Posts Tagged ‘Delaware cases’

Enforceability of Obligations Against Non-Signatories in Private Mergers

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, David B. Feirstein, and Joshua M. Zachariah. 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. Additional articles discussing Cigna Health and Life Insurance Co. v. Audax Health Solutions Inc. et al. are available here.

A recent Delaware decision in Cigna provides important guidance on simple yet important steps that buyers of private companies using a merger structure can take to more effectively impose certain post-closing obligations on stockholders who do not sign agreements to support the deal.

While a stock purchase involves entering into an agreement with each stockholder of a target company, creating an avenue to bind each selling stockholder to terms such as indemnification obligations, non-compete clauses and general releases, in a merger structure direct contractual relationships are only established with those target stockholders who may sign a written consent or voting agreement to support the merger. This leaves buyers facing the challenge of how to impose these post-closing obligations on stockholders who do not consent or sign a voting agreement (“non-signatory stockholders”).

…continue reading: Enforceability of Obligations Against Non-Signatories in Private Mergers

Delaware Court Provides Guidance in a Sale-of-Control Situation

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 10, 2014 at 9:02 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, Penelope A. Graboys Blair, Peter J. Rooney, and Katherine L. Maco. 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 November 25, 2014, the Delaware Court of Chancery issued a decision in In Re Comverge, Inc. Shareholders Litigation, which: (1) dismissed claims that the Comverge board of directors conducted a flawed sales process and approved an inadequate merger price in connection with the directors’ approval of a sale of the company to H.I.G. Capital LLC; (2) permitted fiduciary duty claims against the directors to proceed based on allegations related to the deal protection mechanisms in the merger agreement, including termination fees potentially payable to HIG of up to 13% of the equity value of the transaction; and (3) dismissed a claim against HIG for aiding and abetting the board’s breach of fiduciary duty.

The case provides important guidance to directors and their advisors in discharging fiduciary duties in a situation where Revlon applies and in negotiating acceptable deal protection mechanisms. The decision also is the latest in a series of recent opinions addressing and defining the scope of third party aiding and abetting liability.

…continue reading: Delaware Court Provides Guidance in a Sale-of-Control Situation

Delaware Court Preliminarily Enjoins Merger Due to Flawed Sales Process

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday December 7, 2014 at 9:06 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 November 24, 2014, the Delaware Court of Chancery preliminarily enjoined for thirty 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. In a bench ruling in the case, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., Vice Chancellor Noble concluded that “it is not so clear that the [C&J] board approached this transaction as a sale,” with the attendant “engagement that one would expect from a board in the sales process.” Interestingly, the Court called the issue a “very close call,” and indicated it would certify the question to the Delaware Supreme Court at the request of either of the parties (at this time it does not appear either party has made a request). The decision provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is assuming minority status in the combined entity yet also acquiring management and board control.

…continue reading: Delaware Court Preliminarily Enjoins Merger Due to Flawed Sales Process

Advantages of Board Actions on a “Clear Day”

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 Matthew Solum. 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 its landmark 1971 Chris-Craft decision, the Delaware Supreme Court observed that “inequitable action does not become permissible simply because it is legally possible.” This quote aptly captures the two-stage inquiry that Delaware courts will apply when reviewing a challenged board action—first determining the legality of the action, and second appraising the equity, or fairness, of the act and its application under the specific circumstances.

…continue reading: Advantages of Board Actions on a “Clear Day”

Pontiac General Employees Retirement System v. Healthways, Inc.

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday November 17, 2014 at 9:15 am
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Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Alexandra D. Korry, John E. Estes, S. Neal McKnight, and William J. Magnuson. 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 bench ruling [1] issued on October 14, 2014, the Delaware Court of Chancery (VC Laster) declined to dismiss fiduciary duty claims against the directors of Healthways, Inc. (“Healthways”) and an aiding and abetting claim against SunTrust Bank (“SunTrust”), the lender administrative agent, for entering into a credit facility of Healthways that has a dead hand “proxy put” provision. The provision at issue allows the lenders to declare an event of default and accelerate the debt in the event that a majority of the Healthways board during a period of 24 months is comprised of “non-continuing” directors, including directors initially nominated as a result of an actual or threatened proxy contest. Rejecting the director defendant claims that the fiduciary duty claims were not ripe, the Court stated that Healthways’ stockholders may presently be “suffering a distinct injury” from the deterrent effect of the “proxy put” and the fact that the dissident directors are non-continuing directors under the “proxy put.” In addition, in a further significant development, the Court stated that its prior holdings on the “entrenching” nature of “proxy puts” placed SunTrust on notice that a borrower’s board runs the risk of breaching their fiduciary duties if they accept dead hand “proxy puts” in the borrower’s debt documentation without negotiating significant value in return. Because the dead hand “proxy put” was included in Healthways’ credit agreement shortly after the threat of a proxy contest had occurred, the Court found that there was sufficient “knowing participation” pled to survive a motion to dismiss the aiding and abetting claim against SunTrust.

…continue reading: Pontiac General Employees Retirement System v. Healthways, Inc.

Controlling Stockholders in Delaware—More Than a Number

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 and David B. Feirstein. 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.

Two recent Chancery Court decisions, Crimson Exploration and KKR Financial, confirm that Delaware takes a flexible and fact-specific approach to determining whether a stockholder is deemed to be “controlling” for purposes of judicial review of a transaction. It is important for dealmakers to understand when the courts may make a determination of control, both to properly craft a defensible process and to understand the prospects for resulting deal litigation.

…continue reading: Controlling Stockholders in Delaware—More Than a Number

Delaware Court Dismisses Action Against Seller’s Directors and Financial Advisor

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 7, 2014 at 9:02 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, and Natalie Nahabet. 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 October 24, 2014, the Delaware Court of Chancery issued a decision, In Re: Crimson Exploration Inc. Stockholder Litigation, addressing when: (i) a stockholder with less than majority voting power may be deemed a controlling stockholder, and (ii) the controlling stockholder’s actions trigger “entire fairness” review of a challenged merger. The court also rejected criticisms of the seller’s financial advisor based on supposed conflicts of interest and flawed valuation methodologies.

The decision provides important guidance for directors and their advisors in merger transactions where one stockholder or a cohesive group of stockholders holds a sizable share of company stock.

…continue reading: Delaware Court Dismisses Action Against Seller’s Directors and Financial Advisor

Delaware Court Holds M&A Financial Advisor Liable For $76 Million

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 4, 2014 at 9:15 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 authored by Mr. Halper, Peter J. Rooney, and Louisa S. Irving. 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 October 10, 2014, the Delaware Court of Chancery issued a decision awarding nearly $76 million in damages against a seller’s financial advisor. In an earlier March 7, 2014 opinion in the case, In re Rural/Metro Corp. Stockholders Litigation, Vice Chancellor Laster found RBC Capital Markets, LLC liable for aiding and abetting the board’s breach of fiduciary duty in connection with Rural’s 2011 sale to private equity firm Warburg Pincus for $17.25 a share, a premium of 37% over the pre-announcement market price. The recent decision reinforces lessons from the March 7 decision and provides new guidance for directors and their advisors in M&A transactions and related litigation.

…continue reading: Delaware Court Holds M&A Financial Advisor Liable For $76 Million

Delaware Reaffirms that Corporate Control Lies in the Boardroom

Editor’s Note: Edward D. Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum authored by Mr. Herlihy, William SavittDavid E. Shapiro, 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.

In an important ruling [October 14, 2014], the Delaware Court of Chancery dismissed a merger challenge on the pleadings and reaffirmed the primacy of director authority, the significance of the vote of disinterested stockholders, and the vibrancy of the business judgment rule. In re KKR Fin. Holdings LLC S’holder Litig., C.A. No. 9210-CB (Del. Ch. Oct. 14, 2014).

…continue reading: Delaware Reaffirms that Corporate Control Lies in the Boardroom

The Duty to Maximize Value of an Insolvent Enterprise

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 9, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, 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.

In Quadrant Structured Products Company, Ltd. v. Vertin (October 1, 2014), Vice Chancellor Laster clarified the Delaware Chancery Court’s approach to breach of fiduciary duty derivative actions brought by creditors against the directors of an insolvent corporation. Importantly, the Vice Chancellor applied business judgment rule deference to the non-independent directors’ decision to try to increase the value of the insolvent corporation by adopting a highly risky investment strategy—even though the creditors bore the full risk of the strategy’s failing, while the corporation’s sole stockholder would benefit if the strategy succeeded. By contrast, the court viewed the directors’ decisions not to exercise their right to defer interest on the notes held by the controller and to pay above-market fees to an affiliate of the controller as having been “transfers of value” from the insolvent corporation to the controller, which were subject to entire fairness review.

…continue reading: The Duty to Maximize Value of an Insolvent Enterprise

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