The Delaware Court of Chancery yesterday found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). This decision serves as a reminder of the importance of full disclosure of material facts in cases involving potential conflicts (and not just of the potential conflicts themselves, but also of the ways in which such potential conflicts manifest themselves)—both at the board level and at the stockholder level. As this decision also demonstrates, in addition to the more familiar allegations of financial advisor conflicts, the court may find potential conflicts exist where an activist investor in the target with short-term interests that could be perceived to diverge from the interests of other stockholders is involved in merger negotiations. Continue Reading Delaware Decision Provides Further Lessons for Directors, Activist Investors, and Financial Advisors in Negotiating Mergers
On October 10, 2018, the Department of the Treasury issued interim regulations (“Interim Regulations”) for the Committee on Foreign Investment in the United States (“CFIUS”) to conduct a pilot program implementing provisions relating to critical technologies of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which recently amended the Exon-Florio amendments to the Defense Production Act of 1950 (together, “Exon-Florio”). The Department of the Treasury also released amendments to CFIUS’s regulations effective October 11, 2018 to implement the immediately effective portions of FIRRMA.
Section 1727(c) of FIRRMA authorizes CFIUS to conduct one or more pilot programs to implement any authority provided pursuant to any provision of, or amendment made by, FIRRMA that did not take effect immediately upon enactment. The newly issued Interim Regulations bring into effect a pilot program implementing enhanced, and in many cases mandatory, review of transactions involving “critical technologies” (generally, export-controlled technologies) used by the target in, or designed by the target for, one or more of a list of specified industries. The pilot program takes effect on November 10, 2018.
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This is the fourth 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. Relevant background can be found here and additional posts in this series can be found here.
In the first week of the CBS-NAI litigation, the Court of Chancery denied CBS’s request for a temporary restraining order (“TRO”), which would have prevented NAI from exercising its rights as a controlling stockholder to protect its voting control before the CBS board could meet and vote on a proposed stock dividend to dilute such voting control. In so ruling, the Court of Chancery resolved an “apparent tension” in the law between, on the one hand, past decisions suggesting the possibility that a board might be justified in diluting a controlling stockholder in extraordinary circumstances (arguably implying that, in such circumstances, the board should be permitted to act without interference by the controlling stockholder) and, on the other hand, cases recognizing the right of a controlling stockholder to have the opportunity to take action to avoid being disenfranchised. The court found the well-established right of a controlling stockholder to take measures to protect its voting control “weigh[ed] heavily” against granting a TRO that would restrain it from doing so, and that “truly extraordinary circumstances” would therefore be required to support such a TRO. At the same time, the court noted that it had the power to review and, if necessary, “set aside” any such action taken by the controlling stockholder after the fact (itself another reason why a TRO in these circumstances was not warranted). Continue Reading Lessons from the CBS-NAI Dispute: When (If Ever) Will the Court of Chancery Grant a TRO To Restrain a Controlling Stockholder From Taking Action to Prevent a Board From Diluting Its Voting Control?
Until Vice Chancellor Laster’s decision last week in Akorn Inc. v. Fresenius KABI AG, no Delaware court had released an acquiror from its obligation to close a transaction as a result of the occurrence of a “Material Adverse Effect.” The cases previously adjudicated in Delaware all had required the acquiror to close, often despite a significant diminishment in target value and, in some, the court criticized the acquiror for seeking to avoid its obligations based on little more than buyer’s remorse. Against this weight of precedent, the Vice Chancellor found that the grievous decline of generics pharmaceutical company Akorn, Inc. after it agreed to be acquired by Fresenius constituted a MAC. While Akorn presents a stark set of facts and the Delaware Supreme Court has yet to have the final word in the case, the decision nonetheless provides useful guidance to practitioners in shaping and navigating MAC clauses and related contractual provisions. Continue Reading <i>Akorn v. Fresenius</i>: A MAC in Delaware
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.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?
The Delaware Supreme Court has clarified that controlling stockholder take-private transactions will be reviewed under the business judgment rule, rather than the less deferential entire fairness standard, if the controlling stockholder self-disables by committing to special committee and majority-of-the-minority approval before “economic negotiations” take place, even if the controlling stockholder fails to do so in its initial written offer. See Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018).
The Delaware Supreme Court first announced in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) that business judgment review applies to a merger proposed by a controlling stockholder conditioned “ab initio” on two procedural protections: (1) the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and (2) the uncoerced, informed vote of a majority of the minority stockholders. Continue Reading Delaware Supreme Court Provides Significant Guidance on Timing Requirement Under <i>MFW</i>
On October 11, Silicon Valley Bank’s NYC Office is hosting a forum on the M&A exit. Our partner Ethan Klingsberg, who regularly serves as counsel to serial acquirors, as well as companies in connection with major liquidity events, will be joined by CEO/CFOs from top private companies to lead the discussion. The invitation and RSVP link may be found here.
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. 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
This is the first 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.
- National Amusements, Inc. (“NAI”) owns approximately 80% of the voting shares of CBS Corporation and Viacom Inc., and in early 2018, NAI proposed that CBS and Viacom consider a merger. Each of the boards of CBS and Viacom formed a special committee of independent directors unaffiliated with NAI to consider and potentially negotiate such a merger.
- On Sunday, May 13, 2018, the CBS special committee met and took steps:
- to call a special meeting of the full CBS board on May 17 to consider and vote on 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 – very substantially – NAI’s voting interest in CBS; and
- to commence litigation against NAI in the Chancery Court of Delaware seeking approval of the proposed dilutive dividend and moving for a temporary restraining order to block NAI from taking certain steps as the controlling stockholder of CBS, including any actions prior to the special board meeting that would interfere with the proposed dilutive dividend.
- On May 16, prior to the special board meeting (and prior to a scheduled court hearing on the directors’ motion for a TRO), NAI exercised its right as the holder of a majority of CBS’s voting shares to act by written consent to adopt amendments to the CBS bylaws (the “Bylaw Amendments”). These Bylaw Amendments imposed a 90% supermajority voting requirement on any Board declaration of dividends or any board adoption of bylaw amendments, and also imposed certain procedural requirements for any such actions. Since three of the fourteen CBS directors were individuals with ties to NAI, the Bylaw Amendments, if valid and in effect, would effectively preclude the declaration and payment of the proposed dilutive dividend.
- The CBS board met the next day as scheduled (and following the court’s decision not to grant the TRO) and purported to approve the dilutive stock dividend by a majority vote of less than 90% of the directors, which would dilute the voting power of NAI to about 20% (and also dilute the voting rights of other Class A stockholders), the payment of such dividend conditioned on Delaware court approval.
- On September 9 (after several months of motion practice and discovery), CBS and NAI entered into a settlement agreement providing for the rescission of the dividend, a reconstitution of the CBS board and dismissal of the litigation.
The record breaking heat this past summer left M&A activities cold. Signa and Hudson’s Bay agree on a merger between Karstadt and Kaufhof. Signa takes over the lead role. In addition, Signa acquires significant real estate properties from Hudson’s Bay. Via Warwick, Morgan Stanley submits a takeover offer for all shares of the logistics company VTG. Haniel prepares its withdrawal from retailer group Metro with the disposal of a 7.3% share participation and the granting of a call option for an additional 15.2% of the group’s shares to the Czech firm EP Global Commerce. The acquirer secures an additional 9% Metro package from the co-shareholder Ceconomy. The Hymer family sells its RV business, valued at approx. EUR 2.1 billion, to its competitor Thor Industries. Schwarz Group’s entry into Tönsmeier, a waste disposal company, could alter the recycling business in Germany. Continue Reading