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 a recently published decision of November 7, 2017, the German Federal Court of Justice (Bundesgerichtshof) has added another twist to the much debated acquisition of German Celesio AG by US pharma wholesaler McKesson. McKesson had launched a takeover offer to the free float of Celesio in late 2013, and had entered into a purchase agreement with its then main shareholder Franz Haniel & Cie. to acquire its shareholding of slightly above 50% alongside the takeover bid. The transaction attracted the interest of Paul Singer. Elliott acquired a position of approximately 24% in shares and, in addition, convertible bonds of Celesio, and opposed the initial offer due to an alleged undervaluation. As a result, the initial offer, which was subject to a minimum acceptance threshold of 75%, failed in early January 2014. The 75% acceptance threshold is key under German law, for a bidder to be in a position to exercise control over a German listed corporation and access the cash flows, prior to having effected a squeeze-out of all remaining minorities. Continue Reading Treating Shareholders Equally – Another Chapter in the McKesson/Celesio Saga
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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Last month, we published a blog post explaining the basis for our view that Regulation G does not require a GAAP reconciliation when M&A disclosure documents present the management projections used by financial advisors to opine on the financial fairness of merger consideration. We argued that these projections are not the type of information that Regulation G was adopted to police and that, in view of the bases in Delaware case law and Regulation M-A for including disclosure of these projections, they should be considered exempt from the reconciliation requirements of Regulation G and Item 10(e) of Regulation S-K. Accordingly, we urged the SEC staff to provide guidance confirming our view. Continue Reading New SEC Interpretation Helps Limit Reg G as an Enabler of Merger Litigation
Last year Cleary Gottlieb published a blog post and an alert memorandum highlighting the SEC staff’s renewed focus on whether the use of non-GAAP financial measures (NGFMs) by domestic registrants complies with the requirements of Regulation G. Recently, a number of plaintiff-stockholders of target companies in M&A transactions have brought purported class actions in federal court alleging that the “Forecasts” section in M&A disclosure documents violates Regulation G. In support of these M&A disclosure related claims, plaintiffs have been citing our post and memo about these SEC staff initiatives, which relate to earnings releases and periodic reports, even though our prior publications did not address the application of Regulation G to M&A disclosure documents. Continue Reading Setting the Record Straight: Regulation G Does Not Apply to Non-GAAP Financial Projections in M&A Transactions
Cleary Gottlieb’s “2017 Securities and M&A Litigation Mid-Year Review” discusses major developments so far this year and highlights significant decisions and trends ahead. In the first half of 2017, the U.S. Supreme Court decided securities cases concerning the application of statutes of repose and the five-year statute of limitations for penalties, and granted petitions for certiorari concerning liability under the Exchange Act and the appropriate forum for class actions asserting Securities Act claims. The circuit and district courts also decided significant securities law issues, including the impact of extraterritoriality at the class certification stage. In the context of M&A litigation, plaintiffs continued to file disclosure-only lawsuits in other fora, in response to the Delaware Court of Chancery’s In re Trulia, Inc. Stockholder Litigation decision. Recent decisions by the Delaware courts clarified the application of the business judgment rule to stockholder-approved transactions and the determination of fair value.
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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
The past four years of merger enforcement at the federal antitrust agencies saw more litigated challenges than we’ve seen in a long time. This came about because President Obama made a commitment to merger enforcement and appointed senior officials in the agencies who would carry out his vision. Our partner Dave Gelfand, who oversaw litigation at the DOJ Antitrust Division for three of those years, and our associate Grant Bermann, who focuses on antitrust law, discuss the cases from this period, and the context in which they were brought, in a piece just published in a leading international antitrust publication, Global Competition Review Magazine. The article can be found here.