In a memorandum released on April 18, 2016, the private blood-testing company Theranos – once valued at over $9 billion – announced that it is under investigation by the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Attorney’s Office for the Northern District of California, among other government agencies. The memorandum did not disclose the focus of the government investigations. Theranos’ announcement about the investigations comes on the heels of a series of October 2015 Wall Street Journal (“WSJ”) articles critical of the accuracy of the company’s blood-testing methods. The government investigations into Theranos are not surprising, particularly in light of recent remarks by SEC Chair Mary Jo White (“White”) at a March 31, 2016 address at Stanford University’s Rock Center for Corporate Governance, where White revealed the SEC’s focus on Silicon Valley’s privately held unicorns – private start-up companies with valuations exceeding $1 billion.
We have previously written about how, over the past few years, the SEC and other regulatory agencies have devoted substantial resources to investigations regarding allegations that public companies have inadequate internal controls and/or a system for reporting those controls. See here, here and here. That effort shows no signs of waning. As recently as March 23, 2016, the SEC announced a settlement with a multi-national company due in part to the internal controls failures at two foreign subsidiaries. On March 10, 2016, the SEC announced a settlement of claims against Magnum Hunter Resources Corporation in connection with alleged internal control failures. And, on February 17, 2016, the SEC announced a settlement of claims against a biopesticide company, Marrone Bio Innovations, based on the company having reported misstated financial results caused in part by internal control failures.
On December 10, 2015, the Oregon Supreme Court held that an exclusive forum bylaw provision adopted unilaterally by a Delaware company’s board was a valid and enforceable contractual forum selection clause. Importantly, the Oregon decision is the only reported non-Delaware appellate court decision to date addressing the validity of exclusive forum bylaws on the merits.
The decision, Roberts v. TriQuint Semiconductor, Inc., comes on the heels of the Delaware Court of Chancery’s forum bylaw ruling in Boilermakers Local 154 Retirement Fund v. Chevron Corporation. As previously noted on this blog, in Chevron, then-Chancellor Strine of the Delaware Court of Chancery held that an exclusive forum bylaw provision adopted unilaterally by a board was both facially valid under the Delaware General Corporation Law (“DGCL”) and an enforceable contractual forum selection clause. Citing Chevron, the Oregon Supreme Court similarly concluded that an exclusive forum bylaw adopted only two days prior to the announcement of a merger was permissible and did not render the bylaw unenforceable in the shareholder merger litigation that followed.
On December 19, 2014, the Supreme Court of Delaware reversed the Delaware Court of Chancery’s November decision to preliminarily enjoin for 30 days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. The Supreme Court decision clarifies that in a sale-of-control situation, Revlon and its progeny require an effective, but not necessarily active, market check, and there is no “specific route that a board must follow” in fulfilling fiduciary duties.
On November 26, 2014, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging a going-private transaction where the company’s CEO, Chairman and 17.5% stockholder was leading the buyout group. In his decision in the case, In Re Zhongpin Inc. Stockholders Litigation, Vice Chancellor Noble concluded that the complaint pled sufficient facts to raise an inference that the CEO, Xianfu Zhu, was a controlling stockholder, and as a result, the deferential business judgment rule standard of review did not apply. Instead, the far more exacting entire fairness standard governed, which in turn led the Court to deny the motion.
This is the fourth recent decision to address when a less-than 50% stockholder can be considered a controller, an issue that determines whether the alleged controller owes fiduciary duties to other stockholders and the standard of review the Court will apply in evaluating the challenged transaction. The decision therefore provides important guidance for directors and their advisors in structuring transactions involving large stockholders.
On November 25, 2014, the Delaware Court of Chancery issued a decision in In Re Comverge, Inc. Shareholders Litigation, which: (1) dismissed claims that the Comverge board of directors conducted a flawed sales process and approved an inadequate merger price in connection with the directors’ approval of a sale of the company to H.I.G. Capital LLC; (2) permitted fiduciary duty claims against the directors to proceed based on allegations related to the deal protection mechanisms in the merger agreement, including termination fees potentially payable to HIG of up to 13% of the equity value of the transaction; and (3) dismissed a claim against HIG for aiding and abetting the board’s breach of fiduciary duty.
The case provides important guidance to directors and their advisors in discharging fiduciary duties in a situation where Revlon applies and in negotiating acceptable deal protection mechanisms. The decision also is the latest in a series of recent opinions addressing and defining the scope of third party aiding and abetting liability.
On November 24, 2014, the Delaware Court of Chancery preliminarily enjoined for thirty days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. In a bench ruling in the case, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., Vice Chancellor Noble concluded that “it is not so clear that the [C&J] board approached this transaction as a sale,” with the attendant “engagement that one would expect from a board in the sales process.” Interestingly, the Court called the issue a “very close call,” and indicated it would certify the question to the Delaware Supreme Court at the request of either of the parties (at this time it does not appear either party has made a request). The decision provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is assuming minority status in the combined entity yet also acquiring management and board control.
On October 10, 2014, the Delaware Court of Chancery issued a decision awarding nearly $76 million in damages against a seller’s financial advisor. In an earlier March 7, 2014 opinion in the case, In re Rural/Metro Corp. Stockholders Litigation, Vice Chancellor Laster found RBC Capital Markets, LLC liable for aiding and abetting the board’s breach of fiduciary duty in connection with Rural’s 2011 sale to private equity firm Warburg Pincus for $17.25 a share, a premium of 37% over the pre-announcement market price. The recent decision reinforces lessons from the March 7 decision and provides new guidance for directors and their advisors in M&A transactions and related litigation.
Corporate merger negotiations are typically conducted under a veil of secrecy, with public disclosure withheld until the end when a definitive agreement has been signed. The fear is that premature disclosure of preliminary merger talks will negatively impact the deal. For example, early disclosure might encourage speculative investment in the target company’s stock, driving up the price and diminishing shareholders’ perception of the offered premium, or even cause potential bidders to be reluctant to make an offer in the first place. In light of these problematic scenarios, courts widely recognize that typically there is no duty to disclose merger negotiations prior to the execution of a definitive merger agreement. See, e.g., Thesling v. Bioenvision, Inc., 374 F. App’x 141, 143 (2d Cir. 2010) (there is “no express duty [that] requires the disclosure of merger negotiations, as opposed to a definitive merger agreement”); Williams v. Dresser Indus., Inc., 120 F.3d 1163, 1174 (11th Cir. 1997) (“In the context of sales of stock while negotiations for merger or acquisitions were pending, courts have found no duty to disclose the negotiations”). Read More
Four derivative lawsuits against Facebook’s directors relating to alleged disclosure issues surrounding the company’s initial public offering have a new status: Dismissed. Last month, Judge Robert Sweet of the Southern District of New York dismissed the suits on standing and ripeness grounds, finding that IPO purchasers have no standing to pursue claims related to alleged misconduct that took place before the IPO. The dismissed derivative suits were “tag-along” actions that largely parroted allegations made by investors in a parallel securities class action also pending before Judge Sweet, and had sought to hold Facebook’s directors liable for damages the company might incur as a result of the securities class action.
In dismissing the suits, Judge Sweet held that plaintiffs who buy stock in an IPO lack standing to pursue derivative claims based on alleged misstatements in an IPO registration statement. As Judge Sweet explained, in order to have standing to sue derivatively on behalf of a company, a plaintiff must have owned stock in the company at the time of the alleged misconduct. The registration statement that the plaintiffs allege to have been misleading, however, was finalized and filed with the SEC two days before the IPO. Judge Sweet rejected plaintiffs’ attempts to create standing by arguing that the wrong continued through the date of the IPO because the directors did not correct the allegedly misleading statements by that date. Read More