Posts Tagged ‘Delaware cases’

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

Delaware Court Declines to Dismiss Claims Against Disinterested Directors

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 30, 2014 at 9:02 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 authored by Alexandra D. Korry, Melissa Sawyer, 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 an opinion [1] issued on September 9, 2014, the Delaware Court of Chancery (VC Glasscock) held that in a controlling stockholder freeze-out merger subject to entire fairness review at the outset, disinterested directors entitled under a company’s charter to exculpation for duty of care violations cannot prevail in a motion to dismiss even though the claims against them for breach of fiduciary duty are not pled with particularity; instead, the issue of whether they will be entitled to exculpation must await a developed record, post-trial. The decision once again highlights the litigation cost that will be imposed on companies engaged in controlling stockholder freeze-out mergers for failing to employ both of the safeguards that Delaware has endorsed to ensure business judgment, instead of entire fairness, review—(1) an up-front non-waivable commitment by the controller to condition the transaction on an informed vote of a majority of the minority stockholders and (2) approval of the transaction by a well-functioning and broadly empowered special committee of disinterested directors. At the motion to dismiss stage, disinterested directors effectively will be treated in the same manner as controllers and their affiliated directors.

…continue reading: Delaware Court Declines to Dismiss Claims Against Disinterested Directors

Why Delaware Appraisal Awards Exceed the Merger Price

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 23, 2014 at 9:17 am
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Editor’s Note: The following post comes to us from Philip Richter, 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. Richter, Steven Epstein, David Shine, and Gail Weinstein. The complete publication, including footnotes, 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.

As has been widely noted, the number of post-merger appraisal petitions in Delaware has increased significantly in recent years, due primarily to the rise of appraisal arbitrage as a weapon of shareholder activists seeking alternative methods of influence and value creation in the M&A sphere. The phenomenon of appraisal arbitrage is to a great extent a product of the frequency with which the Delaware Chancery Court has appraised dissenting shares at “fair values” that are higher (often, far higher) than the merger consideration in the transactions from which the shareholders are dissenting. Our analysis of the post-trial appraisal decisions issued in Delaware since 2010 indicates that the court’s appraisal determinations have exceeded the merger price in all but two cases—with the appraisal determinations representing premiums over the merger price ranging from 8.5% to 149% (with an average of 61%).

…continue reading: Why Delaware Appraisal Awards Exceed the Merger Price

Delaware Court Finds Two Transactions Not Entirely Fair

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 18, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert 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.

On September 4, 2014, the Delaware Court of Chancery issued two lengthy post-trial opinions, [1] both authored by Vice Chancellor John W. Noble, finding that recapitalization or restructuring transactions did not satisfy the entire fairness standard of review. Although plaintiffs in each instance had received a fair price, the court found that the defendants had employed unfair processes and breached their fiduciary duties.

Significantly, one of the cases involved a recognizable set of facts: various plaintiff stockholders challenged a recapitalization that was approved at the same time the company conducted an “insider” round of financing as the company was running out of cash. The recapitalization and financing were approved by a five-member board of directors, three of whom were designated by venture capital funds that either participated in the financing or were said to have received a special benefit, with no participation by the company’s other stockholders. While the company received an informal and insider-led valuation of $4 million at the time of the recapitalization, the court found that the company’s equity at that time actually had a value of zero. However, as a result of the recapitalization, the company was able to acquire new lines of businesses. Four years after the recapitalization, the company was sold for $175 million. Following the sale, six years of litigation unfolded.

…continue reading: Delaware Court Finds Two Transactions Not Entirely Fair

Delaware Court of Chancery Upholds Forum Selection Bylaw

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 15, 2014 at 9:04 am
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Editor’s Note: The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert 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.

On September 8, 2014, Chancellor Andre G. Bouchard issued a notable decision in City of Providence v. First Citizens BancShares, Inc., upholding—as a matter of facial validity and on an “as-applied” basis at the motion to dismiss stage—a forum selection bylaw adopted by a Delaware corporation selecting another jurisdiction (North Carolina, where the company is headquartered) as the forum for intra-corporate disputes. This decision is important not only because it reaffirms the decision last year by then-Chancellor, now Chief Justice, Leo E. Strine, Jr. in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), upholding the facial validity of forum selection bylaws, but also because it includes notable pronouncements from the current Chancellor on the application of such provisions. [1]

…continue reading: Delaware Court of Chancery Upholds Forum Selection Bylaw

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