Just over a year ago, the Delaware Court of Chancery upheld the facial validity of exclusive forum bylaws adopted by corporate boards as a means of rationalizing stockholder litigation. In the time since Chancery’s landmark Chevron opinion, numerous corporations have adopted exclusive forum bylaws, and courts in New York, Texas, Illinois, Louisiana, and California have enforced such bylaws against stockholders bringing duplicative lawsuits in violation of their terms. The result, as one commentator recently noted, has been to disincentivize duplicative filings and reduce the concomitant litigation “deal tax” on merging parties. Yet, despite this progress, pernicious multijurisdictional litigation persists. A recent decision from a court in Oregon (Roberts v. TriQuint SemiConductor, Inc., No. 1402-02441 (Or. Cir. Ct. Aug. 14, 2014)) illustrates the potential harm from such litigation and the importance of continued authoritative articulation of the law to ensure the efficacy of exclusive forum bylaws.
Posts Tagged ‘William Savitt’
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.
In a recent paper, Professors Lucian Bebchuk and Robert Jackson have extended Professor Bebchuk’s extreme and eccentric campaign against director-centric governance into a new realm—that of the Constitution of the United States. They claim that “serious questions” exist about the constitutionality of the poison pill—or, more precisely, “about the validity of the state-law rules that authorize the use of the poison pill.” It is likely, they argue, that these state-law rules violate the Supremacy Clause of the Constitution, and are thus preempted, because they frustrate the purposes of the Williams Act, the 1968 federal statute that governs tender-offer timing and disclosure.
Bebchuk and Jackson cite leading academic textbooks and articles that either recognize the preeminence of the poison pill in takeover defense or demonstrate the weakness of preemption challenges to state takeover statutes. The scholars authoring these books and articles, we are told, “overlooked” or “ignored” the obvious fact that poison pills may delay tender offers for lengthy periods of time. Bebchuk and Jackson profess “surpris[e]” that the constitutional issue they discuss “has received little attention, or even notice, from commentators,” and assert that it is rather a shocking “oversight” that, despite a “large literature” on Williams Act preemption, “commentators and practitioners” have devoted “little attention to the question of whether the state-law rules with the most powerful antitakeover effect—the rules authorizing use of the poison pill—are preempted.”
Last week, the Delaware Court of Chancery reached the rare conclusion that an independent, disinterested board breached its fiduciary duties in connection with an arm’s-length, third-party, premium merger transaction. The decision, In re Rural Metro Corp. Stockholders Litig., C.A. No. 6350-VCL (Del. Ch. Mar. 7, 2014), which relies heavily on findings that the board’s financial advisor had undisclosed conflicts of interest, holds the advisor liable for aiding and abetting the breaches, but does not reach the question of whether the directors themselves could have been liable, as they settled before trial. The decision sends a strong message that boards should actively oversee their financial advisors in any sale process.
The Delaware Court of Chancery recently determined that forum selection provisions in corporate charters—much like forum selection bylaws—are presumptively valid, and provided guidance on the appropriate procedure to enforce such provisions against a stockholder who files suit in violation of them. Edgen Grp. Inc. v. Genoud, C.A. No. 9055-VCL (Del. Ch. Nov. 5, 2013) (Trans.).
The dispute arose after the Edgen Group announced that it had agreed to sell itself in a premium, all-cash, sales transaction to an unrelated third party. Edgen’s certificate of incorporation includes a provision that provides that any claim of breach of fiduciary duty by an Edgen stockholder must be filed in Delaware. Nevertheless, a putative class action challenging the merger was filed in Louisiana state court. In response, Edgen filed suit against the stockholder in Delaware, asking the Court of Chancery to enjoin him from proceeding in Louisiana.
In a thoughtful and well-reasoned decision, the Delaware Court of Chancery held last week that the merger price produced by a “throrough, effective” sales process, “free from any spectre of self-interest or disloyalty,” can be the most reliable indicator of the value of shares in an appraisal proceeding. Huff Fund Investment Partnership v. CKx, Inc., No. 6844-VCG (Del. Ch. Nov 1, 2013).
CKx was a publicly traded corporation with interests in iconic entertainment properties, including the American Idol television show, Elvis Presley Enterprises, and Muhammad Ali Enterprises. In 2011, following an attempted go-private transaction and faced with uncertainty related to the network renewal of American Idol, CKx received several unsolicited bids to purchase the Company for cash. The CKx board retained an independent financial advisor and conducted an expedited process to explore a sale of the Company. Interested bidders were given three weeks to conduct diligence and negotiate a transaction. The Company ultimately received an offer of $5.50 per share from Apollo and an offer of $5.60 from a competing private equity firm. The $5.60 bid, while nominally higher, was not supported by financing commitments and the bidder refused to provide documentation that would have allowed CKx to verify its representations as to financing. In light of the uncertainty surrounding the $5.60 bid, CKx accepted the offer from Apollo notwithstanding its nominally lower purchase price.
Earlier this month, the stockholder plaintiffs who unsuccessfully challenged the legality of forum selection bylaws in the Court of Chancery dropped their appeal to the Delaware Supreme Court. This capitulation leaves Chancellor Strine’s well-reasoned June 2013 decision in the Chevron case—holding that directors have the power and authority to adopt bylaws limiting the courts in which stockholder internal-affairs litigation may be filed—as the last word on the subject. Affirmance by the Supreme Court was widely expected. That would have been a welcome answer to those who still harbor doubt on the issue. The plaintiffs’ decision to dismiss their appeal only underscores the incontestability of the Chancellor’s ruling. And that surrender should not diminish the significant advance that the forum selection bylaw represents as a potential solution to the epidemic of duplicative, multi-jurisdictional stockholder litigation.
The Delaware Supreme Court held that the Court of Chancery erred by failing to give preclusive effect to an earlier with-prejudice dismissal of a parallel derivative suit in another state, and by creating a presumption that all plaintiffs who file derivative suits without first conducting books-and-records inspections are inadequate representatives. Pyott v. La. Mun. Police Emps.’ Ret. Sys., No. 380, 2012 (Del. Apr. 4, 2013). The decision stresses the importance of interstate comity and the need to give full faith and credit to the decisions of other courts.
Allergan is a drug company that incurred losses in resolving civil and criminal investigations of off-label drug marketing. Derivative suits were filed in both federal court in California and the Court of Chancery alleging that Allergan’s directors were liable for the losses because they failed to properly monitor the company’s marketing practices. The Delaware shareholder plaintiff obtained documents through a books-and-records inspection under 8 Del. C. § 220 before filing suit. The California plaintiffs did not, but later amended their complaints when the Delaware plaintiff shared the documents. Defendants moved to dismiss in both jurisdictions. The California federal court ruled first, dismissing with prejudice for failure to establish demand futility. The Court of Chancery refused to give preclusive effect to that ruling, applying Delaware law to the preclusion question. Turning to the merits, Chancery disagreed with the federal court, holding that demand was futile and that the case should proceed.
The United States Supreme Court ruled unanimously that a plaintiff’s pre-class certification stipulation, under which plaintiff committed not to seek damages on behalf of the proposed class in excess of $5,000,000 (the federal jurisdictional threshold under the Class Action Fairness Act (“CAFA”)), cannot bind absent class members and therefore cannot be used to defeat federal jurisdiction. Standard Fire Ins. Co. v. Knowles, No. 11-1450 (Mar. 19, 2013).
In 2005, Congress enacted CAFA, which provides that federal district courts have jurisdiction over class actions (subject to certain exceptions, including a carve-out for many state-law class actions for breach of fiduciary duty) if the proposed class has 100 or more members, the parties are minimally diverse (meaning that, for example, one member of the plaintiff class and one defendant are from different states) and the “matter in controversy” exceeds the sum or value of $5,000,000.
In Standard Fire, plaintiff sought to circumvent the federal jurisdiction provisions in CAFA by filing a class action in a state court on behalf of a proposed class of members from that state and stipulating that the plaintiff and the class would not seek to recover total aggregate damages of more than $5,000,000. The defendant nevertheless removed the case to federal court. The district court found that, absent the stipulation, the amount in controversy would have been just above the $5,000,000 jurisdictional threshold. But in light of the stipulation, the district court concluded that the amount in controversy was below the threshold and remanded the case to state court. The Court of Appeals declined to hear the appeal.
The Canadian Securities Administrators (CSA) recently proposed changes to Canada’s early warning regime for the disclosure of substantial blockholdings, including to lower the initial reporting trigger to 5% from 10%, to require disclosure no later than the opening of trading on the next business day, and to include equity equivalent derivatives and securities lending arrangements in the ownership calculation. Separately, the CSA proposed a new policy of greater flexibility as to rights plans, including in connection with unsolicited takeover bids. These proposals reflect sensible and necessary improvements to Canadian market regulation, to protect shareholders from the sorts of activist and takeover techniques and abuses that militate for changes in the U.S.’s Section 13(d) rules, and which, in the context of unsolicited takeover bids, the U.S. acceptance of rights plans have largely banished from the U.S.