?
– What do the Delaware cases say about how long the advance notice period can be?
– How should companies deal with the interplay between Rule 14a-8 and their advance notice bylaws?
– In the wake of the CNET and CSX cases, are companies starting to incorporate the concept of “cash-settle only” and similar derivative instruments into their advance notice bylaw provisions?
– If so, how broadly are such concepts applied in their bylaws?
– Are you seeing companies incorporate the swap and derivatives concept into their poison pills?
– Are there any loopholes in these organic shark repellent provisions that the courts have not addressed?
– Are you seeing hedge funds and their investment banking and other institutional counterparties starting to shy away from total return swaps and similar derivatives arrangements in view of the CSX case?
– Apart from the recent judicial decisions, what mistakes do targets sometimes make with respect to their advance notice bylaws?
– What are the SEC Staff’s views on what is happening?
– At the end of the day, are the decisions in Openwave, C-Net and Office Depot contract construction and drafting error cases – or do they speak more broadly to Delaware corporate policy?
– Are folks over-reacting to all of this?
Yesterday, the SEC approved a host of changes to the exemptions for M&A transactions and rights offerings at an open Commission meeting; here are opening remarks from Tina Chalk of Corp Fin. From Mark Bergman of Paul Weiss, here is a summary of these changes:
– Look-through analysis and beneficial ownership – In order to allow bidders to make the determination of eligibility (the 10% and 40% thresholds) at an earlier point in time, bidders will now be able, in negotiated transactions, to calculate U.S. beneficial ownership as of a date within a range of dates that are no more than 120 days before, and no more than 30 days after, public announcement of a transaction.
In addition, the current requirement to exclude from the calculation of U.S. ownership securities held by persons holding greater than 10% of target securities has been eliminated (the securities held by the bidder will, however, continue to be excluded from the denominator).
If the bidder is unable to conduct the new modified look-through test, an alternate eligibility test is available. This test depends on the comparison of the ADTV of the U.S. float with the worldwide float and consideration of U.S. ownership figures reported in publicly available information, including SEC filings, as well as other information that the bidder knows or has “reason to know” about the U.S. beneficial ownership.
– Tier I exemption – The new rules will eliminate restrictions on the types of cross-border transactions that qualify for the Tier I exemption from Rule 13e-3. As a result, schemes of arrangement, cash mergers and other similar types of transactions will be eligible to rely on the Tier I exemption.
– Tier II exemption – The SEC has extended the Tier II exemption to cover any offer regardless of whether the target’s securities are subject to Regulation 14D or Rule 13e-4.
– Multiple non-U.S. offers – Bidders will now be allowed to make multiple concurrent non-U.S. offers.
– Persons included in offers – Non-U.S. holders of ADRs will now be able to participate in U.S. offers. U.S. holders will also be able to participate in non-U.S. offers where required under local law (that is, where the local law expressly precludes the exclusion of U.S. persons from the local offer) and where adequate disclosure about the implications of participating in the foreign offer or offers is provided to U.S. security holders.
– “Back-end” withdrawal rights – Bidders will be able to suspend back-end withdrawal rights during the time after the initial offering period, when tendered securities are being counted and before they are accepted for payment. This will, therefore, permit withdrawal rights to be terminated at the end of an offer and during the counting process where no subsequent offer period is provided.
– Length of subsequent offer periods – The 20-business day limit on subsequent offer periods has been eliminated.
– Rule 14e-5 – New Rule 14e-5, which prohibits purchases of target’s securities outside and during the pendency of an offer except pursuant to such offer, will codify recurrent Staff’s exemptive relief for tender offers relying on the Tier II exemption.
– Schedule 13G – The new rules will permit foreign institutions (similar to the U.S. domestic institutions that can use Schedule 13G pursuant to Rule 13d-1(b)(1)(ii) of the Exchange Act), under specified conditions, to report beneficial ownership of more than 5% of a subject class of securities on Schedule 13G, rather than filing a Schedule 13D, as it was formerly required.
The SEC has also provided additional interpretive guidance on various other issues covered in the proposing release, including termination of withdrawal rights after reduction or waiver of a minimum acceptance condition; applicability of all-holders rule to non-U.S. holders; the exclusion of U.S. holders of a target to participate in a tender offer; and vendor placements.
Back in June, the Department of Justice published an advisory opinion regarding a US company’s approach to a corporate transaction under the Foreign Corrupt Practices Act. Although the DOJ’s guidance is specific to the facts in the opinion, it is helpful to understand its expectations in the context of a proposed acquisition – the DOJ wants companies to conduct due diligence to ensure against contributing to corrupt activity when entering into transactions, particularly when they are unable to establish that foreign transaction parties are free of corrupt behavior.
Note that in the opinion, the DOJ recognizes that due diligence may be forced to be limited to accommodate the laws of other countries. We have posted memos analyzing the DOJ opinion in our “Due Diligence” Practice Area.
I seriously whacked out my back, so this blog suffers and all I can do is quote from Gordon Smith, one of the folks behind the “Conglomerate Blog“:
If you are following the Ryan case, which I blogged about below, you will be interested to read the “Defendants’ Memorandum of Law in Support of Their Application for Certification of Interlocutory Appeal and to Stay Proceedings Pending Appeal.” (Whew!) The gist of the appeal is that Vice-Chancellor Noble’s decision would “eviscerate” section 102(b)(7) because it conflates the duty of care and the duty of good faith. The crux of the argument is that the defendants were “properly motivated, unconflicted and independent directors.” As Meatloaf reminded us, two out of three ain’t bad.
Vice-Chancellor Noble’s opinion acknowledges that the defendants were unconflicted and independent, so he ends up focusing on motivation: “the Board???s failure to engage in a more proactive sale process may constitute a breach of the good faith component of the duty of loyalty as taught in Stone v. Ritter.”
The only opening I see for the defendants here is the possibility that Vice-Chancellor Noble equates a breach of Revlon with a breach of the duty of good faith. Consider the following from footnote 11 of the opinion: “the Board???s apparent failure to make any effort to comply with the teachings of Revlon and its progeny implicates the directors’ good faith and, thus, their duty of loyalty, thereby, at least for the moment, depriving them of the benefit of the exculpatory charter provision.”
Necessarily implicates? Or may implicate? As noted in my first post on this case, the latter is the better view of Revlon because it implies that directors may violate their Revlon duties because they failed to act with due care, good faith, or loyalty. The Delaware cases do not seem crystal clear on this, but I think that is a fair reading.
But the defendants dont’ take this path. Instead, they argue that Vice-Chancellor Noble’s opinion conflates the duty of care and the duty of good faith because well, because there is no “record evidence that would support an inference that the Lyondell Directors intentionally breached their Revlon duties.” Translated: we don’t like the court’s interpretation of the facts. That argument seems like a certain loser on an interlocutory appeal from a decision on a motion for summary judgment.
In the final analysis, however, the defendants have a bigger problem: nothing in Vice-Chancellor Noble’s opinion would “eviscerate” 102(b)(7), as claimed by the defendants, because the Lyondell directors can still get the benefit of the exculpation provision if they are found after trial to have breached only their duty of care. The problem with the decision is that they can’t get a lawsuit like this dismissed. But I don’t see how you can pin that on Vice-Chancellor Noble. He is just taking direction from the Delaware Supreme Court.
I recently was checking out Damien Park’s new blog – “Activist Hedge Fund Investing” – and noticed the spotlight on Point Blank Solutions and how Steel Partners is chasing after them. In particular what caught my eye was the see-saw legal battle over the company holding its annual shareholders’ meeting. The company hired a bank to explore strategic alternatives – probably because an activist is after them – and then used that to postpone the meeting and buy time. That is not anything new.
John Grossbauer of Potter Anderson notes: But what is pretty rare is a company coming back to the Delaware Court of Chancery for an extension of time after agreeing to a date to hold the annual meeting. I would imagine the Court would want some fairly compelling facts in order to permit the postponement, particularly where – as here – it would result in the meeting being held six months after the original Order was entered. Even the original postponement to August 19th is on the longer end of the range of time periods previously approved by the Court in similar cases.
How to Handle Hedge Fund Activism
We have posted the transcript from our recent popular webcast: “How to Handle Hedge Fund Activism.”