M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Tuesday, April 1, 2014

Jacobs to retire

Delaware Justice Jack Jacobs has today announced his retirement effective July.   There are two obvious potential candidates, James Vaughn and Jan Jurden. Both had applied to replace Chief Justice Steele.  The Judicial Nominating Committee sent their names along with Chief Justice Strine's name to the governor, who ultimately selected Strine.   Jurden, however, has come under some scrutiny in the past few days for her sentencing of an heir to the duPont family fortune.  It's the kind of thing that, while not disabling, will require a lot of explaining.  If you're explaining, you're losing. My uninformed guess is that she gets passed over for now.


April 1, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Monday, March 24, 2014

Delaware Chancery arbitration is over

Cert denied.




March 24, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Cert decision today re Delaware arbitration

Today we will get a decision on Delaware's petition to the US Supreme Court that the court hear an appeal in the Delaware Chancery arbitration case.  For those of you looking for a quick 'get up to speed' on what's going on, there's a nice interview with Brian Farkas in the NY Commercial Litigator Insider (reg. req'd, but it's worth it).


March 24, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Thursday, March 20, 2014

Bouchard nominated

Governor Markel has nominated Andre Bouchard (a Boston College alum, '83) to be the next Chancellor the Delaware Chancery Court.  According the governor's statement:

In nearly 30 years practicing law in Delaware, Andy Bouchard has demonstrated a remarkable ability to dissect complex legal issues and vigorously represent his clients. He is well recognized for his professionalism and ability to think quickly on his feet in the courtroom,” said Markell. “His experience establishing and growing his own small business as founder of his law firm, as well as his long career before the Court of Chancery, will give him a special appreciation for the work of the court and the many and varied litigants who would appear before him in his new role.”

WDDE has all the details here.  


March 20, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 19, 2014

Life tip: Insider trading edition

So, if you find yourself standing in the middle of Grand Central Station eating Post-It notes in order to destroy evidence, I have a life tip for you.  Something has gone terribly wrong and you should reconsider what you're doing.

That bit of million dollar advice alas comes a little too late for three characters involved in the latest insider trading shenanigans to be uncovered by the SEC.  As alleged by the SEC:

The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme.  Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system.  Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal.  The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol.  After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers.  The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information.  Metro also personally traded in advance of at least two deals. 

Here's the civil complaint and then the criminal complaint.


March 19, 2014 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 18, 2014

MFW, just half a loaf?

On Friday last week, the Delaware Supreme Court handed down an opinion affirming the Chancery Court's opinion in MFW.  In the Chancery opinion, (then) Chancellor Strine was attempting to reconcile the frayed strands of jurisprudence around controlling shareholder transactions and - at the same time - trying to reduce incentives to pursue meritless claims in order to seek a settlement.  In Cox Communications, a case where he took teh oopportunity to describe the problem with controlling shareholder cases, Strine described the present incentive structure created by the legal rules in the following manner:

Unlike any other transaction one can imagine — even a Revlon deal — it was impossible after Lynch to structure a merger with a controlling stockholder in a way that permitted the defendants to obtain a dismissal of the case on the pleadings. Imagine, for example, a controlled company on the board of which sat Bill Gates and Warren Buffett. Each owned 5% of the company and had no other business dealings with the controller. The controller announced that it was offering a 25% premium to market to buy the rest of the shares. The controlled company's board meets and appoints Gates and Buffett as a special committee. The board also resolves that it will not agree to a merger unless the special committee recommends it and unless the merger is conditioned on approval by two-thirds of the disinterested stockholders. The special committee hires a top five investment bank and top five law firm and negotiates the price up to a 38% premium. The special committee then votes to approve the deal and the full board accepts their recommendation. The disinterested stockholders vote to approve the deal by a huge margin that satisfies the two-thirds Minority Approval Condition.

After that occurs, a lawsuit is filed alleging that the price paid is unfair. The filing party can satisfy Rule 11 as to that allegation because financial fairness is a debatable issue and the plaintiff has at least a colorable position. The controller and the special committee go to their respective legal advisors and ask them to get this frivolous lawsuit dismissed. What they will be told is this, "We cannot get the case dismissed. We can attempt to show the plaintiffs that we are willing to beat them on this and persuade them to drop it voluntarily because they will, after great expense, lose. But if they want to fight a motion to dismiss, they will win, see Lynch. At the very least, therefore, if the plaintiffs are willing to fight, it would be rational for you to pay an amount to settle the case that reflects not only the actual out-of-pocket costs of defense to get the case to the summary judgment stage, but the (real but harder to quantify) costs of managerial and directorial time in responding to discovery over a past transaction."

Given the inability to settle on the pleadings - no matter how good the process - meant that any merger with a controlling shareholder became an immediate payday for attorneys.  Of course, that's frustrating for everyone involved.  It's especially frustrating for the judges who have to oversee the settlement processes.  

No surprise, then, that when Strine was given an opportunity to address the issue in MFW that he took a swing.  Strine held that in a merger with a controlling stockholder conditioned upfront on a promise that no transaction will proceed without (i) special committee approval, and (ii) the affirmative vote of a majority of the minority stockholders that business judgment and not entire fairness will be the standard of review.  This structure is important because by empowering the minority, it attempts to replicate as much as possible an arm's length transaction.

On appeal, the Delaware Supremes upheld the Chancery opinion and gave us the following standard for dealing with controlling shareholder transactions (Kahn v. M F Worldwide Corp.):

[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.

Ok, so far so good.  

But here's a wrinkle...footnote 14.  In footnote 14, the Supreme Court notes that MFW could not have decided on the pleadings and would have survived a motion to dismiss even under the new standard.  The pleadings, the court noted were sufficient to require discovery on all the new prerequisiting in the application of the standard...

Ultimately we'll see to what degree footnote 14 matters.  But, it does seem a little disconcerting that Strine's project to provide a pathway to early dismissal of these kinds of cases might just move the locus of the argument to the functioning of the special committee.  

Sure, that's obviously better, but it's not yet clear that MFW and footnote 14 will dramatically reduce incentives to bring these cases.  Perhaps we will just be battling the same fight on new ground.  Of course, the Chancery Court is likely to want to find ways to rule on the pleadings and my guess is that now that Chief Justice Strine is in a place to influence how the MFW standard is going to roll out that he won't be looking to increase incentives for plaintiffs to bring these cases.


March 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Multi-jurisdictional litigation report

Cornerstone offers up another report on multi-jurisdictional litigation.  Okay, so things you probably already know -- 94% of all mergers overs $100 million are accompanied by litigation.  On the brighter side, plaintiffs appear not to 'race to the courthouse' with the same degree of speed as in the past.   In 2009, the first suit was filed an average 6.5 days after announcement of a transaction.  By 2013, the average delay for the first suit increased to 11.7 days from announcement.  Read the report here.


March 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, March 17, 2014

Dallas conference on multi-jurisdictional litigation

Eric Chiappinielli of Texas Tech is sponsoring a day long conference in Dallas on April 25 on the topic of multi-jurisdictional litigation.  Kudos to Eric - he has put together a top-notch group for the day: Bernie Black, Randy Baron, Sean Griffith, Minor Myers, Randall Thomas, and Verity Winship as well as Chief Justice Strine and Reuters' Alison Frankel. Here's the conference summary:

M&A litigation is increasingly filed in both the target’s state of incorporation and its headquarters state. It is the most important current development in corporate litigation. The leading plaintiffs’ and defendants’ deal litigators from Delaware and from Texas will discuss every aspect of this issue at our day-long conference. Chief Justice Strine of the Delaware Supreme Court and Justice Brown of the Texas Supreme Court will be panelists.

This looks like an event well-worth attending.  Sign up here.


March 17, 2014 in Conference Announcements | Permalink | Comments (0) | TrackBack (0)

Friday, March 14, 2014

MFW Affirmed

Really not a surprise. The Delaware Supreme Court affirmed Strine's Checnery Court opinion in MFW.  Here is the opinion (MFW - Del Sup Ct).


March 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Johnson and Millon respond to Bebchuk and Jackson

Lyman Johnson and David Millon offer a rebuttal to Bebchuk and Jackson's piece on the constituitonality of the poison pill. You can find it over at Prof. Bainbridge's place.


March 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 13, 2014

Lions Gate - sign of the times?

Lions Gate settled administrative charges brought against it by the SEC in connection with its late run-in with Carl Icahn:

According to the SEC’s order instituting settled administrative proceedings, Lions Gate’s management participated in a set of extraordinary corporate transactions in 2010 that put millions of newly issued company shares in the hands of a management-friendly director.  A purpose of the maneuver was to defeat a hostile tender offer by a large shareholder who had been locked in a battle for control of the company for at least a year.  However, Lions Gate failed to reveal that the move was part of a defensive strategy to solidify incumbent management’s control, instead stating in SEC filings that the transactions were part of a previously announced plan to reduce debt.  In fact, the company had made no such prior announcement.  Lions Gate also represented that the transactions were not “prearranged” with the management-friendly director, and failed to disclose the extent to which it planned and enabled the transactions with the expectation that the director would get the shares.

The settlement (available here) is noteworthy because in addition to paying a $7.5 million fine, Lions Gate admitted wrong-doing.  The SEC has been under pressure for its practice of settling cases without demanding an admission of wrong-doing - the thought being that if firms were required to admit wrong doing as part of any settlement they would resist settlement opportunities.  Well, in this particular case, the SEC was able to secure an admission.  I wonder if this will be the new normal.


March 13, 2014 in SEC | Permalink | Comments (0) | TrackBack (0)

Monday, March 10, 2014

Is staple financing is dead, yet?

Vice Chancellor Laster handed down a decision in  Rural Metro Corporation Stockholders Litigation (opinion here) on Friday evening.  It's Del Monte-like, in that it's the kind of opinion that's going to generate a lot of ink and opinions.  

If it wasn't already clear to investment banks, it should be now.  The Delaware courts are going to look very closely at transactions where there may be banker conflicts brought about by the prospect of staple financing.  In this particular case, RBC was brought in to advise the Special Committee of Rural Metro on strategic alternatives.  While advising on the potential sale, RBC pursued opportunities to assist the ultimate purchaser in providing financing for the transaction.  Though RBC wasn't ultimately successful in securing that business from Warburg (the buyer), it did provide a $65 million revolver for Warburg.  Warburg purchased Rural Metro for $17.25/share.

Stockholders subsquently sued the directors and brought an aiding and abetting claim against RBC.   The directors sued and RBC went to trial on the aiding and abetting claim.   The gist of the shareholders' argument was that RBC manipulated the sales process in order to benefit Warburg and thereby put itself in a good position to secure the financing business from the buyer.   By failing to disclose or deal fairly with the board, RBC caused the board to violate its duty of care in approving the transaction.

By fooling with the DCF analysis, RBC was able to take a transaction that look just ok and make it look super:

The combined effect of lowering ―consensus adjusted EBITDA by $6.7 million and lowering the low-end multiple from 7.5x to 6.3x was dramatic. On Saturday morning, the consensus precedent transaction range was $13.31 to $19.15. On Saturday afternoon, it was $8.19 to $16.71, entirely below the deal price.

RBC‘s DCF analysis showed a range of $16.28 to $21.07, with a base case price of $18.73. RBC used an exit multiple range of 7.0x to 8.0x, which did not match up with the range used for RBC‘s precedent transaction analysis. On February 8, 2011, RBC had provided to DiMino an LBO analysis with an exit multiple range of 7.8x to 8.3x. If the bottom of the exit multiple range was 7.5x (the original bottom of the precedent transaction ranges), then the bottom of the DCF range would be $18.00, above the deal price. When Munoz saw the DCF range, he commented, ―"I thought we were going to try to reduce dcf?" JX 529.

During the afternoon of March 26, Munoz let Fleming know that Warburg was still refusing to include RBC on the financing side. Fleming responded, "I‘m gonna call [W]arburg myself. We just committed 65 to their effing revolver." JX 525. When he asked Munoz for a further update, Munoz wrote,"Not on email." Id.

Yes.  Not on email.  This is precisely the kind of thing that gives investment bankers a bad name... not to mention the process by which RBC generated a 'fairness opinion'.  Oh, and those are 'air quotes' for a reason.

It's worth remembering, that when RBC was manipulating the models to make Warburg's deal look great, RBC and the Rural Metro board were also processing the Del Monte opinion.  Funny that it appears not to really have sunk in.   Maybe it will now. 

In Rural Metro, the facts suggest just how a conflicted banker can work against its client in hopes of furthering its financing business.  It's clear that the Chancery Court finds this kind of conflict pernicious.  Staple financing and the kind of monkeying around done by RBC in  this deal present real conflicts for bankers.  These conflicts and the incentives that come along with bankers trying to generate additional business by using a position with another client may present an insurmountable hurdle.  

These conflicts and the incentives are so real that the court makes it clear that generic conflict language of the type included in RBC's engagement letter is not going to be enough to generate a waiver of the bank's conflict:

This generalized acknowledgment that RBC and Moelis might extend acquisition financing to other firms did not amount to a non-reliance disclaimer that would waive or preclude a claim against RBC for failing to inform the Board about specific conflicts of interest. See RAA Mgmt., LLC v. Savage Sports Hldgs., Inc., 45 A.3d 107, 116-19 (Del. 2012) (explaining why clear and unambiguous non-reliance disclaimer clauses and waiver provisions are enforceable to bar certain fraud claims under New York and Delaware law). Rural did not waive any claim that RBC‘s sell-side advice was tainted by an undisclosed material self-interest. If RBC thought it was obtaining a waiver in the engagement letter without first disclosing the conflict and its import, then it was committing ―what, in the old days, might have been called "constructive fraud." Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1068 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005). 

Although the court's conclusion may be at odds with the way business is currently practiced and the standard language of investment banker engagement letters, the court is setting down a marker.  Generalized acknowledgements of potential conflicts are not going to absolve banks from conflicts.  If a bank is going to pursue financing opportunities along with its sell-side advice, it's going to be a lot more explicit about that going-forward.   I wonder, if the Special Committee had full knowledge of the extent to which RBC was pursuing the Warburg business - and that it had provided a $65 million revolver whether that information might have changed the questions the committee asked of its bankers or perhaps up the information it would have wanted to see before making the decision to accept the offer. 

No doubt, this opinion is going to draw a lot of attention and perhaps criticism.  But, I suspect that the court's instinct here -- the get conflicts out in the open and explicitly acknowledged so that board can make fully informed decisions -- is going to win the day eventually.


March 10, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 6, 2014

The Globalization Carveout?

We've seen a couple of these situations recently -- merger announced, employees or local partner of Chinese-based manufacturing facilities essentially revolt, transaction slowed.  

Following announcement of Apollo's acquisition of Cooper Tire, Cooper's Chinese JV partner locked Cooper personnel out of their Cooper Chengshen Tire operation.  This -- in part -- led to the collapse of the transaction.  After Nokia announced sale of its handseet manufacturer to Microsoft, hundreds of employees at its Dongguan manufacturing plant protested the transaction.  Employees at Nokia's plant were reportedly concerned that the merger would result in their being required to take pay cuts under their new American employers:

An executive of the factory told Xinhua that the workers gradually resumed their duties from Sunday after the two sides reached a compromise, with help from the local authorities.

"Microsoft has promised that the workers' salaries and benefits will stay the same as their current standards within 12 months after the acquisition," according to an internal mail.

Gao Xiang, head of communications of Nokia China, said its Dongguan factory will also give a 1,000-yuan bonus (about 164 U.S. dollars) to each worker who did not join the strike.

Those who refuse to go back to work will be fired, according to an internal mail. A worker surnamed Liang said more than 200 of his colleagues had already been sacked.

Should I comment on the utter fecklessness of Chinese labor unions?  Strike and you'll get fired? Perhaps not.

Next up, Chinese workers at IBM's manufacturing facilities are striking in opposition to the sale of IBM's sale of its low-end server business to Lenovo:

"So far, we've heard nothing from the management or the government in response to our demands," said Hou Hongbo, a 10- year worker at the factory. "The company's attitude so far is to ignore us, but the entire production remains shut down."

The workers want higher pay if they choose to transfer to Lenovo or higher severance packages if they choose to leave. Hou said they were determined to keep their action going.

"We will definitely keep striking tomorrow," he said.

These kind of occurrences are increasingly common.  It raises the question whether the costs of labor disturbances at foreign facilities should be explicitly carved out of material adverse change clauses.  right now, one could reasonably read these kinds of labor disturbances in the language that carves out of the MAC definition events that arise from the announcement or pendency of the transaction.  Nevertheless, particularly with global businesses, it's worth considering whether or not to call out such issues in the MAC, call it a globalization carve-0ut? 


March 6, 2014 | Permalink | Comments (1) | TrackBack (0)

Monday, March 3, 2014

Strine sworn in

 On Friday, Leo E. Strine was sworn in during an emotional - and at times funny - ceremony as the new Chief Justice of the Delaware Supreme Court.  Congratulations!  



March 3, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, February 28, 2014

Peppercorn Settlements

Professors Davidoff, Fisch and Griffith have posted a new paper, Confronting the Peppercorn Settlement in Merger Litigation.  Their empirical study takes on the vexing problem of merger litigation from the settlement angle.  Maybe if litigants weren't rewarded with fees for low-value disclosure-only settlements, perhaps they wouldn't bring them. The abstract is below: 

Abstract: Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result are beneficial to shareholders.

This Article offers a new approach to assessing the value of these claims by empirically testing the relationship between merger litigation and shareholder voting on the merger. If the supplemental disclosures produced by the settlement of merger litigation are valuable, they should affect shareholder voting behavior. Specifically, supplemental disclosures that are, in effect, “compelled” by settlement should produce new and unfavorable information about the merger and lead to a lower percentage of shares voted in favor of it. Applying this hypothesis to a hand-collected sample of 453 large public company mergers from 2005-2012, we find no such effect. We find no significant evidence that disclosure-only settlements affect shareholder voting.

These findings warrant a reconsideration of Delaware merger law. Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs’ lawyers to an award of attorneys’ fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorney fee awards.

Our approach responds to critiques of merger litigation as excessive and frivolous by reducing the incentive for plaintiffs’ lawyers to bring weak cases, but it would have an additional benefit. Current practice drags state court judges into the task of indirectly promulgating disclosure standards in connection with the approval of fee awards. We argue, instead, for a more efficient specialization between state and federal courts in the regulation of mergers: public company merger disclosure should be policed by the federal securities laws while state corporate law focuses on substantive fairness.


February 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, February 27, 2014

Are Pills Preempted by the Williams Act?

Lucian Bebchuk and Robert Jackson think the answer there might be yes.  They have just posted their new paper, "Toward a Constitutional Review of the Poison Pill."

Abstract: In 1968, the Williams Act established a federal regime regulating attempts by outside buyers to acquire control of publicly traded companies through unsolicited tender offers. In the subsequent four decades, however, the states have developed a body of rules that impose additional impediments on such attempts. Recognizing the tension between the Williams Act and these state-law rules, between 1972 and 1985, the federal courts, including the Supreme Court, held some of these rules preempted by the Williams Act. To date, however, federal courts have not examined, and commentators have not analyzed, whether the state-law rules that authorize the use of the poison pill—the most powerful impediment to outside buyers of shares—are also preempted.

 In this Article, we examine this subject and conclude that there is a substantial basis for questioning the continued validity of current state-law rules that authorize broad use of the poison pill. Because these rules enable incumbents to block shareholder consideration of outside tender offers for lengthy periods of time, they may well impose tighter restrictions on unsolicited offers than the state antitakeover regulations that federal courts invalidated on grounds of preemption during the 1970s and 1980s. Indeed, we show that, upon a close examination of the state-law rules governing poison pills, the federal courts are likely to conclude that these rules are preempted.

 Finally, the Article provides a framework for lawmakers seeking to ensure that state-law poison-pill rules are not preempted. We explain that state-law rules that empower directors to block tender offers for long periods of time are least likely to withstand constitutional scrutiny. Thus, we argue, state corporate law that substantially limits the length of time during which a poison pill can be used to delay tender offers would be more likely to survive a preemption challenge. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, we show, these challenges could well have a major impact on the corporate-law landscape.


February 27, 2014 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 26, 2014

Tres Amigos ... one more thing

OK, so one more thing.  All of the amici refer in an off-hand way to the fact that these proceedings aren't really secret.  Sure, the proceedings are confidential -- and they don't even appear in the docketing system.  But!  In the event, the resulting order is appealed, the proceeding is public.  The Business Roundtable sums it up nicely:

Arbitration proceedings shall be considered confidential and not of the public record until such time, if any, as the proceedings are the subject of an appeal.

Here's the thing.  At first glance we might think that that means that the entire record is made public and that the Delaware Supreme Court will be able to provide perhaps a de novo review of the arbitral order. That would be okay, I guess, because novel questions would reach the Delaware Supremes and they could continue to build the common law.    

But, as A-Rod recently found out after he came to his senses, that is not what the court will be permitted to do.  Appeals of arbitral orders - to be consistent with the FAA - are much narrower and do not involve a de novo appeal.  As noted in NASDAQ's brief:

[Appeals are limited] under Federal Arbitration Act to cases of fraud on or corruption, misconduct, or abuse of power by the arbitrator.

So, no de novo review of arbitral awards from Chancery.  

So let's say, Delaware notwithstanding the FAA, Delaware decides that no, it's arbitral program is 'special'.  And, unlike any other arbitral program in the United States, the Delaware program will have the benefit of de novo - or substantive - review by a public court.  That would be unique -- in fact -- by not having FAA-consistent review as the current procedure suggests (but only suggests), the whole Chancery Court arbitration procedure would look exactly like a trial.  (Inconvenient, no?)

Well, I'd love to be a litigator on the first substantive appeal to the Delaware Supreme Court of an arbitral award, cause after they are done with it, we're going straight to the US Supreme Court where the nine have consistently ruled that there is no de novo review of FAA-consistent arbitrations, only reviews for fraud, corruption, or misconduct by the arbitrator.

So, if you want the Delaware Supreme Court to provide a substantive review of an arbitral award our of Chancery litigants would have to come to the court prepared to argue that the Chancellor who handled to the arbitration was incompetent, drunk, or otherwise.  Yeah. Good luck with that.

Ok, I'm done.


February 26, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

The Three Amigos

I just finished reading the three amici filed in support Delaware's petition for writ of cert.  The three letters were written by a group of law firms, the Business Rountable, and NASDAQ OMX GROUP.   

Of the three, the law firm memo is the most strident and, I think, given the source, the most puzzling.  The basic gist of the law firm's amicus brief is that there is just way too much public access of the courts in this country and that it's about time that the Supreme Court did something about it! ("The Court should grant certiorari in this case to restore the Fist Amendment right of access to its properly narrow scope.")  Lawyers, in particular, litigators who make their living in the courts you would think would be among the most sensitive to the importance of information and precedent  to facilitate the work of advising clients and structuring transactions.  But here, they appear to be going 'all in' to ask the Supreme Court to limit the qualified right of access under the First Amendment solely to criminal trials. 

What would the world be like if, as the Business Roundtable brief suggests, "Chancery Court  arbitration is likely to become an increasingly preferred method of dispute resoultion"? Well, they start, but don't finish, to answer to their own question: "[A]s [deal lawyers] counsel their clients to specify Chancery Court arbitration in their agreements, we can expect that it will be an increasinly utilized tool for dispute resolution."  

And...then this is my fear...someone will wake up in ten years time and ask a question, "What's a MAC?" You'll have to dust off an old case book to see what it was once.  But, you won't really know.  And when your clients ask you,"Will a court uphold this deal structure, what's my risk?" You won't really know.  How could you?  All or most of the disputes that are the fodder of the Delaware corporate common law will have gone dark.  Although dispute resolution will not have stopped, law generation through the courts will have.  

That's what's at stake here. It's frustrating to me that so many involved haven't looked down the road to recognize that.  

Or, let's think about it this way.  The chancellors will continue to hear cases and the 'law' as applied by the Chancellors in arbitration will continue to evolve.  However, it won't be precedential and diffusion of knowledge will be limited.  Rather than being able to look up recent decisions - or better read The Chancery Daily in your inbox every morning - practitioners will be forced to rely on meetings with 'lawyers in the know' and relationships to understand the current state of the law.  While that's not an impossible condition, it raises the relative costs of knowing the "Delaware corporate law".  Over time, lawyers who might have previously advised clients to incorporate in Delaware might find the costs of learning the Delaware law to be too expensive.  Why not just rely on California law instead?  The cases are all online and if something happens, we will learn about it cheaply.  That's the long-term threat to Delaware that may well stem from 'success' with Chancery arbitration. 

Anyway, like I said, it's frustrating. 

There are a couple of points in the amici briefs that are worth commenting on.  First, the 'experience and logic test' is all about framing.  The Third Circuit (and the District Court) looked at the proceeding and reached the conclusion that the publicly-funded finding of fact by judges who normally hear this kind of dispute had enough attributes of a civil trial that it was in fact a civil trial. Just because you call something and arbitration doesn't make it an arbitration.  

The Third Circuit felt the procedure looked like a trial and then applied the experience and logic test to civil trials.  The amici say, "No, no, this is an arbitration, so no openness with the experience and logic test."  Where you starts dictates where you end to a certain degree when applying the test.

Second, the amici extoll the virtues of arbitration because it is so much more efficient that the normal judicial system.  Think about that for a second.  The Delaware Secretary of State describes the state's judicial system in the following way: 

The Delaware Court of Chancery is a specialized court of equity with specific jurisdiction over corporate disputes. Without juries, and with only five expert jurists selected through a bipartisan, merit-based selection process, the Court of Chancery is flexible, responsive, focused and efficient. 

Apparently, according to the amici, it's not really all that efficient nevermind what the Secretary of State says.  

Honestly, I find that hard to stomach.  Hello!  Men's Wearhouse filed a suit in the Delaware Chancery Court on Monday. Yesterday - Tuesday - it got a hearing on a motion to expedite.  Please.  Enough with the 'Delaware courts aren't efficient' nonsense.

Okay, let's say for arguments sake the amici are right and Delaware is not an efficient place to resolve disputes. Why would arbitration organized by the same inefficient courts be any better?  This is a bad argument. 

Finally -- not really finally, but I am getting tired you really don't want to read all this -- the amici argue that arbitration is valuable because the entire process is confidential.  'Sure, the Delaware Chancery Court has procedures for confidential treatment of sensitive materials, but just between us, the Delaware rules for confidential treatment suck. Right, amIright?'

Seriously.  Does the Chancery Court seriously believe that its own rules with respect to confidential treatment of trade secrets are inadequate?  I find that hard to believe.  

Anyway. I'm going to finish off this post with a uncategorical statement with which you are free to disagree:

The US capital markets benefit and are strengthed when stockholders of publicly-traded corporations have access to information about the way in which their investments are managed and the law that governs them.  Period. Full stop.




February 26, 2014 in Delaware | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 25, 2014

Family Law and Arbitration

There's a difference between family law and Delaware's Chancery Arbitration program.   In appearance before a legislative budget committee, Chief Justice-designate Strine argued against the idea of opening up Family Court proceedings to the public: 

During a presentation on behalf of the judiciary to legislative budget writers, Leo Strine Jr. said the idea of opening Family Court proceedings regarding sensitive issues such as child custody makes him "really uncomfortable."

Strine, who will be sworn in Friday as chief justice, noted that people often are forced to go to Family Court to deal with "the most intimate, painful things of human life."

"I just think we better pause and think about that," he told members of the Joint Finance Committee. "We have to be very careful."

Delaware's constitution says all courts shall be open, but many Family Court proceedings are nevertheless closed to the public because of laws passed by the General Assembly. Those closed proceedings include hearings involving adoption, termination of parental rights, custody rights and visitation, guardianship, paternity and divorce.

Some readers might find it odd that Delaware is considering opening closed Family Court proceedings, especially since Family Court proceedings in Delaware and in just about every other state are traditionally closed to the public.  So what gives? 

Apparently, in response to the Third Circuit's decision that Delaware's Chancery Court arbitration program may not be confidential, some people in Delaware are reading into that that Family Law courts must also open.  Uh...no. 

This is where the proponents of the Chancery Arbitration program typically go awry.  Here's the thing.  The qualified right of access is just that. It's a qualified right of access to the courts and proceedings: 

A proceeding qualifies for the First Amendment right of public access when “there has been a tradition of accessibility” to that kind of proceeding, and when “access plays a significant positive role in the functioning of the particular process in question.”

This 'experience and logic test' is the touchstone for determining whether there should be a qualified right of access.  When the Third Circuit examined the Chancery Arbitration program it looked sufficiently like a typical corporate law trial except for the fact that the proceedings were to be confidential.  Experience and logic determined that the arbitration program be kept open. 

Apparently, observers of the Family Court in Delaware interpreted the Third Circuit's opinion to mean that perhaps the family courts would also have to be opened to the public.  Fortunately, for all the reasons Chief Justice-designate Strine alluded to today, that's not the case.  Why? Well, applying the experience and logic test to the functioning of the family courts in Delaware (and everywhere else in the country) will firmly place most proceedings behind closed doors where they traditionally have been.

In other news, a series of amici have been filed by firms all over the country asking SCOTUS to take up Delaware's appeal in the arbitration case.   I'll post them soon.



February 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 19, 2014

Annual Destefano Lecture

Mark your calendars.  If you are going to be in NYC in early March, swing by Fordham Law for a talk by former Chief Justice Myron Steele of the Delaware Supreme Court.  Information for the talk is below: 

Steele invite


February 19, 2014 | Permalink | Comments (0) | TrackBack (0)