Friday, May 28, 2010
Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger). In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both
(i) negotiated and recommended by a special committee of independent directors and
(ii) conditioned on a majority-of-the-minority tender or vote.
Thursday, May 27, 2010
This week the FBI arrested the administrative assistant to a high-level Disney executive and her boyfriend. Turns out they were not the smartest couple of inside traders out there. The SEC’s complaint speaks for itself:
9. Beginning in early March 2010, various hedge funds, including several in New York, received letters from an anonymous sender claiming to be able to obtain pre-release access to Disney’s 2Q-2010 quarterly earnings report and offering to share such information prior to its public release for a fee. The letters, post-marked from Los Angeles, California, stated:
Hi, I have access to Disney’s (DIS) quarterly earnings report before its release on 05/03/10 [sic]. I am willing to share this information for a fee that we can determine later. I am sorry but I can’t disclose my identity for confidentiality reasons but we can correspond by email if you would like to discuss it. My email is firstname.lastname@example.org. I count on your discretion as you can count on mine. Thank you and I look forward to talking to you.
10. At least twenty hedge funds, including funds based in several U.S. states and European countries, received the same or substantially the same letter
Discretion. Right. Randomly sending letters out to hedgefunds advertizing an offer to engage in insider trading ahead of earnings calls – that’s discretion? Of course multiple hedge funds forwarded this letter on to the FBI and they promptly set up a sting operation. The substance of the negotiation between the hapless boyfriend and the FBI went something like this:
• “First of all, i am not a fed, I have no way to prove it at this point but i am not asking you to disclose your identity not i will disclose mine. It is up to you to determine if this is worth the risk as i did. I work for Disney, that is all i can tell you.”
But did he ask them if the guys on the other end of the e-mail were Feds? Apparently not.
• As i said in my letter, i am able to get the earnings report of Disney 3 to 4 days before they are out. I will be happy to email them to you for a fee that you can pay after you close your trades. Let me know if you are interested and how much i will get from you for this transaction. Also, i am looking to build a relationship for future earnings and other insider news.”
• I am not asking for any payment up front, i will email you the earnings report and you can pay me after. I was thinking that $20000 is a fair compensation but you are free to make an offer.”
• I am very serious and i will show you that very soon. $15k sounds great and $30k even better as i hope you will make a killing from Q2 earnings. I promise i will keep you informed of any unanticipated event, i keep my ears wide open here.”
And just how profitable was this alleged scheme for the administrative assistant who apparently risked her career and may end up going to jail? She allegedly did it for a handbag and shoes.
[Bonnie] Hoxie stated “here is the bag that you are going to get for me – thank [sic],” and attached a link to a picture of an expensive Stella McCartney designer handbag available for $700 at Neiman Marcus, an upscale department store. Sebbag replied that he would get Hoxie the bag “next week.” Anticipating that they would receive substantial compensation from the Putative Traders, Sebbag stated “I may be able to [buy] u 2 of them, lol.” Hoxie responded via email, “In that case, i also love love these shoes” and attached a link to a picture of expensive Stella McCartney shoes also sold at Neiman Marcus.
Back in March, Prudential announced a $35.5 billion purchase of American International Assurance, the Asian arm of A.I.G. (for more info see this prior post). The deal hit some snags early on because of regulator concern about Prudential's capital. Prudential is also encountering serious resistance from investors as it tries to complete a $21 billion rights offering in order to finance the deal. The offering requires a shareholder vote (a whopping 75% of the shares that are voted) and the Prudential shareholder meeting is scheduled for June 7th. The economist magazine has come out in favor of the deal, seeing it as more about "uniting competitors in Hong Kong and Singapore, which comprise about half of the activities in Asia of both AIA and Prudential" than about destiny and empire building. But now RiskMetrics has now entered the fray and recommended a vote against the deal. The concern is that Prudential may be overpaying for this deal, and that post-acquisition many of AIA’s people may leave to join the company’s rivals.
Prudential's management has not done an amazing job selling this rather expensive deal to their shareholders. Will this be another big deal that goes bust?
The University of New Mexico School of Law invites applications for a faculty position beginning in the fall of 2011, teaching in UNM's Business and Tax Clinic. The Business and Tax Clinic is part of UNM's nationally-ranked clinical law program. This Clinic teaches students to practice law in a commercial setting, specifically assisting individuals, small businesses and non-profit corporations with a variety of transactional and dispute resolution issues, as well as clients with consumer, debtor-creditor, tax, and home mortgage issues. It emphasizes economic development issues and collaborates with our other clinics. The position is full-time and may be probationary leading to a tenure decision, tenured, or visiting. Salary and terms of employment will depend upon the qualifications of the successful candidate.
For best consideration, applicants should apply by June 30th, 2010. The position will remain open until filled. Applicants should attach their cover letter and CV to their online application via the UNMJobs website:
The position is listed as posting number 0806253.
Wednesday, May 26, 2010
I’ve mentioned reverse termination fees previously on this blog. For those of you who attended the ABA Business Law Section’s meetings in April, you’ll know that the Practical Law Company has put together an analysis of RTFs and other remedies "available to target companies in public merger agreements for a buyer's failure to close the transaction because of a willful breach or a financing failure." The PLC study is a sophisticated analysis of RTFs and specific performance remedies in public deals announced between Q1 2009 and Q1 2010. I highly recommend taking a look. The study can be found here.
In the vein of life mimicking possible exam questions - Morris James points out a recent case in the Delaware Chancery Court, Arkansas Teacher Retirement System v Caiaf a ("TRS"). The issue relates to whether a plaintiff may maintain standing in a derivative suit following a merger. The answer is generally no.
Other than in instances of fraud or reorganization, a plaintiff loses standing to maintain a derivative suit where the corporation, in which the plaintiff holds stock, merges with another company (Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984)). A stockholder may maintain his post-merger suit “if the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive stockholders of the standing to bring a derivative action."
This is just another reason why injunctive relief plays such an important role in merger-related litigation. If the plaintiffs don't seek an injunction to prevent the merger from going forward they risk having their claim extinguished as soon as the transaction closes. The only exception to this is, as TRS points outs, when the plaintiffs plead that the merger is a fraud merely to deprive the shareholders of standing.
Tuesday, May 25, 2010
First, my apologies for recent paucity of posts. I've come down with a common seasonal affliction - exams, grading, and then graduation. It's an odd time of year when all my normal routines go out the window and I find myself buried under piles of exams. I'm almost better. I should be back to normal by Monday next week.
In the meantime, I'm fascinated by the ongoing intrigue over at the St. Louis Rams. When we last checked in, the Rosenblooms had negotiated to sell their stake to Illinois businessman Shahid Khan. Rams' minority owner, Stan Kroenke, then exercised his right of first refusal to purchase the 60% of the Rams owned by the Rosenberg family. Kroenke's attempt to exercise his right of first refusal has run into an obstacle - the NFL's cross ownership rules, which prevent cross-ownership across professional sports of sporting teams outside the owners home markets or in other markets with NFL franchises. Apparently, Kroenke has been trying to creatively figure out a way to have his cake and eat it too. According to St.Louistoday.com Kroenke may by attempting to substitute his wife, Anne, for himself in his bid for the Rams in order to avoid having to sell his positions in his basketball and hockey teams. That might work by Kroenke simply assigning his right to match to a group headed by his wife, or by making a bid himself and then immediately turning around and then selling his position to his wife's group. It's hard to imagine that the Rams limited partnership agreement would permit the transfer of a right of first refusal, but we'll see.
The NFL owners are meeting today in Dallas and will discuss the Rams sale among other issues.
Wednesday, May 19, 2010
Perhaps his next article should be "Death of the Solo Blawg"
Given the synergies, I am sure this will be a fantastically successful combination. Congratulations.
Tuesday, May 18, 2010
Last night I attended a fascinating lecture at Stanford’s Rock Center for Corporate Governance by Delaware Vice Chancellor Strine about the lack of alignment in the corporate governance system. Speaking to a packed crowd, Chancellor Strine made a compelling case for a deeper understanding of what we are asking of boards through our various corporate governance reforms. Among his many interesting points, he made two important insights about the role of directors on boards. First, he asked academics to work on “a more or less study” that looks at (i) what more have we given managers to do? and (ii) what less have we required of them? His point was essentially that we have imposed stringent independent director requirements and then heaped more and more responsibility on these independent directors. One worry is of course that humans are bound to make mistakes especially when they have too much on their plates. The other worry is whether these independent directors have the time, skills and company-specific knowledge to effectively manage and monitor risks.
Chancellor Strine’s second point about independent directors was that the increasing push for independent directors has resulted in independent director politicians that serve on many boards and may be beholden to other interests outside of the interests of the particular company that they are serving. These latter comments made me think about a recent paper entitled, The Dark Side of Outside Directors: Do They Quit When They are Most Needed? by Rüdiger Fahlenbrach, Angie Low and Rene M. Stulz. It’s worth a read:
Abstract: Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
Tomorrow, I’ll post about how Chancellor Strine’s comments relate to some important issues in corporate governance reforms outside of the United States.
Monday, May 17, 2010
When an over-leveraged LBO turns out to have an unsustainable capital structure, creditors in an ensuing bankruptcy or other restructuring MAY seek to recover payments made to selling shareholders in the LBO as fraudulent conveyances. In this client alert, WGM describes what selling sponsors can do to mitigate the risk of successful post-LBO fraudulent conveyance claims.
For those of us on a university calendar, it's already summer. It's a great time of year to attack that pile of reading that's been accumulating on the corner of my desk. Funny, reprints no longer take up much space on my desk since I get most of that stuff online these days. I do have an increasingly large pile of books, however. At the top of that pile is Guhan Subramanian's Negotiauctions. Negotiauctions builds on an earlier work Prof. Subramanian did with Richard Zeckhauser on negotiations and the sale process. Subramanian defines a "negotiauction" as a process in which the seller is both a passive player (the auction component) as well as an active player (the negotiation component). During the auction component, Subramanian notes, the bidders do much of the work in terms of pushing up the price. During the negotiation component, which may be simultaneous with the auction component, boards of sellers take a much more active role in generating value. Although life would be easier if the merger process were simply a binary process, Prof. Subramanian is entirely correct in his set up. It's both. That's what can make it so complex. On the one hand deal protection measures can hinder an auction, on the other a well-motivated board can use the same measures to negotiate a higher value. It's a world of grey.
This book is steeped in the academic literature of auction theory and negotiations, but is written for a more general audience. It's well worth the read. The Kindle edition means that you can even read it on vacaction.
Friday, May 14, 2010
I wanted to follow up on an earlier post, Triggering Revlon with Nonconvertible Debt. In the last paragraph of that post I noted that Lyondell reminds us that good faith claims are very hard to win. Stefan Padfield (Business Law Prof Blog) wrote me to remind me that the presence of an optional 102(b)(7) provision in the certificate is what is really motivating the good faith litigation.
It's Friday, and the last day of exams in many places, so it's probably worth quickly walking through why 102(b)(7) matters and the role it's playing in many of these cases, like Binks.
In Van Gorkom the court found directors had breached their duty of care when - among other things - they approved a merger agreement without adequately informing themselves of the agreement's contents. The directors in that case had to pay damages. The response to this decision was swift. Delaware adopted Sec. 102(b)(7) which permits corporations to include provisions eliminating monetary damages for director for any breach of fiduciary duty. This limitation on personal liability is subject to certain conditions. A corporation may not eliminate liability for any of the following:
(i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit.
This language basically tells you that with a 102(b)(7) provision in its certificate there are no monetary damages for Van Gorkom-like violations of the duty of care. Where there is only a care claim at stake and where plaintiffs are only seeking monetary damages, then courts will permit defendants to raise 102(b)(7) as an affirmative defense and will dismiss these cases at the earliest possible moment.
Now, the drafters 102(b)(7) could have just said a corporation may only eliminate liability for monetary damages for any violation of the director's duty of care, but they didn't. What they did was create some unintended ambiguities that created an opportunity for creative plaintiff counsel to bring new claims. In this case, the language that does not permit exculpation of acts not in good faith became a license for new claims. The plaintiff’s strategy in the face of a 102(b)(7) provisions was to take an act by an otherwise independent and informed board that should by all rights be a care claim and convert it into a claim for which there might be the prospect of monetary damages. By arguing that directors acted in bad faith, it might be possible to convert a care claim into a claim for damages. Plaintiffs made that argument with gusto.
In Lyondell, the plaintiffs again made an argument that an otherwise independent board had violated its fiduciary duties when it agreed to sell the company. Plaintiffs argued that the board’s failure was not one of care, but that they had acted in bad faith. Had this argument won the day, the action would have survived summary judgment and what would otherwise be an exculpable care claim would have been converted to a loyalty claim for which monetary damages would be available.
The court in Lyondell recognized that there may be some violations of a director’s duty of care – for example a failure to act in the face of a known duty – that can rise to the level of acts not in good faith. However, in order to make the magical conversion from an exculpable care claim to a non-exculpable loyalty claim, the facts must be extreme. That’s where the court’s language “utter failure” comes into play. To convert a care claim to a loyalty claim, a board would have to utterly fail to act in the face of a known duty.
It’s hard to utterly fail. I mean, you really have to try. Think about how malleable the Revlon standard is. There is no single blueprint to guide a board on how to fulfill their obligations under Revlon. In the face of several reasonable alternatives, a court is not going to step in and tell an informed and disinterested board that it picked the wrong one. It’s hard to imagine how a well-advised board would ever run afoul of Revlon's reasonableness standard to such a degree that it utterly fails. I guess it could happen, but it’s not going to happen very often.
Is it Summer already?
Tuesday, May 11, 2010
Paul Thayer, former CEO of LTV, passed away last week. Obits here and here. LTV was the iconic conglomerate of the 1950s and the Go-Go 1960s. LTV was put together by Jimmy Ling, one of the biggest characters of the conglomerate era. He amassed a slew of mismatched corporate entities under the LTV umbrella. By 1969 its 33 different divisions spanned the gamut from meatballs, golfballs to goofballs. It was an eclectic mix with almost no synergies, unless you think that food service, sports equipment and aerospace go together. In 1970 Jimmy Ling was ousted by the LTV board and replaced by Paul Thayer, who was president of the Vought division of LTV (the "V" in LTV). He may have been one of the first to recognize that the conglomerate was a business model without a future. Thayer spent the next 12 years shedding non-core assets and focusing LTV into a profitable operating company. In doing so Thayer helped usher in the LBO boom of the 1980s. He's worth remembering.
Monday, May 10, 2010
It doesn't happen often. But, that doesn't mean it doesn't happen. The FTC is now suing Dun & Bradstreet (H/T Main Justice) to unwind a transaction D&B closed last year. According to the complaint, D&B acquired the Quality Education Data (QED), a division of Scholastic, Inc., in an asset purchase and integrated QED with its own Market Data Retrieval unit in February 2009. The FTC sums up the transaction this way:
Market Data Retrieval (“MDR”), a company of D&B, is the leading provider of data for marketing to kindergarten through twelfth-grade teachers, administrators, schools and school districts (“K-12 data”) in the
. K-12 data includes but is not limited to contact, demographic and other information relating to K-12 educators. K-12 data is sold or leased to customers that use the data to market products and services to educators. In early 2009, D&B acquired the assets of QED, MDR’s primary competitor. As a result of the acquisition, MDR now holds over 90% of the relevant market, with only a small fringe consisting of two firms accounting for the remainder. This transaction is in practical effect a merger-to-monopoly and, if allowed to remain, would likely allow MDR unilaterally to exercise market power in various ways, including increasing prices and reducing product quality and services to K-12 data customers. United States
"Merge-to-monopoly"? Acquiring your “primary competitor”? Neither of those sound good. In fact, they’re
not. So, why didn’t the HSR process
catch this transaction? Simply put, the
deal was too small to trigger a required HSR filing. The transaction was valued at $29 million,
well below the $69 million trigger at the time.
It was probably unwise not to file anyway. Certainly, in antitrust sensitive
transactions the FTC will accept a voluntary filing. Here it looks like the parties decided against such a filing. They either
neglected to consult antitrust counsel on the transaction, or they did, and then took
a shot (in Feb 2009) that the somnolent attitude towards enforcement that was a
hallmark of the previous administration would continue going forward. And anyway … unscrambling the eggs post
closing is so expensive and time-consuming, the FTC wouldn’t waste their time
on such a small market. Would they?
"Merge-to-monopoly"? Acquiring your “primary competitor”? Neither of those sound good. In fact, they’re not. So, why didn’t the HSR process catch this transaction? Simply put, the deal was too small to trigger a required HSR filing. The transaction was valued at $29 million, well below the $69 million trigger at the time. It was probably unwise not to file anyway. Certainly, in antitrust sensitive transactions the FTC will accept a voluntary filing. Here it looks like the parties decided against such a filing. They either neglected to consult antitrust counsel on the transaction, or they did, and then took a shot (in Feb 2009) that the somnolent attitude towards enforcement that was a hallmark of the previous administration would continue going forward. And anyway … unscrambling the eggs post closing is so expensive and time-consuming, the FTC wouldn’t waste their time on such a small market. Would they?
They would. Here's a little advice from the FTC's Richard Feinstein, Director of the Bureau of Competition:
They would. Here's a little advice from the FTC's Richard Feinstein, Director of the Bureau of Competition:
Despite its relatively low dollar value, this transaction dramatically decreased competition in the marketplace. When Dun & Bradstreet acquired QED, it bought its closest competitor and created a monopoly. That’s going to get the FTC’s attention every time.
While a voluntary HSR filing would not have created an absolute safe harbor from a subsequent antitrust suit, it might have cleared the ground and allowed the parties to address the government's antitrust concerns earlier on in the process - before there had been any integration work, before there had been any joint marketing, etc. True, making such a filing might have added additional costs and added time to an otherwise small transaction. These are common cost/benefit questions that parties have to consider with antitrust counsel in these kinds of transactions. They can be close calls. In this case, it looks like the parties may have made the wrong call. By avoiding a voluntary pre-closing process, the parties have apparently triggered a worse fate - the potential that the government will come in ex post and undo a deal that closed more than a year ago.
Update: A reader helpfully points out the following:
Friday, May 7, 2010
Investor Ron Burkle has had an ongoing dispute with the Barnes
& Noble board over the shareholder rights plan it put in place recently.
Burkle claims the board adopted it to prevent him from making running a
proxy contest. Let’s leave aside for the moment whether or not the BKS
pill actually prevents a proxy contest from being successful. Now, Burkle
has filed suit in the Delaware Chancery Court (complaint). In his complaint, Burkle alleges that
the Riggio family have used BKS as their “personal piggy bank”, alleging a
series of self-dealing transactions.
In my corporations class I often use the following hypothetical to describe the quintessential self-dealing transaction: The controlling shareholder of the corporation causes the corporation to hire his brother’s transportation company to handle all the transportation needs of the corporation. Wouldn’t you know it, that’s the fourth of a series of self-dealing transaction that Burkle alleges!
In any event, the heart of this suit is Burkle’s challenge to the pill. Burkle plans to run a short slate of three directors at the next annual meeting. In his challenge, he is focused on the language in the rights plan that would trigger it in the event shareholders “cooperate” to influence control of BKS. Burkle’s basic argument is that anyone who might agree to vote with him could be construed as “cooperating” and thus be subject to dilution. The effect he argues would be to dissuade anyone from voting for his short slate for fear that their vote would constitute cooperation.
I took a quick look at the Lions Gate rights plan to get a sense whether the cooperation language is common. That plan extends the dilutive effects of the pill to the Acquiring Person and anyone “acting jointly or in concert with the Acquiring Person.” I don’t know…cooperating…acting in concert…it’s a close call. The argument that Burkle is making is not that the pill will prevent him from running, or even succeeding to win, a proxy contest. The courts have already examined this question (Moran v Household) and found that the pill does not significantly deter a proxy contest from going forward.
In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the “beneficial owner” of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of “beneficial owner” would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the “beneficial owner” of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.
Now, it may be that the trigger for the Moran pill did not extend the trigger to persons “cooperating” with a beneficial owner or “acting in concert” with a beneficial owner, but I guess we’ll see.
Thursday, May 6, 2010
Delaware courts and corporate lawyers seem to be paying a lot of attention to the recent paper by John Armour, Bernie Black and Brian Cheffins entitled "Is Delaware Losing its Cases?" We've blogged previously about this paper. Now it looks like some firms may be advising clients to select "the Delaware Court of Chancery as the exclusive forum for the resolution of all intra-corporate disputes including claims asserting breach of fiduciary duty or seeking, under state law, to overturn directors’ business judgments concerning matters ranging from the routine to potential M&A or other transformative transactions." According to a recent memo by Latham and Watkins, the firm is recommending that "Delaware companies consider adopting mandatory Delaware Chancery forum selection provisions in their charter or bylaws in connection with their regular review of governance practices." The Latham memo argues that, given Delaware's substantial expertise in corporate law, mandatory Delaware jurisdiction for intra-corporate suits benefits both public companies and their shareholders. Latham's memo is based in part on dicta by Chancellor Laster in the recent In re Revlon, Inc. Shareholders Litig. Scholar Faith Stevelman in a recent 2009 paper addressed some of the issues with this type of provision.
Are other firms doing the same? And, will there be a backlash by plaintiffs' lawyers outside of Delaware?
Maybe, but so what? The WSJ and Reuters are reporting that Berkshire Hathaway may have run afoul of the Williams Act's early warning disclosure requirements by not filing a timely amendment to its Schedule 13D in connection with its acquisition of Burlington Northern Santa Fe Corp last Fall. Berkshire filed its second amendment to its Schedule 13D in order to report that it had signed a merger agreement with Burlington Northern on November 3, 2009. Rule 13d-2 requires that if there are any material changes to the facts set out in the Schedule 13D that the filer is required to amend the filing. In this case, the original Schedule 13D filed in 2008 noted that the investment was for "investment purposes" and did not disclose any intention to acquire all of BNSF. Reading the rule strictly, the moment Berkshire's purpose for holding the shares turned from investment to acquiring control, Berkshire had an obligation to amend its 13D (within 10 days). Presumably the merger negotiations took longer than 10 days to initiate and complete.
OK, so maybe there was a technical violation. But, there's no NACCO-like fraud allegation or shareholder suit to go along with this violation. There's just discussion of the SEC looking into the matter. Is there any remedy worth pursuing here? I guess the SEC could seek an order to cause Berkshire to come into compliance. But, with its November 3, 2009 filing Berkshire is already in compliance. There isn't much to be done and there's hardly seems a remedy worth pursuing.
Wednesday, May 5, 2010
There has been a lot of fun merger activity and news lately. Unfortunately for me, I’ve been bogged down in end of the semester exam angst. But there is a deal that has caught my attention (in my prior life, I was a Silicon Valley lawyer): HP’s proposed $1.2 billion acquisition of Palm. HP is certainly no stranger to large tech deals, and it’s no secret that Palm has been trying to find a suitor. There is some speculation about whether now that HP has stepped up other suitors will emerge given Palm’s valuable patent portfolio which some value at approximately $1.4 billion. Of course, the usual crowds have already started investigating whether the Palm board breached its fiduciary duty to its shareholders in agreeing to sell the company to HP. According to one plaintiff’s side firm “the deal is suspicious because it appears from a review of the Company's financial statements that the inherent value of the Company's stock is greater than $5.70 per share, because the share price was as high as $6.29 just this month prior to the announcement of the deal, because the share price has been as high as $13.58 just this year and also because it appears that the Company's Board of Directors failed to shop the Company to other potential buyers to assure that its shareholders would receive the best price possible for their shares.” For those of you familiar with Delaware case law on this type of acquisition, you know well that Palm’s sale to HP is a change of control transaction that implicates Revlon duties. But, this will likely be a tough case to win on fiduciary duty grounds as the Delaware courts have stated that "there are no legally prescribed steps that directors must follow to satisfy their Revlon duties." As we have noted many times on this blog, the Delaware Supreme Court’s recent decision in Lyondell Chemical Company v. Ryan seems to confirm that only an utter failure to attempt to secure maximum value will cause directors to run afoul of their obligations under Revlon. Moreover, the terms of the Palm-HP acquisition agreement give a lot of room for a higher bidder to emerge. The $33 million termination fee is fairly low (approximately 2.75% of the deal value) and Palm’s board has a typical fiduciary out. So will other suitors come knocking at Palm’s door?
One of the most common search terms to find this site in the past week or so has been "What triggers Revlon duties?" Now, this has little to do with the business cycle and much more to do with the cycle of law school exams. It's about this time when students are sitting in the library, looking over their incomprehensible notes, and asking themselves, "What triggers Revlon?" I know. I was in that same situation myself.
Almost as if on cue, the Chancery Court hands down decision in Binks v DSL.net dealing with Revlon duties in the context of the issuance of convertible notes (H/T Morris James). It’s a nice review of the state of the law with a slight twist on the facts. The case involves a transaction between DSL.net and MegaPath. DSL was in financial trouble in 2006 and rather than enter bankruptcy entered into a transaction with MegaPath. MegaPath lent DSL.net $13 million and took convertible notes. A few months after the transaction, MegaPath converted its notes to equity and ended up with more than 90% of DSL's common stock. Shortly thereafter MegaPath effected a short form merger to eliminate the minority stockholders.
Plaintiffs argued at the motion to dismiss stage that issuance of the convertible notes represented a potential "change in control" and that the DSL.net directors had an obligation under Revlon to "obtain the best price reasonably available to shareholders." The Plaintiff didn't argued that the board should have held an auction or that a successful auction was likely. Rather, the plaintiff argued the deal the board made with MegaPath essentially permitted MegaPath to loot DSL and that there were a number of other reasonable alternatives that would have left DSL shareholders better off than the issuance of convertible notes (e.g. DSL.net had $50 million in NOLs that could have been used to engineer a transaction).
First, to the question whether Revlon is the applicable standard in the case at the motion to dismiss stage, the court answers in the affirmative, noting that the issuance of the convertible notes can be interpreted as a change in control:
It is not unreasonable to review the Amended Complaint as alleging that the short-form Merger was an inevitable and foreseeable consequence of the MegaPath Financing Transaction. As the Supreme Court in QVC pointed out, in determining whether the transaction constitutes a "change of control" for Revlon purposes, "the answer must be sought in the specific circumstances surrounding the transaction." Inferring that the relevant events should be collapsed for analytical purposes into a single transaction is also consistent with this Court's earlier consideration of the issue:
I assume for purposes of deciding this case, without deciding, that the granting of immediately exercisable warrants, which, if exercised, would give the holder voting control of the corporation, is a transaction of the type that warrants the imposition of the special duties and special standard of [Revlon].
This assumption arose out of the Court's recognition that Revlon duties may arise when a board, as here, "approves a transaction having a change in control effect ( ... specifically ... where a corporate action plays a necessary part in the formation of a control block where one did not previously exist.)
In applying Revlon, the court finds that the plaintiffs did not offer sufficient evidence to support a finding that the board was not independent and disinterested. The Court also noted that the plaintiff’s complaint was devoid of facts suggesting that the board was not adequately informed. With all that in place, the court laid out its standard for deciding this case under Revlon:
Where a board is found to be independent, disinterested, and adequately informed, the decision to enter into a change in control transaction should be upheld unless the directors “utterly failed to attempt to obtain the best sale price … ‘Because there can be several reasoned ways to try to maximize value, the court cannot find fault so long as the directors a reasoned course of action.’ Here the board’s conclusion that the Megapath Financing Transaction was preferable to bankruptcy was within its business judgment.
The Court reiterates the basic holding in Lyondell, that good faith claims (essentially a claim that attempts to convert a care violation into a loyalty violation) are very hard to win and require extreme facts – facts that suggest “utter failure”. These days when even the last kid on the bench of the last place team gets a trophy, it’s hard to imagine what “utter failure” might look like in the corporate context.