Friday, August 9, 2013
The Deal Professor has a nice run down of the issues in Monday's motion to expedite hearing in Delaware. I just had some thoughts about three possible outcomes on Monday -- now I'm not necessarily predicting any of these outcomes, I am usually pretty bad at that, but because there are a range of possible outcomes and each of them tells us something about how the court is thinking about the substantive issues in the case. I think the range looks something like this:
Worst Case Scenario for Dell Board/Total Icahn Victory: The court hears the arguments and says,"Mr. Icahn, you are totally correct. It has been more than 13 months since the last annual shareholder meeting. Under Section 211(c) upon application by a shareholder - that's you, Mr. Icahn - I can and hereby do order a meeting. Oh, and let's have that meeting right now. Who's present? What business do you want the corporation to entertain?"
OK, so that's an extremely low likelihood outcome, the court saves the summary proceeding for the worst of the worst boards. It would be really bad for Dell, but I don't think this is going to happen. the Dell board just isn't bad enough to merit a summary proceeding. Best to ensure against this by making sure Michael Dell and the Silver Lake boys are hanging around the DuPont in Wilmington on Monday. And, better make sure some associate packs a pile of proxies, just in case.
More Pain for Dell/Almost Victory for Icahn: The court hears the arguments and says,"OK, so it's been 13 months since your last meeting, so I am going to order a meeting and that such meeting been held coincident with the special meeting of the shareholders. Yes, yes, counsel, I know I am not required to hold the meetings on the same day and that it might be inconvenient for you. But, I relied on the fact that you had built in procedural protections into the merger agreement the last time you were here. I know, counsel, I know, you weren't required under Delaware law to have majority of unaffiliated shareholders vote in favor, I know all of that. But, I am can order the meeting anytime I want, and I want to order it on the same day as the special meeting. If the shareholders with all their knowledge decide that Mr. Icahn is correct, well, they will vote for him. If not, then not. Good day counsel."
If this is outcome, well then it's pretty clear that the whole changing of the voting rules didn't go over well with Strine who might have felt had because he leaned on all the procedural protections the last time Icahn was in front of him looking for a motion to expedite.
Total Victory Dell/Icahn Loss: The court hears arguments and says,"Why, Mr. Icahn, in all my years of judging, I have never heard a more lucid and compelling argument. You are absolutely correct. I can't help but agree. I am hereby ordering that an annual meeting of the shareholders be held on a date not later than three days after the previously scheduled special shareholder meeting. Is that convenient for you, counsel for Dell?"
"Uh..yes your honor. Very convenient."
"Then, so ordered."
Scheduling the shareholder meeting after the special meeting would bascially be the end of the road for Icahn. Delaware does this kind of thing a lot - hand out Pyhrric victories. If it does so in this case, then it's pretty clear that Strine wasn't all that concerned with the voting changes and the adjournments. It was business judgment all the way, so absent compelling facts or a bona fide comepting bid, let's just get this thing going.
So...we'll see on Monday.
Tuesday, August 6, 2013
Just like that. It's gone. The top-up option has gone the way of the dodo bird. The handwriting has been on the wall for some time (since at least VC Laster's opinion in Olson v EV3), so it's not a surprise. Vice Chancellor Laster described the role of the top-up option in the following way:
The top-up option is a stock option designed to allow the holder to increase its stock ownership to at least 90 percent, the threshold needed to effect a short-form merger under Section 253 of the Delaware General Corporation Law (the “DGCL”), 8 Del. C. § 253. A top-up option typically is granted to the acquirer to facilitate a two-step acquisition in which the acquirer agrees first to commence a tender offer for at least a majority of the target corporation’s common stock, then to consummate a back-end merger at the tender offer price if the tender is successful…
The top-up option speeds deal closure if a majority of the target’s stockholders have endorsed the acquisition by tendering their shares. Once the acquirer closes the first-step tender offer, it owns sufficient shares to approve a long-form merger pursuant to Section 251 of the DGCL, 8 Del. C. § 251. Under the merger agreement governing the two-step acquisition, the parties contractually commit to complete the second-step merger. A long-form merger, however, requires a board resolution and recommendation and a subsequent stockholder vote, among other steps. See id. § 251(b) & (c). When the deal involves a public company, holding the stockholder vote requires preparing a proxy or information statement in compliance with the federal securities law and clearing the Securities and Exchange Commission.
The top-up option accelerates closing by facilitating a short-form merger. Pursuant to Section 253, a parent corporation owning at least 90% of the outstanding shares of each class of stock of the subsidiary entitled to vote may consummate a short form merger by a resolution of the parent board and subsequent filing of a certificate of ownership and merger with the Delaware Secretary of State. See 8 Del. C. § 253(a). This simplified process requires neither subsidiary board action nor a stockholder vote.
The Chancery Court has consistently ruled that top-up options as described above are permissible because at least in part once the acquirer has sufficient shares to approve a long-form back end merger it's not a question of if the merger will occur, but when. So long as the acquirer merger agreement does not permit the dilution of remaining shares for appraisal purposes, the top-up option is unremarkable. Of course, there was the slightly complicated top-up option math that made top-up options fun for exams and tripping up junior associates (hint - you have to add the newly issued shares into the numerator and the denominator...).
All that is gone now that DGCL Sec 251(h) has gone into effect. Sec. 251(h) eliminates the requirement for a shareholder vote in a back end merger following a tender offer if the acquirer is able to obtain control through the tender offer. Here's the new 251(h):
(h) Notwithstanding the requirements of subsection (c) of this section, unless expressly required by its certificate of incorporation, no vote of stockholders of a constituent corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the agreement of merger by such constituent corporation shall be necessary to authorize a merger if:
(1) The agreement of merger, which must be entered into on or after August 1, 2013, expressly provides that such merger shall be governed by this subsection and shall be effected as soon as practicable following the consummation of the offer referred to in paragraph (h)(2) of this section;
(2) A corporation consummates a tender or exchange offer for any and all of the outstanding stock of such constituent corporation on the terms provided in such agreement of merger that, absent this subsection, would be entitled to vote on the adoption or rejection of the agreement of merger;
(3) Following the consummation of such offer, the consummating corporation owns at least such percentage of the stock, and of each class or series thereof, of such constituent corporation that, absent this subsection, would be required to adopt the agreement of merger by this chapter and by the certificate of incorporation of such constituent corporation;
(4) At the time such constituent corporation's board of directors approves the agreement of merger, no other party to such agreement is an "interested stockholder" (as defined in § 203(c) of this title) of such constituent corporation;
(5) The corporation consummating the offer described in paragraph (h)(2) of this section merges with or into such constituent corporation pursuant to such agreement; and
(6) The outstanding shares of each class or series of stock of the constituent corporation not to be canceled in the merger are to be converted in such merger into, or into the right to receive, the same amount and kind of cash, property, rights or securities paid for shares of such class or series of stock of such constituent corporation upon consummation of the offer referred to in paragraph (h)(2) of this section.
If an agreement of merger is adopted without the vote of stockholders of a corporation pursuant to this subsection, the secretary or assistant secretary of the surviving corporation shall certify on the agreement that the agreement has been adopted pursuant to this subsection and that the conditions specified in this subsection (other than the condition listed in paragraph (h)(5) of this section) have been satisfied; provided that such certification on the agreement shall not be required if a certificate of merger is filed in lieu of filing the agreement. The agreement so adopted and certified shall then be filed and shall become effective, in accordance with § 103 of this title. Such filing shall constitute a representation by the person who executes the agreement that the facts stated in the certificate remain true immediately prior to such filing.
Oh, sure. It doesn't actually say the top-up option is no more. It doesn't have to. It just makes the top-up irrelevant. Like the dodo bird.
Tuesday, June 25, 2013
So, I'm already on record about what I think is next. So, forum selection bylaws that restrict litigation to the state of incorporation are helpful for managing the issue of multiforum litigation, which in recent years has become a real waste of resources. But, it's a very tricky - and perhaps impossible - balance.
The hard part of the balance involves arbitration. I'm already on record with respect to my opinions on the Delaware arbitration procedure (here and here), which I think goes too far. The forum selection bylaw, I think, may further open the door to widespread adoption of arbitration provisions in bylaws. If widespread adoption of arbitration includes confidential resolution of disputes and a restriction on the ability of shareholders to bring class actions, then that may be the beginning of the end of Delaware's position as corporate law leader - the end of Delaware's franchise. Seem extreme? Well certainly it won't happen overnight. It will be a long-term degradation of Delaware's competitive position and lowering barriers to entry for other states.
We'll see in 10 years. I've put down my marker.
Wednesday, June 12, 2013
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...
Monday, June 3, 2013
[Updated] Here are a handful of law firm memos on the MFW Shareholders Litigation (in which the Delaware Court of Chancery held that the Business Judgment Rule applied to a freeze-out merger that was conditioned on the approval of both an independent Special Committee and a Majority-of-the-Minority stockholder Vote). Brian discussed the same case here.
Thursday, May 30, 2013
NetSpend: Interesting Insights on Revlon Process, “Don’t Ask, Don’t Waive” Standstills & Fairness Opinions
The Delaware Chancery court's recent decision in Koehler v. NetSpend Holdings Inc. is worth a read for deal planners. Vice Chancellor Glasscock criticized the board's Revlon process, stating:
The Plaintiff has demonstrated that a reasonable likelihood exists that the sales process undertaken by the NetSpend Board—which included lack of a pre-agreement market canvass, negotiation with a single potential purchaser, reliance on a weak fairness opinion, agreement to forgo a post-agreement market check, and agreement to deal protection devices including, most significantly, a don’t-ask-don’t-waive provision—was not designed to produce the best price for the stockholders.
Nevertheless, in line with other recent Delaware decisions where the courts have been reluctant to enjoin a deal when there are no other potential bidders, the court denied plaintiff's motion to enjoin the deal. Still, Vice Chancellor Glassock's criticism of the fairness opinion provided by the company's financial advisor and the board's use of a DADW provision should give sellers some guidance for future deals.
For more info, take a look at this memorandum by Sullivan & Cromwell.
Monday, May 20, 2013
Friday, May 17, 2013
As I noted yesterday, the Delaware Coalition for Open Government and the Chancery Court were before a panel of the Third Circuit arguing the merits of Delaware's arbitration procedure. Tom Hals of Reuters was there and he thinks the Chancery Court scored some points. I've said it before and I still believe it: if the arbitration procedure survives, someone will look back in 10 years or so and shake their head. It's still a bad idea for Delaware and Delaware's franchise.
Thursday, May 16, 2013
The question of the constitutionality of Delaware's Chancery arbitration program is before the Third Circuit today. I think my position on this program is pretty clear -- I'm for openness. See here for past posts on the topic. I've got a paper appearing in Spring 2013 issue of the Cardozo Journal of Conflict Resolution arguing more or less the same thing.
We'll see what the panel thinks.
Tuesday, April 30, 2013
Thinking about it now, it turns out that the 2011 settlement approval of In re Sauer Danfoss Shareholder Litig is an important case. Why? Did it set out any special new points in the law? No. But it did one thing of real value for the courts. In Appendix A to the opinion, it set out a chart of recent settlements with identification of the work accomplished by plaintiffs counsel, the benefit achieved, and the fee approved by the court. It's a price list. And, like a price list, the Delaware courts are now regularly referring to it when they are reviewing requests for attorneys fees in disclosure only cases. I suppose that's a good thing. The downside? Well, now Vice Chancellor Laster has to remember to update the appendix every now and again!
Wednesday, April 10, 2013
The challenge to Chevron's forum selection bylaw is before Chancellor Strine today. Here's the complaint. I've blogged about these challenges before (here). Although, I have advocated for forum selection provisions in corporate charters, forum selection bylaws are easier to adopt. In part the ease of adoption exaplains why a number of firms put them in place in recent years. The ease of their adoptino is, however, their biggest weakness. In a challenge before a federal district court in California (Galaviz v Berg), the judge ruled that forum selection provisions adopted as bylaws lacked "sufficient indicia of consent." This wouldn't be a problem with forum selection provisions adopted at charter provisions.
Although other boards have dropped their bylaws in the face of legal challenges, Chevron has stuck to its guns. Today we will get some sense whether the Delaware courts agree with the California federal court about the sufficiency of a bylaw for the purpose of narrowing possible forums. Looks like the plaintiffs are hoping that the recent Delaware Supreme Court opinion in Pyott v La. Mun. will be enough to keep Chancellor Strine in line. Maybe.
Tuesday, April 9, 2013
There has been a back and forth between the Chancery Court and the Delaware Supreme Court about whether there are default fiduciary duties for LLCs. The Chancery Court takes the position that there are default fiduciary duties, though you may contract around them. The Supreme Court on the other hand take a more extreme, contractualist position. The Chief Justice's position is that there are no default duties because the LLC form is a creature of contract. If parties to an LLC have not contracted for fiduciary duties, then the Supreme Court will not enforce them upon the parties.
It was over this topic that Chief Justice Steele recently called out Chancellor Strine for straying from the question before the court and moving out of his lane. The judicial dust up got some attention at the recent Tulane gathering.
Now, it looks like the Delaware legislature will be stepping in to resolve this little dust up and guess who is going to win? That's right, sanity prevails. There are going to be default fiduciary duties for LLCs. According to Pepper Hamilton:
On March 20, 2013, legislation proposing to amend the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et. seq. (DLLCA) was submitted to the Corporation Law Section of the Delaware State Bar Association. If the proposed legislation is enacted, the amendments, in addition to implementing certain technical changes, would confirm that LLC managers owe fiduciary duties where the LLC agreement is silent.
Expect to see this legislation enacted by the end of the summer. Advantage Strine.
Friday, March 22, 2013
Sounds like the judicial fireworks are flying in Tulane (note to self: go next year). At a panel discussion Chief Justice Myron Steele apparently continued his crusade to get the Chancery Court to shut up (via WSJ Deal Journal:
“Every time they open their mouth they make the law,” Steele said Thursday, discussing how he would love to get that idea into the heads of judges. Steele said it was inappropriate to force lawyers to read transcripts in order to determine the law.
Steele didn’t name names.
But we know. It's funny. The Supreme Court would like the Chancery Court to say less and only speak through its opinions and only on issues that are directly before the court. All of this other stuff is just dicta. It forces lawyers to read transcript hearings and search speeches for hints at what the law is. As an aside - if the court were really worried about closing off access to knowledge of the state of the law, it would reconsider its Chancery Arbitration procedures. Just saying.
Anyway, those things that Steele thinks are bugs, are considered features by the Chancery Court. In a paper (forthcoming in W&L Law Review) by Vice Chancellor Donald Parsons and his former clerk Jason Tyler, the authors point to dicta and judicial asides as an important component of the law making/dealmaking function of Delaware law:
To give just one small example of the organic nature of this process, in December 2011, Vice Chancellor Laster issued an opinion in In re Compellent Technologies. In dicta, he questioned the wording of a provision of a merger agreement requiring the target company’s board to give notice to the acquirer if any subsequent, superior offers arose. The Vice Chancellor did not question the general validity of this relatively common information rights provision, just the particular verbiage used to express it in the merger agreement at issue in that case. Less than two months later, another case—In re Micromet—challenged a merger agreement containing a nearly identical provision, except for a revision in the language the court had questioned in Compellent. The court in Micromet found the revised provision unobjectionable. More important than the outcomes of those two cases, however, is what one reasonably can infer from their facts and sequence. Apparently, within a matter of weeks, transactional attorneys had read the Compellent opinion and advised their clients accordingly in connection with a later transaction that, when challenged, survived judicial scrutiny.
So, it's a bit of a judicial tug of war that will no doubt continue to play out.
Wednesday, March 20, 2013
According to Richards Layton & Finger, Delaware is in the process of amending the DGCL to add a new Sec. 251(h), the purpose of which will be to eliminate a required shareholder vote in the second step of a two-step acquisition:
Under new subsection 251(h), a vote of the target corporation’s stockholders would not be required to authorize the merger if: (1) the merger agreement expressly provides that the merger shall be governed by this new subsection and shall be effected as soon as practicable following the consummation of the offer described below; (2) a corporation consummates a tender or exchange offer for any and all of the outstanding stock of the target corporation on the terms provided in such merger agreement that would otherwise be entitled to vote on the adoption of the merger agreement; (3) following the consummation of the offer, the consummating corporation owns at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement; (4) at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation; (5) the corporation consummating the offer merges with the target corporation pursuant to such merger agreement; and (6) the outstanding shares of the target corporation not canceled in the merger are converted in the merger into the same amount and kind of consideration paid for shares in the offer.
Given the recent proliferation of top-up options, the back end shareholder vote has lost much of its kick, if it ever had any. Really, by now if a target requires an actual back-end vote it's because it either doesn't have enough shares outstanding to permit a top-up option or there were just really bad lawyers working the deal.
Tuesday, March 19, 2013
This client alert from Gibson Dunn discusses Chancellor Strine's bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit. According to the authors,
The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation , Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class. At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays through the settlement of meritless lawsuits filed in the wake of announced deals.
Thursday, March 7, 2013
Many times my students will ask me, well how bad does director inattentiveness to board duties have to be win on a care claim much less a Caremark claim? There are, of course, multiple levels of answers to that question, but the simplest is, "pretty bad". Now we have a stark example of some facts from a recent Delaware transcript ruling that might get you there - In re Puda Coal (Puda_Coal Transcript_Ruling). In Puda, we have a Chinese coal company incorporate in Delaware and trading on US markets with five directors - 2 inside Chinese directors and 3 outside American directors. OK, so it turns out that the 2 inside directors stole all the corporate assets and appropriated them all for themselves. For two years, the outside directors had no idea. They relied on reports from the CEO and sat in the US all the while assuming there were corporate assets somewhere in China. So, the directors, including the outside directors all get sued. OK, so far so good.
During the course of an internal investigation, all the outside directors realizes what had been going on and quit in response, leaving the inside directors in charge of their own malfeseance. Then outside directors turn up in Chancellor Strine's court as defendants seeking to have the derivative suits dismissed for because demand was not excused. Theory: a majority of the directors were independnet and could well have sought to prosecute this case, had it been presented to them. That didn't go well for them:
A Delaware lawyer is telling me, I think, if I dismiss the case on demand excusal grounds, I dismissed it because control of the lawsuit belongs to the company, therefore the decision to sue the insiders who took the assets belongs to the company. The company might conclude that it's perfectly okay to take the assets, or there's a cost benefit analysis of suing and it's just not worth it. I can't take on to myself in that situation. I can't enter a judgment at the instance of derivative plaintiffs because control of a lawsuit belongs to the board, which is now controlled by the guy who your clients suspect stole the assets out from under them.
What stuck in Strine's craw, I think, was the fact that when the outside directors who were a majority realized that the all the assets of the corporation had been sold out from under them that their response was not to sue the bad directors and seek to defend the corporation, but to resign and walk away:
When, as a matter of undisputed reality, when they were faced with knowing in their view that there had been the most extreme sort of fiduciary violation you could imagine, rather than have the company sue, they quit, then come into court and seek to use 23.1 and, frankly, disable the derivative plaintiffs from even going after the bad guys. When I mean bad guys, I'm using your client's own view of these people. I'm trying to understand how my state -- if I were to embrace this -- my state's corporate law would not be justly subject to ridicule.
And that's when the hearing starts to go really bad for the outside directors. Turns out only one of the outside directors speaks Chinese. Whoops. (Note to self, pick up a Rosetta Stone before taking that directorship in the Mongolian company). Strine then let them have it with this:
I think those of us who actually -- judges in Delaware who participate in corporate law in Delaware take legitimate umbrage when folks say that we don't hold managers accountable for breaches of fiduciary duty in Delaware. I find that claim to be astonishingly outdated and simple-minded, when any review of our corporate law will see -- just out of our statutory corporate law will say that is, frankly, much more pro stockholder and more balanced than any of our other states, most of which have stronger insulations against director liability, many of which allow directors in the context of takeovers to use takeover defenses not permissible in Delaware, and when the major controversies that have come out of Delaware over the last 30 years, some of them have been about things that are anti-stockholder. Many of them are cases like Van Gorkom, Omnicare, Quickturn. Guys like me, El Paso, Southern Peru, Loral, where we've held people accountable in big ways for things. And we take seriously in the derivative suit contest that, frankly, you shouldn't lightly take away from the board of directors the ability to control a lawsuit. But to use doctrinal law in some sort of gotcha way is just not appropriate
Now, he's just venting; he's right, but he's just venting. So by now it's pretty obvious that the defendants made an error is seeking to dismissal on failure to make demand. Then Strine turned to the question of whether a 12(b)(6) motion can survive. Sorry, it's not going to get any better for these defendants. But here, Strine lays out some minimum standards for independent directors of Delaware corporations headquartered abroad, and it's pretty sensible:
Independent directors who step into these situations involving essentially the fiduciary oversight of assets in other parts of the world have a duty not to be dummy directors. I'm not mixing up care in the sense of negligence with loyalty here, in the sense of your duty of loyalty. I'm talking about the loyalty issue of understanding that if the assets are in Russia, if they're in Nigeria, if they're in the Middle East, if they're in China, that you're not going to be able to sit in your home in the U.S. and do a conference call four times a year and discharge your duty of loyalty. That won't cut it. That there will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty. There's no such thing as being a dummy director in Delaware, a shill, someone who just puts themselves up and represents to the investing public that they're a monitor. Because the only reason to have independent directors -- remember, you don't pick them for their industry expertise. You pick them because of their independence and their ability to monitor the people who are managing the company. And a lot of life – I would not serve on -- if I were in the private sector -- not that anybody would want me -- but there are a lot of companies on boards I would not serve because the industry's too complex. So if I can't understand how the company makes money, that's a danger. If it's a situation where, frankly, all the flow of information is in the language that I don't understand, in a culture where there's, frankly, not legal strictures or structures or ethical mores yet that may be advanced to the level where I'm comfortable? It would be very difficult if I didn't know the language, the tools. You better be careful there. You have a duty to think. You can't just go on this and act like this was an S&L regulated by the federal government in Iowa and you live in Iowa.
So on Caremark alone, I have no problem saying that it passes muster under 12(b)(6).
This is a case to watch as it winds its way through the courts. It may well start making its way into case books soon.
Wednesday, March 6, 2013
In a recent case in Delaware we get an expected but still important decision in Meso Scale Diagnostics. This is just blocking-and-tackling. The question for the court was whether a reverse triangular merger constituted an assignment with respect to the surviving corporation. The court concluded it did not. In doing so, Vice Chancellor Parsons declined to follow a California case (SQL Solutions) that held that a reverse triangular merger resulted in an assignment by operation of law with respect to the surviving corporation:
Delaware courts have refused to hold that a mere change in the legal ownership of a business results in an assignment by operation of law. SQL Solutions, on the other hand, noted California courts have consistently recognized that an assignment or transfer of rights does occur through a change in the legal form of ownership of a business. The SQL Solutions case, however, provides no further explanation for its apparent holding that any change in ownership, including a reverse triangular merger, is an assignment by operation of law. Both stock acquisitions and reverse triangular mergers involve changes in legal ownership, and the law should reflect parallel results. In order to avoid upsetting Delaware‘s well-settled law regarding stock acquisitions, I refuse to adopt the approach espoused in SQL Solutions.
In sum, Meso could have negotiated for a change of control provision. They did not. Instead, they negotiated for a term that prohibits assignments by operation of law or otherwise. Roche has provided a reasonable interpretation of Section 5.08 that is consistent with the general understanding that a reverse triangular merger is not an assignment by operation of law.
Another reason why the triangular merger structure remains the go-to structure for dealmakers.
Tuesday, January 22, 2013
If you are in NYC on February 7, I'd encourage you to stop by Cardozo for its panel on the Delaware arbitration procedure. They have assembled a great panel, including David Finger, counsel for the Delawaree Coalition for Open Government. Mark your calendars!
Wednesday, December 19, 2012
So, the relevant question is - if the world is going to end on Friday, why did I spend the past week in a cocoon grading exams? Anyway...
On Monday, Chancellor Strine weighed in on Dont Ask-Don't Waive provisions in a bench ruling in the Ancestry.com shareholder litigation. This issue has come before the court a couple of times in the past few months. In November, Vice Chancellor Laster was asked to consider the provision in In re Complete Genomics. He found it troubling. And before that in Celera Corporation Shareholders Litigation Vice Chancellor Parsons also had an opportunity to weigh in on don't ask-don't waive. In Celera, Parsons found them troublesome:
Here, the Don't-Ask-Don't-Waive Standstills block at least a handful of once-interested parties from informing the Board of their willingness to bid (including indirectly by asking a third party, such as an investment bank, to do so on their behalf), and the No Solicitation Provision blocks the Board from inquiring further into those parties' interest. Thus, Plaintiffs have at least a colorable argument that these constraints collectively operate to ensure an informational vacuum. Moreover, the increased risk that the Board would outright lack adequate information arguably emasculates whatever protections the No Solicitation Provision's fiduciary out otherwise could have provided. Once resigned to a measure of willful blindness, the Board would lack the information to determine whether continued compliance with the Merger Agreement would violate its fiduciary duty to consider superior offers. Contracting into such a state conceivably could constitute a breach of fiduciary duty.
Bidders aren't allowed to bid and sellers aren't allowed to ask. To the extent previous Chancery Court rulings have ruled that boards violate their duties to the corporation by engaging in willful blindness, Don't-Ask Don't Waive provisions in standstills do raise legitimate issues.
Chancellor Strine recognized these potential problems on Monday when he considered the same provision in the Ancestry.com Shareholder Litigation. He noted a couple of important things. First, these provisions are not per se illegal. There are uses of don't ask-don't waive that are consistent with a director's fiduciary duties under Revlon. For example, in designing an auction process, directors might want to design credible rules that will generate incentives for bidders to put their best bids on the table right away and thereby avoid potentially lengthy serial negotiations down the road. The don't ask-don't waive provision signals to bidders (credibly, if it's enforceable) that they get only one shot at the apple.
On the other hand, such provisions as Strine noted, can be used by boards in a way that is inconsistent with their fiduciary duties. If directors lean on such provisions to close their eyes to a materially higher subsequent bid, they may be violating their duties to remained informed in the manner that Vice Chancellor Parsons was worried about in Celera.
In this case, the board had disclosed to shareholders - who are supposed to vote on December 27 - that the board could terminate the transaction in the event it received a superior proposal. The board did not disclose to shareholders that the most likely topping bidders were all boxed out by don't ask-don't waive provisions in the standstill agreement. Strine ordered additional disclosures prior to the planned shareholder meeting, sidestepping for the timebeing the question of the don't ask-don't waive provision.
I understand what he's trying to accomplish. On the one hand, shareholders need to know that there isn't effective competition for the seller because of the provision that leaves out the most likely bidders. On the other hand, if shareholders miss the Dec 27 window, then "fiscal cliff" implications may leave shareholders holding a much bigger tax bill. Damned if you do, damned if you don't so to speak. So, he let it proceed and left it to shareholders with all the information in their hands, to decide whether or not to accept the offer on the table.
Thursday, December 6, 2012
This post is not about football, though I will admit to being amused by the circus that presently calls itself the NY Jets. No, it's about an article by David Marcus who points out how Vice Chancellor Laster has lined up with Chancellor Strine on the other side of Chief Justice Myron Steele and the Delaware Supreme Court over the issue of default fiduciary duties in LLCs. It's really not about the issue at hand -- whether managers in an LLC are subject to fiduciary duties by default -- but a larger issue that relates to sometimes tense relationship between the Chancery Court and the Supreme Court. The default fiduciary duty issue is an interesting one with some important ramifications (e.g. can you have federal insider trading liability in a publicly-traded LLC where managers don't have fiduciary duties?, etc), but I'll leave that for another day.
In a per curiam decision last month in Gatz Properties LLC v Auriga Capital, the Supreme Court attempted to put Chancellor Strine back on a short leash:
The opinion suggests that “a judicial eradication of the explicit equity overlay in the LLC Act could tend to erode our state’s credibility with investors in Delaware entities.” Such statements migh be interpreted to suggest (hubristically) that once the Court of Chancery has decided an issue, and because practitioners rely on that court’s decisions, this Court should not judicially “excise” the Court of Chancery’s statutory interpretation, even if incorrect. That was the interpretation gleaned by Auriga’s counsel. During oral argument before this Court, counsel understood the trial court opinion to mean that “because the Court of Chancery has repeatedly decided an issue one way, . . . and practitioners have accepted it, that this Court, when it finally gets its hands on the issue, somehow ought to be constrained because people have been conforming their conduct to” comply with the Court of Chancery’s decisions. It is axiomatic, and we recognize, that once a trial judge decides an issue, other trial judges on that court are entitled to rely on that decision as stare decisis. Needless to say, as an appellate tribunal and the court of last resort in this State, we are not so constrained.
It seems that too many people are forgetting that the Chancery Court is a trial court and not an appellate court, the Supreme Court is reminding us, and practitioners, and the Chancery. OK, got it. Oh, and then the court adds this:
Fifth, and finally, the court’s excursus on this issue strayed beyond the proper purview and function of a judicial opinion. “Delaware law requires that a justiciable controversy exist before a court can adjudicate properly a dispute brought before it.” We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented. A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.
Uh, ouch. OK, but Marcus points to a recent opinion, Feely v NHAOCG LLC by Vice Chancellor Laster in which he lines up with Chancellor Strine and takes issue with the Surpreme Court that Chancellor Strine's analysis of default fiduciary duties in the LLC context are "dictum without any precendential value." He points to the long line of Chancery cases on this issue as persuasive and until such point as the Supreme Court rules on the issue, those cases and Chancellor Strine's analysis of default fiduciary duties will be good enough for him:
The Delaware Supreme Court is of course the final arbiter on matters of Delaware law. The high court indisputably has the power to determine that there are no default fiduciary duties in the LLC context. To date, the Delaware Supreme Court has not made that pronouncement, and Gatz expressly reserved the issue. Until the Delaware Supreme Court speaks, the long line of Court of Chancery precedents and the Chancellor's dictum provide persuasive reasons to apply fiduciary duties by default to the manager of a Delaware LLC. As the managing member of Oculus, AK-Feel starts from a legal baseline of owing fiduciary duties.
Is any of this earth shattering or new? No, but it's an example of the real tension between the Chancery Court and the Supreme Court as it plays out in the opinions of both courts. This dynamic has existed for some time now - predating Strine and Laster. Court watchers - and court anthropoligists - shouldn't be surprised by this.