Winshall v. Viacom International Inc., C.A. 6074-CS (November 10, 2011)
This is another case where a party tried to re-do a contract by claiming that the failure to give it more than it bargained for constituted a violation of the covenant of good faith and fair dealing. In rejecting that claim, the Court again explains the tight limits of that covenant. It just can not be used to make a new deal.
Coughlan v. NXPB, C.A. 5110-VCG (November 4, 2011)
It is sometimes important to decide if a series of transactions are to be coupled together to be treated as one. The so-called step transaction doctrine does that when applied. Here the Court used the step transaction to interpret an agreement that gave the selling stockholders the right to a bump up in the merger consideration and certain protections if company assets were sold before all the additional consideration was paid. This somewhat lenient application of the doctrine may signal its greater acceptance by the Court.
Gaines v. Narachi, C.A. 6784-VCN (October 6, 2011)
What should be disclosed in a proxy is not always clear. This decision notes the reasons and the precedent to disclose free cash flows used to do a discounted cash flow analysis by an investment bank giving the fairness opinion.
GRT, Inc. v. Marathon GTF Technology Ltd., C.A. 5571-CS (July 11, 2011)
One of the more misunderstood aspects of merger agreements is how their representations and warranties are intended to work. Do they continue after closing? What is the limit on when litigation may be filed over any breach? This decision answers those questions and is therefore essential reading for those who deal in these agreements.
Of particular importance is the decision's holding that a 1 year limitation of litigation is binding and may cut off claims for breach of the representations and warranties.
This article was original published in The Delaware Business Court Insider | 2011-07-06
On May 31, Vice Chancellor Leo E. Strine Jr. issued an opinion denying a motion for preliminary injunction to halt a merger between Massey Energy Company and an affiliate of Alpha Natural Resources Inc. One of the critical issues in the opinion was the value of the derivative claims Massey had against certain current and former directors and officers arising out of Massey's compliance with federal mining safety regulations.
Massey's attitude toward federal mining safety regulations arguably manifested itself in the Upper Big Branch mine disaster, which resulted in the loss of 29 lives. In his opinion, Strine found that the plaintiffs had probably stated a Caremark claim against the directors of Massey and criticized the board of Massey for failing to assess the value of the derivative claims but ultimately refused to enjoin the merger, concluding that the derivative claims did not have the value plaintiffs believed.
While this result has received some negative commentary, is it really a surprise? In fact, the court's analysis is consistent with prior analyses addressing the value of derivative claims in the context of a merger. The fact that the party here is more infamous than many others did not change the analysis under Delaware law.
The plaintiffs valued the derivative claims based on the "aggregate negative financial effect on Massey that the Upper Big Branch Disaster and its Fall-Out has caused." According to the plaintiffs' expert, these damages range from at least $900 million to $1.4 billion. The court, however, rejected this theory, in large part because the computation of the value of the derivative claims was far more complicated than the plaintiffs' theory.
First, even though the plaintiffs had stated a viable Caremark claim against the directors, because of the business judgment rule and the exculpatory provisions in Massey's certificate of incorporation, in order to obtain a monetary judgment against the directors, they would have to prove that the directors acted with scienter — a difficult standard to meet, particularly with independent directors.
Second, the court also found that even as to the autocratic former leader of Massey, Don Blankenship, who was arguably responsible for Massey's approach to mining safety, meeting this standard would be difficult. The court noted that there is a large gap between pushing the limits of federal regulations while accepting minimal loss of life and knowingly endangering the mine itself by putting its very operations at risk. Moreover, Blankenship was not directly in charge of any specific mine, and tying his policies directly to any disaster would be challenging.
Third, proving that the directors acted with scienter may entitle the corporation to a monetary judgment from the directors, but it would simultaneously expose the company to third-party civil liability and potential criminal liability, and potentially deprive the directors of the ability to rely on insurance coverage, all of which would harm the company.
Fourth, after the merger, Alpha will continue to have to address direct claims against Massey from its lost and injured miners, regulatory consequences of the company's mining safety approach, and other elements of the "Disaster Fall-Out." To the extent possible, Alpha will have every incentive to shift that liability to the former directors.
Fifth, it is impossible to determine the potential derivative liability of the directors until Massey's direct liability is determined. Indeed, it is not even in the interest of Massey's stockholders to press their claims of derivative liability now, before third-party civil and criminal adjudication, lest the plaintiffs expose the company to additional liability.
Sixth, the plaintiffs' expert put no value on the ability of the company or its stockholders to collect on a potential $1 billion judgment. The company's insurance policy, even assuming it is available to cover claims against the former directors, is only $95 million. While this is no small amount, it is, as the court put it, "not material in the context of an $8.5 billion merger."
While the vice chancellor was quick to note that the Massey board's approach to valuation of the derivative claims was less than ideal, because of the factors noted above, he found that the plaintiffs had not persuaded him that the merger was unfairly priced because of the failure to value separately the derivative claims. Was this conclusion so unprecedented, however, to justify criticism of the valuation?
Delaware courts previously have been asked to consider the value of unliquidated, contingent claims belonging to the company in the valuation context. These courts have never valued derivative claims at the full value of all potential damages, but instead have considered many of the factors Strine addressed in Massey.
For instance, in Onti Inc. v. Integra Bank Inc., petitioners in an appraisal action argued that their derivative claims should have been valued as an asset of the company in the appraisal proceeding. The stockholders' expert valued the claims at more than $19 million, while the company's expert valued the claims at negative $2.5 million. The court determined that the claims had no value. In reaching that conclusion, the court adopted the theory advanced by the company's expert, that all litigation factors should be considered, including the likelihood of success on the merits, the attorney fees necessary to obtain that result and any indemnification that the company would owe to its directors. Citing to prior precedent, the court noted that "there would be strong logic in including the net settlement value of such claims as an asset of the corporation for appraisal purposes."
Later that same year, the court took a similar approach in Bomarko Inc. v. International Telecharge Inc. The court valued the claim in that case by multiplying the probability of success by the likely amount of recovery while subtracting costs incurred to obtain that result.
More recently, in Arkansas Teacher Retirement System v. Caiafa, the Court of Chancery overruled an objection to a settlement that released claims that the board failed to ascribe any value to federal derivative claims in a merger. After noting that there is no case law supporting the proposition that the board was required to undertake a separate and discrete valuation of the derivative claims pending at the time of the challenged merger, the court reached the same result as Strine did in Massey, albeit with less analysis. That is, the court noted that the claims asserted in the federal action were difficult to win, and even those that had a higher probability of success could not have the $2 billion value the objectors claimed they did. On appeal, the Delaware Supreme Court affirmed the Court of Chancery's decision to overrule the objection for the reasons set forth in the Court of Chancery's opinion.
Given these precedents, is the result in Massey all that surprising? While some contingent claims have been given value, it is the exception, and not the rule, to assign material value to contingent derivative claims. Moreover, in the context of a merger worth billions of dollars, the likelihood is low that derivative claims have material value, particularly when reasonable defenses can be interposed.
But does this decision mean that boards can just eschew any analysis of the value of a derivative claim in the context of a merger? Probably not. The Court of Chancery certainly did not condone the practice, and had the court not been persuaded that the board otherwise acted properly, the failure to do so could have had more importance.
Further, because the exception to the derivative standing rule that entering into a merger for the purpose of extinguishing derivative claims remains viable, particularly in light of the Supreme Court's opinion in Caiafa, failure to value the claims could support the conclusion that a merger was negotiated simply to avoid liability. Finally, not all derivative claims are equal in this context. As Strine noted in Massey, if Massey had a liquidated claim against a former fiduciary reduced to a judgment but failed to get any value for this claim, he could see the substantial unfairness in failing to obtain value for that claim in a merger. Alternatively, if recovery on any derivative claim after a cash-out merger would inure solely to the benefit of the acquirer, then perhaps there would be value to the buyer in obtaining that claim.
Put simply, as with many issues of fiduciary law, the context of the situation is important. What is fairly clear, however, is that unliquidated contingent derivative claims are not ascribed much value, if any, in a merger context, unless a party can demonstrate a reasonable likelihood that the net value of the claim to the company is material.
Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 15, 2011
A plaintiff who pleads successfully that a transaction under attack is governed by the entire fairness standard of review instead of business judgment generally stands a good chance of defeating the defendant's motion to dismiss. That is because when a transaction is reviewed for entire fairness, defendants bear the burden in the first instance of proving at trial the fairness of the process and price.
In two recent cases - Ravenswood Investment Co. v. Winmill and Monroe County Employees' Retirement System v. Carlson - the Court of Chancery clarifies that a plaintiff must still make well-pleaded allegations that a transaction is unfair as to process and price if its complaint is to survive dismissal at the pleadings stage.
Ravenswood involved claims that defendant directors' adoption of a performance equity plan violated fiduciary duties by seeking to dilute the minority stockholders' percentage interest in non-voting Class A shares (only Class B shares had voting rights). The court noted that the entire fairness standard applied because "where the individuals comprising the board and the company's management are the same, the board bears the burden of proving that the salary and bonuses they pay themselves as officers are entirely fair to the company unless the board employs an independent compensation committee or submits the compensation plan to shareholders for approval."
Because the directors employed no such protective measures, the court held that the entire fairness standard of review applied. Still, citing Monroe County, the court held that the plaintiff "bears the burden of alleging facts that suggest the absence of fairness."
The court dismissed the plaintiff's complaint because it found he had failed to make well-pleaded allegations that the defendant directors' adoption of the performance equity plan was unfair. Critical to the court's reasoning was that dilution occurs upon the adoption of any options plan; the question is whether the manner in which the options were issued unfairly diluted the stockholders.
As the defendants in their motion to dismiss did not challenge the plaintiff's claim for unfair issuance of the options, the court found that the plaintiff's allegation of dilution did not suffice to state a claim for unfairness in the adoption of the performance equity plan.
This was so because the plaintiff alleged that "(1) the Performance Equity Plan only authorizes the Board to grant stock options with an exercise price not lower than the market value as of that event, (2) the Defendants already control all of the Company's voting rights through their ownership of its Class B shares, and (3) even if all options authorized under the plan were to be granted to the Defendants they would not obtain a majority interest in the Class A shares... ."
The court noted that although it was true that the Class A shares could vote to approve a merger, the plaintiff made no allegation in his complaint that the adoption of the performance equity plan impaired those voting rights. The court declined to comment on whether such an allegation may have sufficed to sustain this claim.
The Ravenswood court relied upon the court's holding in Monroe County. That case involved a challenge to an intercompany agreement that required the plaintiff's company to purchase services and equipment from its controlling shareholder on terms in conformity with (for services) or the same as (for equipment) what the controlling shareholder charged its other affiliates. The parties agreed that the arrangement the plaintiff attacked was governed by the entire fairness standard of review.
They disagreed as to whether the plaintiff's pleading sufficed to survive a motion to dismiss.
As summarized by the court: "Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved such that entire fairness review is in play, plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. (citations omitted). Simply put, a plaintiff who fails to do this has not stated a claim. Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. (citation omitted). Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness."
In reviewing the complaint, the court found no allegations that the price at which the controlling stockholder provided the services and equipment was unfair. Instead, the court found that plaintiff's allegations addressed only alleged unfair dealing.
In the absence of an allegation that the company could have obtained the services or equipment on better terms from a third party or any specific allegation of the worth of the services or equipment relative to what the company paid, the court found that the complaint did not make sufficient factual allegations that the intercompany agreement transactions were unfair. Because the plaintiff chose to stand on its complaint in response to the defendants' motions to dismiss rather than to amend, the court dismissed plaintiff's complaint with prejudice under Court of Chancery Rule 15(aaa).
Together, these two cases clarify that a plaintiff cannot survive a motion to dismiss simply by alleging that a transaction involving a controlling stockholder is unfair. A plaintiff instead must make particular factual allegations suggesting why the transaction was unfair. A plaintiff who cannot make such allegations and who stands on a conclusory complaint, as in Ravenswood, may find that its claims are dismissed with prejudice.
Lewis H. Lazarus (llazarus@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
This article was originally published in the Delaware Business Court Insider | June 08, 2011
Why do so many people care about whether the Delaware courts will continue to uphold the "poison pill" defense to a hostile takeover? After all, comparatively few lawyers practice merger and acquisition law. Few companies are subject to hostile takeover threats, especially in recent years. And who really stays up at night worrying about the fight between the two largely unknown companies that were the participants in Delaware's latest hostile takeover battle and the weapon of choice among defenders in such battles, the poison pill?
Yet, since the Feb.15 Court of Chancery decision in the Air Products case, there have been almost too-many-to-count blog postings, journal articles and symposia about that decision and its upholding of a poison pill. Who cares?
When does the Revlon doctrine apply when a takeover offer involves a mix of cash and stock? After all, at least one Supreme Court decision suggests that if the stockholders will continue as part of a mix of all minority stockholders in the acquiring company, they may still be able to get a control premimum later and so Revlon does not apply. This decision explains that even when the stockholders are being asked to take stock for some but not all of their shares that they still will lose the ability to get a control premimum for those shares to the extent they are sold for cash. Hence, Revlon applies and the board is required to get the best price possible for the stockholders in that transaction.
In re Orchid Cellmark Inc. Shareholders Litigation, C.A. 6373-VCN (May 12, 2011)
In another decision reviewing whether deal protection agreements are impermissibly preclusive, the Court noted: " one of these days some judge is going to say "no more"..." This decision and its recent companion decision, In Re Answers Corporation Shareholders Litigation, C.A. 6170-VCN (April 11, 2011), list many deal protection measures that the Court has accepted.
Since the Delaware Supreme Court's split decision in Omnicare, Inc. v. NCS Healthcare Inc., 818 A.2d 914 (Del. 2003) rejecting a lock up agreement with the majority owner, the Delaware courts have not overturned such deal protection measures in merger agreements. Maybe this decision is a warning. After all, the Chancellor's recent decision in Air Products and Chemicals Inc. v. Airgas Inc., 16 A.3d 48 (Del. Ch. 2011) also expressed some doubts that Delaware should be so protective of a Board's power to block a takeover. We shall see.
This article was originally published in the Delaware Business Court Insider | May 11, 2011
For corporations facing stockholder litigation challenging a proposed business combination, negotiating a settlement in which the corporation agrees to provide additional disclosures without any increased consideration can be an efficient means of avoiding the risk of litigation. The benefit created by the additional disclosures means the plaintiff’s lawyer can apply for a fee while the corporation and its directors get a release of all claims.
Some recent decisions of the Court of Chancery, however, have cast some doubt on the ability of a "disclosure only" settlement to serve as the sole consideration for a settlement or a substantial fee. Practitioners on both sides should be aware of these developments when negotiating a settlement of litigation challenging transactions.
Although the Court of Chancery has not recently issued a written opinion refusing to approve a "disclosure only" settlement, there is precedent for doing so — e.g., the Delaware Court of Chancery's 2006 opinion in In re SS & C Technologies Inc. The issue most recently came to light in Scully v. Nighthawk Radiology Holdings Inc., a much discussed case in which the court appointed special counsel to report on whether the settlement in that case was collusive and improper.
There, the plaintiffs sought expedited proceedings to enjoin a merger between Nighthawk Radiology Holdings Inc. and another party based solely on claims of inadequate disclosures. The court denied the motion, in part, because the court felt the disclosure claims were not meritorious and, indeed, would not support a "disclosure only" settlement. The corporation then reached a "disclosure only" settlement with the plaintiffs in a parallel proceeding in Arizona and agreed to present the settlement for approval to that court. The Court of Chancery viewed this as an attempt to avoid its earlier admonition that a disclosure only settlement would not be adequate consideration to support a release for defendants, and appointed special counsel to investigate the matter.
While the special counsel in Nighthawk ultimately concluded that no collusion was present, the healthy skepticism of "disclosure only" settlements expressed by the Court of Chancery should be noted. Courts appear to be scrutinizing closely "disclosure only" settlements as part of a Delaware court’s independent duty to ensure that a settlement is fair and reasonable — e.g., the Chancery Court's 2005 opinion In re Cox Communications Inc. Shareholders Litigation. That skepticism is most clearly manifested in recent decisions analyzing fee requests in which disclosures were part of the benefit created.
For instance, on April 30's In re Sauer-Danfoss Inc. Shareholder Litigation, Consol, the Court of Chancery considered a request for $750,000 by plaintiffs’ attorneys who claimed they caused the corporation to issue corrective disclosures before the transaction was ultimately abandoned. After first determining that the plaintiffs were entitled to credit for only one of the purported 11 additional disclosures, the court began its discussion of the fee to which the plaintiffs were entitled by noting that "all supplemental disclosures are not equal." When quantifying the fee award for additional disclosures, the court "evaluates the qualitative importance of the disclosures obtained." While one or two meaningful additional disclosures might merit an award of $500,000, prior precedent in contested fee cases reveals that less meaningful disclosures yield much lower awards. With that in mind, the court awarded $80,000, in large part because the disclosures were not particularly meaningful and the plaintiffs had not actively litigated the case after filing, instead seeking to negotiate a settlement.
The court used three recent opinions to support its conclusion that an award of only $80,000 was sufficient under the circumstance. In the 2006 case In re Triarc Companies Shareholders Litigation, the court awarded $75,000 in fees and expenses for the additional disclosure that the chairman of the special committee thought the deal price was inadequate where the plaintiffs had done nothing after the disclosure mooted the claims in the amended complaint to create any benefit.
In the 2009 Chancery Court case In re BEA Systems Inc. Shareholders Litigation, the court awarded fees and expenses of $81,297 where supplemental disclosures were made before discovery, preliminary injunction briefing and hearing, but the injunction was denied.
Finally, in 2010's Brinckerhoff v. Texas Eastern Products Pipeline Co., the Chancery Court awarded fees and expenses of $80,000 to an objector to a settlement who settled his objection in exchange for additional disclosure from the corporation as Form 8-K.
The consistent thread throughout these opinions, including the recent Sauer-Danfoss decision, is that non-meaningful disclosures that were agreed to after little work by plaintiffs will not merit substantial fee awards.
What effect, then, does the court’s reluctance to award large fees for additional disclosures combined with the court’s criticism of "disclosure only" settlements have on class action and derivative litigation going forward?
First, it may provide a disincentive for plaintiffs firms to continue to file litigation in Delaware challenging transactions. The data showing a decrease in the number of lawsuits filed in the Court of Chancery has been readily available for some time now. While smaller fee awards and higher criticism of "disclosure only" settlements cannot be the sole basis for the decrease in filings in the Court of Chancery, it likely plays some role.
Second, the use of the "disclosure only" settlement may become a thing of the past due to the risk for both sides. Plaintiffs may not be willing to enter into a "disclosure only" settlement because they know they are at risk they will not be awarded a substantial fee. Defendants may not be willing to enter into a "disclosure only" settlement because they do not want to put at risk their global release if the settlement is rejected as unfair.
To be clear, there is nothing in the Court of Chancery’s current jurisprudence to suggest that a "disclosure only" settlement is per se impermissible. What is clear, however, is that to the extent that the parties to stockholder litigation challenging a business combination believed they could settle a case for the relatively inexpensive cost of making additional information available to the stockholders, that path must be followed carefully while keeping in mind the authorities cited above.
Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and not those of his firm or any of the firm's clients.
Lewis H. Lazarus and Jason C. Jowers
This article was originally published in the Westlaw Journal Delaware-Corporate | May 4, 2011
In the article, Lewis H. Lazarus and Jason C. Jowers discuss the need for transactional and litigation attorneys who negotiate or litigate material adverse change clauses to focus on the particular language at issue as differences in phrasing could affect whether a seller is protected from a buyer's claim of breach. To view the article, click here.
Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | May 04, 2011
The Delaware Court of Chancery, mindful of its role as a pre-eminent business court, works hard to communicate its expectations of officers and directors and their advisers. That facilitates predictability. Companies can be bought or sold with reduced risk that proposed transactions will be enjoined. The corollary is that when advisers and their boards do not follow the rules, they put their clients’ transactions at risk. Two recent cases illustrate that the Delaware Court of Chancery will not hesitate to enjoin a transaction where parties ignore clear guidance from prior opinions.
In its Feb. 14 decision in In re Del Monte Foods Co. Shareholders Litigation, the Court of Chancery enjoined a merger transaction from closing for 20 days and voided the deal protection terms that would have made a competing bid more expensive during that time period. It did so because of conflicts of interest by the seller’s investment adviser. The conflict arose because the seller’s investment adviser worked with the buyer to develop its merger proposal without telling the board, in apparent violation of a confidentiality agreement arising out of a previous failed effort to sell the company. It then sought a role in providing buy-side financing. All this while acting as financial adviser to the seller.
In enjoining the transaction the court relied on In re Toys "R" Us Inc. Shareholder Litigation, a 2005 case in which the court held that generally "it is advisable that investment banks representing sellers not create the appearance that they desire buy-side work, especially when it might be that they are more likely to be selected by some buyers for that lucrative role than by others."
Here the court found the investment adviser failed to disclose its conversations with prospective buyers or that it sought from the beginning to provide financing to the buyers. This prevented the board from taking steps to protect the integrity of the process. It also caused the seller to incur greater fees because once it was disclosed that the investment adviser sought to provide buy-side financing, the conflict required the board to obtain a new investment banker to opine on the fairness of the transaction. Thus, while "the blame for what took place appears at this preliminary stage to lie with Barclays, the buck stops with the Board," the court said in Del Monte.
The remedy the court fashioned was unique — voiding the deal protection terms while enjoining the closing to permit a 20-day go-shop — but reflects the traditional equity power of the court to fashion a remedy tailored to the breach. The court had no problem voiding the contractually bargained-for deal protection terms where the buyer knowingly participated in the board’s breach of fiduciary duty. In so doing, the Del Monte court emphasized, "After Vice Chancellor [Leo] Strine’s comments about buy-side participation in Toys 'R' Us, investment banks were on notice."
Three weeks later, in its March 4 decision in In re Atheros Communications Inc. Shareholders Litigation, the Court of Chancery enjoined another transaction where the board failed to disclose the nature and amount of the investment adviser’s fee. In Atheros the court found that stockholders voting on a proposed merger transaction would find it important to know that the investment adviser who rendered the fairness opinion upon which the board relied would receive 98 percent of its fixed fee only if a transaction closed. The court was not troubled by the contingent fee per se, but rather by the fact that more than 50 times the portion that was otherwise due would be received only if a transaction closed. As the court held, "the differential between compensation scenarios may fairly raise questions about the financial adviser’s objectivity and self-interest."
An additional factor justifying the court’s entry of injunctive relief was that the board did not disclose how soon in the process the seller’s CEO, who actively participated in negotiating the transaction price, knew that he would be staying on and receiving compensation from the buyer. The court thus required additional disclosure on this point, finding that information that the CEO knew he would receive an offer of employment from the buyer at the same time he was negotiating the offer price would be important to a reasonable stockholder in deciding how to vote.
Both of these cases demonstrate the vitality of the court’s observation in Del Monte, cited in Atheros, that "because of the central role played by investment banks in the evaluation, exploration, selection, and implementation of strategic alternatives, this court has required full disclosure of investment banker compensation and potential conflicts."
That guidance means that practitioners and advisers would be well-served to avoid conflicts, to counsel their clients to avoid them, and to disclose such conflicts promptly. Boards must also ensure that possible conflicts on the part of management who participate in the sale negotiations are properly managed by the board and fully disclosed. As these cases demonstrate, it is the board’s responsibility to manage the sale process and failure to follow clear guidance from the case law imperils prompt closing of potential transactions.
Lewis H. Lazarus (llazarus@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm's clients.
In the most recent issue of the Harvard International Law Journal, John Armour, Justice Jacobs and Curtis Milhaupt analyze how hostile takeovers arise under similar circumstances in different countries and how countries enact substantially different regulatory responses to hostile takeovers. The article focuses primarily on hostile takeovers in the United States, United Kingdom and Japan, but also considers the possible trajectory of hostile takeovers in emerging markets like China, India and Brazil.
In re Atheros Communications Inc. Shareholder Litigation, C.A. 6124-VCN (March 4, 2011)
This decision outlines what must be disclosed to shareholders asked to approve a merger. As to the financial adviser giving a fairness opinion, the disclosures should include whether its fee is contingent on a closing and if so, how much of the fee is contingent. The amount of the fee should also be disclosed.
The decision also held that when the CEO learned he would be employed by the acquiror, that should have been disclosed as well.
The Court of Chancery denied an application by Air Products and Chemicals, Inc. to force the board of Airgas, Inc. to redeem its poison pill so as to allow the stockholders of Airgas to decide whether to tender into Air Products' all-cash, all-shares offer. The Court in this 153-page opinion carefully applies Delaware Supreme Court precedent in holding that the Airgas board reasonably believed that the Air Products offer was inadequate and that its decision to maintain its pill was a reasonable response to that threat. A major factor in upholding the reasonableness of the Airgas board's actions was that three directors nominated by Air Products supported the decision to maintain the pill. While some have questioned the continued vitality of doctrine that allows the board to maintain a poison pill in the circumstance of an all-cash, all-shares and fully financed offer, this decision re-affirms Delaware's director-centric approach to corporate governance. The description in the opinion of the process followed by the Airgas board serves as a primer for how a board might defend against a tender offer it believes is inadequate.
Olson v. ev3, Inc., C.A. 5583-VCL (February 21, 2011)
In recent years, top up options have been frequently used to speed up a merger by avoiding the time-consuming and expensive process of soliciting proxies to approve a merger after a successful tender offer. This decision explains how such an option works and why they are permitted under Delaware law.
The decision is also important is pointing out certain perils in the way top up option rights are structured. The option needs to comply with the provisions of the DGCL governing stock options.
Agreements sometimes try to limit any damages from a misrepresentation or contract breach by excluding consequential or special damages. This decision notes that is hard to do because what falls into what category of damages is not always clear. Better to limit damages some other way such as by the amount paid to the seller.
The opinion is also noteworthy as an example of the far-reaching scholarship the Court undertook to understand the science involved in the dispute. Litigants should not underestimate the Court of Chancery in such matters.
In re Del Monte Foods Company Shareholders Litigation, C.A. 6027-VCL (February 14, 2011)
This is an important decision if only for the creative remedy that the Court came up with to deal with the breach of faith by a target's investment bank. In effect, the investment bank was willing to sell out its client to get a piece of the buy-side financing. The Court enjoined the deal for 20 days to let a competing bid emerge while at the same time not killing a deal that the target's stockholders might want.
The decision gives guidance to advisers on the proper conduct they should be expected to follow.
Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC (January 20, 2011)
This is another decision in the Airgas takeover battle. In this decision, Chancellor Chandler addressed Air Products' motion to compel Airgas' compliance with the protective order and Airgas' motion in limine to preclude Air Products from offering evidence that its $70 offer was indeed its "best and final" offer. With respect to the motion to compel, Air Products sought to reduce Airgas' designation of large chunks of deposition testimony and documents as "Litigators' Eyes Only" ("LEO"). The Court found that Air Products was itself somewhat responsible for the large designation of deposition testimony as LEO since it had not segregated LEO and non-LEO subject matter when deposing Airgas witnesses. The Court ordered Air Products to indicate the testimony that it did not believe should be LEO and then Airgas to respond within 5 hours of receipt of each transcript. Additionally, the Court ordered Airgas to produce a non-LEO version of an institutional shareholder letter setting forth that shareholder's opinion of the fair value of Airgas based on publicly available information. Finally, the Court refused to order Airgas to re-review documents previously produced and designated LEO given the rapidly approaching supplementary evidentiary hearing, but held Air Products could specify LEO documents it thought should be de-designated.
In its motion in limine, Airgas sought to preclude Air Products from offering documentary evidence that its $70 offer was its "best and final" offer because it had refused to produce internal analyses or valuations that the Air Products board relied upon in deciding to make its $70 offer. The Court had previously ordered in a December 23, 2010 opinion that the parties conduct limited discovery on Air Products' "best and final" offer. This discovery was limited to documents relating to the decision to make the final offer and limited depositions of people directly involved with that decision. The Court rejected Airgas's reliance on cases where defendants blocked discovery on privilege grounds to support its motion in limine. According to the Court, those cases involved situations where a party shielded evidence and then relied on that evidence at trial to meet its burden of proof on an issue central to resolution of the case. Air Products' characterization of its $70 offer was not an issue central to resolution of the case. Resolution of the case would depend upon whether Airgas' board had a good faith, honest belief that the $70 offer posed a "threat" to Airgas. The Air Products board's knowledge of Air Products' internal valuations of Airgas was not relevant to that inquiry. The Court was careful to point out, however, that there could be circumstances where a buyer's view of a target's value might be relevant to a fairness inquiry. In this case, Air Products was not required to prove the fairness of its offer or whether the offer was more or less than its internal valuations of Airgas. Accordingly, the Court the denied Airgas' motion in limine.
Significantly, the Court held that Air Products' public announcement of its $70 offer as its "best and final" offer meant Air Products had irrevocably represented to the Court it would not seek judicial relief for any additional offers. Bidders should keep this in mind when characterizing offers as "best and final".
Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. 5249-CC (December 23, 2010)
In this latest chapter of the Airgas takeover saga, the bidder may have bitten off more than it wanted. In the past, the Court of Chancery has recognized an immunity from having to disclose a party's strategy in an on-going takeover fight. Known as the "business strategy" privilege, the idea is that litigation should not be used to gain a negotiating advantage. Here the bidder asked for sensitive discovery and the Court, while granting that request, also permitted discovery on whether the bidder's self-proclaimed "best and final" offer was in fact the best it would do to acquire Airgas.
Given that the bidder had told the Court its offer was its best and final, it had better be true.
In re Atlas Energy Resources, LLC Unitholder Litigation, C.A. No. 4589-VCN (October 28, 2010)
This case is another example of the care practitioners must take in drafting LLC agreements. In this decision, Vice Chancellor Noble applied the Kahn v. Lynch entire fairness standard of review to a merger between a publicly traded LLC and its controlling unitholder. Plaintiffs, LLC unitholders, alleged the controlling unitholder breached its fiduciary duties to minority unitholders by negotiating an unfair merger through an unfair process. Plaintiffs also alleged that the directors and officers of the LLC breached their fiduciary duties by agreeing to the merger.
The controlling unitholder argued that it was not liable for breach of fiduciary duty because the LLC Agreement provided that if a conflict of interest arose between the LLC and controlling unitholder, it could be resolved by certain actions that had occurred here. Plaintiffs argued that the conflict of interest at issue was between the controlling stockholder and minority unitholders and thus the LLC Agreement conflict of interest provision was inapplicable. The Court agreed and found the merger between the LLC and its controlling unit holder subject to the entire fairness standard of review. In the absence of anything in the LLC Agreement addressing a conflict of interest between the controlling unitholders and minority unitholders, the Court saw no reason not to apply the reasoning of Kahn v. Lynch. As is typical in cases where the entire fairness standard of review applies, the Court denied the controlling unitholder's motion to dismiss.
The Court did, however, grant the motion to dismiss of the LLC directors and officers. The LLC Agreement provided that the directors and officers did not owe fiduciary duties to the LLC or its members. Thus, unlike the provision governing conflicts of interest, this provision of the LLC Agreement expressly eliminated fiduciary duties of directors and officers to members. Under the LLC Agreement, the officers and directors were subject to a subjective good faith standard. This standard of good faith is narrower than the good faith standard under Delaware law. Applying this subjective standard of good faith, the Court found that Plaintiffs had failed to state a claim that the directors and officers believed they were acting against the best interests of the LLC's unitholders in negotiating the merger.
In re Cogent Inc. Shareholder Litigation, C.A. 5780-VCP (October 5, 2010)
A termination fee must be reasonable. That is well known. But how to calculate the fee to test its reasonableness is sometimes misunderstood. This decision explains how to do so.
The preferred approach is to calculate the fee based on the equity value of the transaction. That is the amount needed to buy the equity, usually market value. Normally, the equity value is less than the enterprise value that includes the equity value and the value of the debt, less cash.
Versata Enterprises Inc v. Selectica Inc. , C.A. 193, 2010 (October 4, 2010)
This is the most important clarification of Delaware law under the Unocal and Moran decisions in several years and is worth a close study. The Supreme Court upheld the Court of Chancery decision that a 5% poison pill was valid under the Unocal tests and not preclusive under Moran despite the presence of a staggered board.
Aveta Inc. v. Bengoa, C.A. 5074-VCL (September 20, 2010)
In this continuation of a long saga, the Court held that when a stockholder representative is designated to act for the stockholders in calculating a post merger adjustment, then the stockholders are stuck with what their representative does. Big surprise.
There are many decisions pointing out that a board of directors may have a duty to accept a higher offer even after it has signed a merger agreement. However, as this decision points out, if there is no violation of fiduciary duty in entering into an agreement not to solicit other offers, then the company is obligated to honor its commitment.
In re Dollar Thrifty Shareholder Litigation, C.A. 5458-VCS (September 8, 2010)
Everyone knows that the Revlon decision says that a board has to seek the best deal when the company is for sale. This decision clearly explains how the Court will review the board's actions.
First, the Court will review the process used. Adequate advice, full information, careful consideration and independent decision makers are all important.
Second, the Court will decide if the path chosen by the board was reasonable. Note that the board has the burden of proof on this issue. The opinion is particularly helpful in explaining what is a "reasonable" board action and carefully points out that standard is less forgiving than the rational basis test used in a business judgment analysis.
Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. 5465-VCS (August 12, 2010)
In this important decision, the Court of Chancery explains the limits on what may be included in a poison pill. Briefly, the pill must not preclude a successful proxy contest. This may mean that a pill that is triggered by a very low threshold is invalid. However, a pill that does preclude joint proxy solicitations seems permissible. In any event, the Unocal test will be applied.
The Court's very careful analysis is well worth studying. For as it makes clear, the process used to adopt the pill is important with, as usual, the role of independent directors being critical. The effect of the pill under the particular circumstances is also important and while the Court does seem willing to accept the judgment of the Board when the process is sound, the facts will be reviewed in a sort of balancing test to see if a proxy contest is precluded by the pill.
In Re CNX Corporation Shareholders Litigation, C.A. 5377-VCL (July 5, 2010)
Perhaps no area of Delaware corporate law is as confusing as that applicable when a company is taken private by a majority owner in a freeze out of the other shareholders. This scholarly opinion explains that at least 3 different standards of review have been applied by the Court of Chancery in its review of such transactions. As a result, the Court has certifiied its latest decision for appeal to the Delaware Supreme Court with a request that the law be clarified.
Until that clarification is issued, however, this is the definitive analysis of Delaware law in this area and deserves to be read, carefully.
In Re CNX Gas Corporation Shareholders Litigation, C.A. 5377-VCL (May 25, 2010)
This is an important decision explaining the standard of review that the Court will apply in various circumstances involving a tender offer by a majority stockholder that is to be followed by a cash out merger. Briefly, if the minority stockholders are effectively represented by a special committee with real bargaining power and the merger is subject to approval by disinterested stockholders, then the business judgment rule will apply and not entire fairness review.
Sometimes it is difficult to understand the Delaware corporate law. The law is constantly evolving. The evolution is often through long, closely reasoned opinions and there are a lot of those opinions to digest. This decision then is particularly helpful in doing the work of consolidating the past decisions into one unified approach.
It is also an interesting example of the depth of research and thinking that goes into the decisions of the Court of Chancery. Actually, it is a little scary because it is hard to believe that we practitioners can ever get ahead of the Court .
Maric Capital Master Fund, Ltd v. Plato Learning Inc., C.A. 5402-VCS (May 13, 2010)
It is important to note what sort of disclosure violations will casue an injunction to issue. This decision provides guidance on that issue by enjoining a merger until there are corrective disclosures over the discount rate used by the investment banker to give a fariness opinion, the projections of future income and the retention of management.
In Re Cox Radio Shareholders Litigation, C.A. No. 4461-VCP (May 6, 2010)
The standard of review that a court applies to a transaction may determine the outcome of the litigation in a close case. Here the Court explains that entire fairness does not govern the review of a noncoercive tender offer by a controlling shareholder. This continues the trend away from applying the test of Kahn v. Lynch that is now restricted to mergers involving a controlling shareholder. This decision also explains when a tender offer is deemed not to be coercive.
Binks v. DSL.net Inc., C.A. 2823-VCN (April 29, 2010)
In this unusual case filed by a pro se litigant, the Court extended Revlon duties to when a company issues convertible notes that will change control of the company upon conversion. This is consistent with past indications in other decisions.
Selectica Inc. v. Versata Enterprises, Inc., C.A. 4241-VCN ( February 26, 2010)
In a case with an unusual factual setting, the Court of Chancery has upheld a poison pill with a 5% trigger. The very low trigger is explained by the need to protect a NOL that might be adversely affected by the acquisition of 5% of a company's stock.
In its discussion of the Unocal standard of review that applies to defensive measures, the Court applied a very differential approach to the board's decisions. Arguably, that is not the higher standard of review that had been suggested by Moran as applicable to the adoption of a poison pill.
This decision illustrates the Court's limited role in reviewing board's decisions that are not affected by any conflict of interest on the part of directors. Briefly, unless there is a duty of loyalty issue involved, directors just will not be second guessed in Delaware.
NACCO Industries Inc. v. Applica Incorporated, C.A. No. 2541-VCL (December 22, 2009)
In this decision, the Court's newest Vice Chancellor, the Hon. J. Travis Laster, substantially denied a motion to dismiss a complaint filed by a jilted suitor who sought damages from the target and the winning bidder. The complaint alleged that the target violated no-shop and prompt notice provisions of a merger agreement between plaintiff and the target that the target later terminated in favor of a superior proposal from the defendant winning bidder. Plaintiff alleged that the winning bidder violated Delaware law by fraudulently misstating its intentions in filings required by the Securities Exchange Act of 1934 ("the Exchange Act). The Court of Chancery upheld plaintiff's claims for breach of contract, tortious interference with contract, fraud, and civil conspiracy for fraud. Although the Court emphasized that its decision was required under the plaintiff-friendly standard the Court applied in analyzing a motion to dismiss a complaint at the pleadings stage, the opinion has three critical lessons for practitioners concerning (i) the potential inadequacy of termination fee and expense reimbursement provisions to preclude a damages claim, (ii) the viability of state law claims arising out of misstatements in public filings required as a matter of federal law, and (iii) the relation of prior injunction proceedings to later claims for damages.
Payment of Termination Fee and Expense Reimbursement Does Not Preclude a Damages Remedy Where Jilted Suitor Can Allege Fraud Under State Law
First, the Court rejected defendants' arguments that plaintiff was not entitled to damages because the target paid a termination fee and expense reimbursement upon termination. The Court held that if plaintiff were able to show a breach of the merger agreement between the jilted suitor and the target, it should be entitled to receive expectancy or reliance-based damages. The Court recognized that any reliance-based recovery would have to overcome the jilted suitor's receipt of a bargained-for $4 million termination fee and $2 million expense reimbursement. But at the pleadings stage, it was sufficient for the Court to note that the merger agreement excluded from the limitation on liability any termination arising from a willful or material breach of a representation, warranty or covenant in the merger agreement. The Court also noted that the target's ability to terminate and pay fees without further liability required it to comply with its obligations under the no-shop and prompt notice provisions.
Exchange Act Does Not Preclude State Law Claims for Fraud
Second, the Court of Chancery explained that the mere fact that plaintiff's allegations against the winning bidder arose out of filings mandated by the Exchange Act did not deprive a state court of jurisdiction to resolve fraud claims brought solely under state law. The Court noted that a Delaware Supreme Court decision, Rossdeutscher v. Viacom, Inc., 768 A.2d 8 (Del. 2001), and federal decisions comported with this result. The Court's scholarly analysis of this issue at pages 31-42 culminates with emphasis on Delaware's interest in "preventing the entities that it charters from being used as vehicles for fraud." In short, the opinion reaffirms that the Exchange Act contemplates a balance between state and federal roles and responsibilities and does not preempt fraud claims arising under state law.
Moreover, in permitting the jilted suitor to bring a fraud claim, the Court held it was entitled to rely on the bidder's statements in public filings. Note that the Court does not require the jilted suitor to have bought securities or limit the damages to the loss it incurred as a result of its purchase of the target's stock.
Federal Decision Denying Preliminary Injunction Based on Same Claims of Alleged Falsity of Public Filings Does Not Preclude Later State Law Claim for Damages
Third, a decision rendered denying a preliminary injunction is not case dispositive. Here an Ohio Federal District Court had denied an application by the jilted suitor to enjoin the winning bidder's merger with the target based on the same alleged misstatements that formed the basis of the jilted suitor's later state law claim. The strength of that court's conclusion - "[c]ontrary to Plaintiff's position, the Court does not perceive any falsity in [the winning bidder's] filings when they are properly viewed alongside unfolding events." (NACCO Indus., Inc. v. Applica Inc., 2006 WL 3762090, at *7 (N.D. Ohio Dec. 20, 2006)) - did not preclude a different result on a different record and in a different procedural context. The lesson for bidders and practitioners: Absent a binding final judgment, the parties proceed at their own risk.
Perhaps this opinion will focus the attention of transactional lawyers on the breadth of prompt notice provisions in merger agreements and the nature of their clients' intentions when acquiring stock in a target and making the filings required by the Exchange Act. From a target's perspective, this decision reaffirms that contractual language in merger agreements concerning no-shops and prompt notice of competing proposals will be enforced when a party can plead injury from a breach. From a bidder's perspective, this decision reinforces the importance of timely and accurate disclosure regarding a client's intentions in purchasing stock of a company that is in play. The decision is also a reminder that a holding by a Federal district court denying an injunction on a preliminary record does not prevent a later assertion of a state law claim for fraud. As the Court rendered the NACCO decision on a motion to dismiss it remains to be seen whether liability will be imposed on a fuller record.
Amirsaleh v. Board of Trade of the City of New York, C.A. 2822-CC ( January 19, 2010)
A recent trend is to offer 2 types of consideration in connection with a merger and to permit the stockholders to pick which they prefer, such as stock or cash. Of course, the time to pick must be limited as a practical matter. This decision deals with when the time limit may be extended and when a company may in good faith cut off the extensions. Basically, decisions that are made for neutral business reasons and not to favor a selected few will be respected by the Court.
Om August 16, 20121, the Delaware Supreme Court reversed this decision. The Supreme Court held that once a deadline was waived, that waiver could not be retracted, at least with out setting a clear new deadline.
In re 3Com Shareholders Litigation, C.A. 5067-CC (December 18, 2009)
This decision explains that in litigating a disclosure claim it is important to relate the disclosures at issue to past decisions determining when a particular type of disclosure was actionable. Here the Court dealt with when projection must be disclosed and noted that not everything considered by management or a board must be put into the proxy statement.
Airborne Health, Inc. v. Squid Soap, LP, C.A. 4410-VCL (November 13, 2009)
In this decision, the Court explains that an anti-reliance clause is different from an integration clause. The anti-reliance clause bars claims of reliance on extra contractual promises and must be very specific in doing so. A more general integration clause will not bar such claims of reliance.
There are two aspects of this decision that are particularly worth noting. Most importantly, this is the first extensive and significant opinion by the newest Vice Chancellor. It shows he writes wonderfully well and is fun to read.
Second, he brings to the task his extensive business background. That shows how important it is to have a judge who knows what he is talking about.
As a result, the future of the Court of Chancery looks secure.
In re John Q. Hammons Hotels Inc. Shareholder Litigation. C.A. 758-CC (October 2, 2009).
The application of the Lynch doctrine to a merger is an often discussed topic. This decision does a great job of summarizing and explaining the rationale for applying the entire fairness test to a merger that has the majority stockholder on both sides of the deal. Given that Lynch has been applied to other deals where a majority stockholder was not involved [such as when a controlling stockholder dictates a self-dealing transaction], the parameters of that doctrine need such an explanation.
This decision also settles two other points. To shift the burden of proving fairness from the defendants, the vote of the minority stockholders must be by a majority of all the minority stockholders eligible to vote, not just a majority of those who did vote. Second, the vote must be binding and not waivable by a special committee.
Case Financial Inc. v. Alden, C.A. 1184-VCP (August 21, 2009)
This decision is of interest because it explains the effect of a common merger agreement provision that is often misunderstood. It is common for such an agreement to say that representations expire at a certain date, such as the merger date. What does that mean? Some would argue it means that any claim for misrepresentation ends that day. That is not correct.
As this decision explains, this language only means exactly what it says-the representation of a fact ends on that date and the facts may change afterwards. A claim for fraud or misrepresentation may still be filed later.
James Cable LLC v. Millennium Digital Media Systems LLC, C.A. 3637-VCL (June 11, 2009)
When a party to a merger agreement must rely on the financial support of a third party to complete the deal, that must be spelled out in written agreement. Absent that written commitment, the deal is then just an option to close held by the party without assets who is then fee to back out.
This decision rejects some clever attempts to make up for the lack of an agreement to fund the deal. The Court held that the "affiliate privilege" bars a claim that a parent entity wrongly caused its subsidiary to back out of the transaction by refusing funding. Other theories of recovery such as a contract claim were also dismissed for want of facts to support them.
Lyondell Chemical Company v. Ryan, C.A. 401, 2008 (Del Sup March 25, 2009)
In this expected reversal of a decision by the Court of Chancery, the Supreme Court has again defined what constitutes "bad faith." The reversal was expected because of the unusual action of the Supreme Court in taking an interlocutory appeal from a decision denying summary judgment . The trial court's decision was considered controversial by some, although the critics exaggerated its significance, as the trial court itself explained when it had refused to certify the appeal.
First, the Supreme Court decided that Revlon duties did not come into play when the Board had rejected a merger proposal. No surprise there, and this is largely a technical point.
Second, the Court repeated, more forcefully than in the past, that only when a disinterested board "knowingly and completely failed to undertake their responsibilities" will it be said to act in bad faith. This means that grossly negligent conduct is not bad faith when there is no scienter involved.
Most significantly, in this case there was no real evidence that the Board knew what it was doing was wrong. It had competent legal and financial advisers, the merger price was a good one, and a "fiduciary out" clause permitted at least some possibility of a competing offer.
Saint Louis University law professor Matt Bodie offers an interesting view on the decision over at the PrawfsBlawg.
Metcap Securities LLC v. Pearl Senior Care Inc., C.A. 2129-VCN (Del. Ch. Feb. 27, 2009)
In this decision the Court explains when it will grant reformation of a contract based on mistake. Most importantly, it held that an attorney was authorized to agree to the amendment to a contract that his client later argued was a mistake. The circumstances were very unusual, but the key point remains that reformation will not be granted when in hindsight a concession is later regretted.
Here the target tried to argue that the parent entity should be responsible to pay damages for its sub’s failure to close under the facts of this case. It claimed that as all the parties knew the parent had to support the sub to get the deal done, the merger agreement should be read to imply that obligation. The Court of Chancery rejected that argument as inconsistent with the terms of the merger agreement and noted that if the target knew of the risk and failed to cover that risk by securing the parent's guarantee in its agreements, then that was too bad. Many mergers involve the use of a new, assetless entity that is a subsidiary of the real acquiror, as a merger partner. When the parent does not guarantee the obligations of the sub, however, the merger agreement then is really just an option for the parent to exercise or not as it sees fit. For if the sub does not close the merger, the other parties to the deal are left without a real remedy. This insulation of the parent entity is understood and intended, and is a risk the target is willing to take to get the best price.
Aveta Inc. v. Bengoa, C.A. 3598-VCL (Del. Ch. Dec. 11, 2008)
It is now common to provide for post merger payouts and the arbitration of any disputes about those payouts. This case illustrates the problem of what happens when one party feels it does not have enough information to go into arbitration where discovery may be limited. The Court held that when the obligation to arbitrate is not conditioned on the receipt of information, arbitration will be ordered and the parties will be left to deal with the arbitrators over information exchange issues.
The answer is to provide clearly for adequate information exchange rights in the arbitration.
Hexion Specialty Chemicals Inc. v Huntsman Corp., C.A. 3841-VCL (Del. Ch. Sept. 29, 2008)
This ninety-one page opinion is must reading on how to interpret a merger agreement and on the parameters of the obligation to proceed in good faith to close a deal. In upholding the obligation to at least try to obtain the financing to close, the Court goes into great detail on why the party seeking to escape its obligations bears a heavy burden to explain actions it has taken that may impede its ability to get financing or otherwise close a deal that it no longer finds attractive.
In re Loral Space and Communications Consolidated Litigation, C.A. 2808-VCS (September 19, 2008).
This decision covers the now familiar ground of a review of an interested transaction with a controlling parent company that is blessed by a dysfunctional special committee. After finding the transaction was not fairly negotiated, and not substantively fair as well, the Court has granted an unusual remedy. Rather than awarding money damages, the Court has ordered the deal be restructured to make it fair, by converting the preferred stock issued to the parent to non-voting common stock.
The opinion is also particularly interesting for its discussion of the role of the special committee used in this transaction. The committee apparently felt its role was to get the best terms in the deal proposed by the parent company to make it "fair," rather than to question whether the deal was in their company's best interest. The committee's assumption that they could not just say no was in error.
The decision also touches on the rights of bondholders when a major bondholder has its consent to redemption effectively purchased. The Court noted that it is not unusual for indenture covenants to preclude that vote buying, and the absence of such a prohibition here was fatal to the complaining bondholders.
[UPDATE: The Delaware Supreme Court affirms this decision on July 23, 2009.]
Henkel Corp. v. Innovative Brands Holdings LLC, C.A. 3663-VCN (Del. Ch. Aug. 26, 2008)
Merger agreements frequently permit a merger to be terminated in the event of a materially adverse change to the business of the company to be acquired. When the right to invoke such a MAC clause is not set by the agreement, this decision holds that it must be invoked within a reasonable time. What is reasonable depends on the circumstances.
Ryan v. Lyondel Chemical Company, C.A. 3176-VCN (July 29, 2008)
This decision is a textbook explanation and summary of the Delaware case law on the duties of a board of directors when considering a takeover proposal. The Court first sets out the Revlon duties in detail including the effect on those duties when the Barkin "exception" may apply. Next, the Court explains how to comply with the principles of both Omnicare and Unocal concerning defensive measures that protect the proposed transaction. Finally, the Court explains why in the context of a summary judgment motion that the otherwise disinterested board may have its good faith questioned.
This last part of the decision is surely its most controversial. While the Delaware statute protects directors from attacks on their decisions based on their lack of care, the loophole has always been that the statute does not protect from act not taken in good faith. When does a lack of care turn into a lack of good faith is the question.
In a series of decisions such as the Disney case, the Delaware Supreme Court has tried to set out some guidance on this issue. However, the test to be applied is still vague and in the context of a summary judgment motion when all inferences must be drawn in favor of the plaintiff, the test becomes even more difficult in application. This decision illustrates that problem and is worth reading for that issue alone.
Transched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2008 WL 948307 (Del. Super. Apr. 2, 2008)
This case illustrates Delaware’s objective theory of contract interpretation and underscores the importance of certain standard contractual provisions.
The plaintiff purchased software from the defendants and argued that it incurred significant losses due to material misrepresentations, including, for example, the extent of completion of the software. The defendants argued that the material misrepresentation claim was barred by the plain language of the contract, namely the exclusive remedy clause, integration clause, and disclaimer of extra-contractual representations.
The contract stated that indemnification was the exclusive remedy “in respect of any breach of or default under this Agreement . . . .” The integration clause stated that the written agreement was the entire agreement. And, the reps and warranties clause stated that the seller was making no representation or warranty in respect of any of its assets. The court held that the thrust of these three provisions was unambiguous: “no representations made outside of the four corners of the Agreement are to be given consideration by the parties in interpreting the terms.” That is, the provisions precluded the plaintiff’s argument that it justifiably relied on the extra-contractual claims made by the defendants.
Accordingly, the Superior Court dismissed the plaintiff’s negligent misrepresentation claim.
In an opinion issued yesterday by Vice Chancellor Parsons (HT: M&A Law Prof and Pileggi), which you can access here, the Court of Chancery ordered a stay of the Delaware actions filed against Bear Stearns in favor of those filed in New York. The Court’s reasoning recognizes the national importance of the matter and a concern for the stability of the financial markets and national economy.
This blog previously reported here on the class actions filed in Delaware against Bear Stearns and its directors, seeking to enjoin the sale to JPMorgan Chase. A few days earlier, however, other Bear Stearns stockholders had filed similar suits in the New York Supreme Court. Based on those earlier New York filings, the defendants moved the Court of Chancery to dismiss or stay the Delaware action. This blog provided coverage of the oral argument here, remarking that the arguments raised several interesting questions, such as (1) the extent to which Delaware courts would defer to New York courts on matters of Delaware corporate law and (2) how Delaware courts would handle the issue of comity urged by the defendants.
Those questions have now been answered. The Court of Chancery decided to exercise its discretion to stay the Delaware proceedings for reasons of comity and the orderly and efficient administration of justice:
Continue Reading...As discussed in this memorandum opinion, I have decided in the exercise of my discretion and for reasons of comity and the orderly and efficient administration of justice, not to entertain a second preliminary injunction motion on an expedited basis and thereby risk creating uncertainty in a delicate matter of great national importance.
Today is the second and final day of the Tulane Corporate Law Institute conference.
The New York Times DealBook is reporting live, with a look at the private equity market here and coverage of comments by Martin Lipton, Joseph Perella, and Chief Justice Steele here.
The WSJ Deal Journal is providing live coverage: an interview with Sullivan & Cromwell partner Jim Morphy here; comments by Lipton and Perella here, where Lipton traces a line from Drexel Burnham Lambert to the financial world of today; and the Clear Channel discussion here, featuring Vice Chancellor Strine.
The DealScape is reporting here.
The annual Tulane Corporate Law Institute takes place today and tomorrow in New Orleans. The conference brings together the country's most prominent corporate law practitioners, judges, and bankers to discuss the important developments in the world of M&A and corporate law. The panelists this year include Delaware's own Chief Justice Steele, Vice Chancellor Strine, Vice Chancellor Lamb, and Vice Chancellor Parsons, as well as a number of Delaware lawyers. Among the discussions taking place today: how recent legal and market developments are affecting public M&A deals, including a discussion of MAC clauses, breach provisions, and specific performance remedies--topics that are now taking center stage with cases like United Rentals, which this blog previously discussed here.
The full program is available here.
The New York Times DealBook is reporting live here, with CNBC video here, the MAC discusssion here, market outlook here, perils of activist shareholders here, and the Deal Professor's insights and coverage of informal discussions here.
The WSJ is providing live coverage here, discussing MAC's here, the credit crunch here, and the Delaware developments panel here.
Pileggi is reporting here and here.
See latest developments on 03/31/08 above: Last Thursday, a class action complaint was filed against Bear Stearns and its directors in the Court of Chancery. The complaint alleges that the company has failed to maximize shareholder value by agreeing to be purchased by JPMorgan Chase for $2 per share. The complaint further alleges that, by agreeing to the deal, the company has favored numerous constituencies over the shareholders. You can access the complaint here.
Update: The New York Times reports here that JPMorgan Chase raised its offer to $10 per share. Professor Ribstein has commented here, along with Pileggi here.
Further Update: An additional class action was filed against Bear Stearns on Monday by the Wayne County Employees' Retirement System (access the complaint here). And, yesterday a TRO was filed on behalf of the plaintiffs in both actions, seeking to enjoin the sale, which is set to close on April 8 (access the TRO here). Both actions, and the accompanying TRO, have been assigned to Vice Chancellor Parsons.
Yesterday, February 27, 2008, two new complaints were filed against Yahoo! in the Court of Chancery. The first is a class and derivative action, Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Yahoo!, C.A. 3578, which you can access here. The second, Mercier v. Yahoo!, C.A. 3579, an additional class action to those previously filed, can be found here.
The plaintiff in the second action, Vernon A. Mercier, was also the lead plaintiff in Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786 (Del. Ch. 2007), which you can access here. In a decision in that action last August, Vice Chancellor Strine denied the plaintiff’s application for a preliminary injunction and found that directors fearing that stockholders are about to make an unwise decision that poses the threat that all stockholders will irrevocably lose a unique opportunity to receive a premium for their shares have a compelling justification for a short postponement in the merger voting process to allow more time for deliberation. The decision is worth reviewing for its interesting discussion of the interplay between the Blasius and Unocal doctrines.
Gantler v. Stephens, C .A. No. 2392-VCP (February 14, 2008).
This decision illustrates the confusion that exists over the scope of review of a board's decision to not pursue a merger and largely eliminates the uncertainty. Briefly, the board here decided not to pursue a merger opportunity and the potential acquirer then withdrew its offer. The court held that the business judgment rule applied to the decision not to take the offer. In doing so, the court declined to apply the heightened scrutiny used under the Unocal decision as the board did not take any defensive steps to stop the suitor from going forward on its own.
Instead, the court held that to invoke a higher level of review, the plaintiff must show the board acted in bad faith or was not properly advised. Mere allegations that the board made the wrong decision are insufficient.
Continue Reading...G & G LLC v. White, 2008 WL 205150 (D. Del. Jan. 25, 2008)
In this opinion declining to dismiss for lack of personal jurisdiction, the District Court found that it had personal jurisdiction over both the directors/officers of a Delaware corporation and over a foreign corporation that invested in a Delaware corporation. Plaintiff was a Virginia limited liability company that loaned $2.5 million to a Utah corporation. Plaintiff was granted a security interest in the Utah corporation’s assets, and perfected that interest by filing the required financing statements in Utah. However, the Utah corporation subsequently was merged with and into a Delaware corporation. Plaintiff asserted that this was done at the insistence of various defendants that were seeking to invest in the Utah corporation after Plaintiff informed them that it would not agree to subordinate its security interest to theirs. Plaintiff posited that the investor defendants thereafter controlled the Utah corporation and the Delaware corporation it was merged into, and fraudulently concealed the merger to prevent Plaintiff from perfecting its security interest upon the merger, while at the same time perfecting their own in Delaware. Plaintiff pointed to numerous instances where the Utah corporation, the Delaware corporation, their counsel, the directors/officers of the Delaware corporation (who were appointed by the investor defendants), and the investor defendants failed to notify Plaintiff of the merger and/or made misrepresentations regarding the continuing status of the corporation as a Utah corporation. Taking the allegations as true, the Court found that the actions of the investor defendants and the directors they appointed was sufficient to confer specific jurisdiction over them.
Continue Reading...United Rentals Inc v. RAM Holdings Inc. C.A. No. 3360-CC (December 12 and 21, 2007).
In these two decisions the Court of Chancery sets out how it will interpret a contract. Following the objective theory of contract interpretation, the court searches for the "common understanding" of the parties. It will not hear evidence of a party's subjective mental impressions or unilateral understandings.
However, the court will apply the "Forthright Negotiator Principle" when a contract is ambiguous. Under that approach, a reasonable interpretation of contract language of one of the parties will be binding on the other party to the contract if he knew or should have known of the other party's understanding and did not object to it when the contract was signed. Silence then may be fatal.
Globis Partners LP v. Plumtree Software, Inc., C.A. No. 1577-VCP (November 30, 2007).
This decision explains why some attacks on a merger fail for want of a basis to avoid the business judgment rule and for a failure to make proper disclosure claims. The merger was a third-party transaction and the defendant directors received no unique benefit as a result. The Court held that granting those directors a right to indemnification, an acceleration of options and a cash out of vested options, did not constitute a special benefit that would make the directors interested parties. Hence, the business judgment rule applied.
The court also concluded that the complaint's disclosure claims lacked merit. For the most part, those claims were attacks on the merits of the investment banker's analysis attached to the proxy statement. That is not a claim of inadequate disclosure. Thus, the complaint was dismissed.
Appriva Shareholder Litig. Co., LLC v. EV3, Inc., -- A.2d --, 2007 WL 3208783 (Del. Nov. 1, 2007)
Deciding whether a motion to dismiss based on lack of standing is considered under Rule 12(b)(6) or 12(b)(1) has implications and has divided some courts. First, lack of subject matter jurisdiction under 12(b)(1) is non-waivable and can be raised by the court sua sponte, whereas failure to state a claim under 12(b)(6) must be raised by motion. Second, a 12(b)(6) motion for failure to state a claim may be converted to a motion for summary judgment, considering matters outside the pleadings, but a 12(b)(1) motion may not. In this consolidated appeal, the Supreme Court held that when the issue of standing is closely related to the merits, a motion to dismiss for lack of standing is properly considered under 12(b)(6) for failure to state a claim.
Continue Reading...In re Checkfree Corporation Shareholders Litigation, C.A. No. 3193-CC (November 1, 2007).
Exactly what needs to be included in a proxy statement for a merger vote seems to be a constant subject for debate. Only a "fair summary of the substantive work performed by the investment bankers" need be disclosed, not everything given to them. Moreover, when there is no competing bid, then to enjoin the merger the court must be convinced that a strong showing has been made of disclosure errors.
Twin Bridges Limited Partnership v. Draper, C.A. No. 2351-VCP (September 14, 2007).
This decision deals with how to change the governance structure of a limited partnership by using a merger to amend the partnership agreement. At the outset, the Court ruled that the doctrine of independent legal significance would not be applied to a two-step transaction involving an amendment to a limited partnership agreement to permit a merger and then the merger itself. Instead, the Court ruled that the two transactions were integrated and thus, considered as if they were a single event. This may mean that the corporate law concept of treating two transactions separately if they are authorized by two different sections of the corporate law will not apply in the context of a limited partnership that is based on contract law.
In addition, the Court held that using a merger to add an additional, tie-breaking general partner to the partnership governance structure was permissible absent a clear prohibition in the partnership agreement.
Law Debenture Trust Company of New York v. Petrohawk Energy Corp., C.A. No. 2422-VCS (August 1, 2007).
Change of control provisions are common in employment contracts and other contexts. Here the provision was in a debenture. While primarily focusing on the specific language involved, this opinion is useful to others to see how to avoid triggering a change in control provision while at the same time implementing a merger.
Lemon Bay Partners LLP v. Hammonds, C.A. No. 05-327 (D.Del. June 26, 2007)
In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.
Continue Reading...In Re: Lear Corporation Shareholders Litigation, C.A. No. 2728-VCS (June 15, 2007).
The tactics to use and the terms to seek in merger negotiations are often debated and misunderstood. In this decision, the Court sets out considerable guidance on what to do and what to avoid. Moreover, the Court once again points out the problem created by leaving too much of the work to the CEO whose personal economic interests are also at stake. In short, that is a process to be avoided.
The Court's extended discussion of termination fees, go-shop provisions, voting agreements and matching rights are mandatory reading for anyone with a role to play in an M& A deal.
In Re: The Topps Company Shareholders Litigation, C.A. No. 2786-VCS (June 14, 2007).
The duties of directors in a sale of the company situation are often difficult to articulate except to say they should get the best price. Here, however, the Court of Chancery examines a real world problem of dealing with two competing bids and explains in detail how to do so properly. Moreover, when as here the Court concludes the directors have been unreasonably favoring one bidder over another, it will intervene to level the playing field.
The Court required that the board of Topps, the baseball card company, end a standstill agreement it had with Upper Deck, amend Topps proxy materials that had unfairly portrayed the Upper Deck offer for Topps and otherwise act to be sure that Upper Deck's proposal to acquire Topps was fairly considered. The decision also illustrates the problems management may have when they are given assurances of continued employment by one bidder who they then seem to favor in the bidding process.
Matulich v. Aegis Communications Group. Inc., C.A. No. 2601-CC (May 31, 2007).
Under Section 253 of the DGCL, a parent corporation that owns 90% or more of the stock entitled to vote in a subsidiary may merge the subsidiary into itself without a stockholder vote. Here, however, some of the subsidiary's stock had the right to 'consent' to major corporate events, but not to vote on those events. Illustrating the importance of adherence to proper corporate formalities, this decision holds that the right to "'consent' is not the same thing as the right to vote". Hence, the merger was valid when the parent company had 90% of the voting stock of the subsidiary, even if the minority stockholder with the right to consent to the merger did not do so. In short, be careful how you write a corporate charter because the words used really count.
On January 15, 2008, the Delaware Supreme Court affirmed the Court of Chancery's judgment.
Mehiel v. Solo Cup Company, No. 06C-01-169-JEB, 2007 WL 901637 (Del. Super. Ct. Mar. 26, 2007).
This case arose from defendant’s acquisition of SF Holdings and relates to disagreements over the amount of SF Holdings’ working capital adjustments and, by extension, its purchase price. The plaintiff, chairman and CEO of SF Holdings, brought this action in his capacity as the shareholders’ representative for fraud in the inducement, breach of contract, and unjust enrichment.
Shortly after the parties entered into the merger agreement—and days before closing—they found themselves deadlocked and unable to reach an agreement on the working capital adjustments. To resolve their differences, the parties appointed a neutral auditor as provided in the merger agreement, which further stated that the auditor’s decision would be final, binding, and conclusive, making no mention of appeal or reconsideration. The auditor resolved several issues in favor of the purchasing company (defendant), and plaintiffs’ action followed.
Continue Reading...In re Netsmart Technologies, Inc., C.A. No. 2563-VCS, 2007 WL778612 (Del. Ch.).
When a company is to be sold, then the board of directors have so-called Revlon duties that basically come down to getting the best price. There is no set methodology or procedure the board must employ. However it proceeds, its actions will be subject to a level of increased scrutiny by a reviewing court. In other words, the normal business judgment rules do not apply in such a case. This important decision illustrates what the Court of Chancery expects a board in "Revlon land" to do.
Here the board was faced with two possible sets of potential buyers for their company: (1) so-called strategic investors who would acquire the company to run it as part of their other business interests and (2) private equity investors who would let current management run the company after taking it private. The board never really explored the possibility of a sale to strategic investors and, apparently, preferred a sale to private equity from the outset. Only one bidder stayed the course and the court was faced with a complaint that the price was not high enough. After finding some disclosure problems with the proxy materials, the Court held that the stockholders should be given an amended disclosure statement that included more financial information and enjoined the meeting until that was done. More importantly, the Court also ordered that the stockholders be told that their board had not really pursued a sale to strategic investors.
Continue Reading...Ortsman v. Green, C.A. No. 2670-N (Del. Ch. February 28, 2007).
There is sometimes uncertainty as to what should be included in a disclosure statement that seeks stockholder approval of a merger. This brief opinion makes it clear that the basis for an investment banker's fees should be included, particularly when the fee is dependent in some degree on the merger's completion.
Louisiana Municipal Police Employees' Retirement System et al v. Crawford, C.A. No. 2635-N (Del. Ch. February 16, 2007).
In Delaware's corporate law, the doctrine of independent legal significance has a great importance. Basically, this means that if a transaction is authorized by any provision of our law, then it may go forward even if, in substance, it may seem to violate some other provision of that law. Thus, for example, a merger that really seems to be a sale of assets is still valid if it complies with the terms of the statute governing mergers. Here, the strength of that doctrine is called into question.
To make the merger of Caremark and CVS more competitive to a third party offer for Caremark, the directors of Caremark resolved to pay a special dividend to the Caremark stockholders. The problem was that the dividend was conditioned on those stockholders approving the merger with CVS. The plaintiffs argued that this dividend was really a cash payment as part of the merger consideration and thus triggered stockholder appraisal rights that occur when stockholders receive cash in a merger. The Court of Chancery agreed with the plaintiffs and rejected application of the doctrine of independent legal significance.
The result clearly was influenced by the evidence that the Caremark directors were motivated to declare the dividend to make the merger go through and thereby receive large personal benefits in the form of change of control payments. The point then is that when the so-called "independent" event is really tied to personal interest and not to just getting a deal done, the Court is less likely to give it recognition as truly independent.
Continue Reading...AHS New Mexico Holdings, Inc. v. Healthsource Inc., C.A. No. 2120-N (Del. Ch. February 2, 2007).
It is often the case that a merger agreement or sale of stock will provide for an adjustment to the closing price based on post-closing events. This decision holds that in such cases the procedures for submitting any dispute are enforceable and absent agreement of the parties will include all of their disputes over the adjustment. This later point is important because it permits the parties to reach preliminary agreements on some parts of the dispute while preserving their right to take the whole dispute to the chosen forum for resolution if all points are not resolved by negotiations.
Continue Reading...Plaintiff entity controlled by certain former stockholders of acquired corporation sued acquirer alleging breach of merger agreement and fraud. Upon motion by defendant acquirer, the court dismissed the action on ground that plaintiff lacked standing.
The court noted that the merger agreement appointed two individuals as shareholder representatives who were required to act in concert, one of whom the complaint reflected was not affiliated with plaintiff in any way. The court also noted that the merger agreement did not permit assignment of the shareholder representatives' rights without defendants' consent, which was never given. Finally, the court rejected plaintiff's argument that it be permitted to bring the action as a third-party beneficiary as inconsistent with the merger agreement's express terms.
Abraham v. Emerson Radio Corp. C.A. No. 1845-N, 2006 WL 1879205 (Del. Ch. July 5, 2006).
This decision makes it clear that a controlling stockholder may sell control without fear of liability for the actions of the buyer after the transaction closes, with few exceptions. While it has long been the rule that a stockholder may deal with its shares as it sees fit, case law recognized that a controlling stockholder has a fiduciary duty to its company and the minority owners by virtue of the controller's ability to control what the company does. How that duty applied in the sale of control context is the question addressed in this case.
Continue Reading...Gesoff v. IIC Indus. Inc., C.A. No. 19473, 2006 WL 1458218 (Del. Ch. May 18, 2006).
Plaintiff filed a class action, claiming a merger was the subject of unfair dealing and produced an unfair price. Another plaintiff filed a statutory appraisal claim based on the same merger.
Continue Reading...Oliver v. Boston University, C.A. No. 16570-NC, 2006 WL 1064169 (Del. Ch. Apr. 14, 2006).
Defendant Boston University ("BU") was the controlling shareholder of Seragen, a financially troubled biotechnology company. Plaintiffs, a group of former minority stockholders of Seragen's common stock, challenged certain transactions before Seragen was merged and the process by which the merger proceeds were divvied up. The plaintiffs contended that the BU defendants breached their fiduciary duties to Seragen's common shareholders by approving various financial transactions, which were not fair to the common shareholder as a matter of price and process. The Court of Chancery awarded damages in excess of $4.8 million plus interest for breaches of the fiduciary duty of loyalty.
Continue Reading...Plaintiff filed a class action complaint against defendants, alleging violations of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and breach of the fiduciary duty of loyalty by the directors of Pathmark Stores, Inc. ("Pathmark") in connection with a transaction between Pathmark and The Yucaipa Companies, LLC ("Yucaipa"). Plaintiff also moved for appointment as lead plaintiff, with his counsel as lead counsel. Defendants moved to dismiss the complaint.
Continue Reading...This is a motion for expedited proceedings for a preliminary injunction pertaining to certain disclosure claims not made public in SEC-filed proxy statements soliciting shareholder vote for an agreement for sale of the corporation at $24 per share. Class actions were earlier filed in the Delaware Court of Chancery and California's Superior Court challenging the sale transaction as a director-interested one.
Continue Reading...The Delaware Insurance Guaranty Association ("DIGA") sought reimbursement from Christiana Care Health Services ("CCHS") pursuant to one of the Delaware Insurance Guaranty Association Act's provisions for claims paid on behalf of an insolvent insurer. In this case the insolvent insurer had insured a corporation that merged into CCHS. The Superior Court granted CCHS's motion for summary judgment, finding that CCHS was not an "insured" under the insurance policy. Reversing the lower court, the Delaware Supreme Court found that a court must consider the purpose and intent of 18 Del. C. § 4211 when determining if a company is an "insured." A court may not rely on terms in an insurance policy that are inconsistent with the purpose and intent of Section 4211. The Supreme Court found that CCHS became an insured after the named insured merged into the defendant, and CCHS is obligated to reimburse DIGA pursuant to Section 4211.
Continue Reading...Blechner v. Daimler-Benz AG, C.A. No. 04-331-JJF, 2006 WL 167835 (D.Del. Jan. 24, 2005).
Plaintiffs, on behalf of themselves and other foreign shareholders who invested in securities of DaimlerChrysler AG, filed a class action complaint alleging securities fraud in connection with the merger of Chrysler Corporation and Daimler-Benz AG. Defendants moved to dismiss the complaint.
Continue Reading...In re Tele-Communications Inc. Shareholders Litig., C.A. No. 16470, 2005 WL 3547674 (Del. Ch. Dec. 21, 2005), opinion revised and superceded by No. CIV. A. 16470, 2005 WL 3642727 (Del. Ch. Dec. 21, 2005), (revised Jan. 10, 2006)(Westlaw citation not available).
This summary judgment action originates from a Consolidated Amended Complaint that alleged nondisclosure of material information
and
Horizon Personal Communications, Inc. et al. v. Sprint Corp., et al., C.A. No. 1518-N (Del. Ch. Jan. 04, 2006).
These cases pertain to summary judgment and a request for declaratory judgment involving an anticipatory breach of a commercial agreement concerning a merger transaction.
Continue Reading...Former stockholders who were cashed out in connection with merger sued the corporation's former controlling stockholder and the acquirer for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, respectively. Plaintiffs complained of numerous side deals, allegedly negotiated by the controlling stockholder. Plaintiffs also complained that the controlling stockholder breached his fiduciary duty by supplying growth projections that he knew to be unduly pessimistic and inconsistent with management's view. Defendants moved for summary judgment, which the court granted in part and denied in part.
Continue Reading...Bonham v. HBW Holdings, Inc., C.A. No. 820-N, 2005 WL 3589419 (Del. Ch. Dec. 23, 2005).
Former stockholders sued acquirer for release of $25 million held in escrow for purpose of indemnification for breach of warranty claims and other relief. The acquirer moved to dismiss the complaint on the grounds that it properly and timely noticed claims for breach of warranty and other issues, Plaintiffs failed to allege that those claims were made in bad faith, and certain of the claims were subject to mandatory arbitration under the terms of the stock purchase agreement.
Continue Reading...Henke v. Trilithic Inc., C.A. No. 13155, 2005 WL 2899677 (Del. Ch. Oct. 28, 2005).
Plaintiff, who was a stockholder of Trilithic, Inc., brought an appraisal action against Defendant Trilithic under 8 Del. C. §262.
Gentile v. Rossette, C.A. No. 20213-NC, 2005 WL 2810683 (Del. Ch. Oct. 20, 2005).
Plaintiffs, former shareholders of SinglePoint Financial, Inc. which merged into a subsidiary of Cofiniti, Inc., alleged that two former directors of SinglePoint breached their fiduciary duties in connection with the issuance of a large number of shares to one of the defendants and the merger. Defendants moved for summary judgment.
Continue Reading...Mehiel v. Solo Cup Co., C.A. No. 1596-N, 2005 WL 3074723 (Del. Ch. Nov. 3, 2005).
Following the closing on a merger, several disputes developed between the shareholder representative of an acquired company and the acquirer involving working-capital-adjustment issues and the accuracy of seller's representations and warranties. The merger agreement contained two separate arbitration provisions for working capital adjustment disputes and disputes regarding the parties' respective representations and warranties. The acquirer first attempted to submit its disputes with the shareholder representative to arbitration as working-capital claims. The arbitrator refused to consider those claims, however, based on the acquirer's failure to comply with certain procedural requirements. In response, the acquirer submitted the same claims to the separate arbitrator for representation-and-warranty claims. The shareholder representative subsequently filed a complaint asking the court to issue an injunction barring the second arbitrator from hearing the disputed claims.
Continue Reading...AT&T Wireless Services, Inc. v. Federal Ins. Co., 2005 WL 2155695 (Del. Super. Ct. Aug. 18, 2005).
The Plaintiff filed a notice of partial dismissal in an attempt to dismiss certain defendants. The defendants who were purportedly dismissed moved to quash the notice of dismissal. The court found that one defendant insurer could be dismissed because the entire action was being voluntarily dismissed. However, the court granted the motion to quash as to the other defendant because the dismissal only eliminated certain claims as opposed to the entire action. Plaintiff also sought leave of the court to dismiss a second group of defendants pursuant to Rule 41(a)(2). The court denied this motion.
Continue Reading...In re Toys "R" Us Shareholder Litigation, C.A. No. 1212-N, 877 A.2d 975 (Del. Ch. June 24, 2005)
The Court of Chancery considered a motion to enjoin a vote of the stockholders of Toys "R" Us, Inc. to consider approving a merger with an acquisition vehicle formed by a group led by Kohlberg Kravis Roberts & Co. Pursuant to the terms of the merger agreement, the Toys "R" Us stockholders would receive $26.75 per share for their shares. The $26.75 per share merger consideration constituted a 123% premium over the price of TRU stock when merger negotiations began in January 2004. Plaintiffs charged the board did not act reasonably in pursuit of the highest attainable value. The Court of Chancery denied the motion to enjoin a stockholder vote on the proposed merger, saying stockholders could stop the merger by voting if they thought it was unfair
Continue Reading...Vice Chancellor Strine ruled on a fee request in a case arising out of a proposal by the Cox Family to take Cox Communications private. The Family proposed a merger on fully negotiable terms with an opening bid of $32. The proposal was immediately followed by a flurry of class action lawsuits, as well as the formation of a special committee to review and evaluate the terms of the offer. The Family tentatively agreed with a special committee of independent directors to a price of $34.75 per share subject to approval by a majority of the minority stockholders and conditioned on settlement of the outstanding lawsuits, a final fairness opinion, and agreement on the terms of a final merger agreement.
Counsel for the plaintiffs eventually agreed that the $34.75 price accepted by the special committee was fair, accepted the other terms of the transaction, and agreed to settle their claims. After settlement, the Cox family agreed not to oppose a request by plaintiffs' counsel for payment of attorneys' fees of up to $4.95 million. Certain Cox stockholders, however, did object to the fee request and the Court of Chancery heard their obections.
The Court slashed a $4.95 million fee request to an award of $1.275 million and advised the plaintiff's bar to consider that award "generous."
Continue Reading...Frontier Oil Corporation v. Holly Corporation, 2005 WL 1039027 (Del. Ch. April 29, 2005).
Frontier Oil Corporation and Holly Corporation are petroleum refiners that sought to merge. In conducting its due diligence review of Frontier, Holly discovered that activist Erin Brockovich was planning to bring a toxic tort suit claiming that an oil rig that had been operating for decades on the campus of Beverly Hills High School caused the students to suffer from a disproportionately high incidence of cancer. This raised concerns for Holly because a subsidiary of Frontier had previously operated the Beverly Hills drilling facility. Although the terms of the merger agreement were modified to address the situation, including broadening the representation to apply to litigation that would reasonably be expected to have a material adverse effect ("MAE") on Frontier, the court found that substantial litigation costs were not a MAE and therefore the contract could not be rescinded.
Continue Reading...In re J.P. Morgan Chase & Co. S'holder Litig., 2005 WL 1076069 (Del. Ch. April 29, 2005), aff'd, 2006 WL 585606 (Del. Mar. 8, 2006).
J.P. Morgan Chase & Co. ("JPMC") and Bank One agreed to a business combination that was expected to create the second largest financial institution in the country. JMPC paid a premium over the market share price for Bank One, effectively making JPMC the acquirer and the Bank One the target. After the merger was completed, the stockholders of the acquirer sued its directors, alleging breaches of fiduciary duty with regard to the acquisition. Their claims stemmed from the allegation that the directors paid too much for the acquired bank. The defendants moved to dismiss the complaint on the basis that the claims were derivative, not direct, and that demand was not excused. The court granted defendants motion to dismiss.
Continue Reading...Finkelstein v. Liberty Digital, Inc., 2005 WL 1074364 (Del. Ch. April 25, 2005).
This appraisal case involved the fair value of shares of a company, Liberty Digital, Inc., that was merged with an acquisition subsidiary of Liberty Media Corporation and survived the merger as a wholly owned subsidiary of Liberty Media. What was atypical about this appraisal case was that the parties were able to stipulate to the value of all but one of Liberty Digital's assets.
Continue Reading...Examen, Inc. v. VantagePoint Venture Partners 1996, 873 A.2d 318 (Del. Ch. 2005).
The plaintiff, a Delaware corporation, sought a judicial declaration that Delaware law governed a stockholder vote on a pending merger because if the vote was governed by Delaware law, common stockholders and preferred stockholders would vote on the merger as a single class. The defendant, a large venture capital firm owning 83% of the corporation's preferred stock, argued that California law controlled because if California law were to apply in determining the voting rights of the Delaware corporation's stockholders in connection with the proposed merger, the preferred stockholders would have the right to vote as a separate class, effectively giving the defendant a veto over the merger. The court granted plaintiff's motion for judgment on the pleadings finding that Delaware law applied because this case was governed by the internal affairs doctrine.
Continue Reading...Gilliland v. Motorola, Inc., 873 A.2d 305 (Del. Ch. 2005).
Plaintiff sought a class-wide "quasi-appraisal" remedy for minority stockholders eliminated in a short-form merger. Statutory appraisal was impractical for two reasons. First, formalistically, the minority stockholders no longer owned shares in the merged subsidiary and without the shares, they could not make the demand required by the appraisal statute. Second, from a practical standpoint, the two-year delay made it impossible to recreate the factual context necessary to have statutory appraisal. Therefore, Vice Chancellor Lamb granted the quasi-appraisal remedy and outlined its procedure.
Continue Reading...This is an action for plaintiff's attorney fees following settlement of fiduciary duty-based shareholder class actions.
Continue Reading...This is a 8 Del. C. §262 share appraisal case brought by a "debtor in possession" after the dismissal of its earlier filed adversarial proceeding in the bankruptcy court.
Continue Reading...This is an insurance contract related action brought by plaintiff, who also sought an injunction demanding notice under certain insurance policies. Plaintiff also sought a declaratory judgment that the insurance settlement agreement did not impair their rights and a permanent injunction.
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For more information concerning any of these cases, contact Edward M. McNally at emcnally@morrisjames.com or 302.888.6880
