Corporate Law Update from the First State: The Latest Developments in Delaware Corporate Law, Cases and Statutes

Transcription

1 Corporate Law Update from the First State: The Latest Developments in Delaware Corporate Law, Cases and Statutes Andrew M. Johnston Morris, Nichols, Arsht & Tunnell LLP Dallas Bar Association Securities Section March 28, 2016 Noon

2 Issues and Cases MFW controlling stockholder squeeze-outs Cornerstone independent directors KKR Financial Revlon claims DGCL Amendments VAALCO Energy director removal provisions Trulia disclosure only settlements 2

3 MFW A new paradigm for squeeze-out transactions by controlling stockholders Standard of review will change from entire fairness to business judgment rule if six conditions are met Jurisprudential underpinning of the case the controller has given up control and influence over the transaction process 3

4 MFW The six conditions: the controller conditions procession of the transaction on approval of the transaction by a committee of independent directors and the vote of a majority of the minority stockholders the committee is independent the committee is empowered to select its own advisors and to say no definitely the committee meets its duty of care in negotiating a fair price the minority vote is informed and the minority vote is uncoerced 4

5 MFW The first condition must be satisfied at the controller s inception of the proposal It is not good enough that the as negotiated transaction has the two conditions Danfoss [the majority stockholder] did not expressly condition the Merger on approval by a special committee before proceeding with the transaction MFW makes clear that its procedural protections apply only to a controller who, before the transaction begins, unambiguously disables itself at the board and stockholder level by conditioning its proposed transaction on approval by a fully empowered special committee and an informed and uncoerced majority of the minority vote. That did not happen here, so entire fairness applies. In re Sauer- Danfoss, Inc. S holder Litig., C.A. No VCL (Del. Ch. Jan. 22, 2016 (Order partially granting, partially denying motions for summary judgment)) 5

6 MFW As with any new standard, questions remain What does the 4 th condition mean? The Court noted that the complaint in MFW would have survived a motion to dismiss under this new standard because it alleged that the independent committee might not have negotiated effectively. For example, the profits and cash flow multiples allegedly were well below comparable transactions and the final Merger price was two dollars per share lower than the trading price only about two months earlier. According to the Supreme Court: These allegations about the sufficiency of the price call into question the adequacy of the Special Committee s negotiations, thereby necessitating discovery on all of the new prerequisites to the application of the business judgment rule. 6

7 MFW What happens if the stockholders vote the deal down? Can the controller propose another transaction? If so, when? What s left (if anything) of the so-called Pure Resources tender offer structure? 7

8 Cornerstone Supreme Court holds that independent directors (including directors who served on a special committee) who are protected by a Section 102(b)(7) provision will be entitled to be dismissed from an entire fairness case challenging a controlling stockholder transaction unless the plaintiff asserts well pled claims for breach of fiduciary duty against the independent directors that are not exculpated under a Section 102(b)(7) provision. 8

9 Cornerstone The case resolved an issue that had bedeviled the Chancery Court for years in a conflict transaction, at what stage of the lawsuit could the independent directors be dismissed from the case Earlier Supreme Court case suggested dismissal was appropriate only after a full factual record had established the basis for liability because fiduciary duty analysis can be intertwined in entire fairness cases 9

10 KKR Financial Supreme Court holds that, post-closing (when only money damages claims are left), a fully informed, uncoerced vote of a majority of disinterested stockholders approving a merger changes the standard of review in Revlon transactions to business judgment. Places focus on pre-vote relief (injunction, disclosure claims, other equitable relief). Combined with the Supreme Court s holding in C&J Energy Services, KKR Financial signals another prodirector shift in Delaware law. 10

11 KKR Financial But again, open issues remain No coerced vote break up fees? Naked no-vote fees? Disclosure and banker conflicts How far can the case be pushed? Private companies? Controlled companies? How to square with Trulia? 11

12 DGCL Amendments Council of the Corporate Law Section of the DSBA is generally the sole source of amendments to the DGCL and the alternate entity statutes Council is made up of representatives from the big firms, small firms, primarily defense firm, primarily plaintiffs firms Some recent notable exceptions B-Corp Last year s appraisal amendments Forum selection and fee shifting 12

13 DGCL Amendments Several important amendments this year - Appraisal Two-step merger provision (251(h)) Default rules for board committee and subcommittee action 13

14 DGCL Amendments - Appraisal De minimus exclusion from appraisal relief Public company 1% or less of shares covered by demand Value of consideration provided under the merger agreement for the shares that are covered by appraisal demand exceeds $1M Aimed at nuisance appraisal demands 14

15 DGLC Amendments - Appraisal Some objections to interest rate (5% over the Federal Reserve discount rate) Amendments allow (but don t require) buyer to pay petitioners some or all of the purchase price to toll the accrual of interest Buyers can figure out their cost of capital and decide for themselves what is most economically advantageous 15

16 DGCL Amendments - Appraisal Bigger policy issues deferred Primary issue buying into appraisal claims Some of the cases have helped dampen the controversy around this issue For instance, recent cases hold that if deal price is product of a broad, well run auction, courts have found the deal price to be the fair value 16

17 DGCL Amendments - Appraisal Issue continues to be studied by the Council 17

18 DGCL Amendments Two-step Mergers Section 251(h) added to the merger statute 3 years ago Background top-up options Well received by deal planners but. Delaware lawyers drafting a statute for a transaction structure that is much more than a creature of Delaware law has resulted in the need to refine the statute as we better understand how tender offers work and what is really important to deal makers in these transactions 18

19 DGCL Amendments Two-step Mergers This year s amendments address several issues Eligibility public company with a class of privately held securities Minimum condition (vs. any and all requirement) Roll-over shares When are shares received in the TO so that the merger can be effected? 19

20 DGCL Amendments Two-step Mergers MNAT tracks each 251(h) deal A few recurring issues we see: Rollover shares included in shares owned (this will be addressed by 2016 amendments) Can t have an LLC as merger sub Appraisal rights in exchange offer, even if shares are publicly traded 20

21 DGCL Amendments Board Committees Amendments provide default quorum and voting rules for committees and subcommittees 21

22 VAALCO Energy Director Removal VAALCO had a non-staggered board whose members were elected every year Its charter also contained a provision that provided that directors can only be removed for cause 22

23 VAALCO Energy Director Removal What s the problem? Section 141(k) provides that: (k) Any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except as follows: (1) Unless the certificate of incorporation otherwise provides, in the case of a corporation whose board is classified as provided in subsection (d) of this section, stockholders may effect such removal only for cause; or (2) In the case of a corporation having cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against such director's removal would be sufficient to elect such director if then cumulatively voted at an election of the entire board of directors, or, if there be classes of directors, at an election of the class of directors of which such director is a part. Whenever the holders of any class or series are entitled to elect 1 or more directors by the certificate of incorporation, this subsection shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. 23

24 VAALCO Energy Director Removal VAALCO was the target of an activist campaign and the issue of the validity of this provision came in to focus Plaintiffs sued claiming the removal provision violated Section 141(k) Case assigned to VC Laster 24

25 VAALCO Energy Director Removal VAALCO had three arguments First Delaware law (and specifically Section 102(b)(1)) allows flexibility in this regard Section 102(b)(1) provides: (b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters: (1) Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State. Any provision which is required or permitted by any section of this chapter to be stated in the bylaws may instead be stated in the certificate of incorporation 25

26 VAALCO Energy Director Removal Under Jones Apparel Group v. Maxwell Shoe Company, Section 102(b)(1) should provide sufficient authority to change the Section 141(k) rule Maxwell Shoe a 2004 case about record dates Charter provided for an automatic record date that did not allow the board discretion or authority to set the date as Section 213 contemplates Section 213 does not include an unless otherwise provided provision 26

27 VAALCO Energy Director Removal Jones Apparel, which was running a consent solicitation to remove the Maxwell Shoe board, challenged the charter provision, claiming it violated Section 213 VC Strine disagreed: DGCL is broad and enabling Failure to include unless otherwise provided in Section 213 is not fatal Provision at issue was not contrary to the laws of Delaware: The court must. carefully consider the statutory text at issue and the policy values at stake as reflected not only in the DGCL but also in our common law, and only invalidate a certificate provision if it transgress[es] i.e., vitiates or contravenes a mandatory rule of our corporate code or common law. Although the identification of what is mandatory might at times be difficult, the approach [of an earlier Supreme Court opinion] leaves the space for private ordering that the General Assembly s adoption of 102(b)(1) and 141(a) clearly contemplated. 27

28 VAALCO Energy Director Removal Second, VAALCO argued everyone does this and provided to the Court a list of 175 public corporations that had similar provisions Finally, VAALCO argued that Section 141(k) permits a classified board to have 1 class and thus the provision does not run afoul of the statute 28

29 VAALCO Energy Director Removal VC Laster rejected VAALCO s arguments. Statute is clear. Section 102(b)(1) does not help because the charter provision is contrary to law Not surprising: Director election and removal is foundational to our corporate governance scheme 29

30 VAALCO Energy Director Removal The everyone does it defense was unpersuasive to VC Laster: To the extent that this upsets expectations at some give-or-take 175 public companies that have some strange combination of provisions that attempts to achieve the same result, that is just a consequence of people not reading the statute. And I think the defendants, quite appropriately, backed away from this argument today. Just as all the other kids are doing it wasn t a good argument for your mother, and just as all the other drivers are speeding still isn t a good argument for the highway patrolman, the idea that 175 other companies might have wacky provisions isn t a good argument for validating your provision. And I would note that there used to be around 6,000 public companies out there. By conservative measures, that number has dropped to around 4,000. So what we re talking about is less than 5 percent. Even giving the defendants the best number, we re talking about, what, 3-ish, 4-ish percent. There s 3-ish or 4- ish percent that will do as we know now from the Internet, there is a 3-ish, 4-ish percent that would dare to be different pretty much no matter what. So I am not one who would be swayed by those examples. And if people have to go and fix things, so be it. 30

31 VAALCO Energy Director Removal VC Laster also rejected the 1 class classified board by digging into the legislative history of Section 141 and concluding, after citing to an article written by Sam Arsht and Lew Black in 1974, that: And one of the things that they talk about in there about 141(d) is that part of the goal of including this language divided into 1, 2 or 3 classes was to make clear in combination with the language about The certificate of incorporation may confer upon holders of any class or series of stock the right to elect 1 or more directors, et cetera, that that second half of 141(d), those special directors, special stock directors, were not an additional class of directors. So there was uncertainty about whether that would be an additional class of directors, such that if you had a three-class classified board plus special directors, do you suddenly have four classes? And what Arsht and Black explain is no, that s not the case. You then still only have three classes. I suspect that this 1, 2 or 3 classes was getting at the idea that if you only have a straight board, you only have one class of directors, even if you have special stock directors. I don t think that it s not designed to create the somewhat oxymoronic idea of a one-class classified board. It s rather, saying that if you have special stock directors, they re just part of the board along with everybody else I think it s one thing if you went out to your stockholders and said We are declassifying, and we are declassifying from three classes into one class, and our newly re-classified one-class board will have all the attributes of a classified board under Delaware law and, therefore, will not allow removal except for cause. That at least would squarely present the issue of what 1, 2 or 3 classes means under (d). Here, what we have is a declassified straight board. We have a declassified straight board that does not try to get into 141(k)(1) that way but, rather, admits that it is a straight board and simply looks to that 141(d) example by analogy as to say Hey, there s another way we could have done this. We didn t do it, but you ought to let us do it, anyway. 31

32 VAALCO Energy Director Removal Why is this important to you? The 175 companies that VAALCO listed are getting demands from stockholder plaintiffs and getting sued in some cases and the plaintiffs bar is looking for others Looking for quick hit settlements Moral of the story check your client s charter and bylaws 32

33 Trulia The Chancery Court rejected a disclosure-only settlement in the amount of $375,000 (in a transaction valued at $2.5 billion) The Court notes that a disclosure-only settlement is the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. The Court found that the following disclosures were not material, or even helpful, for the stockholders: Synergy numbers in banker s value creation analysis Selected comparable transaction multiples Selected public trading multiples (already publicly available) Implied terminal EBITDA multiples for a relative discounted cash flow analysis 33

34 Trulia On meaningful disclosures: The Court [in Pure Resources] held that, under Delaware law, when the board relies on the advice of a financial advisor in making a decision that requires stockholder action, those stockholders are entitled to receive in the proxy statement a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely.... A fair summary, however, is a summary. By definition, it need not contain all information underlying the financial advisor s opinion or contained in its report to the board. Indeed, this Court has held that the summary does not need to provide sufficient data to allow the stockholders to perform their own independent valuation. The essence of a fair summary is not a cornucopia of financial data, but rather an accurate description of the advisor s methodology and key assumptions. In my view, disclosures that provide extraneous details do not contribute to a fair summary and do not add value for stockholders. (emphasis added). 34

35 Trulia The Court expressed its preference for disclosure claims to be resolved on their merits as part of an adversarial process: Disclosure claims arising in deal litigation optimally should be adjudicated outside of the context of a proposed settlement so that the Court s consideration of the merits of the disclosure claims can occur in an adversarial process without the defendants desire to obtain an often overly broad release hanging in the balance. The Court pointed to the fact that virtually every transaction is challenged, and that plaintiff has the leverage of a threatened injunction, which incentivizes defendants to settle quickly The Court notes that mootness dismissals might provide a logical and sensible framework as they are more adversarial insofar as defendants, who do not obtain a broad release, are incentivized to oppose fee requests 35

36 Trulia Court notes that litigants who continue to pursue disclosure-only settlement can expect the court to be increasingly vigilant in scrutinizing the give and the get of such settlements to ensure their fairness To be more specific, practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently. In using the term plainly material, I mean that it should not be a close call that the supplemental information is material as that term is defined under Delaware law. Incidentally, following the settlement hearing, the parties had endeavored to narrow the scope of the release by removing unknown and foreign claims from ambit of the release, and adding a carveout for claims arising under Hart Scott-Rodino, the Sherman Act, and the Clayton Act It is one thing for the Court to judge the fairness of a settlement, even in a nonadversarial context, when there has been significant discovery or meaningful motion practice to inform the Court s evaluation. It is quite another to do so when little or no motion practice has occurred and the discovery record is sparse.... (in Trulia, less than 3,000 pages of documents were produced and 3 depositions were taken) 36

37 Trulia What do we do about Trulia? Following the Court s decision in Trulia, the Court has attempted to guide parties about the possibility of disclosure-only settlements going forward 37

38 Trulia In re NPS Pharmaceuticals S holder Litig., C.A. No VCN (Del. Ch. Feb. 18, 2016) Outcome: Court approves settlement in the amount of $370,000 What do we do about Trulia? Release: Parties negotiated a release that mirrors what the Court approved in CareFusion Scope: Release covers all claims involving the transaction, but not appraisal claims or antitrust claims. Includes unknown claims and securities claims, but only insofar as they arise out of or relate to the transaction. Plaintiff s counsel investigated potential federal securities violation and found there not to be any Disclosure: Unlevered free cash flow projections prepared by management out to 2030 Company-wide R&D expenses, SGA expenses, net operating loss carry forwards used, taxes through 2024 Probability of regulatory approval of certain drugs Board s consideration of Goldman s prior relationship with buyer No individual on Goldman team who had worked on prior transaction involving buyer Trulia came out after notice was sent out, and counsel tried as best as we can to keep up with the changes. The Court was sympathetic to the fact that the law had changed after the settlement was agreed upon, but noted that it was bound by Trulia. The plaintiff pointed out that the Court in Trulia acknowledged that there could have been supplemental disclosures that would support a release broader than simply a release of disclosure claims No one knows with 100 percent certainty how Trulia standard is going to work 38

39 Trulia In re BTU Int l Inc. S holder Litig., C.A. No CB (Del. Ch. Feb. 18, 2016) Outcome: Court approves settlement in the amount of $325,000 Release: Prior to the settlement hearing (because of the changes in the law), the parties agreed to limit the scope of the release-limited only to claims related to any disclosures (or lack thereof) to BTU s stockholders concerning the Merger and any fiduciary duty claims concerning the decision to enter into the Merger. Plaintiff s counsel represented that I don t think that it can possibly encompass any regulatory, antitrust, or private-action claims that are not implicated by that. Disclosures: Standstill agreements and notices sent to counterparties to NDAs informing them that they would construe the standstill as to not be in effect. (Notice did not produce a topping bid) Previously undisclosed projections (standalone and combined company) (cut against merger-growth in sales and revenue right before announcement of merger) Two officers who negotiated the merger consideration also negotiated their continued employment and potential employment of one of the directors Did not obtain disclosure of cash flow estimates on a standalone basis-commercially sensitive 39

40 Trulia In re BTU Int l Inc. S holder Litig., C.A. No CB (Del. Ch. Feb. 18, 2016) (Cont.) Court s Analysis: Court notes that it would be wise [for parties] to pursue the options enumerated in Trulia in the future Court analyzes the give and the get : The get - Court determines that the get for the stockholders is sufficient to support a settlement-disclosures: Company issued notices to parties who had entered into NDAs that they were free to privately request a waiver of their standstills. Court determines this is valuable Management projections-standalone forecasts indicating growth in revenue and sales prior to announcement of merger. Court determines that this is valuabledisclosure of projections provided stockholders with a key input to DCF analysis that they could not find elsewhere. Standalone forecasts had been revised significantly downward-genuine negative information for stockholder to consider. The give - The Court determines that the release is consistent with the scope of a release that would pass muster under Trulia because it is limited to the release of disclosure claims and fiduciary duty claims relating to the decision to enter into the merger. But, the Court notes that counsel in the future should not include words like foreign claims or regulatory claims because they have no relevance to the nature of claims that are being released. 40

41 Trulia A New Regime? Expectations for the Future Releases for disclosure claims or fiduciary duty claims related to sale process only where disclosures are plainly material (Trulia) Potential for broader release only for real, financial benefit (Intermune) Mootness dismissals may become more common (Trulia) Litigate disclosure issues post-closing 41

42 Trulia Other Considerations Is expedition even guaranteed for disclosure claims? In Johnson v. Driscoll, C.A. No VCL (Del. Ch. Feb. 3, 2016), the Court denied expedition where plaintiff asserted disclosure claims, but did not rely on the factors for expedition in doing so. Rather, the Court held that such claims could be decided post-closing. The Court encouraged both parties to re-evaluate their claims, asking Plaintiff to evaluate whether there was a real wrong, and asking defendants to moot their claims or stand on their existing disclosures and litigate post-closing. The Court observed that it did not want[] to create a system where we substitute ritualized litigation leading to disclosure-only settlements and replace that with ritualized litigation leading to mootness fee buy-offs. 42

43 Trulia What do directors really want? Complaints that every public deal gets sued vs. but I can settle and get a release 43

44 Speaker Andy is a member of the Delaware Corporate Counseling Group and a member of the Firm s Executive Committee. His practice includes advising corporations and their counsel on a wide variety of Delaware corporate law issues including those relating to the fiduciary duties of directors, officers and stockholders, financings, conflict of interest transactions, corporate governance, indemnification and director liability. He has worked closely with boards of directors, special committees of directors, and managements of public and private corporations in conflict transactions, proxy contests, sale of control and business combination transactions and hostile takeovers. Andy serves on the Drafting Subcommittee of the Corporate Practice Committee of the Business Law Section of the American Bar Association, which is responsible for preparing model corporate documents for both Delaware and the Model Act. Since 2007, he has been included in The Best Lawyers in America as a leading Delaware attorney for Corporate Law. Andrew M. Johnston PARTNER Delaware Corporate Counseling (302) T ajohnston@mnat.com 44

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