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.
Delaware Court of Chancery
Delaware Chancery Court Finds that Director Defendants Can Not “Merge Their Way Out of” Breach of Fiduciary Claims
On July 28, 2016, the Delaware Chancery Court allowed claims of unfair dealing against the Board of property management company Riverstone National Inc. to survive where the directors facilitated a merger that forestalled a derivative suit against them. The court held that by orchestrating a merger that extinguished a possible derivative action, the director defendants obtained a special benefit for themselves. As a result, the directors were interested in the transaction, thereby rebutting the presumption of the business judgment rule, and triggering application of the “entire fairness” doctrine.
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.
Forum Shopping No More? Oregon Joins Delaware in Upholding Exclusive Forum Bylaw Provision
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.
The End of Disclosure Only Settlements in M&A Cases? Not So Fast.
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.”
Flawed Valuation Leads Delaware Court to Award Damages to Option Holders
On July 28, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it criticized in particularly strong terms the analysis performed by a financial firm that was retained to value companies that were being sold to a third party or spun off to stockholders (the “valuation firm”). See Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del Ch. July 28, 2015). CDX is just the latest decision in which the Chancery Court has awarded damages and/or ordered injunctive relief based in part on a financial firm’s failure to discharge its role appropriately. Calling the valuation firm’s work “a new low,” Vice Chancellor Laster’s opinion is another chapter in this cautionary tale that lays bare how financial firms can be exposed not only to potential monetary liability but, as importantly, significant reputational harm from flawed sell side work on M&A transactions.
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.
Delaware Chancery Awards Investors $171 Million
On April 20, 2015, the Delaware Court of Chancery issued a decision awarding $171 million in damages to the common unitholders of a limited partnership against its general partner in connection with a “dropdown” transaction. The decision is the latest in a series of decisions by the Chancery Court concerning the conduct of directors and advisers in conflict of interest and/or sale of the company transactions. See also In re Rural/Metro Corp. S’holders Litig., No. 6350-VCL (Del. Ch. Oct. 10, 2014); Chen v. Howard-Anderson, No. 5878-VCL (Del Ch. April 8, 2014); In re Orchard Enter., Inc. S’holder Litig., No. 7840-VCL (Del. Ch. Feb. 28, 2014). The decision yet again highlights areas that should be of concern to boards and their advisers in such transactions.