Posts Tagged ‘Going private’

Delaware Court Endorses Business Judgment Review in Controlling Stockholder Mergers

Editor’s Note: Theodore N. Mirvis and Paul Rowe are partners in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Mirvis, Mr. Rowe, Igor Kirman, and William Savitt. 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.

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.

…continue reading: Delaware Court Endorses Business Judgment Review in Controlling Stockholder Mergers

Top 5 Delaware Case Developments in 2013 for M&A Practitioners

Editor’s Note: Kerry E. Berchem is partner and co-head of corporate practice at Akin Gump Strauss Hauer & Feld LLP. The following post is based on an Akin Gump Client Alert by Elisabeth Cappuyns, Trey Muldrow, and Carlos Bermudez. This post is part of the Delaware law series, cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

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.

…continue reading: Top 5 Delaware Case Developments in 2013 for M&A Practitioners

New York Court Upholds Kenneth Cole Going Private Transaction

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 19, 2013 at 9:11 am
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Editor’s Note: The following post comes to us from Tariq Mundiya, partner in the litigation department of Willkie Farr & Gallagher LLP, and is based on a Willkie client memorandum by Mr. Mundiya and Sameer Advani.

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.

The Facts

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.

…continue reading: New York Court Upholds Kenneth Cole Going Private Transaction

Delaware Court of Chancery Applies Business Judgment Rule

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 23, 2013 at 9:30 am
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Editor’s Note: The following post comes to us from Alan Stone, partner in the Litigation & Arbitration Group at Milbank, Tweed, Hadley & McCloy LLP, and is based on a Milbank client alert by Mr. Stone & David Schwartz. 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 Southeastern Pennsylvania Transportation Authority v. Ernst Volgenau, et al [1] (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. [2]

…continue reading: Delaware Court of Chancery Applies Business Judgment Rule

The Effect of Delaware Doctrine on Freezeout Structure and Outcomes

Editor’s Note: Guhan Subramanian is the Joseph Flom Professor of Law and Business at the Harvard Law School. The following post is based on a paper co-authored by Professor Subramanian and Fernan Restrepo of Stanford Law School. 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.

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.

…continue reading: The Effect of Delaware Doctrine on Freezeout Structure and Outcomes

SEC and Revlon Settle Allegations of Deceptive Acts

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 12, 2013 at 9:07 am
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Editor’s Note: The following post comes to us from Michael D. Trager, senior partner at Arnold & Porter LLP and chair of the firm’s Securities Enforcement Practice. This post is based on an Arnold & Porter memorandum.

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. [1] 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. [2] 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.

…continue reading: SEC and Revlon Settle Allegations of Deceptive Acts

Delaware Court Decision on Entire Fairness Review for Mergers

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 7, 2013 at 9:30 am
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Editor’s Note: The following post comes to us from Robert B. Schumer, chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client 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. Additional reading about In re MFW Shareholders Litigation is available here.

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:

…continue reading: Delaware Court Decision on Entire Fairness Review for Mergers

Sponsor-Backed Going Private Transactions

Posted by Douglas Warner, Weil, Gotshal & Manges LLP, on Monday May 27, 2013 at 10:07 am
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Editor’s Note: Douglas P. Warner is a partner and head of US Private Equity and Hedge Fund practices at Weil, Gotshal & Manges LLP. This post is based on the methodology and key findings of a Weil survey; the full publication is available here. The previous edition of this survey is available here

Research Methodology

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:

…continue reading: Sponsor-Backed Going Private Transactions

IPOs and Innovation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday August 15, 2012 at 10:33 am
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Editor’s Note: The following post comes to us from Shai Bernstein of the Department of Finance at Stanford University.

Corporate managers, bankers, and policy makers alike have expressed concerns that the recent dearth of initial public offerings (IPOs) has caused a breakdown in the engine of innovation and growth. In the paper, Does Going Public Affect Innovation?, which was recently made publicly available on SSRN, I explore whether the transition to public equity markets indeed affects innovation, and if so, how. Theoretically, the effect of IPOs on innovation is ambiguous. On the one hand, going public provides improved access to capital that may allow firms to enhance their innovative activities; on the other hand, market pressures and potential departure of employees following the IPO may lead to opposite results.

To answer this question, I use standard patent-based metrics to capture changes in innovative activity in the years around the IPO and focus on three important dimensions of firms’ innovative activity: internally generated innovation, the productivity and mobility choices of individual inventors, and the acquisition of external innovation.

…continue reading: IPOs and Innovation

Surveying Sponsor-Backed Going Private Transactions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 22, 2011 at 9:38 am
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Editor’s Note: The following post comes to us from Douglas P. Warner, partner and co-head of the Hedge Fund practice at Weil, Gotshal & Manges LLP, and discusses a Weil survey, available here.

Weil, Gotshal & Manges LLP recently conducted our fifth annual survey of sponsor-backed going private transactions. Weil surveyed 60 sponsor-backed going private transactions announced from January 1, 2010 through December 31, 2010 with a transaction value (i.e., enterprise value) of at least $100 million (excluding target companies that were real estate investment trusts).

Thirty-nine of the surveyed transactions in 2010 involved a target company in the United States, thirteen involved a target company in Europe and eight 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.

With a significant rebound in the availability of debt financing for new acquisitions, 2010 was a strong year for sponsor-backed going private transactions in the United States. Thirty-nine sponsor-backed going private transactions in the United States were announced over the course of 2010.

…continue reading: Surveying Sponsor-Backed Going Private Transactions

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