Ruling that the value of certain supplemental transaction disclosures in the context of a $15 billion merger was “nil,” the Seventh Circuit Court of Appeals recently overturned an award of attorneys’ fees to plaintiffs’ counsel in the context of merger litigation. On August 10, 2016, in the case In Re: Walgreen Co. Stockholder Litigation, case number 15-3799, writing for the 7th Circuit, Judge Posner, following a recent trend of decisions denying requests for attorneys’ fees to attorneys representing shareholders challenging a merger, adopted Delaware’s Trulia standard for approval of such settlements.
The case In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) decided by the Delaware Chancery Court held in part that “[t]o be more specific, practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission….”
In Walgreen, the plaintiffs’ counsel successfully forced the defendant company to furnish supplemental disclosures regarding the proposed transaction. The Court in analyzing the supplemental disclosures in the context of the transaction and information that had been previously disclosed to the stockholders determined that the additional disclosures were largely worthless. As a result, the 7th Circuit held that the additional disclosures did not meet the clearer standard that the disclosures be “plainly material” and the Court held that the settlement award to plaintiffs’ counsel should be rejected by the lower court.
Based on the recent trend of courts to reject payment of fee only settlements in the context of merger litigation, evidence suggests that the filing of so called “strike suits” has begun to decrease.
For more information please contact Joe Marrow.
Welcome to MBBP’s M&A Clips Series. This series of 12 videos will provide quick, easy-to-digest snapshots of common issues in M&A transactions, as well as practical information on how to avoid complicated, expensive and time-consuming pitfalls.
First up: MBBP’s Scott Bleier speaks on Deal Structure.
Sign up for our M&A newsletter to be sure you don’t miss the next video in the series: Investment Banker Engagement Letters
It’s MBBP’s first issue of 2015 and we’re providing plenty of news to start the year off right!
This newsletter is packed with articles, such as:
- TAX: Treasury Announces New Restrictions on Inversions – Robert Finkel
- IP: Scrutinizing Biotechnology & Software Patent Eligibility in M&A Deal Valuations – David Fazzolare
- TECHNOLOGY: Open Source Issues in Mergers & Acquisitions – Michael Cavaretta
- PRIVACY: M&A Privacy & Data Security Considerations: Compliance with Applicable Privacy Laws & Sharing of Customer Information – Faith Kasparian
- Massachusetts Court (Sort of) Adopts Delaware’s Great Hill Holding Regarding the Attorney-Client Privilege in Mergers – Carl Barnes
- Delaware Court Refuses to Enforce Indemnity & Release Provisions Against Non-Consenting Stockholder – Mark Tarallo
- From Trados to Nine Systems: And Now for Something Completely Different? – Scott Bleier
You might just want to read this one cover to cover! Open the full January issue of M&A Today.
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.
By: Scott Bleier
In connection with a merger/acquisition transaction, signatures to transaction documents are typically collected from parties in advance of closing and held in escrow prior to being released at the effective time of the transaction. Despite this common practice – and although the General Corporation Law of the State of Delaware (the “DGCL”) provides that any action required or permitted to be taken at a meeting of the Board of Directors may be taken without the necessity of a meeting if all of the members of the Board consent in writing – Delaware law provides that when an individual executes a written consent prior to actually joining a Board of Directors, the consent is invalid as a matter of law. This was underscored most notably in AGR Halifax Fund, Inc. v. Fiscina (743 A.2d 1188 (Del. Ch. 1999)) in which the Delaware Court of Chancery held that only a lawfully appointed director is empowered to consent to Board action and that an individual that has not yet been officially appointed to the Board cannot act in a director’s capacity.
The holding in Halifax has been a practical thorn in the side of dealmakers and practitioners, especially in the context of transactions where the purchase price for the target company is financed by a third-party lender. In virtually all merger/acquisition transactions, the Board of the target company resigns and a new Board is appointed effective upon closing. In an acquisition financing transaction, this creates logistical complications as the lender typically requires the formal approval of the target company’s Board to the financing but the soon-to-be-resigning Board will not be keen to accept any responsibility for the financing package. And, under Halifax, the soon-to-be-appointed Board cannot consent to the financing in advance as a matter of law.
In response to the practical concerns raised by Halifax, new legislation has recently been proposed that would amend Section 141(f) of the DGCL to clarify that an individual, whether or not then a director, may consent to Board action at a future time (including upon the occurrence of an event) no later than 60 days after the consent is given. If enacted, the proposed amendment would become effective on August 1, 2014 and would allow a soon-to-be-appointed director to consent to a future action of the Board and place the consent in escrow, such consent to become effective upon the closing of a transaction (provided that the closing does not occur more than 60 days after the consent was provided and placed in escrow).
Concurrent with this proposed legislation, the Delaware legislature has also proposed a similar amendment to Section 228(c) of the DGCL that would specifically permit the escrowing of stockholder consents. Note that this amendment would not impact the statutory requirement under Delaware law that a stockholder consent must include the actual date on which the consent is signed.
Links to the text of the proposed newly-proposed legislation can be found here.