In Varjabedian v. Emulex, the Ninth Circuit recently held that plaintiffs bringing claims under Section 14(e) of the Securities Exchange Act of 1934 (“Exchange Act”)—which prohibits misstatements, omissions or fraudulent conduct in connection with a tender offer—need only show that defendants acted negligently, rather than with scienter.

This decision marks a conspicuous divergence from

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.


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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.”[1]  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.”[2]  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.[3]  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.
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Last week, the Delaware Court of Chancery issued its first significant appraisal decision applying the Delaware Supreme Court’s recent Dell[1] and DFC[2] opinions, which we’ve previously discussed here and hereSee 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,[3] which are excluded statutorily from the determination of fair value.[4]  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.
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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

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.
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Last week, the Delaware Supreme Court issued another highly anticipated appraisal decision, Dell, Inc. v. Magnetar Global Event Driven Master Fund LtdDell 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

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.  
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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.
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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