June 03, 2013
Law firm memos on MFW Shareholders Litigation
[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.
April 30, 2013
Sauer Danfoss turns out to be an important case
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!
April 01, 2013
Coupon Settlements and Merger Litigation in TexasNate Raymond guest writing on Alison Frankel's On The Case blog points out that a second Texas appellate court has ruled out attorney fees in disclosure only cases. In August last year, a Texas appellate court in Rocker v Centex ruled that in disclosure only cases, Texas law prohibits attorney from being awarded fees. Citing "section 26.003(b) of the Texas Civil Practice and Remedies Code", which reads
(b) Rules adopted under this chapter must provide that in a class action, if any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney's fees awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.
The court ruled that where the only benefit for shareholders in a settlement is additional disclosure, then attorneys cannot be awarded fees. Now, another Texas court has done it again. This time in Kazman v Frontier Oil the plaintiffs will get nothing following a disclosure settlement. So, if a case if typical merger related flotsam, the plaintiffs might be hoping to get a couple of minor disclosures and/or reduction in a termination fee in exchange for legal fees and giving the board a global release. In Texas, that kind of settlement will no longer result in fees for plaintiffs counsel. That pretty much makes such cases -- or settlements in Texas -- a non-starter from now on.
The coupon settlement legislation in Texas appears to be having a big impact on the development of merger litigation Texas. One only need to look at Dell. To be honest, I was a little surprised by the low number of Texas suits followed in connection with this transaction. Of the 25 suits filed, only 5 of them were filed in Texas. Of course, coupon settlement legislation is not the answer to multiforum litigation, but it does make Texas uneconomic as a forum for a lot of transaction related litigation.
March 19, 2013
GD&C on Chancellor Strine's rejection of disclosure only settlement of M&A stockholder lawsuit
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.
February 13, 2013
Dell and transaction-related litigation
I'll admit to being disappointed by the work ethic of the plaintiff's bar -- so far only 6 complaints have been filed against the Dell transaction. My guess was 9. Six, though, is still above average. Steven Davidoff and Matt Cain have released their statistical compendium of transaction-related litigation for 2012 (SSRN: Takeover Litigation in 2012). This is the second iteration of this statistical compilation and it has quickly become a must read for those of us interested in the issue of transaction-related litigation.
We see the steady upwards trend in transaction-related litigation and how it has really exploded since 2005. Now, almost 92% of all transactions are accompanied by litigation of some sort and 50% of that involved multi-forum litigation. Davidoff and Cain also report median attorneys’ fees for settlements of $595,000 in 2012.
January 30, 2013
Dell being cautious
... and rightly so. From Bloomberg:
Michael Dell, the special committee of the company’s board and their advisers are finalizing details of the equity financing while making sure they have explored all possible alternative options, including a sale to other buyers, said two of the people familiar with the situation. Given the potential for conflicts in a deal where Michael Dell helps take his company private, financial advisers and Dell’s board are being extra cautious, said these people.
Evercore Partners Inc. (EVR), which is advising the special committee of the board, has approached other potential buyers and no alternative bids have emerged so far, said one of the people. Dell and its advisers have also explored the possibility of a dividend recapitalization, which would involve taking on debt to help pay for a special dividend, as a way to increase shareholders’ value, said another person.
What's the over/under on the number of suits filed once this transaction is announced regardless of how good the process? I say 9.
January 24, 2013
Demand ... refused
For all you law students out there who are mystified by the procedural niceties of derivative litigation (actually, I should include a pile of politicians and media types in this group as well), AIG has filed a copy of its demand refusal with the SEC. It's right here. You'll also find a copy of the plaintiff's demand letter that kicked this whole thing off. I'll probably be using these materials in the future when I next walk through derivative litigation.
What does the filing tell us? Well, after plaintiffs filed their demand that the board took its time and didn't rush its decision with respect to the litigation. When it took up the litigation, it had informed itself of the issues and decided that pursuing Starr's claims in any form wouldn't be in the best interests of the corporation. That's pretty straightforward.
I-Banker Liability in M&A
For those of you paying attention to the back and forth related to the H-P/Autonomy acquisition, the question of the potential liability of advisors has popped up more than a couple of times. How could H-P's advisors (investment bankers, lawyers, and accountants) let slip by the alleged accounting fraud that caused H-P to write down more than $5 billion? Close on the heels of that question is whether the advisors should face any liability for not picking up on the fact that Autonomy might not be a good candidate for an acquisition.
Well, for a partial answer as to the liability exposure of M&A advisors when the transaction goes wrong look no further than Baker v. Goldman Sachs, just decided by a jury in federal district court in Boston. There, the founders with Goldman's assistance sold their company, Dragon Systems to Belgium-based Lernout & Hauspie for $580 million in L&H stock. Not long after the transaction closed, fraud at the acquirer was discovered and the acquirer quickly went bankrupt leaving Dragon stockholders holding worthless stock.
Having lost everything, including their tech company, founders Janet and Jim Baker sued Goldman for allegedly failing in its duties to them, their clients, when it brokered the deal. Here's the original complaint (Baker v Goldman) - filed in state court and then removed to federal district court. The jury heard the evidence and the arguments in this case and found that Goldman had not breached any duties to the Bakers.
If H-P is thinking about going after its advisors for its ill-fated Autonomy deal, it will have to be more successful than the Bakers were in convincing a jury that M&A advisors should bear liability for a deal gone wrong.
December 06, 2012
Lining up like Jets and Sharks
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.
December 04, 2012
Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision
The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill. The provision is designed to reduce the possibility that the bidder will be able to put the target "in play" and bypass the terms and spirit of the standstill agreement.
In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.
As a result, Gibson advises that
until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties . . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.
December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack
December 03, 2012
Kinder Morgan settlement
The Chancery Court approved a settlement in the El Paso case. Here's the El Paso Settlement. Something I thought was interesting - the transaction attracted 22 lawsuits - 13 in Delaware, 8 in Texas, and one in New York. That's quite a crowd. Then again, the facts in the case were the type that made it an attractive target for litigation. In the settlement, El Paso will pay $110 to the class fund and Goldman will give up its $20 million fee. Plaintiff counsel received $26 million in fees to split amongst all the counsel.
November 20, 2012
Bingham on Big Boy Language
Bingham just issued this interesting Legal Alert on Pharos Capital Partners, L.P. v. Deloitte & Touche.
In that case, on Oct. 26, 2012, the United States District Court for the Southern District of Ohio granted summary judgment in favor of Credit Suisse, holding that, under New York or Ohio law, plaintiff Pharos Capital Partners failed to prove it justifiably relied on Credit Suisse in connection with its private equity investment in National Century Financial Enterprises (a business that was later found to be fraudulent) because Pharos expressly disavowed any such reliance in a letter agreement with Credit Suisse.
According to Bingham:
The decision is significant for the financial industry because it enforces a party’s representations in an agreement that it was relying on its own due diligence investigation in connection with its investment, rather than any alleged representations made by a placement agent. Prior to the decision in Pharos, many courts have been reluctant to enforce such agreements to defeat claims for fraud and negligent misrepresentation.
September 18, 2012
Southern Copper and legal fees
The Southern Copper case has generated lots of attention - and for good reason. The courts don't often hand out $2 billion verdicts. Over at the WSJ Dealpolitik column, Ronald Barusch takes a look at the hefty legal fee - an eye popping $304 million (or an approximate $35,000/hour fee) and suggests it might be time for state legislatures to step in and reform shareholder litigation -- perhaps by relyiong on administrative remedies against directors. That's not altogether a unique recommendation. My colleague, Renee Jones, recently published a piece in the Vanderbilt Journal of Transnational Law recommending director bars as an alternative administrative remedy for director violations of the duty of care. It's an idea worth pursuing especially given the ubquity of 102(b)(7) protections.
In any event, I'm getting far afield. Rather than see Southern Copper as an example of judicial overreach, it might be better to put it in the context of Delaware trying to muddle through the problem of transaction-related litigation. By now, it's pretty well known that almost every public transaction is bound to be the subject of litigation. Most of that litigation is, to be perfectly frank, nuisance litigation. That said, shareholder litigation remains an important quiver in the corporate governance arrow. So, how to encourage good suits and discourage bad ones? There have been lots of attempts to get a handle on this problem - PSLRA for example. In recent years, the courts in Delaware have (I supposed relying on the hive-mind) decided that policing down fees on "bad" cases and being generous with fees on "good" cases is one way to set the incentives. Southern Copper falls into the "good" case category. Chancellor Strine presumably wants to signal to potential litigants that these kinds of cases, where the duty of loyalty is at issue, will be cases that pay off and that plaintiffs should invest their resources in pursuing these cases over the garden variety disclosure cases that often accompany merger announcements.
August 23, 2012
NY adopts Tooley test
Ok, news for corporate law geeks. The Corporate & Securities Law Blog reports this morning that the Appellate Division of the New York Supreme Court in Yudell v Gilbert has discarded its previous case-by-case approach to determining whether shareholder litigation is direct or derivative. Rather, it held that going forward the test to apply is the test announced in the Tooley v. Donaldson, Lufkin & Jenrette (Delaware Supreme Court). The Tooley test asks a court to consider two things: 1) who suffered the harm in question; 2) to the extent there is a remedy, who will receive it. Where the answers to those questions are "the corporation", then the litigation is derivative. Where the answers are "the shareholder", then the litigation is direct.
The question of whether shareholder litigation is direct or derivative is a go-to for law professors at exam time. I guess the beginning of a new academic year is the right time to iron our some of the jurisdictional differences in favor of a more "common sense approach" (NY's words).
July 12, 2012
Forsythe settlement news
You'll remember back in May we posted about Vice Chancellor Laster's innovation in settlement of a derivative suit. Back then objectors to a settlement appeared. VC Laster challenged them to put up a bond if they really thought the claim was worth more than the settlement. At the time, I really didn't know if the objectors would step up and take over the suit. Afterall, VC Laster made it clear that if the objectors took up the suit and won, they would only receive their pro-rata share of any settlement or judgment. So, the delta between what they think it is worth and the initial settlement would have to be pretty large to induce them to put up a bond. Lo and behold, Reuters is reporting that the objectors put up a bond yesterday:
To the surprise of many lawyers who followed the case, the objectors said in court documents last week they had found the money to keep the case going. They said they would post a $13.25 million bond funded in part by a unit of UK litigation finance firm Burford Capital.
Now, I know from the comments last time that not everyone thinks this kind of innovation in shareholder litigation is a good thing. I get that. But, I think it's worth experimenting. Cause what we've got going now is definitely in need of improvement.
June 01, 2012
The Economist has a piece on the issue of transaction-related litigation that's worth reading (here). It starts with that gem of a Vonnegut quote from God Bless You Mr. Rosewater that Ron Gilson used in the introduction to his article on Value Creation:
In every big transaction, there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make the moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.
The Economist editors leave out the best part, which comes immediately after:
If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient’s blubbering thanks.
March 22, 2012
Lamb on transaction related litigation
The Deal caught up with Former Vice Chancellor Stephen Lamb on the evolution of shareholder litigation down at the Tulane conference. Here's the video:
March 19, 2012
Shareholder suit against Sokol dismissed
The shareholder suit against Berkshire Hathaway's David Sokol (here, here, and here) was dismissed for failure to make demand. You'll remember that Sokol was accused by shareholders of taking a corporate opportunity when he learned about a corporate opportunity for Berkshire and then bought stock before bringing the opportunity to Buffet. Mr. Buffet wasn't too happy about it when he found out. Sokol was shown the door. Shareholders brought suit against Sokol and the Berkshire Hathaway board.
The question before the court today was whether the shareholders should have made demand of the corporation before bringing the derivative lawsuit. For derivative suits, shareholders have to make a demand that the board vindicate the corporation's rights or state why making such a demand would otherwise be futile. The shareholders argued that demand in this case would be futile for three reasons:
1) The fact that the board had not yet sued Sokol was evidence that they had no intention of doing so;
2) The board faced a substantial likelihood of liability such that it would cloud their ability to objectively resolve the question on their own; and finally,
3) That Warren Buffet is such a high-profile person that the board cannot be trusted to exercise their own independent business judgment in assessing the merits of a potential action against Mr. Sokol.
Looking at these questions, the court correctly determined that this is a case where demand should have been made, thus dismissing the case on the board's motion.
Of course, the board has already conducted an investigation into Mr. Sokol's trading and fired him for it. It might still bring a suit, but there is no requirement that it do so. It's well within the board's perogatives to determine what the proper level of "punishment" is for Mr. Sokol's trading. The substantial likelihood factor is unlikely to apply. There's allegation that the board itself did anything wrong. In fact, it appears that once the board found out about Mr. Sokol's trading, it took actions. Finally, I have no doubt that Mr. Buffet has a lot of influence over the Berkshire board. No doubt at all. But, I doubt that Mr. Buffet is all that happy about what Sokol did. He's already demonstrated that he isn't interested in ignoring it or sweeping it under a rug.
Anyway, rightly decided. That's enought corporate litigation review for today.
February 08, 2012
Exclusive forum provisions challenged in Delaware
Francis Pileggi brings to my attention a number of suits filed in the past two days against Delaware companies with exclusive forum provisions in the bylaws. The exclusive forum bylaws are typically adopted by boards and not shareholders. They purport to restrict any shareholder litigation based on state law claims to the courts of the state of incorporation. Recent interest in such provisions is a result of the recent rapid increase in transaction-related litigation. Steven Davidoff's paper on The Great Game is good background, as is Bernie Black's paper, Is Delaware Losing its Cases? and Randall Thomas & Bob Thompson's paper Litigation in Mergers & Acquisitions.
Here are two of the current complaints: Sutton_vs_AutoNation_Inc and Tejinder_Singh_vs_Navistar_Int. They both attack a bylaw provision that was unilertally adopted by a board - so no shareholder vote. A similar bylaw was struck down last year in Galaviz v Berg as lacking sufficient indicia of consent. These complaints are worth giving a read. There's merit to the argument that unilaterally adopted bylaws shouldn't bind shareholders. But the complainants also raise a number of other interesting questions. I'm already on record supporting exclusive forum provisions in corporate charters, so I'll be following these cases with great interest.
January 19, 2012
Corporate governance overreach by Carlyle?
The Deal Prof looks at The Carlyle Group's proposed IPO and figures it's a corporate governance dud. I agree. Carlyle's Amended and Restated Limited Partnership Agreement (Appendix A to the S-1A) has a dispute resolution provision that is reprinted in relevant part below (it's lengthy, sorry). It does two things. First, it requires that limited partners in Carlyle's soon to be publicly traded firm resolve all their dispute only in private arbitration and not in any court. Second, it prohibits any arbitration be brought in a representative capacity.
Now, I'm the first one to admit that there is plenty of abuse of shareholder litigation. These days, one can't imagine a merger announcement not being accompanied by shareholder litigation. But still, the correct answer can't be to eliminate representative shareholder litigation altogether. The way this arbitration provision is written, it's pretty clear that no one should ever bring any litigation against management at all ... ever. That can't be the correct result. For all its warts, in a world where shareholding is increasingly dominated by institutional shareholders who don't have incentives to provide intense monitoring and are not permitted to perform the "Wall Street walk", shareholder litigation is one of the few governance arrows left in the corporate governance quiver.
Sure, there are plenty of suits that aren't worth more than their nuisance value. (Steven Davidoff highlights the sheer volume of these transaction related lawsuits in his new paper examining the "Great Game" and the rise of transaction-related litigation). But, at the same time, there are other valuable cases like Delmonte or Southern Peru. If Carlyle's approach becomes the norm as firms go public there are real downsides to firms opting out of the formal legal regime.
First, there's a threat to the development and maintainence of the corporate law. This arbitration provision goes further than Delaware's optional arbitration system that I've blogged about before. If parties are required to bring all corporate litigation to private arbitrators, then corporate law litigation will quickly disappear from the courts and the law will begin to atrophy. Rather than having a deep and rich common law, the corporate law will become nothing more than an inside game with only a small number of litigators and professionals being in the "know" as to the current state of the private law.
Second, even if one accepts that a private law system is acceptable, and I don't think that's correct, then there are still important incentive effects associated with the elimination of representative litigation. If arbitration may not be pursued in a representative capacity, then the incentives for any plaintiff's counsel to be in this business quickly fall away. The result is, effectively, that shareholder arbitration for a publicly traded issuer would disappear.
Now, I guess if you are incumbent management eliminating pesky shareholders is a good thing. On the other hand, if you are an investor, you have less reason to be sanguine about managers taking away one more tool for you to monitor their behavior.
I've previously recommended exclusive forum provisions as a middle ground to reduce incentives to engage in nuisance-like shareholder litigation while leaving open avenues for litigants to bring claims before courts. That middle-ground strikes me as a better result than the more extreme route taken by Carlyle. Of course, Carlyle's managers have different incentives and care about different things than do the courts in Delaware or investors. The Deal Prof doesn't think that the SEC will permit Carlyle to go public with this provision intact. I hope he's right. In that event, Carlyle's Section 16.9(c) provides for an exclusive forum provision to govern disputes should the arbitration provision be voided by a court or otherwise be found to be as uneforceable.
Carlyle Amended & Restated Limited Partnership Agreement