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 November 3, 2014, the U.S. Supreme Court held oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund. As discussed in earlier posts, from March 18, 2014 and July 22, 2014, the Supreme Court in Omnicare has been asked to resolve a circuit split regarding the scope of liability under Section 11 of the Securities Act: does an issuer violate Section 11 if it makes a statement of opinion that is objectively false, or must the issuer also have known that the statement was false when made?
One of the most significant challenges facing plaintiffs in pleading a violation of Section 10(b) of the Securities Exchange Act of 1934 is sufficiently alleging that the defendant company possessed scienter, or an “intent to deceive.” Because a corporation can only act through its employees, the challenge is to determine which employees’ alleged state of mind should be imputed to the company.
On October 10, 2014, the Sixth Circuit considered that question in In re Omnicare Sec. Litig., No. 13-5597, 2014 WL 5066826 (6th Cir. Oct. 10, 2014). Omnicare involved a Section 10(b) shareholder class action against Omnicare, Inc., a pharmaceutical manufacturer, alleging that Omnicare’s financial statements and other public disclosures contained misstatements regarding the company’s compliance with Medicare and Medicaid regulations. In particular, plaintiffs alleged that although Omnicare’s internal audit group discovered that certain company facilities had submitted false reimbursement claims, Omnicare failed to disclose the fraud and, in publicly-filed documents signed by the CEO and CFO, asserted that Omnicare’s “billing practices materially comply with applicable state and federal requirements.” Read More
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.
On July 16, 2014, a three-judge Second Circuit panel affirmed the dismissal of a securities class action against Deutsche Bank AG and several underwriters. The case was brought on behalf of investors who purchased approximately $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that defendants misled them about the bank’s exposure to mortgage-backed securities and other risks in a registration statement filed in October of 2006. Plaintiffs alleged that the registration statement omitted details about Deutsche Bank’s business, including that the company failed to properly record provisions for RMBS, commercial real estate loans and exposure to monoline insurers.
Today the Supreme Court rejected calls from lawyers, economists and corporate associations to overrule the “fraud-on-the-market” theory that makes it possible to litigate federal securities fraud claims as class actions, instead handing defendants a modest procedural victory. In Halliburton Co. v. Erica P. John Fund, Inc., the Court declined to overrule a decision that for more than twenty-five years has been used by securities plaintiffs to certify thousands of federal class actions, but also recognized that defendants can rebut class certification by showing that allegedly misleading statements did not affect the price of a company’s securities. Halliburton kills what had been a growing movement to eliminate federal securities fraud class actions for all intents and purposes.
Plaintiff-respondent Erica P. John Fund, Inc. (the “Fund”) purchased stock in Halliburton and lost money when Halliburton’s stock price dropped upon the release of certain negative news regarding the company. The Fund filed suit against Halliburton and its CEO David Lesar (collectively, “Halliburton”), alleging that Halliburton had made knowing or severely reckless misrepresentations concerning those topics, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Read More
ATP Tour: The Little Case That Could
On May 8, 2014 the Delaware Supreme Court upheld a “loser pays” fee-shifting bylaw for a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund. While the decision was released with little heralding, if ATP Tour’s “loser pays” provisions are widely adopted by public corporations and held also to be valid, the decisionmay create a significant impediment to the ubiquitous lawsuits alleging that directors have breached their fiduciary duties of loyalty and care to the corporation.
The board of ATP Tour, a membership organization that operates men’s professional tennis competitions, enacted a fee-shifting bylaw which provides that a “Claiming Party,” i.e. a member organization, would be liable for the corporation’s attorneys’ fees and other litigation expenses if it loses in an intra-corporation claim against the company. The fee-shifting bylaw obligates any Claiming Party to reimburse the League and any member or owner of ATP Tour that the Claiming Party also sued. Read More