Wednesday, March 18, 2015
Usually amendments to the corporate law are pretty sleepy affairs. This year is different. There's anti-fee-shifting legislation, In the slew of amendments generating interest this year, there's the new Chancery facilitated arbitration procedure, and then there are the amendments to the appraisal statute. If you would have told me two years ago that arbitration would be the least controversial of all the amendments, I would have laughed at you, but there you have it.
The amendments to the appraisal statute (262 Appraisal) come in response to the rise in appraisal arbitrage. There are a number of important changes to the way Section 262 operates. First, the amendment follows what is common practice in other states by setting a floor with respect to appraisal petitions before getting access to the remedy. Going forward, stockholders will only be entitled to an appraisal if all the shares seeking an appraisal exceed 1% of the outstanding shares or at least $1 million in merger consideration. In any event a transaction done pursuant to Sections 253 and 267 would always have appraisal rights.
To give you a sense of what this floor means, Dell generated valid petitions for only 2% of the stockholders - though the value of the merger consideration would have easily exceeded $1 million. The floor makes sense and will likely get rid of nuisance litigation to the extent there is any nuisance appraisal litigation. I don't think that's a real problem, but I suppose if you are going in to tinker, you might as well tinker.
Of larger import, is the amendment that permits the acquirer to pay some portion of the consideration immediately and stop the accruing of interest on the amount paid, leaving interest to accrue only on the amounts still in controversy. Because of the statutory interest rate, that one change might go quite a way to reducing some incentives for hedge funds to pursue appraisal arbitrage as a business. In CKx, defendants made a motion to require petitioners to accept the uncontested portion of the merger consideration in order to stop the clock on the accrual of interest. Vice Chancellor Glasscock refused to issued such an order. However, this amendment would explicitly permit that maneuver.
These changes may not go far enough for some - who were seeking things like stock tracing. Stock tracing would require the beneficial holder to prove that she was a beneficial stockholder prior to announcement of the merger. Right now, so long as the record holder was a holder prior to the merger, the beneficial holder need not establish that they were owners prior to the announcement of the merger. This is a loophole that appraisal arbs have driven trucks through.
Dole has complained that the changes are too timid and is pushing Delaware to go further. Indeed, Dole is even threatening to "pull out of Delaware" if it doesn't do more to eliminate appraisal arbs. Frankly, it's a ridiculous threat that I would have thought Delaware legislators would be sophisticated enough to discount. The inference is that if Delaware doesn't eliminate the appraisal arb business through stock tracing, that Dole would close its shipping business in Delaware. Umm. Okay. Hard to see how the two are related. If they close that business they will do so for business reasons, not because of the appraisal statute. If Dole means it will reincorporate elsewhere. Ok, where? Have fun.
Anyway, it's going to be a more interesting summer than previously thought in Wilmington.
Thursday, March 12, 2015
As Lawrence Cunningham noted, tenacity, thy name is Delaware! Along with the recent proposed amendments to the corporate law, the Delaware General Assembly will also consider the new Delaware Rapid Arbitration Act - to replace the Chancery Arbitration procedure that was deemed unconstitutional.
Regular readers of this blog might remember that I was opposed to Chancery arbitration as it was originally conceived. Here's a paper I wrote on the subject. Ultimately, the Federal Appellate Courts agreed with my view. Public judges sitting in public courts conducting confidential hearings is not a good look for many reasons.
In any event, the new approach - Chancery facilitated arbitration - an improvement and will likely pass constitutional muster. Also, the way the act has been written, there is little fear that firms might attempt to put Chancery arbitration provisions in corporate charters. In order to be eligible for Chancery arbitration, among other conditions, the arbitration agreement has to be signed by both parties, thus making it difficult to make constructive notice arguments in connection with the purchase of stock. Consequently, as it is currently drafted, the scope of arbitration-eligible disputes is relatively narrow - merger agreements and other commercial agreements that might typically appear before the Chancery Court. Also, although the arbitral proceedings are facilitated by the Chancery court, the arbitrators are not sitting judges and are paid directly by the parties. Proceedings will be confidential, judgments will be treated consistent with the FAA.
This attempt to create an arbitration regime will likely stick. All in all, not a bad effort.
Tuesday, March 10, 2015
The Delaware General Assembly is considering its annual amendments to the corporate law. This time, the proposed amendments (2015 Amendment text here) are doing more than just some ministerial changes/fixes to the text. The amendments purport to deal with two big issues. First, the amendments add a new section 115 that would explicitly permit corporations to include forum selection provisions in their certificates of incorporation or bylaws. I proposed as much in a 2011 article, so it's nice to see that take shape. By including forum selection provisions as a permissible menu option, the legislature is clearing the deck and making it much more likely that Delaware firms will opt in going forward. It's not a total solution to the problem of transaction related litigation, but it does help reduce the volume of litigation that must be managed. By the way, 94.9% of all deals were accompanied by litigation last year. This is a problem that's not going away on its own.
The other proposed amendment is much more controversial. The new sections 102(f) and 109(b) reverse the Delaware Supreme Court's decision in ATP Tour, Inc. In ATP, the court upheld a fee shifting bylaw that, if widely adopted, would likely have shut down most, if not all, shareholder litigation, good and bad. ATP would be like using a sledgehammer to hang paintings in your house. These new sections make such provisions illegal. You'll remember that last year the legislature tried to move an ATP amendment through in the aftermath of the decision. While corporate law amendments are usually a fairly boring affair, that one drew the attention of the US Chamber of Commerce. This time, the US Chamber is back, arguing that the adoption the anti-fee shifting provision "could threaten Delaware's billion dollar incorporation franchise." That seems like a bit of excessive rhetoric.
Stay tuned. I suspect this year will be anything but a quiet ride through the amendment process.
Monday, February 23, 2015
Gov. Markell has nominated Collins J. Seitz to replace Justice Ridgely. Mr. Seitz is a well-known Delaware litigator with some very big cases under his belt. He also has a judicial pedigree. His father, Collins Seitz, was a judge on Federal Third Circuit Court of Appeals and before that Chancellor of the Delaware Chancery Court.
Thursday, February 12, 2015
This from Delawareonline:
Six men, including three current or former judges, have applied for the vacant seat on the Delaware Supreme Court following the recent retirement of Henry du Pont Ridgely, according to sources close to the judicial nominating process.
The applicants for the state's highest court include Superior Court judges William L. Witham Jr and Calvin L. Scott Jr.; former Superior Court Judge Joseph R. Slights III; Collins J. Seitz, Jr. a founding partner of Seitz Ross Aronstam & Moritz LLP; Martin S. Lessner, a partner at Young Conaway Stargatt & Taylor; and John R. Williams, a lawyer in the Delaware Department of Justice appeals unit, the sources said.
Seems unfortunate that we have apparently exhausted the supply of female and minority candidates for this court. In any event, this pick will be Delaware Governor Markell's opportunity to temporarily put a stamp on this court. Under the Delaware constitution, the courts are required to be politically balanced with an equal number of Republicans and Democrats. However, in cases where the court is odd numbered, like the Supreme Court, the Governor is permitted to appoint the swing member from his own party affiliation. In this case Ridgely is a Republican, but since there are already two sitting Republicans and two sitting Democrats, Markell is free to appoint a Democrat to replace Ridgely. I am not sure how many other states follow Delaware's lead with balanced judicial appointments but I like the way it lessens the political stakes involved in judicial selections. If the US Supreme Court followed the same process we might all be better off.
Wednesday, October 1, 2014
Some insider-ish analysis on what led to the nomination of Jim Vaughn to the Delaware Supreme Court from the Delaware Grapevine and the Delaware Law Weekely. Both sources suggest some old-school geographic politics might be at least partly responsible. Vaughn, you see, is from Kent County and getting a representative from Kent County on the court was apparently important. What's interesting about Delaware and its judiciary, if this bit of Kremlinology is true is just how hard Delaware works to create a representative court -- constitutionally mandated political balance and at least implicit geographic balancing. With a nod to now retired Justice Berger, it's worth noting that the court is still not exactly representative. Lots of work to do, still.
Tuesday, September 23, 2014
Friday, September 12, 2014
According to the Delaware Law Weekly, Delaware's Judicial Nominating Committee has sent four names to the governor's office to consider as replacements for the now retired Justice Carolyn Berger:
The candidates are said to be Superior Court President Judge James T. Vaughn Jr.; Superior Court Judge Jan R. Jurden; Joseph R. Slights III, former Superior Court judge and current Morris James partner; and Morris, Nichols, Arsht & Tunnell partner Frederick H. Alexander.
Thursday, June 26, 2014
Karen Valihura was confirmed yesterday to replace the retiring Justice Jack Jacobs. The changes at the Delaware Supreme Court aren't done, yet. Next up, a replacement for retiring Justice Carolyn Berger. Then, maybe things will settle down.
Friday, June 20, 2014
A couple of weeks ago, it looked the stars were aligning in a once in a generation way that would have the plaintiffs and defendants bar stand behind an unusual amendment to the Delaware code. That amendment would effectively prohibit firms from adopting fee-shifting bylaws. Following ATP, it became possible for Delaware corporations to adopt bylaws that would put the costs of shareholder litigation on the plaintiff in the event the plaintiff is unable to get its claims successfully adjudicated on the merits. A proposal was quickly made to the Delaware legislature and it seemed like it would move through quickly. And then, the US Chamber of Commerce - not one to usually care about amendments to the Delaware code - got involved. The proposal has now been tabled.
Friday, June 6, 2014
Governor Markell nominated Karen Valihura, a corporate litigator in Skadden's Wilmington office to the Delaware Supreme Court to replace retiring Justice Jack Jacobs. Ms. Valihura will become the second woman after Justice Carolyn Berger to sit on the court.
Ms. Valihura was interviewed for LawDragon.com just a week or so ago. Among the questions, there's this one:
Lawdragon: Is there a case/deal/client in your career that stands out as a “favorite” or one that is particularly memorable?
Karen Valihura: My favorite deal litigation was Norfolk Southern's takeover fight with CSX over Conrail, resulting in Norfolk Southern's acquisition of a substantial portion of Conrail. It was a classic hostile fight among the Class I railroad titans: Norfolk Southern (represented by Skadden), Conrail and CSX. It involved a multitiered, front-end loaded transaction spanning three preliminary injunction hearings, as well as appeals to the Third Circuit over the Christmas and New Year's holidays. I greatly enjoyed working with and learning from Morris Kramer and Steve Rothschild, who were both legendary Skadden partners; and my fellow senior associate on the matter was Eric Friedman, who is now our firm's Executive Partner. It was Skadden at its finest.
Best of luck to the nominee.
Thursday, June 5, 2014
At a speech before the Delaware Bench and Bar Conference, Chief Justice Strine raised the possibility that Delaware would revisit its Chancery Arbitration Program:
"Regrettably, a federal court in Philadelphia issued a divided ruling striking down these statutes because they violated two judges’ reading of unsettled precedent, a reading that, if good law, would invalidate long-standing dispute resolution procedures used in their own federal court system,” said Strine.
“But, consistent with our history, Delaware is not wallowing in defeat,” Strine said, adding that the governor, the Corporate Law Council and members of the bar “are working on a different approach to be ready for the consideration by the General Assembly in January.”
I could quibble, but I won't. I suspect what they will do is create an arbitration procedure that will be effectively the same as the one they had previously implemented but with some public access. Supporters believe that it won't work without confidentiality, but I suspect public access won't be as terrible as some think.
Thursday, May 29, 2014
According to the Delaware Law Weekly, there are seven candidates to replace retiring Justice Jack Jacobs:
The candidates are said to be Superior Court President Judge James T. Vaughn Jr.; Superior Court Judges Jan R. Jurden and Calvin L. Scott Jr.; Widener University School of Law professor Lawrence Hamermesh; Family Court Chief Judge Chandlee Johnson Kuhn; Skadden, Arps, Slate, Meagher & Flom attorney Karen L. Valihura; and Grant & Eisenhofer attorney Megan McIntyre.
Jurden and Vaughn were recently under consideration for the Chief Justice position, so I suppose no surprise there. Nice to see Larry Hamermesh on the list.
Wednesday, May 28, 2014
The ubiquity of transaction-related litigation is, I think, a real problem. By now, 94%+ of announced mergers end up with some litigation. I think that most reasonable people can agree that not all 94% of transactions where there are lawsuits do the facts suggest that something has gone wrong. Much of the litigation is really just flotsam intended to generate a settlement -- a settlment that directors are all too willing to grant in exchange for a global release.
In any event, there have been a series of efforts, including exclusive forum provisions, which have been deployed in a self-help manner to try manage this issue and its multi-jurisidictional cousin. In the 2013 Boilermakers opinion, Chief Justice Strine gave his blessing to board-adopted exclusive forum bylaw. Following Galaviz v Berg there was some question as to whether an exlcusive forum bylaw adopted by the board had sufficient inidicia of consent such that it would be enforceable against shareholders. In Boilermakers, Strine noted that forum selection bylaws were consistent with both Delaware and federal law, and also that the mere fact that such a bylaw was adopted by the board does not render such a bylaw invalid:
The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board’s authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.
Boilermakers set the stage for the Delaware Supreme Court very recent opinon in ATP Tour. ATP Tour, you know, the tennis guys. The issue in the ATP is related both to the question of transaction-related litigation and unilaterally adopted bylaws. In ATP, the tour adopted a fee shifting bylaw that would eschew the "American Rule" and require that in the event of unseuccessful shareholder litigation - or litigation that "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought" then the shareholder will be responsible for paying the corporation's litigation fees. Here's the bylaw as adopted:
(a) In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.
Clearly, such a bylaw, if adopted and upheld, would bring the transaction-related litigation train to a screeching halt or at the very least dramatically alter the settlement dynamics.
This bylaw ended up in front of the Delaware Supreme Court as a certified question from the federal district court in Delaware. You'll remember that Delaware is one of the few state supreme courts that will accept certified questions of law. The question before the court was whether the unilaterally adopted fee-shifting bylaw above was valid under Delaware law.
That such a provision is legal under Delaware law isn't all that surprising, really. What is surprising is that court would agree to wander into this hornet's nest of an issue entirely of voluntarily. Whether or not to accept a certified question is entirely within the discretion of the court and the court could have avoided deciding the question altogether had it wanted to. But, apparently it wanted to decide the issue.
The reaction to the opinion has been pretty incredible. For example, Delaware litigator Stuart Grant remarked,"The Delaware Supreme Court seems to have caused Delaware to secede from the union." A little over the top, sure. But, the just because plaintiffs hate the result, don't think that the defense bar is jumping up and down claiming victory and recommending widespread adoption of these provisions. They're not. In fact, many worry that adopting such provisions might just put their clients in the cross hairs. No one wants a fight if they can avoid it. And anyway, the global releases their clients get from settling otherwise trivial transaction challenges are valuable security blankets for directors.
The reaction by both plaintiffs and defendants to the ATP ruling has been a unique constellation of interests. Ronald Baruch calls the reaction evidence of the "cozy" litigation community in Delaware. Plaintiffs want to get paid and defendants want their releases. In response the Corporation Law Section of the Delaware Bar has moved quickly to propose an amendment to elminate fee shifting under the DGCL. The proposed amendment (with underlined insertion) is below:
Amend § 102(b)(6), Title 8 of the Delaware Code by making insertions as shown by underlining as follows:
A provision imposing personal liability for the debts of the corporation on its stockholders based solely on their stock ownership, to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts.
The effect of the proposed amendment would make fee shifting impermissable under the DGCL and therefore rule it out as a bylaw. If approved by the legislature in Delaware, the amended 102(b)(6) would go into effect on August 1. Now that's swift justice.
The battle against transaction-related litigation will have to be fought on other ground.
Thursday, April 10, 2014
Yesterday, the Delaware Senate confirmed Andre Bouchard as the next Chancellor to replace Leo Strine who is now Chief Justice of the Delaware Supreme Court. Next up on the Delaware judicial merry go round, nominating a replacement for Justice Jacobs who will retire in July.
Tuesday, April 1, 2014
Delaware Justice Jack Jacobs has today announced his retirement effective July. There are two obvious potential candidates, James Vaughn and Jan Jurden. Both had applied to replace Chief Justice Steele. The Judicial Nominating Committee sent their names along with Chief Justice Strine's name to the governor, who ultimately selected Strine. Jurden, however, has come under some scrutiny in the past few days for her sentencing of an heir to the duPont family fortune. It's the kind of thing that, while not disabling, will require a lot of explaining. If you're explaining, you're losing. My uninformed guess is that she gets passed over for now.
Monday, March 24, 2014
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).
Thursday, March 20, 2014
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.
Wednesday, February 26, 2014
OK, so one more thing. All of the amici refer in an off-hand way to the fact that these proceedings aren't really secret. Sure, the proceedings are confidential -- and they don't even appear in the docketing system. But! In the event, the resulting order is appealed, the proceeding is public. The Business Roundtable sums it up nicely:
Arbitration proceedings shall be considered confidential and not of the public record until such time, if any, as the proceedings are the subject of an appeal.
Here's the thing. At first glance we might think that that means that the entire record is made public and that the Delaware Supreme Court will be able to provide perhaps a de novo review of the arbitral order. That would be okay, I guess, because novel questions would reach the Delaware Supremes and they could continue to build the common law.
But, as A-Rod recently found out after he came to his senses, that is not what the court will be permitted to do. Appeals of arbitral orders - to be consistent with the FAA - are much narrower and do not involve a de novo appeal. As noted in NASDAQ's brief:
[Appeals are limited] under Federal Arbitration Act to cases of fraud on or corruption, misconduct, or abuse of power by the arbitrator.
So, no de novo review of arbitral awards from Chancery.
So let's say, Delaware notwithstanding the FAA, Delaware decides that no, it's arbitral program is 'special'. And, unlike any other arbitral program in the United States, the Delaware program will have the benefit of de novo - or substantive - review by a public court. That would be unique -- in fact -- by not having FAA-consistent review as the current procedure suggests (but only suggests), the whole Chancery Court arbitration procedure would look exactly like a trial. (Inconvenient, no?)
Well, I'd love to be a litigator on the first substantive appeal to the Delaware Supreme Court of an arbitral award, cause after they are done with it, we're going straight to the US Supreme Court where the nine have consistently ruled that there is no de novo review of FAA-consistent arbitrations, only reviews for fraud, corruption, or misconduct by the arbitrator.
So, if you want the Delaware Supreme Court to provide a substantive review of an arbitral award our of Chancery litigants would have to come to the court prepared to argue that the Chancellor who handled to the arbitration was incompetent, drunk, or otherwise. Yeah. Good luck with that.
Ok, I'm done.