M&A

Delaware Supreme Court Wastes No Words: Summarily Affirms In re Volcano Corp. Stockholder Litigation, Upholding Business Judgment Rule and Dismissing Remaining Waste Claim

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On February 9, 2017, the Supreme Court of Delaware summarily affirmed the Court of Chancery’s decision in In re Volcano Corp. Stockholder Litigation which had dismissed plaintiffs’ complaint on defendants’ 12(b)(6) motion to dismiss.

Plaintiffs, former stockholders of Volcano Corporation, had brought an action against defendants for breaches of fiduciary duty arising from the all-cash merger between Volcano and Philips Holding USA Inc. The parties had disputed what standard of review the Court of Chancery should apply: the Revlon test, as plaintiffs claimed, because Volcano’s stockholders received cash for their shares, or the irrebuttable business judgment rule, as defendants argued, because Volcano’s stockholders were “fully informed, uncoerced, and disinterested” when they approved the merger by tendering a majority of Volacano’s shares into a tender offer.  As the Court of Chancery explained, if a business judgment rule is irrebuttable, plaintiffs could only challenge the transaction on the basis of waste.  Thus, plaintiffs also argued in the alternative that if the business judgment rule did apply, it should only be a rebuttable presumption.

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Gordon v. Verizon: New York Parts Company with Delaware

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People at a Table

On February 2, 2017, the New York Appellate Division, First Department, issued a decision in Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 WL 442871 (1st Dep’t 2017), approving the settlement of litigation over an acquisition by Verizon Communications (“Verizon”) and articulating a new test to evaluate the fairness of such settlements. The Gordon decision signals that New York will remain a friendly venue to disclosure-based M&A settlements and may see increased shareholder M&A lawsuits as a result

As we have repeatedly written about (here, here and here), Delaware Chancery Courts have spent the past year attempting to curtail, or eliminate altogether, M&A litigation settlements where the sole remedy is enhanced proxy disclosures. Chancellor Bouchard’s landmark decision in In re Trulia Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), rejected these “disclosure-only” settlements, finding that the “enhanced” disclosures produced by such settlements were not “material or even helpful” to stockholders.  The Chancery Court bemoaned the proliferation of disclosure-only settlements in Delaware, and indicated that these types of settlements would be met by “continued disfavor” unless the supplemental disclosures are “plainly material,” i.e., they must “significantly alter the ‘total mix’ of information made available.”

In Trulia’s wake, the number of M&A suits filed in Delaware plummeted—declining by almost 75% in the first half of 2016—as plaintiffs’ counsel opted to file in federal court or states other than Delaware in the hope of finding more hospitable fora for “disclosure-only” resolutions.  READ MORE →

Seventh Circuit Brands Disclosure-Only Settlement a “Racket” and Endorses Delaware Court of Chancery’s Stricter Standard for Approval of Disclosure-Only Settlements

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In a 2-1 decision, the Seventh Circuit has joined the Delaware Court of Chancery’s call for enhanced scrutiny of “disclosure-only” M&A settlements that involve no monetary benefits to shareholders.  As previously discussed here, M&A litigation, typically alleging breach of fiduciary duty by directors and insufficient disclosures, often ends in settlement, with defendants agreeing to provide supplemental disclosures in exchange for broad releases of claims, while plaintiffs’ counsel “earns” large attorneys’ fees for providing the class with the “benefit” of the agreed-upon disclosures.  In In re Walgreen Company Stockholder Litigation (“In re Walgreen Co.”), the Seventh Circuit rejected such a settlement, endorsing the standard for approval of disclosure-only settlements articulated by the Delaware Court of Chancery in In re Trulia, Inc. Shareholder Litigation (“In re Trulia”).  In In re Trulia, the Court of Chancery held that disclosure-only settlements in M&A litigation will meet with disfavor unless they involve supplemental disclosures that address a “plainly material misrepresentation or omission” and any proposed release of claims accompanying the settlement encompasses only disclosure claims and/or fiduciary duty claims regarding the sale process.

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The Ever-Increasing Importance of the Shareholder Vote: Delaware Chancery Court Extends Corwin to Two-Step Mergers under DGCL § 251(h)

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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.

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Chancery Court Continues to Close the Door on Disclosure-Only Settlements and Fees (But Opens a Window for “Mootness Dismissals”)

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As previously discussed here, in 2015, the Delaware Court of Chancery issued a number of decisions calling for enhanced scrutiny of “disclosure-only” M&A settlements that involve no monetary benefits to a shareholder class.  For example, the recent decision in In re Riverbed Technology, Inc. Stockholders Litigation expressly eliminated the “reasonable expectation” that a merger case can be settled by exchanging insignificant supplemental disclosures (and nothing more) for a broad release of claims.  In In re Trulia, Inc. Stockholder Litigation, the Chancery Court demonstrated that its “increase[ed] vigilance” in this area is genuine, rejecting a disclosure-only M&A settlement and finding that the supplemental disclosures did not warrant the broad release of claims.

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Gatekeepers No More: Delaware Supreme Court Clarifies Scope of Potential Financial Advisor Liability In M&A Sales Transactions

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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.

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The End of Disclosure Only Settlements in M&A Cases? Not So Fast.

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Disclosure-only settlements have been popular in the past – last year, about 80% of settlements in M&A-related lawsuits were for disclosures only, according to Cornerstone Research – but lately they have come under scrutiny.  The Delaware Court of Chancery has issued opinions refusing disclosure-only settlement agreements before, noting that at times in these cases “there is simply little to commend the process of weighing the merits of a ‘settlement’ of litigation where the only continuing interest is that of the plaintiffs’ counsel in recovering a fee.”  The incentives of attorneys on both sides can be such that “the potential claims belonging to the class [are not] adequately or diligently investigated or pursued.”

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The Growing Power of Fair Price and Process in Delaware Appraisal Actions

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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).

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In re Riverbed: The Beginning of the End for Disclosure-Only Settlements in M&A Cases?

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Gavel and Hundred-Dollar Bill

The past decade has seen an incredible rise in M&A litigation.  According to Cornerstone, in 2014, a whopping 93% of announced mergers valued over $100 million were subject to litigation, up from 44% in 2007.  As Delaware Supreme Court Chief Justice Leo Strine explained several years ago, “the reality is that every merger involving Delaware public companies draws shareholder litigation within days of its announcement.”  These lawyer-driven class action suits, which typically allege breaches of fiduciary duty by directors and insufficient disclosures, overwhelmingly end in settlement, with corporate defendants agreeing to provide additional disclosures in exchange for a broad release, and plaintiffs’ counsel walking away with attorneys’ fees for the theoretical “benefit” they conferred upon the class.

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Delaware Supreme Court Holds That Revlon Does Not Require An Active Market Check

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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.

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