Friday, July 11, 2014
You know the drill. A merger is announced and immediately a number of lawsuits are filed. Of course, they allege Revlon duties, yada yada… But what does it take for one of these typical Revlon claims to survive a motion to dismiss? A lot. In Dent v Ramtron, Vice Chancellor Parsons reminds us just how hard it is to make a case that a board has run afoul of enhanced review under Revlon where a board has the protection of a 102(b)(7) exculpatory provision:
In that regard, if the corporation’s certificate contains an exculpatory provision pursuant to 8 Del. C §102(b)(7) barring claims for monetary liability against directors for breaches of the duty of care, the complaint must state a nonexculpated claim, i.e., a claim predicated on a breach of the directors‟ duty of loyalty or bad faith conduct.
A factual showing that, for example, a majority of the board of directors was not both disinterested and independent would provide sufficient support for a claim for breach of loyalty to survive a motion to dismiss. “A director is considered interested where he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders.” “Independence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences,” such as where one director effectively controls another. Moreover, as to any individual director, the disqualifying self-interest or lack of independence must be material, i.e., “reasonably likely to affect the decision-making process of a reasonable person . . . .”
Well-pled allegations that the board did not act in good faith also would state a claim for breach of the duty of loyalty sufficient to survive a motion to dismiss. In general, “bad faith will be found if a ‘fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.’” Alternatively, notwithstanding approval by a majority of disinterested and independent directors, a claim for breach of duty may exist “where the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.”
So, unless the suit you are filing immediately upon announcement of a deal can allege that directors didn’t act in good faith or a majority of directors were interested and that the disqualifying interest was material, then, well your claim isn’t going very far and it's going to get the business judgment presumption. Revlon is a high bar for plaintiffs.
Thursday, July 10, 2014
Ron Barusch at the WSJ points out some lessons for deploying poison pills following American Apparel's failure to use a pill to keep former CEO/Chairman Dov Charney at bay.
I won't go into the details, but let's just say the board probably felt they had good reason to let him go when they did last month. The result of the ouster has been a struggle for control of the company with Charney (founder and large bloc stockholder) seeking to fight his way back onto the board and the board resisting. Not long after being removed from the board, Standard General and Charney entered into a partnership whereby SG lent money to Charney to purchase shares of American Apparel stock from SG. Collateral for that purchase was Charney's existing bloc of APP stock. The long and short of it - SG was able to move into position where it had the ability to control 43% of APP stock.
After announcement of the partnership, APP adopted a pill. As Ron notes, that was just too late. SG and Charney were already in a position and even if they didn't acquire any more shares, they couldn't be touched.
Yesterday, the board of APP gave in and signed a support agreement with SG. That agreement provides that board will be reconstituted with five of the current seven members, including Charney, stepping down. The new board members will be chosen jointly by SG and the current board. Charney stays on as a consultant at his present salary with a determination as to what to do with him to be resolved after an ongoing internal investigation. And then finally a standstill agreement that will prevent SG and Charney from acquiring additional shares.
So, following the turmoil, Charney is still out (for the timebeing), the current board has been mostly dislodged and SG is suddenly in the cat-bird's seat.
This past year has been quite a year for activist investors. It looks like they are writing new playbooks, taking advantage of opportunities as they pop up. Maybe it's time to reconsider whether simply having a pill on the shelf ready to go is sufficient. Perhaps, boards should be considering adopting pills pre-emptively and taking their ISS lumps.
Wednesday, July 9, 2014
Monday, July 7, 2014
Once more into the breach on this topic - the impact of private equity on jobs at target firms. Economists Stephen Davis, Josh Lerner and others have released a paper, Private Equity, Jobs, and Productivity. Here's the abstract:
Private equity critics claim that leveraged buyouts bring huge job losses and few gains in operating performance. To evaluate these claims, we construct and analyze a new dataset that covers U.S. buyouts from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing to controls defined by industry, size, age, and prior growth. Buyouts lead to modest net job losses but large increases in gross job creation and destruction. Buyouts also bring TFP gains at target firms, mainly through accelerated exit of less productive establishments and greater entry of highly productive ones.
Talk about burying the lede... OK, from the paper, some of their conclusions:
Our establishment-level analysis yields three main findings: First, employment shrinks more rapidly, on average, at target establishments than at controls after private equity buyouts. The average cumulative difference in favor of controls is about 3% of initial employment over two years and 6 percent over five years. Second, the larger post-buyout employment losses at target establishments entirely reflect higher rates of job destruction at shrinking and exiting establishments. In fact, targets exhibit greater post-buyout creation of new jobs at expanding establishments. Adding controls for pre-buyout growth history shrinks the estimated employment responses to private equity buyouts but does not change the overall pattern. Third, earnings per worker at continuing target establishments fall by an average of 2.4 percent relative to controls over two years post buyout.
But it's not all bad news. If one looks at firm-level job creation vs. establishment-level job creation, the authors find net positive growth as target firms tend to add net jobs at greenfield establishments. Give it a read. It's an AER paper, so it's short.
Friday, July 4, 2014
Thursday, July 3, 2014
Lots of ink has already been spilt on the Hobby Lobby opinion. I won't add to any of the discussion on contraception or even much about the RFRA claim. I do want to say something about the Supreme Court's conception of the corporation, though. That's where I think this case and the cases below all went off the rails. Justice Alito describes the corporate form thusly:
A corporation is simply a form of organization used by human beings to achieve desired ends. An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people...Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.
This characterization is reminiscent of the Court's characterization of the corporate form in the Citizens United opinion. There, the court repeatedly describes the corporate form as an "association of citizens" or an "association of individuals".
The Supreme Court's understanding of the corporate form from both Citizens United and Hobby Lobby is ... well ... novel. I doubt there are many state courts in America that would immediately look through the corporate form to the personal interests of the officers or the employees and say that's what a corporation is all about. In fact, if a court did, I wonder what would be left of the concept of limited liability and the strong public policy of corporate separateness - even where there might be only one shareholder.
Still thinking about the implications of this. But, I'm glad that state courts won't be looking to the US Supreme Court for guidance on the corporate law anytime soon.
Oh, and given the US Supreme Court's characterization above, there is no reason why corporations should not have the full array of constitutional protections afforded natural persons. For example, corporations presently don't enjoy 5th Amendment protections, but given Alito's characterization above, there is no reason to believe they shouldn't have those rights and others.
So, now that the Chamber of Commerce has put the kibbosh on the quick fix to prohibit fee shifting bylaws following ATP, no surprise...the first of what might well be many fee shifting bylaws adopted by public companies have already been adopted. This one by Echo Therapeutics. Here is their new "Litigation Costs" bylaw:
Litigation Costs. To the fullest extent permitted by law, in the event that (i) any current or prior stockholder or anyone on their behalf (“Claiming Party”) initiates or asserts any claim or counterclaim (“Claim”) or joins, offers substantial assistance to, or has a direct financial interest in any Claim against the Corporation and/or any Director, Officer, Employee or Affiliate, and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Corporation and any such Director, Officer, Employee or Affiliate, the greatest amount permitted by law of all fees, costs and expenses of every kind and description (including but not limited to, all reasonable attorney's fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.
Given that the Delaware Supreme Court has already passed on the validity of these bylaws, unless the legislature decides to prohibit them, I suspect more and more of them will get rolled out this summer.
Wednesday, July 2, 2014
OK, I'll just say it. I think David Yermack is the most talented selector of paper topics out there. His series of tailspotter papers was great. Now, he follows up with Evasive Shareholder Meetings. If you have to hold your shareholder meeting at the bottom of a well, then don't expect that the company has positive news to share. Good stuff. Here's the abstract:
abstract: We study the location and timing of annual shareholder meetings. When companies move their annual meetings a great distance from headquarters, they tend to announce disappointing earnings results and experience pronounced stock market underperformance in the months after the meeting. Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists, and the media. However, shareholders do not appear to decode this signal, since the disclosure of meeting locations leads to little immediate stock price reaction. We find that voter participation drops when meetings are held at unusual hours, even though most voting is done electronically during a period of weeks before the meeting convenes.
Tuesday, July 1, 2014
Late last week Pershing Square settled is suit with Allergan over Alergan's poison pill. The settlement permits Pershing Square to put together a group of shareholders sufficient to call a special meeting without triggering the pill. Pershing Square, with 9;7% of Allergan, was worried that if it got the support of the required 25% of shareholders sufficient to call a meeting that it would trigger Allergan's poison pill with its 10% trigger. The settlement will allow Pershing Square to get the support to call the meeting with triggering the pill.
Thursday, June 26, 2014
Karen Valihura was confirmed yesterday to replace the retiring Justice Jack Jacobs. The changes at the Delaware Supreme Court aren't done, yet. Next up, a replacement for retiring Justice Carolyn Berger. Then, maybe things will settle down.
What with all the attention to hostile pharma deals these days, it's no surprise that names of potential targets are getting batted around in the press. This was interesting, though. A name of a firm that is not a target - Eli Lilly. Why? Because Eli Lilly is an Indiana corporation and Indiana corporations are subject to that state's control share statute. This flavor of state antitakeover prevents an acquiring shareholder from exercising the voting rights over any "control shares" without the express approval by the other shareholders of the target corporation. This particular type of antitakeover decision was approved by the US Supreme Court in CTS Corp as not pre-empted by the Williams Act and within the competence of state legislatures. Though largely superceded by Section 203, later generation antitakeover statutes, the control share statutes are still out there and they are potent defenses.
Tuesday, June 24, 2014
Now we have another in the series of videos from Rick Climan and Keith Flaum at Weil in which they negotiate provisions of a merger agreement before an audience - with some animation to keep you engaged. This series is really interesting and - especially for young associates - worth every minute of time you spend with it. This latest video revisits the issue of indemnification and damages that the pair discussed in an earlier video (Rube Goldberg). In this video they discuss negotiating waivers of consequential damages.
The case on consequential damages that Keith refers to in the video is Biotronik v Conor Medsystems Ireland.
Monday, June 23, 2014
Claudia Allen, who has been wonderful about documenting the development of exclusive forum provisions, has posted a paper on arbitratin bylaws and the issues facing corporations who might seek to roll them out for shareholder litigation. You can download her paper, Bylaws Mandating Arbitration of Stockholder Disputes?, here.
Abstract: Would a board-adopted bylaw mandating arbitration of stockholder disputes and eliminating the right to pursue such claims on a class action basis be enforceable? That question came to the fore as a result of late June 2013 decisions from the United States Supreme Court and the Delaware Court of Chancery, which, when read together, suggest that the answer to this question is yes. In American Express Co. v. Italian Colors Restaurant, the United States Supreme Court, interpreting the Federal Arbitration Act, upheld a mandatory arbitration provision, including a class action waiver, in a commercial contract. The decision focused upon the arbitration provision as a contract subject to the FAA. Next, the Delaware Court of Chancery rendered its opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corp. The decision, which emphasized that bylaws are contracts between a corporation and its stockholders, upheld the validity of bylaws adopted by the boards of Chevron Corporation and FedEx Corporation requiring that intra-corporate disputes be litigated exclusively in Delaware courts. Subsequent United States Supreme Court and Delaware Supreme Court decisions addressing forum selection and the board’s power to adopt bylaws have only strengthened the argument.
In addition to complementing each other, both American Express and Boilermakers address a similar issue, namely, the explosion in class action and derivative litigation that settles primarily for attorneys’ fees, most commonly in the context of mergers and acquisitions. Stockholders ultimately bear the costs of such litigation. Class actions and derivative lawsuits are forms of representative litigation, in which named plaintiffs seek to act on behalf of a class of stockholders or the corporation itself. The plaintiffs are customarily represented by attorneys on a contingent fee basis, making the lawyer the “real party in interest in these cases.” If mandatory arbitration bylaws barring class actions were enforceable, the logical outcome would be a marked decline in class actions, since the alleged existence of a class is a principal driver of attorneys’ fees.
This Article examines the legal and policy issues raised by arbitration bylaws, whether adopting such bylaws would be attractive to public companies, likely reaction from stockholders and opportunities for private ordering. Since arbitration is a creature of contract, this article argues that there are opportunities for corporations to craft bylaws that take into account company-specific issues, while responding to many likely criticisms. However, the inherent bias of some stockholders and corporations against arbitration is likely to make experimentation in this area slow and difficult.
Friday, June 20, 2014
A couple of weeks ago, it looked the stars were aligning in a once in a generation way that would have the plaintiffs and defendants bar stand behind an unusual amendment to the Delaware code. That amendment would effectively prohibit firms from adopting fee-shifting bylaws. Following ATP, it became possible for Delaware corporations to adopt bylaws that would put the costs of shareholder litigation on the plaintiff in the event the plaintiff is unable to get its claims successfully adjudicated on the merits. A proposal was quickly made to the Delaware legislature and it seemed like it would move through quickly. And then, the US Chamber of Commerce - not one to usually care about amendments to the Delaware code - got involved. The proposal has now been tabled.
Bill Bratton and Michael Wachter have a new paper, Bankers and Chancellors, on a topic that has attracted my attention over the past few weeks - liability of bankers for aiding and abetting board fiduciary duty violations in Revlon. Here's the abstract:
Abstract: The Delaware Chancery Court recently squared off against the investment banking world with a series of rulings that tie Revlon violations to banker conflicts of interest. Critics charge the Court with slamming down fiduciary principles of self-abnegation in a business context where they have no place or, contrariwise, letting culpable banks off the hook with ineffectual slaps on the wrist. This Article addresses this controversy, offering a sustained look at the banker-client advisory relationship. We pose a clear answer to the questions raised: although this is nominally fiduciary territory, both banker-client relationships and the Chancery Court’s recent interventions are contractually driven. At the same time, conflicts of interest are wrought into banker-client relationships: the structure of the advisory sector makes them hard to avoid and clients, expecting them, make allowances. Advisor banks emerge in practice as arm’s length counterparties constrained less by rules of law than by a market for reputation. Meanwhile, the boards of directors that engage bankers clearly are fiduciaries in law and fact and company sales processes implicate enhanced scrutiny of their performance under Revlon. Revlon scrutiny, however, is less about traditional fiduciary self-abnegation than about diligence in getting the best deal for the shareholders. The Chancery Court’s banker cases treat conflicts in a contractual rather than fiduciary frame, standing for the proposition that a client with a Revlon duty has no business consenting to a conflict and then passively trusting that the conflicted fiduciary will deal in the best of faith. The client should instead treat the banker like an arm’s length counterparty, assuming self-interested motivation on the banker’s part and using contract to protect itself and its shareholders. As a doctrinal and economic matter, the banker cases are about taking contract seriously and getting performance incentives properly aligned, and not about traditional fiduciary ethics. They deliver considerably more than a slap on the wrist, having already ushered in a demonstrably stricter regime of conflict management in sell-side boardrooms. They also usher in the Delaware Chancery Court itself as a focal point player in the market for banker reputation. The constraints of the reputational market emerge as more robust in consequence.
Thursday, June 19, 2014
The Valeant/Pershing Square challenge (Complaint and the (Motion to Expedite) to the Allergan pill just got fast-tracked in the Delaware Chancery Court. The thing to remember and what no doubt the guys over at Third Point will tell you, just because you get your pill case expedited, doesn't mean you are going to win.
For all the fireworks that accompany many transactions, it's a little sad that they almost always end with a whimper. The same was true of the Men's Wearhouse/JOSB transaction. That particular deal was the center of quite a bit of back and forth all of last year. Public letters back and forth, hostile offers, pills, litigation, etc. But, like so many other deals, that deal closed yesterday with almost no fanfare. Just a lonely associate somewhere submitting a filing.
Tuesday, June 17, 2014
I am shocked! Shocked that there is insider trading in advance of merger announcements! OK, so I'm not. But, what is surprising is just how much of that insider trading happens via equity options. Seriously. I know you can make a lot of money in equity options, but you're also going to get caught. Anyway, there is a new study by Augustin, Brenner and Subramanian, Informed Options Trading Prior to M&A Announcements: Insider Trading? I think that's a rhetorical question. Here's the abstract:
Abstract: We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash offers for large target firrms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial - about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.
Three in a trillion? Those are pretty long odds. You'd be better off buying a lottery ticket than replicating the results they find here in the absence of material inside information ... a lottery ticket! It's odd, because it's so dumb of the traders, but the authors find that in the run-up to an announcement of a merger, there is increased abnormal trading volume in single equity options of the target. If it's not obvious, that means if you are in possession of material non-public information and you are trading in single equity options prior to a merger announcement, you might as call the SEC and tell them to arrest you.
Tuesday, June 10, 2014
Well, this is unusual. In reponse to ATP - the Delaware Supreme Court opinion that ruled that fee-shifting bylaws are facially valid in Delaware - there was a rare moment of unanimity when both the plaintiffs bar and the defense bar seemed to line up behind a quick fix to Section 102(b)(6) of the corporate law that would prohibit such bylaws. Now, according to the WSJ's Liz Hoffman, the US Chamber of Commerce is weighing in on the fix:
The Delaware legislature is set to vote as soon as this week on a bill to prevent companies from sticking stockholder plaintiffs with corporate legal bills in an effort to deter lawsuits, especially those that routinely follow merger deals.
But the U.S. Chamber Institute for Legal Reform, an arm of the U.S. Chamber of Commerce, is opposing the bill, which it says would deprive companies of a self-help tool that could reduce corporate litigation, which has risen sharply in recent years.
This fee shifting fix and the Chamber's response to it is highly usual. First, the proposed legislative fix it is being adopted very quickly on the heels of ATP. Usually, amendments to the DGCL take time and are worked out by committee over a good deal of time. Second, by the time such amendments get proposed, they have been so fully vetted that they are extremely non-controversial. Here, the Chamber is stepping in the lobby the legislature against adoption. I guess this week just got interesting.
Friday, June 6, 2014
Governor Markell nominated Karen Valihura, a corporate litigator in Skadden's Wilmington office to the Delaware Supreme Court to replace retiring Justice Jack Jacobs. Ms. Valihura will become the second woman after Justice Carolyn Berger to sit on the court.
Ms. Valihura was interviewed for LawDragon.com just a week or so ago. Among the questions, there's this one:
Lawdragon: Is there a case/deal/client in your career that stands out as a “favorite” or one that is particularly memorable?
Karen Valihura: My favorite deal litigation was Norfolk Southern's takeover fight with CSX over Conrail, resulting in Norfolk Southern's acquisition of a substantial portion of Conrail. It was a classic hostile fight among the Class I railroad titans: Norfolk Southern (represented by Skadden), Conrail and CSX. It involved a multitiered, front-end loaded transaction spanning three preliminary injunction hearings, as well as appeals to the Third Circuit over the Christmas and New Year's holidays. I greatly enjoyed working with and learning from Morris Kramer and Steve Rothschild, who were both legendary Skadden partners; and my fellow senior associate on the matter was Eric Friedman, who is now our firm's Executive Partner. It was Skadden at its finest.
Best of luck to the nominee.