Fried Frank discusses Delaware Supreme Court’s Zale Decision and Lower Risk of Liability for Bankers

The Delaware Supreme Court’s recent decision in Singh v. Attenborough (May 6, 2016, en banc, “Zale III”), written by Chief Justice Leo E. Strine, Jr., is consistent with the trend of Delaware decisions that, as a practical matter, have significantly narrowed the risk of directors being found to have breached fiduciary duties in M&A transactions. The decision is most notable, however, for apparently reversing the momentum of recent Delaware decisions that have been interpreted as potentially expanding the risk of aiding and abetting liability for M&A financial advisors.

Key Points

  • Lower risk of aiding and abetting liability for bankers.

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Fried Frank explains BMC Software and the Court’s Ongoing Incremental Path to Increased Reliance on the Merger Price in Appraisal Cases

The Delaware Court of Chancery has been on a slow but clear path toward increased reliance on the merger price in determining fair value in appraisal cases. While the court’s reliance on the merger price as the best indicator of fair value has been more frequent recently, the court appears to continue to struggle with a fundamental conflict in its approach to determining fair value.

On the one hand, the court has explicitly recognized that, when a merger price has been derived through an arm’s-length sale process, involving parties with a real economic stake in the outcome and during which … Read more

Fried Frank discusses FTC Challenges Reliance on “Investment-Only” Exemption

This week, the Federal Trade Commission announced a settlement of charges that Third Point, a well-known activist investor, improperly relied on the “investment-only” exemption to the reporting obligations under the Hart-Scott-Rodino Act. This enforcement action is a harsh reminder of the FTC’s narrow interpretation of the exemption and provides additional insight on the types of conduct that the FTC deems inconsistent with passive investment intent. In a separate statement, the Director of the FTC’s Bureau of Competition emphasized that the test for the “investment-only” exemption is the acquirer’s intention, and merely “considering” or “expecting” to take certain actions may be … Read more

Fried Frank discusses Expansion of Aiding and Abetting Liability for “Gatekeepers” — Stewart v. Wilmington Trust

In Stewart v. Wilmington Trust (March 26, 2015), the Delaware Chancery Court characterized the outside auditor and the administrative management company for certain captive insurance companies as having a “gatekeeping role” for the companies. On that basis, the court refused to dismiss claims against them for aiding and abetting the alleged breaches of fiduciary duties of the companies’ directors. The decision expands the Chancery Court’s recent focus on the gatekeeper concept, underscoring the potential for aiding and abetting liability for advisors.

Focus on advisors who have a “gatekeeper” role. An advisor to a board may have aiding and … Read more

Fried Frank discusses Proposed Appraisal Statute Amendments, Which Would Permit Companies to Reduce Their Interest Cost

Proposed amendments to the Delaware appraisal statute announced recently are expected to be adopted by the Delaware Legislature. The stated purpose of the amendments is to reduce the recent rise in the volume of appraisal petitions. If adopted, the amendments would apply to merger agreements entered into on and after August 1, 2015.

The proposed amendments.

  • Option for companies to reduce interest cost (the “Interest Reduction Amendment”). This Amendment would provide an option for a company in an appraisal proceeding to pay a cash amount to the dissenting shareholders before the appraisal proceeding ends (an “Upfront Payment”). Statutory interest would

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Fried Frank discusses Delaware Corporations’ Expansive Powers with Respect to Bylaws

Recent Delaware decisions have reinforced the expansive power and authority of a board to adopt and enforce corporate bylaws. Advance notice bylaws have become commonplace; exclusive forum bylaws are becoming more prevalent; and adoption of fee shifting bylaws generally awaits action by the Delaware legislature, which is expected in the upcoming 2015 session.

Exclusive Forum Bylaws

An exclusive forum bylaw typically requires that intra-corporate litigation (such as stockholder suits) be brought only in the courts of a specified state (generally where the corporation is incorporated, and sometimes where it is headquartered). The purpose is to increase the predictability and efficiency … Read more

Fried Frank discusses In re Zhongpin

In In re Zhongpin Inc. Stockholders Litigation (Nov. 26, 2014), the Delaware Chancery Court found that the plaintiffs had pled sufficient facts to raise an inference that Xianfu Zhu, who was the company’s founder, Chairman and CEO, was a controlling stockholder, even though he owned only 17% of the company’s stock and had not controlled the directors’ decision relating to his going-private bid. Vice Chancellor Noble’s decision appears to have been based on a conclusion that the unusual degree to which Zhu was indispensable to the company as a practical matter precluded the special committee from functioning effectively because—without Zhu’s … Read more

Fried Frank discusses Delaware Appraisal Arbitrage as a New Activist Weapon

From 2004 through 2010, the number of appraisal petitions filed in Delaware rose and fell roughly in parallel with the overall level of merger activity, with appraisal rights being asserted in about 5% of the transactions for which they were available. In 2011, however, the rate of petitions more than doubled (to 10%) and it has continued to increase. In 2013, 28 appraisal petitions were filed in Delaware, representing about 17% of appraisal eligible transactions. In 2014, so far, more than 20 appraisal claims already have been filed in Delaware. The amounts at stake in appraisal actions have increased as … Read more