In Hamilton Partners, L.P. v. Highland Capital Management, L.P., C.A. No. 6547-VCN, 2014 WL 1813340 (Del. Ch. May 7, 2014), the Court of Chancery, by Vice Chancellor Noble, in connection with a challenge to a going-private transaction whereby American HomePatient, Inc. (“AHP”) was acquired by an affiliate of one of its stockholders, Highland Capital Management, L.P. (“Highland”), refused to dismiss breach of fiduciary duty claims against Highland. The Court held that, for purposes of defendants’ motion to dismiss, plaintiff alleged facts sufficient to support an inference that Highland, which owned 48% of AHP’s stock and 82% of AHP’s debt, was the controlling stockholder of AHP and that the merger was not entirely fair.
Posts Tagged ‘Going private’
Are private firms more efficient than public firms? Jensen (1986) suggests that going-private could result in efficiency gains by aligning managers’ incentives with shareholders and providing better monitoring. In our paper, Do Going-Private Transactions Affect Plant Efficiency and Investment?, forthcoming in the Review of Financial Studies, we examine a broad dataset of going-private transactions, including those taken private by private equity, management and private operating firms between 1981 and 2005. We link data on going-private transactions to rich plant-level US Census microdata to examine how going-private affects plant-level productivity, investment, and exit (sale and closure). While we find within-plant increases in measures of productivity after going-private, there is little evidence of efficiency gains relative to a control sample composed of firms from within the same industry, and of similar age and size (employment) as the going-private firms. Further, our productivity results hold excluding all plants that underwent a change in ownership after going-private, alleviating the potential concern that control plants may undergo improvements through ownership changes.
The Delaware Supreme Court today affirmed that a going-private transaction may be reviewed under the deferential business judgment rule when it is conditioned on the approval of both a well-functioning special committee and a majority of the minority stockholders. Kahn v. M&F Worldwide Corp., No. 334, 2013 (Del. Mar. 14, 2014).
As described in our previous memo, the case arose out of a stockholder challenge to a merger in which MacAndrews & Forbes acquired the 57% of M&F Worldwide it did not already own. Then-Chancellor Strine granted summary judgment in favor of the defendants, finding that the record established the transaction was approved by both an independent special committee that functioned effectively and had the power to say no and the fully-informed vote of a majority of the unaffiliated stockholders, thus entitling them to business judgment review.
During 2013, in addition to the important changes to the Delaware General Corporation Law (“DGCL”) and the Limited Liability Company Act, described here, the Delaware courts issued a number of decisions that have a direct impact on the M&A practice. Below are our Top 5 case law picks for M&A practitioners:
1. A new look at the standard of review in going-private mergers (the Business Judgment Rule)
In its In re MFW Shareholders Litigation (May 29, 2013) decision, the Court of Chancery held that in going-private mergers with a controlling stockholder on both sides the deferential business judgment standard of review applies, instead of the entire fairness standard, if certain procedural safeguards are included from the beginning. Specifically, the controlling stockholder has to agree at the outset to proceed with the merger only if the transaction is both (1) negotiated and approved by an attentive special committee comprised of directors who are independent of the controlling stockholder and fully empowered to decline the transaction and to retain its own financial and legal advisors and (2) conditioned on the un-coerced, fully informed and non-waivable approval of a majority of the unaffiliated minority stockholders.
On September 3, 2013, a New York trial court dismissed a stockholder challenge to a going private transaction in which Kenneth Cole, who held approximately 47% of the Company’s outstanding common stock and controlled 90% of the voting power of Kenneth Cole Productions Inc. (“KCP”), purchased the remaining 53% of the common stock of KCP that he did not already own. Willkie Farr & Gallagher represented Mr. Cole in the underlying going private transaction and the class action litigation that ensued.
On February 24, 2012, KCP announced that Mr. Cole had proposed a transaction to take KCP private and to pay the public stockholders $15.00 per share, which reflected a 17% premium to KCP’s unaffected share price. KCP’s board created a special committee of four independent directors to negotiate with Mr. Cole, who conditioned his bid on the approval of the special committee and the affirmative vote of a majority of the minority stockholders. Mr. Cole made it publicly clear that he would not entertain any offers to sell his shares in a third party transaction and was only interested in buying shares from the minority stockholders. After several months of negotiations, Mr. Cole agreed to pay $15.25 per share. 99.8% of KCP’s shares unaffiliated with Mr. Cole that voted ultimately voted in favor of the transaction.
In Southeastern Pennsylvania Transportation Authority v. Ernst Volgenau, et al  (the “SRA” decision), Vice Chancellor Noble continued a recent trend in Delaware case law involving acquisitions of companies with a controlling stockholder—if robust procedural protections are properly used (such as the recommendation of an empowered, disinterested special committee and the transaction is conditioned on a non-waivable vote of the majority of all minority target stockholders), the standard of judicial review applicable to such a transaction will be the deferential business judgment rule. Accordingly, when a target company is acquired by a third party unaffiliated with the target’s controlling stockholder, the target company can avoid “judicial review under the entire fairness standard and, perhaps in most instances, the burdens of trial.”
Only a few weeks ago, in a precedent setting decision, Chancellor Strine held that the standard of judicial review applicable to going private mergers with controlling stockholders (i.e., transactions in which the buyer is affiliated with or is the controlling stockholder) should also be the deferential business judgment rule if certain similar robust procedural protections were properly employed. 
Historically, buyouts by controlling shareholders (also known as “going-private transactions,” “squeeze-outs,” and hereinafter “freezeouts”) were subject to different standards of judicial scrutiny under Delaware corporate law based on the transactional form used by the controlling shareholder to execute the deal. In a line of cases dating back at least to the Delaware Supreme Court’s 1994 decision in Kahn v. Lynch Communications, a freezeout executed as a statutory merger was subject to stringent “entire fairness” review, due to the self-dealing nature of the transaction. In contrast, in a line of cases beginning with the Delaware Chancery Court’s 2001 opinion in In re Siliconix Inc. Shareholder Litigation, a freezeout executed as a tender offer was subject to deferential business judgment review.
Subramanian (2007) presents evidence that, after Siliconix, minority shareholders received less in tender offer freezeouts than in merger freezeouts. Restrepo (2013) finds that these differences in outcomes occurred only after Siliconix, and that the incidence of tender offer freezeouts increased after this opinion, also supporting the idea that controlling shareholders took advantage of the opportunity provided by Siliconix. Subramanian (2005) describes why these differences in outcomes for minority shareholders create a social welfare loss and not just a one-time wealth transfer from minority shareholders to the controlling shareholder.
On June 13, 2013, the Securities and Exchange Commission (SEC) announced that it had reached a settlement with Revlon, Inc. (Revlon) regarding allegations that Revlon deceived minority shareholders in connection with a 2009 “going private” transaction.  Under Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3 thereunder issuers are prohibited from taking fraudulent or deceitful actions in connection with a “going private” transaction. The SEC’s rules for “going private” transactions require disclosure, among other things, of any report, opinion, or appraisal from an outside party that is materially related to the transaction.  The SEC alleged that Revlon engaged in a variety of deceptive acts in order to avoid disclosure of a third-party financial advisor’s determination that the “going private” transaction would not provide adequate consideration for minority shareholders. Revlon did not admit or deny the SEC’s findings set forth in the cease-and-desist order, but agreed to cease and desist from committing any future violations and to pay an $850,000 penalty. Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3 thereunder have rarely been the subject of SEC enforcement action. This settlement may signal that, just as the Staff of the Enforcement Division of the SEC is more generally expanding its enforcement reach into the area of private equity firms — which are often involved in going private transactions—its enforcement priorities may also be expanding into areas that have been historically addressed by private litigants in civil actions brought under state corporate fiduciary law.
In an important and thoughtful decision that will influence the structure of future going-private transactions by controlling stockholders, Chancellor Strine of the Delaware Court of Chancery applied the business judgment rule—instead of the more onerous entire fairness review—to a going-private merger by a controlling stockholder because the merger was structured to adequately protect minority stockholders. The decision is likely to be appealed, but if affirmed by the Delaware Supreme Court on appeal, the case should provide certainty in an area of the law that has been a source of debate and uncertainty for two decades. The decision, In re MFW Shareholders Litigation, provides a detailed roadmap to obtaining the more favorable business judgment rule review and reducing the considerable litigation costs and risks associated with entire fairness review.
The court in MFW held that if the transaction is (1) negotiated by a fully-empowered special committee of directors who are independent of the controlling stockholder and (2) conditioned on the approval of a majority of the minority stockholders, then entire fairness review will not apply. The court noted the following key elements of the process:
Weil surveyed 40 sponsor-backed going private transactions announced from January 1, 2012 through December 31, 2012 with a transaction value (i.e., enterprise value) of at least $100 million (excluding target companies that were real estate investment trusts).
For United States transactions to be included in the survey, the transaction must have closed or such transaction remains pending.
Twenty-four of the surveyed transactions in 2012 involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific. The publicly available information for certain surveyed transactions did not disclose all data points covered by our survey; therefore, the charts and graphs in this survey may not reflect information from all surveyed transactions.
The 40 surveyed transactions included the following target companies: