Corporate Securities Law Blog

Two decisions earlier this year by the Delaware Court of Chancery in which the Court (Noble, V.C.) reached opposite conclusions on the divergent facts before it, serve to highlight that determining whether a bidder is “serious” in its pursuit of the target is a key factor in analyzing a target director’s liability for “bad faith” in the context of a merger and acquisition (“M&A”) sales process under Delaware law.

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP, 2013 WL 911118 (Del. Ch. Feb. 22, 2013, rev. Mar. 8, 2013), the Delaware Court of Chancery held that a reverse triangular merger does not result in an assignment of the assets of the surviving entity by operation of law. Although the Meso Scale Diagnostics decision confirms, at least under Delaware law, the long-standing view of many practitioners that a reverse triangular merger does not result in an assignment by operation of law, it does not directly affect the contrary position taken by the United States District Court for the Northern District of California in SQL Solutions, Inc. v. Oracle Corp., 1991 WL 626458 (N.D. Cal. Dec. 19, 1991), that under California law a reverse triangular merger does constitute an assignment by operation of law. As a result, foreign (i.e., non-California) corporations in California subject to Section 2115 of the California Corporations Code (“Section 2115”) must consider the holdings in Meso Scale Diagnostics and SQL Solutions when analyzing the effect that an acquisitions may have on contractual anti-assignment provisions.

By John Stigi, John Tishler, and Edwin Astudillo

In In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS, Chancellor Strine of the Delaware Chancery Court held that Delaware has no per se rule against “don’t ask, don’t waive” standstill provisions, but cautioned that boards using “a powerful tool like that” need to deploy it consistent with their fiduciary duties. This decision comes less than three weeks after another Delaware judge (Vice Chancellor Laster) enjoined a target company from enforcing a “don’t ask, don’t waive” standstill provision in In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL.

In Dixon v. Cost Plus, Inc., No. 12-2721, 2012 U.S. Dist. LEXIS 90854 (N.D. Cal. Jun. 27, 2012), the United States District Court for the Northern District of California held that Section 1312(a) of the California Corporations Code precluded plaintiff-minority shareholder’s breach of fiduciary duty claim to the extent that the claim relied upon arguments that a proposed merger price was unfair, or that the process employed by the board of directors was inadequate. Nonetheless, the court noted a “recognized exception” to this bar for challenges based upon “the question of an insufficient vote to authorize a merger or consolidation.” In so holding, the court upheld a “unique” California statute which limits the availability of relief for allegations that directors breached their fiduciary obligations in agreeing to merger terms and in the process engaged in self-dealing and other breaches of duty, while also noting an exception to the general bar.

On September 21, 2011, the IRS announced (in Announcement 2011-64) a new program that will allow employers to resolve their worker classification problems at a relatively low cost. This new Voluntary Classification Settlement Program (VCSP) is available to businesses that erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees. Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year (technically, the employer will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under reduced rates). The employer will not be audited on payroll taxes related to these workers for prior years, and will not be subject to interest or penalties. To participate in the program, the employer must meet certain eligibility requirements, apply to participate in the VCSP, and enter into a closing agreement with the IRS.

In The Bank of New York Mellon Trust Co., N.A., v. Liberty Media Corp., No. 284, 2011 WL 4376552 (Del. Sept. 21, 2011), the Delaware Supreme Court held that Liberty Media Corp's proposed split-off was not sufficiently connected to previous transactions to warrant aggregation of both the proposed and previous transactions, and thus the proposed split-off did not constitute a sale of "substantially all" of its assets. Bond indentures issued by corporate borrowers typically contain a covenant that the issuer will not sell "all or substantially all" of its assets without the substitution of the purchaser as successor obligor or without otherwise causing a default and acceleration. This landmark ruling should allow corporate issuers accessing the debt capital markets greater flexibility to manage assets and dealmakers’ increased clarity in interpreting a standard indenture provision.
 

In Monty v. Leis, 193 Cal. App. 4th 1367, 123 Cal. Rptr. 3d 641 (2011), the California Court of Appeal, Second District, affirmed the order of the California Superior Court, Santa Barbara County, denying a motion by shareholders of Pacific Capital Bancorp (“PCB”), a California corporation, for a preliminary injunction to enjoin or rescind a transaction by which Ford Financial Fund, L.P. (“Ford”) would acquire between 80 and 91 percent of PCB’s stock. The Court held that because the transaction closed while the motion was pending, the appeal of the preliminary injunction motion was moot, and that California law would not permit the shareholder plaintiffs to seek rescission of the transaction after it had been completed. The Court also rejected plaintiffs’ argument that the investment agreement constituted an improper defensive mechanism because it did not include a provision that allowed PCB to back out of the deal if a better offer was received. Instead, the Court held, there is no requirement under California law that the board of directors negotiate a “fiduciary out” before binding the company to particular strategic transaction. This decision, in which the Court declined to follow Delaware law, underscores the latitude given to a board of directors of a California corporation to cause the company to enter into a strategic transaction.
 

In Graulich v. Dell, Inc., 2011 WL 1843813 (Del. Ch. May 16, 2011), the Delaware Court of Chancery rejected a stockholder’s demand under Section 220 of the Delaware General Corporation Law (“Section 220”). Section 220 provides that a stockholder in a Delaware corporation may, under certain conditions, request that that corporation make available certain books and records, provided that the request is made for a “proper purpose.” In Graulich, the Court held that the plaintiff stockholder, who sought books and records for the purpose of investigating and possibly filing a derivative lawsuit against the company’s officers and directors, nonetheless lacked a “proper purpose” because the stockholder did not have legal standing to bring the derivative suit and the potential claims the stockholder wished to pursue were time-barred and barred by claim preclusion.
 

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011), the Delaware Court of Chancery denied a motion to dismiss a breach of contract claim, holding that a reverse triangular merger may constitute an assignment by operation of law. In the first Delaware case to address this issue, the Court found plausible plaintiff’s argument that an assignment “by operation of law” covers mergers that effectively operate like an assignment. The Court held that Delaware’s stock acquisition jurisprudence is not controlling with respect to reverse triangular mergers. In its decision, the Court indicated that the actions a buyer takes after a reverse triangular merger with respect to the target company are relevant to whether an anti-assignment clause is triggered.
 

In Booth Family Trust v. Jefferies, No. 09-3443, 2011 WL 1237583 (6th Cir. Apr. 5, 2011), the United States Court of Appeals for the Sixth Circuit reversed the district court dismissal of a shareholder derivative action, holding that the special litigation committee (“SLC”) of the board of directors, which recommended the dismissal, was not sufficiently independent of management.  The Court reached its decision despite the fact that one of the two members of the SLC recused himself from considering claims against the defendant Robert S. Singer (“Singer”), CEO of Abercrombie & Fitch Co. (“Abercrombie”), with whom the SLC member had a personal relationship. In fact, the Court held that the SLC member’s recusal constituted an admission that he, and thus the SLC as a whole, lacked independence. This decision, which applies Delaware law, reinforces the high standard of independence imposed on members of SLCs.
 

Update:

The IRS recently came out with a Notice (Notice 2011-18) stating that, for transactions occurring in 2011, penalties will not be imposed against issuers for missing the deadline to file a return or post the tax return on the issuer's primary public Web site (which generally was required 45 days after the transaction), provided that the return is filed or the posting is made by January 17, 2012.

A recent decision by the Delaware Court of Chancery has provided a stark reminder that buyers, directors of target firms and financial advisors must be mindful that conflicts of interest affecting a target’s financial advisor will be closely scrutinized by the courts.
 

On January 14, 2011, the Delaware Chancery Court issued an opinion in In re John Q. Hammons Hotels Shareholder Litigation that a merger transaction in which a controlling stockholder received consideration different than that received by the minority stockholders met the “entire fairness” standard. This opinion followed the Court’s determination in October 2009 that “entire fairness,” was the appropriate standard of review in this case.
 

In Golden Telecom, Inc. v. Global GT LP, 2010 WL 5387589 (Del. Dec. 29, 2010), the Delaware Supreme Court affirmed a judgment of the Delaware Chancery Court in an appraisal proceeding under Section 262(h) of the Delaware General Corporation Law (“DGCL”). Section 262(h) provides that in the event of a merger, a stockholder of a Delaware corporation is entitled to an independent appraisal proceeding regarding the “fair value” of its outstanding shares. In affirming the Chancery Court, the Supreme Court declined to adopt two bright line rules for appraisal proceedings under Section 262(h). First, it rejected the notion that the Chancery Court must consider the merger price agreed to by the parties following arm’s-length negotiations and fair process as necessarily reflecting the “fair value” of the corporation’s shares. Second, it rejected the assertion that a corporation is bound by company-specific data included in its fairness opinion in arriving at a “fair value” under Section 262(h). This decision confirms that the Chancery Court has great flexibility, and is entitled to great deference, in conducting its independent appraisal of the value of a merger target under Section 262(h).
 

The treatment of accrued but unused vacation pay (hereinafter, referred to as "Vacation Benefits") in the context of selling a business has arisen in recent transactions involving clients advised by the firm's Corporate Practice Group. This gives us an opportunity to remind business owners operating in California of the landscape of the rules associated with the payment of Vacation Benefits and the practice of transferring those liabilities to the new employer in the sale of a business.
 

1. Lower Thresholds For HSR Filings

On January 19, 2010, the Federal Trade Commission announced revised, lower thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product. For the first time, the thresholds have been reduced. They will be effective thirty days after publication in the Federal Register. Publication is expected to occur this week. Thus the new thresholds will most likely become effective late February 2010. Acquisitions that have not closed by the effective date will be subject to the new thresholds. Filing persons must wait a designated period of time, usually 30 days, before completing their transactions. The HSR Act imposes premerger notification and waiting period obligations on transactions over a certain size, where the parties are over a certain size, before those transactions may be completed. Each "person" who is a party to an HSR-reportable deal must file an HSR notification with the Department of Justice Antitrust Division and the Federal Trade Commission.
 

In Berger v. Pubco Corporation, Case No. 509, 2009 WL 1976529(Del. July 9, 2009), the Delaware Supreme Court held that minority stockholders are entitled to a “quasi-appraisal” remedy to recover the difference between the fair value of their shares and the merger price. The Court also held that these stockholders did not have to opt-in to the appraisal proceedings or to escrow proceeds received from the merger. The decision in Berger resolves an important question, previously unclear under Delaware law, regarding the nature and scope of the remedies available to minority stockholders who allege misconduct by directors in connection with short form mergers.

On Wednesday, March 25, 2009, the Delaware Supreme Court issued an opinion reversing the Chancery Court's decision in Ryan v. Lyondell Chemical Co., 2008 WL 2923427 (Del. Ch. July 29, 2008). We posted about the Chancery Court decision on the Corporate and Securities Law Blog here. In reversing the Chancery Court decision, the Delaware Supreme Court granted summary judgment in favor of Lyondell’s directors and in doing so held that a board of directors determination to adopt a “wait and see” approach in response to an unsolicited takeover bid was subject to the business judgment and that Revlon duties did not apply until the Board began negotiating with the bidder. This case provides important guidance for directors of Delaware corporations in discharging their fiduciary duties in connection with company sales.

On January 6, 2009, the Federal Trade Commission announced revised thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  They will be effective thirty days after publication in the Federal Register.  Publication is expected to occur in the next few days.  Thus the new thresholds will most likely become effective mid-February 2009.  Acquisitions that have not closed by the effective date will be subject to the new thresholds.  Filing persons must wait a designated period of time, usually 30 days, before completing their transactions.  The HSR Act imposes premerger notification and waiting period obligations on transactions over a certain size, where the parties are over a certain size, before those transactions may be completed.  Each "person" who is a party to an HSR-reportable deal must file an HSR notification with the Department of Justice Antitrust Division and the Federal Trade Commission.

Picture this:

You and your partner have not been contributing equally to your business or seeing eye to eye for quite some time, but with a good economy and a healthy income from the business you let sleeping dogs lie.  Or, you now see an opportunity to grow your business despite the ongoing uncertainty in the economy, and you can't get your cautious business "partner" to budge.

The world is changing and you and the business cannot sit still.  Gritting your teeth, you tell yourself that if only you had sole control . . . things would change!

If it’s any consolation, you're not alone; difficult times strain even the best business partnerships in many ways, often causing disastrous breakups and business failure.

On the other hand, a bad economy can provide the catalyst for a successful business divorce if it tempts the hesitant partner to get out while the getting is good – and if the remaining partner understands the roadblocks along the way to a breakup.

By a "business divorce," we mean a buy-out of an owner by the other owner or the business itself, whether it be a corporation, partnership, limited liability company or other form of enterprise.  The more owners, the more complicated this process becomes.

Effective December 22, 2008, the U.S. Department of the Treasury (“Treasury”) issued new rules relating to the procedures that the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) will use in reviewing foreign investments in U.S. companies.  See 73 Fed. Reg. 70702.  The revised, final rules continue to focus on the potential impact that a particular transaction may have on U.S. national security and retain many of the features of the proposed rules, which we have previously discussed here and here.

Increasingly in recent years, purchase agreements are being negotiated to add a go-shop provision, permitting a target's board not only to consider unsolicited offers but also to actively solicit bids for the target for a limited period of time in order to fulfill target board fiduciary duties to shareholders.  The term "go-shop" is a relatively new addition to M&A transaction terminology.  "Go-shop" refers to a provision in a purchase agreement that permits a target company's board of directors to actively solicit competing bids for a specified period of time following the execution of the agreement.  Over the last two years, go-shop provisions have become more common.  According to a recent ABA study, 2% of deals announced in 2005 had go-shop provisions while 29% of deals announced in 2006 had them.

On January 18, 2008, the Federal Trade Commission announced new jurisdictional and filing fee thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Section 7A of the Clayton Act, 15 U.S.C. § 18a, et seq. (the “HSR Act”).  The new HSR thresholds will apply to transactions that close on or after February 28, 2008.  The new minimum HSR threshold for a reportable transaction is $63.1 million. The amount of the filing fees are not changed, although the thresholds that determine the amount of the filing fee are increased.

No MAE Occurred Based on Merger Agreement Carve-Out

On December 27, 2007 the Tennessee Chancery Court ordered sportswear retailer Finish Line, Inc. (FINL.O), to complete its purchase of Tennessee-based shoe and hat retailer Genesco, Inc. (GCO.N), as contemplated by a merger agreement offering $54.50 per share for a total purchase price of $1.5 billion.

Amendments to the best price rule applicable to tender offers for securities registered under the Securities Exchange Act of 1934 became effective in December 2006.  The best price rule requires that the consideration paid to any security holder in a tender offer be the highest consideration paid to any other security holder in the tender offer with the result that all shareholders are to be treated equally.

As of October 24, 2007, Sallie Mae and the buyout group led by J.C. Flowers have failed to negotiate an agreement on dropping conditions of the buyout deal that prevent Sallie Mae from talking to other potential suitors.  This comes following the buyout group's assertion that a Material Adverse Effect has occurred and that it does not intend to proceed with the buyout deal.  In response to the buyout group's "cold feet," Sallie Mae filed suit in Delaware seeking payment of a $900 million termination fee.

In In re Netsmart Technologies, Inc. Shareholders Litigation, C.A. No. 2536-VCS (Del. Ch. Mar. 14, 2007), Vice Chancellor Strine held that the shareholder plaintiffs demonstrated a probability of success on the merits of their claim that the Netsmart board of directors failed to fulfill their Revlon duties in considering and approving a cash sale of the company to two private equity firms.  The Court determined that the board’s decision not to conduct a broad market canvass for strategic acquirers, and instead focus the search for acquirers solely on private equity firms, did not appear to be reasonable under the circumstances.  The Court also held that the post-signing “market check” recommended by the company’s financial advisers was not appropriate for a small-cap company like Netsmart, thus was far too passive to have been effective in mitigating the narrowness of the pre-signing market canvass.  This decision provides guidance to boards when considering a sale to a private equity firm — an increasingly common situation affecting boards of directors of public companies throughout the country.

A recent Delaware Chancery Court decision raises questions about certain common merger practices. The opinion, In re TCI Shareholders Litigation, criticizes both:

• the use of a contingent fee arrangement by an investment bank that issued a fairness opinion to a special committee; and
• a special committee's use of investment bankers and legal counsel who had worked for the company.