Friday, June 14, 2013
Next week (Tuesday) we'll hear arguments in the Google shareholder litigation (Complaint). Shareholders are challenging a recapitalization plan that would have Google issue a new series of shares, Series C, that would have no voting rights. Google intends to use this new series of shares as an acquisition currency and to fund stock option programs. Use of these new shares has the side benefit of not diluting the voting control of Google's founders Larry Page and Sergei Brin. So comes the question: is this entirely fair to non-controlling shareholders. In the joint pre-trial stipulation, the parties agree on certain facts and questions that are at issue in the trial. It's worth reading before you dip your toes too far into the Google water. Some of the most relevant questions for the Chancellor to consider taken from the stipulation are below:
1. Whether the Recapitalization is entirely fair.
2. Whether the Recapitalization is motivated, in whole or in large part, by the desire of the Founders to entrench themselves in office for an extended period of time. ...
5. Whether the Special Committee, and each of its members, was disinterested and independent. ...
8. Whether the Special Committee functioned effectively and bargained at arm’s length, with the best interests of the Class A stockholders in mind. ...
10. Whether the failure of the Special Committee to obtain an opinion concerning the relative fairness of the Recapitalization to the two classes of stock, one of which is owned primarily by a controlling group, is in violation of Delaware law.
11. Whether the Special Committee failed in its duties by failing to bargain for limitations on the Founders’ control based on their performance, the passage of time, or other factors. ...
14. Whether Page took steps to undermine the Special Committee process. ...
18. Whether the Proxy Statement misrepresented certain facts, and omitted others, such that defendants breached their duty of candor. ...
If CVN gets the go-ahead to broadcast the arguments, I'll get the popcorn ready and will be along for the ride.
Thursday, June 13, 2013
OK, Rick and Keith again - this time negotiating use restrictions in confidentiality agreements. In this video, they take up the question that tripped up the parties in Martin Marietta v Vulcan - the limits on the use of confidential information as a backdoor standstill. Is it just me, or does Keith look a little like Ben Franklin?
The SEC has just imposed an $850,000 civil penalty on Revlon for misleading disclosures in the run up to its going-private transaction that were the subject of litigation (2009-2010) before the Chancery Court. Vice Chancellor Laster's opinion in In re Revlon S'holder Litig got a lot of attention - in part because of his tongue-lashing of plaintiff's counsel as well as his approval in dicta of forum selection clauses.
The original Revlon transaction called for MacAndrews & Forbes to acquire 100% of the publicly-traded Class A shares. Public shareholders wouldn't receive cash in the transaction. Rather, they would get new Series A Preferred Stock (unlisted) instead. The board was unable to get Barclays to issue a fairness opinion, prompting a change in the structure. Rather than a merger, the board restructured the transasction to be an exchange offer, thus doing away for the messy necessity of special committees and fairness opinions. Vice Chancellor Laster didn't agree.
Turns out the SEC, which scrutinizes 13e-3 disclosures, didn't either. In its order the SEC laid out what it thought was misleading about Revlon's 13e-3 disclosures:
49. Revlon’s third amended exchange offer filing included a section, prominently displayed in bold, entitled “Position of Revlon as to the Fairness of the Exchange Offer.” As a general matter, Revlon disclosed in this section the view of its Independent Board members concerning the fairness of the transaction.
52. Revlon disclosed: “The Board of Directors approved the Exchange Offer and related transactions based upon the totality of the information presented to and considered by its members.” Second, in a related disclosure, Revlon, in disclosing the positive factors it considered for the exchange offer, noted that “the exchange offer . . . [was] unanimously approved by the Independent Directors . . . who were granted full authority to evaluate and negotiate the Exchange Offer and related transactions.”
53. As represented by Revlon to its minority shareholders, the Board’s process in evaluating and approving the exchange offer was full, fair, and complete. The Board’s process, however, was not full, fair, and complete. In particular, the Board’s process was compromised because Revlon concealed – both from minority shareholders and its Independent Board members – that it had engaged in a course of conduct to “ring-fence” the adequate consideration determination.
54. Accordingly, Revlon’s disclosures about the Board’s evaluation of the exchange offer were materially misleading to minority shareholders. Moreover, Revlon’s “ring-fencing” deprived the Board, and in turn, minority shareholders of the opportunity to receive revised, qualified, or supplemental disclosures, including any that might have informed them of the third party financial adviser’s determination that the transaction consideration to be received by 401(k) members in connection with the transaction was inadequate.
55. Third, Revlon materially misled minority shareholders when it stated that unaffiliated shareholders – which included Revlon’s 401(k) members – could decide whether to voluntarily tender their shares. Revlon cited the voluntary nature of the exchange as a positive factor on which the Board relied in approving the exchange offer.
56. In fact, all minority shareholders – as well as its Independent Board members – were unaware that Revlon’s 401(k) members would not be able to tender their shares if an adviser found that the consideration offered for their shares was inadequate. Moreover, Revlon’s non-401(k) minority shareholders were not on equal footing with Revlon’s 401(k) members because Revlon’s 401(k) members received protection as a result of the adviser’s finding that 401(k) members were not provided adequate consideration.
OK, so that's not very pretty. Although the SEC does give 13e-3 filings extra scrutiny, it's not as often that they come in after a transaction and impose fines, so an administrative proceeding here is uncommon. Plaintiff's counsel in Delaware ultimately settled claims in this case for $9.2 million. Fidelity settled its claims with the company on its own got $19.9 million. Now, tack onto that an addtional $850,000 for the SEC.
Wednesday, June 12, 2013
Allison Frankel reports on developments in the fight over the mandatory shareholder arbitration bylaw adopted by the board of Commonwealth. She points to a law professor filing in opposition to the bylaw. The 11 law professors argue that access to public courts is critical to the development and maintenance of good corporate governance:
Absent the transparency and visibility provided by legal proceedings in an open courtroom, and the possibility of a rebuke by a judge, fiduciaries would be much less deterred from violating their duties to shareholders...
That's all true. I think the widespread adoption of mandatory shareholder arbitration would lead to the long term dismantling of corporate governance. I've argued as much with respect to Delaware's Chancery sponsored arbitration procedure in a paper now appearing in the Cardozo Journal of Conflict Resolution.
The Corporate Counsel just published an interview with Chancellor Strine. Some of it is Delaware boosterism - no surprise. But, there are a number of useful tidbits. First, Strine gives examples of what he believes are the two most important issues before his court recently. These won't come as a big surprise to those of you paying attention: 1) don't ask-don't waive provisions; and 2) Caremark liability for directors of US incorporated, foreign headquartered firms. He remains shocked (as am I, frankly) that people would agree to be directors at a distance of business in a country where they don't speak the language.
Another interesting comment - and this is full of irony - turns out Chancellor Strine doesn't think very highly of arbitration -- it's expensive and slow!
...Arbitration is increasingly more expensive than litigation, with some arbitrators charging more than leading M&A lawyers. It’s also often as slow. Worst of all are disputes that bounce between the two, where parties can’t resolve underlying issues, such as whether the matter is arbitrable in the first place.
So the principal advantages of being a Delaware entity are access to efficient dispute resolution services and the ability to rely upon guidance from our corporate law and precedent. Both are important, but the first has become increasingly important in light of the priority placed on business relationships.
Yes. I agree. Just go to court...
Tuesday, June 11, 2013
So it looks like David Murdock, Dole's CEO and 40% shareholder, is putting in an offer to take Dole Foods private at $12/share. According to the WSJ, this offer is subject to two conditions: 1) that a najority of the disinterested directors approve it; and 2) that it be approved by a majority of the minority shareholders.
Why would Murdock make it clear in his initial offer to the board that he has those two conditions? Isn't that for the board to decide? Well, it looks like Murdock's lawyers have been up late reading. Remember In re MFW S'holders Litigation from 10 days ago. Chancellor Strine is trying to bring some order to the question of standards of review of transactions involving controlling shareholders. In MFW he provided Murdock and his lawyers the following bit of help:
When a controlling stockholder merger has, from the time of the controller’s first overture, been subject to:
(i) negotiation and approval by a special committee of independent directors fully empowered to say no, and
(ii) approval by an uncoerced, fully informed vote of a majority of the minority investors,
the business judgment rule standard of review applies.
And that's what Murdock is setting up for here. By relying on robust procedural protections Murdock is hoping to get the deferential business judgement standard to apply to his deal to take Dole private. So will will this get litigated? Well, yes. So, a very quick first test for Chancellor Strine's unified approach.