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.
By: Mark J. Tarallo
In a decision issued on January 22, 2016, in In re Trulia, Inc. Stockholder Litig., (“Trulia”), the Delaware Chancery Court struck another blow against “disclosure-only” settlements. In Trulia, Chancellor Andre Bouchard rejected a proposed disclosure-only settlement and in a strongly worded opinion stated that “the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined,” and that the Chancery Court would be “increasingly vigilant in scrutinizing the “give” and the “get” of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.”
Disclosure-only settlements are common in litigation arising out of M&A transactions. As Chancellor Bouchard noted:
“It has become the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel.”
In rejecting the settlement, Chancellor Bouchard ruled that “from the perspective of Trulia’s stockholders, the “get” in the form of the Supplemental Disclosures does not provide adequate consideration to warrant the “give” of providing a release of claims to defendants and their affiliates, in the form submitted or otherwise.” The Trulia ruling may signal the end of such settlements in Delaware. The full text of the opinion can be found here.
For more information, please contact Mark Tarallo.
By: Scott R. Bleier
Although the ultimate “home run” for venture capital investors remains an IPO of a portfolio company investment, for most investors the primary method of liquidity is an acquisition event. Mindful of this typical exit scenario, investors will often bargain for “drag-along rights” in their financing documents which contractually require all (or most) of a company’s stockholders to vote in favor of an acquisition event that is approved by a specified percentage of the company’s stockholders. A recent Delaware Court of Chancery decision serves as an important reminder that the failure to closely follow the procedural rules of exercising drag along rights can result in grave and unintended consequences for companies and their investors.
In Halpin v. Riverstone National, Inc., five minority stockholders of Riverstone National, Inc. (“Riverstone”) sought appraisal of their shares of stock in connection with the June 2014 merger of Riverstone and Greystar Real Estate Partners. The merger transaction had been approved by the 91% majority stockholder of Riverstone, CAS Capital Limited (“CAS”), who sought to obtain the minority stockholders’ approval of the merger by invoking the drag-along rights contained in a 2009 Stockholders Agreement. The Stockholders Agreement stated in relevant part:
“[I]f at any time any stockholder of the Company, or group of stockholders, owning a majority or more of the voting stock of the Company (hereinafter, collectively the “Transferring Stockholders”) proposes to enter into any [Change-in-Control Transaction], the Company may require the Minority Stockholders to participate in such Change-in-Control Transaction with respect to all or such number of the Minority Stockholders’ Shares as the Company may specify in its discretion, by giving the Minority Stockholders written notice thereof at least ten days in advance of the date that tender is required, as the case may be. Upon receipt of such notice, the Minority Stockholders shall tender the specified number of Shares, at the same price and upon the same terms and conditions applicable to the Transferring Stockholders in the transaction or, in the discretion of the acquirer or successor to the Company, upon payment of the purchase price to the Minority Stockholders in immediately available funds. In addition, if at any time the Company and/or any Transferring Stockholders propose to enter into any such Change-in-Control Transaction, the Company may require the Minority Stockholders to vote in favor of such transaction, where approval of the shareholders is required by law or otherwise sought by giving the Minority Stockholders notice thereof within the time prescribed by law and the Company’s Certificate of Incorporation and By-Laws for giving notice of a meeting of shareholders called for the purpose of approving such transaction.”
Rather than providing the minority stockholders with prior notice of the merger transaction (as required by the Stockholders Agreement), CAS informed the minority stockholders of the closing of the effectiveness of the merger a week after the closing of the transaction. In its notice to the minority stockholders, CAS informed the minority stockholders that it had exercised its drag-along rights and instructed the minority stockholders to execute a written consent approving the merger. The notice went on to state that if a minority stockholder executed the written consent, he would not be entitled to execute appraisal rights, but that if he did not exercise the written consent, he would be in breach of the Stockholders Agreement.
In its counterclaim to the minority stockholders’ petition for appraisal, Riverstone sought specific performance of the drag-along provisions of the Stockholders Agreement. The court denied this request, finding that the express language of the Stockholders Agreement required advance notice of a proposed merger transaction and as such the drag-along rights were unambiguously prospective in nature. Riverstone was limited to the benefit of its bargain and, by a literal reading of the Stockholders Agreement, this did not include the power to require the minority stockholders to consent to a transaction that had already taken place. Riverstone also contended that the minority stockholders were compelled to consent to the merger due to the implied covenant of good faith and fair dealing, arguing that by entering into the Stockholders Agreement the minority stockholders implicitly agreed that they would participate in any merger approved by CAS. The court similarly dismissed this argument, finding that the minority stockholders’ refusal to consent to the merger transaction was not arbitrary or unreasonable and that applying the “gap-filling” function of the implied covenant was not warranted.
Drag-along rights serve to facilitate the approval process related to the sale of a company by preventing stockholder dissent and undue leverage by minority stockholders. The Court of Chancery’s decision in Halpin serves as an important reminder that drag along rights must not only be carefully drafted but properly exercised in order to serve their intended purpose.
 Halpin v. Riverstone National, Inc., C.A. No. 9796-VCG (Del. Ch. Feb. 26, 2015).
For more information please contact Scott Bleier.
The Delaware Supreme Court recently upheld the Chancery Court’s decision in Huff Fund Investment Partnership v. CKx, Inc. with respect to assessing the merger price in an acquisition. On February 12, 2015, in a short, two-page order, the Court affirmed the holding of the Chancery Court in its determination of the “fair value” of CKx for the reasons set forth by the Court of Chancery in its prior opinions.
The Chancery Court had addressed the issue of appraisal for stockholders of CKx who had exercised their appraisal rights in lieu of accepting the cash-out price which otherwise would have been received in the sale of CKx to the acquiror. The Chancery Court noted that the sales process “has been challenged, reviewed, and found free of fiduciary and process irregularities” and that CKx was sold “after a full market canvas and auction”. It also acknowledged that the Court is not permitted to “rely presumptively on the price achieved by exposing the company to the market” and, pursuant to the Delaware appraisal statute, must “evaluate ‘all relevant factors’”, without taking into account any potential change in the value that could occur as a result of or in anticipation of the merger transaction itself.
The Chancery Court reviewed two different valuation methodologies presented by the parties to the lawsuit. First, it considered and rejected the proposed valuation based upon a comparable company analysis because the guideline companies were not truly comparable to CKx – the companies were not of a similar size, none of the companies owned assets similar to CKx’s assets and none of the companies competed with CKx. Second, the Court considered and rejected the discounted cash flow analysis approach because the Court found that the five-year cash flow projections were unreliable; “without reliable five-year projections, any values generated by a [discounted cash flow] analysis are meaningless.” Additional future revenue remained uncertain and the unreliability of these estimates created significant difficulty in preparing an appropriate discounted cash flow analysis. Without reliable cash flow projections, the Court was unable to determine fair value using a discounted cash flow analysis method.
In analyzing whether it should ignore the merger price in determining the fair value of CKx, the Chancery Court stated that it has “an obligation to consider all relevant factors, and that no per se rule should presumptively or conclusively exclude any of those factors from consideration.” In this situation, given that the Court could not look to any appropriate comparable companies, comparable transactions or reliable cash flow projection models, the consideration given in the transaction was the best indicator of the actual value of CKx. CKx’s transaction process was “thorough, effective, and free from any spectre of self-interest and disloyalty,” with several potential buyers presenting offers and CKx engaging a financial advisor to assist with the transaction to negotiate the best possible price for CKx’s stockholders. The Chancery Court therefore concluded that the merger price was the “most relevant exemplar of valuation available.”
The Delaware Supreme Court’s affirmation of the lower court’s decision in this case is an important reminder for stockholders contemplating exercising appraisal rights that the merger price may very well be used during an appraisal proceeding as an appropriate method to determine the fair value of a company.
Any questions regarding this topic, please feel free to contact Mary Beth Kerrigan directly.
“Materiality Scrape” Provisions in Merger/Acquisition Agreements
By: Scott Bleier
In connection with the sale of a business, the seller will typically make a series of factual representations and warranties about its business to the buyer. The scope of these representations and warranties is often the subject of significant negotiation by legal counsel to both the buyer and seller and, invariably, one of the areas of “give and take” between the parties is determining which representations and warranties will be qualified as to the seller’s knowledge and/or materiality. As a countermeasure, the buyer may attempt to have these knowledge and materiality qualifiers be disregarded for the purposes of determining the seller’s post-closing indemnification obligations to the buyer. While both parties may advance valid arguments for and against disregarding these types of qualifiers, middle-ground “compromise” positions should be considered in an effort to consummate the transaction.
For an in-depth look at both the buyer and seller arguments for introducing or avoiding “Materiality Scrape” language, read the full article here.
Delaware Courts Apply Business Judgment Rule to Controlling Stockholder Transactions
By: Mark Tarallo
In the past, the Delaware Chancery Court has typically applied the “entire fairness” standard when evaluating a proposed takeover transaction undertaken by a controlling shareholder. This approach was clearly articulated in Kahn v. Lynch Communication Systems, Inc. 638 A.2d 1110 (Del. 1994), wherein the court stated that “the exclusive standard of judicial review in examining the propriety of an interested cash-out merger transaction by a controlling or dominating shareholder is entire fairness” and that “[t]he initial burden of establishing entire fairness rests upon the party who stands on both sides of the transaction.” Kahn, 638 A.2d 1110, 1117 (Del. 1994). The entire fairness standard has two components, fair price and fair dealing, each of which must be satisfied independently. It is a burdensome standard that places the obligation on the defendant(s) to show that all aspects of the transaction were ultimately fair to the shareholders.
In two recent cases, the Delaware Supreme Court upheld Chancery Court rulings applying the business judgment rule to evaluate controlling stockholder takeovers. Read the full article to learn how a business judgment ruling benefits the defendants and provides a clear roadmap for controlling stockholders.
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