Tuesday, July 16, 2019
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.
Wednesday, October 10, 2018
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.
Thursday, September 20, 2018
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.
Tuesday, February 7, 2017
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.
Tuesday, December 1, 2015
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.
Friday, November 20, 2015
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.
Wednesday, October 14, 2015
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!
Wednesday, October 7, 2015
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.
Tuesday, April 21, 2015
Tuesday, April 7, 2015
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?
Wednesday, March 18, 2015
Usually amendments to the corporate law are pretty sleepy affairs. This year is different. There's anti-fee-shifting legislation, In the slew of amendments generating interest this year, there's the new Chancery facilitated arbitration procedure, and then there are the amendments to the appraisal statute. If you would have told me two years ago that arbitration would be the least controversial of all the amendments, I would have laughed at you, but there you have it.
The amendments to the appraisal statute (262 Appraisal) come in response to the rise in appraisal arbitrage. There are a number of important changes to the way Section 262 operates. First, the amendment follows what is common practice in other states by setting a floor with respect to appraisal petitions before getting access to the remedy. Going forward, stockholders will only be entitled to an appraisal if all the shares seeking an appraisal exceed 1% of the outstanding shares or at least $1 million in merger consideration. In any event a transaction done pursuant to Sections 253 and 267 would always have appraisal rights.
To give you a sense of what this floor means, Dell generated valid petitions for only 2% of the stockholders - though the value of the merger consideration would have easily exceeded $1 million. The floor makes sense and will likely get rid of nuisance litigation to the extent there is any nuisance appraisal litigation. I don't think that's a real problem, but I suppose if you are going in to tinker, you might as well tinker.
Of larger import, is the amendment that permits the acquirer to pay some portion of the consideration immediately and stop the accruing of interest on the amount paid, leaving interest to accrue only on the amounts still in controversy. Because of the statutory interest rate, that one change might go quite a way to reducing some incentives for hedge funds to pursue appraisal arbitrage as a business. In CKx, defendants made a motion to require petitioners to accept the uncontested portion of the merger consideration in order to stop the clock on the accrual of interest. Vice Chancellor Glasscock refused to issued such an order. However, this amendment would explicitly permit that maneuver.
These changes may not go far enough for some - who were seeking things like stock tracing. Stock tracing would require the beneficial holder to prove that she was a beneficial stockholder prior to announcement of the merger. Right now, so long as the record holder was a holder prior to the merger, the beneficial holder need not establish that they were owners prior to the announcement of the merger. This is a loophole that appraisal arbs have driven trucks through.
Dole has complained that the changes are too timid and is pushing Delaware to go further. Indeed, Dole is even threatening to "pull out of Delaware" if it doesn't do more to eliminate appraisal arbs. Frankly, it's a ridiculous threat that I would have thought Delaware legislators would be sophisticated enough to discount. The inference is that if Delaware doesn't eliminate the appraisal arb business through stock tracing, that Dole would close its shipping business in Delaware. Umm. Okay. Hard to see how the two are related. If they close that business they will do so for business reasons, not because of the appraisal statute. If Dole means it will reincorporate elsewhere. Ok, where? Have fun.
Anyway, it's going to be a more interesting summer than previously thought in Wilmington.
Thursday, March 12, 2015
As Lawrence Cunningham noted, tenacity, thy name is Delaware! Along with the recent proposed amendments to the corporate law, the Delaware General Assembly will also consider the new Delaware Rapid Arbitration Act - to replace the Chancery Arbitration procedure that was deemed unconstitutional.
Regular readers of this blog might remember that I was opposed to Chancery arbitration as it was originally conceived. Here's a paper I wrote on the subject. Ultimately, the Federal Appellate Courts agreed with my view. Public judges sitting in public courts conducting confidential hearings is not a good look for many reasons.
In any event, the new approach - Chancery facilitated arbitration - an improvement and will likely pass constitutional muster. Also, the way the act has been written, there is little fear that firms might attempt to put Chancery arbitration provisions in corporate charters. In order to be eligible for Chancery arbitration, among other conditions, the arbitration agreement has to be signed by both parties, thus making it difficult to make constructive notice arguments in connection with the purchase of stock. Consequently, as it is currently drafted, the scope of arbitration-eligible disputes is relatively narrow - merger agreements and other commercial agreements that might typically appear before the Chancery Court. Also, although the arbitral proceedings are facilitated by the Chancery court, the arbitrators are not sitting judges and are paid directly by the parties. Proceedings will be confidential, judgments will be treated consistent with the FAA.
This attempt to create an arbitration regime will likely stick. All in all, not a bad effort.
Tuesday, March 10, 2015
The Delaware General Assembly is considering its annual amendments to the corporate law. This time, the proposed amendments (2015 Amendment text here) are doing more than just some ministerial changes/fixes to the text. The amendments purport to deal with two big issues. First, the amendments add a new section 115 that would explicitly permit corporations to include forum selection provisions in their certificates of incorporation or bylaws. I proposed as much in a 2011 article, so it's nice to see that take shape. By including forum selection provisions as a permissible menu option, the legislature is clearing the deck and making it much more likely that Delaware firms will opt in going forward. It's not a total solution to the problem of transaction related litigation, but it does help reduce the volume of litigation that must be managed. By the way, 94.9% of all deals were accompanied by litigation last year. This is a problem that's not going away on its own.
The other proposed amendment is much more controversial. The new sections 102(f) and 109(b) reverse the Delaware Supreme Court's decision in ATP Tour, Inc. In ATP, the court upheld a fee shifting bylaw that, if widely adopted, would likely have shut down most, if not all, shareholder litigation, good and bad. ATP would be like using a sledgehammer to hang paintings in your house. These new sections make such provisions illegal. You'll remember that last year the legislature tried to move an ATP amendment through in the aftermath of the decision. While corporate law amendments are usually a fairly boring affair, that one drew the attention of the US Chamber of Commerce. This time, the US Chamber is back, arguing that the adoption the anti-fee shifting provision "could threaten Delaware's billion dollar incorporation franchise." That seems like a bit of excessive rhetoric.
Stay tuned. I suspect this year will be anything but a quiet ride through the amendment process.
Monday, February 23, 2015
Gov. Markell has nominated Collins J. Seitz to replace Justice Ridgely. Mr. Seitz is a well-known Delaware litigator with some very big cases under his belt. He also has a judicial pedigree. His father, Collins Seitz, was a judge on Federal Third Circuit Court of Appeals and before that Chancellor of the Delaware Chancery Court.
Thursday, February 12, 2015
This from Delawareonline:
Six men, including three current or former judges, have applied for the vacant seat on the Delaware Supreme Court following the recent retirement of Henry du Pont Ridgely, according to sources close to the judicial nominating process.
The applicants for the state's highest court include Superior Court judges William L. Witham Jr and Calvin L. Scott Jr.; former Superior Court Judge Joseph R. Slights III; Collins J. Seitz, Jr. a founding partner of Seitz Ross Aronstam & Moritz LLP; Martin S. Lessner, a partner at Young Conaway Stargatt & Taylor; and John R. Williams, a lawyer in the Delaware Department of Justice appeals unit, the sources said.
Seems unfortunate that we have apparently exhausted the supply of female and minority candidates for this court. In any event, this pick will be Delaware Governor Markell's opportunity to temporarily put a stamp on this court. Under the Delaware constitution, the courts are required to be politically balanced with an equal number of Republicans and Democrats. However, in cases where the court is odd numbered, like the Supreme Court, the Governor is permitted to appoint the swing member from his own party affiliation. In this case Ridgely is a Republican, but since there are already two sitting Republicans and two sitting Democrats, Markell is free to appoint a Democrat to replace Ridgely. I am not sure how many other states follow Delaware's lead with balanced judicial appointments but I like the way it lessens the political stakes involved in judicial selections. If the US Supreme Court followed the same process we might all be better off.
Wednesday, October 1, 2014
Some insider-ish analysis on what led to the nomination of Jim Vaughn to the Delaware Supreme Court from the Delaware Grapevine and the Delaware Law Weekely. Both sources suggest some old-school geographic politics might be at least partly responsible. Vaughn, you see, is from Kent County and getting a representative from Kent County on the court was apparently important. What's interesting about Delaware and its judiciary, if this bit of Kremlinology is true is just how hard Delaware works to create a representative court -- constitutionally mandated political balance and at least implicit geographic balancing. With a nod to now retired Justice Berger, it's worth noting that the court is still not exactly representative. Lots of work to do, still.
Tuesday, September 23, 2014
Friday, September 12, 2014
According to the Delaware Law Weekly, Delaware's Judicial Nominating Committee has sent four names to the governor's office to consider as replacements for the now retired Justice Carolyn Berger:
The candidates are said to be Superior Court President Judge James T. Vaughn Jr.; Superior Court Judge Jan R. Jurden; Joseph R. Slights III, former Superior Court judge and current Morris James partner; and Morris, Nichols, Arsht & Tunnell partner Frederick H. Alexander.
Thursday, June 26, 2014
Karen Valihura was confirmed yesterday to replace the retiring Justice Jack Jacobs. The changes at the Delaware Supreme Court aren't done, yet. Next up, a replacement for retiring Justice Carolyn Berger. Then, maybe things will settle down.
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.