On July 27, 2022, Delaware Gov. John Carney signed into law this year’s amendments to the DGCL, which became effective yesterday. This Saul Ewing memo highlights the most notable aspect of the 2022 amendments:
The most significant change to the DGCL is the extension of Section 102(b)(7)’s exculpation of personal liability to corporate officers. Previously, Section 102(b)(7) authorized the exculpation of personal liability for corporate directors only. This discrepancy between director and officer liability often created issues in litigation involving individuals serving as both corporate directors and officers. In such instances, an individual could be exempt from liability in his or her director capacity yet still liable in his or her capacity as an officer.
The newly revised Section 102(b)(7) remedies this discrepancy by authorizing corporations to adopt exculpatory provisions in their certificates of incorporation that limit or eliminate the personal liability of officers, as well as directors. As with director liability, corporations may only limit an officer’s liability for breaches of the duty of care. Specifically, officers may only be exempted from claims for breach of duty of care brought directly by stockholders. Officers remain liable for breach of fiduciary duty claims brought directly by the corporation or derivatively by stockholders, as well as for breaches of the duty of loyalty and for intentional acts or omissions.
Exculpation of liability under Section 102(b)(7) is available only for senior officers authorized to receive service of process under Delaware law. These officers include the president, CEO, CFO, COO, chief legal officer, controller, treasurer, chief accounting officer, and others named as executives in SEC filings.
Officer liability is a topic we’ve addressed quite frequently over the past few years, and the ability of companies to include exculpatory language in their charter documents akin to the language that protects directors provides an opportunity to help even the playing field – at least hypothetically. The idea of exculpating senior corporate officers from liability to stockholders is controversial, so it remains to be seen how many companies will opt to ask stockholders to approve these exculpatory charter amendments.
Last week, in City Pension Fund for Firefighters & Police Officers v. The Trade Desk, (Del. Ch.; 7/22), held that the controlling stockholder of The Trade Desk, founder & CEO Jeff Green, and the company’s board of directors satisfied the MFW standard in connection with the adoption of a charter amendment. That amendment repealed a “dilution trigger” that would have eliminated the company’s dual class capital structure if the high-vote shares – most of which were owned by Green – dipped below 10% of the shares of common stock outstanding.
After rejecting allegations that the Special Committee appointed to negotiate the terms of the amendment with the controlling stockholder lacked independence, Vice Chancellor Fioravanti addressed claims that stockholder approval of the amendment wasn’t fully informed. In making these allegations, the plaintiff pointed to a variety of alleged disclosure shortcomings in the proxy statement.
Most of these allegations weren’t all that interesting and were disposed of pretty quickly by the Vice Chancellor. However, one of the allegations was a little more intriguing. It related to the company’s failure to disclose Compensation Committee discussions about a possible “mega equity award” to Jeff Green that were held while proxies for the charter amendment were being solicited. That award – which amounted to 5% of the company’s outstanding equity (!) – was subsequently made 10 months later.
The plaintiff claimed that stockholders known that the board was “strongly considering the near-term bestowal of a windfall on Green, stockholders may have decided to vote against the perpetuation of control.” Vice Chancellor Fioravanti rejected the plaintiff’s claim that information about this potential award should have been disclosed.
The Contemplated Green Award was not one of the proposals presented to the stockholders for their vote in December 2020. In fact, the Contemplated Green Award was entirely speculative at the time the adjourned and reconvened stockholder meetings were held. “Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders.” Arnold, 650 A.2d at 1280; accord Crane, 2017 WL 7053964, at *13; see also In re Columbia Pipeline Gp., Inc., 2017 WL 898382, at *5 (Del. Ch. Mar. 7, 2017) (“As a matter of Delaware law, a board does not have a fiduciary obligation to disclose preliminary discussions, much less an analysis of preliminary discussions.”). Plaintiff’s argument that disclosure of a potential large equity grant was required because it was being considered as an “alternative to the then-uncertain Dilution Trigger Amendment” is equally unpersuasive.
The Vice Chancellor said that the plaintiff failed to explain how the Compensation Committee’s preliminary consideration of the option award would have been “important in deciding how to vote” on the charter amendment. Accordingly, he applied the business judgment rule to the board’s decision to endorse the charter amendment.
We’ve been cranking out podcasts lately, and our latest features my interview with Datasite’s Mark Williams on his firm’s recent M&A Outlook Survey. Topics addressed in this 23-minute podcast include:
– Survey methodology and overview of results.
– Dealmakers’ expectations for deal climate and types of deals.
– Expectations concerning the impact of macroeconomic and geopolitical issues.
– Impact of the “Great Resignation” on the M&A talent market.
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Last week, in In re GGP Stockholder Litigation, (Del.; 7/22), a divided Delaware Supreme Court overruled the Chancery Court and refused to dismiss breach of fiduciary duty and aiding & abetting claims premised on allegedly misleading proxy disclosure concerning the appraisal rights available to stockholders who dissented from the transaction.
According to the plaintiffs, the target’s directors and the buyer structed the transaction to “eviscerate” stockholders’ appraisal rights. In order to accomplish this objective, the plaintiffs alleged that the parties bifurcated the consideration payable under the terms of the transaction. Over 95% of the total consideration was payable in the form of a pre-closing dividend, while the remainder was paid in the form of what the proxy statement defined as the “merger consideration.” Including the dividend, a total of $23.50 per share was paid in the transaction, of which only $0.312 per share was defined as “merger consideration.”
The target’s proxy statement disclosed that its stockholders were “entitled to exercise their appraisal rights solely in connection with the merger,” and that the target’s appraised fair value “may be greater than, the same as or less than” the “per share merger consideration.” The plaintiffs contended that this language linking appraisal rights to the defined term “merger consideration” was intended to mislead stockholders into concluding that their appraisal remedy would be limited to the target’s post-dividend value.
The Supreme Court first concluded that, as a matter of Delaware law, the pre-closing dividend was part of the merger consideration. The Court pointed to two reasons for this conclusion; first, the dividend was conditioned upon approval of the merger and, second, because it was paid for with the buyer’s funds in the same wire as the per share merger consideration. The Court then rejected the Chancery Court’s conclusion that the proxy statement’s disclosure about appraisal rights was not misleading:
The Proxy defined the “merger” as occurring after GGP’s charter was amended and the Pre-Closing Dividend was declared and told the GGP stockholders that they were “entitled to exercise their appraisal rights solely in connection with the merger.” The fair value available in that proceeding, stockholders were told, would be “greater than, the same as or less than” the “per share merger consideration.” This decision capitalizes Per-Share Merger Consideration for the reader’s convenience; the Proxy defined it in lowercase as the sliver of compensation, eventually set at $0.312, that would remain after GGP declared the massive Pre-Closing Dividend.
These disclosures were, in our view, confusing and misleading. As discussed above, a properly conducted appraisal would have valued GGP before the Charter Amendments and the payment of the Pre-Closing Dividend and the Per-Share Merger Consideration. It was the fair value of this pre-Transaction entity that stockholders were set to part with if they consented to the Transaction, and therefore it was this fair value that the stockholders were entitled to in an appraisal.
The Court ultimately refused to dismiss duty of loyalty-based disclosure claims against the target’s directors and aiding & abetting claims against the buyer and concluded that the stockholders had not waived their appraisal rights by accepting the non-volitional dividend payment.
Justices Montgomery-Reeves and Vaughn dissented from the Court’s decision. They indicated that they would have upheld the Chancery Court’s decision for three reasons:
(1) the Proxy’s use of the term “per-share merger consideration” in the appraisal notice tells the stockholders what is at risk in an appraisal proceeding; (2) the Proxy’s use of the term “merger” is qualified by the phrase “in connection with,” and the entirety of the Proxy makes clear that the Pre-Closing Dividend is connected to the merger; and (3) any appraisal proceeding would exclude any value (positive or negative) arising from the Transaction and the Pre-Closing Dividend is value arising from the Transaction.
In Lee v. Fisher, (9th Cir.; 5/22), the 9th Circuit upheld a prior district court ruling dismissing federal disclosure claims and state law derivative claims on the basis of an exclusive forum bylaw designating the Delaware Court of Chancery as the exclusive forum for derivative suits. The Court reached that conclusion despite the fact that as a result of the application of the bylaw, the plaintiffs’ claims under Section 14(a) of the Exchange Act – which may only be asserted in federal court – would effectively be precluded.
This Troutman Pepper memo notes that the 9th Cir.’s decision creates a conflict with the 7th Cir., which recently held in Seafarers Pension Plan v. Bradway, (7th Cir.; 1/22), that the provisions of the DGCL authorizing exclusive forum bylaws did not permit Exchange Act claims to be brought in a Delaware court, since the Exchange Act gives federal courts exclusive jurisdiction over those claims. This excerpt from the memo summarizes the implications of the circuit split:
The circuit split created by the Ninth Circuit’s and the Seventh Circuit’s divergent rulings has injected some uncertainty into a common practice among Delaware corporations in the context of derivative claims brought under the Exchange Act. The Seventh Circuit’s decision, which is friendly to derivative plaintiffs, partially upsets standard practice in corporate affairs — that is, deciding where derivative internal corporate disputes should be heard.
The Ninth Circuit’s decision, which is friendly to Delaware corporations, generates uncertainty by splitting with the Seventh Circuit. Naturally, would-be plaintiffs and defendants will likely forum shop to the extent possible and gravitate toward their respective safe harbors. This issue could become exacerbated to the extent other circuit courts contribute to the circuit split. In that event, the uncertainty would likely continue unless and until the Supreme Court has the opportunity to, and chooses to, resolve the burgeoning circuit split.
Our new Deal Lawyers Download podcast features my interview with Michael Levin, founder of The Activist Investor & UniversalProxyCard.com, who provided an activist’s perspective on the universal proxy rules. Topics addressed in this 23-minute podcast include:
– How activists will approach universal proxy’s minimum solicitation requirement
– How the implementation of universal proxy will change the dynamics of proxy contests
– The likelihood of more proxy contests involving multiple activists
– Key decisions that companies and activists need to make
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
The DOJ recently settled a False Claims Act proceeding against a company that erroneously certified that it qualified as a small business in connection with 22 government set-aside contracts that it entered into subsequent to a 2011 acquisition. According to this DLA Piper memo, one interesting aspect of the case is that the violations were discovered during the due diligence process for a potential 2019 acquisition of the company. After reviewing the draconian sanctions associated with FCA violations, the memo says that there’s a lesson here for potential acquirors of government contractors who have been awarded set-asides based on small business status. Here’s an excerpt:
Given the risks and liabilities associated with inaccurate small business size certifications, it is important to thoroughly perform diligence on size status in connection with a pending merger or acquisition involving a contractor that performs, or has performed, government contracts set aside for small business concerns. Because the size regulations promulgated by the US Small Business Administration (SBA) are nuanced and the resulting analysis is highly fact-specific, it is not surprising to uncover inaccurate size certifications in the course of buy-side diligence or, when representing the target, in preemptively reviewing the target’s SAM.gov profile, as well as the target’s active and historic contract documents to be made available to prospective buyers.
If an incorrect size certification is discovered, steps should be taken both within the parameters of the M&A transaction and with regard to the government to address, and ideally mitigate, the potential liability and reputational risks.
If a size certification issue is discovered, the memo says that counsel should assess, among other things, the scope and volume of the target’s set-aside contract portfolio & other government contracts, the scope & nature of the inaccurate size certifications, the business consequences of loss of small business status or other collateral consequences, and the remedial measures and strategy for communicating with the government.
Our new Deal Lawyers Download podcast features my interview with Goodwin’s Sean Donahue on the universal proxy rules. Topics addressed in this 19-minute podcast include:
– How will universal proxy change the dynamic of proxy contests?
– What strategic and tactical opportunities does universal proxy create for activists? – What are some vulnerabilities that public companies may not have focused on?
– What should public companies do between now and September 1 to put themselves in the best position to deal with the universal proxy rules?
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
This recent blog by Paul Weiss’s Jeffrey Marell provides some advice to boards to keep in mind when they navigate the volatility and uncertainty of current market conditions. One piece of advice he offers up is the need for patience, because putting deals together & getting to closing is going to take more time in the current environment:
When markets are rising (or at least stable), it is typically much easier for companies to agree on M&A terms. Deals are, of course, still done during times of volatility, but deal valuations and modeling get more complex due to their dependence on market pricing. Deals may involve stock considerations. Even cash deals may be affected because buyer access to credit markets may be based on stock valuations. Even if the transaction involves private assets, valuations may look to public company comparables.
Separately, added scrutiny from antitrust regulators will mean that deal terms related to such approvals will be more complicated to negotiate and the approval process itself will be lengthier. Given this, boards should anticipate a longer timeline and more fits and starts than a typical M&A process in a stable or up-market environment.
This Fenwick memo discusses a proposed FTC consent order involving a completed acquisition that targets the terms of the non-competition language included in the acquisition agreement. Here’s the intro:
Last month, in a proposed consent order settling a challenge to a previously consummated transaction, the Federal Trade Commission not only succeeded in partially unwinding the transfer of certain assets but also secured a victory in substantially narrowing the scope of the noncompete provisions of the parties’ asset sale agreement.
The challenge thus underscores the commitment of FTC leadership to aggressively pursue consummated transactions it believes to be anticompetitive, but it is most noteworthy for its focus on the parties’ noncompete provisions, which historically have received little attention from the antitrust agencies. Moreover, existing federal court precedent arguably supports the legality of the specific provisions challenged by the FTC.
As such, this action is entirely consistent with FTC Chair Lina Khan’s stated intention to aggressively expand the reach of existing antitrust law, even when doing so potentially entails litigation risks. Going forward it also serves as a warning that, as noted in a joint statement by Khan and the FTC’s two other Democratic commissioners, the agency will scrutinize mergers and acquisitions agreement noncompete provisions “with a critical eye.”
The FTC’s press release announcing the proposed consent order highlighted the aspects of the non-competition provision that it found objectionable. It said that the non-compete that the seller was required to sign as part of the deal not only prohibited the seller from competing in the markets in which the gas stations it sold operated, but in many other markets as well. Even in the markets where the acquired gas stations operated, the FTC’s complaint alleged that the non-compete was “unreasonably overbroad in geographic scope and longer than reasonably necessary to protect a legitimate business interest.”
The memo provides additional background on the case and offers up some key takeaways from the case, including the need to appropriately calibrate a non-compete’s scope to the business being acquired, and the importance of being prepared to defend the duration of any non-compete provisions related to an acquisition.