When a board of directors resolves to sell the corporation, it must structure the sale so as to obtain the highest price reasonably available. In the landmark case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court held that when a sale of the corporation becomes inevitable, the “directors’ role change[s] from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders . . . .” Post-Revlon, auctions have become a pervasive feature of the modern takeover landscape. Indeed, a recent survey of four hundred large-scale takeovers with a … Read more
On July 2, 2015, in Hill International, Inc. v. Opportunity Partners L.P., No. 305, 2015, the Delaware Supreme Court affirmed a Court of Chancery decision that Opportunity Partnership L.P. (the “Fund”), a stockholder in Hill International, Inc. (“Hill” or the “Company”), had complied with the Company’s advance notice bylaws and thus timely submitted two business proposals for consideration and two nominees for election at Hill’s 2015 Annual Meeting (the “Notice”). Accordingly, the Supreme Court held that it was proper to enjoin the Company from conducting any business at the Annual Meeting other than convening the Meeting for the sole … Read more
Our paper titled “The Power of Shareholder Votes: Evidence from Director Elections” aims to answer the question: Do shareholder votes matter in uncontested director elections? In principle, shareholders who own a firm should be free to pick the board members who represent them. However, in the U.S., for the most part, shareholder votes for director elections are non-binding, leading scholars to describe shareholder votes as “sham democracy”. Plenty of anecdotal evidence supports this view. For instance, in Cablevision Systems, shareholders repeatedly cast majority votes against re-electing three directors. The directors remained on the board.
Is the Cablevision election an isolated … Read more
On June 3, 2015, the US Department of the Treasury (Treasury) and the Internal Revenue Service (the IRS) issued final regulations (the 2015 Final Regulations) under Section 7874, 1 relating to corporate inversions or expatriations. The 2015 Final Regulations largely follow temporary regulations issued on June 12, 2012 (the 2012 Temporary Regulations), which introduced a rigorous, bright-line test (discussed below) that a foreign group must satisfy in order to be treated as having “substantial business activities” in a single foreign country and thereby avoid the US anti-inversion rules. The 2015 Final Regulations will continue to make it difficult for most … Read more
A major criticism of activist hedge funds, and one that allegedly supports the argument that they suffer from short-termism, is that their recommendations almost always focus on disinvestment. For example, they will typically recommend raising the dividend, cutting costs, spinning off divisions or subsidiaries or preparing the company for sale. Since we should expect activist hedge funds to be indifferent to the types of recommendations they make as long as they believe the recommendations will result in the highest possible stock price, then why do these recommendations seem to be so heavily biased in the direction of disinvestment?
One … Read more
On May 14, 2015, the Delaware Supreme Court issued its decision in In re Cornerstone Therapeutics Inc., S’holder Litig., clarifying that damages claims against independent directors can be dismissed where: (1) an applicable exculpatory charter provision exists; and (2) a plaintiff fails to plead a non-exculpated claim against them, regardless of the applicable standard of review. That is, independent directors will not automatically be required to remain defendants in a litigation simply because, for example, the challenged transaction was with a controlling stockholder. Rather, plaintiffs must state facts sufficient to support an inference of disloyalty against independent directors themselves.… Read more
On November 3, 2014, the board of directors of Cogent Communications Holdings, Inc., a publicly traded internet-service provider incorporated in Delaware, amended Cogent’s bylaws to include two new provisions. One was a forum-selection provision designating Delaware as the exclusive forum for derivative actions and other claims involving internal corporate matters. The other was a so-called “fee-shifting” bylaw requiring any stockholder who asserts “any claim … against the Corporation and/or any director, officer, [or] employee” and does not obtain a judgment on the merits that “substantially achieves… the full remedy sought” to reimburse any costs the corporation incurred defending the suit … Read more
- This highly celebrated DuPont victory signals that shareholders recognize that not all companies require activist intervention or a seismic change in strategy – DuPont’s strong financial performance and implementation of strategic initiatives supported its contention that it was pursuing a viable long-term strategy while remaining receptive to alternative approaches and the need to focus on smart capital deployment.
- DuPont benefitted from an atypically high percentage of retail shareholders, who normally side with the board, and seemed to have listened and responded to its institutional shareholders, rather than simply battling with the insurgent. While DuPont does not by any means portend
Among practitioners, it is a customary cliché to say that all proxy contests—just like all trials—are unique and idiosyncratic. There is some truth to that easy generalization, but it also misses the forest for the trees. Some obvious truths stand out in the recent battle between Trian Fund Management and DuPont that will apply to future contests:
1. What explains DuPont’s Victory? DuPont won only a narrow victory, despite enormous advantages. Press accounts have reported that DuPont won 52% of the vote. This close margin may seem surprising, given (1) DuPont’s very large market capitalization (over $68 billion), (2) DuPont’s … Read more
How does corporate law matter? My recent paper suggests that the main impact of corporate law is not in imposing sanctions, but rather in producing information. The process of litigation or regulatory investigations produces information on the behavior of defendant companies and businessmen. This information reaches third parties, and affects the way that outside observers treat the parties to the dispute. In other words, corporate and securities litigation affects behavior indirectly, through shaping the reputations of companies and businessmen.
The paper explores how exactly information from the courtroom translates into the court of public opinion. By analyzing the content of … Read more
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
On March 29, 2015, the National Association of Insurance Commissioners (the “NAIC”) Private Equity Issues Working Group (the “PEI Working Group”) adopted a new section to be added to the NAIC’s Financial Analysis Handbook that provides a narrative guidance to state insurance regulators considering an application seeking approval to acquire control of a domestic insurance company (the “Guidance”). The Guidance draws from many of the practices that have recently been used by states such as New York and Iowa in approving the acquisition of control of domestic insurers by private equity firms, and, in the case of New York, recently … Read more
The negotiation of the “deal protection” package in a public company M&A transaction almost always involves the inevitable discussion as to the amount and percentage of the break-up fee. In general, the Delaware courts have upheld break-up fees within a range of 3% to 4% of equity value as reasonable and not preclusive. Delaware courts also have accepted somewhat higher break-up fees in certain deals (e.g., 4.3% in In re Topps Company Shareholder Litigation, and 4.4% in In re Answers Corporation Shareholder Litigation), depending on the circumstances.
Despite the contentious negotiations surrounding break-up fees and other deal protection … Read more
In addition to change-of-control benefits (“golden parachutes”), executives often negotiate for personal side-payment at the same time that they are bargaining with an acquirer over the sale of their firm. Side-payments differ from golden parachutes in that they are negotiated ex post in connection with a specific acquisition proposal, whereas golden parachutes are part of the executive’s employment agreement negotiated when she is hired. Side-payments are structured in a variety of different ways: by awarding a merger bonus (often structured as a non-compete agreement); augmenting parachute entitlements during deal negotiations; signing a post-merger consulting or employment contract; or granting ‘unscheduled’ … Read more
The ISS Report on the DuPont-Trian proxy contest calls attention to a number of important insights into ISS policies and practices and those of many of its institutional investor clients. Concomitantly, these policies illustrate the realities of the sharp increase in activist activity and the steps corporations can, and should, take to deal with the activist phenomena.
ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.
Trian Fund Management and its … Read more
The Delaware Rapid Arbitration Act (DRAA)—which provides a streamlined arbitration process that will allow for prompt, cost-effective resolution of business disputes—was passed by the Delaware House of Representatives on March 19, 2015, and the Delaware Senate on March 31, 2015, and was signed by Governor Jack Markell on April 3, 2015. The DRAA will become effective on May 4, 2015, and will be codified as new Chapter 58 of Title 10 of the Delaware Code. As summarized in more detail below, the DRAA offers a real alternative to the litigation process, providing companies with the chance to engage in a … Read more
A watershed moment is coming for shareholder activism and corporate governance generally, as the proxy contest brought by Trian Management Fund, seeking effectively to break up DuPont, enters its final stages (with the vote being less than a month away). Technically, the contest is to elect four Trian Fund nominees to the DuPont board, but, as a column in the New York Time’s Dealbook put it more bluntly, the real fight is over whether to break DuPont into three parts and “shut down DuPont’s central research labs.” Much about this contest is unusual: unlike other targets of activism, DuPont … Read more
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
In an environment of escalating antitrust activity around the globe with ever increasing government sanctions and private litigation exposure, it pays to ensure that your antitrust compliance efforts evolve with changes in your business and the enforcement landscape and are road-tested through regular audits. In this briefing, we highlight some key areas of antitrust enforcement to be prepared for in 2015.
Aggressive Prosecution of Cartels Will Continue
With the proliferation of leniency programs and “amnesty plus” incentivizing companies to self-report cartel conduct, 2015 is likely to bring new cartel investigations and expansion of existing cases into related product markets. The … Read more
The Committee on Foreign Investment in the United States (“CFIUS”), a multi-agency U.S. regulatory body empowered to review transactions involving a foreign person and a U.S. business that may affect U.S. national security, recently delivered its unclassified Annual Report to Congress for the calendar year 2013 (“Annual Report”). In accordance with the legal prohibition against public disclosure of such information, the Annual Report contains no information with respect to specific transactions. Nonetheless, it remains a remarkable window into the reach and operation of CFIUS, and its impact on transactions involving U.S. businesses.
As in previous years, and as required … Read more