July 1, 2010
NOL Pill Arguments Set
The Delaware Supreme Court has set July 7 for arguments in Versata's appeal of Vice Chancellor Noble's ruling in Selectica v Versata. Briefs in the case are available via the Harvard Corporate Governance Blog. (Versata's brief and Selectica's answering brief). The issue at stake is the legality of a shareholder rights plan with a 4.99% trigger adopted to protect Selectica's NOLs. The Chancery Court held that board's adoption of the plan was consistent with their obligations under Unocal. Hopefully the argument will be carried on CVN so we can watch from the luxury home.
June 30, 2010
Loyalty Pleading Standards
Chancellor Chandler reminds us in a letter opinion in Monroe County Employee Retire. Sys. v Carlson, et al (H/T Morris James) that at the pleading stage it isn't enough for plaintiffs to simply point to a transaction where directors or insiders sit on both sides. Plaintiffs also have to plead some facts to suggest that the transaction itself is unfair before the defendants are required to shoulder the exacting entire fairness burden.
[The parties] agree about defendants’ burden at the proof stage of the proceedings. The parties sharply disagree, however, about plaintiff’s burden at the pleading stage of the proceedings; the stage in which we find ourselves situated. Plaintiff argues that to survive a motion to dismiss the complaint need only allege that a transaction between the controlling shareholder and the company exists. Defendants argue that this is insufficient, that plaintiff must make factual allegations in its complaint that, if proved, would establish that the challenged transactions are not entirely fair. Defendants have the winning argument on this point. 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. 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. Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness.In the context of a going private transaction, it isn't enough that the plaintiffs plead that there is a controlling shareholder on both sides of the transaction. In order to survive the pleading stage, the plaintiff will also have to plead some facts that demonstrate the unfairness of the transaction. That's not the same as proving unfairness, but you have to have some facts. Remember entire fairness includes both fair dealing and fair price. Facts that demonstrate a flawed process are helpful in making the case, but if the flawed process nevertheless resulted in a fair price as a plaintiff you might find yourself out of luck.
June 29, 2010
Why Diligence Matters
Last word on this for the day. Imagine you are tasked with conducting a diligence exercise on a target. Maybe you have no idea what you're supposed to look for when the target opens up their data room. Here's a hint. If you stumble upon something like this, start taking notes.
The Role of Diligence
This is another post aimed at summer associates and junior lawyers. That research memo on blue sky laws in Guam can be safely put aside - you've got your first real M&A assignment. A senior associate has asked you to help her with "due diligence" on an acquisition target. If you are like me at that stage, you quickly realize that you have precious little understanding of what's expected of you in a diligence exercise. Instruction given junior lawyers with respect to diligence exercises is typically minimal and very narrowly focused. Jeff Weiner has recently posted his Conceptual Framework for Due Diligence in M&A that's worth downloading and reading. It's a good 20,000 foot overview of the importance and the role of the diligence exercise. OK, but you're saying, will it help me build a capitalization table or figure out if the target's board book is in shape? Probably not, but it does place the exercise in context and makes it clear that it's not just a make work assignment. For a more granular "how to" on diligence Jeff recommends Crilly's Due Diligence Handbook. However, given the price tag for the handbook, you won't want to buy one for yourself.
June 28, 2010
Supreme Court Narrows Scope of "Honest Services" Prosecution
The U.S. Supreme Court recently vacated the conspiracy conviction (premised on an improper theory of "honest services" wire fraud) of former Enron chief executive officer Jeffrey Skilling. In vacating the conviction, the Court essentially narrowed the scope of the U.S. wire fraud statute. As a result, prosecutors will likely be deterred from bringing mail and wire fraud charges against corporate executives whose alleged acts of disloyalty do not involve the receipt of bribes or kickbacks. Read this alert from Proskauer Rose to learn more about the decision and its ramifications.
The Supreme Court just handed down its opinion in the PCAOB case. The court ruled along familiar 5-4 lines that the way the accounting board was created in violation of the President's appointment power. From the opinion:
The Government errs in arguing that, even if some constraints on the removal of inferior executive officers might violate the Constitution, the restrictions here do not. There is no construction of the Commission’s good-cause removal power that is broad enough to avoid invalidation. Nor is the Commission’s broad power over Board functions the equivalent of a power to remove Board members. Altering the Board’s budget or powers is not a meaningful way to control an inferior officer; the Commission cannot supervise individual Board members if it must destroy the Board in order to fix it. Moreover, the Commission’s power over the Board is hardly plenary, as the Board may take significant enforcement actions largely independently of the Commission. Enacting new SEC rules through the required notice and comment procedures would be a poor means of micro-managing the Board, and without certain findings, the Act forbids any general rule requiring SEC preapproval of Board actions. Finally, the Sarbanes-Oxley Act is highly unusual in committing substantial executive authority to officers protected by two layers of good-cause removal.
I'll admit it, there's a
I'll admit it, there's alittle too much con law on this blog for me these days.
Update: The Court's ruling that the appointments process used to staff PCAOB is unconstitutional does not mean that the entire Sarbanes-Oxley Act is unconstitutional. The court considered the question severable:
We reject such a broad holding. Instead, we agree with the Government that the unconstitutional tenure provisions are severable from the remainder of the statute. “Generally speaking, when confronting a constitutional flaw in a statute, we try to limit the solution to the problem,” severing any “problematic portions while leaving the remainder intact.” […] Because “[t]he unconstitutionality of a part of an Act does not necessarily defeat or affect the validity of its remaining provisions,” […] the “normal rule” is “that partial, rather than facial, invalidation is the required course,” Putting to one side petitioners’ Appointments Clause challenges (addressed below), the existence of the Board does not violate the separation of powers, but the substantive removal restrictions imposed by §§7211(e)(6) and 7217(d)(3) do.”
The PCAOB Appointments Clause falls. The rest of it stands.
Helpful Drafting Tips
Ken Adams' excellent bog, AdamsDrafting, has another good post with helpful drafting hints. This one relates to the use of "material" as a modifier in the representations and warranties. I love this. It's the kind of stuff that makes every lawyer's heart skip - "But only represented that I wasn't in violation of a material law, not that I wasn't in material violation of any law!!"
Ken's blog is a must-read for anyone in the drafting business, which is just about all of you.