Archive for the ‘Court Cases’ Category

The Difficulties of Reconciling Citizens United with Corporate Law History

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday February 27, 2015 at 9:00 am
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Editor’s Note: The following post is based on a recent article earlier issued as a working paper of the Harvard Law School Program on Corporate Governance, by Leo Strine, Chief Justice of the Delaware Supreme Court and a Senior Fellow of the Program, and Nicholas Walter, associate in the litigation department at Wachtell, Lipton, Rosen & Katz. The article, Originalist or Original: The Difficulties of Reconciling Citizens United with Corporate Law History, is available here. Related research from the authors includes Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United, discussed on the Forum here. Research from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here, Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert Jackson, available here. and Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United by Leo Strine and Nicholas Walter, discussed on the Forum here.

Citizens United has been the subject of a great deal of commentary, but one important aspect of the decision that has not been explored in detail is the historical basis for Justice Scalia’s claims in his concurring opinion that the majority holding is consistent with originalism. In this article, we engage in a deep inquiry into the historical understanding of the rights of the business corporation as of 1791 and 1868—two periods relevant to an originalist analysis of the First Amendment. Based on the historical record, Citizens United is far more original than originalist, and if the decision is to be justified, it has to be on jurisprudential grounds originalists traditionally disclaim as illegitimate. The article is available on SSRN at http://ssrn.com/abstract=2564708.

Citizens United v. FEC struck down McCain-Feingold’s restraints on electoral expenditures by corporations. In his concurring opinion, Justice Scalia argued that the decision could be justified through the originalist approach to constitutional interpretation. In particular, Justice Scalia asserted that there was “no evidence” that, at the time of the Founding, corporations were not subject to government regulation of their ability to spend money to advocate the election or defeat of political candidates.

…continue reading: The Difficulties of Reconciling Citizens United with Corporate Law History

Jurisdiction Shifting—Creative Structuring Opportunities

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on Monday February 9, 2015 at 9:02 am
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Editor’s Note: Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Sarkis Jebejian, and David B. Feirstein.

As we have noted in prior M&A Updates, when dealmakers face a transaction where one or both of the parties are incorporated outside the Delaware comfort zone, they often confront unexpected structuring issues unique to entities or deals undertaken in that state or country. These may include corporate law, tax, accounting or structuring concerns and, most often, the deal teams will have to adjust the transaction terms to accommodate these issues.

But a recent decision from the Virginia Supreme Court is a timely reminder that, on occasion, these issues can be managed using some resourceful and creative structuring involving shifting jurisdictions. In the case, a Virginia corporation planned to sell its assets which, under Virginia law, would trigger appraisal rights for minority stockholders. Seemingly to avoid this result, the seller undertook a multi-step restructuring ahead of the sale which began with a “domestication” under Virginia law that shifted its jurisdiction of incorporation to Delaware. Under the Virginia statute, no appraisal rights apply to such a reincorporation. Once reincorporated in Delaware, the seller continued its restructuring, ultimately selling its assets to the buyer. Notably, Delaware does not provide for appraisal rights in an asset sale. The Virginia court dismissed the minority stockholders’ argument that they were entitled to appraisal rights. It rejected a “steps transaction” argument that looked to collapse the multiple steps and focus on the substance of the transaction (i.e., a sale of the company’s assets to the buyer), favoring instead the seller’s assertion that the first-stage move to Delaware had independent legal significance and therefore was effective to shift the appraisal rights analysis to Delaware law.

…continue reading: Jurisdiction Shifting—Creative Structuring Opportunities

Regulation S-K Failure to Disclose Creates Liability Under Section 10(b)

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday February 8, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Jonathan C. Dickey, partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication.

On January 12, 2015, the United States Court of Appeals for the Second Circuit issued an unprecedented decision holding that a company’s failure to disclose a known trend or uncertainty in its Form 10-Q filings, as required by Item 303 of SEC Regulation S-K, can give rise to liability under Section 10(b) of the Securities Exchange Act of 1934. Stratte-McClure v. Morgan Stanley, 2015 WL 136312 (2d Cir. Jan 12, 2015). The decision in Stratte-McClure is in direct conflict with the Ninth Circuit’s recent ruling in In re NVIDIA Corp. Securities Litigation, 768 F.3d 1046 (9th Cir. 2014) (“NVIDIA“), the only other court of appeals decision to squarely address this issue. The Second Circuit’s decision, while affirming the dismissal of the case against Morgan Stanley, potentially exposes issuers to greater liability under Section 10(b) for alleged failures to disclose known adverse trends and uncertainties as required by Item 303, in addition to the already existing exposure to regulatory claims arising out of such alleged disclosure violations. In light of Stratte-McClure, issuers should proceed with even greater care in crafting their MD&A disclosures, and in particular their disclosures related to known trends and uncertainties.

…continue reading: Regulation S-K Failure to Disclose Creates Liability Under Section 10(b)

Delaware in 2014: Increasing Deference to Directors’ Decision

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday February 3, 2015 at 9:02 am
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Editor’s Note: The following post comes to us from David N. Shine, partner and co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank publication by Mr. Shine, Steven Epstein, Philip Richter and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

A foundational premise of Delaware jurisprudence has been the courts’ deference to decisions made by independent and disinterested directors. Over the last year, the Delaware courts have continued a trend in their opinions toward increased judicial deference to the decisions of independent and disinterested directors. Thus, for example, the Delaware Supreme Court’s seminal MFW decision provides a roadmap to business judgment review even of controller transactions (which used to be reviewed under an entire fairness standard).

Other than MFW, however, the courts have not changed the fundamental ground rules for review of a sale process. Thus, as in the past:

…continue reading: Delaware in 2014: Increasing Deference to Directors’ Decision

2014 Delaware Decisions and What They Mean For 2015

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday February 2, 2015 at 9:09 am
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Editor’s Note: The following post comes to us from John L. Reed, chair of the Wilmington Litigation group and a partner in the Corporate and Litigation groups at DLA Piper LLP, and is based on portions of a DLA Piper Corporate Update; the complete publication is available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware has long been known as the corporate capital of the world, and it is now the state of incorporation for 66 percent of the Fortune 500 and more than half of all companies whose securities trade on the NYSE, Nasdaq and other exchanges. Each year, the Delaware courts issue a number of significant opinions demonstrating that the Delaware courts are neither stockholder nor management biased. Many of those recent and important cases are discussed in this post, which is intended to provide sufficient detail so as to be helpful to in-house counsel, but is also written in a way so that the often-long and complex Delaware decisions can be easily understood by directors and other fiduciaries. Takeaway observations are also provided.

…continue reading: 2014 Delaware Decisions and What They Mean For 2015

Recent Delaware Rulings Support Practice of “Appraisal Arbitrage”

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday January 29, 2015 at 9:02 am
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Editor’s Note: The following post comes to us from William E. Curbow, partner in the Mergers & Acquisitions practice at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a pair of memorandum opinions written by Vice Chancellor Glasscock and decided on January 5, 2015, the Court of Chancery of the State of Delaware, in In Re Appraisal of Ancestry.com, Inc. and Merion Capital LP v. BMC Software, Inc., found that neither the beneficial owner nor the record owner of shares for which appraisal is sought under Section 262 of the General Corporation Law of the State of Delaware is required to show that the specific shares for which it seeks appraisal have not been voted in favor of the merger in question by previous stockholders. The findings follow the analysis applied in In Re Appraisal of Transkaryotic Therapies, Inc., a 2007 case which preceded an amendment to Section 262(e) later that year permitting beneficial owners to petition for appraisal in their own name. The decisions support the practice known as “appraisal arbitrage”—a practice which has contributed to the more than tripling of incidents of appraisal petition filings in eligible deals over the past 10 years—for investors who buy stock in target companies following the record date for stockholder votes on mergers and highlight public policy considerations concerning the role of Delaware’s appraisal statute in merger transactions.

…continue reading: Recent Delaware Rulings Support Practice of “Appraisal Arbitrage”

2014′s Valuable Lessons For M&A Financial Advisers

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday January 28, 2015 at 9:04 am
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Editor’s Note: The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an article by Mr. Halper, Peter J. Rooney, and Colton M. Carothers that that first appeared in Law360. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

During the past year, Delaware and New York courts have issued a number of decisions that have important implications for financial advisers, as well as attorneys advising them, on mergers and acquisitions transactions. From the point of view of financial advisers and their legal counsel, the record is mixed. The two decisions by the Delaware Court of Chancery in In re Rural Metro Corp. Stockholders Litigation demonstrate the perils facing M&A financial advisers (especially financial advisers that are large, multifaceted financial institutions) in today’s litigation environment, where virtually all public deals are subject to shareholder litigation.

New York courts, on the other hand, in the case of S.A. de Obras Y Servicios v. The Bank of Nova Scotia, confirmed the protection that can be accorded to financial advisers by a well-crafted engagement letter governed by New York law and litigated in a New York forum. These and other decisions discussed below also provide useful guidance for counsel charged with protecting financial advisers providing M&A advisory services.

…continue reading: 2014′s Valuable Lessons For M&A Financial Advisers

New Decision Holds Some Post-Closing Purchase Price Adjustment Provisions Unenforceable

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday January 25, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Lisa R. Stark and Jessica C. Pearlman, partners in the Corporate/Mergers & Acquisitions practice at K&L Gates LLP, and is based on a K&L Gates publication by Ms. Stark and Ms. Pearlman. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In private company acquisitions, it is common for the buyer to require that a portion of the merger consideration be set aside in escrow as an accessible source of funds to cover the buyer’s post-closing indemnification claims relating to breaches of the target company’s representations and warranties and other specified contingencies. However, the buyer might demand additional protection if its losses under such claims exceed the escrow amount by insisting upon collection of the full loss from the target company’s stockholders. If the losses are significant and the indemnification obligations are uncapped or have a sufficiently high cap, this could require the target company’s stockholders to return their full pro rata share of the merger consideration to the buyer.

Although the Delaware courts have previously upheld post-closing purchase price adjustments, a recent decision found common provisions unenforceable in certain circumstances. Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., C.A. No. 9405 (Del. Ch. Nov. 26, 2014) (V.C. Noble). In this case, the merger agreement and related Letter of Transmittal (the “LoT”) required the target company’s stockholders (1) to indemnify the buyer, up to their pro rata share of the merger consideration, for the target company’s breaches of its representations and warranties, and (2) to release the buyer and its affiliates from any and all claims relating to the merger. The Court found these common provisions unenforceable under the facts in Cigna; accordingly, this decision has significant implications for other private company acquisitions by merger.

…continue reading: New Decision Holds Some Post-Closing Purchase Price Adjustment Provisions Unenforceable

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

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday January 24, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Halper, Peter J. Rooney, Christin Joy Hill, and Christine M. Smith. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On December 19, 2014, the Supreme Court of Delaware reversed the Delaware Court of Chancery’s November decision (discussed on the Forum here) 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.

The decision also reaffirms the type of record that must be made to support a mandatory preliminary injunction, a type of injunction that requires parties to take affirmative actions as opposed to merely maintaining the status quo. The Court found that the Chancery Court “blue penciled” the merger agreement, and in the process stripped Nabors of its contractual rights, by effectively inserting a go-shop provision into the contract where the parties never agreed to one. Moreover, the Chancery Court improperly did so without finding that Nabors aided and abetted a fiduciary duty breach and based its holding only on disputed facts that were not adjudicated following a trial. While the decision does not break new ground, it is significant in better defining directors’ duties when selling control and articulating the limits of a court’s ability to issue mandatory preliminary injunctions.

…continue reading: Delaware Supreme Court Holds That Revlon Does Not Require Active Market Check

Delaware Court Decisions on Appraisal Rights Highlight Need for Reform

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on Wednesday January 21, 2015 at 9:02 am
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Editor’s Note: Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on an article by Mr. Mirvis, Trevor S. Norwitz, Andrew J. Nussbaum, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Recent developments in the once sleepy area of appraisal rights have woken folks up. It seems that deals are subjected to intense scrutiny even in non-Revlon Revlon cases, and then face the mill of appraisal where claim-buying has become virtually enshrined. Below is one suggestion for legislative reform.


Two recent decisions of the Delaware Court of Chancery highlight the troubling expansion of stockholder appraisal rights. Delaware’s appraisal statute prohibits stockholders who vote in favor of a transaction from seeking appraisal for their shares. Notwithstanding this requirement, the Court of Chancery permitted claims to be pursued by a petitioner who purchased its shares after public announcement of the merger for the purpose of bringing an appraisal lawsuit and who was unable to show that the shares for which it sought appraisal had not been voted in favor of the deal. In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. Jan. 5, 2015); Merion Capital LP v. BMC Software, Inc., C.A. No. 8900-VCG (Del. Ch. Jan. 5, 2015). (Wachtell Lipton represents the respondent in the Ancestry case.)

…continue reading: Delaware Court Decisions on Appraisal Rights Highlight Need for Reform

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