The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals. The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding shares, unless the company’s charter provides a higher threshold).
Posts Tagged ‘Delaware legislation’
In the recent decision Gatz Properties LLC v. Auriga Capital Corporation, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s January 2012 decision in Auriga Capital Corporation v. Gatz Properties. In January of this year, the Court of Chancery held that a controlling member and manager of a limited liability company breached his fiduciary duties to the company’s minority members because the process by which he purchased the limited liability company from the minority members did not result in the payment of a fair price under the entire fairness standard of review. In affirming the decision, the Supreme Court stated that the question of whether the default standard under the Delaware Limited Liability Company Act is that a manager owes fiduciary duties to the members of a limited liability company remains unanswered and should not have been addressed by the lower court. Until this question is answered definitively, members of limited liability companies should clearly state in the limited liability company agreement whether and to what extent the company’s managers or controlling persons should have any fiduciary duties to the members.
Last month, the Columbia Business Law Review published “A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking.” In this brief paper, I examine interaction between Delaware and Washington in corporate lawmaking, focusing on the shareholder access initiatives in each jurisdiction. The paper uses a straight-forward spatial model of the state-federal interaction, paralleling spatial models that political scientists have used to illustrate other instances of jurisdictional interaction.
In prior work I showed how Delaware corporate law can be, and often is, confined by, or influenced by, federal action. Sometimes Washington acts and preempts the field, constitutionally or functionally, leaving no space for state corporate law action. Sometimes Delaware tilts toward or follows Washington opinion, even if Washington opinion does not square perfectly with the state lawmakers’ own consensus view of the best way to proceed. I examined these channels in Delaware’s Competition, 117 Harvard Law Review 588 (2003), and Delaware’s Politics, 118 Harvard Law Review 2491 (2005).
In its latest session, the Delaware legislature enacted several amendments to Delaware’s four “alternative entity” statutes – the Delaware Limited Liability Company Act (“DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), the Delaware Revised Uniform Partnership Act (“DRUPA”) and the Delaware Statutory Trust Act (“DSTA”).  Among other things, the amendments (i) provide a statutory default rule for the amendment of LLC agreements which requires the consent of all members; (ii)that a standard “supermajority amendment provision” applies only to supermajority provisions in an LLC agreement or partnership agreement and not to supermajority provisions under the applicable alternative entity statute; and (iii) modify the language relating to action by written consent by members, managers and partners to eliminate the requirement that the written consent set forth the action so taken thereby facilitating action by consent, particularly by electronic means.
Chancellor Chandler’s decision in Air Products and Chemicals Inc. v. Airgas, Inc. (Del. Ch., CA No. 5249-CC, 2/15/11) upholding the board’s maintenance of the company’s shareholder rights plan in the face of an unfriendly cash tender offer the board determined was inadequate has justifiably received a great deal of attention and analysis. Despite his reluctance, I believe the Chancellor got it right. By permitting the Airgas board to keep the rights plan in place under the facts of that case, he upheld the foundational director-centric model for governance of Delaware corporations and recognized the importance of long-term value creation as a critical focus for Delaware corporate enterprises.
On January 28, 2011, the Delaware Supreme Court clarified in King v. VeriFone Holdings, Inc., Del. Supr., No. 330, 2010, that plaintiffs may in some circumstances inspect a corporation’s books and records to bolster a derivative action complaint even after they have filed a lawsuit.
Section 220 of Delaware’s General Corporation Law provides shareholders with a limited right to inspect the books and records of Delaware companies in which they own stock. That right is subject to several conditions, including the condition that shareholders have a “proper purpose” for seeking inspection.  Investigating corporate mismanagement, for example, is a proper purpose.  Indeed, Delaware courts have repeatedly urged shareholders to use Section 220 to conduct such investigations before filing a derivative action. By using the “tools at hand,” those courts have explained, shareholders can become better equipped to plead allegations that are sufficient to meet the stringent pleading requirements that apply to derivative complaints, particularly in cases in which the plaintiffs did not serve a pre-suit demand and thus must plead “demand futility” (i.e., that serving a demand would be useless because the board of directors is biased against the claims or dominated by others who are).  Litigants have frequently clashed over whether the purpose of obtaining information to fortify a derivative complaint is “proper” when the complaint has already been filed.
Delaware’s renowned corporation law rests upon a director-centric premise, reflected in Section 141 of the Delaware General Corporation Law (“DGCL”), that the business and affairs of corporations are to be managed by boards of directors. In carrying out this mandate, directors owe fiduciary duties requiring that they act in an informed manner (i.e., the duty of care) and only in the best interests of the corporation and all of its shareholders (i.e., the duty of loyalty). Consistent with the legislative judgment placing directors at the helm of the corporate enterprise, and mindful of the necessary risk-taking inherent in that role, the Delaware courts afford unconflicted, informed, and properly motivated directors wide latitude in carrying out their duties. That deference is reflected in the venerable business judgment rule, under which courts will not second-guess the decisions of independent and disinterested directors acting in good faith and following an appropriate decision-making process.
Delaware’s Antitakeover Statute Continues to Give Hostile Bidders a Meaningful Opportunity for Success
In their article, Is Delaware’s Antitakeover Statute Unconstitutional? Evidence from1988–2008, Professor Guhan Subramanian and co-authors Steven Herscovici and Brian Barbetta (“SHB”) claim to present “the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success” after studying a small sample (sixty) of “hostile” or “unsolicited” tender offers for Delaware target companies from January 1, 1988, to December 31, 2008. They found that six hostile bidders (or 10%) went from less than 15% ownership in the target to more than 85% in a single tender offer, as required for exemption from Delaware’s antitakeover statute without prior board approval or approval by two-thirds of the stockholders. They also found that no hostile bidder achieved 85% ownership in a single tender offer between 1990 and 2008. Based on this “empirical evidence,” they claim that the constitutionality of Section 203 “is up for grabs.” After reading their article and examining their data, we conclude that SHB have failed to provide a reason to reexamine the constitutionality of Section 203.
The current takeover battle between Airgas and Air Products highlights one of the key areas of uncertainty in Delaware law today—the continued vitality of the “just say no” defense to unsolicited advances. Stated simply, if upheld, the “just say no” defense allows the board of directors of a target company to combine a refusal to negotiate and an unwillingness to waive structural defenses such as a poison pill or its less-effective statutory counterpart, Section 203 of the Delaware corporate code, to frustrate advances from an unwanted suitor. The defense is unique to the U.S. market— by comparison to the swift resolution of the recent Cadbury/Kraft hostile offer mandated by UK takeover rules, the defense can result in protracted battles that last for months, and sometimes years, oftentimes despite support for an offer from target shareholders.
Despite its popularity in the public (well, the dealmakers’) imagination, the “just say no” defense has a somewhat limited judicial pedigree. The case most often cited as establishing the validity of the defense is a 1995 Federal decision applying Delaware law to the defense by Wallace Computer against a hostile bid from Moore. In that case, the court upheld the refusal by Wallace’s board to redeem a pre-existing poison pill in the face of a non-coercive premium tender offer that was accepted by nearly 75% of Wallace’s shareholders. This ruling was seemingly inconsistent with the holdings in two 1988 Delaware Chancery decisions (Interco and Grand Metro) where redemption of a poison pill was mandated. The court held in the Wallace case that the mere refusal to redeem a historical poison pill can be viewed as defensive, thereby triggering the enhanced scrutiny of Unocal to the board’s decision. However, the court found that the board’s decision satisfied the two requirements of the Unocal test of defensive measures—the board’s good faith and sound investigation showed reasonable grounds for the board’s belief that a danger to corporate policy and effectiveness existed (i.e., the danger that shareholders, tempted by the premium, would tender at an inadequate price in ignorance of the true value of the target) and the retention of the poison pill, even beyond the period necessary to formulate an alternative plan to maximize shareholder value, was reasonable and proportionate to the danger posed. As such, the board’s defense was entitled to the presumptions of the “business judgment rule” and would not be second-guessed by the court.
New rules took effect February in Delaware governing the arbitration of business disputes in the Delaware Court of Chancery. The rules implement amendments to Delaware law, adopted last year, granting the Chancery Court jurisdiction to arbitrate certain business disputes, and compliment rules already in place governing the Court’s mediation of business and technology disputes.
Under the new law, the Court of Chancery has jurisdiction to arbitrate “business disputes,” which would include most complex corporate and commercial disputes. At least one of the parties must be a business entity, and at least one must be organized under Delaware law or have its principal place of business in Delaware. No party can be a consumer. In a claim exclusively for monetary damages, the amount in controversy must be at least $1 million. All parties must consent to the arbitration.