By: Joe Marrow
Continuing a recent trend, a Delaware Chancery Court judge recently denied a request for an award of attorneys’ fees and expenses in connection with the Keurig Green Mountain Inc. shareholder litigation. On July 22, 2016, in the case In Re: Keurig Green Mountain Inc. Shareholders Litigation, case number 11815, Chancellor Andre G. Bouchard considered a petition seeking an award of attorneys’ fees and expenses to the attorneys representing shareholders that had challenged the acquisition of Keurig.
On behalf of the shareholders, the lawyers had questioned the deal disclosures that had been made by Keurig in its proxy statement. As a result of the action, Keurig made certain supplemental disclosures to the shareholders. The attorneys representing the shareholders then sought an award of $300,000 of fees and expenses from Keurig. Keurig’s attorneys opposed the petition arguing that the supplement disclosures merely confirmed information that had previously been provided in the proxy statement. Chancellor Bouchard agreed and denied the petition on the basis that disclosures in question were not beneficial to the shareholders. Chancellor Bouchard has taken a strong position against granting significant fee awards in the context of disclosure-only settlements in shareholder litigation.
For more information, please contact corporate attorney Joe Marrow.
By: Mark Tarallo
In Fortis Advisors v. Dialog Semiconductor, C.A. No. 9522-CB, the Delaware Chancery Court rejected several claims made by the selling shareholders’ representative relating to the conduct of the buyer in relation to the earn-out. The equityholders of iWatt, Inc., sold their shares (in a transaction structured as a merger) to Dialog Semiconductor PLC, in a transaction that included both a cash payment and an earn-out. The Merger Agreement included language that the buyer would use “commercially reasonable best efforts” to operate the acquired business to achieve the earn-out, and also included a list of several specific obligations, covenants and restrictions applicable to the buyer in connection with the post-closing operation of the business. When the earn-out targets were not met, Fortis, as the shareholders’ representative, sued the buyer for, among other things, breach of the implied covenant of good faith and fair dealing. The buyer filed a motion to dismiss relating to the claims, and the Chancery Court ruled in favor of the buyer with respect to the allegations of breach of the implied covenant of good faith and fair dealing. The Chancery Court found that the Merger Agreement included very specific terms relating to the operation of the business in connection with the earn-out, and that “the allegations of the complaint fail to state a claim for breach of the implied covenant because Fortis has not identified, as it must, a gap in the Merger Agreement to be filled by implying terms through the implied covenant.” In light of the decision, parties that are negotiating acquisition documents under Delaware law should be careful not to rely on the implied covenant for post-transaction enforcement where the documents contain specific language addressing the obligations of the parties, as the Delaware courts will not impose the implied covenant where there is no gap in the documents.
For more information regarding this topic, please contact Mark Tarallo.
By: Mark Tarallo
The Delaware Chancery Court recently considered the issue of whether or not the failure to obtain a fairness opinion in connection with the sale of a company constituted bad faith on the part of the board of directors. The actions decided in Houseman v. Sagerman, C.A. No. 8897-VCG, 2014 WL 1600724 (Del. Ch. Apr. 16, 2014), arose out of the merger of Universata, Inc. (“Universata”) with HealthPort Technologies, LLC (“HealthPort”). In late 2010, Universata was approached by HealthPort and at least one other suitor about a potential acquisition. Universata sought legal counsel in connection with the proposed transactions, and counsel suggested that Universata engage an investment bank to assist in negotiations. Universata engaged KeyBanc, as KeyBanc had worked with Universata previously and was familiar with the company.
In an effort to keep costs down (and presumably increase the return to shareholders), KeyBanc’s engagement was limited to assisting with due diligence and identifying other potential buyers. Universata’s board of directors considered obtaining a fairness opinion from KeyBanc, but ultimately chose not to on the grounds of cost and timing. Universata’s board ultimately approved the merger with HealthPort, at a directors’ meeting attended by counsel where the board was provided with a summary of the legal aspects of the merger documents by counsel and had the opportunity to ask questions of counsel.
The plaintiffs, who were stockholders and creditors of Unversata, brought suit against the directors on the grounds that they breached their duty of care by, among other things, failing to obtain a fairness opinion from KeyBanc in connection with the merger. The court found that while the sales process was not perfect, the board did not “knowingly and completely fail to undertake a reasonable sales process.” The court found that the board took several steps intended to maximize value, including hiring counsel, engaging KeyBanc to perform certain tasks, reviewing offers from multiple bidders, and negotiating aggressively with the ultimate buyer (HealthPort). The court found that the plaintiffs could not prove bad faith by the board, as there was not a complete failure by the board to run a reasonable sales process, and dismissed the plaintiffs’ complaint on these issues.
The full text of the opinion is available here.
Feel free to contact Mark with any questions on this topic.
By: Mark Tarallo
In the past, the Delaware Chancery Court has applied the “entire fairness” standard when evaluating claims made by minority shareholders in the context of a buyout by a controlling shareholder. The entire fairness standard is generally considered the most rigorous standard of review, incorporating a detailed review of the specific facts surrounding both the price and process of a controlling shareholder buyout. In an entire fairness review, the burden is on the controlling shareholder to prove fairness. The Delaware Supreme Court recently upheld a Chancery Court decision applying the much less rigorous business judgment rule instead of the entire fairness standard.
On May 29, 2013, former Chancellor Strine, sitting in the Chancery Court, granted summary judgment in favor of MacAndrews & Forbes Holdings Inc., and indicated that the business judgment rule should be applied to evaluate the transaction (In re MFW Shareholders Litigation, May 29, 2013). In Kahn v. M&F Worldwide Corp., 2014 WL 996270 (Del. Mar. 14, 2014), the Delaware Supreme Court upheld this ruling and confirmed that a buyout by a controlling shareholder should be reviewed under the business judgment standard, if certain procedural protections were implemented at the outset of the transaction.
MacAndrews & Forbes Holdings, Inc. (“MacAndrews”) owned 43% of M&F Worldwide Corp. (“MFW”). In June 2011, MacAndrews offered to take MFW private. MacAndrews’ offer contained, among other items, two specific requirements for the transaction: (1) negotiation and approval by a special committee of independent MFW directors and (2) approval of the acquisition by a majority of the minority stockholders who were unaffiliated with MacAndrews. The MFW board then formed a special committee, and the special committee retained its own separate advisors. The special committee negotiated and approved transaction terms, and the transaction was then approved by over 65% of the minority stockholders of MFW.
The plaintiffs brought several claims against various parties alleging breaches of fiduciary duty, arguing that the transaction should be evaluated under the entire fairness standard. The Chancery Court found that the business judgment rule should apply, “if, but only if:
(i) the controller conditions the transaction on the approval of both a Special
Committee and a majority of the minority stockholders;
(ii) the Special Committee is independent;
(iii) the Special Committee is empowered to freely select its own advisors and to say no definitively;
(iv) the Special Committee acts with care;
(v) the minority vote is informed; and
(vi) there is no coercion of the minority.”
The Delaware Supreme Court upheld this ruling, and recently upheld a ruling in a similar case where there was a controlling stockholder, who was not on both sides of the transaction but was alleged to have used his position to compete with the minority for merger consideration that the business judgment rule should be the applicable standard of review (Southern Pennsylvania Transportation Authority v. Volgenau, C.A. No. 461, 2013 (Del. May 13, 2014)). These cases provide clear guidance to controlling stockholders as to the steps they should incorporate in the M&A process to ensure a business judgment standard of review.
For more information on this topic, please contact Mark Tarallo.