On June 30, 2016, the Delaware Chancery Court extended the Supreme Court’s holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), to two-step mergers under DGCL § 251(h). The Chancery Court concluded that acceptance of a first-step tender offer by a fully informed and uncoerced majority of disinterested stockholders insulates a two-step merger from challenge except on the ground of waste, even if a majority of directors were not disinterested and independent. See In re Volcano Corp. S’holder Litig., C.A. No. 10485-VCMR. In this situation, the business judgment rule is “irrebutable” and dismissal is typically appropriate given the high bar for proving “waste” and the unlikelihood that a majority of informed stockholders would approve such a transaction. In re Volcano is the latest decision underscoring the critical importance of securing an uncoerced and fully informed majority vote of disinterested stockholders if boards wish to benefit from this extremely deferential standard of review.
Greg is a commercial litigator based in New York. He represents leading financial institutions, Fortune 500 and other companies in complex, high stakes litigation involving sophisticated financial products, business torts, contract disputes, and class actions. He also has extensive experience representing companies, including energy providers and EPC contractors, in domestic and international arbitration.Array
Posts by: Greg Beaman
Taking Action That Affects The Shareholder Vote? Expect the “Gimlet Eye”
On May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election. Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016). The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.
Delaware Supreme Court Reaffirms KKR, But Sounds Cautionary Note to Gatekeepers
On May 6, 2016, the Delaware Supreme Court affirmed the Delaware Chancery Court’s ruling that Zale Corporation’s sale to Signet Jewelers withstood scrutiny under the business judgment rule because the transaction was approved by a fully-informed, uncoerced vote of the disinterested stockholders, and that an aiding and abetting breach of fiduciary duty claim against Zale’s financial advisor failed as a matter of law where the plaintiff failed to establish that the Zale board had acted with gross negligence. In so holding, the Court reaffirmed its holding in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), that in cases in which Revlon would otherwise apply, approval of the transaction by a fully-informed, uncoerced majority of disinterested stockholders invokes the deferential business judgment rule standard of review. While the Court also affirmed the Chancery Court’s dismissal of the aiding and abetting claim against Zale’s financial advisor, it called the Chancery Court’s reasoning for the dismissal into doubt and sounded a cautionary note to gatekeepers that they are not insulated from liability merely because they are alleged to have aided and abetted a non-exculpated breach of fiduciary duty by their director clients.
Chancery Court Reaffirms There Is No Magic Number for “Control” Status
On February 29, 2016, the Delaware Court of Chancery denied a motion to dismiss fiduciary duty claims against certain current and former directors of Halt Medical and a 26% stockholder, American Capital, arising out of a transaction that was allegedly designed to “squeeze out” minority stockholders. See Calesa Associates, L.P. v. American Capital, Ltd., C.A. No. 10557-VCG. Vice Chancellor Glasscock found that the plaintiffs had adequately alleged that American, despite owning only 26% of the company’s shares, exercised sufficient influence over the Halt Medical board such that it and certain affiliates could be deemed “controlling stockholders” owing fiduciary duties to other stockholders. Among other things, the decision in Calesa reaffirmed that majority stock ownership is not the sole criterion for determining “control.” The decision also sounded a cautionary note, however, by suggesting that, where plaintiffs remain minority stockholders in the company after the allegedly dilutive transaction at issue, they must plead demand futility even where, as here, only direct claims are asserted, or face dismissal at the pleading stage.
SEC Speaks – What to Expect in 2016
The leaders of the Securities and Exchange Commission (“SEC” or “Commission”) addressed the public on February 19-20 at the annual SEC Speaks conference in Washington, D.C. The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its increasing focus on cyber issues including its use of new technology to surveil and root out harmful practices in the modern and increasingly-complex market, and its continued focus on the conduct of gatekeepers. From a litigation and enforcement perspective, key takeaways from the conference include the following:
SEC Chair Mary Jo White began her remarks by touting the “unprecedented number of enforcement cases” brought by the Commission in 2015, which produced “an all-time high for orders directing the payment of penalties and disgorgement”—a trend that she stressed would continue in 2016. READ MORE
Gatekeepers No More: Delaware Supreme Court Clarifies Scope of Potential Financial Advisor Liability In M&A Sales Transactions
On November 30, 2015, the Delaware Supreme Court issued a 107-page opinion affirming the Court of Chancery’s post-trial decisions in In re Rural/Metro Corp. Stockholders Litigation (previously discussed here). In the lower court, Vice Chancellor Laster found a seller’s financial advisor (the “Financial Advisor”) liable in the amount of $76 million for aiding and abetting the Rural/Metro Corporation board’s breaches of fiduciary duty in connection with the company’s sale to private equity firm Warburg Pincus LLC. See RBC Capital Mkts., LLC v. Jervis, No. 140, 2015, slip op. (Del. Nov. 30, 2015). The Court’s decision reaffirms the importance of financial advisor independence and the courts’ exacting scrutiny of M&A advisors’ conflicts of interest. Significantly, however, the Court disagreed with Vice Chancellor Laster’s characterization of financial advisors as “gatekeepers” whose role is virtually on par with the board’s to appropriately determine the company’s value and chart an effective sales process. Instead, the Court found that the relationship between an advisor and the company or board primarily is contractual in nature and the contract, not a theoretical gatekeeping function, defines the scope of the advisor’s duties in the absence of undisclosed conflicts on the part of the advisor. In that regard, the Court stated: “Our 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” an aiding and abetting claim. In that (albeit limited) sense, the decision offers something of a silver lining to financial advisors in M&A transactions. Equally important, the decision underscores the limited value of employing a second financial advisor unless that advisor is paid on a non-contingent basis, does not seek to provide staple financing, and performs its own independent financial analysis.
The Growing Power of Fair Price and Process in Delaware Appraisal Actions
On October 21, 2015, the Delaware Court of Chancery issued a post-trial opinion in an appraisal action in which it yet again found that the merger price was the most reliable indicator of fair value. Vice Chancellor Glasscock’s opinion in Merion Capital LP v. BMC Software, Inc., No. 8900-VCG (Del. Ch. Oct. 21, 2015), underscores, yet again, the critical importance of merger price and process in Delaware appraisal actions. In fact, as we have previously discussed, Merion is just the latest of several decisions by the Delaware Chancery Court over the past six months finding that merger price (following an arm’s length, thorough and informed sales process) represented the most reliable indicator of fair value in the context of an appraisal proceeding. See also LongPath Capital, LLC v. Ramtron Int’l Corp., No. 8094-VCP (Del. Ch. June 30, 2015); Merlin Partners LP v. AutoInfo, Inc., No. 8509-VCN (Del. Ch. Apr. 30, 2015).
Merger Price and Process Win the Day Yet Again In Delaware Appraisal Action
On June 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it yet again rejected a dissenting shareholder’s attempt to extract consideration for its shares above the merger price through appraisal rights. See LongPath Capital, LLC v. Ramtron Int’l Corp., Slip. Op. June 30, 2015, C.A. No. 8094-VCP (Del. Ch. June 30, 2015). LongPath is just the latest decision in which the Chancery Court has upheld merger price as the most reliable indicator of fair value where it was the result of a fair and adequate process. Vice Chancellor Parsons’ opinion reaffirms the importance of merger price and process in Delaware appraisal actions, and offers helpful guidance to companies, directors and their counsel in defending against claims that the company was sold at too low a price.
Delaware Supreme Court Clarifies That Section 102(b)(7) Charter Provisions May Be Basis For Dismissal At The Pleading Stage In Controlling Stockholder Transactions
On May 14, 2015, the Delaware Supreme Court clarified that, even in conflict-of-interest transactions subject to “entire fairness” review, breach of fiduciary duty claims against independent, disinterested directors should be dismissed at the pleading stage where a complaint fails to allege a non-exculpated breach. See In re Cornerstone Therapeutics, Inc. S’holder Litig., Case No. 564, 2014; Leal, et al. v. Meeks, et al., Case No. 706, 2014 (Del. May 14, 2015). The Court’s decision resolves two separate consolidated appeals by outside directors of Cornerstone Therapeutics, Inc. and Zhongpin, Inc. (For a discussion of the Chancery Court’s Zhongpin decision, see Jason M. Halper, et al., Delaware Court Determines That 17.5% Stockholder Seeking to Take Company Private Could Be Deemed a Controller, The M&A Lawyer, Jan. 2015, Vol. 19, Issue 1.) In each case, the Chancery Court denied the independent directors’ motions to dismiss, even though there were no allegations that those directors committed a breach of loyalty or acted in bad faith such that the companies’ Section 102(b)(7) charter provisions would not apply. Instead, those courts held that “entire fairness” review effectively precludes dismissal of breach of fiduciary duty claims at the pleading stage based on a Section 102(b)(7) charter provision. The Supreme Court’s rejection of these decisions potentially offers significant protections to independent directors tasked with deciding whether to approve transactions involving interested directors.
The Importance of Merger Price and Process In Delaware Appraisal Actions
On April 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it rejected an attempt by dissenting shareholders to extract extra consideration for their shares above the merger price through appraisal rights. See Merlin Partners LP v. AutoInfo, Inc., Slip. Op. Apr. 30, 2015, Case No. 8509-VCN (Del. Ch. Apr. 30, 2015). Vice Chancellor Noble’s decision in AutoInfo offers important lessons for companies, directors and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell the company at an inadequate price. AutoInfo reaffirms that a negotiated merger price can be the most reliable indicator of value when it is the product of a fair and adequate process.