Honored in the Breach: Diverging Law and Practice in Tender Offers for Debt Securities

The views expressed in this article are those of the authors and do not necessarily represent the views of Jones Day or its clients.

In a recent article in the NYU Journal of Law & Business, we discuss some of the legal and regulatory concerns that have arisen in structuring tender offers for debt securities.  The paper’s title refers to a divergence that has developed between accepted market practices and the legal framework that is supposed to govern them.  This divergence is grounded in the SEC’s reliance on no-action letters as a regulatory mechanism to address developing market practices, … Read more

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Editor's Tweet: Haag and Keller discuss Diverging Law and Practice in Tender Offers for Debt Securities

Gibson Dunn on Controlling Shareholders and the Business Judgment Rule in Going Private Merger Transactions

On May 29, 2013, Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery issued an important decision that lays the foundation for controlling stockholders to pursue going-private merger transactions with the comfort that, if certain conditions are met, such transactions will be reviewed under the deferential business judgment rule standard, rather than the exacting entire fairness standard.   

In In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), Chancellor Strine considered a question of law that had long vexed the deal community: whether a controlling stockholder that expressly conditions a going-private merger transaction on Read more

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Wachtell on Controlling Shareholders and the Business Judgment Rule in Going Private Merger Transactions

The Delaware Court of Chancery this week held that the use of both an independent special committee and a majority-of-the-minority vote condition in a go-private merger between a controlled company and its controlling stockholder will result in application of the deferential business judgment rule standard of review rather than the onerous entire fairness standard.  In re MFW S’holders Litig., C.A. No. 6566-CS (Del. Ch. May 29, 2013).

The case arose out of a stockholder challenge to a merger in which MacAndrews & Forbes acquired the 57% of M&F Worldwide it did not already own.  The transaction was subject to … Read more

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The Marketplace of Ideas: Professor Coffee and Brandon Gold on the Wachtell Bylaw

The CLS Blue Sky Blog presents its first installment of our new series, entitled “The Marketplace of Ideas.”  The intent is to present different perspectives on the same subject by two or more authors.

Today, Professor John C. Coffee, Jr. of Columbia Law School responds to Mr. Brandon Gold, a fellow in the Harvard Law School Program on Corporate Governance, who will be an associate with Schulte Roth & Zabel LLP this fall.  Mr. Gold’s post, available here, argues, for a number of reasons, that a proposed bylaw suggested by Wachtell, Lipton is overbroad and potentially invalid.

The proposed … Read more

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Editor's Tweet: Introducing "The Marketplace of Ideas" Professor Coffee and Brandon Gold offer different views on the Wachtell Bylaw

The Wachtell Bylaw: A Balanced Perspective

In a free-swinging and provocative attack, Brandon Gold, a graduating Harvard Law School student, argues (1) that third party bonuses, paid by hedge funds or others soliciting proxies, to their director nominees are acceptable and even desirable, and (2) that a proposed bylaw, drafted by Wachtell, Lipton, that would disqualify nominees who were parties to any such agreement or understanding or who have received such compensation from third parties is invalid.  Only the second of these questions involves much nuance, but both are worth exploring.

Mr. Gold’s first assertion that such “pay for performance” compensation arrangements for directors are desirable … Read more

Why the Wachtell Bylaw on Director Compensation by Shareholders is Overbroad and May Fail Blasius Scrutiny

The following post comes to us from Brandon S. Gold, a fellow in the Harvard Law School Program on Corporate Governance.  Beginning in the Fall, Brandon will be an associate with Schulte Roth & Zabel LLP.

In a recent memorandum to clients shared on this blog, Wachtell, Lipton, Rosen & Katz urged companies to adopt a bylaw that would effectively prevent hedge funds and other shareholders from offering their director nominees compensation arrangements such as “pay-for-performance” plans.[1] In an effort to weaken shareholder activists, Wachtell has ignored arguments it has been making for decades and has treated the … Read more

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Editor's Tweet: Brandon Gold discusses why the Wachtell Bylaw on director compensation by shareholders is overbroad and may fail blasius scrutiny

Sullivan & Cromwell Discusses last week’s new development in Delaware on “Don’t Ask, Don’t Waive” Standstills

In a preliminary injunction opinion issued on May 21, 2013, the Delaware Court of Chancery (VC Glasscock) found that the board of directors of NetSpend Holdings Inc., comprised of four directors representing private equity-affiliated stockholders that owned over 45% of NetSpend’s shares, three independent directors and the CEO, likely failed to satisfy their so-called “Revlon” duties to attempt to secure the best value reasonably attainable when agreeing to sell the company to Total Systems Services, Inc. (“TSYS”) in an all-cash $1.4 billion transaction. Specifically, the Court concluded that while the single-bidder sale process was not unreasonable per se … Read more

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Editor's Tweet: Sullivan & Cromwell Discusses last week's new development in Delaware on "Don't Ask, Don't Waive" Standstills

An Incentive-Compatible Alternative to “Don’t Ask Don’t Waive” Standstills

In a recent essay forthcoming in the Delaware Journal of Corporate Law (available on SSRN), we argue that the current controversy over “Don’t Ask, Don’t Waive” standstills in M&A practice highlights the need to apply mechanism design to change-of-control transactions.[1]  Mechanism design is a Nobel Prize-winning theory based on incentive compatibility, whereby algorithmic procedures render it in the parties’ interests to be forthcoming, or truthful about their “bottom lines,” rather than relying exclusively on ex-post enforcement.

A.  The Tension Between Deal Certainty and Value Maximization in M&A Transactions

In M&A auctions, the board’s duty to maximize … Read more

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Editor's Tweet: NYU's Professor Steven J. Brams discusses An Incentive-Compatible Alternative to “Don’t Ask Don’t Waive” Standstills

Do Impending Delaware Law Changes Mean a Seismic Shift for Cash Tender Offers in Business Combinations?

Delaware appears almost certain to adopt changes that would become effective August 1 to the Delaware General Corporation Law (DGCL) which would change the process for back-end mergers after a tender offer closes.

Under this change,  a Buyer of over 50 percent (instead of the current threshold of over 90 percent) of shares of the Target will be able to effect a short-form merger without the burdensome and lengthy process of a further proxy solicitation and stockholder vote, which, by definition, the Buyer always wins.

Such DGCL amendments represent the most significant shift in the balance between usage of a … Read more

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Editor's Tweet: Will impending Delaware law changes mean a seismic shift for cash tender offers in business combinations?

How VCs Induce Entrepreneurial Teams to Sell Startups

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure … Read more

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Editor's Tweet: Professor Jesse Fried of Harvard Law School discusses how VCs induce eintrepreneurial teams to sell startups

Gibson Dunn Discusses Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure

The Delaware State bar recently proposed an amendment to Section 251 of the Delaware General Corporation Law (DGCL) to add new subparagraph (h) that would greatly enhance the appeal of the tender offer over a one-step merger structure.

Currently, bidders can usually consummate an acquisition more quickly as a tender offer compared to a one-step merger.  If, however, the bidder is unable to reach the 90% threshold necessary to effect a short form merger, the bidder must prepare, file and mail to stockholders an information statement on Schedule 14C (which is subject to SEC review and comment) before a back-end … Read more

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Editor's Tweet: Gibson Dunn Discusses Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure

Wachtell Lipton Discusses Proposed Amendments to Delaware Law that Would Facilitate Tender Offer Structures

The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals.  The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding … Read more

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Editor's Tweet: Wachtell Lipton Discusses Proposed Amendments to Delaware Law that Would Facilitate Tender Offer Structures

Delaware Supreme Court Reverses Chancery and Gives Collateral Estoppel Effect to California Federal Court’s Dismissal of Derivative Claims

In its widely followed Allergan decision, the Delaware Court of Chancery declined to apply collateral estoppel to dismiss a Delaware derivative complaint even though a California federal court dismissed (with prejudice) essentially the same complaint brought by different stockholders. The Court of Chancery had reasoned that there was no privity between the derivative stockholders because, until a stockholder survives a motion to dismiss based on failure to make demand, the stockholder is not acting on behalf of the corporation. Moreover, the Court of Chancery found that the California plaintiffs were inadequate representatives because they filed suit before seeking corporate books … Read more

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Editor's Tweet: Delaware Supreme Court Reverses Chancery and Gives Collateral Estoppel Effect to California Federal Court's Dismissal of Derivative Claims

M&A Litigation: More and More Dysfunctional

Empirical scholars of corporate law are uncovering a rapidly changing and depressing pattern in M&A litigation. This new research dates from a series of articles in 2012 by Professors John Armour, Bernard Black and Brian Cheffins, which announced that Delaware was “losing” its cases, as plaintiff’s attorneys migrated to other jurisdictions where they could expect lower dismissal rates and/or higher fee awards.[1] This year, a newer study by Professors Matthew Cain and Steven Davidoff covers 1,117 merger transactions between 2005 and 2011 and reports more surprising and complex findings. [2]  But the key question has not been faced by these … Read more

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Editor's Tweet: Professor John Coffee of Columbia Law School discusses M&A Litigation and its increasing dysfunctional

Qualitative Disclosure & Financial Projects: Overshadowed Lessons from In re Ancestry.com

Chancellor Strine’s December 17, 2012 bench ruling in In re Ancestry.com Inc. Shareholder Litigation attracted immediate attention from M&A practitioners and scholars regarding the Chancellor’s comments on so-called “Don’t Ask, Don’t Waive” standstill provisions.[1]  That attention, however, overshadowed the Chancellor’s equally important guidance regarding the materiality—and, therefore, need to disclose to shareholders—of qualitative facts surrounding fairness opinions prepared by a target’s financial advisor.  This post attempts to highlight that guidance, now that some of the proverbially dust kicked up by the Chancellor’s commentary on “Don’t Ask, Don’t Waive” standstills has begun to settle.

Background to the Ancestry.com Dispute

Beginning … Read more

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Editor's Tweet: S&C Krishna Veeraraghavan and Jason Tyler discuss overshadowed lessons from In re Ancestry.com

Gibson Dunn discusses recent Delaware Chancery ruling rejecting settlement of M&A litigation

On February 28, 2013, Chancellor Leo E. Strine, Jr. of the Delaware Chancery Court issued a rare bench ruling rejecting a disclosure-only, negotiated settlement of an M&A stockholder lawsuit.  The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation, Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class.  At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays Read more

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Editor's Tweet: Gibson Dunn discusses recent Delaware Chancery ruling rejecting settlement of M&A litigation

Recent Delaware Developments: Three Cases with Surprising Outcomes that Reinforce Traditional Fiduciary Principles

In three relatively low profile decisions issued by the Delaware Court of Chancery in February 2013, the court reached seemingly atypical results given the issued involved and the procedural postures of the respective cases.  The first decision was on February 6 in In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (TRANSCRIPT).  There, Chancellor Strine denied from the bench a motion to dismiss a claim alleging that the defendant directors had breached their duty of loyalty by failing to monitor the company’s officers.  This result is noteworthy in that such so-called Caremark claims have been characterized by the … Read more

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Editor's Tweet: S&C's Krishna Veeraraghavan & Jason S. Tyler discuss three recent Delaware cases with suprising outcomes

Why the Out-Of-Delaware Trend in Merger Litigation May Not Be So Bad

The recent discovery that corporate law litigation very often takes place in courts outside of Delaware has rattled the academic consensus that Delaware won the corporate law “race” by providing a well-managed forum staffed with expert judges willing to decide complex deal cases quickly.  In an apparent affront to this settled understanding, recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself.[1]  As a forum for corporate litigation, in other words, Delaware no longer dominates.

Shaken from their settled understandings, commentators have sounded the alarm that fewer cases decided in Delaware … Read more

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Editor's Tweet: Professor Sean J. Griffith of Fordham Law discusses why the out-of-Delaware trend in merger litigation may not be so bad

No-Shops & Fiduciary Outs: A Survey of 2012 Public Merger Agreements

One of the fundamental tenets of corporate law is that boards of directors owe fiduciary duties to the corporation and its stockholders. In the context of a sale of the corporation, these duties may require a board of directors to pursue multiple transactions in an effort to ensure that the corporation’s stockholders receive the highest price reasonably available for their shares. However, once a merger agreement has been signed, the board of directors of the target corporation typically becomes subject to contractual commitments not to pursue alternative transactions and to recommend the transaction to its stockholders. The potential tension between … Read more

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Editor's Tweet: Gibson Dunn releases a survey of 2012 Public Merger Agreements, including an examination of many provisions at the center of negotiations.

Wachtell Lipton Discusses Rulemaking Petition for Modernization of Section 13 Beneficial Ownership Reporting Rules

NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute have jointly filed a rulemaking petition with the SEC, seeking prompt updating to the reporting rules under Section 13(f) of the Securities Exchange Act of 1934, as well as supporting a more comprehensive study of the beneficial ownership reporting rules under Section 13. The petitioners urge the SEC to shorten the reporting deadline under Rule 13f-1 from 45 days to two business days after the relevant calendar quarter, and also suggests amending Section 13(f) itself to provide for reporting on at least a monthly, … Read more

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Editor's Tweet: Wachtell Discusses a Rulemaking Petition Calling for Modernization of Section 13 Beneficial Ownership Reporting Rules