Thursday, June 26, 2014
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 Though largely superceded by Section 203, later generation antitakeover statutes, the control share statutes are still out there and they are potent defenses.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.
Thursday, June 5, 2014
At a speech before the Delaware Bench and Bar Conference, Chief Justice Strine raised the possibility that Delaware would revisit its Chancery Arbitration Program:
"Regrettably, a federal court in Philadelphia issued a divided ruling striking down these statutes because they violated two judges’ reading of unsettled precedent, a reading that, if good law, would invalidate long-standing dispute resolution procedures used in their own federal court system,” said Strine.
“But, consistent with our history, Delaware is not wallowing in defeat,” Strine said, adding that the governor, the Corporate Law Council and members of the bar “are working on a different approach to be ready for the consideration by the General Assembly in January.”
I could quibble, but I won't. I suspect what they will do is create an arbitration procedure that will be effectively the same as the one they had previously implemented but with some public access. Supporters believe that it won't work without confidentiality, but I suspect public access won't be as terrible as some think.
Monday, June 2, 2014
The news over the weekend that Phil Mickelson is subject of an insider trading investigation is surprising and not surprising at the same time. Celebrities and high profile athletes will naturally attract a lot of investigator attention when their names show up on lists of suspect trades. Imagine you are a FINRA staffer and your job involves scanning lists of hundreds of names of people involved in suspect trades. Frankly, it can be a boring job. Not all that different from doc review or a never ending diligence exercise. Of course, if a name that looks familiar pops up on a list, you are definitely going to stop and take a look. Who wouldn't?
Add to that the pedagogic effect of possibly catching a high profile athelete/celebrity with their hand in the cookie jar. Prosecution of such cases doesn't only make a career, but it's also going to send a much bigger message to the trading public about insider trading than prosecuting an anonymous hedge fund trader. So, there are real incentives for prosecutors to run down every lead when the name of a high profile individual pops up on a suspect trade list.
Of course, having one's name on a suspect trade list is not the same as actually engaging in insider trading. Don't get me wrong. If you are a deal lawyer, you never want to see you father's name turn up on a suspect trade list of a deal that you've been working on. That will take you down a long, dark road to be sure.
No, what I mean is that since the news of the Phil Mickelson investigation has leaked, precious little evidence beyond the fact that Mickelson may have traded in Clorox stock options in the week before Carl Icahn announced his intent to acquire Clorox in 2011. Given how thin the market for single stock options are, it's not good - really not good - that Mickelson happened to buy call options just before announcement of a potential acquisition. That's going to mean a huge legal bill for Mickelson as he explains himself to the SEC, but that, in and of itself, is not going to be enough to tag Mickelson with any liability.
To get to liability - exam review for students who just took my exam - the SEC will first have to find someone with a fiduciary duty to the source of the information. Second, the SEC will have to prove that the person with the information about Icahn's bid actually tipped Mickelson (let's make this sumple and not daisy-chain the information, yet). Third, that the when tipping Mickelson the source of the information received a "personal benefit" and therefore breached his or her fiduciuary duty to the source. And then finally, that when Mickelson traded on the information, he knew or should have known that the information he received was tainted because it was inside information received via a breach. That's a lot of dots to connect. And so far, there's not a lot of ink to connect them.
Friday, May 30, 2014
MoFo has posted a brief overview of activist stategies in the context of the merger space. It comes down to three basic strategies:
1. Challenge an announced deal in an effort to force the board to regnegotiate for a marginally higher price (e.g. Dell/Icahn).
2. Chase an appraisal remedy in an announced target (e.g. Dole/Merion Investment Management).
3. Try to put a company in play through an unsolicited offer ... and pray someone else comes along to top you (e.g. Icahn/Clorox).
This is obviously not an exhaustive list. What were are witnessing in the Pershing Square/Valeant/Allergan bid is an interesting twist.
Thursday, May 29, 2014
According to the Delaware Law Weekly, there are seven candidates to replace retiring Justice Jack Jacobs:
The candidates are said to be Superior Court President Judge James T. Vaughn Jr.; Superior Court Judges Jan R. Jurden and Calvin L. Scott Jr.; Widener University School of Law professor Lawrence Hamermesh; Family Court Chief Judge Chandlee Johnson Kuhn; Skadden, Arps, Slate, Meagher & Flom attorney Karen L. Valihura; and Grant & Eisenhofer attorney Megan McIntyre.
Jurden and Vaughn were recently under consideration for the Chief Justice position, so I suppose no surprise there. Nice to see Larry Hamermesh on the list.
Wednesday, May 28, 2014
The ubiquity of transaction-related litigation is, I think, a real problem. By now, 94%+ of announced mergers end up with some litigation. I think that most reasonable people can agree that not all 94% of transactions where there are lawsuits do the facts suggest that something has gone wrong. Much of the litigation is really just flotsam intended to generate a settlement -- a settlment that directors are all too willing to grant in exchange for a global release.
In any event, there have been a series of efforts, including exclusive forum provisions, which have been deployed in a self-help manner to try manage this issue and its multi-jurisidictional cousin. In the 2013 Boilermakers opinion, Chief Justice Strine gave his blessing to board-adopted exclusive forum bylaw. Following Galaviz v Berg there was some question as to whether an exlcusive forum bylaw adopted by the board had sufficient inidicia of consent such that it would be enforceable against shareholders. In Boilermakers, Strine noted that forum selection bylaws were consistent with both Delaware and federal law, and also that the mere fact that such a bylaw was adopted by the board does not render such a bylaw invalid:
The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board’s authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.
Boilermakers set the stage for the Delaware Supreme Court very recent opinon in ATP Tour. ATP Tour, you know, the tennis guys. The issue in the ATP is related both to the question of transaction-related litigation and unilaterally adopted bylaws. In ATP, the tour adopted a fee shifting bylaw that would eschew the "American Rule" and require that in the event of unseuccessful shareholder litigation - or litigation that "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought" then the shareholder will be responsible for paying the corporation's litigation fees. Here's the bylaw as adopted:
(a) In the event that (i) any [current or prior member or Owner 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 League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), 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 League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.
Clearly, such a bylaw, if adopted and upheld, would bring the transaction-related litigation train to a screeching halt or at the very least dramatically alter the settlement dynamics.
This bylaw ended up in front of the Delaware Supreme Court as a certified question from the federal district court in Delaware. You'll remember that Delaware is one of the few state supreme courts that will accept certified questions of law. The question before the court was whether the unilaterally adopted fee-shifting bylaw above was valid under Delaware law.
That such a provision is legal under Delaware law isn't all that surprising, really. What is surprising is that court would agree to wander into this hornet's nest of an issue entirely of voluntarily. Whether or not to accept a certified question is entirely within the discretion of the court and the court could have avoided deciding the question altogether had it wanted to. But, apparently it wanted to decide the issue.
The reaction to the opinion has been pretty incredible. For example, Delaware litigator Stuart Grant remarked,"The Delaware Supreme Court seems to have caused Delaware to secede from the union." A little over the top, sure. But, the just because plaintiffs hate the result, don't think that the defense bar is jumping up and down claiming victory and recommending widespread adoption of these provisions. They're not. In fact, many worry that adopting such provisions might just put their clients in the cross hairs. No one wants a fight if they can avoid it. And anyway, the global releases their clients get from settling otherwise trivial transaction challenges are valuable security blankets for directors.
The reaction by both plaintiffs and defendants to the ATP ruling has been a unique constellation of interests. Ronald Baruch calls the reaction evidence of the "cozy" litigation community in Delaware. Plaintiffs want to get paid and defendants want their releases. In response the Corporation Law Section of the Delaware Bar has moved quickly to propose an amendment to elminate fee shifting under the DGCL. The proposed amendment (with underlined insertion) is below:
Amend § 102(b)(6), Title 8 of the Delaware Code by making insertions as shown by underlining as follows:
A provision imposing personal liability for the debts of the corporation on its stockholders based solely on their stock ownership, to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts.
The effect of the proposed amendment would make fee shifting impermissable under the DGCL and therefore rule it out as a bylaw. If approved by the legislature in Delaware, the amended 102(b)(6) would go into effect on August 1. Now that's swift justice.
The battle against transaction-related litigation will have to be fought on other ground.
Friday, May 16, 2014
Antoniades, et al have a paper, No Free Shop. There have always been two sides to the g0-shop issue. On the one side, if a company has the right to proactively shop itself post-signing, that should be good, right? In Topps, Chief Justice Strine called the go-shop "sucker's insurance". Generally, employing a go-shop provision is one of several ways that a board can, in good faith, reassure itself that it has received the highest price reasonably available in a sale of control.
On the other hand, when one looks at the way go-shops are actually deployed, one wonders what is going on. By now, they are regularly included in merger agreements with private equity buyers and rarely included in merger agreements with strategic buyers. If you believe that private equity buyers have characteristics of a common value buyers and strategic buyers are more like private value buyers, then the go-shop takes on a different, less appealing light.
The paper from Antoniades, et al backs up this view; go-shops are associated with lower initial prices and fewer competing offers. These results raise the question whether boards can reasonably rely on the go-shop to confirm valuations. Here's the abstract:
Abstract: We study the decisions by targets in private equity and MBO transactions whether to actively 'shop' executed merger agreements prior to shareholder approval. Specifically, targets can negotiate for a 'go-shop' clause, which permits the solicitation of offers from other would-be acquirors during the 'go-shop' window and, in certain circumstances, lowers the termination fee paid by the target in the event of a competing bid. We find that the decision to retain the option to shop is predicted by various firm attributes, including larger size, more fragmented ownership, and various characteristics of the firms’ legal advisory team and procedures. We find that go-shops are not a free option; they result in a lower initial acquisition premium and that reduction is not offset by gains associated with new competing offers. The over-use of go-shops reflects excessive concerns about litigation risks, possibly resulting from lawyers' conflicts of interest in advising targets.
Guhan Subramanian's 2007 Business Lawyer paper, Go-Shops v No-Shops, came to a different conclusion with respect to the utility of go-shops.
Thursday, May 15, 2014
Ron Gilson and Jeff Gordon weigh in on activist pills and Sotheby's at the Blue Sky Blog:
Delaware corporate governance rests on two conflicting premises: on the one hand, the board of directors and the management the board selects run the corporation’s business, but on the other the shareholders vote on who the directors are. The board needs discretion to run the business, but the shareholders decide when the board’s performance is so lacking that it (and management) should be replaced. All of the most interesting issues in corporate governance arise when these two premises collide – when the board’s assessment of how the company is doing is different than the shareholders’, and each claims that their assessment controls. These collisions work out within a predictable range when, unexpectedly, new governance initiatives shift the underlying plate tectonics and disequilibrate the settled patterns. Whether the particular earthquake is caused, as was the case in the 80s, by the emergence of a hostile tender offer or, as now, by activist investors seeking to change management, policy or both through a threatened proxy fight, the underlying question is the same: when does the board’s discretion end and the shareholders’ power begin? The boundary is the corporate governance ring of fire.
Gilson and Gordon suggest that the new distribution of share ownership, heavily weighted in favor of institutional ownership, may require a new approach to governance. This new approach would recognize that institutional shareholders may well need less protecting from threats than would individual shareholders with less information.
Students in my just completed M&A class will enjoy Rick Climan's latest installment of this series of mock negotiations with Keith Flaum. This one on a potentially controversial customary carveout to the MAE.
The lesson -- even though everyone is including it, doesn't mean you have to!
Wednesday, May 14, 2014
Over at Prawfslawblog yesterday - and hopefully bleeding into today - is the Bruner Book Club. They are discussing Chris' new book, Corporate Governance in a Common-Law World: The Political Foundations of Shareholder Power. Drop by a give it a read.