M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, March 24, 2014

Delaware Chancery arbitration is over

Cert denied.




March 24, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Cert decision today re Delaware arbitration

Today we will get a decision on Delaware's petition to the US Supreme Court that the court hear an appeal in the Delaware Chancery arbitration case.  For those of you looking for a quick 'get up to speed' on what's going on, there's a nice interview with Brian Farkas in the NY Commercial Litigator Insider (reg. req'd, but it's worth it).


March 24, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Thursday, March 20, 2014

Bouchard nominated

Governor Markel has nominated Andre Bouchard (a Boston College alum, '83) to be the next Chancellor the Delaware Chancery Court.  According the governor's statement:

In nearly 30 years practicing law in Delaware, Andy Bouchard has demonstrated a remarkable ability to dissect complex legal issues and vigorously represent his clients. He is well recognized for his professionalism and ability to think quickly on his feet in the courtroom,” said Markell. “His experience establishing and growing his own small business as founder of his law firm, as well as his long career before the Court of Chancery, will give him a special appreciation for the work of the court and the many and varied litigants who would appear before him in his new role.”

WDDE has all the details here.  


March 20, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 19, 2014

Life tip: Insider trading edition

So, if you find yourself standing in the middle of Grand Central Station eating Post-It notes in order to destroy evidence, I have a life tip for you.  Something has gone terribly wrong and you should reconsider what you're doing.

That bit of million dollar advice alas comes a little too late for three characters involved in the latest insider trading shenanigans to be uncovered by the SEC.  As alleged by the SEC:

The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme.  Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system.  Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal.  The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol.  After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.  The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information.  Metro also personally traded in advance of at least two deals. 

Here's the civil complaint and then the criminal complaint.


March 19, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 18, 2014

MFW, just half a loaf?

On Friday last week, the Delaware Supreme Court handed down an opinion affirming the Chancery Court's opinion in MFW.  In the Chancery opinion, (then) Chancellor Strine was attempting to reconcile the frayed strands of jurisprudence around controlling shareholder transactions and - at the same time - trying to reduce incentives to pursue meritless claims in order to seek a settlement.  In Cox Communications, a case where he took teh oopportunity to describe the problem with controlling shareholder cases, Strine described the present incentive structure created by the legal rules in the following manner:

Unlike any other transaction one can imagine — even a Revlon deal — it was impossible after Lynch to structure a merger with a controlling stockholder in a way that permitted the defendants to obtain a dismissal of the case on the pleadings. Imagine, for example, a controlled company on the board of which sat Bill Gates and Warren Buffett. Each owned 5% of the company and had no other business dealings with the controller. The controller announced that it was offering a 25% premium to market to buy the rest of the shares. The controlled company's board meets and appoints Gates and Buffett as a special committee. The board also resolves that it will not agree to a merger unless the special committee recommends it and unless the merger is conditioned on approval by two-thirds of the disinterested stockholders. The special committee hires a top five investment bank and top five law firm and negotiates the price up to a 38% premium. The special committee then votes to approve the deal and the full board accepts their recommendation. The disinterested stockholders vote to approve the deal by a huge margin that satisfies the two-thirds Minority Approval Condition.

After that occurs, a lawsuit is filed alleging that the price paid is unfair. The filing party can satisfy Rule 11 as to that allegation because financial fairness is a debatable issue and the plaintiff has at least a colorable position. The controller and the special committee go to their respective legal advisors and ask them to get this frivolous lawsuit dismissed. What they will be told is this, "We cannot get the case dismissed. We can attempt to show the plaintiffs that we are willing to beat them on this and persuade them to drop it voluntarily because they will, after great expense, lose. But if they want to fight a motion to dismiss, they will win, see Lynch. At the very least, therefore, if the plaintiffs are willing to fight, it would be rational for you to pay an amount to settle the case that reflects not only the actual out-of-pocket costs of defense to get the case to the summary judgment stage, but the (real but harder to quantify) costs of managerial and directorial time in responding to discovery over a past transaction."

Given the inability to settle on the pleadings - no matter how good the process - meant that any merger with a controlling shareholder became an immediate payday for attorneys.  Of course, that's frustrating for everyone involved.  It's especially frustrating for the judges who have to oversee the settlement processes.  

No surprise, then, that when Strine was given an opportunity to address the issue in MFW that he took a swing.  Strine held that in a merger with a controlling stockholder conditioned upfront on a promise that no transaction will proceed without (i) special committee approval, and (ii) the affirmative vote of a majority of the minority stockholders that business judgment and not entire fairness will be the standard of review.  This structure is important because by empowering the minority, it attempts to replicate as much as possible an arm's length transaction.

On appeal, the Delaware Supremes upheld the Chancery opinion and gave us the following standard for dealing with controlling shareholder transactions (Kahn v. M F Worldwide Corp.):

[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.

Ok, so far so good.  

But here's a wrinkle...footnote 14.  In footnote 14, the Supreme Court notes that MFW could not have decided on the pleadings and would have survived a motion to dismiss even under the new standard.  The pleadings, the court noted were sufficient to require discovery on all the new prerequisiting in the application of the standard...

Ultimately we'll see to what degree footnote 14 matters.  But, it does seem a little disconcerting that Strine's project to provide a pathway to early dismissal of these kinds of cases might just move the locus of the argument to the functioning of the special committee.  

Sure, that's obviously better, but it's not yet clear that MFW and footnote 14 will dramatically reduce incentives to bring these cases.  Perhaps we will just be battling the same fight on new ground.  Of course, the Chancery Court is likely to want to find ways to rule on the pleadings and my guess is that now that Chief Justice Strine is in a place to influence how the MFW standard is going to roll out that he won't be looking to increase incentives for plaintiffs to bring these cases.


March 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Multi-jurisdictional litigation report

Cornerstone offers up another report on multi-jurisdictional litigation.  Okay, so things you probably already know -- 94% of all mergers overs $100 million are accompanied by litigation.  On the brighter side, plaintiffs appear not to 'race to the courthouse' with the same degree of speed as in the past.   In 2009, the first suit was filed an average 6.5 days after announcement of a transaction.  By 2013, the average delay for the first suit increased to 11.7 days from announcement.  Read the report here.


March 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, March 17, 2014

Dallas conference on multi-jurisdictional litigation

Eric Chiappinielli of Texas Tech is sponsoring a day long conference in Dallas on April 25 on the topic of multi-jurisdictional litigation.  Kudos to Eric - he has put together a top-notch group for the day: Bernie Black, Randy Baron, Sean Griffith, Minor Myers, Randall Thomas, and Verity Winship as well as Chief Justice Strine and Reuters' Alison Frankel. Here's the conference summary:

M&A litigation is increasingly filed in both the target’s state of incorporation and its headquarters state. It is the most important current development in corporate litigation. The leading plaintiffs’ and defendants’ deal litigators from Delaware and from Texas will discuss every aspect of this issue at our day-long conference. Chief Justice Strine of the Delaware Supreme Court and Justice Brown of the Texas Supreme Court will be panelists.

This looks like an event well-worth attending.  Sign up here.


March 17, 2014 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

Friday, March 14, 2014

MFW Affirmed

Really not a surprise. The Delaware Supreme Court affirmed Strine's Checnery Court opinion in MFW.  Here is the opinion (MFW - Del Sup Ct).


March 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Johnson and Millon respond to Bebchuk and Jackson

Lyman Johnson and David Millon offer a rebuttal to Bebchuk and Jackson's piece on the constituitonality of the poison pill. You can find it over at Prof. Bainbridge's place.


March 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 13, 2014

Lions Gate - sign of the times?

Lions Gate settled administrative charges brought against it by the SEC in connection with its late run-in with Carl Icahn:

According to the SEC’s order instituting settled administrative proceedings, Lions Gate’s management participated in a set of extraordinary corporate transactions in 2010 that put millions of newly issued company shares in the hands of a management-friendly director.  A purpose of the maneuver was to defeat a hostile tender offer by a large shareholder who had been locked in a battle for control of the company for at least a year.  However, Lions Gate failed to reveal that the move was part of a defensive strategy to solidify incumbent management’s control, instead stating in SEC filings that the transactions were part of a previously announced plan to reduce debt.  In fact, the company had made no such prior announcement.  Lions Gate also represented that the transactions were not “prearranged” with the management-friendly director, and failed to disclose the extent to which it planned and enabled the transactions with the expectation that the director would get the shares.

The settlement (available here) is noteworthy because in addition to paying a $7.5 million fine, Lions Gate admitted wrong-doing.  The SEC has been under pressure for its practice of settling cases without demanding an admission of wrong-doing - the thought being that if firms were required to admit wrong doing as part of any settlement they would resist settlement opportunities.  Well, in this particular case, the SEC was able to secure an admission.  I wonder if this will be the new normal.


March 13, 2014 in SEC | Permalink | Comments (0) | TrackBack (0)

Monday, March 10, 2014

Is staple financing is dead, yet?

Vice Chancellor Laster handed down a decision in  Rural Metro Corporation Stockholders Litigation (opinion here) on Friday evening.  It's Del Monte-like, in that it's the kind of opinion that's going to generate a lot of ink and opinions.  

If it wasn't already clear to investment banks, it should be now.  The Delaware courts are going to look very closely at transactions where there may be banker conflicts brought about by the prospect of staple financing.  In this particular case, RBC was brought in to advise the Special Committee of Rural Metro on strategic alternatives.  While advising on the potential sale, RBC pursued opportunities to assist the ultimate purchaser in providing financing for the transaction.  Though RBC wasn't ultimately successful in securing that business from Warburg (the buyer), it did provide a $65 million revolver for Warburg.  Warburg purchased Rural Metro for $17.25/share.

Stockholders subsquently sued the directors and brought an aiding and abetting claim against RBC.   The directors sued and RBC went to trial on the aiding and abetting claim.   The gist of the shareholders' argument was that RBC manipulated the sales process in order to benefit Warburg and thereby put itself in a good position to secure the financing business from the buyer.   By failing to disclose or deal fairly with the board, RBC caused the board to violate its duty of care in approving the transaction.

By fooling with the DCF analysis, RBC was able to take a transaction that look just ok and make it look super:

The combined effect of lowering ―consensus adjusted EBITDA by $6.7 million and lowering the low-end multiple from 7.5x to 6.3x was dramatic. On Saturday morning, the consensus precedent transaction range was $13.31 to $19.15. On Saturday afternoon, it was $8.19 to $16.71, entirely below the deal price.

RBC‘s DCF analysis showed a range of $16.28 to $21.07, with a base case price of $18.73. RBC used an exit multiple range of 7.0x to 8.0x, which did not match up with the range used for RBC‘s precedent transaction analysis. On February 8, 2011, RBC had provided to DiMino an LBO analysis with an exit multiple range of 7.8x to 8.3x. If the bottom of the exit multiple range was 7.5x (the original bottom of the precedent transaction ranges), then the bottom of the DCF range would be $18.00, above the deal price. When Munoz saw the DCF range, he commented, ―"I thought we were going to try to reduce dcf?" JX 529.

During the afternoon of March 26, Munoz let Fleming know that Warburg was still refusing to include RBC on the financing side. Fleming responded, "I‘m gonna call [W]arburg myself. We just committed 65 to their effing revolver." JX 525. When he asked Munoz for a further update, Munoz wrote,"Not on email." Id.

Yes.  Not on email.  This is precisely the kind of thing that gives investment bankers a bad name... not to mention the process by which RBC generated a 'fairness opinion'.  Oh, and those are 'air quotes' for a reason.

It's worth remembering, that when RBC was manipulating the models to make Warburg's deal look great, RBC and the Rural Metro board were also processing the Del Monte opinion.  Funny that it appears not to really have sunk in.   Maybe it will now. 

In Rural Metro, the facts suggest just how a conflicted banker can work against its client in hopes of furthering its financing business.  It's clear that the Chancery Court finds this kind of conflict pernicious.  Staple financing and the kind of monkeying around done by RBC in  this deal present real conflicts for bankers.  These conflicts and the incentives that come along with bankers trying to generate additional business by using a position with another client may present an insurmountable hurdle.  

These conflicts and the incentives are so real that the court makes it clear that generic conflict language of the type included in RBC's engagement letter is not going to be enough to generate a waiver of the bank's conflict:

This generalized acknowledgment that RBC and Moelis might extend acquisition financing to other firms did not amount to a non-reliance disclaimer that would waive or preclude a claim against RBC for failing to inform the Board about specific conflicts of interest. See RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 116-19 (Del. 2012) (explaining why clear and unambiguous non-reliance disclaimer clauses and waiver provisions are enforceable to bar certain fraud claims under New York and Delaware law). Rural did not waive any claim that RBC‘s sell-side advice was tainted by an undisclosed material self-interest. If RBC thought it was obtaining a waiver in the engagement letter without first disclosing the conflict and its import, then it was committing ―what, in the old days, might have been called "constructive fraud." Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1068 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005). 

Although the court's conclusion may be at odds with the way business is currently practiced and the standard language of investment banker engagement letters, the court is setting down a marker.  Generalized acknowledgements of potential conflicts are not going to absolve banks from conflicts.  If a bank is going to pursue financing opportunities along with its sell-side advice, it's going to be a lot more explicit about that going-forward.   I wonder, if the Special Committee had full knowledge of the extent to which RBC was pursuing the Warburg business - and that it had provided a $65 million revolver whether that information might have changed the questions the committee asked of its bankers or perhaps up the information it would have wanted to see before making the decision to accept the offer. 

No doubt, this opinion is going to draw a lot of attention and perhaps criticism.  But, I suspect that the court's instinct here -- the get conflicts out in the open and explicitly acknowledged so that board can make fully informed decisions -- is going to win the day eventually.


March 10, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 6, 2014

The Globalization Carveout?

We've seen a couple of these situations recently -- merger announced, employees or local partner of Chinese-based manufacturing facilities essentially revolt, transaction slowed.  

Following announcement of Apollo's acquisition of Cooper Tire, Cooper's Chinese JV partner locked Cooper personnel out of their Cooper Chengshen Tire operation.  This -- in part -- led to the collapse of the transaction.  After Nokia announced sale of its handseet manufacturer to Microsoft, hundreds of employees at its Dongguan manufacturing plant protested the transaction.  Employees at Nokia's plant were reportedly concerned that the merger would result in their being required to take pay cuts under their new American employers:

An executive of the factory told Xinhua that the workers gradually resumed their duties from Sunday after the two sides reached a compromise, with help from the local authorities.

"Microsoft has promised that the workers' salaries and benefits will stay the same as their current standards within 12 months after the acquisition," according to an internal mail.

Gao Xiang, head of communications of Nokia China, said its Dongguan factory will also give a 1,000-yuan bonus (about 164 U.S. dollars) to each worker who did not join the strike.

Those who refuse to go back to work will be fired, according to an internal mail. A worker surnamed Liang said more than 200 of his colleagues had already been sacked.

Should I comment on the utter fecklessness of Chinese labor unions?  Strike and you'll get fired? Perhaps not.

Next up, Chinese workers at IBM's manufacturing facilities are striking in opposition to the sale of IBM's sale of its low-end server business to Lenovo:

"So far, we've heard nothing from the management or the government in response to our demands," said Hou Hongbo, a 10- year worker at the factory. "The company's attitude so far is to ignore us, but the entire production remains shut down."

The workers want higher pay if they choose to transfer to Lenovo or higher severance packages if they choose to leave. Hou said they were determined to keep their action going.

"We will definitely keep striking tomorrow," he said.

These kind of occurrences are increasingly common.  It raises the question whether the costs of labor disturbances at foreign facilities should be explicitly carved out of material adverse change clauses.  right now, one could reasonably read these kinds of labor disturbances in the language that carves out of the MAC definition events that arise from the announcement or pendency of the transaction.  Nevertheless, particularly with global businesses, it's worth considering whether or not to call out such issues in the MAC, call it a globalization carve-0ut? 


March 6, 2014 | Permalink | Comments (1) | TrackBack (0)

Monday, March 3, 2014

Strine sworn in

 On Friday, Leo E. Strine was sworn in during an emotional - and at times funny - ceremony as the new Chief Justice of the Delaware Supreme Court.  Congratulations!  



March 3, 2014 | Permalink | Comments (0) | TrackBack (0)