Wednesday, March 18, 2015
Usually amendments to the corporate law are pretty sleepy affairs. This year is different. There's anti-fee-shifting legislation, In the slew of amendments generating interest this year, there's the new Chancery facilitated arbitration procedure, and then there are the amendments to the appraisal statute. If you would have told me two years ago that arbitration would be the least controversial of all the amendments, I would have laughed at you, but there you have it.
The amendments to the appraisal statute (262 Appraisal) come in response to the rise in appraisal arbitrage. There are a number of important changes to the way Section 262 operates. First, the amendment follows what is common practice in other states by setting a floor with respect to appraisal petitions before getting access to the remedy. Going forward, stockholders will only be entitled to an appraisal if all the shares seeking an appraisal exceed 1% of the outstanding shares or at least $1 million in merger consideration. In any event a transaction done pursuant to Sections 253 and 267 would always have appraisal rights.
To give you a sense of what this floor means, Dell generated valid petitions for only 2% of the stockholders - though the value of the merger consideration would have easily exceeded $1 million. The floor makes sense and will likely get rid of nuisance litigation to the extent there is any nuisance appraisal litigation. I don't think that's a real problem, but I suppose if you are going in to tinker, you might as well tinker.
Of larger import, is the amendment that permits the acquirer to pay some portion of the consideration immediately and stop the accruing of interest on the amount paid, leaving interest to accrue only on the amounts still in controversy. Because of the statutory interest rate, that one change might go quite a way to reducing some incentives for hedge funds to pursue appraisal arbitrage as a business. In CKx, defendants made a motion to require petitioners to accept the uncontested portion of the merger consideration in order to stop the clock on the accrual of interest. Vice Chancellor Glasscock refused to issued such an order. However, this amendment would explicitly permit that maneuver.
These changes may not go far enough for some - who were seeking things like stock tracing. Stock tracing would require the beneficial holder to prove that she was a beneficial stockholder prior to announcement of the merger. Right now, so long as the record holder was a holder prior to the merger, the beneficial holder need not establish that they were owners prior to the announcement of the merger. This is a loophole that appraisal arbs have driven trucks through.
Dole has complained that the changes are too timid and is pushing Delaware to go further. Indeed, Dole is even threatening to "pull out of Delaware" if it doesn't do more to eliminate appraisal arbs. Frankly, it's a ridiculous threat that I would have thought Delaware legislators would be sophisticated enough to discount. The inference is that if Delaware doesn't eliminate the appraisal arb business through stock tracing, that Dole would close its shipping business in Delaware. Umm. Okay. Hard to see how the two are related. If they close that business they will do so for business reasons, not because of the appraisal statute. If Dole means it will reincorporate elsewhere. Ok, where? Have fun.
Anyway, it's going to be a more interesting summer than previously thought in Wilmington.
Thursday, March 12, 2015
As Lawrence Cunningham noted, tenacity, thy name is Delaware! Along with the recent proposed amendments to the corporate law, the Delaware General Assembly will also consider the new Delaware Rapid Arbitration Act - to replace the Chancery Arbitration procedure that was deemed unconstitutional.
Regular readers of this blog might remember that I was opposed to Chancery arbitration as it was originally conceived. Here's a paper I wrote on the subject. Ultimately, the Federal Appellate Courts agreed with my view. Public judges sitting in public courts conducting confidential hearings is not a good look for many reasons.
In any event, the new approach - Chancery facilitated arbitration - an improvement and will likely pass constitutional muster. Also, the way the act has been written, there is little fear that firms might attempt to put Chancery arbitration provisions in corporate charters. In order to be eligible for Chancery arbitration, among other conditions, the arbitration agreement has to be signed by both parties, thus making it difficult to make constructive notice arguments in connection with the purchase of stock. Consequently, as it is currently drafted, the scope of arbitration-eligible disputes is relatively narrow - merger agreements and other commercial agreements that might typically appear before the Chancery Court. Also, although the arbitral proceedings are facilitated by the Chancery court, the arbitrators are not sitting judges and are paid directly by the parties. Proceedings will be confidential, judgments will be treated consistent with the FAA.
This attempt to create an arbitration regime will likely stick. All in all, not a bad effort.
Tuesday, March 10, 2015
The Delaware General Assembly is considering its annual amendments to the corporate law. This time, the proposed amendments (2015 Amendment text here) are doing more than just some ministerial changes/fixes to the text. The amendments purport to deal with two big issues. First, the amendments add a new section 115 that would explicitly permit corporations to include forum selection provisions in their certificates of incorporation or bylaws. I proposed as much in a 2011 article, so it's nice to see that take shape. By including forum selection provisions as a permissible menu option, the legislature is clearing the deck and making it much more likely that Delaware firms will opt in going forward. It's not a total solution to the problem of transaction related litigation, but it does help reduce the volume of litigation that must be managed. By the way, 94.9% of all deals were accompanied by litigation last year. This is a problem that's not going away on its own.
The other proposed amendment is much more controversial. The new sections 102(f) and 109(b) reverse the Delaware Supreme Court's decision in ATP Tour, Inc. In ATP, the court upheld a fee shifting bylaw that, if widely adopted, would likely have shut down most, if not all, shareholder litigation, good and bad. ATP would be like using a sledgehammer to hang paintings in your house. These new sections make such provisions illegal. You'll remember that last year the legislature tried to move an ATP amendment through in the aftermath of the decision. While corporate law amendments are usually a fairly boring affair, that one drew the attention of the US Chamber of Commerce. This time, the US Chamber is back, arguing that the adoption the anti-fee shifting provision "could threaten Delaware's billion dollar incorporation franchise." That seems like a bit of excessive rhetoric.
Stay tuned. I suspect this year will be anything but a quiet ride through the amendment process.
Wednesday, February 25, 2015
I talk a lot of students about life as a lawyer and finding ways to balance the needs of the profession with having a life. There's no way around it. It's not easy. It's particularly tough on women. In response to issues in the profession and in M&A that are specific to women, the ABA's M&A Committee has formed a Women in M&A Task Force Task Force:
The primary goal of the Women in M&A Taskforce is to increase the participation and retention of women lawyers in M&A through four key initiatives: (i) work with law schools to educate women law students about the profession; (ii) increase awareness at law firms; (iii) promote networking and provide business development tools to women in the profession; and (iv) provide avenues of communication among Taskforce members to enable the sharing of materials, experiences and best practices. The American Bar Association’s Women in M&A Taskforce is Co-Chaired by Jennifer Muller at Houlihan Lokey and Leigh Walton from Bass, Berry & Sims. Any questions may be directed to email@example.com.
It's a worthy effort that everyone should get behind. I'll post links to any reports or recommendations the Taskforce may generate.
Tuesday, February 24, 2015
Our friends at Cal are looking to hire a Fellow for the Berkeley Center for Law, Business, & the Economy. This would be an excellent opportunity for an associate looking to transition to academia.
Here's the ad:
The Berkeley Center for Law, Business and the Economy is seeking to hire a Research Fellow.
The Berkeley Center for Law, Business and the Economy (BCLBE) is Berkeley Law’s hub for rigorous, relevant, empirically based research and education on the interrelationships of law, business, and the economy. BCLBE informs students, policymakers and the public of the implications of this innovative work to promote positive outcomes on business operations, economic growth, and market efficiency. BCLBE’s interdisciplinary approach to basic research, timely policy research, curriculum innovation, and public education empowers current and future leaders in business, law and policy to tackle the most pressing problems of today and tomorrow.
The Fellow’s primary responsibilities will include:
• Working with the BCLBE faculty and staff to arrange and implement programming, including student events, conferences workshops and alumni and practitioner events.
• Working with the BCLBE faculty and staff, to develop research topics in law, business and the economy;
• Researching and writing white papers of publishable quality for policy-focused audiences, under the direction of faculty and staff;
• Speaking at workshops, to the academic community and the press about research initiatives;
• Assisting with other necessary aspects of the operation of BCLBE; and
• Assisting faculty in research questions involving data collection.
In addition, the Fellow will be provided with a significant opportunity to develop a research and writing agenda, including authorship of their own research work.
• J.D. degree or equivalent is required at the time of application
• Relevant experience in corporate finance, programming, and/or quantitative research is preferred;
• Excellent research, analytical and writing skills;
• Excellent communication and interpersonal skills;
• Organizational skills;
• Self-starter able to prioritize and function both independently and collaboratively;
• The ideal candidate will have a high degree of organization skills, experience and knowledge of business law and the ability to work capably with faculty and staff. The candidate should also have an interest in research and academia.
Monday, February 23, 2015
Gov. Markell has nominated Collins J. Seitz to replace Justice Ridgely. Mr. Seitz is a well-known Delaware litigator with some very big cases under his belt. He also has a judicial pedigree. His father, Collins Seitz, was a judge on Federal Third Circuit Court of Appeals and before that Chancellor of the Delaware Chancery Court.
Friday, February 13, 2015
Shareholder activists have been in the headlines a lot in recent months. The Staples-OfficeDepot deal was credited to Starboard Capital. Starboard was also around the Yahoo/Alibaba spin. The Economist recently published an overview of the current state of stockholder activism. Included in the overview is some data on activists' relatively outsized influence:
Activists are a small sliver of the hedge-fund world. Hedge Fund Research (HFR), a research firm, says that of about 8,000 hedge funds activists number just 71—less than 1%. But they are larger than most; at $120 billion under management the activists account for about 4% of the hedge-fund total (see chart 1). Their clients now include many of the world’s big endowments, family offices and sovereign-wealth funds. And their assets have risen by a factor of five over the past decade. In 2014 they raised $14 billion of new money, a fifth of all flows into hedge funds.
That's a lot of money for just 71 firms. The Economist believes the longer term implications of the rise of the activist will be positive. I'll reserve judgment for now. Activists, like boards, are not a homogenous group.
Thursday, February 12, 2015
This from Delawareonline:
Six men, including three current or former judges, have applied for the vacant seat on the Delaware Supreme Court following the recent retirement of Henry du Pont Ridgely, according to sources close to the judicial nominating process.
The applicants for the state's highest court include Superior Court judges William L. Witham Jr and Calvin L. Scott Jr.; former Superior Court Judge Joseph R. Slights III; Collins J. Seitz, Jr. a founding partner of Seitz Ross Aronstam & Moritz LLP; Martin S. Lessner, a partner at Young Conaway Stargatt & Taylor; and John R. Williams, a lawyer in the Delaware Department of Justice appeals unit, the sources said.
Seems unfortunate that we have apparently exhausted the supply of female and minority candidates for this court. In any event, this pick will be Delaware Governor Markell's opportunity to temporarily put a stamp on this court. Under the Delaware constitution, the courts are required to be politically balanced with an equal number of Republicans and Democrats. However, in cases where the court is odd numbered, like the Supreme Court, the Governor is permitted to appoint the swing member from his own party affiliation. In this case Ridgely is a Republican, but since there are already two sitting Republicans and two sitting Democrats, Markell is free to appoint a Democrat to replace Ridgely. I am not sure how many other states follow Delaware's lead with balanced judicial appointments but I like the way it lessens the political stakes involved in judicial selections. If the US Supreme Court followed the same process we might all be better off.
Friday, January 30, 2015
In local Massachusetts news, a state Superior Court judge refused to approve a consent agreement permitting PartnersHealthcare to close its merger with three smaller hospitals. The transactions had been opposed by the MA Attorney General on grounds that they stifled competition in the healthcare markets in the affected communities. Partners and the AG had reached an agreement to permit the transactions to close under certain conditions. These conditions included a series of regulations on pricing, price caps, and other conduct-based regulations over a ten year period as well as oversight by the Superior Court. When presented with the consent agreement, the court balked. The court refused to approve the agreement for two reasons:
1. The court believed the merger was not in "public interest" as defined by the case law. In the view of the court, the proposed consent agreement did not adequately address the harm alleged by the AG in her complaint, namely that transaction would limit competition in this sector.
2. The court through up its hands when it came to implementation of the consent agreement. The court noted that the agreement was not self-enforcing and that implementation as well as oversight would be complicated. For its part, the court admitted that it was "ill-equipped" to stay abreast of the many rapid changes in the healthcare industry such that the court would be able to adequately oversee implementation of the agreement.
Result, the court refused to sign on. Partners and the AG are left to decide how to move forward, with the AG threatening to take up litigation again in the event Partners decides to close the transaction without its approval.
What's interesting here is that this is an example of a local AG moving to enforce state level anti-competition/antitrust laws in the context of a transaction that has either cleared HSR or was too small to require an HSR filing. It's a reminder that even for small deals, antitrust counsel have important roles early on in the transaction planning process.
Wednesday, January 28, 2015
Yesterday, Yahoo announced a plan to spin off its Alibaba stock in a "tax efficient" spin. Rather than distribute its Alibaba stock directly to shareholders, Yahoo will distribute the stock to a SpinCo. Presumably the only asset of SpinCo will be Yahoo's Alibaba stock. SpinCo will then go public and Yahoo will distribute SpinCo stock to its shareholders.
Levine thinks the end game here is not that Yahoo shareholders hold Alibaba through the SpinCo vehicle forever. Rather, he believes that the ultimate goal here is still for Alibaba to buy back the stock via a merger with SpinCo. That's a definite possibility and seems to make more sense than holding SpinCo stock at a discount to is asset value.
Yahoo's spin-off of its Alibaba stock is just one of many recent spin-off transactions, including eBay's planned spin-off of PayPal and a favored strategy of activists.
Tuesday, January 13, 2015
Cain and Solomon have published their paper, A Great Game: The Dynamics of State Competition and Litigation. They find evidence of competition, perhaps inadvertant, for corporate litigation:
We theorize a multi-dimensional picture of jurisdictional competition for corporate litigation. We test this theory by examining merger litigation in a hand-collected sample of 1117 takeovers from 2005 to 2011. We find evidence of state competition for merger litigation. Entrepreneurial plaintiffs’ attorneys drive this competition by bringing suits in jurisdictions which have previously awarded more favorable judgments and higher fees and by avoiding unfavorable jurisdictions. States with an apparent interest in attracting corporate litigation respond in-kind by adjusting judgments and awards to re-attract litigation. These states award higher attorneys’ fees and dismiss fewer cases when attorneys have been migrating to other jurisdictions. Our findings illuminate the dynamics and existence of jurisdictional competition for corporate litigation.
In China, a merger between two large state-owned railroad companies may be heading for trouble. Why? Apparently 20 executives in both companies AND their families were engaged in insider trading in the 6 months leading up to the announcement of the deal. According to the China Daily:
Last October's merger plan actually disclosed the stock holdings of the executives and their relatives. It claimed that the executives were unaware of the plan when they engaged in the stock trading, and their various investment decisions were made solely based on the value and prospect of the companies.
The merger document showed that Cui Dianguo, president of the CNR, bought 15,000 shares in CSR at an average of price 5.14 yuan (87 cents) per share and sold 50,000 shares at the price of 5.96 yuan from April to October last year, according to the public information. But the company did not disclose how many shares Cui owned before April.
The largest amount of stocks traded were by Gao Zhi, CNS's vice-president and his relatives. They bought and sold nearly 2 million shares in CSR with total investment exceeding 10 million yuan prior to the trading suspension, according to the information.
So, the president of one of the two companies involved in this transaction claims not to have known that the deal was pending? You know ... we can see you.
Friday, January 9, 2015
Don't like the billable hour? Then bill like a banker. AmLawDaily has been poking around the CVR docket and they pulled a copy of Wachtell's fee letter.
The American Lawyer has obtained what appears to be a standard fee agreement that Wachtell sent a client in 2012. It shows that the firm typically charges fees for M&A deals that range from 1 percent to 0.1 percent of the transaction amount. The fee agreement was signed by CVR Energy Co., an oil refining and fertilizer business headquartered in Sugar Land, Texas. The company paid Wachtell $6 million for a three-month failed takeover defense against corporate raider Carl Icahn, and is now suing Wachtell and two of its partners for malpractice in Manhattan federal court and seeking return of the $6 million. Wachtell maintains that CVR's claims are meritless.
A fee ranging from 1% on matters where the estimateed transaction size is less than $250 million and 10% of 1% on matters where the estimated transaction size is greater than $25 billion. Hmm. That seems better than billing in six minute increments.
Thursday, January 8, 2015
Since In re Transkaryotic in 2008 appraisal arbitrage has been an issue bubbling just below the surface. Every now and then it pops up and then it disappears for a while. This week, Vice Chancellor Glasscock provided more justification for investors pursuing appraisal arbitrage as an investment strategy when he handed down an opinion in the Ancestry.com appraisal proceeding. To get the gist, you only need to read the first few paragraphs:
Ancestry.com, Inc. (“Ancestry”) was acquired in 2012 by a private equity firm in a cash-out transaction. Merion Capital L.P. (“Merion”), one of the Petitioners in this appraisal action, purchased its shares of Ancestry after the record date for that transaction. The shares were held in fungible bulk by a record owner, Cede & Co. (“Cede”). Merion caused Cede to file a timely appraisal demand for the shares beneficially owned by Merion. A stockholder may seek appraisal only for shares it has not voted in favor of a merger; Cede had at least as many shares not voted for the merger as those for which Merion sought appraisal. That is, Cede had sufficient shares it had not voted in favor of the merger to “cover” its demand on behalf of Merion. Merion then filed this petition for appraisal of the shares.
A plain reading of the appraisal statute as it existed prior to 2007—and case law construing it—indicates that it is the record holder of shares whose actions with respect to the merger determine standing to seek appraisal; the beneficial owner’s actions are irrelevant. Ancestry points out, however, that Section 262 as it existed prior to 2007 required the record owner to file the appraisal action on behalf of the beneficial owner, that the 2007 amendment to Section 262(e) allowed, for the first time, the beneficial owner to file suit in its own name, and that Merion did so here. Thus, argues Ancestry, it is Merion, not Cede, that must show it did not vote in favor of the merger. Moreover, according to Ancestry, because Merion purchased its stock after the record date, it must show that its predecessors did not vote in favor of the merger with respect to these shares as well. Since it cannot demonstrate the latter fact, Ancestry posits, Merion lacks standing here. Ancestry accordingly seeks summary judgment.
Ancestry’s arguments notwithstanding, a plain reading of the statute discloses that, for standing purposes, it remains the record holder who must not have voted the shares for which it seeks appraisal. Even if the focus were on the beneficial owner rather that the record owner, Merion did not vote in favor of the merger—to have standing, the statue requires that the stockholder must not have voted the stock for which appraisal is sought in favor of the merger; Section 262 imposes no requirement that a stockholder must demonstrate that previous owners also refrained from voting in favor. Accordingly, Ancestry’s Motion for Summary Judgment is denied.
Key is that the record holder is the one with the right to an appraisal udner the statute. The statute recognizes that beneficial holders come and go so it is unconcerned with them. The fact that a beneficial holder appears after the merger is announced isn't relevant if the record holder is and remains a record holder through the merger.
For all you corporate law geeks out there - you know who you are - the opinion is also worth reading because it's got a nice little history of appraisal and the appraisal statute. Because....of course you want to be able to drop all that appraisal knowledge on junior associates who wander into your office!
Wednesday, January 7, 2015
I've basically stayed out of this since it bubbled up. It's kind of like watching over your backyard fence as your neighbors get into an embarrassing argument. In any event, main stream media (Dealbook) has decided this was worth paying attention to, so here we are. In article by Andrew Ross Sorkin yesterday in the Dealbook, Sorkin shined a light on the West Coast - East Coast corporate law rock fight that started in December:
At the heart of the dispute is an academic paper written last month by Daniel M. Gallagher, a member of the Securities and Exchange Commission, and Joseph A. Grundfest, a professor at Stanford Law School and himself a former S.E.C. commissioner, that was titled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.”
The paper took aim at Lucian A. Bebchuk, a Harvard Law School professor who has long researched corporate governance issues and has been an outspoken advocate for increased democracy in corporate America’s boardrooms. Through Harvard’s Shareholder Rights Project, a group he created, Mr. Bebchuk, on behalf of public pension funds, has helped wage proxy contests at 129 companies to change policies that prevent shareholders from electing, or overthrowing, an entire board at once.
Typically, academic disagreements are pretty small bore stuff. "How dare you say that my dependent variable is not significant!" This is ... well ... it's a little more serious. Accusing another professor of violating securities laws and egging another institution into shutting down that professor's work? I don't know. Don't we all have other things to do? And why is a sitting SEC commissioner accusing a professor of securities violations in a paper? Not quite sure what that's all about. Anyway, it's confusing to me. Like watching my neighbors fight over my back fence.
Tuesday, January 6, 2015
Talk about belts and suspenders. Now, there's a paper from Mira Ganor, Why Do Dual-Class Stock Companies Have Staggered Boards?
Conventional wisdom regards the combination of a staggered board with a dual-class capital structure as superfluous. However, the incidence of this combination in U.S. firms, identified in this Paper, is not trivial. This Paper considers a few possible motivations for this practice and reports the results of empirical studies conducted on dual-class firms with staggered boards. Significantly, even in the universe of dual-class capital structures, effective staggered boards are associated with lower firm value. These findings suggest that entrenchment may not fully explain the correlation between lower value and staggered boards in single-class firms.
I suppose founders who are going public with dual-class stock are looking forward and thinking about how they can maintain control way into the future...but I don't know. Belts and suspenders.
Monday, January 5, 2015
Before the holiday there was a bit of attention to the Delaware Supreme Court's opinion in the C&J Energy case. You'll remember that Vice Chancellor Noble issued an order to enjoin a merger between C&J Energy and a division of its competitor, Nabors Industries Ltd., until such time as the board of C&J could shop the company. The Supreme Court then overturned the Vice Chancellor's order. In doing so, the court reminded us what Revlon "requires". It turns out, when the board is disinterested and there is no competing bid on the horizon, Revlon doesn't require much:
Not only did the Court of Chancery fail to apply the appropriate standard of review, its ruling rested on an erroneous understanding of what Revlon requires. Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the board's CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.
But Revlon does not require a board to set aside its own view of what is best for the corporation's stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, "there is no single blueprint that a board must follow to fulfill its duties," and a court applying Revlon's enhanced scrutiny must decide "whether the directors made a reasonable decision, not a perfect decision." ...
In prior cases like In re Fort Howard Corporation Shareholders Litigation, this sort of passive market check was deemed sufficient to satisfy Revlon. But as the years go by, people seem to forget that Revlon was largely about a board's resistance to a particular bidder and its subsequent attempts to prevent market forces from surfacing the highest bid. QVC was of a similar ilk. But in this case, there was no barrier to the emergence of another bidder and more than adequate time for such a bidder to emerge. The Court of Chancery was right to be "skeptical that another buyer would emerge." As important, the majority of C&J's board is independent, and there is no apparent reason why the board would not be receptive to a transaction that was better for stockholders than the Nabors deal.
It is also contextually relevant that C&J's stockholders will have the chance to vote on whether to accept the benefits and risks that come with the transaction, or to reject the deal and have C&J continue to be run on a stand-alone basis. Although the C&J board had to satisfy itself that the transaction was the best course of action for stockholders, the board could also take into account that its stockholders would have a fair chance to evaluate the board's decision for themselves. As the Court of Chancery noted, "[t]he shareholders are adequately informed."
Note also, the court's reluctance - in the absence of a competing bid - to step in between fully informed shareholders who have a vote and an opportunity to turn down the transaction and the transaction itself. Directors are required to make reasonable, not perfect decisions. And, if directors are unconflicted, and shareholders have the material information related to the transaction and an opportunity to say no, don't look for a court to step in between them and their decision.
Tuesday, December 23, 2014
Thursday, December 18, 2014
There have been a number of recent cases that raised the question, "Who is a controller?" The answer is important because in the context of a going private transaction, the presence of a controlling stockholder will affect the standard of review a court will deploy in reviewing the deal (See Kahn v Lynch and Kahn v M&F). Absent procedural protections, going private transactions with controllers will be subject to entire fairness review.
But, who is a controller? In the easy cases, the controller holds a majority of the stock. But in the harder cases, the controller holds less than a majority but still exerts control. In In re KKR Financial Holdings LLC Shareholder Litigation, the Chancelor Bouchard ruled that KKR, a 1% stockholder, was not a controller because ecause (1) KKR, had no control over the company's board of directors at the time the merger was approved, and (2) plaintiffs failed to show that a majority of the comapny's board was not independent of KKR. Bouchard laid out the inquiry that a court will apply when asked to determine whether a less than majority stockholder is a controller:
[I]n deciding whether a stockholder owes a fiduciary obligation to the other stockholders of a corporation in which it owns only a minority interest, the focus of the inquiry is on whether the stockholder can exercise actual control over the corporation’s board.
The issue of when a less than 50% holder is a controller cameup again recently in In re Zhongpin. In Zhongpin, a 17% stockholder offered to take the company private. The transaction was approved by a special committee and a "slim majority of unaffiliated stockholders." Plaintiffs challenged the transaction on M&F footnote 14 issue -- the interestedness and independence of the special committee, and the fact that the initial proposal did not contain the M&F conditions. Plaintiffs argued that the special committee members were not independent because they were beholden to the 17% stockholder. Consequently, rather than get the benefit of the business judgment presumption, plaintiffs argued the transaction should be subject to entire fairness review.
In determing whether the 17% stockholder was a controller, Vice Chancellor Noble explained:
A stockholder who owns less than 50% of a corporation’s outstanding stock is presumptively not a controlling stockholder. However, Delaware law recognizes that a stockholder can achieve controlling status with less than 50% ownership, in which case “a plaintiff must allege domination by [the] minority shareholder through actual control of corporate conduct.” A plaintiff cannot rely on conclusory allegations that a minority stockholder possessed control; rather, a complaint must contain well-pled facts showing that the minority stockholder “exercises ‘such formidable voting and managerial power that [it], as a practical matter, [is] no differently situated than if [it] had majority voting control.’” “[T]here is no absolute percentage of voting power that is required in order for there to be a finding that a controlling stockholder exists.” Instead, the Court considers whether or not a stockholder’s voting power and managerial authority, when combined, enable him to control the corporation.
The Court has recognized several attributes of controlling stockholders, including “the power to elect directors . . . and to adopt or reject fundamental transactions proposed by directors.” Voting power gives latent control to a stockholder, even if he does not exert active control as “a direct participant in operational decisions or in the formulation of strategic policy.” However, as the disjunctive proposition laid out in Kahn v. Lynch makes clear, one may be a controller by virtue of owning a majority interest or exercising control over a corporation’s business affairs. Actual control over business affairs may stem from sources extraneous to stock ownership, and the Court does not take an unduly restrictive view of the avenues through which a controller obtains corporate influence. Again, a dominating stockholder relationship can “exist in the absence of controlling stock ownership.”
In this case, the court found that notwithstanding the fact that the 17% holder did not have a majority of the stock in the company that the 17% holder could "exercise significant influence oer shareolder approvals for the election of directors, mergers and acquisitions, and amendments to Zhongpin's bylaws" such that he could be deemed a controller. The court also found that the 17% holder also excercised active control over Zhongpin's day-to-day operations. Because the procedural protections were not included as part of the initial offer and because the special committee was not independent of the controller, the court applied entire fairness to the transaction.
To a certain extent, Zhongpin is an easy case - a significant blockholder and founder exert day to day control over the business he set up. Other cases might not be so clear-cut. Think about Michael Dell, a 14% holder in the then-public Dell. A big, important stockholder, and the founder, but a controller?
Tuesday, December 16, 2014
Deborah Demott has an addition to the whole forum selection clause debate with her new paper Forum Selection Bylaw Refracted Through an Agency Lens. Here's the abstract:
Forum-selection bylaws are controversial when they are unilaterally adopted by directors of public companies acting pursuant to a generic bylaw power. The legitimation of such bylaws by the Delaware Court of Chancery in Boilermakers Local 154 Retirement Fund v. Chevron Corp. cleared the way for ever-more-aggressive uses of bylaw power in provisions mandating arbitration of internal-governance claims or imposing one-way fee shifting on shareholder plaintiffs. This Article uses the oblique perspective afforded by agency law to critique these bylaws and clarify the underlying issues they raise. In particular, agency doctrine includes precise articulations of concepts of consent and knowledge. The Article's analysis undermines the assumption that underpins the reasoning in Boilermakers: by investing in a corporation in which directors hold generic power to adopt, amend, or repeal bylaws, shareholders become parties to a "flexible contract" through which they impliedly consent to directors' later uses of their bylaw power (subject to ex-post judicial review under equitable doctrines). In the world of the "flexible contract," shareholders are deemed to know facts not in existence when they invest, which is inconsistent with the knowledge required by agency doctrine for effective consent by a principal. Even when considered alongside boilerplate consumer contracts, the "flexible contract" is a singular instance, in part because its subject matter is an ongoing governance relationship. The article proposes statutory revisions to the Delaware General Corporation Law to address these vulnerabilities by making forum-choice for shareholders more parallel to section 3114 (applicable to the assertion of personal jurisdiction over directors and officers) and section 102(b)(7), which enable but also regulates provisions that exculpate directors against monetary liability.