Merger Litigation

Subscribe to Merger Litigation via RSS

Courts have long applied the exacting “entire fairness” standard to one-step, going-private merger transactions.  In Delaware, after years of agonizing by courts and commentators, this changed in 2013 in Kahn v. M&F Worldwide Corp. (“MFW”).[1]  MFW held that if certain procedural protections were observed in the course of the transaction the far more deferential business judgment standard would be applied.  The required safeguards included, most notably, negotiation and approval of the transaction by a committee of the target’s independent directors and subsequent approval by an informed majority vote of target stockholders unaffiliated with the acquiror.  Last week, the New York Court of Appeals adopted Delaware’s MFW approach in its review of the Kenneth Cole Productions going-private transaction.[2] 
Continue Reading Business Judgment Rule Applied to Going-Private Mergers in New York

On May 6, the Delaware Supreme Court issued an Order that sets forth concisely the contours of the defendant-favorable standards for determining liability of directors and their advisors following the closing of sales of control of companies.  These standards are available, however, only following an uncoerced and informed approval of the sale by the target stockholders, including a majority of the disinterested holders.  Thus, while the Order clarifies a roadmap (set forth recently in Corwin v. KKR and discussed here) for obtaining easy dismissal of post-merger damages claims against directors and advisors, the need for directors and their advisors to avoid, or at least ferret out and disclose, any deficiencies in sales processes remains as strong as ever.  Only if these deficiencies are avoided or uncovered and disclosed in advance of the shareholder approval will the lower courts be able to rely on these defendant-favorable standards to dismiss claims.
Continue Reading Delaware Supreme Court Enhances Defenses Available to Directors and Financial Advisors Where Well-Run Sale Processes and Adequate Disclosure

In two recent cases, the Delaware courts addressed the question of when a minority stockholder has sufficient influence over a corporation to be deemed a controlling stockholder.  The issue typically arises in the context of a transaction between the minority stockholder and the corporation, such as an attempt to acquire the corporation’s publicly held shares.  In such cases, the stakes for the minority stockholder can be quite high as transactions between a corporation and a controlling stockholder may be subject to the exacting  “entire fairness” standard. 
Continue Reading Controlling Minority Stockholders — When Does a Minority Constitute a Majority?

Joining a rising chorus of criticism of “disclosure settlements” in merger class actions, Chancellor Bouchard (in In re Trulia, Inc. Stockholder Litigation) rejected a proposed settlement of a stockholder class action challenging Zillow, Inc.’s acquisition of Trulia, Inc. in a stock-for-stock merger that closed in February 2015.  After defendants agreed to moot plaintiffs’ disclosure claims by supplementing their disclosures before the stockholder vote, the proposed settlement would have resulted in a fee to plaintiffs’ counsel and broad releases for defendants, but no economic benefit to the stockholder class.  Although not the first to express distaste for such settlements and the incentives they create, the Chancellor’s Opinion is notable for its comprehensive discussion of their problems and firm proposals to avoid such problems going forward, including a clear message that the Court will no longer hesitate to reject disclosure settlements involving supplemental disclosures of dubious value and overbroad releases, even if unopposed.
Continue Reading Chancery Court Rejects Disclosure-Only Settlement, Suggests in Future Such Settlements Will Be Approved Only in Narrow Circumstances

October featured significant M&A opinions from Delaware that are already having an impact on board processes and relationships between corporations and their financial advisors.  While the most recent opinion dismisses claims against the financial advisor for aiding and abetting breaches of duties by the target board, a careful reading of the case reveals that the decision is unlikely to change the practical impact of the holdings from earlier in the month.
Continue Reading What Do the Recent Delaware Opinions Mean for Corporate Board Processes and Relationships with Financial Advisors?

Re-affirming the significance of stockholder approval in corporate governance, the Delaware Supreme Court recently held that transactions approved by a fully informed, uncoerced stockholder vote will be reviewed under the business judgment rule when not subject to the entire fairness standard of review.  Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015).  Last Friday, the Court unanimously affirmed Chancellor Bouchard’s dismissal of a post-closing damages action in In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).  The opinion by Chief Justice Strine canvassed Delaware authority from as far back as 1928 to find extensive support for the proposition that “the approval of the disinterested stockholders in a fully informed, uncoerced vote that was required to consummate a transaction has the effect of invoking the business judgment rule.”  Op. at 7-8 n.19.
Continue Reading Corwin v. KKR: The Significance of Stockholder Approval

Addressing motions to dismiss in connection with the acquisition of Zale Corporation by Signet Jewelers, Vice Chancellor Parsons (in In Re Zale Corporation) dismissed claims against the Zales directors (under DGCL §102(b)(7)) and Signet, but denied dismissal of claims against Zales financial advisor.  Based on the allegations in the plaintiffs’ complaint, before being engaged, the financial advisor told the Board it had “limited prior relationships and no conflicts with Signet,” even though it had received approximately $2 million in fees in the year before the merger agreement.  More significantly for the Court, the complaint alleged that the financial advisor did not disclose – until after the merger agreement was signed – that it had made a presentation to Signet advocating a purchase of Zales shortly before Signet approached Zales, and that a senior member of the team that presented to Signet later became a member of the team that advised Zales.
Continue Reading Further Chancery Court Guidance on Financial Advisor Aiding and Abetting Claims

The Delaware Supreme Court issued a welcome decision, In re Cornerstone Therapeutics Inc. Stockholder Litigation (Del. May 14, 2015), to remove an anomaly that had been inhibiting lower courts from dismissing monetary claims against independent directors based on their roles in the approval of related party transactions.  Nevertheless, even as the Delaware Supreme Court adopts principles to distinguish the state’s courts as director-friendly venues, independent directors will continue to bear burdens of discovery in Delaware and consequent risks of actions that seek monetary damages and survive motions to dismiss. In addition, the considerations for the insider counterparties (e.g., the controlling stockholders) participating in related party transactions, as outlined in our prior memoranda, remain unchanged. 
Continue Reading Liability of Independent Directors and Insiders in Conflict Transactions: A Practical Perspective on Recent Delaware Case Law

Directors of public companies are increasingly facing pressure from hedge fund and institutional stockholders to engage in accretive combinations with competitors.  But they must balance this pressure against the willingness of antitrust regulators in the United States, Europe, China and beyond to delay transactions and either require significant divestitures or conduct remedies or just block these combinations outright. 
Continue Reading Delaware Chancery Court Provides Guidance on Fulfillment of Fiduciary Duties When Evaluating Antitrust Risk

In a typical public company merger agreement, the target is required to continue to operate in the “ordinary course of business” prior to closing.  This covenant provides protection for the buyer who is obligated to complete the acquisition subject only to the fulfillment of limited closing conditions, including, typically, the non-occurrence of a “Material Adverse Effect,” and wants some certainty as to what it will be acquiring come the closing. 
Continue Reading Operating in the Ordinary Course of Business after an Extraordinary Event: Cooper Tire & Rubber v. Apollo (Mauritius) Holdings