Trevor Norwitz

Delaware Legislature Should Act to Curb Appraisal Arbitrage Abuses

A triad of recent decisions out of the Delaware Court of Chancery highlight the urgent need for legislative reform in Delaware to ameliorate the risk that appraisal arbitrage – now a multibillion dollar industry – poses to transactional vitality and shareholder value.

In two recent cases, In re Appraisal of Ancestry.com, Inc.[1] (Ancestry I) and Merion Capital LP vs. BMC Software [2], Vice Chancellor Glasscock followed the literal interpretation of the Delaware appraisal statute adopted in 2007 by Chancellor Chandler in In re Appraisal of Transkaryotic Therapies, Inc.[3] Before Transkaryotic, it was generally understood that … Read more

Goodwin Procter discusses Two New York Decisions Rejecting Disclosure-Based Settlements of Merger Lawsuits

Speed Read

In two recent rulings, the New York Supreme Court rejected settlements arising from lawsuits in which plaintiff stockholders challenged the defendant public companies’ merger-related disclosures. The court in each case found that proposed supplemental disclosures that defendants would provide were immaterial as a matter of law and therefore the court declined to approve the settlements of the stockholders’ claims. The rulings provide helpful guidance on materiality in the context of merger disclosures and continue the trend of greater judicial scrutiny of so-called “merger tax” settlements. In light of that increased scrutiny, stockholder plaintiffs may choose to bring fewer … Read more

Wachtell Lipton discusses Acquisition Financing

Acquisition financing activity was robust in 2014, as the credit markets accommodated increased demand from rising M&A activity.  At over $749 billion, global 2014 M&A loan issuance was up approximately 40 percent year over year, the highest total since before the Great Recession.  While the aggregate figures suggest a borrower-friendly market, the actual picture is more nuanced.  Investment grade acquirors benefited from a consistently strong financing environment throughout 2014 and finished the year with a flourish (including a $36 billion commitment backing Actavis’ acquisition of Allergan), while leveraged acquirors encountered more volatility, as lenders responded quickly to regulatory changes and … Read more

Megan Shaner

Legal Agency Costs: Our Preference to Sue Directors

Stockholders’ ability to sue to protect their interests plays a critical role in corporate governance.[1] As described by the Delaware Court of Chancery: “Due to rational passivity, ‘it is likely that in a public corporation there will be less shareholder monitoring expenditures than would be optimum from the point of the shareholders as a collectivity.’ Incentivized by contingent fees, specialized law firms representing stockholder plaintiffs can ‘pursue monitoring activities that are wealth increasing for the collectivity (the corporation or the body of its shareholders).’ ‘In so doing, corporations are safeguarded from fiduciary breaches and shareholders thereby benefit.’ Understood from … Read more

Gibson Dunn discusses Important New Guidance on Revlon Duties

On December 19, 2014, the Delaware Supreme Court issued a ruling reversing an order of the Court of Chancery granting a preliminary injunction that would have enjoined an agreed-to merger and required a mandatory post-signing 30-day go-shop period.  In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, No. 655/657 (Del. Dec. 19, 2014), the Supreme Court held, among other things, that the Court of Chancery had imposed a non-existent requirement that a selling company must engage in an active market process as a matter of law.

The Transaction.  The transaction that … Read more

Cleary discusses American Bankruptcy Institute’s Proposed Chapter 11 Reforms

On December 8, 2014, the American Bankruptcy Institute (“ABI”) Commission to Study the Reform of Chapter 11 (the “Commission”) issued its Final Report and Recommendations (the “Report”). The Report proposes a number of important changes to Chapter 11.[1]

The Commission was formed in 2012 to respond to shifts in the financial markets, corporate structures and credit and derivatives products since the Bankruptcy Code’s adoption in 1978 and is comprised of leading bankruptcy practitioners, professors and judges. The Report is the result of an in-depth, two-year review of Chapter 11 by the Commission and 13 separate Advisory Committees. The “Recommended Principles” … 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

Morrison & Foerster discusses DOJ Antitrust Gun Jumping

Just five weeks after the Antitrust Division of the U.S. Department of Justice announced that Flakeboard America had abandoned its plan to acquire a medium-density fiberboard (MDF) mill and two particleboard mills from SierraPine in the face of the Division’s competitive concerns, the Division has settled separate gun-jumping and Section 1 claims against the same parties relating to their conduct during the course of the Division’s review of the transaction.[1]

This enforcement action is a reminder that parties to mergers and acquisitions – whether or not reportable under the Hart-Scott-Rodino Act (“HSR Act”) regime – need to exercise care both … Read more

Sullivan & Cromwell discusses Concentration Limits on Large Financial Companies

[On November 5, 2014,] the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved a final rule (the “Final Rule”) implementing Section 622 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),[1] which establishes a financial sector concentration limit (the “Section 622 Concentration Limit”). The Section 622 Concentration Limit generally prohibits insured depository institutions, bank holding companies, foreign banking organizations (“FBOs”) that are treated as bank holding companies, savings and loan holding companies, other companies that control an insured depository institution, as well as nonbank financial companies designated by the Financial Stability Oversight … Read more

Sullivan & Cromwell discusses In re KKR Financial Holdings LLC Shareholder Litigation

In an October 14, 2014 decision[1] on a motion to dismiss, the Delaware Court of Chancery (C Bouchard) held that business judgment review applied to breach of fiduciary duty claims asserted against directors in connection with a stock-for-stock sale of KKR Financial Holdings LLC (“KFN”) to KKR & Co. L.P. (“KKR”), an entity which held 1% of KFN’s stock and whose affiliate managed KFN’s day-to-day operations under a management agreement having terms making it difficult for KFN to sell to anyone other than KKR. The Court held business judgment to be the appropriate standard of review because (i) the … Read more

Davis Polk discusses Implications of Anti-Inversion Guidance for Insurance Companies

The Treasury Department and the IRS recently released Notice 2014-52 (the “Notice”), which describes regulations that the government intends to issue to target the tax benefits of corporate inversions. The provisions of the Notice are summarized in our previous client memorandum dated September 23, 2014, Treasury Issues Long-Awaited Anti-Inversion Guidance. This Client Newsflash highlights a feature of the Notice that has not attracted much public attention, and that appears both to eliminate the ability of many foreign insurance companies to participate in inversion transactions and to impede the ability of many foreign insurance companies to acquire U.S. target companies … Read more

Latham & Watkins discusses Trends in Master Limited Partnership M&A

In the first half of 2014, master limited partnership (MLP) mergers and acquisitions (M&A) transactions represented approximately 25 percent of all US oil and gas industry M&A activity. MLP transactions in the midstream and upstream subsectors have dominated the MLP M&A market. By value, the vast majority of these deals (88 percent) consisted of public companies acquiring private targets. Following the trend from last year, entity-level (as opposed to asset-level) M&A transactions have been the primary form of MLP M&A activity so far this year. From this year’s transactions, we have identified four trends worth exploring.

1. The Kinder Morgan Read more

Dorsey discusses Survival of Non-Binding LOI Provisions

On September 30, 2014, the Delaware Supreme Court reversed a jury verdict finding that ev3, Inc. breached its contractual obligation to the shareholders of Appriva Medical, Inc., a company purchased by ev3. In ev3, Inc. v Lesh, No. 515m 2013, the Delaware Supreme Court ruled that an integration clause in a definitive merger agreement that provided for survival of a previously signed letter of intent did not transform the non-binding provisions of the LOI into binding provisions. The case was remanded to the Delaware Superior Court for further proceedings consistent with the Delaware Supreme Court’s opinion.

Post-Merger Milestone PaymentsRead more

coffee-dpalia

Hedge Fund Activism: Impacts and Options

Hedge fund activism has increased almost hyperbolically.  Some view this optimistically as a means for bridging the separation of ownership and control; others are more pessimistic, seeing mainly wealth transfers from bondholders or speculative expectations of a takeover as fueling the spike.  Equivalent division exists over the impact of this increased activism, with optimists seeing real gains that do not erode over time and improvements in operating performance, and pessimists predicting shortened investment horizons, increased leverage, and reduced investment in research and development.

In a paper recently posted on SSRN,[1] we take an analytic perspective.  We begin by surveying the … Read more

mmck

The Structure of Stockholder Litigation: When Do the Merits Matter?

The following post comes to us from Minor Myers, Assistant Professor at Brooklyn Law School, and Charles Korsmo, Assistant Professor at Case Western Reserve University School of Law.  It is based on their recent paper, “The Structure of Stockholder Litigation: When Do the Merits Matter?,” which is forthcoming in the Ohio State Law Journal and is available here.

We offer a novel perspective on an old question in corporate law: Do the merits matter in stockholder litigation? In short, we find that the merits appear to matter very little in an important type of stockholder litigation—fiduciary duty class … Read more

Sullivan & Cromwell discusses Berkshire Hathaway’s Civil Penalty for Hart-Scott-Rodino Act Violation

Summary

Berkshire Hathaway Inc. has agreed to pay a civil penalty of $896,000 concerning its conversion of notes into voting securities of USG Corporation in December 2013, which was more than five years after Berkshire’s HSR Act filing to acquire an initial USG stock position and thus past the expiration date of the original HSR. In addition, Berkshire previously had made a corrective filing in July 2013 concerning the acquisition of voting securities of a different issuer and was, therefore, treated as a repeat offender by the Federal Trade Commission.

Discussion

On Wednesday, August 20, the Federal Trade Commission (“FTC”) … Read more

Kirkland & Ellis discusses Shareholder “Books and Records” Demands after the Wal-Mart Decision

A recent Delaware Supreme Court decision highlights the growing risks to companies of extensive statutory “books and records” demands that recently have become a favorite in the toolkit of plaintiffs’ lawyers and even activist shareholders conducting what are often speculative fishing expeditions under the guise of investigating alleged corporate wrongdoing. The statutory inspection right under Section 220 of the Delaware corporation law (and analogous rights in other states) permits shareholders with a holding of any size to access almost any internal information under the control of the company as long as there is a “proper purpose” for the request. Most … Read more

White & Case discusses DC Circuit’s CFIUS Ruling

On July 15, 2014, the US Court of Appeals for the District of Columbia (DC Circuit) ruled that if the President, pursuant to his powers under the Exon-Florio Amendment to the Defense Production Act of 1950 (DPA), deprives a foreign acquirer or investor in the United States of its constitutionally protected property interests, the foreign acquirer or investor must be accorded certain due process protections. The case at issue, Ralls Corp. v. CFIUS et al, is the first-ever challenge to the review process conducted by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee within … Read more

Morrison & Foerster discusses Tax Inversions

Alongside the more typical summer fare, such as coverage of the best beach reading and the latest action movie blockbuster, this summer the media have been abuzz with seemingly daily reports on the latest so-called “inversion” transactions shifting a U.S.-based multinational corporation’s tax residence offshore. Recently announced transactions include the Medtronic acquisition of Irish-listed Covidien (which itself had previously inverted); Mylan’s acquisition of the Abbott Laboratories non-U.S. specialty and branded generics businesses for $5.3 billion in stock; and AbbVie’s $54 billion acquisition of Shire, a London-listed, Jersey incorporated, Irish tax resident corporation. Other transactions remain in the planning stages (Walgreens-Boots), … 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