M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, December 6, 2012

Lining up like Jets and Sharks

This post is not about football, though I will admit to being amused by the circus that presently calls itself the NY Jets.  No, it's about an article by David Marcus who points out how Vice Chancellor Laster has lined up with Chancellor Strine on the other side of Chief Justice Myron Steele and the Delaware Supreme Court over the issue of default fiduciary duties in LLCs.   It's really not about the issue at hand -- whether managers in an LLC are subject to fiduciary duties by default -- but a larger issue that relates to sometimes tense relationship between the Chancery Court and the Supreme Court.  The default fiduciary duty issue is an interesting one with some important ramifications (e.g. can you have federal insider trading liability in a publicly-traded LLC where managers don't have fiduciary duties?, etc), but I'll leave that for another day.

In a per curiam decision last month in Gatz Properties LLC v Auriga Capital, the Supreme Court attempted to put Chancellor Strine back on a short leash: 

The opinion suggests that “a judicial eradication of the explicit equity overlay in the LLC Act could tend to erode our state’s credibility with investors in Delaware entities.” Such statements migh be interpreted to suggest (hubristically) that once the Court of Chancery has decided an issue, and because practitioners rely on that court’s decisions, this Court should  not judicially “excise” the Court of Chancery’s statutory interpretation, even if incorrect. That was the interpretation gleaned by Auriga’s counsel. During oral argument before this Court, counsel understood the trial court opinion to mean that “because the Court of Chancery has repeatedly decided an issue one way, . . . and practitioners have accepted it, that this Court, when it finally gets its hands on the issue, somehow ought to be constrained because people have been conforming their conduct to” comply with the Court of Chancery’s decisions. It is axiomatic, and we recognize, that once a trial judge decides an issue, other trial judges on that court are entitled to rely on that decision as stare decisis. Needless to say, as an appellate tribunal and the court of last resort in this State, we are not so constrained.

It seems that too many people are forgetting that the Chancery Court is a trial court and not an appellate court, the Supreme Court is reminding us, and practitioners, and the Chancery.  OK, got it.  Oh, and then the court adds this:  

Fifth, and finally, the court’s excursus on this issue strayed beyond the proper purview and function of a judicial opinion. “Delaware law requires that a justiciable controversy exist before a court can adjudicate properly a dispute brought before it.” We remind Delaware judges that the obligation to write judicial opinions on the issues presented is not a license to use those opinions as a platform from which to propagate their individual world views on issues not presented. A judge’s duty is to resolve the issues that the parties present in a clear and concise manner. To the extent Delaware judges wish to stray beyond those issues and, without making any definitive pronouncements, ruminate on what the proper direction of Delaware law should be, there are appropriate platforms, such as law review articles, the classroom, continuing legal education presentations, and keynote speeches.

Uh, ouch.  OK, but Marcus points to a recent opinion, Feely v NHAOCG LLC by Vice Chancellor Laster in which he lines up with Chancellor Strine and takes issue with the Surpreme Court that Chancellor Strine's analysis of default fiduciary duties in the LLC context are "dictum without any precendential value."  He points to the long line of Chancery cases on this issue as persuasive and until such point as the Supreme Court rules on the issue, those cases and Chancellor Strine's analysis of default fiduciary duties will be good enough for him:

The Delaware Supreme Court is of course the final arbiter on matters of Delaware law. The high court indisputably has the power to determine that there are no default fiduciary duties in the LLC context. To date, the Delaware Supreme Court has not made that pronouncement, and Gatz expressly reserved the issue. Until the Delaware Supreme Court speaks, the long line of Court of Chancery precedents and the Chancellor's dictum provide persuasive reasons to apply fiduciary duties by default to the manager of a Delaware LLC. As the managing member of Oculus, AK-Feel starts from a legal baseline of owing fiduciary duties.

Is any of this earth shattering or new?  No, but it's an example of the real tension between the Chancery Court and the Supreme Court as it plays out in the opinions of both courts.  This dynamic has existed for some time now - predating Strine and Laster.  Court watchers - and court anthropoligists - shouldn't be surprised by this.







December 6, 2012 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.


December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack (0)

Monday, December 3, 2012

Kinder Morgan settlement

The Chancery Court approved a settlement in the El Paso case.  Here's the El Paso Settlement.  Something I thought was interesting - the transaction attracted 22 lawsuits - 13 in Delaware, 8 in Texas, and one in New York.   That's quite a crowd.  Then again, the facts in the case were the type that made it an attractive target for litigation.  In the settlement, El Paso will pay $110 to the class fund and Goldman will give up its $20 million fee.  Plaintiff counsel received $26 million in fees to split amongst all the counsel.


December 3, 2012 in Delaware, Investment Banks, Litigation | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 20, 2012

Bingham on Big Boy Language

Bingham just issued this interesting Legal Alert on Pharos Capital Partners, L.P. v. Deloitte & Touche.

In that case, on Oct. 26, 2012, the United States District Court for the Southern District of Ohio granted summary judgment in favor of Credit Suisse, holding that, under New York or Ohio law, plaintiff Pharos Capital Partners failed to prove it justifiably relied on Credit Suisse in connection with its private equity investment in National Century Financial Enterprises  (a business that was later found to be fraudulent) because Pharos expressly disavowed any such reliance in a letter agreement with Credit Suisse.

According to Bingham:

The decision is significant for the financial industry because it enforces a party’s representations in an agreement that it was relying on its own due diligence investigation in connection with its investment, rather than any alleged representations made by a placement agent. Prior to the decision in Pharos, many courts have been reluctant to enforce such agreements to defeat claims for fraud and negligent misrepresentation.


November 20, 2012 in Cases, Contracts, Deals, Litigation, Private Transactions | Permalink | Comments (1) | TrackBack (0)

Tuesday, September 18, 2012

Southern Copper and legal fees

The Southern Copper case has generated lots of attention - and for good reason.  The courts don't often hand out $2 billion verdicts.  Over at the WSJ Dealpolitik column, Ronald Barusch takes a look at the hefty legal fee - an eye popping $304 million (or an approximate $35,000/hour fee) and suggests it might be time for state legislatures to step in and reform shareholder litigation -- perhaps by relyiong on administrative remedies against directors.  That's not altogether a unique recommendation. My colleague, Renee Jones, recently published a piece in the Vanderbilt Journal of Transnational Law recommending director bars as an alternative administrative remedy for director violations of the duty of care.  It's an idea worth pursuing especially given the ubquity of 102(b)(7) protections. 

In any event, I'm getting far afield.  Rather than see Southern Copper as an example of judicial overreach, it might be better to put it in the context of Delaware trying to muddle through the problem of transaction-related litigation.  By now, it's pretty well known that almost every public transaction is bound to be the subject of litigation.  Most of that litigation is, to be perfectly frank, nuisance litigation.  That said, shareholder litigation remains an important quiver in the corporate governance arrow.  So, how to encourage good suits and discourage bad ones?  There have been lots of attempts to get a handle on this problem - PSLRA for example.  In recent years, the courts in Delaware have (I supposed relying on the hive-mind) decided that policing down fees on "bad" cases and being generous with fees on "good" cases is one way to set the incentives. Southern Copper falls into the "good" case category.  Chancellor Strine presumably wants to signal to potential litigants that these kinds of cases, where the duty of loyalty is at issue, will be cases that pay off and that plaintiffs should invest their resources in pursuing these cases over the garden variety disclosure cases that often accompany merger announcements.  


September 18, 2012 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, August 23, 2012

NY adopts Tooley test

Ok, news for corporate law geeks.  The Corporate & Securities Law Blog reports this morning that the Appellate Division of the New York Supreme Court in Yudell v Gilbert has discarded its previous case-by-case approach to determining whether shareholder litigation is direct or derivative.  Rather, it held that going forward the test to apply is the test announced in the Tooley v. Donaldson, Lufkin & Jenrette (Delaware Supreme Court).   The Tooley test asks a court to consider two things: 1) who suffered the harm in question; 2) to the extent there is a remedy, who will receive it.  Where the answers to those questions are "the corporation", then the litigation is derivative.  Where the answers are "the shareholder", then the litigation is direct.

The question of whether shareholder litigation is direct or derivative is a go-to for law professors at exam time.  I guess the beginning of a new academic year is the right time to iron our some of the jurisdictional differences in favor of a more "common sense approach" (NY's words). 


August 23, 2012 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, July 12, 2012

Forsythe settlement news

You'll remember back in May we posted about Vice Chancellor Laster's innovation in settlement of a derivative suit.  Back then objectors to a settlement appeared.  VC Laster challenged them to put up a bond if they really thought the claim was worth more than the settlement.  At the time, I really didn't know if the objectors would step up and take over the suit. Afterall, VC Laster made it clear that if the objectors took up the suit and won, they would only receive their pro-rata share of any settlement or judgment.  So, the delta between what they think it is worth and the initial settlement would have to be pretty large to induce them to put up a bond.  Lo and behold, Reuters is reporting that the objectors put up a bond yesterday:

To the surprise of many lawyers who followed the case, the objectors said in court documents last week they had found the money to keep the case going. They said they would post a $13.25 million bond funded in part by a unit of UK litigation finance firm Burford Capital.

Now, I know from the comments last time that not everyone thinks this kind of innovation in shareholder litigation is a good thing.  I get that.  But, I think it's worth experimenting.  Cause what we've got going now is definitely in need of improvement.



July 12, 2012 in Litigation | Permalink | Comments (1) | TrackBack (0)

Friday, June 1, 2012

Shark attack

The Economist has a piece on the issue of transaction-related litigation that's worth reading (here).  It starts with that gem of a Vonnegut quote from God Bless You Mr. Rosewater that Ron Gilson used in the introduction to his article on Value Creation:

In every big transaction, there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make the moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on.

The Economist editors leave out the best part, which comes immediately after: 

If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient’s blubbering thanks.



June 1, 2012 in Lawyers, Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, March 22, 2012

Lamb on transaction related litigation

The Deal caught up with Former Vice Chancellor Stephen Lamb on the evolution of shareholder litigation down at the Tulane conference. Here's the video:




March 22, 2012 in Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, March 19, 2012

Shareholder suit against Sokol dismissed

The shareholder suit against Berkshire Hathaway's David Sokol (here, here, and here) was dismissed for failure to make demand.  You'll remember that Sokol was accused by shareholders of taking a corporate opportunity when he learned about a corporate opportunity for Berkshire and then bought stock before bringing the opportunity to Buffet.  Mr. Buffet wasn't too happy about it when he found out.  Sokol was shown the door.  Shareholders brought suit against Sokol and the Berkshire Hathaway board.

The question before the court today was whether the shareholders should have made demand of the corporation before bringing the derivative lawsuit.  For derivative suits, shareholders have to make a demand that the board vindicate the corporation's rights or state why making such a demand would otherwise be futile.  The shareholders argued that demand in this case would be futile for three reasons:

1) The fact that the board had not yet sued Sokol was evidence that they had no intention of doing so;

2) The board faced a substantial likelihood of liability such that it would cloud their ability to objectively resolve the question on their own; and finally, 

3) That Warren Buffet is such a high-profile person that the board cannot be trusted to exercise their own independent business judgment in assessing the merits of a potential action against Mr. Sokol.

Looking at these questions, the court correctly determined that this is a case where demand should have been made, thus dismissing the case on the board's motion. 

Of course, the board has already conducted an investigation into Mr. Sokol's trading and fired him for it.  It might still bring a suit, but there is no requirement that it do so.  It's well within the board's perogatives to determine what the proper level of "punishment" is for Mr. Sokol's trading. The substantial likelihood factor is unlikely to apply.  There's allegation that the board itself did anything wrong. In fact, it appears that once the board found out about Mr. Sokol's trading, it took actions.  Finally, I have no doubt that Mr. Buffet has a lot of influence over the Berkshire board. No doubt at all.  But, I doubt that Mr. Buffet is all that happy about what Sokol did. He's already demonstrated that he isn't interested in ignoring it or sweeping it under a rug.  

Anyway, rightly decided.  That's enought corporate litigation review for today.





March 19, 2012 in Litigation | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 8, 2012

Exclusive forum provisions challenged in Delaware

Francis Pileggi brings to my attention a number of suits filed in the past two days against Delaware companies with exclusive forum provisions in the bylaws.  The exclusive forum bylaws are typically adopted by boards and not shareholders.  They purport to restrict any shareholder litigation based on state law claims to the courts of the state of incorporation.  Recent interest in such provisions is a result of the recent rapid increase in transaction-related litigation.  Steven Davidoff's paper on The Great Game is good background, as is Bernie Black's paper, Is Delaware Losing its Cases? and Randall Thomas & Bob Thompson's paper Litigation in Mergers & Acquisitions.

Here are two of the current complaints:   Sutton_vs_AutoNation_Inc and Tejinder_Singh_vs_Navistar_Int. They both attack a bylaw provision that was unilertally adopted by a board - so no shareholder vote.  A similar bylaw was struck down last year in Galaviz v Berg as lacking sufficient indicia of consent. These complaints are worth giving a read.  There's merit to the argument that unilaterally adopted bylaws shouldn't bind shareholders. But the complainants also raise a number of other interesting questions. I'm already on record supporting exclusive forum provisions in corporate charters, so I'll be following these cases with great interest.


February 8, 2012 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Thursday, January 19, 2012

Corporate governance overreach by Carlyle?

The Deal Prof looks at The Carlyle Group's proposed IPO and figures it's a corporate governance dud.  I agree. Carlyle's Amended and Restated Limited Partnership Agreement (Appendix A to the S-1A) has a dispute resolution provision that is reprinted in relevant part below (it's lengthy, sorry).  It does two things.  First, it requires that limited partners in Carlyle's soon to be publicly traded firm resolve all their dispute only in private arbitration and not in any court.  Second, it prohibits any arbitration be brought in a representative capacity.

Now, I'm the first one to admit that there is plenty of abuse of shareholder litigation. These days, one can't imagine a merger announcement not being accompanied by shareholder litigation.  But still, the correct answer can't be to eliminate representative shareholder litigation altogether.  The way this arbitration provision is written, it's pretty clear that no one should ever bring any litigation against management at all ... ever.  That can't be the correct result.  For all its warts, in a world where shareholding is increasingly dominated by institutional shareholders who don't have incentives to provide intense monitoring and are not permitted to perform the "Wall Street walk", shareholder litigation is one of the few governance arrows left in the corporate governance quiver.

Sure, there are plenty of suits that aren't worth more than their nuisance value.  (Steven Davidoff highlights the sheer volume of these transaction related lawsuits in his new paper examining the "Great Game" and the rise of transaction-related litigation). But, at the same time, there are other valuable cases like Delmonte or Southern Peru. If Carlyle's approach becomes the norm as firms go public there are real downsides to firms opting out of the formal legal regime.

First, there's a threat to the development and maintainence of the corporate law.  This arbitration provision goes further than Delaware's optional arbitration system that I've blogged about before.  If parties are required to bring all corporate litigation to private arbitrators, then corporate law litigation will quickly disappear from the courts and the law will begin to atrophy.  Rather than having a deep and rich common law, the corporate law will become nothing more than an inside game with only a small number of litigators and professionals being in the "know" as to the current state of the private law.  

Second, even if one accepts that a private law system is acceptable, and I don't think that's correct, then there are still important incentive effects associated with the elimination of representative litigation.  If arbitration may not be pursued in a representative capacity, then the incentives for any plaintiff's counsel to be in this business quickly fall away. The result is, effectively, that shareholder arbitration for a publicly traded issuer would disappear.  

Now, I guess if you are incumbent management eliminating pesky shareholders is a good thing.  On the other hand, if you are an investor, you have less reason to be sanguine about managers taking away one more tool for you to monitor their behavior.

I've previously recommended exclusive forum provisions as a middle ground to reduce incentives to engage in nuisance-like shareholder litigation while leaving open avenues for litigants to bring claims before courts.  That middle-ground strikes me as a better result than the more extreme route taken by Carlyle.  Of course, Carlyle's managers have different incentives and care about different things than do the courts in Delaware or investors. The Deal Prof doesn't think that the SEC will permit Carlyle to go public with this provision intact.  I hope he's right. In that event, Carlyle's Section 16.9(c) provides for an exclusive forum provision to govern disputes should the arbitration provision be voided by a court or otherwise be found to be as uneforceable. 



Carlyle Amended & Restated Limited Partnership Agreement

Section 16.9.  Dispute Resolution.
 (a) The Partnership, each Partner, each Record Holder, each other Person who acquires an interest in a Partnership Security and each other Person who is bound by this Agreement (collectively, the “Consenting Parties” and each a “Consenting Party”) (i) irrevocably agrees that, unless the General Partner shall otherwise agree in writing, any claims, suits, actions or proceedings arising out of or relating in any way to this Agreement or any Partnership Interest (including, without limitation, any claims, suits or actions under or to interpret, apply or enforce (A) the provisions of this Agreement, including without limitation the validity, scope or enforceability of this Section 16.9(a) or the arbitrability of any Dispute (as defined below), (B) the duties, obligations or liabilities of the Partnership to the Limited Partners or the General Partner, or of Limited Partners or the General Partner to the Partnership, or among Partners, (C) the rights or powers of, or restrictions on, the Partnership, the Limited Partners or the General Partner, (D) any provision of the Delaware Limited Partnership Act or other similar applicable statutes, (E) any other instrument, document, agreement or certificate contemplated either by any provision of the Delaware Limited Partnership Act relating to the Partnership or by this Agreement or (F) the federal securities laws of the United States or the securities or antifraud laws of any international, national, state, provincial, territorial, local or other governmental or regulatory authority, including, in each case, the applicable rules and regulations promulgated thereunder (regardless of whether such Disputes (x) sound in contract, tort, fraud or otherwise, (y) are based on common law, statutory, equitable, legal or other grounds, or (z) are derivative or direct claims)) (a “Dispute”), shall be finally settled by arbitration conducted by three arbitrators (or, in the event the amount of quantified claims and/or estimated monetary value of other claims contained in the applicable request for arbitration is less than $3.0 million, by a sole arbitrator) in Wilmington, Delaware in accordance with the Rules of Arbitration of the International Chamber of Commerce (including the rules relating to costs and fees) existing on the date of this Agreement except to the extent those rules are inconsistent with the terms of this Section 16.9, and that such arbitration shall be the exclusive manner pursuant to which any Dispute shall be resolved; (ii) agrees that this Agreement involves commerce and is governed by the Federal Arbitration Act, 9 U.S.C. Section 1, et seq., and any applicable treaties governing the recognition and enforcement of international arbitration agreements and awards; (iii) agrees to take all steps necessary or advisable, including the execution of documents to be filed with the International Court of Arbitration or the International Centre for ADR in order to properly submit any Dispute for arbitration pursuant to this Section 16.9; (iv) irrevocably waives, to the fullest extent permitted by law, any objection it may have or hereafter have to the submission of any Dispute for arbitration pursuant to this Section 16.9 and any right to lay claim to jurisdiction in any venue; (v) agrees that (A) the arbitrator(s) shall be U.S. lawyers. U.S. law professors and/or retired U.S. judges and all arbitrators, including the president of the arbitral tribunal, may be U.S. nationals and (B) the arbitrator(s) shall conduct the proceedings in the English language; (vi) agrees that except as required by law (including any disclosure requirement to which the Partnership may be subject under any securities law, rule or regulation or applicable securities exchange rule or requirement) or as may be reasonably required in connection with ancillary judicial proceedings to compel arbitration, to obtain temporary or preliminary judicial relief in aid of arbitration, or to confirm or challenge an arbitration award, the arbitration proceedings, including any hearings, shall be confidential, and the parties shall not disclose any awards, any materials in the proceedings created for the purpose of the arbitration, or any documents produced by another party in the proceedings not otherwise in the public domain; (vii) irrevocably agrees that, unless the General Partner and the relevant named party or parties shall otherwise mutually agree in writing, (A) the arbitrator(s) may award declaratory or injunctive relief only in favor of the individual party seeking relief and only to the extent necessary to provide relief warranted by that party’s individual claim, (B) SUCH CONSENTING PARTY MAY BRING CLAIMS ONLY IN ITS INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF, CLASS REPRESENTATIVE OR CLASS MEMBER, OR AS A PRIVATE ATTORNEY GENERAL, IN ANY PURPORTED CLASS OR REPRESENTATIVE PROCEEDING, and (C) the arbitrator(s) may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class or consolidated proceeding; and (viii) agrees that if a Dispute that would be arbitrable under this Agreement if brought against a Consenting Party is brought against an employee, officer, director or agent of such Consenting Party or its affiliates (other than Disputes brought by the employer or principal of any such employee, officer, director or agent) for alleged actions or omissions of such employee, officer, director or agent undertaken as an employee, officer, director or agent of such Consenting Party or its affiliates, such employee, officer, director or agent shall be entitled to invoke this arbitration agreement. Notwithstanding Section 16.10, each provision of this Section 16.9(a) shall be deemed material, and shall not be severable and this Section 16.9(a) shall be enforced only in its entirety.



January 19, 2012 in Litigation | Permalink | Comments (1) | TrackBack (0)

Wednesday, January 11, 2012

Representative plaintiff sanctioned for improper trading

After Calix, Inc. announced its acquisition of Occam Networks, Inc. in September 2010 the by now usual lawsuit appeared to challenge the transaction. One of the representative plaintiffs in this case was Michael Steinhardt, a hedge fund investor, described as "one of the most successful investors in the history of Wall Street" and an Occam shareholder.  The suit alleged that the directors of Occam violated their fiduciary duties to the corporation when they agreed to sell the corporation to Calix at an "unfair price."  OK, so far, so good.  Well, not good, but expected. You know what I mean.  In any event, the plaintiffs pursued their case and were permitted to take discovery subject to a confidentiality order. That order read, in part:

Confidential Discovery Material, or information derived therefrom, shall be used solely for purposes of this Litigation and in an appraisal proceeding that Plaintiffs in this Litigation may file . . . . Confidential Discovery Material shall not be used for any other purpose, including, without limitation, for any business or commercial purpose or for any other litigation or proceeding. Confidential Discovery Material Parties and non-parties who receive Confidential Discovery Material shall not purchase, sell, or otherwise trade in the securities of any company, including but not limited to Occam and Calix, on the basis of confidential information contained in the Confidential Discovery Material to the extent such information is still confidential at the time of such purchase, sale or trade. 

Of course, with an order like this and with sophisticated investors like Steinhardt, you can only guess what happened next.  That's right, after Steinhardt was in possession of confidential information (via one of his co-plaintiffs) he began to short Calix common stock. When the Calix defendants found out that Steinhardt had shorted their stock they moved in the Delaware Chancery Court for sanctions against him. 

Last Friday, Vice Chancellor Laster sanctioned Steinhardt for trading in violation of the confidentiality order (Steinhardt Sanctions Opinion).  The sanctions Steinhardt and his funds for improper trading include:

 (i) dismissal from the case with prejudice and barred from receiving any recovery from the litigation; 
(ii) requirement to self-report their improper trading to the SEC;
(iii) requirment to disclose their improper trading in any future application to serve as lead plaintiff; and
(iv) an order to disgorge their trading profits (approximately $500,000).

Lesson?  If you are going to be a representative plaintiff in one of these transaction related lawsuits, you can't trade in the stock of the either the acquirer or the target during the pendancy of the litigation.  That seems pretty straightforward.  You'd have thought Steinhardt would have already known that.


January 11, 2012 in Insider Trading, Litigation | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 3, 2012

Weil on Arbitration vs. Litigation

Practitioners are often asked by their clients, "Which do you recommend to resolve disputes under a merger agreement: Litigation or Arbitration?"

Here's a Weil client alert by Sara Duran that "addresses the pros and cons of arbitration, situations where litigation may be preferable and drafting considerations for an agreement to arbitrate, in each case, from the viewpoint of US counterparties arbitrating domestically and applying US law."



January 3, 2012 in Contracts, Litigation, Merger Agreements | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 14, 2011

J Crew settled

Chancellor Strine approved the J Crew settlement today over the objections of one of the co-lead plaintiffs, Martin Vogel.

The only individual acting as a lead plaintiff, Martin Vogel, was also removed because he opposed the settlement. ...

Mark Vogel, a New Jersey lawyer and investment adviser who represented his father Martin Vogel at Wednesday's hearing, said the class action process was driven by attorneys who "confined me to a silo" and "steamrolled" him.

"Lead counsel's game is to intimidate the one individual who managed to find his way into their cozy club," Mark Vogel said.

Vogel laid out his complaints about plaintiff counsel in his objection (here).  Notwithstanding those complaints, Vogel was removed as a co-lead plaintiff and the case was permitted to settle.  The plaintiff's counsel received a $6.5 million fee award and the board got another chastizing.

Strine also criticized the behavior of J Crew's directors and chief executive for allowing TPG Capital, one of the buyers, to get a head start in the sale process, which he said may have eliminated potential rivals.

"It's icky stuff," said Strine. "This was not good corporate governance."

Not good, indeed.


December 14, 2011 in Delaware, Going-Privates, Litigation | Permalink | Comments (1) | TrackBack (0)

Wednesday, October 26, 2011

Selecting a lead plaintiff

I was cleaning off my desktop and came across an interesting letter opinion in which the Chancery Court deals with the question of selecting a lead plaintiff (SEPTA v Rubin et al).  Selecting a lead plaintiff and the problem of multi-jurisdiction litigation in the context of transaction-related litigation is a recent interest of mine.  While this can be difficult problem when there is multiple litigation in different jurisdictions, it's less complicated with respect to litigation within a single jurisdiction.  

Delaware has long not followed the old "first to file" rule in determining the identity of lead plaintiffs.  Rather, it has a two step approach. First, the courts encourage plaintiffs to organize themselves and work it out internally.  That's a pretty successful approach.  When it fails, however the court has to make a determination as to which of the competing plaintiffs should be the lead plaintiff.  The court does does by applying the so-called "Hirt factors":

  • the quality of the pleading that appears best able to represent the interests of the shareholder class and derivative plaintiffs;
  • the relative economic stakes of the competing litigants in the outcome of the lawsuit (to be accorded great weight);
  • the willingness and ability of all the contestants to litigate vigorously on behalf of an entire class of shareholders;
  • the absence of any conflict between larger, often institutional, stockholders and smaller stockholders;
  • the enthusiasm or vigor with which the various contestants have prosecuted the lawsuit; [and]
  • the competence of counsel and their access to the resources necessary to prosecute the claims at issue.

Rather than encourage a race to courthouse, the Hirt factors are intended to create incentives for parties to bring quality claims and to weed out low quality, knee-jerk claims that appear in the wake of many deal announcements.  


October 26, 2011 in Delaware, Litigation | Permalink | Comments (0) | TrackBack (0)

Monday, September 12, 2011

Omnicare's litigation with Pharmerica

As part of its hostile effort to acquire Pharmerica, last week Omnicare filed suit against Pharmerica and its board.  Here's the Omnicare - Pharmerica complaint. Now, let me state right up front that I don't think this suit falls into the more general category of litigation flotsam that accompanies many merger announcements these days.  Although this is acquisition-related litigation, it involves a purported acquirer attempting to have the target's board withdraw its defenses against the offer.  This case is more along the lines of the Airgas scenario. In any event, given Airgas, one wonders whether Omnicare thinks it can pull an Omnicare-styled rabbit of the litigation hat.  And why not?  It happened famously for them once before.

In any event, the first defense that Omnicare would like the court to order withdrawn is Pharmerica's pill.  It's hard, given Airgas, to come up with a reasonable justification for the court to order Pharmerica's board to pull its pill.  Maybe after a year or trying, but now?  Probably not.  Omnicare's argument that Pharmerica's board is violating its fiduciary duties by not negotiating with Omnicare is going to fall flat.  The requirement is that Pharmerica's board be informed.  There is no requirement that it negotiate to sell its company to an unwanted bidder.  Of course, this is complicated by the fact that early in the summer, Pharmerica's CEO approaced Omnicare's CEO to discuss a possible combination, but that's just a complication.  Omnicare doesn't present any evidence to seriously suggest that Pharmerica's board is uninformed about its decision not to engage with Omnicare.

Second, Omnicare would like the court order Pharmerica's board to adopt resolutions exempting Omnicare from the effects of DGCL 203.  Yikes.   Omnicare's argument is essentially that Pharmerica's board is violating its fiduciary duties to the corporation by not actively exempting an unwanted bidder from Delaware's antitakeover statute.  Absent egregious facts that aren't present in the complaint, I can't imagine a court taking that argument all that seriously.    


September 12, 2011 in Litigation, State Takeover Laws, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 20, 2011

Is this unlawful?

According to this story from Bloomberg, the SEC

sued a Michigan man, claiming he traded on information he learned from a houseguest about the impending acquisition of Brink’s Home Security

Apparently, the

investment banker for Tyco International Inc., the buyer, inadvertently left behind a draft presentation on the deal.

According to the SEC, months later, the homeowner discovered the draft. Another month or so after the discovery, the homeowner intuited from changes in the banker’s travel schedule that the transaction was imminent.

According to the SEC, the homeowner profited from trading in Brink’s stock after the public announcement of the deal caused its price to jump 30 percent.

The homeowner's lawyer said his client has settled the case and will turn over his profits and pay a fine.

Obviously the facts are incomplete, but I wonder if Professor Bainbridge would have advised the homeowner to fight the case.


July 20, 2011 in Cases, Current Affairs, Current Events, Deals, Federal Securities Laws, Insider Trading, Litigation, Mergers, SEC | Permalink | Comments (3) | TrackBack (0)

Tuesday, July 12, 2011

More troubles for Murdoch

The ongoing collapse of the Murdoch enterprise is almost as fascinating to watch as that unforced error going on in DC right now.  It's also found its way into an ongoing challenge to News Corp's acquisition of Shine from earlier in the Spring.  Plaintiffs have now amended their complaint (here) ( News Corp-Shine-Amended Complaint - helpfully red-lined for your reading pleasure) to include additional claims against the board for violations of fiduciary duty related to its running of News Corp while closing its eyes to what appears to have been a pattern of law breaking in its news gathering operations.  From the amended complaint:

The most recently revealed manifestation of the Board’s utter capitulation to the control and domination of Murdoch is their complete failure to oversee the news gathering practices carried out under the watch of Murdoch’s close friends, confidantes, and staunch supporters, Rebekah Brooks and Andy Coulson, both of whom served as the chief editors of News Of The World, News Corp’s premier UK newspaper. ... The Board failed in its duty to investigate this egregious conduct in the face of red flags, for to do so would have required Defendants to be objective, critical, and non-biased, which they are incapable of being, given Murdoch’s control over all of the Board’s affairs.

Recent revelations have demonstrated that, over the past decade, both junior and very senior employees at the British tabloid the  News of the World and its sister newspaper the Sun were engaged in a massive scheme to intercept voicemail and other forms of electronic communication in order to obtain stories for the papers.

News Corp’s Board should have learned that reporters from News of the World were using illegal means to gather news during Brooks’ tenure as chief editor of News of the World from 2000 to 2003.  Given Murdoch’s close personal and professional relationship with Brooks, described more fully below, and the fact that Brooks herself was fully aware of and even involved in this conduct, it is inconceivable that he and his fellow Board members would not have been aware of the manner in which Brooks ran News of the World and, later, the Sun.

News Corp’s Board received (or should have received) its next red flag when, in 2005, Prince William’s staff notified authorities that William’s phone had been hacked.  The Prince’s aides noticed that voicemails to which they had never listened were showing up as “saved” messages in William’s inbox.  At the same time,  News of the World was running a series of articles that reported startlingly intimate details of the Prince’s life.  Indeed, one News of the World article quoted verbatim a hacked voicemail in which William imitated Prince Harry’s girlfriend. ...

The magnitude of the problem must have been apparent to the Board as far back as 2009.  The Guardian reported on July 8, 2009 that “27 different journalists from the News of the World and four from the Sun” made more than 1,000 requests to private investigators to secure wiretaps, phone records, or otherwise illegally obtain personal and confidential information.  According to The Guardian, “These purchases were not secret within the  News of the World  office:  they were openly paid for by the accounts department with invoices that itemised [sic] illegal acts” (emphasis added).  Moreover, evidence seized in connection with the 2006 Goodman investigation reveals that “several thousand public figures” were targets of News International’s illegal newsgathering practices, including, during a single month in 2006: then-deputy prime minister John Prescott; Tessa Jowell, a government official then responsible for regulating the media; Gwyneth Paltrow; George Michael; and Jade Goody.

Goodness.  And it goes on ...

Of course, the chancery court has made it clear on numerous occassions that boards may not sanction violations of the law and still comport with their duty of loyalty to the corporation.  If it's true that the board knew - or closed its eyes to the fact that - there was wide-spread illegal activity going on at News Corp's operations - or that indeed illegal activity was at the center of News Corp's ability to get scoops and therefore make profits, then this case has just taken a turn for the very worse for News Corp's directors.  

I guess, the directors could go for broke and make an argument hinted at in Massey:  "You shareholders knew just as much as we did that we were breaking the law and you invested anyway - so you get nothing!"  Remember in that case, Vice Chancellor Strine was not all that sympathetic to arguments that shareholders were victims of a board that sanctioned egregious violations of the law.  Here, I suppose the shareholders will argue that the pattern of law breaking is as much a shock to them as it was to everyone else.

In any event, this case has just moved from being an interesting entire fairness claim destined to end up on the heap to a fascinating soap opera where plaintiffs have a shot.



Update:  Hey, when it rains, it pours...  It turns out that US-based News Corp doesn't even have to pay taxes! A negative effective tax rate.  Excellent.  From Reuters:

Over the past four years Murdoch's U.S.-based News Corp. has made money on income taxes. Having earned $10.4 billion in profits, News Corp. would have been expected to pay $3.6 billion at the 35 percent corporate tax rate. Instead, it actually collected $4.8 billion in income tax refunds, all or nearly all from the U.S. government.

he relevant figure is the cash paid tax rate. This is the net amount of corporate income taxes actually paid after refunds. For those four years, it was minus 46 percent, disclosure statements show.

Even on an accounting basis, which measures taxes incurred but often not actually paid for years, News Corp. had a tax rate of under 20 percent, little more than half the 35 percent statutory rate, company disclosures examined by Reuters show. News Corp. had no comment.

 Oh yeah, and now News Corp's proposed acquisition of BSkyB is teetering on the edge.


July 12, 2011 in Litigation | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 2, 2011

J Crew - but we had a deal!

J Crew has filed a letter with the court in response to the plaintiff's letter.  You can download it here.  Rather than subvert the MOU, defendants argue in their letter that they have fully complied with the terms of the MOU and that the plaintiffs are just trying to have their cake and eat it, too.   The plaintiffs complained that J Crew's board was undermining the terms of the settlement by announcing that they had received no offers by the end of the initial go-shop period.   So what, say the defendants (from their letter):

Plaintiffs claim that the January 18 press release undermined the go shop. But that makes no sense. Announcing the results of the initial go-shop would have no effect on the viability of the extended go-shop. If there were additional bidders during the initial go-shop, announcing that fact before extending the go-shop would simply have the effect of continuing an open, public auction, something that would benefit shareholders. And TPG would be forced to compete with any new bidder no matter whether the Company publicly announced it or not.  If there were no additional bidders during the initial go-shop, announcing that fact could only encourage bidders who might be on the fence to bid during the extended go-shop because they would perceive less competition. In either event, TPG could not possibly be benefited by knowing whether there were or were not additional bidders during the initial go-shop. Plaintiffs do not provide any explanation as to how the announcement of the results of the go-shop would in any way affect the go-shop process.

Nor could they. The public disclosure of the results of the initial go-shop period simply will not have any meaningful effect on the extended go-shop. Potential new bidders do not care whether someone did or did not bid before (except the fact that there were no bidders means that there potentially is less competition for the Company.) Likewise, TPG cannot do anything with the information it learned from J. Crew’s public disclosure. If there is a new bid, it still will have to compete with that bid.

Looks like this whole thing is landing on Vice Chancellor Strine's lap.


February 2, 2011 in Going-Privates, Litigation | Permalink | Comments (0) | TrackBack (0)