Christopher E. Austin

Subscribe to Christopher E. Austin's Posts
Contact:Read more about Christopher E. Austin

A recent decision of the Delaware Court of Chancery in the ongoing WeWork/SoftBank litigation addressed a previously unresolved question:  can management withhold its communications with company counsel from members of the board of directors on the basis that such communications are privileged?  Building on past Delaware decisions concerning directors’ rights to communications with company counsel, including in the CBS case we previously discussed here, the court clarified that directors are always entitled to communications between management and company counsel unless there is a formal board process to wall off such directors (such as the formation of a special committee) or other actions at the board level demonstrating “manifest adversity” between the company and those directors.  See In re WeWork Litigation, C.A. No. 0258-AGB (Del. Ch. August 21, 2020).  In other words, management cannot unilaterally decide to withhold its communications with company counsel from the board (or specified directors management deems to have a conflict).
Continue Reading Recent Decision Confirms Directors’ Right to Access Privileged Communications Between Management and Company Counsel

The recent dispute between CBS and its controlling stockholder, National Amusements (NAI), should serve as a reminder that determining whether a director is “independent” is context specific. This post summarizes the applicable standards regarding independence and discusses how and when varying standards should be utilized in the context of controlled companies.
Continue Reading Lessons From the CBS-NAI Dispute: Who is an “Independent” Director in the Context of a Controlled Company

This is the third in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.[1]Relevant background can be found here and additional posts in this series can be found here.

As described in a prior post, on May 17, 2018, the majority of the CBS board (other than the three directors with ties to NAI) considered and purported to approve a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting NAI’s voting interest in CBS, with the payment of such dividend conditioned on Delaware court approval.  In addition to diluting NAI’s voting power from about 80% to about 20%, such dividend would have also diluted the voting rights of other Class A stockholders.
Continue Reading Lessons From the CBS-NAI Dispute: Can Stockholders Rely on Stock Exchange Rules to Prevent Dilution of Their Voting and Economic Interests?

This is the second in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.[1] Relevant background can be found here and additional posts in this series can be found here.

The vast majority of public company shares are owned in “street name” – e.g., through a broker.  When holding shares in “street name,” a stockholder’s brokerage account reflects his or her ultimate beneficial ownership of such shares, but the records of the issuer (maintained by the issuer’s transfer agent) indicate that the broker (or more often, another intermediary through which the broker holds the shares) is the record holder of such shares.  In the typical case of “street name” registration, Cede & Co., as nominee for the Depository Trust Company (“DTC”), is listed on the issuer’s records as the holder of record of most of the issuer’s shares.  DTC, in turn, keeps its own account records, which list the DTC participants that hold those shares through DTC, including a number of brokers.  Finally, those brokers keep their own account records, listing the ultimate beneficial owners of such shares.  Contrast this with direct registration, sometimes referred to as “record ownership,” where the ultimate beneficial holder holds the shares directly and therefore the records of the issuer indicate that such person is also the holder of record of such shares.
Continue Reading Lessons From the CBS-NAI Dispute: The Limitations of “Street Name” Ownership in Effectively Exercising Stockholder Rights

A challenge to a transaction between a Delaware corporation and its controlling stockholder generally will be subject to the highest level of judicial review—“entire fairness”.  As a result, a critical factual question often is whether a significant, but minority, stockholder could be viewed as controlling the corporation.

In a recent decision,[1] the Delaware Court of Chancery (the “Court”) concluded that it was reasonably conceivable that Elon Musk, the founder and the owner of 22.1% of the stock of Tesla, Inc. (“Tesla”), was a controlling stockholder of Tesla and controlled Tesla’s board of directors in connection with its decision to acquire (the “Acquisition”) SolarCity Corporation (“SolarCity”), another company founded by Musk and his cousins and of which Musk owned 21.9% of its stock.  As a result, the transaction could be subject to the heightened entire fairness standard of review notwithstanding that it was approved by the holders of a majority of Tesla’s disinterested shares.Continue Reading Delaware Chancery Court Denies Motion to Dismiss and Permits Discovery into 22.1% Minority Stockholder’s Controller Status

In a recent decision[1], Vice Chancellor Laster of the Delaware Court of Chancery clarified certain issues related to the obligations of a controlling stockholder that often arise in connection with going private and similar transactions.  The case involved a relatively conventional proposal by a controlling stockholder (the Anderson family) to acquire the remaining shares of Books-A-Million, Inc. (“BAM”) from BAM’s minority stockholders.  The family structured the proposal with the goal of satisfying the conditions of the MFW decision so that any challenge to the transaction would benefit from the favorable “business judgment” level of judicial review.[2]
Continue Reading Delaware Chancery Applies MFW to Dismiss Challenge to Going Private Transaction and Clarifies Obligations of Controlling Stockholders

A recent opinion [1] from the Delaware Superior Court addresses the not uncommon situation of a buyer of a business seeking to pursue remedies against the seller that are not specified in the purchase agreement based on allegations of fraudulent conduct by the seller or its representatives.  Specifically, the buyer acquired the shares of a company that had a liability (an obligation to make an “earn-out” payment to the former owners of a previously acquired company) that became payable after completion of the acquisition.  The buyer sued the seller alleging that the seller (and not the acquired company) should be responsible for satisfying the earn-out liability when it became due.
Continue Reading Yet Another Reminder that “Boilerplate” Matters

Valeant’s hostile bid for Allergan was one of 2014’s most discussed takeover battles.  The situation, which ultimately resulted in the acquisition of Allergan by Actavis plc, included a novel structure that involved a “partnership” between Valeant and the investment fund Pershing Square.  In particular, a Pershing Square-controlled entity having a  small minority interest owned by Valeant, acquired shares and options to acquire shares constituting more than nine percent of Allergan’s common stock.  Such purchases were made by Pershing Square with Valeant’s consent and with full knowledge of Valeant’s intentions to announce  a proposal to acquire Allergan.  Pershing Square and Valeant then filed a Schedule 13D and Pershing Square then supported Valeant’s proposed acquisition.  Ultimately Pershing Square made  a very substantial profit on its investment when Allergan was sold to Actavis.
Continue Reading An Update on Insider Trading and Tender Offers: The 14e-3 Claims from the Allergan/Valeant Takeover Battle Survive a Motion to Dismiss

In a recent Delaware Chancery Court decision, Vice Chancellor Laster considered yet another challenge to the approval by a “conflicts committee” of a master limited partnership (“MLP”) in the energy sector of a transaction with the MLP’s parent company. Although the Vice Chancellor noted criticism of the process undertaken by the conflicts committee as portrayed in the complaint by holders of the publicly-traded  units of the MLP, the Court nonetheless dismissed the complaint due to the limited ability to challenge the transaction under the partnership agreement (which was typical for MLPs).
Continue Reading Pendulum Swings the Other Way in New Conflicts Committee Decision, But Scrutiny and Criticism of Independent Directors Continues

In his recent decision in In Re: El Paso Pipeline Partners, L.P. Derivative Litigation [1], Vice Chancellor Laster awarded $171 million in damages to the limited partners of a master limited partnership (“MLP”) that had challenged the MLP’s acquisition of  assets from a related party.   The transaction at issue — a so-called “dropdown” of assets — involved the sale to the MLP by its controller and general partner (El Paso Corporation) of certain LNG-related assets in exchange for approximately $1.41 billion in cash.
Continue Reading Related Party Transactions – Lessons from the El Paso MLP Decision