Monday, September 13, 2010
Tuesday, July 13, 2010
B&N's outside counsel from Cravath, Scott Barshay is back on the stand. Says that the "family transfer provisions" that got Burkle so upset early on weren't the idea of anyone in the company and that it all came from Cravath. Barshay is walking through the process of adoption of the rights plan and its amendments. And very quickly the defense is done.
Barshay is now on cross examination.
- "Mr. Barshay, isn't it a fact that the first time you met any members of the board was five minutes before the pill was adopted?"
Five minutes? Ouch.
Counsel is trying to tag Barshay for immediately considering adoption of a rights plan once Burkle surfaced. There's an objection. Strine steps in to calm the children, noting that considering the adoption of a pill would not be an altogether uncommon response.
Pushing Barshay again on his knowledge of the board before he met them for the first time. It sounds like he had no idea who was going to be in the room or the background of anyone on the board. How is that possible? He certainly didn't give a lot of push back on that line of questioning.
Lots of questions regarding the presentations on the rights plan that Barshay prepared for Daniels (24 pages) and the 2 page presentation for the board. Seems like a pretty standard overview of how pills work. Hope B&N didn't pay too much for it. I could have told them the same for less.
Shoutout for Chuck Nathan! An article by Chuck Nathan gets commended to the viewing audience. I guess that's me. I suppose I should find out which article they are talking about.
"Does the pill as it stands does not prevent Riggio and his family from acquiring more stock. Is that correct?"
Because Riggio's adult children aren't living with him, they are not affiliates and don't trigger the beneficial ownership definition under the pill. Barshay tries to push back by pointing to the 13D group requirements, but concedes the defense's general point. Tries to argue that Burkle's kids could buy stock and not trigger the beneficial ownership rules. Defense counsel corrects him by noting that Burkle's kids live with him so, no. Now working through some pill math. Counsel makes the point that the board can accumulate stock without triggering the rights plan while Yucaipa's acquisition of stock would trigger the plan. Cross examination is done.
On re-direct - discussion of whether or not a pill can impede a proxy contest. Barshay's view is that a pill is not triggered by a proxy contest. Indeed, notes that no pill as ever been triggered by a proxy contest.
Strine asking some questions regarding setting of the trigger for the pill at 20%.
Mr. Barshay is excused. B&N lead director Michael Del Giudice is called.
Lots of questions regarding Del Giudice's background and how he came to the board. Everybody - including Strine - is reliving the unfortunate Dukakis presidential campaign and the "tank" incident for which Del Giudice disclaims any responsibility.
Back from the morning break and the plaintiffs object to agreement that has not been produced. The agreement disclaims Del Giudice's financial interest accruing to Rockland that result from any Riggio investment in Rockland. Strine doesn't appear happy that the document hasn't been produced and rules as such.
OK, back to direct testimony. Discussion of the board meeting at which the pill was adopted. Interesting, but not surprising - Riskmetrics' reaction to a pill adoption was a topic of conversation in the boardroom and that the pill was designed in order to be as "Riskmetrics friendly" as possible.
Now on cross, plaintiff's counsel is all geared up for a "Law & Order" gotcha moment, but technical difficulties screw it up. That, and the fact that Del Giudice immediately offers up that he was wrong in his deposition that mistated that Zivaly was not an independent director. You could almost see plaintiff's counsel say - not so soon! I'm not there yet!
I suspect the next couple of minutes will be anticlimatic.
Why are they dragging up the ghost of the Dukakis campaign again? Do they have to ask whether Dukakis won 10 states? Really, where does that get us? Painting Del Giudice as a political fund raiser and Riggio as one of his "go-to" money guys in NY Democratic circles. Don't think that'll go far. Plaintiff's counsel have moved on to describe the various investments that Riggio has made in Del Giudice's Rockland entities. This might have more legs. Riggio made a $20 million investment in Rockland.
I think plaintiffs might be confusing (or obfuscating) good corporate governance with the corporate law. Plaintiffs seem to be implying that because the B&N board is waiting for the SEC to implement rules with respect to independent compensation consultants before it changes its own policy that there is some sort of conflict. That's a weak argument.
Q: If stockholders got together and voted to pull the pill, would that trigger the pill?
A: If there is an arrangement or understanding to vote against the pill, that would trigger the pill.
That seems like the wrong answer. What good is stockholder approval of the pill if stockholders can't organized to vote against it? This question is better asked of the Cravath lawyer. Del Giudice isn't a legal expert and shouldn't be permitted to provide a legal opinion on the mechanics of the pill. Del Giudice has clearly moved beyond his level of knowledge and he knows it.
Break for lunch.
Back from lunch. Couple of questions about whether a group of stockholders representing 20% of all the shares might be required to pay a premium to vote their shares for a director. I'm not sure what that's supposed to mean, but whatever. Plaintiffs are done.
Del Giudice is now on re-direct. Turns out Riggio's $20 million investment is not yet funded.
Del Giudice is excused and defense rests. Various motions regarding admission of evidence.
Strine is venting (for the benefit of the viewing audience apparently) about the lack of tabs and readability of post-trial briefs.
Look at this thing -- no tabs!
Strine is now riffing on the European takeover directive and creeping takeovers. The pill here is being used in a somewhat unusual circumstance. Now you have two block-holders and how to do you deal with them? Eichler and Aletheia seems a mystery to Strine. Why do they refuse to vote their shares? He thinks they may have their own fiduciary issues. He's giving hints for post-trial briefs.
There is skepticism factor that Yucaipa will face in a proxy contest because they are unwilling to make an offer or go on the board.
Snooki?! Yes, Snooki is a character on that Jersey show. How did Snooki make an appearance in Strine's comments? Anyway.
The 20% threshold is sticking in his mind - because Riskmetrics will focus on it - that why the board went for that number. What's not sticking in his mind is whether the board considered or should have considered a larger trigger because of the Riggio block already in place.
It's clear that the differential trigger has gotten Strine's attention - and not in a good way.
Yucaipa needs to sharpen what it wants in this trial - do you want to acquire more shares? Do you just want to feel love? Compares Yucaipa to an adolescent who wants to ask a girl out, but only if she will say yes...
And thus ends Strine's rambling. Briefs are due on Friday evening and then answering briefs on Monday evening. Post-trial arguments will occur late next week.
Monday, July 12, 2010
Once again thanks to the folks at Courtroom View Network, court in Yucaipa v Barnes & Noble is back in session with VC Strine presiding. Nachbar has some initial objections with respect to demonstratives used with those reports.
Kenneth Nachbar making his objections:
VC Strine sounds like a guy who bet on the Netherlands. Not happy about a demonstrative prepared over the weekend. Oh, no. We're back at 6th grade math. The objection is to a demonstrative prepared by the plaintiff to walk through the 6th grade math that caused Strine to break out in a cold sweat on Friday.
VCS: "It's out. ... Honestly speaking, if it's so simple, you could have gotten [the demonstrative] to them on Saturday."
OK, moving on. Now, Daniel Burch, plaintiff's expert, is back on the stand discussing proxy contests and solicitation of proxies. VC Strine is now questioning Burch regarding how one puts together a proxy contest without triggering a 13D filing. Burch is now on cross. Lot's of challenges to the fact that the first draft of his report was prepared by an associate and that he made subsequent corrections to it.
Colloquy between Strine and Burch:
On re-direct. I'm surprised that actual ownership percentages of B&N are really still in issue. Now some discussion about probable votes in the case of a proxy contests. Here's a demonstrative chart comparing Burch's report and the defendant's expert (Harkin). We'll hear from Harkin later.
Nachbar objects to leading questions. Sustained. But, with a warning - if Nachbar wants to be "persnickety" then Strine will let the plaintiffs be persnickety later. I expect there will be fewer of these objections going forward.
VCS to Burch: You are free to stretch your legs and enjoy the Dunkin Donuts on the subterranean level of the courthouse. Burch is excused.
And that's it for the plaintiff's witnesses.
Defense calls their expert, Peter Harkins. While the plaintiff's experts have tried to make the argument that the shareholder rights plan would make it impossible for a dissident to win a proxy contest, Harkins is making the argument that a dissident can win a proxy contest.
On cross: generating these table and charts just requires math, right? Right. Why are we talking about math, again? VC Strine is quiet this morning...maybe mulling the World Cup.
Breaking for lunch.
Back. Harkins is back on the stand under cross. Lots of questions about Alethia's voting (or no-voting) policy.
Strine interrupts to give both sides a hint about what he's thinking. He wants some help with his "limited mind" in post-trial briefings. Specifically, how or why people on either side think that Alethia might at the same time have a policy not to vote its shares and at the same time help finance a proxy contest. It doesn't make sense to him and he'd like people to think about it and explain it to him in post-trial briefs.
Back to cross. Harkins is dismissed after a brief colloquy with Strine regarding the scope of his expert testimony.
Next up for the defense - Jennifer Daniels, former GC for B&N.
She is testifying about the early stages of B&N's adoption of the pill. The argument that the defense is making here is that Jennifer Daniels, as a good GC, moved on her own to start things moving on the adoption of the pill - it's all good corporate stewardship and nothing to do with Riggiio actively seeking to stop Burkle from running a proxy contest.
On cross -
PL Lawyer: Ms. Daniels, did you think you might be a witness in Delaware on this issue?
JD: I was told I might have to give a deposition, and that a I might be required at trial, but was told at the time that "we're not there yet" ...
VCS: Oh, but now the dream has come true and here you are...
Since Daniels is no longer an employee of B&N (she's at NCR now), she's appearing voluntarily. Plaintiffs appear to be trying to make her look like a tool of Cravath and an incompetent lawyer.
You didn't advise the board that Morgan Stanley had been paid $4 million for its work in the College Books transaction? Morgan Stanley also advised on the rights plan.
Don't know if that will fly. Anyway, she's getting annoyed. Strine injects some more levity and then orders a recess.
Back again. Plaintiffs return to the line of questioning suggesting that hiring MS was a conflicted transaction because Riggio had previously hired MS in the College Books transaction and that Daniels is a bad lawyer because she listened to outside counsel on the issue of MS. The independent directors didn't get their own counsel - separate from company counsel - with respect to the question of adopting the rights plan. This issue is potentially problematic, but will it have legs?
On cross, plaintiff's attorneys are now trying to paint Daniels as being motivated by how to protect Riggio's position when she was having discussions with Cravath. She answers that she was thinking about all the possible questions that she might be asked. I wonder if this impresses Strine. Surely, he's hand plenty of contact with GC's like Daniels. We'll see. He's been quiet.
Ouch. Draft minutes of board meeting are in evidence. OK, you're all on notice - never let a junior lawyer draft minutes of a board meeting cause the other side is going to enter them into evidence. And the plaintiffs are done for the day.
Thursday, July 1, 2010
The Delaware Supreme Court has set July 7 for arguments in Versata's appeal of Vice Chancellor Noble's ruling in Selectica v Versata. Briefs in the case are available via the Harvard Corporate Governance Blog. (Versata's brief and Selectica's answering brief). The issue at stake is the legality of a shareholder rights plan with a 4.99% trigger adopted to protect Selectica's NOLs. The Chancery Court held that board's adoption of the plan was consistent with their obligations under Unocal. Hopefully the argument will be carried on CVN so we can watch from the luxury home.
Wednesday, June 30, 2010
Chancellor Chandler reminds us in a letter opinion in Monroe County Employee Retire. Sys. v Carlson, et al (H/T Morris James) that at the pleading stage it isn't enough for plaintiffs to simply point to a transaction where directors or insiders sit on both sides. Plaintiffs also have to plead some facts to suggest that the transaction itself is unfair before the defendants are required to shoulder the exacting entire fairness burden.
[The parties] agree about defendants’ burden at the proof stage of the proceedings. The parties sharply disagree, however, about plaintiff’s burden at the pleading stage of the proceedings; the stage in which we find ourselves situated. Plaintiff argues that to survive a motion to dismiss the complaint need only allege that a transaction between the controlling shareholder and the company exists. Defendants argue that this is insufficient, that plaintiff must make factual allegations in its complaint that, if proved, would establish that the challenged transactions are not entirely fair. Defendants have the winning argument on this point. Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved—such that entire fairness review is in play—plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. Simply put, a plaintiff who fails to do this has not stated a claim. Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness.In the context of a going private transaction, it isn't enough that the plaintiffs plead that there is a controlling shareholder on both sides of the transaction. In order to survive the pleading stage, the plaintiff will also have to plead some facts that demonstrate the unfairness of the transaction. That's not the same as proving unfairness, but you have to have some facts. Remember entire fairness includes both fair dealing and fair price. Facts that demonstrate a flawed process are helpful in making the case, but if the flawed process nevertheless resulted in a fair price as a plaintiff you might find yourself out of luck.
Tuesday, June 22, 2010
OK, so you're a summer associate or a junior litigation associate in a NY firm. Probably the highest stakes litigation around for your clients may well entail a proposed merger and a challenge to it. Your not uncommon reaction to realizing that most of your litigation work will be focused on corporate related matters may well be - "But, uh, I didn't take corporate law. ... I'm a litigator." If you're a summer associate, don't worry, that's what your 3L year is for. If you happen to have gotten out of law school with taking corporate law or M&A, there's always this: Courtney Rosen's The Litigator's Role in M&A Transactions. It's a quick review (42 pages) of everything a litigator needs to know after getting tossed into litigation over an M&A transaction. It's no substitute for taking an M&A class, but its focus on the process of litigation, including privilege and discovery issues will be useful.
Friday, May 28, 2010
Richards Layton just released this client alert on In re CNX Gas Corp. Shareholders Litigation, in which the Delaware Chancery Court attempts to clarify the standard applicable to controlling stockholder freeze-outs (a first-step tender offer followed by a second-step short-form merger). In short, the Court held that the presumption of the business judgment rule applies to a controlling stockholder freeze out only if the first-step tender offer is both
(i) negotiated and recommended by a special committee of independent directors and
(ii) conditioned on a majority-of-the-minority tender or vote.
Tuesday, May 18, 2010
Last night I attended a fascinating lecture at Stanford’s Rock Center for Corporate Governance by Delaware Vice Chancellor Strine about the lack of alignment in the corporate governance system. Speaking to a packed crowd, Chancellor Strine made a compelling case for a deeper understanding of what we are asking of boards through our various corporate governance reforms. Among his many interesting points, he made two important insights about the role of directors on boards. First, he asked academics to work on “a more or less study” that looks at (i) what more have we given managers to do? and (ii) what less have we required of them? His point was essentially that we have imposed stringent independent director requirements and then heaped more and more responsibility on these independent directors. One worry is of course that humans are bound to make mistakes especially when they have too much on their plates. The other worry is whether these independent directors have the time, skills and company-specific knowledge to effectively manage and monitor risks.
Chancellor Strine’s second point about independent directors was that the increasing push for independent directors has resulted in independent director politicians that serve on many boards and may be beholden to other interests outside of the interests of the particular company that they are serving. These latter comments made me think about a recent paper entitled, The Dark Side of Outside Directors: Do They Quit When They are Most Needed? by Rüdiger Fahlenbrach, Angie Low and Rene M. Stulz. It’s worth a read:
Abstract: Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
Tomorrow, I’ll post about how Chancellor Strine’s comments relate to some important issues in corporate governance reforms outside of the United States.
Thursday, May 6, 2010
Delaware courts and corporate lawyers seem to be paying a lot of attention to the recent paper by John Armour, Bernie Black and Brian Cheffins entitled "Is Delaware Losing its Cases?" We've blogged previously about this paper. Now it looks like some firms may be advising clients to select "the Delaware Court of Chancery as the exclusive forum for the resolution of all intra-corporate disputes including claims asserting breach of fiduciary duty or seeking, under state law, to overturn directors’ business judgments concerning matters ranging from the routine to potential M&A or other transformative transactions." According to a recent memo by Latham and Watkins, the firm is recommending that "Delaware companies consider adopting mandatory Delaware Chancery forum selection provisions in their charter or bylaws in connection with their regular review of governance practices." The Latham memo argues that, given Delaware's substantial expertise in corporate law, mandatory Delaware jurisdiction for intra-corporate suits benefits both public companies and their shareholders. Latham's memo is based in part on dicta by Chancellor Laster in the recent In re Revlon, Inc. Shareholders Litig. Scholar Faith Stevelman in a recent 2009 paper addressed some of the issues with this type of provision.
Are other firms doing the same? And, will there be a backlash by plaintiffs' lawyers outside of Delaware?
Wednesday, May 5, 2010
One of the most common search terms to find this site in the past week or so has been "What triggers Revlon duties?" Now, this has little to do with the business cycle and much more to do with the cycle of law school exams. It's about this time when students are sitting in the library, looking over their incomprehensible notes, and asking themselves, "What triggers Revlon?" I know. I was in that same situation myself.
Almost as if on cue, the Chancery Court hands down decision in Binks v DSL.net dealing with Revlon duties in the context of the issuance of convertible notes (H/T Morris James). It’s a nice review of the state of the law with a slight twist on the facts. The case involves a transaction between DSL.net and MegaPath. DSL was in financial trouble in 2006 and rather than enter bankruptcy entered into a transaction with MegaPath. MegaPath lent DSL.net $13 million and took convertible notes. A few months after the transaction, MegaPath converted its notes to equity and ended up with more than 90% of DSL's common stock. Shortly thereafter MegaPath effected a short form merger to eliminate the minority stockholders.
Plaintiffs argued at the motion to dismiss stage that issuance of the convertible notes represented a potential "change in control" and that the DSL.net directors had an obligation under Revlon to "obtain the best price reasonably available to shareholders." The Plaintiff didn't argued that the board should have held an auction or that a successful auction was likely. Rather, the plaintiff argued the deal the board made with MegaPath essentially permitted MegaPath to loot DSL and that there were a number of other reasonable alternatives that would have left DSL shareholders better off than the issuance of convertible notes (e.g. DSL.net had $50 million in NOLs that could have been used to engineer a transaction).
First, to the question whether Revlon is the applicable standard in the case at the motion to dismiss stage, the court answers in the affirmative, noting that the issuance of the convertible notes can be interpreted as a change in control:
It is not unreasonable to review the Amended Complaint as alleging that the short-form Merger was an inevitable and foreseeable consequence of the MegaPath Financing Transaction. As the Supreme Court in QVC pointed out, in determining whether the transaction constitutes a "change of control" for Revlon purposes, "the answer must be sought in the specific circumstances surrounding the transaction." Inferring that the relevant events should be collapsed for analytical purposes into a single transaction is also consistent with this Court's earlier consideration of the issue:
I assume for purposes of deciding this case, without deciding, that the granting of immediately exercisable warrants, which, if exercised, would give the holder voting control of the corporation, is a transaction of the type that warrants the imposition of the special duties and special standard of [Revlon].
This assumption arose out of the Court's recognition that Revlon duties may arise when a board, as here, "approves a transaction having a change in control effect ( ... specifically ... where a corporate action plays a necessary part in the formation of a control block where one did not previously exist.)
In applying Revlon, the court finds that the plaintiffs did not offer sufficient evidence to support a finding that the board was not independent and disinterested. The Court also noted that the plaintiff’s complaint was devoid of facts suggesting that the board was not adequately informed. With all that in place, the court laid out its standard for deciding this case under Revlon:
Where a board is found to be independent, disinterested, and adequately informed, the decision to enter into a change in control transaction should be upheld unless the directors “utterly failed to attempt to obtain the best sale price … ‘Because there can be several reasoned ways to try to maximize value, the court cannot find fault so long as the directors a reasoned course of action.’ Here the board’s conclusion that the Megapath Financing Transaction was preferable to bankruptcy was within its business judgment.
The Court reiterates the basic holding in Lyondell, that good faith claims (essentially a claim that attempts to convert a care violation into a loyalty violation) are very hard to win and require extreme facts – facts that suggest “utter failure”. These days when even the last kid on the bench of the last place team gets a trophy, it’s hard to imagine what “utter failure” might look like in the corporate context.
Monday, April 5, 2010
In the last couple of days there have been a couple of pieces on line (like this one) that suggest that arbitration proceedings in Delaware will be the end of the world for corporate law. I'll admit, my first thought when I saw that Delaware was instituting voluntary arbitration was that perhaps too many litigants would take their disputes private, thus depriving the Delaware courts of the judicial oxygen required to keep the Delaware common law alive. Thinking about it now, I think that fear is over-stated for a couple of important reasons.
First, it's voluntary. Plaintiff cases may derive higher settlement values by staying public - if a director thinks that embarrassing testimony would be presented at trial, he may be more interesting in avoiding a trial. If the process is private, no one will know that you were a bad director, so there may be greater incentive to fight. If I can figure that out, plaintiffs can as well. So there's an incentive for them to resist agreeing to take cases dark.
Second, the arbitration process only involves cases where the claim is one for a monetary remedy. There are precious few of those cases out there. Why? If a plaintiff brings a derivative suit alleging some violation of the duty of care (in the takeover context) and the only claim is for monetary damages, that case will be quickly shown the door (BJR, 102(b)(7), ...). The smart plaintiff attorney simply doesn't bring those cases. Their cases always have some claim for injunctive relief in an attempt to survive a motion to dismiss.
More likely than not, arbitration in Delaware will be limited to commercial disputes and not include many shareholder/corporate law actions. That's my guess. If we are worried about the common law atrophying I'd be more worried about the trend spotted by Armour, Black, and Cheffins noted (see below).
Friday, April 2, 2010
John Armour, Bernie Black, and Brian Cheffins have a new paper, Is Delaware Losing its Cases? that argues Delaware may well be losing its competitive edge with respect to corporate litigation. They focus their research on what Wachtell's Ted Mirvis has called the "Anywhere But Chancery" trend. They put together a dataset of 729 corporate law opinions over 15 years and conclude that Delaware is losing its market share with respect to the types of cases that have typically called Delaware home. Here's an interesting chart from their paper that makes this point:
The big move over the past decade appears to be to the Federal courts. That's consistent with other scholarship that suggests that states don't really compete for incorporations and that the only viable competition is with Federal regulators. However, it looks like since the 2002 states have also begun to hear and apply Delaware cases. If I were sitting in Wilmington, this graph would be disturbing.
Contrast the findings here with findings in Cain and Davidoff's paper, Delaware's Competitive Reach that looked at merger agreement and found that the overwhelming majority of agreements (60%) select Delaware as their choice of forum.
State competition for incorporations and governing law it seems is still a live issue.
Wednesday, January 27, 2010
Here's hoping that Delaware's arbitration process doesn't become too successful. Why? Well, much of Delaware's value derives from the positive externalities that come from its corporate law jurisprudence. If parties increasingly take disputes "private" via the Delaware courts, increased reliance on the confidentiality of the arbitration process might have the effect of degrading the continued development of the Delaware common law. That's actually something worth paying attention, but difficult to track.
Wednesday, December 30, 2009
Francis Pileggi at the Delaware Corporate and Commercial Litigation Blog interviews Delaware Chief Justice Myron Steele.
Tuesday, November 17, 2009
You know what they say ... it's not a real deal unless there's a lawsuit. Well, the 3Com/HP deal has its first lawsuit. The $2.7 billion all cash deal was announced last week. Here's the merger agreement. Given that it's an all cash deal, the complaint alleges that the board failed to meet its fiduciary duties by not getting the highest price reasonably available to shareholders when it agreed to sell the company to HP. That's a Revlon complaint. I used to think that meant something, but following Lyondell, I now know that unless there's a claim of fraud or misrepresentation, short of an "utter failure" by the board to attempt to meet its duties, this kind of complaint is going nowhere. Since the only question is price, then it appears the only available remedy for those who think the company got sold for less than its fair value is appraisal under Sec 262 of the DGCL.
(c) Statutory Rights of Appraisal.(i) Notwithstanding anything to the contrary set forth in this Agreement, all shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and held by Company Stockholders who shall have neither voted in favor of the Merger nor consented thereto in writing and who shall have properly and validly perfected their statutory rights of appraisal in respect of such shares of Company Common Stock in accordance with Section 262 of the DGCL (collectively, “Dissenting Company Shares”) shall not be converted into, or represent the right to receive, the Per Share Price pursuant to Section 2.7(a). Such Company Stockholders shall be entitled to receive payment of the consideration that is deemed to be due for such Dissenting Company Shares in accordance with the provisions of Section 262 of the DGCL, except that all Dissenting Company Shares held by Company Stockholders who shall have failed to perfect or who shall have effectively withdrawn or lost their rights to appraisal of such Dissenting Company Shares under such Section 262 of the DGCL shall no longer be considered to be Dissenting Shares and shall thereupon be deemed to have been converted into, and to have become exchangeable for, as of the Effective Time, the right to receive the Per Share Price, without interest thereon, upon surrender of the certificate or certificates that formerly evidenced such shares of Company Common Stock in the manner provided in Section 2.8.(ii) The Company shall give Parent (A) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments received by the Company in respect of Dissenting Company Shares and (B) the opportunity to control all negotiations and proceedings with respect to demands for appraisal in respect of Dissenting Company Shares. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal, or settle or offer to settle any such demands for payment, in respect of Dissenting Company Shares.
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.