Tuesday, August 23, 2011
John Coates, IV has posted an interesting new paper Managing Disputes Through Contract: Evidence from M&A. The paper looks at dispute management provisions in a sample of 120 randomly chosen M&A contracts from 2007 and 2008. The paper examines contract terms “aimed at managing litigation, such as (a) clauses mandating and setting the scope for arbitration; (b) choice of law clauses, (c) forum selection clauses, (d) jury waivers, (e) clauses allocating legal costs in the event of a dispute, and (f) clauses attempting to increase or decrease the odds that a court will award specific performance as a remedy in the event of breach.”
Abstract: An important set of contract terms manages potential disputes. In a detailed, hand-coded sample of mergers and acquisition (M&A) contracts from 2007 and 2008, dispute management provisions in correlate strongly with target ownership, state of incorporation, and industry, and with the experience of the parties’ law firms. For Delaware, there is good and bad news. Delaware dominates choice for forum, whereas outside of Delaware, publicly held targets’ states of incorporation are no more likely to be designated for forum than any other court. However, Delaware’s dominance is limited to deals for publicly held targets incorporated in Delaware, Delaware courts are chosen only 20% of the time in deals for private targets incorporated in Delaware, and they are never chosen for private targets incorporated elsewhere, or in asset purchases. A forum goes unspecified in deals involving less experienced law firms. Whole contract arbitration is limited to private targets, is absent only in the largest deals, and is more common in cross-border deals. More focused arbitration – covering price-adjustment clauses – is common even in the largest private target bids. Specific performance clauses – prominently featured in recent high-profile M&A litigation – are less common when inexperienced M&A lawyers involved. These findings suggest (a) Delaware courts’ strengths are unique in, but limited to, corporate law, even in the “corporate” context of M&A contracts; (b) the use of arbitration turns as much on the value of appeals, trust in courts, and value-at-risk as litigation costs; and (c) the quality of lawyering varies significantly, even on the most “legal” aspects of an M&A contract.
Wednesday, July 13, 2011
Wednesday, June 29, 2011
According to the Delaware Law Weekly, Sam Glasscock was unanimously confirmed by the Delaware General Assembly today as Vice Chancellor to fill the vacancy created when Vice Chancellor Strine moved over to take up the position of Chancellor.
Monday, June 27, 2011
When negotiating an acquisition agreement, it often appears that the other side is negotiationg language without any real knowledge of what the law actually is. One area where this is often the case is anti-sandbagging provisions. This article frames the sandbagging/anti-sanbagging issue and provides a useful summary of the law in several of the most relevant jurisdictions:
In Delaware, the buyer is not precluded from recovery based on pre-closing knowledge of the breach because reliance is not an element of a breach of contract claim. The same is true for Massachusetts and, effectively, Illinois (where knowledge is relevant only when the existence of the warranty is in dispute). But in California, the buyer is precluded from recovery because reliance is an element of a breach of warranty claim, and in turn, the buyer must have believed the warranty to be true. New York is less straightforward: reliance is an element of a breach of contract claim, but the buyer does not need to show that it believed the truth of the representation if the court believes the express warranties at issue were bargained-for contractual terms.
In New York, it depends on how and when the buyer came to have knowledge of the breach. If the buyer learned of facts constituting a breach from the seller, the claim is precluded, but the buyer will not be precluded from recovery where the facts were learned by the buyer from a third party (other than an agent of the seller) or the facts were common knowledge.
Given the mixed bag of legal precedent and little published law on the subject, if parties want to ensure a particular outcome, they should be explicit. When the contract is explicit, courts in California, Delaware, Massachusetts and New York have either enforced such provisions or suggested that they would. Presumably Illinois courts would enforce them as well, but there is very little or no case law to rely upon.
June 27, 2011 in Asset Transactions, Contracts, Deals, Delaware, Leveraged Buy-Outs, Management Buy-Outs, Merger Agreements, Private Equity, Private Transactions, Transactions | Permalink | Comments (0) | TrackBack (0)
Thursday, June 23, 2011
According to DelawareOnline, Strine was unanimously confirmed by the Delaware Senate yesterday to be the Chancellor of the Chancery Court replacing Chancellor Chandler who has retired and will join Wilson Sonsini. According to the DelawareOnline:
Strine ... is widely known in the legal community as an intelligent and talented jurist who can be both comical and combative in the courtroom.
Thursday, June 9, 2011
For insights into the challenges faced by the Delaware Chancery Court and how soon to be Chancellor Strine will approach them, you should read One Fundamental Corporate Governance QuestionWe Face: Can Corporations Be Managed for theLong Term Unless Their Powerful ElectoratesAlso Act and Think Long Term?. This paper appear in the November 2010 Business Lawyer. It's reasonably short, but all the footnotes make it look longer. It's definitely worth reading if you haven't already.
He asks a lot of tough questions and isn't shy about making his opinions known. Sometimes, the problem isn't the law. It's us. For example:
Although the focus of the institutional investor community over the last twenty five years on issues like takeover defense and encouraging executive compensationtied to stock price performance is understandable, what is less edifying is the absence of any similar weight given to issues that many end-user investors care more about, such as whether corporations are endangering their solvency by excessively leveraging themselves or skirting the law through financial gimmicks to improve the optics of the company’s balance sheet.
Even after the market debacle involving WorldCom and Enron, the institutional investor community remained preoccupied with issues like takeovers and executive compensation. And before the more recent market crash, important segments of the institutional investor community were demanding to know why more public companies could not operate with the high degree of leverage employed by those owned by private equity firms.
The potency of the institutional investor community is easy to see. When they want something, they tend to get it. Institutional investors demanded and largely got changes to CEO compensation so that it was primarily based on components—such as options—that were tied to raising the corporation’s stockprice. Institutional investors wanted a reduction in takeover defenses and have been highly successful in achieving that objective. In the wake of Delaware’s passage of a so-called majority voting statute in 2006, over 70 percent of the largest public companies have adopted that approach in response to stockholder demands. In response to investor sentiment, corporations levered up, took more risks, and engaged in huge stock buyback programs.
It's going to interesting.
Gov. Markell has nominated Vice Chancellor Leo Strine to replace retiring Chancellor Chandler in the Chancery Court. Here's the press release from the governor's office. With Strine moving to the Chancellor's position, that leaves a vacant Vice Chancellor's slot. Gov. Markell has nominated Sam Glasscock, now a special master on the Chancery Court to fill that slot.
Sunday, June 5, 2011
According to the Delaware Grapevine, Delaware Governor Markell now has before him a short-list of potential candidates to replace retiring Chancellor Chandler. It's indeed a short list:
1. Leo Strine Jr., a vice chancellor who could move up to chancellor
2. Sam Glasscock III, already on the chancery court as a special master, and
3. Karen Valihura, a partner in the Wilmington office of Skadden Arps.
A couple of things worth noting. Since Chandler is a Republican, Delaware's court rules require that he be replaced by a Republican. So, if Strine is moved into the role of Chancellor, Markell will have to appoint a Republican Vice Chancellor to replace Strine. Glasscock and Valihure are reportedly Republicans. Also, The Deal reported some info regarding Glasscock last year when Governor Markell was considering a replacement for Vice Chancellor Lamb - that eventually went to now Vice Chancellor Laster. Here was the scuttlebut from last summer:
One theory making the rounds in Wilmington is that Sam Glasscock III will succeed Chandler. Currently a special master in Chancery, Glasscock was born in Erie, Pa., and grew up in Lewes, Del. He graduated from the University of Delaware with a B.A. in history in 1975 and earned a law degree at Duke University in 1983 and a master's in marine policy from the University of Delaware in 1989. Glasscock was a litigation associate at Prickett, Jones, Elliott, Kristol & Schnee, a special discovery master in Delaware's Superior Court and a deputy attorney general in the state's Department of Justice before being appointed a special master, a position in which he hears some of his own cases, especially those involving property and trust disputes, and assists the Chancery judges on discovery and procedural matters.
Wednesday, April 27, 2011
Here's the job announcement as posted on the employment section of the Delaware Courts' website.
There are requirements of political balance under the Delaware Constitution Art. IV § 3 and, in this case, the appointee must be either a Republican (including a current judicial officer who is a Republican) or a Democrat who is a current Vice Chancellor or Supreme Court Justice. There also is a requirement that the appointee be a resident of the State of Delaware. There are no other geographical requirements for this office. The position provides a current annual salary of $185,750. The Commission solicits candidates for this office.
Candidates for Chancellor also will be simultaneously considered by the Commission for a potential derivative vacancy in the office of Vice Chancellor if a sitting Vice Chancellor is nominated to be Chancellor. In the event a sitting Vice Chancellor is nominated to be Chancellor, the Commission may not solicit further applications for the office of Vice Chancellor. Applicants for Vice Chancellor must be a resident of the State of Delaware and a Republican (including a current judicial officer who is a Republican) or a Democrat who is a current Supreme Court Justice. There are no other geographical requirements for the office of Vice Chancellor. The position provides a current annual salary of $174,950.
In the event a sitting member of a court other than the Court of Chancery is appointed to the office of Chancellor or to a derivative vacancy in the office of Vice Chancellor, the Commission will provide a separate notice soliciting candidates for the vacancy caused thereby.
Delaware residents only!
Monday, April 25, 2011
According to Delaware online:
In a surprise announcement, Chancellor William B. Chandler III, one of the most influential business court judges in the world, has announced he will leave the bench.
Chandler has been speaking his mind recently about the Airgas opinion and the steady erosion of Unocal over time. He'll be hard to replace.
Saturday, March 26, 2011
David Marcus over at The Deal has a really good piece on how Vice Chancellor Travis Laster is pushing everyone's buttons these days -- in a good way! His ruling in Del Monte got a lot of attention, but what looks the case that will define his early days his is ruling in In re Revlon from last Spring. There he ordered a change in lead plaintiff's counsel in a ruling that got a lot of attention. From Marcus' piece:
Actual litigation, Laster emphasized, is what he wants. Shareholder suits "serve as a valuable check on managerial conflicts of interest," he wrote in Revlon, and therefore should be treated seriously by both lawyers and courts.
"Traditional plaintiffs' law firms who bring lawsuits on behalf of stockholders without meaningful economic stakes can best be viewed as entrepreneurial litigators who manage a portfolio of cases to maximize their returns through attorneys' fees," he wrote. "A systemic problem emerges when entrepreneurial litigators pursue a strategy of filing a large number of actions, investing relatively little time or energy in any single case, and settling the cases early to minimize case-specific investment and maximize net profit." Replacing counsel who engage in such practices should encourage other lawyers to bring more meritorious cases.
Laster admitted that such an approach risks driving plaintiffs' lawyers to other jurisdictions. But, he wrote in response, "While in the short run policing frequent filers may cost some members of the bar financially, in the long run it enhances the legitimacy of our state and its law." In this view, stingy fee awards to lawyers who are generally looking to turn a quick profit for opportunistic strike suits will drive that less desirable work to other courts, while generous fee awards for good work will only make Delaware a more appealing venue for meritorious suits.
Laster shifted his focus to company-side lawyers in a case that immediately got their attention. In a piece of shareholder litigation last fall, Laster focused his ire on David Berger, a litigation partner at Wilson Sonsini Goodrich & Rosati PC in Palo Alto, Calif. Laster threatened to bar Berger from litigating in Delaware by removing his pro hac vice status because of how Berger represented NightHawk Radiology Holdings Inc. in settling shareholder litigation arising from the company's merger with Virtual Radiologic Corp. (Pro hac vice allows lawyers not admitted in a jurisdiction to appear before its courts.) Shareholders initially sued NightHawk in Chancery, and in oral argument Laster found "there were meaningful, litigable" issues in the deal that the plaintiffs opted not to pursue. Instead, they focused on weak disclosure claims.
"So imagine my surprise," Laster told lawyers at a Dec. 17 hearing in the case, upon learning that NightHawk and its shareholders had agreed to a disclosure-based settlement approved by an Arizona state court that probably didn't know about Laster's view of the case. The parties settled the claims that Laster rejected and passed over those he'd told them might have merit.
In the judge's view, the settlement raised the specter of "collusive forum shopping." Once a public company announces a sale, different shareholders often sue for alleged breaches of fiduciary duty in different jurisdictions. Defense lawyers complain about the resulting inefficiency and expense, but the multiple forums may allow defendants "to force plaintiffs to reverse-bid for the lowest possible settlement," Laster said at the hearing. In other words, the company settles with the plaintiffs' lawyer who often accepts the smallest settlement -- and, possibly, the smallest fee, but one that on an hourly basis may be quite lucrative. "Defense lawyers benefit from this game, too," Laster said. "They get to bill hours without any meaningful reputational risk from a loss. They then get a cheap settlement for their client. Disclosures are cheap."
It's worth reading the whole piece here.
Tuesday, March 22, 2011
The Takeover Panel in the UK is moving forward with reforms adopted in the wake of Kraft's acquisition of Cadbury. One of the reforms is a near ban on termination fees.
Among the biggest changes will be a tightened “put up or shut up” period, requiring a publicly named bidder to declare its formal intentions within 28 days, from a system where the clock starts ticking at the request of the target company.
Other changes include banning incentives that give special protection to the first bidder, commonly known as break fees.
This move highlights two different directions that regulatory bodies have moved with respect to the question of deal protections. On the one hand, we have Delaware. It's reasonableness standard with respect to any ex post review of deal protections is pretty deferential of board action. Absent allegations of loyalty conflicts, a board acting in good faith basically has a green light to grant deal protection measures. On the other, we have an series of ex ante rules that govern what a board can or cannot do in advance of an acquisition, including setting strict limits on termination fees. These are two very different ways of looking at the world. If you were to only read Delaware case law, you'd think that no bidder would ever come forward absent strong deal protection measures. But, when you look at the UK's takeover market you know that it's just not the case. There is room for diversity in regulatory approaches.
Monday, January 24, 2011
So, tomorrow Chancellor Chandler will take up the question of whether to order the Airgas board to pull its pill. Air Products, you'll remember, has been pursuing Airgas for many months now. Airgas has steadfastly said "No." In the fall Air Products elected three members to the board and got shareholders to vote to approve a new bylaw that would have moved up the next annual meeting to January - thereby cutting short the defense that time provides in the classified board. The Chancery Court upheld the bylaw change. But then, in a little bit of a stunner, the Delaware Supreme Court overruled the Chancery Court's opinion. The Chancellor, I assuming confident that his opinion wouldn't be overruled, had put off the question of whether to order the rights plan pulled to a date just past the accelerated shareholder meeting date. That was a nice way to avoid the question of the pulling the pill -- had the Chancery Court's opinion not been overruled, the shareholders would have met by now, and presumably, voted in a new majority for the board, thus making the question of the pill moot. The Delaware Supreme Court decision ensured that this was not to be.
So, Chancellor Chandler is put in the uncomfortable position of having to consider whether to order a board that has lost the first round in a proxy contest whether it must pull its rights plan. Of course, Chancellor Chandler is not opposed to issuing such an order in the right circumstances. In the Craigslist case he order the board to pull its pill. Craigslist was a bit of a unique case. How many closely-held firms have shareholder rights plans anyway? Probably just Craigslist. The Airgas case is more difficult. Why? Well because it's precisely the kind of case that the Chancery Court has studiously avoided hearing for year. In his 2002 paper, which is a response to a paper from Profs. Bebchuk, Coates, and Subramanian, Vice Chancellor Strine described just this scenario as the "professorial bear hug" intended to forces judges to deal directly with the fiduciary duty issues related to the pill.
The question the authors ask us to decide affirmatively is fundamental: Can control of the corporation be sold over the objections of a disinterested board that believes in good faith that the sale is inadvisable? That is, at bottom, the authors want to force the hand of the Delaware courts to decide, once and for all, that impartial and well-intentioned directors do not have the fiduciary authority to "just say no" for an indefinite--even perpetual--period to a noncoercive tender offer made to their company's shareholders. ...
... When the stockholders of a corporation with an ESB have expressed their desire to receive a fully funded, all-shares tender offer in a fair, noncoercive board election that was preceded by an adequate opportunity for the incumbent board to develop a better strategy and make their case to the target stockholders, does a well-motivated and well- informed majority of independent, incumbent directors who believe that the offer is inadequate have the power to block that tender offer by continuing to deploy a poison pill?
And that, in essence, is what is at stake tomorrow in Chancellor Chandler's courtroom. A couple of months ago, I predicted that we'd never get to see this day. I also predicted that the Del. Supreme Court wouldn't overturn Chancellor Chandler's bylaw decision and that the Pats would beat the Jets (not cover the spread, just beat them). Clearly, I'd be a mess if I had to make my living in Vegas, so I'm making no predictions. Chancellor Chandler has shown himself to be sufficiently peeved at being overruled in his earlier decision that I think most bets are off. I continue to be amazed that the Delaware Supreme Court wasn't able to look ahead to tomorrow and realize that by knocking down the bylaw they set up this Just-Say-No case to come before Chandler, and inevitably them. Why is that a better outcome than letting the bylaw survive? I don't know. Anyway, tune in tomorrow for all the fun.
Wednesday, December 15, 2010
Friday, December 10, 2010
I wasn't paying attention. I figured he'd be around forever. This piece on the Delaware Grapevine blog reminds that Vice Chancellor Strine's 12 year term on the Chancery Court recently expired:
His 12-year term expired Nov. 9. A judge is allowed by the state constitution to stay on for another 60 days but emphatically no longer. "In no event," the constitution says.
Strine would be out three days before the General Assembly normally would be back in. The constitution has a remedy. It instructs the governor to summon the Senate to a special session, so that is what Jack Markell, the Democratic governor, did.
A constitution can be so inconvenient.
The senate will be meeting on December 14. Strine's reappointment will be one of the first things on the agenda. Though before dealing with Strine, there is apparently a coup going on with respect to senate leadership. I'll leave that to the Delaware politicos. With all the turmoil, is Strine in jeopardy?
... Strine is expected to glide into his next term. This is not what happened when he was last nominated in 1998 by Tom Carper, the Democratic governor now in the U.S. Senate.
At the time, Strine was the 34-year-old counsel to Carper. Both then and today, Strine was known for his braininess, demolishing wit and little compunction about sandpapering others, no matter if they were state senators with the power of advice and consent or million-dollar lawyers in his courtroom.
Tom Sharp, a Democratic senator when Strine was first considered for the bench, told him, "Maybe the problem is some of us have gotten to know you very well."
We'll check in next Wednesday to make sure Strine is still there!
Friday, December 3, 2010
I don't know, but I think Chancellor Chandler isn't all that impressed with the Supreme Court reversing his decision in the Airgas case. He sent a letter to the parties yesterday (Letter here) with a number of questions seeking supplemental information relevant to the next part of the case - the redemption of Airgas' pill. To give you a sense of how he is feeling, here's question number 7:
Please identify specific evidence in the record bearing upon the Airgas stockholder profile that suggests that the Airgas stockholders are unable to make a decision for themselves or that suggests that Airgas stockholders are vulnerable to mistakenly rejecting the Airgas board’s advice about the firm’s alleged higher intrinsic value. In other words, what evidence in the record developed during the trial in this case indicates or suggests that Airgas stockholders are likely to accept an inadequate offer?
I recognize that the Delaware Supreme Court apparently has concluded that stockholders may be simultaneously intelligent enough to decide whether to oust directors from office but not intelligent enough to decide whether an offer to purchase their property is in their best economic interest,[...] but exactly what is it about the Airgas stockholders (or about the Airgas business strategy, or about the Air Products tender offer) that would make the Airgas stockholders uniquely incapable of properly making an economic judgment in their own self- interest?
I guess he's not all that impressed with the Supreme Court's opinion. In another question, Chandler suggests asks for arguments why, if the only issue is price, shouldn't shareholders be permitted to decide on their own whether to take the offer, particularly since Airgas hasn't offered them an alternative. Interco anyone? [But see Time.]
OK, OK, I've learned my lesson about prognosticating too much with this case. But, could Chandler, in a pique, order Airgas to pull its pill? I know it's a low probability, OK, a really low probability and highly unlikely, sure. Still ... who predicted that the Supremes would reverse the trial opinion? I'm assuming nothing. But yet, it's another reason to keep paying attention to this case.
Monday, November 29, 2010
The Deal Prof has a run-down on the Airgas decision. He has it about right:
The signal this reversal sends is that it basically says don’t worry about the language of your contracts so long as everybody “knows” what it means.
Potato, potahto, tomato, tomahto. Let's call the whole thing off ... But you know, for the life of me, I can't figure out what motivated the court to take this path with the decision.
Tuesday, November 23, 2010
See that there? That's egg on my face (ARG-DelSupCtOpinion). It's a total victory for Ted Mirvis and Wachtell. The Supreme Court even cited approvingly to the ABA's form book.
The Supreme Court overturned the Chancery Court, basically holding that since everyone has always assumed the language "in the third year following the year of their election" means a "three year term" for directors, then four months between annual meetings is too truncated to count as an annual meeting. So a bylaw that moves the annual meeting to a date that isn't near the "traditional" date, but still "in the third year following the year of their election" is invalid. That seems like a victory for poor (or sloppy) drafting: "in the third year following the year of their election" or "three year term" ... whatev's.
Of course, the court leaves unanswered the next question - okay, so what's the minimum amount of time between annual meetings? Five months? Six months? More?
So the good news? By ruling against the bylaw, the Supreme Court has given new life to Air Products challenge to Airgas' "just-say-no" defense. Could it be that we might finally get "just-say-no" litigated? We'll see. Air Products' challenge to Airgas' poison pill is next up in the docket.
Monday, October 11, 2010
Top-Up options are fairly standard in friendly tender offers. A top-up option provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold so that it can complete a short-form squeeze-out merger. The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules (although it's debatable whether this really matters or not). Also, as Brian has pointed out before, make sure you do the math to determine if the target has enough authorized but unissued stock so that the top-up is possible (this should really make you remember the importance of paying attention in your basic Business Associations class).
Now, for people interested in learning more about Top-ups, Davis Polk has issued a client memo on two recent Delaware cases touching upon top-ups. As the Deal Professor notes, Chancellor Parsons’ recent opinion in the In re Cogent, Inc. S'holders Litig. case provides a good “road map for how deal lawyers should negotiate and structure top-up options in order for them to comply with Delaware law.”
Monday, September 13, 2010