On November 19, 2015, in Depomed, Inc. v. Horizon Pharma plc, the Superior Court of California, County of Santa Clara granted Depomed’s request for a preliminary injunction to enjoin Horizon’s hostile exchange offer to acquire Depomed. The injunction was issued based on Horizon’s misuse of Depomed’s confidential information under a pre-existing confidentiality agreement. Less than one hour after the ruling was issued, Horizon withdrew its bid to acquire Depomed. The outcome highlights the importance of careful drafting of confidentiality agreements, and the need for companies to regularly monitor compliance with their obligations under pre-existing agreements.
Background: In 2013, … Read more
Even where the business judgment rule does not apply in the first instance because its preconditions are not satisfied, Delaware corporate law allows the use of ex ante procedural protections to avoid ex post substantive judicial review. D. Gordon Smith makes this point in “The Modern Business Judgment Rule,” which is forthcoming in the Research Handbook on Mergers and Acquisitions. In my forthcoming article, “Predatory Management Buyouts,” I analyze the related question whether the procedural mechanisms that, under Delaware law, boards may implement in order to “sanitize” the conflict-of-interest taint present in management buyout (MBO) transactions … Read more
A trio of opinions from the Delaware Supreme Court, each authored by Chief Justice Leo E. Strine, Jr., has reaffirmed Delaware’s deference to the business judgment of disinterested corporate decision-makers and restored important protections for directors that had been weakened by prior court decisions.
C&J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust
First, in late 2014, in C&J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the Delaware Supreme Court vacated an injunction issued by the Court of Chancery and held … Read more
In case you are wondering – no, this is not about making the closing more festive, or planning for a champagne celebration after the closing.
As companies think about the timing of the closing, several key drivers are leading both the buyer and the seller to strongly prefer a month-end closing (which could happen to fall on a weekend), especially:
- Accounting and systems issues with having a cut-off date that is not at month-end for purposes of preparing the closing balance sheet or financial statements to be included in future public filings
- The switch over of operational items and IT
… Read more
With recent stock market volatility and sharp drops in stock market prices coupled with the continuing low interest rate environment, management and boards of directors of companies with significant net operating loss carryforwards (NOLs) may want to consider taking steps to preserve these valuable tax assets. Section 382 of the Internal Revenue Code applies formulaic limitations on the ability of a company to utilize its NOLs in future years if it undergoes an “ownership change” (i.e., an ownership increase of fifty percentage points or more by 5% shareholders of the company during a three-year testing period). In general, the … Read more
How different is private equity from Berkshire Hathaway? The phrase “private equity” has a certain ring to it, suggesting providing shareholder capital to buy and hold businesses. In fact, most private equity firms use substantial debt to acquire companies, charge considerable fees to restructure them, and finally flip them as rapidly as possible, often to public capital markets.
Berkshire’s approach is essentially the opposite, and sounds more like what the phrase private equity connotes: regularly buying companies using solely its own capital, which includes leverage from insurance float but never debt, and holding subsidiaries permanently while giving managers free … Read more
Over the last few years, hedge fund activism has received a great deal of coverage in financial media (and in the mainstream press), has triggered heated debates and been the focus of much academic research. Saviour of capitalism for some, for others, activist hedge funds are but mongers of short-term tactics which eventually damage business corporations.
Academic research on the topic mostly focused on the short-term returns surrounding the intervention date, and the few ones that examined the longer-term relationship with performance were often marred by various methodological issues. Coffee and Palia (2014), among others, beseeched researchers on … Read more
In an important ruling last week, the Delaware Supreme Court reaffirmed that control of Delaware companies lies in the boardroom and held that the deferential business judgment rule is the “appropriate standard of review for a post-closing damages action” when a third-party merger “has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015) (en banc).
The ruling affirms the Court of Chancery’s dismissal of a case challenging KKR’s $2.6 billion acquisition of KKR Financial Holdings LLC (“KFN”), about which we previously wrote. … Read more
On September 24, 2015, the U.S. District Court for the Northern District of Ohio denied the Federal Trade Commission’s (“FTC”) motion for a preliminary injunction to prevent the merger of Steris Corporation (“Steris”) and Synergy Health plc (“Synergy”), two providers of sterilization services for manufacturers predominantly in the healthcare industry. Merger cases are rarely litigated, and the decision marks the first trial defeat in recent years for either of the U.S. antitrust agencies (the FTC and the Antitrust Division of the U.S. Department of Justice (collectively, the “Agencies”)), each of which has been successful in its active approach towards … Read more
The tradeoffs between facilitating private contracting or imposing a one-size-fits-all solution by regulatory mandate are often unclear. In the field of corporate governance, predicting which approach would be more efficient is particularly complicated. Because the optimal level of shareholder rights may vary across firms, a universal public mandate may be a blunt solution when compared to private contracting. On the other hand, agency problems may impede private market forces, as when entrenched boards resist changes desired by shareholders.
In our new working paper, “Public versus Private Provision of Governance: The Case of Proxy Access,” we study a unique … Read more
Takeover disputes can be fiercely contested. Given this, there is an important question about the forum for these disputes. Traditionally, takeover disputes were resolved by the courts. However, in recent years, there has been a trend to have these disputes resolved by Takeovers Panels. The countries with these Panels include Australia, the United Kingdom, Hong Kong, Singapore, India, Ireland, New Zealand, Switzerland and South Africa.
Takeover dispute resolution in the United States is undertaken by the courts. According to Cornerstone Research, in 2014, 93% of all mergers and acquisitions deals in the United States valued at over US$100 million were … Read more
Crown jewel lock-up options, a deal protection device common during the 1980s mergers and acquisitions boom, are back. My forthcoming paper, Fleecing the Family Jewels, is the first scholarly paper to examine the reemergence of crown jewel lock-ups in M&A transactions and to compare recent lock-ups to those used in the 1980s.
Crown jewel lock-ups became popular in the 1980s, a period which saw a significant number of hostile transactions. Lock-ups were defense du jour – employed to deter hostile bidders. These lock-ups took the form of agreements between a target company and a buyer pursuant to which … Read more
Multiforum shareholder litigation has increased sharply in recent years. In our working paper, The Private Ordering Solution to Multiforum Shareholder Litigation, we empirically analyze what has quickly proven to be the most popular and robust response to this trend: exclusive forum provisions in corporate charters and bylaws. These provisions require that corporate law-related suits be filed in a single forum, usually a court in the corporation’s statutory domicile. We identify 746 U.S. public corporations that have adopted the provision (as of August 2014); the bulk of these (93 percent) are incorporated in Delaware. Using hand-collected data on these firms, … Read more
To the friends of the CLS Blue Sky Blog: The ABA journal is conducting a poll to identify the top 100 legal blogs. We would be honored by your nomination. In addition to reprinting commentary from practitioners and regulators on legal developments in corporate law, securities and other financial regulation, antitrust, restructuring and kindred topics, we feature explanations of recent scholarship in these fields and debates on policy issues. We select our content to provide readers with a rich and broad view, and do not shy away from technical topics. I believe there are few if any other forums serving … Read more
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