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.
Posts Tagged ‘Delaware law’
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.
Director-adopted bylaws that affect shareholders’ litigation rights have attracted both praise and controversy. Recent bylaws specify an exclusive judicial forum for litigation of corporate-governance claims, require that shareholder claims be arbitrated, and (most controversially) impose a one-way regime of fee shifting on shareholder litigants. To one degree or another, courts have legitimated each development, while commentators differ in their assessments. My paper, Forum-Selection Bylaws Refracted Through an Agency Lens, brings into clear focus issues so far blurred in the debate surrounding these types of bylaws.
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.
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.
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.)
On Friday, December 19, 2014, the Delaware Supreme Court reversed a preliminary injunction entered by the Delaware Court of Chancery which had (a) barred, for 30 days, a stockholder vote to approve the combination of C&J Energy Services, Inc. and a division of Nabors Industries Ltd., (b) required C&J to conduct a “go-shop” during that period and (c) preemptively declared that such “go-shop” did not constitute a breach of the “no-shop” or other deal-protection provisions in the Nabors/C&J merger agreement. In reversing the injunction, the Supreme Court held that the C&J board likely satisfied its Revlon duties (to the extent such duties applied), notwithstanding the lack of a pre-signing market check, given that “[w]hen a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, [Delaware courts] cannot conclude that the board likely violated its Revlon duties.”
A unanimous Delaware Supreme Court yesterday reaffirmed the ability of Delaware companies to organize corporate litigation in the Delaware courts. United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014) (en banc).
The case involved an action to produce corporate books and records under Section 220 of the Delaware General Corporation Law, an increasingly frequent preliminary battleground in derivative litigation. Following a familiar pattern, stockholder plaintiffs demanded access to certain books and records of United Technologies Corporation, allegedly to assist in their consideration of potential derivative litigation. UTC asked that all demanding stockholders agree to restrict use of the materials obtained in the inspection to cases filed only in Delaware, pointing out that litigation had already been filed relating to the same matters in the Delaware courts and that any derivative lawsuit would be governed by Delaware law. Then, further evincing its concern to organize corporate governance litigation in the courts of Delaware, UTC’s board adopted a forum selection bylaw during the pendency of the Section 220 lawsuit.
The volume of Court of Chancery decisions has been proceeding apace. We have culled out two that we believe are worthy of your attention:
Cigna Health & Life Ins. Co. v. Audax Health Solutions, 2014 WL 6784491 (Del. Ch.).
This is a “must read” for all M&A and Private Equity practitioners and professionals, given the use of certain of the deal devices found to be invalid in the specific circumstances of this case.
Cigna, a large stockholder of Audax, the acquired company, sued to invalidate certain conditions of an arm’s length negotiated cash-out merger of Audax into United. Essentially, the defendant merging corporations conditioned receipt of the merger consideration not only upon surrender of the (to-be-cancelled) shares, but also upon the execution of a Letter of Transmittal, wherein each surrendering stockholder agreed to the “Obligations” set forth therein. Cigna refused to execute a Letter of Transmittal, and in response the defendants refused to pay Cigna the merger consideration. Cigna sued in the Court of Chancery for a judgment declaring the Obligations invalid and mandating payment of the merger consideration to Cigna. The Court of Chancery (V.C. Parsons) held the obligations invalid under 8 Del. C. §251 and (relatedly) for lack of consideration.
In In re Zhongpin Inc. S’holders Litig., the Delaware Court of Chancery denied motions to dismiss breach of fiduciary duty claims against an alleged controlling stockholder and members of the company’s board of directors, holding that the plaintiffs had raised reasonable inferences that (i) although the stockholder held only 17.3% of the company’s outstanding common stock, as CEO and Chairman of the Board, he possessed “both latent and active control” over the company, and (ii) the sales process was not entirely fair.