Posts in M&A

Court of Chancery Explains Fair Summary Rules

In re Checkfree Corporation Shareholders Litigation, C.A. No. 3193-CC (November 1, 2007).

Exactly what needs to be included in a proxy statement for a merger vote seems to be a constant subject for debate. Only a "fair summary of the substantive work performed by the investment bankers" need be disclosed, not everything given to them. Moreover, when there is no competing bid, then to enjoin the merger the court must be convinced that a strong showing has been made of disclosure errors.

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Court of Chancery Upholds Use of Merger to Change Partnership Governance

Twin Bridges Limited Partnership v. Draper, C.A. No. 2351-VCP (September 14, 2007).

This decision deals with how to change the governance structure of a limited partnership by using a merger to amend the partnership agreement. At the outset, the Court ruled that the doctrine of independent legal significance would not be applied to a two-step transaction involving an amendment to a limited partnership agreement to permit a merger and then the merger itself. Instead, the Court ruled that the two transactions were integrated and thus, considered as if they were a single event. This may mean that the corporate law concept of treating two transactions separately if they are authorized by two different sections of the corporate law will not apply in the context of a limited partnership that is based on contract law.

In addition, the Court held that using a merger to add an additional, tie-breaking general partner to the partnership governance structure was permissible absent a clear prohibition in the partnership agreement.

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Court of Chancery Interprets Change of Control Provision

Law Debenture  Trust Company of New York v. Petrohawk Energy Corp., C.A. No. 2422-VCS (August 1, 2007).

Change of control provisions are common in employment contracts and other contexts. Here the provision was in a debenture. While primarily focusing on the specific language involved, this opinion is useful to others to see how to avoid triggering a change in control provision while at the same time implementing a merger.

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District Court Declines to Exercise Supplemental Jurisdiction Over Fiduciary Duty Claims, Grants Motion to Dismiss

Lemon Bay Partners LLP v. Hammonds, C.A. No. 05-327 (D.Del. June 26, 2007)

 

In this shareholder derivative action for breach of fiduciary duties against various corporate defendants, the Court held that the state law claims asserted so predominated the lone federal claim that exercise of supplemental jurisdiction was inappropriate. Plaintiffs, former shareholders of MBNA Corporation, asserted various claims against the defendants based on breach of fiduciary duties in connection with earnings reports and the merger of MBNA with Bank of America. Defendants moved to dismiss based on lack of subject matter jurisdiction, arguing that the Plaintiffs’ sole claim that rested on federal jurisdiction was so predominated by the state law claims as to make the exercise of the Court’s supplemental jurisdiction inappropriate. The Court concurred with the defendants, concluding that Plaintiffs’ federal law claim bore only a tangential relationship to the rest of the claims. The Court therefore granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.  More ›

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Court of Chancery Explains Proper Merger Negotiations

In Re: Lear Corporation Shareholders Litigation, C.A. No. 2728-VCS (June 15, 2007).

The tactics to use and the terms to seek in merger negotiations are often debated and misunderstood. In this decision, the Court sets out considerable guidance on what to do and what to avoid.  Moreover, the Court once again points out the problem created by leaving too much of the work to the CEO whose personal economic interests are also at stake. In short, that is a process to be avoided.

The Court's extended discussion of termination fees, go-shop provisions, voting agreements and matching rights are mandatory reading for anyone with a role to play in an M& A deal.

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Court of Chancery Overturns Standstill Agreement

In Re: The Topps Company Shareholders Litigation, C.A. No. 2786-VCS (June 14, 2007).

The duties of directors in a sale of the company situation are often difficult to articulate except to say they should get the best price. Here, however, the Court of Chancery examines a real world problem of dealing with two competing bids and explains in detail how to do so properly. Moreover, when as here the Court concludes the directors have been unreasonably favoring one bidder over another, it will intervene to level the playing field.

The Court required that the board of Topps, the baseball card company, end a standstill agreement it had with Upper Deck, amend Topps proxy materials that had unfairly portrayed the Upper Deck offer for Topps and otherwise act to be sure that Upper Deck's proposal to acquire Topps was fairly considered. The decision also illustrates the problems management may have when they are given assurances of continued employment by one bidder who they then seem to favor in the bidding process.

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Court of Chancery Upholds Short Form Merger With Odd Vote

Matulich v. Aegis Communications Group. Inc., C.A. No. 2601-CC (May 31, 2007).

Under Section 253 of the DGCL, a parent corporation that owns 90% or more of the stock entitled to vote in a subsidiary may merge the subsidiary into itself without a stockholder vote. Here, however, some of the subsidiary's stock had the right to 'consent' to major corporate events, but not to vote on those events. Illustrating the importance of adherence to proper corporate formalities, this decision holds that the right to "'consent' is not the same thing as the right to vote". Hence, the merger was valid when the parent company had 90% of the voting stock of the subsidiary, even if the minority stockholder with the right to consent to the merger did not do so. In short, be careful how you write a corporate charter because the words used really count.

On January 15, 2008, the Delaware Supreme Court affirmed the Court of Chancery's judgment.

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Superior Court Grants Motion to Dismiss Claims Raised in Arbitration, Denies Motion to Dismiss Separate Breach of Contract

Mehiel v. Solo Cup Company, No. 06C-01-169-JEB, 2007 WL 901637 (Del. Super. Ct. Mar. 26, 2007).

This case arose from defendant’s acquisition of SF Holdings and relates to disagreements over the amount of SF Holdings’ working capital adjustments and, by extension, its purchase price. The plaintiff, chairman and CEO of SF Holdings, brought this action in his capacity as the shareholders’ representative for fraud in the inducement, breach of contract, and unjust enrichment. 

Shortly after the parties entered into the merger agreement—and days before closing—they found themselves deadlocked and unable to reach an agreement on the working capital adjustments. To resolve their differences, the parties appointed a neutral auditor as provided in the merger agreement, which further stated that the auditor’s decision would be final, binding, and conclusive, making no mention of appeal or reconsideration. The auditor resolved several issues in favor of the purchasing company (defendant), and plaintiffs’ action followed. More ›

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Court of Chancery Explains Revlon Duties

In re Netsmart Technologies, Inc., C.A. No. 2563-VCS, 2007 WL778612 (Del. Ch.).

When a company is to be sold, then the board of directors have so-called Revlon duties that basically come down to getting the best price. There is no set methodology or procedure the board must employ.  However it proceeds, its actions will be subject to a level of increased scrutiny by a reviewing court. In other words, the normal business judgment rules do not apply in such a case. This important decision illustrates what the Court of Chancery expects a board in "Revlon land" to do. 

Here the board was faced with two possible sets of potential buyers for their company: (1) so-called strategic investors who would acquire the company to run it as part of their other business interests and (2) private equity investors who would let current management run the company after taking it private. The board never really explored the possibility of a sale to strategic investors and, apparently, preferred a sale to private equity from the outset. Only one bidder stayed the course and the court was faced with a complaint that the price was not high enough. After finding some disclosure problems with the proxy materials, the Court held that the stockholders should be given an amended disclosure statement that included more financial information and enjoined the meeting until that was done. More importantly, the Court also ordered that the stockholders be told that their board had not really pursued a sale to strategic investors. More ›

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Court of Chancery Sets Disclosure Rule For Banker

Ortsman v. Green, C.A. No. 2670-N (Del. Ch. February 28, 2007).

There is sometimes uncertainty as to what should be included in a disclosure statement that seeks stockholder approval of a merger. This brief opinion makes it clear that the basis for an investment banker's fees should be included, particularly when the fee is dependent in some degree on the merger's completion.

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Court of Chancery Finds Hidden Appraisal Right

Louisiana Municipal Police Employees' Retirement System et al v. Crawford, C.A. No. 2635-N (Del. Ch. February 16, 2007).

In Delaware's corporate law, the doctrine of independent legal significance has a great importance. Basically, this means that if a transaction is authorized by any provision of our law, then it may go forward even if, in substance, it may seem to violate some other provision of that law. Thus, for example, a merger that really seems to be a sale of assets is still valid if it complies with the terms of the statute governing mergers. Here, the strength of that doctrine is called into question.

To make the merger of Caremark and CVS more competitive to a third party offer for Caremark, the directors of Caremark resolved to pay a special dividend to the Caremark stockholders. The problem was that the dividend was conditioned on those stockholders approving the merger with CVS. The plaintiffs argued that this dividend was really a cash payment as part of the merger consideration and thus triggered stockholder appraisal rights that occur when stockholders receive cash in a merger. The Court of Chancery agreed with the plaintiffs and rejected application of the doctrine of independent legal significance.

The result clearly was influenced by the evidence that the Caremark directors were motivated to declare the dividend to make the merger go through and thereby receive large personal benefits in the form of change of control payments. The point then is that when  the so-called "independent" event is really tied to personal interest and not to just getting a deal done, the Court is less likely to give it recognition as truly independent. More ›

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Court of Chancery Upholds Post-Closing Adjustment Clause

AHS New Mexico Holdings, Inc. v. Healthsource Inc., C.A. No. 2120-N (Del. Ch. February 2, 2007).

It is often the case that a merger agreement or sale of stock will provide for an adjustment to the closing price based on post-closing events. This decision holds that in such cases the procedures for submitting any dispute are enforceable and absent agreement of the parties will include all of their disputes over the adjustment. This later point is important because it permits the parties to reach preliminary agreements on some parts of the dispute while preserving their right to take the whole dispute to the chosen forum for resolution if all points are not resolved by negotiations. More ›

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Superior Court Dismisses Suit by Corporation Representing Former Shareholder for Lack of Standing

Appriva Shareholder Litigation Co. v. ev3, Inc., C.A. No. 05C-11-208 JOH, 2006 WL 2555348 (Del. Super. Ct. Aug. 24, 2006). Plaintiff entity controlled by certain former stockholders of acquired corporation sued acquirer alleging breach of merger agreement and fraud. Upon motion by defendant acquirer, the court dismissed the action on ground that plaintiff lacked standing. The court noted that the merger agreement appointed two individuals as shareholder representatives who were required to act in concert, one of whom the complaint reflected was not affiliated with plaintiff in any way. The court also noted that the merger agreement did not permit assignment of the shareholder representatives' rights without defendants' consent, which was never given. Finally, the court rejected plaintiff's argument that it be permitted to bring the action as a third-party beneficiary as inconsistent with the merger agreement's express terms. Share

Court of Chancery Clarifies Right To Buy Control

Abraham v. Emerson Radio Corp. C.A. No. 1845-N, 2006 WL 1879205 (Del. Ch. July 5, 2006). This decision makes it clear that a controlling stockholder may sell control without fear of liability for the actions of the buyer after the transaction closes, with few exceptions. While it has long been the rule that a stockholder may deal with its shares as it sees fit, case law recognized that a controlling stockholder has a fiduciary duty to its company and the minority owners by virtue of the controller's ability to control what the company does. How that duty applied in the sale of control context is the question addressed in this case. More › Share

Court of Chancery Finds Merger Between Controlling Stockholder and Subsidiary Unfair

Gesoff v. IIC Indus. Inc., C.A. No. 19473, 2006 WL 1458218 (Del. Ch. May 18, 2006). Plaintiff filed a class action, claiming a merger was the subject of unfair dealing and produced an unfair price. Another plaintiff filed a statutory appraisal claim based on the same merger. More › Share