Posts tagged M&A

Court Of Chancery Upholds Duty To Not Solicit Competing Offer

Wavedivision Holdings LLC v. Millennium Digital Media Systems LLC, C.A. 2993-VCS (September 17, 2010)

There are many decisions pointing out that a board of directors may have a duty to accept a higher offer even after it has signed a merger agreement.  However, as this decision points out, if there is no violation of fiduciary duty in entering into an agreement not to solicit other offers, then the company is obligated to honor its commitment.

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Court Of Chancery Explains Revlon Analysis

In re Dollar Thrifty Shareholder Litigation, C.A. 5458-VCS (September 8, 2010)

 Everyone knows that the Revlon decision says that a board has to seek the best deal when the company is for sale. This decision clearly explains how the Court will review the board's actions.

First, the Court will review the process used.  Adequate advice, full information, careful consideration and independent decision makers are all important.

Second, the Court will decide if the path chosen by the board was reasonable.  Note that the board has the burden of proof on this issue.  The opinion is particularly helpful in explaining what is a "reasonable" board action and carefully points out that standard is less forgiving than the rational basis test used in a business judgment analysis.

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Court Of Chancery Explains Pill Limits

Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. 5465-VCS (August 12, 2010)

In this important decision, the Court of Chancery explains the limits on what may be included in a poison pill.  Briefly, the pill must not preclude a successful proxy contest.  This may mean that a pill that is triggered by a very low threshold is invalid.  However, a pill that does preclude joint proxy solicitations seems permissible.  In any event, the Unocal test will be applied.

The Court's very careful analysis is well worth studying.  For as it makes clear, the process used to adopt the pill is important with, as usual, the role of independent directors being critical. The effect of the pill under the particular circumstances is also important and while the Court does seem willing to accept the judgment of the Board when the process is sound,  the facts will be reviewed in a sort of balancing test to see if a proxy contest is precluded by the pill.

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Court Of Chancery Explains Delaware Freeze Out Law

In Re CNX Corporation Shareholders Litigation, C.A. 5377-VCL (July 5, 2010)

Perhaps no area of Delaware corporate law is as confusing as that applicable when a company is taken private by a majority owner in a freeze out of the other shareholders.  This scholarly opinion explains that at least 3 different standards of review have been applied by the Court of Chancery in its review of such transactions.  As a result, the Court has certified its latest decision for appeal to the Delaware Supreme Court with a request that the law be clarified.

Until that clarification is issued, however, this is the definitive analysis of Delaware law in this area and deserves to be read, carefully.

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Court of Chancery Explains Tender Offer/ Merger Review Standard

In Re CNX Gas Corporation Shareholders Litigation, C.A. 5377-VCL (May 25, 2010)

This is an important decision explaining the standard of review that the Court will apply in various circumstances involving a tender offer by a majority stockholder that is to be followed by a cash out merger.  Briefly, if the minority stockholders are effectively represented by a special committee with real bargaining power and the merger is subject to approval by disinterested stockholders, then the business judgment rule will apply and not entire fairness review.

Sometimes it is difficult to understand the Delaware corporate law. The law is constantly evolving. The evolution is often through long, closely reasoned opinions and there are a lot of those opinions to digest. This decision then is particularly helpful in doing the work of consolidating the past decisions into one unified approach.

It is also an interesting example of the depth of research and thinking that goes into the decisions of the Court of Chancery.  Actually, it is a little scary because it is hard to believe that we practitioners can ever get ahead of the Court .

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Court Of Chancery Enjoins Merger For Disclosure Violations

Maric Capital Master Fund, Ltd v. Plato Learning Inc., C.A. 5402-VCS (May 13, 2010)

It is important to note what sort of disclosure violations will casue an injunction to issue. This decision provides guidance on that issue by enjoining a merger until there are corrective disclosures over the discount rate used by the investment banker to give a fariness opinion, the projections of future income and the retention of management.

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Court of Chancery Explains Standard of Review for Tender Offer

In Re Cox Radio Shareholders Litigation, C.A. No. 4461-VCP (May 6, 2010)

The standard of review that a court applies to a transaction may determine the outcome of the litigation in a close case.  Here the Court explains that entire fairness does not govern the review of a noncoercive tender offer by a controlling shareholder.  This continues the trend away from applying the test of Kahn v. Lynch that is now restricted to mergers involving a controlling shareholder.  This decision also explains when a tender offer is deemed not to be coercive.

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Court Of Chancery Extends Revlon To Convertible Notes

 Binks v. DSL.net Inc., C.A. 2823-VCN (April 29, 2010)

In this unusual case filed by a pro se litigant, the Court extended Revlon duties to when a company issues convertible notes that will change control of the company upon conversion. This is consistent with past indications in other decisions.

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Court Of Chancery Upholds NOL Pill

Selectica Inc. v. Versata Enterprises, Inc., C.A. 4241-VCN ( February 26, 2010) In a case with an unusual factual setting, the Court of Chancery has upheld a poison pill with a 5% trigger. The very low trigger is explained by the need to protect a NOL that might be adversely affected by the acquisition of 5% of a company's stock. In its discussion of the Unocal standard of review that applies to defensive measures, the Court applied a very differential approach to the board's decisions. Arguably, that is not the higher standard of review that had been suggested by Moran as applicable to the adoption of a poison pill. This decision illustrates the Court's limited role in reviewing board's decisions that are not affected by any conflict of interest on the part of directors. Briefly, unless there is a duty of loyalty issue involved, directors just will not be second guessed in Delaware. This decision was affirmed . See 5 A3d 586 (Del Sup.) Share

Court of Chancery Holds Jilted Suitor May Recover Damages Even After Target Pays Termination Fee and Expense Reimbursement

NACCO Industries Inc. v. Applica Incorporated, C.A. No. 2541-VCL (December 22, 2009)

In this decision, the Court's newest Vice Chancellor, the Hon. J. Travis Laster, substantially denied a motion to dismiss a complaint filed by a jilted suitor who sought damages from the target and the winning bidder.  The complaint alleged that the target violated no-shop and prompt notice provisions of a merger agreement between plaintiff and the target that the target later terminated in favor of a superior proposal from the defendant winning bidder.  Plaintiff alleged that the winning bidder violated Delaware law by fraudulently misstating its intentions in filings required by the Securities Exchange Act of 1934 ("the Exchange Act).  The Court of Chancery upheld plaintiff's claims for breach of contract, tortious interference with contract, fraud, and civil conspiracy for fraud.  Although the Court emphasized that its decision was required under the plaintiff-friendly standard the Court applied in analyzing a motion to dismiss a complaint at the pleadings stage, the opinion has three critical lessons for practitioners concerning (i) the potential inadequacy of termination fee and expense reimbursement provisions to preclude a damages claim, (ii) the viability of state law claims arising out of misstatements in public filings required as a matter of federal law, and (iii) the relation of prior injunction proceedings to later claims for damages.

Payment of Termination Fee and Expense Reimbursement Does Not Preclude a Damages Remedy Where Jilted Suitor Can Allege Fraud Under State Law

First, the Court rejected defendants' arguments that plaintiff was not entitled to damages because the target paid a termination fee and expense reimbursement upon termination.  The Court held that if plaintiff were able to show a breach of the merger agreement between the jilted suitor and the target, it should be entitled to receive expectancy or reliance-based damages.  The Court recognized that any reliance-based recovery would have to overcome the jilted suitor's receipt of a bargained-for $4 million termination fee and $2 million expense reimbursement.  But at the pleadings stage, it was sufficient for the Court to note that the merger agreement excluded from the limitation on liability any termination arising from a willful or material breach of a representation, warranty or covenant in the merger agreement.  The Court also noted that the target's ability to terminate and pay fees without further liability required it to comply with its obligations under the no-shop and prompt notice provisions.

Exchange Act Does Not Preclude State Law Claims for Fraud

Second, the Court of Chancery explained that the mere fact that plaintiff's allegations against the winning bidder arose out of filings mandated by the Exchange Act did not deprive a state court of jurisdiction to resolve fraud claims brought solely under state law.  The Court noted that a Delaware Supreme Court decision, Rossdeutscher v. Viacom, Inc., 768 A.2d 8 (Del. 2001), and federal decisions comported with this result.  The Court's scholarly analysis of this issue at pages 31-42 culminates with emphasis on Delaware's interest in "preventing the entities that it charters from being used as vehicles for fraud."  In short, the opinion reaffirms that the Exchange Act contemplates a balance between state and federal roles and responsibilities and does not preempt fraud claims arising under state law.

Moreover, in permitting the jilted suitor to bring a fraud claim, the Court held it was entitled to rely on the bidder's statements in public filings.  Note that the Court does not require the jilted suitor to have bought securities or limit the damages to the loss it incurred as a result of its purchase of the target's stock.

Federal Decision Denying Preliminary Injunction Based on Same Claims of Alleged Falsity of Public Filings Does Not Preclude Later State Law Claim for Damages

Third, a decision rendered denying a preliminary injunction is not case dispositive.  Here an Ohio Federal District Court had denied an application by the jilted suitor to enjoin the winning bidder's merger with the target based on the same alleged misstatements that formed the basis of the jilted suitor's later state law claim.  The strength of that court's conclusion - "[c]ontrary to Plaintiff's position, the Court does not perceive any falsity in [the winning bidder's] filings when they are properly viewed alongside unfolding events." (NACCO Indus., Inc. v. Applica Inc., 2006 WL 3762090, at *7 (N.D. Ohio Dec. 20, 2006)) - did not preclude a different result on a different record and in a different procedural context.  The lesson for bidders and practitioners: Absent a binding final judgment, the parties proceed at their own risk.

Perhaps this opinion will focus the attention of transactional lawyers on the breadth of prompt notice provisions in merger agreements and the nature of their clients' intentions when acquiring stock in a target and making the filings required by the Exchange Act.  From a target's perspective, this decision reaffirms that contractual language in merger agreements concerning no-shops and prompt notice of competing proposals will be enforced when a party can plead injury from a breach.  From a bidder's perspective, this decision reinforces the importance of timely and accurate disclosure regarding a client's intentions in purchasing stock of a company that is in play.  The decision is also a reminder that a holding by a Federal district court denying an injunction on a preliminary record does not prevent a later assertion of a state law claim for fraud.  As the Court rendered the NACCO decision on a motion to dismiss it remains to be seen whether liability will be imposed on a fuller record.

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Court Of Chancery Explains Good Faith In Extending Time Limit To Accept Merger Consideration

Amirsaleh v. Board of Trade of the City of New York, C.A. 2822-CC ( January 19, 2010)

A recent trend is to offer 2 types of consideration in connection with a merger and to permit the stockholders to pick which they prefer, such as stock or cash. Of course, the time to pick must be limited as a practical matter. This decision deals with when the time limit may be extended and when a company may in good faith cut off the extensions. Basically, decisions that are made for neutral business reasons and not to favor a selected few will be respected by the Court.

Om August 16, 20121, the Delaware Supreme Court reversed this decision. The Supreme Court held that once a deadline was  waived, that waiver could not be retracted, at least with out setting a clear new deadline.

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Court of Chancery Explains Disclosure Rules

In re 3Com Shareholders Litigation, C.A. 5067-CC (December 18, 2009)

This decision explains that in litigating a disclosure claim it is important to relate the disclosures at issue to past decisions determining when a particular type of disclosure was actionable. Here the Court dealt with when projection must be disclosed and noted that not everything considered by management or a board must be put into the proxy statement.

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Court of Chancery Explains Anti-Reliance Clause

Airborne Health, Inc. v. Squid Soap, LP, C.A. 4410-VCL (November 13, 2009)

In this decision, the Court explains that an anti-reliance clause is different from an integration clause. The anti-reliance clause bars claims of reliance on extra contractual promises and must be very specific in doing so. A more general integration clause will not bar such claims of reliance.

There are two aspects of this decision that are particularly worth noting. Most importantly, this is the first extensive and significant opinion by the newest Vice Chancellor. It shows he writes wonderfully well and is fun to read.

Second, he brings to the task his extensive business background. That shows how important it is to have a judge who knows what he is talking about.

As a result, the future of the Court of Chancery looks secure.

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Court of Chancery Explains Lynch, Again

In re John Q. Hammons Hotels Inc. Shareholder Litigation. C.A. 758-CC (October 2, 2009).

The application of the Lynch doctrine to a merger is an often discussed topic. This decision does a great job of summarizing and explaining the rationale for applying the entire fairness test to a merger that has the majority stockholder on both sides of the deal. Given that Lynch has been applied to other deals where a majority stockholder was not involved [such as when a controlling stockholder dictates a self-dealing transaction], the parameters of that doctrine need such an explanation.

This decision also settles two other points. To shift the burden of proving fairness from the defendants, the vote of the minority stockholders must be by a majority of all the minority stockholders eligible to vote, not just a majority of those who did vote. Second, the vote must be binding and not waivable by a special committee.

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Court of Chancery Addresses Effect of Typical Merger Agreement Provision

Case Financial Inc. v. Alden, C.A. 1184-VCP (August 21, 2009)

This decision is of interest because it explains the effect of a common merger agreement provision that is often misunderstood. It is common for such an agreement to say that representations expire at a certain date, such as the merger date. What does that mean? Some would argue it means that any claim for misrepresentation ends that day. That is not correct.

As this decision explains, this language only means exactly what it says-the representation of a fact ends on that date and the facts may change afterwards. A claim for fraud or misrepresentation may still be filed later.

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