M & A Law Prof Blog

Elson's Requiem for Delaware

In today's FT, Prof. Charles Elson gives his requiem for the Delaware franchise post SB 313 in an article titled: "Delaware is Jettisoning its Traditional Approach to Protecting Investors." In it he describes the capitulation to controlling shareholders and the opening it creates for increased Federal regulation to displace Delaware: 

Available here.

Was Buster Scruggs really the worst Texas Twit?

In which a governor demonstrates that he has no idea what the corporate law is about...

-bjmq

Mandatory shareholder arbitration being considered by SEC ... again?

Apparently the whole issue of mandatory arbitration of shareholder disputes has begun to percolate again. The issue is whether the SEC should permit registration statements to go effective with mandatory shareholder arbitration provisions in their corporate charters. This had been percolating for some time as a high priority item for some interest groups, waiting for a Republican administration to push it through. So, here we are, a two years into the Trump Administration and the scuttlebutt is that there is talk of moving forward with this. 

 Commissioner Pierce seems fine with the idea. Commissioner Piwowar is already on the record as good to go with this. Commissioner Clayton (here) and then Commissioner Jackson, on the other hand seem reticent to move away from the status quo (so, no). We'll see where it goes from here, but clearly if this is going to move, now is the time. 

Before things move too quickly, though, just a gentle reminder that under §115 of the Delaware Corporation Law, mandatory arbitration provisions that prevent shareholders from bringing their cases in the Delaware Chancery Court are not permitted to be included in the corporate charter. Section 115 reads as follows:

The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.  “Internal corporate claims” means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery. (Emphasis added)

Even if the SEC permits a corporation to go public with such a provision, such a provision would violate state corporate law.

Given that more than 60% of publicly traded companies are incorporated in Delaware, if the SEC were to move forward with permitting mandatory shareholder arbitration, most listed corporations would not be in a position to include such provisions. So, why bother? Indeed, there are lots of good reasons why the SEC shouldn't take a permissive approach towards shareholder arbitration. 

First, I'm no fan of the litigation flotsam that jammed up the courts these past few years. Frankly, the disclosure settlement litigation was mostly just rent seeking in the economic sense. We're all better off without it. However, the creation of law by courts operating in the open is a public good. If shareholder claims were to be moved into arbitration we would lose the value of incremental developments of the law and the value associated with investors as well as managers actually knowing what the law is. All of that becomes a closely held mystery once we move a substantial block of shareholder claim resolution into private arbitration. 

Second, in confidential arbitration bad actors and bad actions go unnoticed. Or, to the extent self-interested managers are successfully sued, there is little prospect for accountability. For example, if a board engages in a self-dealing transaction is sued, then discovery, the trial and then the opinion are all held in confidence - not disclosed via any court filing system and not filed with the SEC, except in the most cursory fashion. That can't be good for "price discovery." Who wants that kind of system? Bad actors. 

So, count me down as a "no" if the SEC is still actively considering this bad idea. 

-bjmq

Shareholder/Stockholder

Kyle Wagner Compton's deep dive into the Delaware Chancery Court turns up another example of Vice Chancellor Laster trying to move mountains - in this case trying to get lawyers to refer to shareholder litigation as stockholder litigation.  Vice Chancellor Laster denied a proposed order to consolidate a series of cases into a single case titled " In re Astex ShareholderLitigation" with the following: 

"Shareholders litigation?  Under what state's corporate law do you believe you are litigating?"

Laster has been trying to change conventions for while now.  Students sometime ask what's the difference between shareholder and stockholder.  The correct answer is, well, nothing, but...but...corporate law drafting isn't creative writing.  To the extent one is looking at the statute, it's probably always better practice to rely on the language of the statute.  Laster's effort is a small one to move away from the convention of calling representative litigation in Delaware shareholder litigation.  Since the corporate code refers only to stockholders, proper usage should indicate captioning shareholder litigation, stockholder litigation.

-bjmq

Shnader on Squeeze-out Mergers in Pennsylvania

Standard learning has long held that a minority shareholder of a Pennsylvania corporation who was deprived of his stock by a "cash-out" or "squeeze-out" merger had no remedy after the merger was completed other than to take what the merger gave or demand statutory appraisal and be paid the "fair value" for his shares. No other post-merger remedy, whether based in statute or common law, was thought to be available to a minority shareholder to address the actions of the majority in a "squeeze-out." Now, after the Pennsylvania Supreme Court’s holding in Mitchell Partners, L.P. v. Irex Corporation, minority shareholders may pursue common law claims on the basis of fraud or fundamental unfairness against the majority shareholders that squeezed them out.

The full client alert can be found here.

MAW

Massey gets its due

Back in the summer, there was a 'to-do' about the Massey shareholder litigation.  You'll remember that shareholders brought a derivative suit against the directors for violations of their fiduciary duties in the running of the company that ended with a disaster at the Upper Big Branch mine in West Virginia. Twenty-nine miners lost their lives.  Chancellor Strine dismissed the case after Massey was acquired by Alpha, refusing to allow the shareholders who had lost standing to maintain the case. Although the shareholders' attorney were volubly upset at the decision, Strine made it clear first, that there were still other avenues to find justice for the victims, and second, the shareholders weren't the victims.  They had benefited from the directors' bad acts.

Now, we get word that the Federal Mine Safety and Health Administration and the US attorney have reached settlements with Alpha, Massey's successor.  Alpha will pay $209 million in civil and criminal penalities to resolve its liability with respect to the UBB disaster.  This settlement includes $46.5 million in payments to the families of the victims of the UBB disaster. While this settlement resolved any corporate criminal liability, it left open the possibility of personal criminal liability for executives of Massey.

This seems like a start.

-bjmq 

Was the H-P Board paying attention?

Really? Really?!  This was the headline from James Stewart's Business Day article today:  Voting to Hire a Chief Without Meeting Him.  The article highlights the almost complete lack of attention the full board of H-P gave to the job of hiring a new CEO after firing Mark Hurd.

Among their revelations: when the search committee of four directors narrowed the candidates to three finalists, no one else on the board was willing to interview them. And when the committee finally chose Mr. Apotheker and again suggested that other directors meet him, no one did. Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor to the recently ousted chief executive, Mark Hurd, most board members had never met Mr. Apotheker. ...

Before a final vote on Mr. Apotheker, H.P. search committee members again urged other directors to meet him. No one took them up. At least one director, Ms. Salhany, tried to slow the process, worrying aloud that “no one has ever met him. Are we sure?” But her concerns were brushed aside. “Among the finalists, he was the best of a very unattractive group,” one director said.

Really, I find that revelation - if true - to be an absolutely incredible abdication of responsibility by a board.  Short of a merger, hiring a CEO is one of the most important things a board can do.  And they can't even bring themselves to have coffee with the guy they are going to hire.  How is that possible?  Who advised them?

The members of the board should be thankful that Delaware has Sec. 102(b)(7) in the code, otherwise they might be looking at major liability - that's not to say they won't get sued, they just might anyway.

I wonder now how involved the board was with Apotheker's recent shift in corporate strategy away from the PC and tablet business and its generous acquisition of Autonomy (for 10x earnings revenues).  The shift took the investment community by surprise.  I wonder if the H-P board was surprised, too. 

-bjmq

Update:  A nice piece by Reuters reminds us just how dysfunctional the H-P board has been over the years.  Of course, one can start with the rancor over the Compaq acquisition that got H-P into the PC business in the first place.  There were accusations that then CEO Fiorina bought DB's votes to get that deal through.  And then there was the whole Patricia Dunn/boardroom leaks investigation that led to Tom Perkins' resignation in 2005/2006?  And now they're talking about hiring Meg Whitman to take over.  Goodness. 

 

Corps Roundtable

Over at the Conglomerate they recently hosted one of their virtual roundtables - this one on teaching corporations/business associations.  It's worth reading the back-and-forth, especially since our own Afra Afsharipour and my colleague Kent Greenfield were in the mix. 

-bjmq

Ten Books for Transactional Practioners

Over at Truth on The Market, J.W. Verret lists the Top Ten Books in Corporate Law that he believes a practitioner would find useful in day to day practice.  This follows a prior post listing his top ten books in corporate governance, which reader comments led him to believe had (perhaps) too academic a focus.  As he notes, most of the entries on the new list are treatises. 

Acknowledging that corporate practices can vary widely, I have to say that, while I have consulted most of the books on his list, they are not the ones I turn to most often.  As a transactional practitioner I’m generally looking for books that give more concise, practical advice on how to actually do things.

So, here’s my list of 10 texts for the transactional practitioner (in no particular order):

1. Corporate Finance and the Securities Laws, by Charles J. Johnson, Jr., Esq., Joseph McLaughlin, Esq.
2. Negotiated Acquisitions of Companies, Subsidiaries and Divisions, by Lou R.  Kling & Eileen T. Nugent
3. Start-Up & Emerging Companies: Planning, Financing & Operating the Successful Business, edited and co-authored by Gregory C. Smith with  Contributing Experts
4. Negotiating and Drafting Contract Boilerplate, edited & co-authored by Tina L. Stark
5. Any one of: (a) The Section 16 Treatise and Reporting Guide, (b) The Section 16 Deskbook or (c) The Section 16 Forms and Filings Handbook, each of which is by Peter Romeo and Alan Dye
6. Resales of Restricted Securities, by J. William Hicks 
7. The Williams Act—Tender Offers and Stock Accumulations, by Arnold S. Jacobs 
8. Legal Opinions: Drafting, Interpreting, and Supporting Closing Opinions in Business Transactions, by Donald W. Glazer, Scott T. FitzGibbon, Steven O. Weise 
9. Regulation of Securities: SEC Answer Book, by Steven Mark Levy 
10.  Regulation of Corporate Disclosure, by J. Robert Brown

In the interest of full disclosure, several have been written or edited by partners or former partners of mine and I’ve contributed to a couple of them.  I have excluded bar resources and pure form books, although often these are the things I use most frequently.  I also excluded any text that is over two volumes long.  And of course I've left off imternet resources, which I use quite frequently.

Thoughts welcome in the comments.

MAW

Corporate Law Update - 2010

Prickett Jones' annual review of 2010 developments in the Delaware corporate law can be found here.  It's definitely worth downloading and reading.

-bjmq

Chancellor Strine on Board Effectiveness

Last night I attended a fascinating lecture at Stanford’s Rock Center for Corporate Governance by Delaware Vice Chancellor Strine about the lack of alignment in the corporate governance system.  Speaking to a packed crowd, Chancellor Strine made a compelling case for a deeper understanding of what we are asking of boards through our various corporate governance reforms.  Among his many interesting points, he made two important insights about the role of directors on boards.  First, he asked academics to work on “a more or less study” that looks at (i) what more have we given managers to do? and (ii) what less have we required of them?  His point was essentially that we have imposed stringent independent director requirements and then heaped more and more responsibility on these independent directors.  One worry is of course that humans are bound to make mistakes especially when they have too much on their plates.  The other worry is whether these independent directors have the time, skills and company-specific knowledge to effectively manage and monitor risks. 

Chancellor Strine’s second point about independent directors was that the increasing push for independent directors has resulted in independent director politicians that serve on many boards and may be beholden to other interests outside of the interests of the particular company that they are serving.  These latter comments made me think about a recent paper entitled, The Dark Side of Outside Directors: Do They Quit When They are Most Needed? by Rüdiger Fahlenbrach, Angie Low and Rene M. Stulz. It’s worth a read:

Abstract: Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.

Tomorrow, I’ll post about how Chancellor Strine’s comments relate to some important issues in corporate governance reforms outside of the United States.
-  AA

More on NACCO Industries from Davis Polk

Brian recently posted about the NACCO Industries case (here), As he reminds us:

NACCO reminds us that if you are going to terminate a merger agreement, you better comply with all its provisions.  If you don't, if you perhaps willfully delay your notice to the buyer about a competing proposal, you might not be able to terminate without breaching.  And, if you breach, your damages will be contract damages and not limited by the termination fee provision.  Remember, you only get the benefit of the termination fee if you terminate in accordance with the terms of the agreement.  Willfully breaching by not providing "prompt notice" potentially leaves a seller exposed for expectancy damages.

Davis Polk has just issued this client alert, drawing a few more lessons from the case.  Here's a sample:

A recent Delaware Chancery Court decision raises the stakes for faulty compliance with Section 13(d) filings, holding that a jilted merger partner in a deal-jump situation may proceed with a common law fraud claim for damages against the topping bidder based on its misleading Schedule 13D disclosures.  NACCO Industries, Inc. v. Applica Inc., No. 2541-VCL (Del. Ch. Dec 22, 2009).  The decision, which holds that NACCO Industries may proceed with numerous claims arising out of its failed 2006 merger with Applica Incorporated, also serves as a cautionary reminder to both buyers and sellers that failure to comply with a "no-shop" provision in a merger agreement not only exposes the target to damages for breach of contract, but in certain circumstances can also open the topping bidder to claims of tortious interference.

MAW

Rehoboth Beach Reading

Wondering what to read during your next weekend at the beach?  The latest Nora Roberts or Catherine Colter novels not attracting your attention?  Or maybe like me, your local bookstore for some reason doesn't carry the latest Glenn Beck tome?  OK, that's probably a sign that your weekend might be better spent catching up on recent developments in the Delaware corporate law.  So how about the 2009 Developments in Delaware Corporation Law (James Holzman at Prickett, Jones, & Elliott)?  It's a nice 60 page overview of everything you missed over the past year while you were struggling just to keep up with the day's headlines.  Print it out and bring it to the beach. 

-bjmq  

Interview with Justice Jacobs

J.W. Verret's interview with Delaware Supreme Court Justice Jacobs is here.  It's worth your time.  Below is a link to the recent Brennan Lecture on the State Courts at NYU Law School given by Justice Jacobs in February 2009.  His talk is a reflection on the role of federalism in corporate law and is well worth listening to. Among other topics, he provides a nice historical overview of the development of Delaware corporate law.  He also discusses CA 2115 (Vantage Point v Examen, etc) and the internal affairs doctrine starting at around 44 minutes in.

- bjmq