Monday, November 16, 2009
HealthSouth Corp. recently announced a policy to reimburse shareholder initiatives relating to shareholder nominations for the election of directors:
Board of Directors has authorized the Company to amend its bylaws to adopt procedures relating to shareholder nominations for the election of directors. At its October 22, 2009 regular meeting, the Board approved the general terms of an amendment to the Company's Bylaws that will provide for reimbursement of shareholder expenses in connection with a proxy solicitation campaign, subject to certain conditions including the Board's determination that reimbursement is consistent with its fiduciary duties. The Board expects to adopt the final form of this Bylaw amendment this week. The final amendment will be included in a Form 8-K to be filed with the Securities and Exchange Commission when approved.
Friday, November 13, 2009
In Amirsaleh v. Board of Trade of The City of New York, Inc, Chancellor Chandler takes up the heavy burden of politely explaining the Delaware corporate law to the Supreme Court. I apologize for posting such a long quotation, but it's well worth reading. The issue here is whether in "bad faith" is the same as "not in good faith." The Supreme Court thinks the two are different. The Chancery Court begs to disagree.
According to plaintiff, all that need be shown is an absence of good faith. I must note that, in support of plaintiff’s argument, there are two known instances where the Delaware Supreme Court has suggested that there may be a difference between “bad faith” and “conduct not in good faith” in the context of the implied covenant [of good faith].
The first suggestion was made in Dunlap v. State Farm Fire and Casualty Insurance Co.when the Supreme Court stated “the case law frequently (and unfortunately) equates a lack of good faith with the presence of bad faith . . . .” But in the same case the Supreme Court explains that “[d]espite its evolution, the term ‘good faith’ has no set meaning, serving only to exclude a wide range of heterogeneous forms of bad faith.” This latter statement teaches that a party fulfills its obligation to act in “good faith” when it does not engage in any of the heterogeneous forms of “bad faith.” Put another way, “good faith” conduct can only be understood by reference to “bad faith” conduct. If no stand-alone definition of “good faith” exists, I admit my inability to understand how the phrase “a lack of good faith” has any ascertainable meaning. How can the plaintiff prove the absence of something that is undefined? In the Dunlap opinion the Supreme Court does not develop its suggestion that there might be a substantive difference between “a lack of good faith” and “bad faith.” Moreover, it does not appear to base its decision in Dunlap on that distinction (i.e., it did not find that the defendant’s actions “lacked good faith” without rising to the level of “bad faith”). Accordingly, I conclude that the Dunlap opinion did not hold that a breach of the implied covenant can be established by “a lack of good faith.”
The second suggestion was made in 25 Massachusetts Avenue Property L.L.C. v. Liberty Property Ltd. Partnership when the Supreme Court stated “[a]lthough the Vice Chancellor determined that Republic did not act in bad faith, he did not expressly address [defendant’s] liability for breach of the implied duty of good faith and fair dealing . . . . The two concepts—bad faith and conduct not in good faith are not necessarily identical. Accordingly, we must remand for the Court of Chancery to consider this claimed breach . . . .” On remand, Vice Chancellor Strine could not find a meaningful distinction between the two concepts and declined to reverse his previous ruling because he had already found that the defendant did not act in bad. Analyzing whether there was any meaningful distinction between the concepts, the Vice Chancellor observed: “Given the longstanding use of the concept of good faith to articulate the state of mind appropriate for various actors . . . and the use of the concept of bad faith to label someone whose state of mind is violative of the appropriate standard, one would think this concept of ‘neutral faith’ would have been embraced in American law before now if it had any logic or utility. I do note that in our corporate law, this court has firmly rejected the notion that the words ‘not in good faith’ means something different than ‘bad faith,’ and has done so on sensible policy, logical, and linguistic grounds.”
Based on all of the foregoing, I agree with Vice Chancellor Strine that there is no meaningful difference between “a lack of good faith” and “bad faith.” Accordingly, to prove a breach of the implied covenant plaintiff must demonstrate that defendants acted in “bad faith.”
Tuesday, November 10, 2009
Continuing the theme of comparative takeover regulation: here's a new paper, A Simple Theory of Takeover Regulation in the United States and Europe, from Ferrarini and Miller forthcoming in the Cornell International Law Journal investigating a federal approach to takeover regulation in teh US and Europe.
Monday, November 9, 2009
The UK-styled approach to takeover regulation relies heavily (although not exclusively) on brightline rules for delimiting what is permitted in the context of an offer and a response to an offer. The upside of this structure is that it leaves the decision whether to accept or reject an offer in the hands of the shareholders.
Contrast this approach with Delaware where the corporate code and the courts leave directors with a high degree of discretion whether to accept or reject offers. To the sometimes chagrin of academics (myself included) Delaware courts are loathe to set out brightline rules governing the takeover process. One of the selling points of the Delaware approach is that the fact-intensive approach allows for directors and courts reviewing directors actions to recognize that there may not be a one-size-fits-all solution and to take into account the specific issues in every case.
In Australia today we have an example why Delaware might be right to eschew many mandatory rules. Australia's Takeovers Panel is modeled on the UK Takeover Panel. EWC, a private Australian company in the process of going public, announced a bid for NewSat, publicly-traded Australian company. The details of the back-and-forth between the two companies can by found here care of The Brisbane Times newspaper. In any event, the talk of a take-over triggered a required Bidder's Statement to be filed by EWC. After some delay, EWC just filed its statement along with a surprising recommendation:
On behalf of the directors of EWC Payments Pty Ltd (EWC), I am pleased to enclose an offer by EWC to acquire all of your shares in NewSat Ltd (NewSat).However, in light of unexpected action taken by the Commonwealth Bank AFTER the Takeover Offer was made, and which the Commonwealth Bank set aside prior to a Court Hearing, I very sadly recommend that your do NOT accept this offer from EWC ...
While this is certainly a very good reason for NewSat shareholders to reject the EWC offer, there are many other equally good reasons...
Academic empirical legal analysis, when not coupled with a clear understanding of both fundamental corporate law principles and practical takeover market dynamics, can lead to meaningless data and misleading conclusions.
Tuesday, November 3, 2009
Vice Chancellor Laster's first days on the job and an informative backgrounder of the Chancery's newest vice chancellor:
Vice Chancellor J. Travis Laster strode down the hallway used by judges in Delaware's Court of Chancery like an old hand on the bench.
But when it came time to enter the courtroom, he couldn't get the door open. Turns out, Laster was pushing the door instead of pulling it.
"That shows how new I am," Laster, 39, said on his third day on the job last month.
Monday, October 19, 2009
Reuters sat down with the newest Vice Chancellor. His thoughts on the financial crisis:
"With the crash in the banking system still ringing loud in everyone's ears," said Laster. "If there was ever a moment where a politically sensitive Delaware judiciary might have reached out to change Delaware law, that was it. Oversight law is not going to change for a moment-specific reason."
"I don't think it's fair to say about the financial crisis that directors weren't trying to do a good job. Directors were trying to do a good job," he said.
"Now it is always nice after the fact to try to find someone else to hold the bag, but I think it critically important we not to judge these things in hindsight. The core question for us is always: At the time the decision was made, what were the directors thinking?"
Wednesday, October 14, 2009
It's a recurring question. We know that an all cash transaction will constitute a change of control and thus require directors attempt to get the highest price reasonably available for the benefit of target shareholders. A stock-for-stock deal where the shareholders of the target remain in the fluid aggregate doesn't constitute a change of control, so directors are free to take into considerations other issues when deciding whether to accept an offer. But what if you are taking a combination of stock and cash - how much cash will result in Revlon duties being triggered?
In In re NYMEX Shareholder Litigation, the chancery court had chance to slap down another data-point to help narrow the band of when Revlon duties might be triggered. In the NYMEX-CME transaction, at the time the board initially approved the transaction, NYMEX shareholders were to receive 36% cash and 64% CME stock. Whether Revlon was triggered by this consideration mix was an issue of some debate between the parties when they were before the court.
Saturday, October 10, 2009
Thursday, October 8, 2009
Wednesday, September 23, 2009
From yesterday's confirmation hearing as reported by the Sussex Countian:
“For the past 13 years the vast majority of my practice has been before the Court of Chancery,” he said, adding that he understands not only the legal precepts that guide the court, but also the procedures and practices under which it operates.
“What the Court of Chancery does is very different from other courts, the legal questions are of a particular nature,” he said. “There is not a lot of correspondence between other courts and the Court of Chancery.”
The court, which has jurisdiction over cases involving businesses, contracts, trusts and other financial matters, is often cited as the leading authority on corporate law worldwide.
In response to a question from Senate President Pro Tem Anthony J. DeLuca, D-Varlano, Laster said he would work to preserve the court’s status as a model, even when its decisions conflict with trends in the federal judiciary.
Laster told the committee that, even in light of the bad feelings the public and politicians may have towards corporate America and its conduct before and during the recession, the Court of Chancery must hold its ground and remain fair and reasonable.
“A lot of people are hurting and are angry, they’ve lost a lot of money, it’s justifiable,” he said. “I think there’s a culture in Washington that says, whatever happens we have to change something.”
While some are quick to accuse Delaware and the Court of Chancery of leaning on the side of corporate interests, Laster said the court must prove that it is and has always been fair.
“We have to stick to what got us to a point of preeminence,” he said. “We have to make sure that we’re not labeled a pro-management state, we are a balanced state.”
Tuesday, September 22, 2009
Wednesday, September 16, 2009
The Senate Executive Committee will meet to consider the nomination of Travis Laster at 1 p.m. hearing on September 22. At 4:00pm following the nomination hearings, the full Senate will be called into session, presumably to vote on the nominations. Now that's quick!
Update: Link to Senate Executive Committee.
Link to full Senate agenda for the 22nd.
Sunday, September 6, 2009
On Friday, The Dealbook helpfully linked to some of the comments submitted in response to the SEC's "shareholder access" proposal. There are lots of comments and they cover a wide variety of issues related to the access proposal. A general line of argument submitted by many is one, I think, that makes a lot of sense. While more shareholder access is good, the SEC's proposal may be moving too quickly.
OK, I know that's hard to imagine that an issue like this that has been floating around for years in one form or another is "moving too quickly", but Delaware just amended its code to permit shareholders to adopt bylaws requiring the corporation to include sharheolder nominees on the ballot and bylaws requiring reimbursement of shareholder expenses in connection with such nominations.
The comments from the Delaware Bar Association provide a nice summary of the issues related to DGCL 112 and 113 and the proposed rule 14a-11. As the comments from Wachtell and O'Melveny point out, after 2006 when Delaware adopted amendments permitting the adoption of majority voting proviions, there has been a flood of private ordering in that area. My sense is that while O'Melveny is neutral on that outcome, Wachtell is predictably less happy.
In any event, rather than move forward now on a "one-size-fits-all" shareholder access proposal, why not wait some more and see what the impact of the DGCL amendments is? The response by shareholders following the majority voting amendments has been significant. There's no reason to believe that there won't a similar response by shareholders in the wake of the 2009 DGCL amendments with respect to shareholder access - all that without additional moves by the SEC. If the SEC is serious about allowing shareholders more power, then it seems obvious that they should sit back and wait before adopting 14a-11.
Wednesday, August 26, 2009
Wednesday, August 19, 2009
Governor Markell's nominating statement follows below:
Markell Announces He Will Nominate J. Travis Laster To Serve On The Court of Chancery
Wilmington Lawyer Spent His Career Litigating High-Stakes Disputes Before the Court
WILMINGTON – Governor Jack Markell announced Tuesday that he will nominate J. Travis Laster, a Wilmington attorney, to serve as Vice Chancellor on Delaware’s Court of Chancery.
“Travis Laster has spent his career litigating in front of the Court of Chancery, and has developed an outstanding reputation for his intelligence and integrity,” said Markell. “If confirmed, I think he will be a great addition to a court known for its professionalism, its hard work, and its leadership in matters of corporate law.”
Laster, a graduate of Princeton University and the University of Virginia Law School, currently practices with Abrams & Laster, a law firm he helped create in 2005. Before founding Abrams & Laster, Laster practiced with Richards, Layton & Finger. Laster will be nominated to fill the Vice Chancellor seat vacated by the Honorable Stephen P. Lamb upon his retirement.
“I am honored to be nominated by Governor Markell,” Laster said. “I have profound respect for the Court of Chancery and for the many jurists who have given that court its national reputation for excellence. If confirmed, I hope to contribute to the court’s tradition.”
Saturday, August 1, 2009
A found farewell to Vice Chancellor Lamb and then some scuttlebutt
on a potential replacement in the Delaware
Those who confirmed they applied for the post are: Delaware Superior Court Judge Mary Miller Johnston; J. Travis Laster, a partner with Abrams & Laster in Wilmington; Joel Friedlander, a partner with Bouchard Margules & Friedlander in Wilmington; and Bruce Silverstein, a partner with Young Conaway Stargatt & Taylor in Wilmington. Richard Forsten, who is a partner with Saul Ewing in Wilmington, declined to comment on speculation that he applied. Robert Saunders, a partner at Skadden, Arps, Slate, Meagher & Flom in Wilmington, whose name had been suggested earlier this month, said he did not apply.
The paper says to expect things to move on a nomination by mid-August.
Monday, July 27, 2009
Last week Chancellor Chandler dismissed Wayne County
Employees’ Retirement System v Corti (the Activision litigation). The plaintiffs in the case made a number of
claims – you can probably guess what they were.
What caught my eye in the opinion was how the court dealt with the Revlon claims against the board. FYI: The business combination agreement in
question is here. The opinion can be found over at AmLawDaily.com along with commentary.
The court dismissed claims that the directors of Activision failed in the obligations under Revlon by not conducting an independent market check before agreeing to a sale of control. By the way, the transaction is slightly out of the ordinary in that it’s a two step deal. In the first step, Activision issued new shares to Vivendi giving them 52% control of the stock, then Vivendi engaged in a tender offer for the outstanding shares of Activision that it did not control.
In dismissing the claims against Activision’s board, the court reiterates what is by now settled Delaware law – directors are not liable for failing to carry out a perfect process during in a sale of control. There is “no blueprint” for meeting one’s duties under Revlon. Indeed, citingthe Delaware Supreme Court's decision in Lyondell v. Ryan, the court noted that “the relevant question is whether the Director Defendants ‘utterly failed to attempt to obtain the best sale price’” and not whether the process was perfect.
“Utterly failed to attempt” now that’s not an active auction or even much of a market check. In fact, that’s a pretty low bar when it comes to assessing whether directors have met their obligations under Revlon. Whatever happened to the board as auctioneer. If that’s not low enough, the court offers up Lyondell’s “knowingly and completely failed to undertake their responsibilities” language.
It’s hard to imagine what kind of inaction by directors can be the product of ‘utterly failing to attempt’ and ‘knowingly and completely failing’. I mean, it's really got to be bad. I imagine that if the facts of Revlon re-appeared in 2009 post-Lyondell that the case might even come out a different way given these standards. In Revlon, court struck down a lock-up granted to a favored bidder. That’s hardly an utter failure to attempt to obtain the best sale price.
Tuesday, July 14, 2009
Wondering what to read during your next weekend at the beach? The latest Nora Roberts or Catherine Colter novels not attracting your attention? Or maybe like me, your local bookstore for some reason doesn't carry the latest Glenn Beck tome? OK, that's probably a sign that your weekend might be better spent catching up on recent developments in the Delaware corporate law. So how about the 2009 Developments in Delaware Corporation Law (James Holzman at Prickett, Jones, & Elliott)? It's a nice 60 page overview of everything you missed over the past year while you were struggling just to keep up with the day's headlines. Print it out and bring it to the beach.