Friday, August 23, 2013
What better way to end the summer and ring in a new academic year (just around the corner), than to post another of this great series of transaction videos by Rick Climan. In this end of summer edition, it's the 'hell or high water' deal:
Wednesday, August 21, 2013
There has been a bit of back and forth recently about under what circumstances boards might have some duty to shareholders to carve-out derivative claims to prevent them from being extinguished by a merger (see e.g. Massey and Countrywide). Now Michael Sirkin, a former Laster clerk, has posted a paper, Standing at the Singularity, in which he proposes a way forward. Here's the abstract:
Abstract: This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration of existing Delaware law under which Delaware courts would follow three black-letter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders’ derivative standing; and (3) stockholders of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts.
Tuesday, August 20, 2013
More clarity on under what conditions a transaction involving a controlling shareholder can get business judgment review. In MFW Shareholder Litigation Chancellor Strine laid out guidance about under what conditions a controller can expect business judgment review for a transaction with the corporation. Two weeks ago, Vice Chancellor Noble handed down a decision in SEPTA v Volganau in which he dealt with a related question – under what circumstances is a transaction entitled to business judgment review when that transaction involves a controller and a sale of the corporation to a third party. He also provides some context with a comparison to MRW:
B. A Note on In re MFW Shareholders Litigation As an initial matter, the Court’s recent decision in In re MFW Shareholders Litigation (“MFW”)82 illuminates many of the procedural protections at issue in this case. For the first time, the Court addressed the question whether, and under what conditions, a merger between a controlling stockholder and its subsidiary could be reviewed under the business judgment rule, as opposed to the entire fairness standard. The Court held that the business judgment rule could apply if all of the following conditions were satisfied:(1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.83 In concluding that this structure would benefit minority stockholders, the Court explained:
[S]tockholders get the benefits of independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason, plus the critical ability to determine for themselves whether to accept any deal that their negotiating agents recommend to them.84
The Court further reasoned that, because these procedural protections had the effect of replicating an arms’ length transaction, they had a “cleansing” effect on the transaction that justified judicial review under the deferential business judgment rule.85 Unlike MFW, which involved a controlling stockholder on both sides of the transaction, this case involves a merger between a third-party and a company with a controlling stockholder. Despite SEPTA’s attempt to show otherwise, Volgenau is not a buyer in this transaction. As a seller, his interest is generally aligned with that of minority stockholders to the extent that he receives equal consideration for his shares. But as this Court has observed before, a controlling stockholder may, even in this context, inappropriately influence the outcome of the sale process:
[I]t is . . . true that [a controlling stockholder] and the minority stockholders [are] in a sense competing for portions of the consideration [that the third-party is] willing to pay to acquire [the company] and that [the controlling stockholder] . . . could effectively veto any transaction. In such a case it is paramount . . . that there be robust procedural protections in place to ensure that the minority stockholders have sufficient bargaining power and the ability to make an informed choice of whether to accept the third-party’s offer for their shares.86
Hammons sets forth the procedural protections necessary for a third-party transaction involving a controlling shareholder to qualify for review under the business judgment rule: (1) the transaction must be recommended by a disinterested and independent special committee, (2) which has “sufficient authority and opportunity to bargain on behalf of minority stockholders,” including the “ability to hire independent legal and financial advisors[;]” (3) the transaction must be approved by stockholders in a non-waivable majority of the minority vote; and (4) the stockholders must be fully informed and free of any coercion.
Monday, August 19, 2013
Vice Chancellor Laster issued a post-trial opinion in the Trados matter on Friday. Can I just say, I like the fact that the Chancery Court is increasingly releasing opinions on the "free to the world" website. In 2009, Trados caused a bit of a stir when Chancellor Chandler denied the defendant's motion to dismiss. The plaintiffs brought a case against the defedant directors after they approved an acquisition by SDL in which the common stockholders of the sellers received nothing. At the MTD stage, the court observed that it is possible for a director to breach her duty of loyalty by favoring the interests of preferred stockholders over those of common stockholders where those interests diverge. The Court therefore refused to dismiss plaintiff’s claim that the board improperly favored the interests of the preferred stockholders by agreeing to a merger in which the common stockholders received no consideration.
The venture capital community was understandably upset -- afterall they bargain for liquidation preferences and now -- at the MTD stage -- a court held directors might well have violated their fiduciary duties by agreeing to a merger agreement in which the liquidation preferences were honored. If the court's opinion was the last word, then well, it might be required for boards to disregard liquidation preferences going forward.
Well, it turns out that it wasn't the last word. On Friday, Laster issued issued his post-trial opinion in which the world - from the point of view of the VC community - was set right:
Directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders which require that they strive prudently and in good faith to maximize the value of the corporation for the benefit of its residual claimants. A court determines whether directors have fulfilled their fiduciary duties by evaluating the challenged decision through the lens of the applicable standard of review. Because a board majority comprised of disinterested and independent directors did not approve the Merger, the defendants had to prove that the transaction was entirely fair.
Despite the directors’ failure to follow a fair process and their creation of a trial record replete with contradictions and less-than-credible testimony, the defendants carried their burden of proof on th[e] issue [fair dealing]. Under Trados‘s business plan, the common stock had no economic value before the Merger, making it fair for its holders to receive in the Merger the substantial equivalent of what they had before. The appraised value of the common stock is likewise zero.
Remember Weinberger -- it's fair price and fair dealing. Not just the one. So, here's an example of unfair dealing, but because the price was fair - and the price was $0 - the transaction was entirely fair to the stockholders.