Wednesday, October 19, 2016
Today's post continues the discussion started by Anne’s informative post regarding the law of controlling stockholders. Anne astutely notes that the MFW “enhanced ratification” framework was rendered in connection with a going private merger. Although I recognize the intuitive appeal, I wish to call into question the impact of MFW’s holding on other manners of controlling shareholder transactions.
Going private transactions differ from going concern transactions in that their successful completion wipes out the minority float. This distinction accelerates stockholders' divergent incentives and raises the possibility for minority stockholder abuse. An unscrupulous controller might structure the transaction in a manner that captures all unlocked value for later private consumption. Going private transactions allow controlling stockholders to shed the restrictions of the public market, thereby evading future retribution by minority stockholders. Policy considerations accordingly call for superior protection of minority stockholders participating in a going private transaction.
Since MFW establishes a procedure for achieving less intrusive judicial review for going private transactions, it stands to reason that this procedure should apply to all transactions involving a controlling stockholder. Indeed, without addressing the distinction between going private and going concern transactions in this context, a fairly recent Chancery Court decision has explicitly opined that the MFW framework applies to all controlling stockholder transactions (In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *28 (Del. Ch. Jan. 25, 2016)).
In a forthcoming article at the Delaware Journal of Corporate Law, I argue that the borders of "MFW-Land" are not as clear-cut as they appear. The Delaware Supreme Court decision does not create a universally-applicable safe harbor procedure for all manner of controlling stockholder transactions. Two main arguments form the basis of this contention.
The dual tenets of doctrinal clarity and cohesion underpin the first argument. A careful reading of the MFW decision fails to detect any mention of competing precedent or a general proclamation regarding its applicability to other types of controlling stockholder transactions. MFW is clearly situated on a path of doctrinal evolution of judicial inspection of going private transactions with controlling stockholders. Canons of judicial interpretation counsel against an indirect reversal or modification of established precedent.
Additionally, the theoretical justifications for the MFW decision hold significantly less weight in the going concern context. MFW's doctrinal shift is grounded on the twin pillars representing the competency of independent directors and non-affiliated stockholders. Whatever the validity of these mechanisms in the freeze out context, the legal and financial scholarship does not validate an extension to going concern transactions. Serious flaws hamper the ability of independent directors and non-affiliated stockholders to pass meaningful judgment on going concern transactions. In the final tally, MFW does not produce an all-encompassing framework for all controlling stockholder transactions.
Wednesday, October 12, 2016
I am preparing to teach the doctrine on controlling shareholders in my corporations class tomorrow, and found the recent Delaware opinions on non-controlling shareholder cleansing votes and the BJR to be helpful illustrations of the law in this area.
In summer 2016, the Delaware Court of Chancery dismissed two post-closing actions alleging a breach of fiduciary duty where there was no controlling shareholder in the public companies, where the stockholder cleaning vote was fully informed, and applied the 2015 Corwin business judgment rule standard. The cases are City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB, (Del. Ch. Aug. 24, 2016) (Bouchard, C.) and Larkin v. Shah, C.A. No. 10918-VCS, (Del. Ch. Aug. 25, 2016) (Slights, V.C.), both of which relied upon Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015). (Fellow BLPB blogger Ann Lipton has written about Corwin here).
The Larkin case clarified that Corwin applies to duty of loyalty claims and will be subject to the deferential business judgment rule in post-closing actions challenging non-controller transactions where informed stockholders have approved the transaction. The Larkin opinion states that:
(1) when disinterested, fully informed, uncoerced stockholders approve a transaction absent a looming conflicted controller, the irrebuttable business judgment rule applies; (2) there was no looming conflicted controller in this case; and (3) the challenged merger was properly approved by disinterested, uncoerced Auspex stockholders. Under the circumstances, the business judgment rule, irrebuttable in this context, applies. ....The standard of review that guides the court’s determination of whether those duties have been violated defaults to a deferential standard, the business judgment rule, which directs the court to presume the board of directors “acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company.” In circumstances where the business judgment rule applies, Delaware courts will not overturn a board’s decision unless that decision 'cannot be attributed to any rational business purpose.' This broadly permissive standard reflects Delaware’s traditional reluctance to second-guess the business judgment of disinterested fiduciaries absent some independent cause for doubt. Larkin at 21-22 (internal citations omitted).
Two-sided controller transactions (a freeze out merger where a controlling shareholder stands on both sides of the transaction) is covered by the 2014 Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014) case, which I summarized in an earlier BLPB post here.
To refresh our readers, the controlling shareholder test is a stockholder who owns a majority of stock. Additionally, a stockholder may qualify as a controller if:
Under Delaware law, a stockholder owning less than half of a company’s outstanding shares may nonetheless be deemed a controller where 'the stockholder can exercise actual control over the corporation’s board.'This “actual control” test requires the court to undertake an analysis of whether, despite owning a minority of shares, the alleged controller wields “such formidable voting and managerial power that, as a practical matter, [it is] no differently situated than if [it] had majority voting control.'A controlling stockholder can exist as a sole actor or a control block of “shareholders, each of whom individually cannot exert control over the corporation . . . [but who] are connected in some legally significant way—e.g., by contract, common ownership agreement, or other arrangement—to work together toward a shared goal.' Larkin at 33-34 (internal citations omitted).
Excellent commentary on theLarkin and Comstock cases and their practical implications can be found on the Harvard Law School Forum on Corporate Governance and Financial Regulation, available here.
Wednesday, August 24, 2016
Increasing business demands are prompting companies to expand into new products and markets. Businesses also are engaging in mergers, acquisitions and joint ventures; issuing securities; and performing other transactions associated with business growth, which results in larger corporate teams. Many companies have a need for additional in-house legal professionals who are readily available to help manage mounting financial and industry-related regulations. Moreover, corporate legal departments often prefer to handle more routine legal work in-house and retain the services of outside counsel for specialized legal work.
Real estate, IP, health care and compliance were also mentioned along with the noted strong growth in litigation. The full report/study is available here: Download Legal_2016_job_salary_guide.
Friday, August 12, 2016
In the spring of 2012, around the time that Facebook purchased Instagram for roughly $1 billion, I was teaching an M&A class.
At the time, I had difficulty explaining why Facebook would pay that amount of money for a company that was not only not profitable, but also had no revenue. I spoke as someone trained to use multiples EBITDA and as someone who did not (and still does not) have an Instagram account.
Now, over four years later, Forbes estimates Instagram's value at $25billion to $50billion. That valuation still requires some creativity, as Instagram had sales of "only" $630 million in 2015. Instagram, however, has added roughly 100 million new users in the last 9 months and is projected to have revenue of $1.5billion this year. While there is reason to be wary of projections, the projected sales for Instagram in 2018 is an impressive $5billion.
This drives home that valuation is as much art as science, and the conventional valuation methods will not work well for every company. In that deal, I imagine Instagram's technology, brand, and the user base were all large value drivers. With the benefit of hindsight, Instagram is looking like a good acquisition for Facebook, even if the current projections end up being a bit optimistic.
Wednesday, June 8, 2016
If you've been slamming away on a writing deadline then perhaps you've missed the opportunity (like me) to dive into the recent Chancery Court of Delaware Dell appraisal rights opinion (downloadable here). Have no fear, your summary is here.
Vice Chancellor Laster valued Dell’s common stock at $17.62 per share, reflecting a 28% premium above the $13.75 merger price that was paid to Dell shareholders in October 2014 in a going private transaction lead by company-founder Michael Dell. Dell's going private transaction was opposed by Carl Icahn and this juicy, contentious transaction has its own required reading list. When conceding defeat, Carl Icahn sent the following letter to Dell Shareholders:
New York, New York, September 9, 2013
Dear Fellow Dell Inc. Stockholders:
I continue to believe that the price being paid by Michael Dell/Silver Lake to purchase our company greatly undervalues it, among other things, because:
1. Dell is paying a price approximately 70% below its ten-year high of $42.38; and
2. The bid freezes stockholders out of any possibility of realizing Dell’s great potential.
Fast forward nearly 3 years later and it seems Vice Chancellor Laster agrees. VC Laster reached his undervaluation decision despite no finding of significant fault with the company’s directors' conduct or a competing bidder. Instead, VC Laster focused on the fall in the company’s stock price, and a failure to determine the intrinsic value of Dell before negotiating the buyout. The business press and law blogs have exploded with articles, a few of which are highlighted below:
- For a good summary of the ruling see this succinct Delaware Chancery Court blog post and Andrew Ross Sorkin's NY Times article.
- For a good discussion of how appraisal remedies were applied in Dell, see Steven Davidoff Solomon's NY Times article here.
- For a discussion of the increase in shareholder appraisal actions and contributing factors (arbitrage) and the future of appraisal rights, see this ABA article.
Monday, May 23, 2016
Well, given that I just spent several hours constructing a somewhat lengthy post that I apparently lost (aargh!), I will keep this relatively short.
This summer, I am working on a benefit corporation project for the Annual Adolf A. Berle Symposium on Corporation, Law and Society (Berle VIII) to be held in Seattle next month. In that connection, I have been thinking about litigation risk in public benefit corporations, which has led me to consider the specific litigation risks incident to mergers and acquisitions ("M&A"). I find myself wondering whether anyone has yet done a benefit corporation M&A transaction and, if so, whether a checklist might have been created for the transaction that I could look at. I am especially interested in understanding the board decision-making aspects of a benefit corporation M&A transaction. (Haskell, maybe you know of something on this . . . ?)
Preliminarily, I note that fairness opinions should not carry as much weight in the benefit corporation M&A approval context, since they only speak about fairness "from a financial point of view." Benefit corporation boards of directors must consider not only the pecuniary interests of shareholders in managing the firm, but also the firm's articulated public benefit or benefits (which is/are set forth in its charter). Will legal counsel pick up the slack and render an opinion that the board's consideration of the public benefit(s) complies with law? What diligence would be required to give that opinion? I assume in the absence of interpretive decisional law, any opinion of that kind would have to be qualified. I also assume that legal counsel will not readily volunteer to give this kind of opinion.
However, even in the absence of an opinion, legal counsel will have to offer advice on the matter, since the board of a benefit corporation has the legal obligation to manage the firm consistent with its public benefit(s) in any case. Moreover, M&A agreements typically include representations (on transactional consents, approvals, and governance/legal compliance) affirming that the requisite consents and approvals for the transaction have been obtained and that the agreement and consummation of the transactions contemplated by it do not violate the firm's charter or applicable law. Legal counsel will be responsible for counseling the client on these contractual provisions.
At first blush, the embedded issues strike me as somewhat complex and fact-dependent. Important facts in this context include the precise language of the applicable statutory requirements, the nature of the firm's public benefit or benefits, the type of M&A transaction at issue and the structure of the transaction (including which entity survives in a merger), and the identity of the other party or parties to the transaction (especially whether, e.g., a merger partner is organized as a public benefit corporation or another form of entity). As I continue to ponder these and related matters in the benefit corporation M&A setting, I invite your comments on any of this--or on broader aspects of litigation risk in the public benefit corporation environment.
Monday, February 22, 2016
Free Web Seminar: The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
One of my two former firms, King & Spalding, is hosting a free interactive web seminar on cybersecurity and M&A on February 25 at 12:30 p.m. Thought the web seminar might be of interest to some of our readers. The description is reproduced below.
An Interactive Web Seminar
The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
February 25, 2016
12:30 PM – 1:30 PM
Over the last several years, company after company has been rocked by cybersecurity incidents. Moreover, obligations relating to cybersecurity and data privacy are rapidly evolving, imposing on corporations a complex and challenging legal and regulatory environment. Cybersecurity and data privacy deficiencies, therefore, might pose potentially significant business, legal, and regulatory risks to an acquiring company. For this reason, cybersecurity and data privacy are becoming integral pre-transaction due diligence items.
This e-Learn will analyze the (1) special cybersecurity and data privacy dangers that come with corporate transactions; (2) strategies to mitigate those dangers; and (3) benefits of incorporating cybersecurity and data privacy into due diligence. The panel will zero in on these issues from the vantage point of practitioners in the deal trenches, and from the perspective of a former computer crime prosecutor and a former FBI agent who have dealt with a broad range of cyber risks to public and private corporations. This e-Learn is for managers and attorneys at all levels who are involved at any stage of the M&A process and at any stage of cyber literacy, from the beginner who is just starting to appreciate the complex nature of cyber risks to the expert who has addressed them for years. The discussion will leave you with a better understanding of this critical topic and concrete, practical suggestions to bring back to your M&A team.
Robert Leclerc, King & Spalding’s Corporate Practice Group and experienced deal counsel; Nick Oldham, King & Spalding, and Former Counsel for Cyber Investigations, DOJ's National Security Division; John Hauser, Ernst & Young, and former FBI Special Agent specializing in cyber investigations.
Wednesday, January 13, 2016
This post highlights SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (Dec. 23, 2015).
At the end of 2015, the Delaware Supreme Court issued an opinion affirming its earlier holding that where parties have agreed to negotiate in good faith, a failure to reach an agreement based upon the bad faith of one party entitles the other party to expectation damages so long as damages can be proven with "reasonable certainty."
Francis Pileggi, on his excellent Delaware Commercial and Business Litigation blog, provides a succinct summary of the case, available here. The parties to the suit entered into merger negotiations to develop a smallpox antiviral drug. Due to the uncertainty of the merger negotiations, the parties also entered into a non-binding license agreement, the terms of which would be finalized if the merger fell through for whatever reason. While nonbinding, the preliminary license agreement contained detailed financial terms and benchmarks. When the merger was terminated, SIGA proposed terms for a collaboration that departed from the preliminary license agreement. The Delaware Supreme Court affirmed the Court of Chancery finding that SIGA's acted in bad faith. The question of the case became what damages were due from the bad faith breach of a preliminary agreement to "negotiate in good faith,” when all essential terms have not been agreed to by the parties?
The first gem in the opinion, and something I'll be working into my damages lectures for first year contracts this spring, is that:
when a contract is breached, expectation damages can be established as long as the plaintiff can prove the fact of damages with reasonable certainty. The amount of damages can be an estimate.
What constitutes reasonable certainty changes whether the party is establishing damages are due versus the amount of the damages. And here is the second gem: the standard of proof can be lessened where willful wrongdoing contributed to the breach and the uncertainty about the amount of damages.
where the wrongdoer caused uncertainty about the final economics of the transaction by its failure to negotiate in good faith, willfulness is a relevant factor in deciding the quantum of proof required to establish the damages amount.
Tuesday, December 29, 2015
The Pep Boys – Manny, Moe & Jack (NYSE: PBY) merger triangle with Bridgestone Retail Operations LLC and Icahn Enterprises LP is proving to be an exciting bidding war. The price and the pace of competing bids has been escalating since the proposed Pep Boys/Bridgestone agreement was announced on October 16, 2015. Pep Boys stock had been trading around $12/share. Pursuant to the agreement, Bridgestone commenced a tender offer in November for all outstanding shares at $15.
Icahn Enterprises controls Auto Plus, a competitor of Pep Boys, the nation's leading automotive aftermarket service and retail chain. Icahn disclosed an approximately 12% stake in Pep Boys earlier in December and entered into a bidding war with Bridgestone over Pep Boys. The price climbed to $15.50 on December 11th, then $17.00 on December 24th. Icahn Enterprises holds the current winning bid at $18.50/share, which the Pep Boys Board of Directors determined is a superior offer. In the SEC filings, Icahn Enterprises indicated a willingness to increase the bid, but not if Pep Boys agreed to Bridgestone's increased termination fee (from $35M to 39.5M) triggered by actions such as perior proposals by third parties. Icahn challenged such a fee as a serious threat to the auction process.
Regardless of which company ends up claiming control over Pep Boys, this is a excellent example of sale principles in action and also shows the effect of merger announcements (and the promised control premiums) have on stock prices. This will be a great illustration to accompany corporations/business organizations class discussions of mergers and the role of the board of directors. For those teaching unincorporated entities as a separate course or component of the larger bus.org survey course, Icahn Enterprises is a publicly-traded limited partnership formed as a master limited partnership in Delaware-- BONUS! Bridgestone Retail Operations LLC, as in limited liability company, is a wholly-owned subsidiary of Bridgestone Corporation ADR, a publicly traded corporation.
See you all in the New Year! Anne Tucker
EDITED January 4, 2016. Based on the thoughtful observations of fellow BLPB editor Haskell Murray, I removed the inarticulate references to this bidding war as a "Revlon" transaction. As Haskell pointed out, Pep Boys is a Pennsylvania corporation and subject to a constituency statute. The constituency statute modifies directors' "Revlon" duties by authorizing (but not requiring) directors to consider:
The effects of any action upon any or all groups affected by such action, including shareholders, members, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.
(2) The short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation.....15 Pa. Stat. and Cons. Stat. Ann. § 515 (West)
Thursday, December 10, 2015
A few days ago, co-blogger Steve Bradford posted on law professor complaints about grading under the title Warning: Law Professor Whine Season. OK. I typically am one of those whiners. But today, rather than noting that grading is the only part of the semester I actually need to be paid for (and all that yada yada), I want to briefly extoll one virtue of exam season: the positive things one sees in students as they consciously and appropriately struggle to synthesize the material in a 14-week jam-packed semester.
My Business Associations final exam was administered on Tuesday. Like many other law professors, I gave my students sample questions (with the answers), held a review session, and responded to questions posted to the discussion board on our class course management site. Sometimes, I dread any and all of that post-class madness. This year, I admit that there were few of the thinly veiled (and, by me, expressly discouraged and disdained) "is this on the exam?" or "please re-teach this part of the course . . ." types of questions or requests in any of the forums that I offered for post-class review and learning. That was a relief.
The students' final work product for my Corporate Finance planning and drafting seminar was due Monday. I met with a number of students in the course about that drafting assignment and about the predecessor project in the final weeks before each was due. I watched them work through issues and begin to make decisions, uncomfortable as they might be in doing so, that solve real client problems. Satisfying times . . . .
In fact, there have been a number of moments over the past week in which I was exceedingly proud of the learning that had gone on and was continuing to go on during the post-class exam-and-project-preparation phase of the semester. I offer a few examples here to illustrate my point. They come from both my Business Associations course, for which students take a comprehensive written final examination, and my Corporate Finance planning and drafting seminar, for which students solve a corporate finance problem through planning and drafting and write a review of a fellow student's planning and drafting project.
Saturday, November 28, 2015
A short while ago, some commentators declared that the Treasury had successfully ended corporate inversions. But after several recent corporate migrations, reports of the inversion’s death appear to have been greatly exaggerated.
A corporate inversion is a complicated and costly transaction used by American corporations to avoid particularly burdensome aspects of the U.S. tax code. The United States not only enforces the OECD’s highest corporate tax rate (the tax rate for most U.S. corporations ranges between 35% to 39%) but also worldwide taxation. This latter feature subjects an American corporation’s entire revenue stream to the United States’ extraordinary tax rate, whereas most countries tax only what is earned inside their territorial borders. In simplified terms, a corporation hoping to invert must merge with a foreign corporation—while satisfying some very idiosyncratic conditions—in order to reorganize in the foreign company’s country. After inverting, a company’s foreign generated income becomes subject to more favorable foreign tax rates, though it must still pay U.S. taxes on domestically generated revenue.
The rhetoric surrounding inversions has been heating up since Pfizer announced its intentions to invert into an Irish entity after acquiring Allegran in a $160 billion deal. The chief complaint against inversions is that inverted companies avoid their “fair share” of taxes (the United States likely lost 33.6 billion in tax revenue in 2014 alone). Not only that, the inversion trend perhaps shifts research and development and intellectual property innovation to foreign countries (see this excellent article by Omri Marian). President Obama famously declared that inversions are “unpatriotic,” Jon Stewart warned his viewers of the “Inversion of the Moneysnatchers,” and countless politicians have proposed ending the inversion loophole.
But why should we demonize inverted companies. First, consider an old Learned Hand quote: “[a]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose the pattern which best pays the treasury.” And considering that inverted companies must still pay U.S. taxes on U.S. generated income, the process shields only foreign-based revenue with which the United States has limited association. In fact, if the internal affairs doctrine incentivizes companies to incorporate in whichever U.S. state they wish, why should this policy not include foreign countries?
In the end, what to do about inversions presents a number of complex issues. Critics offer very accurate arguments concerning the deleterious effects of inversions. However, in light of previous attempts, it seems quite unlikely that the tax code could be amended to prohibit future companies from inverting. As of a couple days ago the Treasury just added new inversion restrictions with the caveat that there is only so much that the Treasury can do. Indeed either lowering the corporate tax rate or ending worldwide taxation would likely be the most effective anti-inversion policy. Or the United States could take better aim at the income shifting transactions that corporations use to repatriate foreign income into the United States. But probably the best first step is for us to quit viewing inversions normatively; any well-informed policy prescription should avoid the very commonly used rhetoric of “good” guys and “bad” guys. After all, companies are just following incentivizes that the law offers.
For an excellent discussion of inversions, please read this Virginia Law Review article by Eric Talley.
Friday, November 27, 2015
I try to read everything Lyman Johnson writes, so my Thanksgiving break reading is his recent book chapter The Reconfiguring of Revlon. The abstract is below:
Three decades later, an irksome uncertainty still impedes a settled understanding of the Delaware Supreme Court’s landmark ruling in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. For such a towering doctrine, Revlon’s underlying rationales remain controversial, its exact contours and demands continue to be surprisingly unclear, and it holds out scant hope for remedial relief. In spite of these troubling features of today’s Revlon jurisprudence, however, Revlon is slowly being worked back into the larger fabric of Delaware’s fiduciary duty law and away from being a gangling, standalone doctrine. The organizing themes of this judicial project are strong deference in the deal context to decisions made by independent directors without regard to deal structure, the substantially reduced likelihood of equitable or monetary remedies in all types of deal-related lawsuits, and a nascent effort at harmonizing Revlon with Delaware’s more general, and ill-defined, doctrine on corporate purpose.
This chapter discusses the original Revlon decision and its rapid expansion before turning to lingering uncertainties surrounding the reach of Revlon, the decline of Revlon’s remedial clout, and where Revlon stands today in relation to Delaware’s overall fiduciary duty law. Revlon’s sharp focus on immediate value maximization was a breakthrough pronouncement on corporate purpose, a subject of longstanding national debate but one on which the Delaware Supreme Court had been strangely silent. However, grave reservations about whether and when corporate directors should be required to pursue short term goals found useful cover in sustained judicial murkiness over the boundaries of Revlon. Only if Delaware courts resolve the underlying issue of corporate purpose more generally will Revlon either be fitted into the larger body of Delaware law or continue to stand uncomfortably to the side as a doctrinal loner of diminished significance.
Monday, November 23, 2015
Last week was the 30th anniversary of the Delaware Supreme Court’s decision in Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985). In Moran, decided on Nov. 19, 1985, the Delaware Supreme Court upheld what has become the leading hostile takeover defensive tactic, the poison pill.
Martin Lipton, the primary developer of the pill, even makes an appearance in the case—and obviously a carefully scripted one: “The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of ‘bust-up’ takeovers, the increasing takeover activity in the financial sector industry, . . . , and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt.”
I’m not sure the takeover world would be that different today if Moran had rejected poison pills. I’m reasonably confident the Delaware legislature would have amended the Delaware statute to overturn the ruling, as they effectively did with another ruling decided earlier that same year, Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). Shortly after Van Gorkom made it clear that directors might actually be liable for violating the duty of care, the legislature added section 102(b)(7) to the Delaware law, allowing corporations to eliminate any possibility of damages for duty-of-care violations.
As my colleague Joan Heminway has pointed out, 1985 was an incredibly important year for M & A practitioners. In addition to Moran and Van Gorkom, a third major case was also decided that year: Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
Van Gorkom was decided in late January of 1985, Unocal in June, and Moran in November. Corporations casebooks and treatises are filled with Delaware Supreme Court decisions, but that has to be one of the most important ten-month periods in Delaware corporate law jurisprudence—especially in the mergers and acquisitions area.
Wednesday, October 28, 2015
Earlier this month BLPB editor Ann Lipton wrote about the Delaware Supreme Court opinion in Sanchez regarding director independence (Delaware Supreme Court Discovers the Powers of Friendship). On the same day as the Del. Sup. Ct. decided Sanchez, it affirmed the dismissal of KKR Financial Holdings shareholders' challenge to directors' approval of a buyout. The transaction was a stock-for-stock merger between KKR & Co. L.P. (“KKR”) and KKR Financial Holdings LLC (“Financial Holdings”). Plaintiffs alleged that the entire fairness standard should apply because KKR was a controlling parent in Financial Holdings. The controlling parent argument hinged on the facts that:
Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee.
Chief Justice Strine, writing an en banc opinion for the Court, upheld Chancellor Bouchard's finding that KKR could not be considered a controlling parent where "KKR owned less than 1% of Financial Holdings's stock, had no right to appoint any directors, and had no contractual right to veto any board action."
The Delaware Supreme Court upheld the familiar standard of effective control, absent a majority, which focuses on "a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock."
Chancellor Bouchard had noted that plaintiff's complaint stemmed from dissatisfaction at the contractual relationship between KKR and Financial Holdings which limited the growth of Financial holdings. Chancellor Bouchard wrote:
At bottom, plaintiffs ask the Court to impose fiduciary obligations on a relatively nominal stockholder, not because of any coercive power that stockholder could wield over the board's ability to independently decide whether or not to approve the merger, but because of pre-existing contractual obligations with that stockholder that constrain the business or strategic options available to the corporation.
Sometimes a "nothing new" case provides a good reminder of an established standard and provides clear language for recapping the concept to students. This will become a note case on "effective" control in my ChartaCourse corporations casebook and also a good illustration of the role of private agreements in shaping how legal standards are applied.
You can read the opinion at: Corwin et al. v. KKR Fin. Holdings et al., No. 629, 2014, 2015 WL 5772262 (Del. Oct. 2, 2015).
Wednesday, September 9, 2015
A while back, the CLS Blue Sky Blog featured a post by Michael Peregrine on an article authored by Delaware Supreme Court Chief Justice Leo Strine (Documenting The Deal: How Quality Control and Candor Can Improve Boardroom Decision-making and Reduce the Litigation Target Zone, 70 Bus. Law. 679 (2015)) offering pragmatic advice to corporate directors in deal-oriented decision making. Michael's post summarizes points made by Justice Strine in his article, including (of particular importance to legal counsel) those set forth below.
- "Counsel can play an important role in assuring the engagement of the strongest possible independent financial advisor, and structuring the engagement to confirm the provision of the full breadth of deal-related financial advice to the board; not simply the delivery of a fairness opinion or similar document."
- "[I]n the M&A process, it is critical to be clear in the minutes themselves about what method is being used, and why."
- "Lawyers and governance support personnel should be particularly attentive to documenting in meeting minutes the advice provided by financial advisors about critical fairness considerations or other transaction terms, and the directors’ reaction to that advice."
- "[P]laintiffs’ lawyers are showing an increasing interest in seeking discovery of electronic information that may evidence the attentiveness of individual directors to materials posted on the board portal."
Michael concludes by noting the thrust of Justice Strine's points--that "a more thoughtful approach to the fundamental elements of the M&A process will enhance exercise of business judgment by disinterested board members, and their ability to rely on the advice of impartial experts." All of the points made reflect observations of the Chief Justice emanating from Delaware jurisprudence. Michael also notes that the points made by Justice Strine have application to decision making in other forms of business association as well as the corporation.
I could not agree more with the thesis of the post and the article. Maybe it's just my self-centered, egotistical, former-M&A-lawyer self talking, but good lawyering can make a difference in M&A deals and the (seemingly inevitable) litigation that accompanies them. I wrote about this in my article, A More Critical Use of Fairness Opinions as a Practical Approach to the Behavioral Economics of Mergers and Acquisitions, commenting on Don Langevoort's article, The Behavioral Economics of Mergers and Acquisitions. We should be teaching this in the classroom as we frame the lawyer's role in M&A transactions. I use a quote from Steve Bainbridge to introduce this matter to my Business Associations, Corporate Finance, and Cross-Border M&A students:
Successful transactional lawyers build their practice by perceptibly adding value to their clients’ transactions. From this perspective, the education of a transactional lawyer is a matter of learning where the value in a given transaction comes from and how the lawyer might add even more value to the deal.
Stephen M. Bainbridge, Mergers and Acquisitions 4 (2003). Great stuff, imv. I am sure this quote or one like it is in the current version of this book somewhere, too. But I do not have that with me as I write this. Perhaps if Steve reads this he will add the current cite to the comments . . . ?
At any rate, I want to make a pitch for highlighting the role of the lawyer in guiding the client through the legal minefields--territory that only we can help clients navigate most efficaciously. As business law educators, we have a podium that enables us to do this with law students who are lawyers-in-training about to emerge from the cocoon-like academic environment into the cold, cruel world in which fiduciary duty (derivative and direct) and securities class action litigation is around every transactional corner. Let's give them some pointers on why and how to take on this task!
Wednesday, September 2, 2015
As many readers already know, I teach Corporate Finance in the fall semester as a three-credit-hour planning and drafting seminar. The course is designed to teach students various contexts in which valuations are used in the legal practice of corporate finance, the key features of simple financial instruments, and legal issues common to basic corporate finance transactions (including M&A). In the process of teaching this substance, I introduce the students to various practice tips and tools.
As part of teaching M&A in this course and in my Advanced Business Associations course, I briefly cover the anatomy of an M&A transaction and the structure of a typical M&A agreement. For outside reading on these topics, I am always looking for great practical summaries. For example, Summary of Acquisition Agreements, 51 U. Miami L. Rev. 779 (1997), written by my former Skadden colleagues Lou Kling and Eileen Nugent (together with then law student, Michael Goldman) has been a standard-bearer for me. In recent years, practice summaries available through Bloomberg, LexisNexis, and Westlaw (Practical Law Company) have been great supplements to the Miami Law Review article. In our transaction simulation course, which is more advanced, I often assign part of Anatomy of a Merger, written many moons ago by another former Skadden colleague, Jim Freund. Just this past week, I came across a new, short blog post on the anatomy of a stock purchase agreement on The M&A Lawyer Blog. Although I haven't yet given the post a review for teaching purposes, it is a nice summary in many respects and makes some points not made in other similar resources.
I will be revisiting my approach to the M&A part of my Corporate Finance course in the coming weeks. I am curious about how others teach M&A in a context like this--where the topic must be covered in about three-to-five class hours and include practice points, as well as a review of doctrine, theory, and policy. I am always interested in new materials and approaches that may reach more students better. I invite responses in the comments that may be useful to me and others.
Wednesday, August 26, 2015
Yesterday, my husband and I celebrated our 30th wedding anniversary. I am married to the best husband and dad in the entire world. (Sorry to slight all of my many male family members and friends who are spouses or fathers, but I am knowingly and seriously playing favorites here!) My husband and I bought the anniversary memento pictured below a few years ago, and it just seems to be getting closer and closer to the reality of us as a couple (somewhat endearing, but aging) as time passes . . . .
Of course, our wedding was not the only important event in 1985. There's so much more to celebrate about that year! In fact, it was a banner year in business law. Here are a few of the significant happenings, in no particular order. Most relate to M&A doctrine and practice. I am not sure whether the list is slanted that way because I (a dyed-in-the-wool M&A/Securities lawyer) created it or whether the M&A heyday of the 1980s just spawned a lot of key activity in 1985.
- Smith v. Van Gorkom was decided. It was my 3L year at NYU Law. I remember the opinion being faxed to my Mergers & Acquisitions instructor during our class and being delivered--a big stack of those goofy curly thermal fax paper sheets--to the table in the seminar room where we met. Cool stuff. As I entered practice, business transactional lawyers were altering their advisory practices and their board scripts to take account of the decision.
- Unocal v. Mesa Petroleum was decided. The Delaware Supreme Court established its now famous two-part standard of review for takeover defenses, finding that "there was directorial power to oppose the Mesa tender offer, and to undertake a selective stock exchange made in good faith and upon a reasonable investigation pursuant to a clear duty to protect the corporate enterprise. Further, the selective stock repurchase plan chosen by Unocal is reasonable in relation to the threat that the board rationally and reasonably believed was posed." (The italics were added by me.) More changes to transactional practice . . . .
- Moran v. Household International was decided. As a result, I spent a large part of my first five years of law practice promoting and writing poison pills that innovated off the anti-takeover tool validated in this case. The firm I worked for was on the losing side of the Moran case, so we determined to build a better legal mousetrap, which then became the gold standard.
- The Revised Uniform Limited Partnership Act (RULPA) was amended by the Uniform Law Commission. Among the 1985 changes was an evolution of the rules relating to the liability of limited partners for partnership obligations. The 2001 version of the RULPA took those evolutions to their logical end point, allowing limited partners to enjoy limited liability for partnership obligations even if the limited partners exercise management authority over the partnership.
- Landreth Timber Co. v. Landreth was decided. Stock is a security under the Securities Act of 1933, as amended, unless the context otherwise requires. The Court determined that instruments labeled stock that have the essential attributes of stock should be treated as stock in an offering context, even when the stock is transferred to sell a business. Bye-bye "sale of business" doctrine . . . .
That's enough on 30th anniversaries for this post. I am sure you all will think of more 30th anniversaries in business law that we can celebrate in 2015. Feel free to leave those additional 1985 memories in the comments.
Friday, August 21, 2015
In this interview, Delaware Supreme Court Chief Justice Leo Strine singles out C & J Energy Services, Inc. v. City of Miami General Employees’ ("Nabors"), 107 A.3d 1049 (2014) as, perhaps, the most important opinion he has authored as CJ.
Given such an endorsement, I took time to read the case yesterday. The following paragraphs get to the heart of the case, which overturned the Delaware Court of Chancery's mandate to shop the company at issue.
Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, “there is no single blueprint that a board must follow to fulfill its duties,” and a court applying Revlon ‘s enhanced scrutiny must decide “whether the directors made a reasonable decision, not a perfect decision.”
In a series of decisions in the wake of Revlon, Chancellor Allen correctly read its holding as permitting a board to pursue the transaction it reasonably views as most valuable to stockholders, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so. Such a market check does not have to involve an active solicitation, so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal. The ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context.
Wednesday, May 20, 2015
The centerpiece of the Florange Law is a mandate that French companies give two votes to any share held for longer than two years. This goes against the historical one-vote-for-every-share system that most countries have. The law allows an opt-out if two-thirds of shareholders approve one by March 31, 2016.
ISS issued a guide (Download Impact-of-florange-act-france) opposing the law and encouraging investors to pressure directors to opt out of the law (through amendments to corporate bylaws) before the deadline.
Professor Davidoff Solomon questions the strength of the one-share-one-vote corporate democracy in the U.S., noting that recent IPOs, like Facebook, went public with two classes of stock as a anti-takeover measure. There is also the related question of what impact a law like this would have given the turnover rates of many institutional investors.
Wednesday, May 6, 2015
Monday, I had the privilege of moderating a discussion on structuring merger and acquisition transactions that I had organized as part of a continuing legal education program for the Tennessee Bar Association. Rather than doing the typical comparison/contrast of different business combination structures (with charts, etc.), I organized the hour-long discussion around the banter that corporate/securities and tax folks have in structuring a transaction. We used the terms of a proposed transaction (an LLC business being acquired by a public corporation) as a jumping-off point.
The idea for the format came from a water cooler conversation--literally--among me (in the role of a corporate/securities lawyer), one of my property lawyer colleagues, and one of my tax lawyer colleagues. The conversation started with a question my property law colleague had about the conveyance of assets in a merger. I told him that mergers are not asset conveyance transactions but, rather, statutory transactions that have the effects provided for in the statute, which include a vesting of assets in the surviving corporation. I told him that I call this "merger magic." I showed him Section 259(a) of the Delaware General Corporation Law:
When any merger or consolidation shall have become effective under this chapter, . . . all property, real, personal and mixed, and all debts due to any of said constituent corporations on whatever account, as well for stock subscriptions as all other things in action or belonging to each of such corporations shall be vested in the corporation surviving or resulting from such merger or consolidation . . . .
We discussed the possibility of an assignment/transfer of assets by operation of law under that provision and more generally under Delaware law in connection with different types of mergers, including recent case law regarding reverse triangular mergers. Ultimately, my property law colleague decided that a direct merger involved an asset sale by the target entity and a purchase transaction by the surviving corporation, as a matter of property law, notwithstanding my "merger magic" explanation I was forwarding as a descriptor under state corporate law.
The tax guy thought all this (both descriptions of a merger) was balderdash. These descriptions were too complex and stilted for his taste. Not to be outdone, he offered that all merger and acquisition transactions are either asset sales or sales of equity. At least, he allowed, that's how federal income tax law looks at them . . . . I told him that asset and equity sale transactions are joined by mergers (direct, reverse triangular, and forward triangular) and share exchange transactions (which are also statutory transactions, available in Tennessee and other Model Business Corporation Act states, but not available in Delaware) in the corporate lawyer's business combination toolkit. I also noted that federal securities law voting and reporting requirements work off these different corporate law descriptors.
Fascinating! Three lawyers, three different conceptions of business combination transactions. The moderated discussion on Monday was, in effect, an attempt by me to recreate, albeit in a different form, parts of that conversation. The discussion was, in my view, decently successful in achieving its limited purpose in the program. Nevertheless, I really wish I had a transcription of that original conversation by the water cooler. That was truly priceless . . . .