Public and private businesses today face many decisions that do not arise from, and have consequences far beyond, solely financial performance. Rather, these decisions are primarily driven by, and implicate, important social, cultural and political concerns. They include harassment, pay equity and other issues raised by the #MeToo movement; immigration and labor markets; trade policy; sustainability and climate change; the manufacture, distribution and financing of guns and opioids; corporate money in politics; privacy regulation in social media; cybersecurity; advertising, boycotts and free speech; race relations issues raised by the pledge of allegiance controversy; the financing of healthcare; the tension between religious freedom and discrimination laws; and the impact of executive pay on income inequality, among others. If the nature of the issues is not unprecedented, the number, diversity and polarization seem to be. Continue Reading <i>Caremark</i> and Reputational Risk Through #MeToo Glasses
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, 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.
The general policy of the Delaware Limited Liability Company Act (the “Act”) is “to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.” Specifically, with respect to duties, the Act provides that to the extent law or equity would impose a fiduciary or other duty on a member or manager of an LLC, that duty may be “restricted or eliminated by provisions in the limited liability company agreement.” This flexibility makes LLCs an especially attractive vehicle for private equity investors, in particular with respect to allowing management and other minority holders to participate in an investment.
An LLC agreement, however, cannot eliminate the implied covenant of good faith and fair dealing that inheres in all contracts under Delaware law. As a result, for private equity funds and other controlling investors, a lurking concern has been whether the implied covenant potentially provides a mechanism for a minority investor to undermine or change the terms of an LLC agreement, including through the imposition of otherwise waived fiduciary duty-like obligations. Continue Reading The Peril of the Implied Covenant of Good Faith in LLC Agreements
Last week, the Delaware Court of Chancery issued its first significant appraisal decision applying the Delaware Supreme Court’s recent Dell and DFC opinions, which we’ve previously discussed here and here. See Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (“Aruba”). Although Dell and DFC both emphasized that deal price will often be the best evidence of fair value in appraisal actions involving open, competitive, and arm’s-length mergers of publicly traded targets, neither case involved a merger where the transaction resulted in significant synergies, which are excluded statutorily from the determination of fair value. Picking up where those cases left off, the court in Aruba, despite finding that the deal price was the product of an uncompetitive and flawed process, nonetheless found fair value to be significantly below deal price because the merger resulted in significant synergies. The court instead found fair value to be equal to the pre-announcement market trading price of the public shares, which was 30% below the deal price. Subject to any appeal from this decision, Aruba continues, and in the context of strategic mergers expands upon, the trend of substantially reducing appraisal risk for buyers of public companies. Continue Reading Delaware Court of Chancery Finds Fair Value in Appraisal Case To Be Unaffected Market Price
Cleary Gottlieb’s “2017 Developments in Securities and M&A Litigation” discusses major developments from 2017 and highlights significant decisions and trends ahead.
The trend of increased securities class action filings in federal courts continued from 2016 to 2017. The Supreme Court was particularly active in the securities field, ruling in CalPERS that the Securities Act’s repose period is not subject to class action tolling, holding in Kokesh that disgorgement in SEC proceedings is subject to the five-year statute of limitations for penalties, and granting three additional cert petitions to address important issues in the securities laws, with decisions expected in 2018. With respect to M&A litigation, the Delaware Supreme Court issued key rulings on appraisal issues in DFC Global and Dell, and is expected to provide further guidance in the coming months.
Please click here for a PDF version of 2017 Developments in Securities and M&A Litigation.
In recent years, shareholder plaintiffs have brought a series of claims before the Delaware Court of Chancery alleging that directors of Delaware companies have abused their discretion in granting themselves excessive equity compensation for their board service. These cases raised the threshold question of whether the plaintiffs’ challenges should be reviewed under the “entire fairness” standard, which requires the company to bear the burden of proving that the director awards were fair, or the more deferential “business judgment” standard, which grants considerable discretion to directors’ decisions, often resulting in dismissal of claims that fail to plead particularized facts indicating fiduciary lapses by the directors. Continue Reading New Year’s Resolutions For Director Compensation From <i>Investors Bancorp</i>
Last week, the Delaware Supreme Court issued another highly anticipated appraisal decision, Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. Dell builds on the Court’s DFC decision earlier this year in which the Court held that the merger price will generally be entitled to significant, if not dispositive, weight in an appraisal action involving the sale of a public company pursuant to an open, competitive, and arm’s-length bidding process, regardless of whether the buyer is a financial or strategic bidder. Dell extends and applies this principle to mergers involving a relatively limited pre-signing bidding process, at least where that process is competitive and does not exclude logical potential bidders. Significantly, Dell also expands DFC to cases involving management buyouts (MBOs), at least where management is not a controlling stockholder and is committed to working with rival bidders who are given full access to necessary information about the company. As Dell makes clear, while process is extremely important in determining whether to defer to (or give substantial weight to) deal price in an appraisal case, it will take more than merely theoretical doubts about an arm’s-length and competitive process to justify departing from the deal price.
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On August 1, 2017, the Delaware Supreme Court issued its highly anticipated decision in the appraisal appeal, DFC Global Corp. v. Muirfield Value Partners, L.P. The Chancery Court’s decision below had garnered substantial attention for its determination that DFC Global’s fair value was approximately 7.5% higher than the deal price, even though the court found a robust and conflict-free sale process. On appeal from that decision, DFC Global argued that the Delaware Supreme Court should adopt a presumption in appraisal actions that the deal price in arm’s length and competitive mergers equals fair value. The appeal drew dueling amicus briefs from two groups of prominent professors, one in favor of this presumption, and one opposed to it. Continue Reading Delaware Supreme Court Declines To Establish A Presumption In Favor Of Deal Price In Appraisal Actions—Or Did It?
In a decision issued on Friday that will likely slow the recent spike in appraisal suits, the Delaware Court of Chancery held that the fair value of Clearwire Corp. was $2.13 per share—less than half the merger price of $5 per share. See ACP Master, Ltd. et al. v. Sprint Corp., et al., C.A. No. 8508-VCL (Del. Ch. July 21, 2017) (“Clearwire”). The decision by Vice Chancellor Laster also found that Sprint Nextel Corp. (“Sprint”), which owned slightly more than 50% of Clearwire’s voting stock at the time of the merger, did not breach its fiduciary duties in acquiring the Clearwire shares it did not already own because the merger was entirely fair to Clearwire’s minority stockholders. Continue Reading Chancery Finds Fair Value To Be Less Than Half Merger Price
Investors frequently negotiate for a redemption right to ensure at least some return on preferred stock investments in a “sideways situation”—where the target company is neither a huge success nor an abject failure. Continuing a consistent theme in recent Delaware jurisprudence, the Delaware Court of Chancery declined to dismiss a complaint alleging directors breached their duty of loyalty in taking steps to satisfy an investor’s redemption request.