M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Saturday, June 22, 2024

A 122(18) Research Agenda

A mentor of mine once sighed and remarked to me, it's hard to be a corporate law professor since all the interesting questions were asked in the 80s. True enough. But, with the passage of §122(18) there's a bright side for law profs looking for research projects. I guess we can make hay from the Delaware legislature's missteps. I mean, I already pay a sales tax in Massachusetts, so what do I care what happens to the price of beer in Rehoboth.

Things to look for after Aug 1 when §122(18) goes into effect as part of a research agenda:

  • How many S-1's get filed with Stockholder Agreements listed in their exhibit list?
  • How many Stockholder Agreements in S-1's have arbitration provisions?
  • What is the law/forum of these arbitration provisions (NY/DE)? 
  • How many and what kind of internal governance decisions get outsourced to the shareholder? (A catalog of sorts.)
  • Do VC-backed IPOs use these Agreements to replace the dual class structure (I suggested as much last week: Here's your Hat, What's Your Hurry 141(a).)
  • Do these Agreements include "fiduciary outs"? (I know Rep. Griffith assured us all that "fiduciary duty trumps contract" but that line of thinking didn't work in Van Gorkom all those years ago, so will planners agree with Griffith and include fiduciary outs as a matter of course in these agreements? [Spoiler Alert: no, they won't. Shocker, I know.])

A year or two from now, we might start to look for answers to the following questions:

  • Do institutional shareholders balk at Delaware incorporations for IPO companies and push to incorporate in home states to protect minority investors ? So, is there a discernible decline in the DE IPOs? 
  • Wither the DE premium?  
  • Is there a discernible shift in the types of cases in DE Chancery? Are fiduciary disputes involving companies with these agreements ending up elsewhere? Either in arbitration or the DE Superior Court to resolve the question of whether the arbitration provision is effective?
  • Do we see existing dual-class corporations (eg. Meta, Google and the like) abandoning their dual class structures as incumbent controllers shift to stockholder agreements to cement control and then liquidate their majority voting positions? 

I suspect very few IPOs will let the opportunity go, and they will begin to adopt these agreements prior to going public. Mike Klausner's piece on staggered boards at IPOs suggests the IPO is the point of maximum leverage to extract entrenching governance structures. So, the IPO will be the time/place to entrench managers/founders.

Also, my guess, the median agreement will have an arbitration provision. I mean, why not? The legislature told them to do it. The language is right there in §122(18) giving transactional planners the idea if they didn't already have it. If you're a transaction planner and you haven't already thought of adding confidential arbitration provisions to your form of stockholder agreement, well here's some free advice: add it. It's totally fine. Delaware wants you to add it.   

If you are a VC-backed firm that might otherwise rely on dual-class stock structures to entrench your founder, these agreements will be very attractive. The company gets to keep a single class structure, and the founder can sell off the majority of their equity position while maintaining control. At least with the dual class structure, founders had to hang on to enough stock to justify their voting control, but beginning Aug 1, that's a thing of the past. Your IPO company can have a single class of stock and you can control it without owning many shares. You can play with other people's money. No problem.    



June 22, 2024 in Delaware | Permalink | Comments (0)

Friday, June 21, 2024

The dead hand pill is back

Still thinking about the implications of new § 122(18). One thing, if you ever wanted a dead hand poison pill - made illegal by Carmody v. Toll Brothers (1998) - well that's now possible.  The dead hand pill purported restrict the right to redeem a poison pill to continuing directors only. If a hostile acquirer were successful in replacing the board via a proxy contest, then the new board members would lack the power to redeem the pill.

Poison Pill basics for those new to the audience: Remember that a poison pill is made up of two important documents. First, there is the Shareholder Rights Plan (think of this as a stockholder agreement) and the other is the Certificate of Designations, which lays out the powers of the preferred stock. The preferred stock is just the catalyst to make the poison pill magic happen, it doesn't actually do anything or even get issued.  The Rights initially permit the shareholder to buy preferred stock but at a price that's out of the money. Upon a triggering event, the Rights convert in the right to purchase new common stock at a discount to the current market price, an in the money option. In the event a hostile acquirer passes a threshold number of shares, the pill would trigger and existing shareholders other than the hostile acquirer can buy common stock of the company at a discount thereby severely diluting the acquirer. Think Sisyphus.  At any point in time, the board can redeem the Rights and make them go away. This obviously creates an incentive for the acquirer to reach a friendly deal with the target board rather than trigger the rights. Or, the acquirer could pursue a proxy contest to replace the target board with new board members more friendly to the acquirer. Having won a proxy contest the new board could then safely redeem the Rights Agreement and permit the hostile offer to move forward.  OK? Still with me?

In Toll Brothers, VC Jacobs - on a motion to dismiss - held that since the Rights that were the fulcrum for the dead hand pill could not be redeemed pursuant to the terms of the Rights Agreement by any board other than the directors who had initially adopted the pill (or at least by the directors who were continuing from the original board following a successful proxy contest) that the Rights Agreement ran afoul of § 141(a) and (d) was therefore invalid. 

OK, so fast forward to 2024. Now that § 122(18) has passed and § 141(a) no longer sits atop the statutory hill, one can imagine writing an amendment to the Shareholder Rights Agreement that designates a shareholder or shareholders (who happen to be current directors) as responsible for pulling the pill. The board covenants not to redeem the pill under the Rights Agreement unless the director/shareholder agrees. So, even if the director (or directors) are replaced in a proxy contest, their dead hands will still float around the boardroom preventing the new board from pulling the pill in a manner that the new board believes is consistent with its fiduciary duties. 

Good times like these - brought to you be the CLC of the Delaware State Bar Association and the Delaware General Assembly.




June 21, 2024 in Delaware | Permalink | Comments (0)

Reflections on Delaware Amendments

OK, so last night, the Delaware House passed SB 313 and sent the 2024 amendments to the DGCL to the governor for signature. Ordinarily, this would not be the kind of thing that would get much notice. Amendments to the DGCL and business entity laws get presented to the Delaware General Assembly every year by the DSBA's Corporation Law Council every year. Most of them are boring technical amendments. Occasionally, there are more substantive changes. Yesterday, a series of amendments went through the Assembly that the CLC characterized as technical; they were anything but that. 

A number of people who don't represent any clients with interests in these amendments (including me) raised substantive objections to these amendments. Proponents never really argued that these amendments were the right thing to do. They said they were technical, they said they were just bringing the statute into compliance with "market practice" and that kind of thing. But, they never really said these are amendments are the right thing to do for the law and here's is why. One line of argument they did raise and one that seemed to have purchase with legislators was that only people objecting were a bunch of pointy headed law professors who aren't even members of the Delaware bar so what do they know? 

This line of argument, I think, was probably the most pernicious line of argument that they could have rolled out.  I'm not so full of myself that I think the world revolves around me, because I certainly know that it doesn't. But, what I do know is that the value of Delaware's corporate law franchise lies in not insignificant part in the network effect associated with people outside of Delaware who are familiar with the corporate law of Delaware and look it first. It lies with all the lawyers and law professors in places outside of Delaware who have conversations about interesting things like Revlon, Unocal, § 141(a) and the like. It lies in the fact that law reviews publish articles about Delaware law and that lawyers in New York read them. It lies in the fact that generations of law students study casebooks where Delaware opinions make up the body of the jurisprudence that will become the foundation of their professional careers. 

A bunch of out of state law professors, what do they know anyway? Hmm. Since you put it that way... maybe I should just stick to teaching the corporate law of Massachusetts? Maybe add a couple of more classes about the MBCA to my syllabus? Or, maybe a case about Kane's Donuts? That's a good Massachusetts case. Or, maybe any of the Demoulas cases. 

So begins the erosion of the franchise. 




June 21, 2024 in Delaware | Permalink | Comments (2)

Friday, June 14, 2024

122(18) Kills the Close Corporation

Joan Heminway makes excellent points about proposed § 122(18) over at the Business Law Prof Blog. One wonders whether there is even a future for the Delaware statutory close corporation following passage of § 122(18). Close corporations are governed by Subchapter XIV of the DGCL. Most of what the provisions of the subchapter accomplish can be accomplished by a 122(18) stockholder agreement. There are a couple of exceptions of note: first, statutory close corporations are limited to private corporations, whereas a 122(18) stockholder agreement can be used in both private and public corporations. Second, where stockholders are managing a close corporation, the stockholders inherit the fiduciary obligations and liabilities of the board, whereas there is no such imputation on stockholders in 122(18). Finally (well, not finally, just finally for this post), stockholders of close corporations are on notice that they are stockholders in a close corporation by way of the certificate of incorporation, there is no such notice to stockholders in a corporation with an active 122(18) stockholder agreement. 

OK, so the Delaware State Bar Association has just killed the Close Corporation. That was their intention? Seems like the kind of unintended collateral damage that comes from a shabby process. 


June 14, 2024 in Delaware | Permalink | Comments (0)

Thursday, June 13, 2024

Bulletproof deals are coming back, baby!

SB 313, including new § 122(18) is advancing on the floor of the Delaware Senate today. First, things first. This bill is a bad idea. It shouldn't pass. That said, think of all the opportunities once it becomes legal for boards to contract away their § 141(a) obligations to a prospective stockholder. Bulletproof deals are coming back! 

Behold the Lock-up Agreement with a Prospective Stockholder!

  • This agreement should be signed coincident with a merger agreement between the corporation and the prospective stockholder;
  • Consideration to be paid by the prospective stockholder to the corporation on the closing of the merger (hehe. it will never get paid. genius!);
  • Notwithstanding the language of the merger agreement, the board covenants not to recommend any other deal to its stockholders;
  • Notwithstanding the language of the merger agreement, the board covenants not to exercise any termination rights it might have under the merger agreement without the express consent of the prospective stockholder;
  • Any disputes with respect to this lock-up agreement would be subject to confidential arbitration in New York (or Texas) under New York (or Texas) law.
  • The terms of this agreement as well as the existence of this agreement will remain confidential between the corporation and the prospective stockholder (obvi).




June 13, 2024 in Delaware, Lock-ups | Permalink | Comments (0)

Wednesday, June 12, 2024

Smelling my way to Dover

With apologies to the Bard, I made my way to Dover (DE) yesterday using a GPS, not my nose.  I was in the capital of the First State to attend the Senate Judiciary Committee's hearing on SB 313, the proposed amendments to the DGCL that seek to overturn three Chancery Court opinions (Moelis, Activision, and Crispo).  In the time I was allotted to speak, I made three points: 

First, the proposed Moelis provisions (§ 122(18)) is very broadly drafted and threatens to seriously undermine § 141(a) in ways that may not be repairable. For example, the proposed provision permits the board to outsource internal governance of the corporation to a single common stockholder with disputes over that contract decided by an arbitrator outside of Delaware. It's truly baffling to me why people who consider the delicate balance of the corporation law think this might be a good thing. It’s a threat to the basic underpinnings of the Delaware corporation law and could quickly become the source of erosion in Delaware’s market position.

Second, although the Activision amendments are intended to make sure boards are not penalized for foot-faults when doing a merger, these amendments do a bit more than that. They are not just technical amendments. Specifically, proposed § 147 permits a board to approve a merger agreement that is in "substantially final form." There may be still be i's to dot and t's to cross, but the material terms are there or are known to the board when they approve the merger agreement, the fact that there is some clean up after approval shouldn't cause a merger agreement to fail.

However, proposed § 268 provides that disclosure schedules, which can materially alter the meaning of a merger agreement “shall not be deemed part of the agreement for purposes of any provision of this title.” So, when a merger agreement is in "substantially final form" that merger agreement excludes the disclosure schedule. A disclosure schedule call alter the understanding of material terms of the merger agreement. As written, the proposed § 268, as written, contemplates a scenario where the board can validly approve a merger agreement in "substantially final form" without any knowledge of how a disclosure schedule material affects the terms of the merger agreement. It’s hard for me to imagine that the legislature intends for directors to do this, but by adopting this language, the legislature is giving board license, in effect, to violate their duty of care.

Finally, the Crispo amendments are also fraught with unintended consequences. This provision specifically permits parties to merger agreements to include so-called “Con Ed” provisions. While merger agreements now uniformly include specific performance provisions and deal makers have come to rely on the Delaware courts for deal certainty in the face of a reluctant buyer, I worry about the impact on deal certainty that a proliferation of statutorily authorized Con Ed provisions will have on judges who must decide whether to order performance (generally disfavored) or damages.  I mean it's widely believed that Elon Musk only closed on the Twitter deal because his lawyers told him he would be ordered to perform. What might have happened if he had been given the option of paying $5 billion to walk away? 

Anyway, the amendments advanced out of committee on a vote of 4 in favor with 3 abstentions.


June 12, 2024 in Delaware | Permalink | Comments (0)

Friday, June 7, 2024

Making things worse

Usually, we do things. Then people say, "hey, that doesn't work." And, in response, we fix things up and try to do better. Is it possible to get comments on a thing and then make things worse? That's hard. I mean, you really have to try. 

Take, for example, proposed § 122(18). In its first iteration, it was already pretty bad. Then the DSBA made revisions to its proposal and made it worse! After the DSBA handed it over to the legislature, the language looked like this: 

(18) Notwithstanding § 141(a) of this title, make contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, one or more actions); provided that no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State (other than § 115 of this title) if included in the certificate of incorporation.  

When I saw this language, my reaction was, "That basically looks the same. Hmm, what's that in the parenthetical? Why are they carving out  § 115 (exclusive forum provisions)?"

The legislative text, then provides some helpful notes that describe what the drafters think this carveout does: 

The proviso excludes § 115, so that corporations may enter into contracts under § 122(18) with exclusive forum and arbitration provisions that do not select the courts of this State to adjudicate claims under the contracts.

Wait. What. So, do I understand this correctly? The legislature, which only in the last decade or so fought off a challenge of cases leaving Delaware's court system is now inviting litigation regarding proposed § 122(18) to leave Delaware? To litigate in Texas? Or Ohio? Or to require binding, confidential, arbitration somewhere outside of Delaware? Who thought that was a good idea? You might think that if you are going to take a big swing at § 141(a) before the Delaware Supreme Court had a chance to weigh in that you might want to allow the courts of your own state have an ability to set the tone and work out the kinks of this § 122(18) thing once you get it on the books. Or, perhaps not. Maybe that's the last thing you want?

Section 122(18) is a fundamental challenge to Delaware corporation law - § 141(a) in particular. And, the Delaware legislature intends to hand over deciding how it will work to an arbitrator - worse, some arbitrator in NY in confidential arbitration?? Whose idea was this? Is there anyone in Dover thinking about how to preserve the value of the Delaware franchise? Because this is a pretty cavalier way to treat the thing that has allowed you eschew an income tax and still fund your government for the past one hundred years. 

Wild guesses what percentage of stockholder agreements are going to include confidential arbitration provisions after § 122(18) passes? I'll tell you: 100%. 

I guess, someone might say, don't worry, in the worst case bad decisions can still can appealed back up through Delaware. No, that's not how arbitration under the Federal Arbitration Act works. If a challenge to an arbitral decision with respect to a § 122(18) claim gets appealed in Delaware, the only real question for the court will be did the parties form a contract when they adopted the arbitration provision. If so, that's the end. The court will almost never look at the underlying substance of the arbitrator's decision. 

Moving litigation of § 122(18) cases to confidential arbitration is a good way to do to corporate law what arbitration did to contract law. Ever wonder why contract law casebooks are so dull and full of old cases? Arbitration basically killed the public development of law. Innovations in contract law now all hide behind confidential arbitration. And for some reason, the Delaware legislature thinks this a good thing to do to corporate law? 



June 7, 2024 in Delaware | Permalink | Comments (0)

Be careful what you wish for

And then there's the Crispo amendment. Frankly, I don't understand the motivation for rushing this one through. Really, I don't think anyone has thought very hard about the implications of this amendment. Why? 

Proposed § 261 permits parties to merger agreements to include so-called “Con Ed” provisions. The typical Con Ed provision provides for a remedy for the corporation to seek damages, including “lost stockholder premium” on behalf of selling stockholders in the event the buyer willfully breaches the merger agreement and fails to close. Con Ed provisions are relatively common in merger agreements, but not uniformly so. 

On the other hand, parties to merger agreements uniformly agree to include specific performance clauses. As a matter of contract law doctrine, specific performance has always been a disfavored remedy. When at all possible, courts will seek to fashion a cash damages remedy rather than look to specific performance. This is just first year Contracts (or basic Remedies if law schools still taught that class).

However since IBP in 2001, practitioners have come to rely on the willingness of the Chancery Court to enforce negotiated specific performance provisions in merger agreements. Where two parties hire sophisticated counsel and negotiate away all the other remedies and then agree that as between them for this agreement, specific performance is the desired remedy, the Chancery Court has deferred to the parties' desire for deal certainty This has been especially true in recent years when buyers pointed to exogenous events (e.g. Global Financial Crisis & COVID-19) as reasons to walk away from deals.

In a recent article Chancellor McCormick noted that the Delaware court has departed from the traditional doctrinal aversion to ordering specific performance in order to honor the contracting parties desire for deal certainty:

As specific performance provisions became ubiquitous in M&A agreements, Delaware law’s analysis of specific performance in the merger context shifted away from the traditional equitable approach to instead prioritize the parties’ contractual scheme. This contractarian approach led the court to, in effect, invert the common-law framework for specific performance and treat specific performance as the presumptive remedy in the event of breach. 

[Chancellor Kathaleen St. Jude McCormick & Robert Erikson, Delaware’s Approach to Specific Performance in M&A Litigation, 20 NYU J. L & Bus. 7, 8 (2023).]

Deal makers have come to understand that when sophisticated parties have negotiated for specific performance and deal certainty, they will get it in Delaware. That's been a selling point for Delaware law. 

So, now I worry about the downstream effect on contracting parties and the court of raising Con Ed provisions from occasional boilerplate to a statutorily authorized remedy favoring cash damages in merger agreements.  I fear the existence of this statutory remedy will cause these provisions to proliferate in merger contracts.  Why? Increasing the salience of a damages remedy by way of statutory availability will result in lawyers adding them into their merger agreements. Let's be frank. Buyers will often hire repeat counsel to represent them in acquisitions. Sellers, on the other hand, often are represented by general corporate counsel. I'm sure they're nice people, but when a buyer asks for a Con Ed provision, pointing to the statute, a corporate lawyer who's only done 10 mergers in their career might say, "Hmm. Seems legit. Ok."

A future court may find itself facing a situation in which a reluctant buyer wishes to walk away from a merger agreement that includes two contractual remedies: a doctrinally disfavored specific performance provision and a statutorily authorized cash damages provision. In that situation, we may begin to see Delaware courts opt to fashion cash damages remedies for jilted sellers and step away from treating specific performance as the presumptive remedy in the event of breach of a merger agreement.

A contractual damages remedy would not be difficult to fashion. Experts are regularly deployed in the Delaware Chancery Court to estimate share premia in the context of statutory appraisal remedies on a normal briefing schedule. That's not hard. Compare that to fashioning a specific performance remedy on an expedited schedule. Expedited proceedings are costly for the court. Ordering specific performance in the face of an unwilling buyer is obviously not easy. In that case, one could well imagine courts leaning heavily on these statutorily authorized provisions and moving towards appraisal-like proceedings for busted deals.

It may be that's what Delaware wants: to reduce deal certainty. I can't imagine why. Here's a gun, shoot yourself in the foot. Maybe Delaware thinks ole' Chancellor McCormick is just plain old wrong and that Delaware should really be about creating more options to walk away from merger deals for buyers. And to create those options quickly!  I don't understand the motivation to move so quickly to erode a real comparative advantage. Reducing deal certainty just fills in the moat surrounding Delaware's corporate franchise.  It's idiotic, but who am I? I'm no fancy PE buyer on Wall Street. I'm just a professor sitting in Boston.


June 7, 2024 in Delaware | Permalink | Comments (0)

Thursday, June 6, 2024

Love being a lawyer, but can't stand the paperwork? Here's § 268

The second set of proposed market practice amendments are those in response to the Activision case. In that case, Chancellor McCormick gave the selling board a knuckle-wrapping for failing to adhere to § 251's requirement that "(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation and declaring its advisability." The Chancellor interpreted that to mean that the board must approve an "essentially complete" merger agreement with its material terms. Since the key terms of the merger agreement (including a component of the consideration provision) were still open at the time the board approved the merger agreement, the Chancellor ruled for the plaintiff shareholders on the defendant directors' 12(b)(6) motion. 

In response to this ruling, we get a series of amendments that intend to recognize the reality of deal making - that things move quickly, people are often negotiating up until the very end and that it might not be practical to wait to have the board approve the execution version of the merger agreement. I mean. Ok. I'm sympathetic. 

At first, these proposed amendments to the merger approval process (responsive to Activision) seem like innocuous, ministerial amendments simplifying the paperwork attendant to a merger approval, the kind of technical amendments that used to wander through the legislature without drawing any attention. In fact, the first time I read through them, my eyes glazed over and I skimmed quickly. That was a mistake. These proposed provisions may do more to market practice than one immediately perceives. 

The amendments (§ 268)call for approval of the merger agreement in "substantially final form." Ok, I'm assuming that means at the very least the parties will have settled on consideration.

The amendments also drop the requirement that the merger agreement include "any provision regarding the certificate of incorporation of the surviving corporation in order for the agreement of merger to be considered in final form or substantially final form." Mmkay. Who wrote these amendments? A private equity buyer? I guess if my world of mergers is narrowed entirely down to reverse triangular mergers for cash consideration, I suppose there's no particular reason for selling shareholders to care about the surviving corporation's certificate. Paperwork, who needs it, amiright?

Oh, wait, then there's this: Proposed § 268(b) says "any disclosure letter, disclosure schedules or similar documents ...  shall not be deemed part of the agreement for purposes of any provision of this title but shall have the effects provided in the agreement." Say what now?! Hold on. Do we seriously mean to say that a board can approve a merger agreement that is in "substantially final form" as required by the proposed amendments and literally have no idea what is contained within the disclosure schedule? And that's okay?  

I know disclosure schedules can be a pain and that they usually get delegated to the most junior lawyers on the team, but there is material information the disclosure schedule. I remember the BoA-ML deal that went down during the Financial Crisis where ML buried information about the huge bonuses that were going to be paid to their executives. Seemed material. The boards hid it in the disclosure schedule, no doubt afraid that disclosing it to shareholders might jeopardize the deal. 

I mean, I don't think there is any question that disclosure schedules contain material information. Let's say, the buyer represents the following: "Except as listed in the disclosure schedule, the buyer has sufficient cash to close this transaction."  Would anyone be surprised to see a disclosure saying that the buyer doesn't have a nickel? Or, maybe in response to the environmental rep, there is a list as long as your arm of the seller's toxic waste sites. 

How can it be possible that a board can make an informed decision to buy/sell the company by approving the merger agreement without having knowledge of the disclosure schedule? Sure, these schedules are messy and they can be long, but c'mon. Is there any decision more important than selling the company? Shouldn't the board be under some obligation to know? I really find this disturbing. 

Sure, the bankers and the deal guys hate paperwork. I get that. That's why they hire the lawyers! But, lawyers who can't stand paperwork should find another job.


June 6, 2024 in Delaware | Permalink | Comments (0)

Tuesday, June 4, 2024

It's a bad idea, right? F-- it, it's fine.

Hi. Back again. I've generally taken a hiatus from blogging, but felt it important to come back and put some things on the record, as it were. If this has not been on your radar, in the past two months or so, Delaware has been on a mad rush to make some significant amendments to its corporate law. This, after having previously signaled it wasn't going to make any amendments this year. I'll go into each of the proposed amendments in subsequent posts and the problems I see with the process, but in this post I want to focus on one of the potential reasons for moving so quickly to make changes to the law. 

The amendment themselves are what are being called market practice amendments. Earlier this year the Chancery Court asked itself: "What happens when the seemingly irresistible force of market practice meets the traditionally immovable object of statutory law? A court must uphold the law, so the statute prevails." Moelis. In all three of these cases, the court effectively dealt a knuckle-wrapping to practitioners.

The response from the bar association has been to move with alacrity to push through amendments to the statute even before the Delaware Supreme Court has had an opportunity to weigh in on any of the cases in question. While the Delaware corporate law amendment process is typically apolitical and attempts to balance various competing interests, what's happening now strikes me as extremely premature, exhibiting an undue sense of panic.

But panic about what? The world will not end because the Chancery Court has restrained market practice to conform within the limits of the statute. What's driving this amendment drive this year? 

It's hard to know for sure. Perhaps, the bar is attempting to separate the transactional bar from an iconoclastic tech entrepreneur who is seeking to lead corporations to reincorporate into Nevada and Texas. Perhaps the bar believes by moving quickly to respond to the transactional bar’s concerns about regulation of their market practices that the state bar might forestall any momentum behind corporations considering a reincorporation into other jurisdictions at the instigation of iconoclastic tech entrepreneurs. Maybe. But, if that's the case, the state bar's fear is misplaced.

Remember that the last time a well-known stockholder sought to lead a parade out of Delaware was in 2007. Carl Icahn had hopes of moving corporations out of Delaware and to a jurisdiction with laws more amenable to shareholder activists. Mr. Icahn selected North Dakota and worked with their legislature to pass revision of the North Dakota Corporation Law. The sponsors of the legislation intended North Dakota’s corporate law to become an activist-friendly corporate governance regime tilting their law’s balance in favor of stockholders, thereby attracting corporations away from Delaware and Delaware’s board centric governance model. That particular parade made a lot of noise, but ultimately went nowhere. By 2009 only one publicly-traded corporation made the move to North Dakota. During the 2009 legislative session, Delaware adopted (without an unnecessary rush) measured provisions providing for stockholder proxy access and proxy expense bylaws (§§ 112, 113) that maintained a balance between Delaware’s director centric approach and the need for corporate boards to be responsive to the stockholder’s voice.

The current attempt to lead others out of Delaware is similarly likely to fail without regard to the market practice cases or any effort to amend the code. Current motivations for reincorporating out of Delaware this time are mostly self-serving. Certain controllers are in search of a jurisdiction that will protect them at the expense of unaffiliated investors. They are searching for a jurisdiction that will placed its thumb on the judicial scale against stockholders and in favor of controllers. This kind of self-serving campaign is unlikely to succeed, except for maybe a few controlled corporations. Publicly-traded corporations without a controller are unlikely to follow. 

A rush to make substantive changes to the corporation law to stem a feared parade out of Delaware will ultimately not be worth the cost. They seem to be at odds with basic governance norms that are at the heart of the corporate law (I'm looking at you proposed 122(18). Rather than, reassure transactional lawyers, these proposed amendments may well erode confidence in the institutional investments Delaware has made in the corporation law over the past five decades, filling in Delaware's protective moat, making it easier to advise clients to incorporate elsewhere. Seems like a bad idea, right? 

I'll comment on the substance of the amendments in another post.


June 4, 2024 in Delaware | Permalink | Comments (0)

Tuesday, July 16, 2019

Does Revlon Matter?

A star-studded line-up of law profs got together to try to answer this question.  Does Revlon Matter? An Empirical  and Theoretical Study (Cain, Davidoff-Solomon, Griffith, and Jackson) recently posted to SSRN.  Since it came down in 1986, many have tried to make Revlon into more than it was. Revlon was and is a Unocal case, a preliminary inquiry into the question of board motivation in the context of a sale of control. Absent evidence of conflict, courts will grant boards the presumption of business judgment when deciding to sell control (see e.g. QVC).  In any event, Cain et al ask whether notwithstanding Revlon's limited reach if it has an impact  on the way boards negotiate sales of control or structure deals. They conclude it does. 

Abstract: We empirically examine whether and how the doctrine of enhanced judicial scrutiny that emerged from Revlon and its progeny actually affects M&A transactions. Combining hand-coding and machine-learning techniques, we assemble data from the proxy statements of publicly announced mergers over a fifteen year period, 2003-2017, ultimately assembling a dataset of 1,913 unique transactions. Of these, 1,167 transactions are subject to the Revlon standard, and 553 are not. After subjecting this sample to empirical analysis, our results show that Revlon does indeed matter for companies incorporated in Delaware. We find that for Delaware Revlon deals are more intensely negotiated, involve more bidders, and result in higher transaction premiums than non-Revlon deals. However, these results do not hold for target companies incorporated in other jurisdictions that have adopted the Revlon doctrine.

Our results shed light on the implications of the current state of uncertainty surrounding Revlon and provide some direction for courts going forward. We theorize that Revlon is a monitoring standard, the effectiveness of which depends upon the judiciary’s credible commitment to intervene in biased transactions. The precise contours of the doctrine are unimportant provided the judiciary retains a substantive avenue for intervention. Recent Delaware decisions in C&J and Corwin have been criticized for overly restricting Revlon, but we suggest that such concerns are overstated so long as Delaware judges continue to monitor the substance of transactions. Thus, in applying these decisions Delaware judges should focus not on procedural aspects but the substantive component of transactions which Revlon initially sought to regulate.


July 16, 2019 in Delaware, Takeovers | Permalink | Comments (0)

Wednesday, October 10, 2018

What does ab initio mean anyway?

Since Kahn v. M&F Worldwide there have been a series of challenges to the application of the business judgment presumption in the context of controller squeezeout transactions. The crux of these challenges was M&F's ab initio requirement.

You'll remember that in M&F, the court tried to iron out the problems associated with the Kahn v. Lynch standard that were essentially flypaper for litigation in controller squeezeout transactions. It didn't matter how good a job you might have done in structuring a transaction to look like an arm's length deal, under Lynch your deal was still going to be subject to entire fairness review and you were going to get sued. Although entire fairness was the standard of review for a controller squeezeout with robust procedural protections (approval by disinterested special committee or stockholders), Lynch shifted the pleading burden to plaintiffs rather than the board. That was a mistake by the Del. Supreme Court. Rather than reward boards and give controllers an incentive to do the right thing, shifting the burden of proving entire fairness to plaintiffs simply ensured plaintiffs would sue and demand their day in court - guaranteeing that even meritless litigation had settlement value.

M&F sought to address this problem adopting the following standard:

[B]usiness judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.

Of course, no good deed goes unpunished. What does ab initio mean anyway? Does it mean that if the controller's first proposal to the board doesn't stipulate the M&F conditions that the transaction must be subject to entire fairness review under Lynch?  Or is it more forgiving than that? The Chancery Court has taken the position in a series of cases that ab initio should not be read so rigidly. Now, the Delaware Supreme Court has agreed. In Flood v. Synutra, the Court yesterday clarified what it meant by ab initio:

Admittedly, our opinion and the Court of Chancery’s opinion in MFW uses what can be read as ambiguous language to express the requirement that the key dual procedural protections must be in place before economic negotiations so the protections are not used as a bargaining tool in substitution for economic concessions by the controller. In describing this prerequisite to the invocation of the business judgment rule standard of review, we and the Court of Chancery have said the conditions must be in place “ab initio,” before the “procession of the transaction,” “from inception,” “from the time of the controller’s first overture,” and “upfront.”

From these uses, the plaintiff argues that MFW strictly hinges the application of the business judgment rule on the controller including the two key procedural protections in the first offer. A controller gets one chance, as the master of its offer, to take advantage of MFW, and if it fails to do so, that is it. But in an earlier case, the Court of Chancery and we did not embrace this rigid reading of MFW. In the case of Swomley v. Schlecht, the Court of Chancery held that MFW’s “ab initio” requirement was satisfied even though “the controller’s initial proposal hedged on whether the majority-of-the-minority condition would be waivable or not” because the controller conditioned the merger on both of MFW’s dual requirements “before any negotiations took place.” We affirmed that well reasoned conclusion, and adhere to that approach[.] 

Rather than read ab initio literally and rigidly, the Court wants controllers and boards and, most especially potential plaintiffs to have a more flexible reading of ab initio:

A goal scored in the fifth minute of a 90-minute game would be referred to as a goal at the beginning of the match. Enjoying the beginning of fall refers to those few weeks in late September and early October when the weather gets chilly and the leaves start to change color, not just the autumnal equinox. The beginning of a novel is not the first word, but the first few chapters that introduce the reader to the characters, setting, and plot. Indeed, three years after Britain entered World War II, Winston Churchill famously declared that the War had reached “the end of the beginning.” 

So, perhaps this is the beginning of the end of litigation in properly structured controlling shareholder transactions.


October 10, 2018 in Delaware, Litigation | Permalink | Comments (1)

Thursday, September 20, 2018

Two new Vice Chancellors for Chancery

Today, Gov Carney nominated Morgan Zurn and Katherine McCormick to fill the newly created vacancies in the Delaware Chancery Court. This will expand the number of chancellors from five to seven. A few years ago, the Chancery Court was often criticized for being an all-male bastion. With these two new additions, the number of women chancellors will rise to three. 


September 20, 2018 in Delaware | Permalink | Comments (0)

Tuesday, February 7, 2017

Appraisal and Merger Price

Over the past couple of years something has been happening in appraisal litigation. For a long time, appraisal litigation was something of a backwater: experts battling over which variables a judge must insert into a discounted cash flow model and the proper level for beta. Shoot me. 

Anyway, as I said, something is happening. Appraisal litigation is getting more interesting. In part this is a response to the growing interest in appraisal proceedings by investment funds. Myers and Korsmo wrote about this trend in their 2015 paper Appraisal Arbitrage and the Future of Public Company M&A. As they laid out in their paper, there has been an explosion in investor interest in appraisal proceedings. Appraisal arbitrage, it turns out, is good business. 

As the number of appraisal actions has increased (partly also in response to the Corwin ruling having some bite), so too has attention to how fair value is determined by the courts. In the last couple of years, at the Chancery Court, chancellors have started moving away from the view that the court will determine fair value without regard to the merger price. Now, in certain circumstances (where the deal price is a product of a competitive or robust sales price) chancellors may consider merger price as one of the relevant factors for purposes of determining fair value.

Now this question has found its way to the Delaware Supreme Court and the parties are lining up on both sides. There are even amici! Two sets of amici have rolled up: on the one side there are law professors arguing that the court should be able to presumptively rely on merger price to determine fair value in an appraisal proceeding unless that price does not result from arm's length bargaining (DFC Holdings - Bainbridge, et al). On the other are law professors arguing requiring a court to rely on merger price to determine fair value would run counter to the language of the statutory appraisal remedy and also not always reflect fair value (DFC Holdings - Talley, et al).  Read both briefs. They are a great review of the issues relating to this issue.



February 7, 2017 in Delaware, Litigation | Permalink | Comments (0)

Tuesday, December 1, 2015

RBC and the falling sky

No, no, no. The sky isn't falling. Yes, it's true that the $75 million damage award against RBC for aiding and abetting a duty of care violation by the board of Rural/Metro in connection with the company's sale was upheld, but the sky is not falling. 

In the Rural/Metro Chancery Court opinion, Vice Chancellor raised the spectre of a falling banker sky when he emphasized the role of bankers as gatekeepers of the M&A process:

The threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs. Framed for present purposes, the prospect of aiding and abetting liability for investment banks who induce boards of directors to breach their duty of care creates a powerful financial reason for the banks to provide meaningful fairness opinions and to advise boards in a manner that helps ensure that the directors carry out their fiduciary duties when exploring strategic alternatives and conducting a sale process, rather than in a manner that falls short of established fiduciary norms. It is not irrational for the General Assembly to have excluded aiders and abettors from the ambit of those receiving exculpation under Section 102(b)(7). The statutory language therefore controls.

By holding bankers' feet against the fire and expanding liability for bankers, the fear of aiding and abetting liability might ensure financial advisors are more attentive to their obligations to clients. This prospect sent some shockwaves through the world of bankers. But that fear might have been a little over-wrought. 

In yesterday's ruling, the Delaware Supreme Court made it clear that although the facts in this particular case supported an aiding and abetting claim, the ruling was not an expansion of banker liability along the lines suggested in the Chancery Court opinion: "[O]ur holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to a claim for aiding and abetting a breach of the duty of care."

In narrowing its ruling, the court expanded on Vice Chancellor Laster's gatekeeper analysis and in the process narrowed its bite:

In affirming the principal legal holdings of the trial court, we do not adopt the Court of Chancery’s description of the role of a financial advisor in M & A transactions. In particular, the trial court observed that “[d]irectors are not expected to have the expertise to determine a corporation’s value for themselves, or to have the time or ability to design and carryout a sale process. Financial advisors provide these expert services. In doing so, they function as gatekeepers.” Rural I, 88 A.3d at 88 (citations omitted). Although this language was dictum, it merits mention here. The trial court’s description does not adequately take into account the fact that the role of a financial advisor is primarily contractual in nature, is typically negotiated between sophisticated parties, and can vary based upon a myriad of factors. Rational and sophisticated parties dealing at arm’s-length shape their own contractual arrangements and it is for the board, in managing the business and affairs of the corporation, to determine what services, and on what terms, it will hire a financial advisor to perform in assisting the board in carrying out its oversight function. The engagement letter typically defines the parameters of the financial advisor’s relationship and responsibilities with its client. Here, the Engagement Letter expressly permitted RBC to explore staple financing. But, this permissive language was general in nature and disclosed none of the conflicts that ultimately emerged. As became evident in the instant matter, the conflicted banker has an informational advantage when it comes to knowledge of its real or potential conflicts. See William W. Bratton & Michael L. Wachter, Bankers and Chancellors, 93 TEX. L. REV. 1, 36 (2014) (“The basic requirements of disclosure and consent make eminent sense in the banker-client context. The conflicted banker has an informational advantage. Contracting between the bank and the client respecting the bank’s conflict cannot be expected to succeed until the informational asymmetry has been ameliorated. Disclosure evens the field: the client board has choices in the matter . . . and needs to make a considered decision regarding the seriousness of the conflict.”). The banker is under an obligation not to act in a manner that is contrary to the interests of the board of directors, thereby undermining the very advice that it knows the directors will be relying upon in their decision making processes. Adhering to the trial court’s amorphous “gatekeeper” language would inappropriately expand our narrow holding here by suggesting that any failure by a financial advisor to prevent directors from breaching their duty of care gives rise to an aiding and abetting claim against the advisor.

So, bankers are not insurers of bad director behavior. Bankers are insurers of their own behavior. If bankers want the benefit of conflict waivers, then specific disclosure is the answer.  If you are going to act in a way that might raise a conflict, then disclose the facts and allow the client board to make an informed waiver of those specific acts. I suspect that for the vast majority of the investment banking community, this is not going to be an issue. Conclusion: sky intact.


December 1, 2015 in Delaware, Investment Banks | Permalink | Comments (1)

Friday, November 20, 2015

More change in Chancery

More change in Chancery now that word has come down that Vice Chancellor Noble is retiring in February, 2016.  In recent years, there has been a new wholesale change on the bench in Chancery. Could it be that Vice Chancellor Laster will now be the most senior tenured Vice Chancellor? Time flies. 


November 20, 2015 in Delaware | Permalink | Comments (0)

Wednesday, October 14, 2015

Big news out of Delaware

Gov. Markell has announced the nomination of Tamika Montgomery-Reeves, a Wilson Sonsini partner, to replace retiring Vice Chancellor Donald Parsons.  Ms. Montgomery-Reeves will be the first African-American to serve as Vice Chancellor in the Chancery Court and the first woman since Justice Carolyn Berger was elevated to the Supreme Court in 1994.  Ms. Montgomery-Reeves recently represented the defendants in the Riverbed Technologies litigation.

Riverbed may mark the beginning of the end for the litigation industrial complex.  Vice Chancellor Glasscock began his opinion there with the following paragraph:

As a bench judge in a court of equity, much of what I do involves problems of, in a general sense, agency: insuring that those acting for the benefit of others perform with fidelity, rather than doing what comes naturally to men and women— pursuing their own interests, sometimes in ways that conflict with the interests of their principals. In this task, I am generally aided by advocates in an adversarial system, each representing the interest of his client. Of course, these counsel are themselves agents, but their actions are generally aligned with that of their principals in a way that does not require Court involvement. The area of class litigation involving the actions of fiduciaries stands apart from this general rule, however, especially in litigation like the instant case, involving the termination of ownership rights of corporate stockholders via merger. Such cases are particularly fraught with questions of agency: among others, the basic questions regarding the behavior of the fiduciaries that are the subject of the litigation; questions of meta-agency involving the adequacy of the actions of the class representative—the plaintiff—on behalf of the class; and what might be termed meta-meta-agency questions involving the motivations of counsel for the class representative in prosecuting the litigation. At each remove, there may be interests of the agent that diverge from that of the principals. This matter, involving the deceptively straightforward review of a proposed settlement, bears a full load of such freight.

While Glasscock hesitated, he signaled in this opinion that the Vice Chancellors have had enough. So... Welcome to the bench Ms. Montgomery-Reeves!


October 14, 2015 in Delaware | Permalink | Comments (0)

Wednesday, October 7, 2015

The sound of glass cracking in Delaware

Gov. Markell is about to announce his nomination to replace Vice Chancellor Parsons who announced his retirement this past summer.  Here's the thing.  The Chancery Court has not had a female chancellor since Vice Chancellor Berger left the court to join the Supreme Court in 1994.  Now, according to press reports Gov. Markell is considering three nominees - all women:

According to sources, the candidates are Abigail M. LeGrow, who is a Master in Chancery or judicial officer who assists the court; Tamika Montgomery-Reeves, a corporate lawyer and partner at Wilson Sonsini Goodrich & Rosati in Wilmington; and Elena C. Norman, a partner and corporate lawyer at Young Conaway Stargatt & Taylor in Wilmington. LeGrow and Montgomery-Reeves declined to comment. Norman could not be reached for comment.

The Senate will consider Gov. Markell's nomination on Oct. 28.  That's the sound of glass cracking. Good.


October 7, 2015 in Delaware | Permalink | Comments (0)

Tuesday, April 21, 2015

Laster Interview

Morris James' Corp Cast just posted an interesting podcast interview with Vice Chancellor Laster. It's actually an interesting 30 minutes.  Give it a listen!


April 21, 2015 in Delaware | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 7, 2015

Strine at One

A nice little retrospective in the Delaware Law Weekly on Chief Justice Leo Strine's first year as chief:

Strine became Delaware's eighth Supreme Court chief justice on Feb. 28, 2014. Since then, he has issued more than 100 opinions and orders, welcomed three new justices to the court, formed a committee to overhaul problem-solving courts, and started a commission for access to justice.

More than a year already. Where has the time gone?  


April 7, 2015 in Delaware | Permalink | Comments (0) | TrackBack (0)