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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 61 posts in News.
Delaware Judge Charles H. Toliver, IV Joins Morris James LLP
Morris James Receives Top Legal Rankings in Chambers USA 2014
Thirteen Lawyers and Four Practices Recognized as Top-Tier in Delaware
Morris James LLP is pleased to announce that thirteen attorneys in five separate practice areas have been top ranked among the leading Delaware lawyers in the 2014 edition of Chambers USA: America's Leading Lawyers for Business. Chambers also ranked four of its practice areas as among the top practices in Delaware including Bankruptcy/Restructuring, Chancery, Intellectual Property and Labor & Employment. Read more.
ShareMorris James Receives Top Legal Rankings in Chambers USA 2014
Morris James Elects Brett M. McCartney, Eric J. Monzo & David J. Soldo as Partners
Morris James LLP is pleased to announce that Brett M. McCartney, Eric J. Monzo and David J. Soldo, have been elected partners effective January 1, 2014. The new partners are part of the Business Representation group in the areas of corporate litigation, bankruptcy and creditors’ rights and commercial litigation.
“The addition of this new group of partners strengthens our ability to offer exceptional service and value to our clients,” said David H. Williams, Managing Partner. Mr. Williams also congratulated the new partners for the manner in which they have distinguished themselves in the legal community.
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ShareNew ANDA Litigation Book
Kenneth L. Dorsney Is Editor-In-Chief and a Co-Author of a New ANDA Litigation Book Published by the American Bar Association
The recently released book, ANDA Litigation, provides both a ready roadmap for novice litigators in the field as well as more detailed material and strategy to assist the more experienced ANDA litigator. The first part details the Hatch-Waxman Act and how it was implemented. Practical tools in these chapters include: an overview of the drug approval process, including required notice and pre-litigation considerations, and issues related to the timeline of litigation.
Following this, the authors explore even deeper into the actual litigation under the act, with topics covering: responses to the complaint, discovery, the work of experts, and patent claim construction and summary judgment. Further chapters are practice-focused, covering issues including preparing the case for trial, the work of trial, managing the litigation process, and post-trial issues, including appeals to the U.S. Court for the Federal Circuit. Finally, the authors discuss remedies, settlement, and antitrust implications, and the book also includes chapters on regulation and litigation of pharmaceuticals outside the U.S.
Please visit the American Bar Association’s bookstore to learn more or to order a copy of this new book, ANDA Litigation: Strategies and Tactics for Pharmaceutical Patent Litigators.
Representing a compromise in the pharmaceutical industry in balancing patent exclusivity against market competition, the effect of the Drug Price Competition and Patent Term Restoration Act (commonly known as the Hatch-Waxman Act) on controlling the pharmaceutical market remains unsettled. Amendments to the original act included provisions for an abbreviated process for FDA approval of generic versions of patented pharmaceuticals through the filing of an Abbreviated New Drug Application (ANDA) and the right to initiate patent litigation against an applicant. This law has resulted in ANDA litigation cases and a constant struggle to shape the landscape of the patent and regulatory regime governing FDA approved patented and generic drugs.
The Hatch-Waxman Act with it amendments is a hybrid of two already complex areas of the law -- U. S. patent law and FDA regulatory law -- which makes patent litigation in this area especially complicated and hotly contested. ANDA Litigation: Strategies and Tactics for Pharmaceutical Patent Litigators is a single-source guide examining the intersection between the statutory and regulatory scheme governing approval of generic pharmaceuticals and U.S. patent law in the context of Paragraph IV ANDA litigation. In 19 detailed chapters, this single-source reference focuses both on the current and developing law as well as the strategies and tactics employed by the litigants.
2012 Federal Trial Practice Seminar: An Introduction to Federal Practice in the District of Delaware
The Delaware Chapter of the Federal Bar Association, in conjunction with the United States District Court for the District of Delaware, is pleased to announce another exciting new initiative. On the evenings of Thursday, May 17 and Thursday, May 31, 2012, from 5:00 to 7:30 p.m., the District Court and FBA will sponsor a two-night seminar program entitled “The Federal Trial Practice Seminar Presents: An Introduction to Federal Practice in the District of Delaware.” The sessions will take place in Courtroom 2B at the J. Caleb Boggs Federal Building.
Attorneys who have been practicing in the District for three years or less are eligible to participate in this seminar. One of the two seminar sessions will relate to an attorney’s interaction with opposing counsel and participation in the litigation process, while the other session will focus on an attorney’s interaction with the Court. Each session will include a presentation from a speaker and a panel discussion. The speakers and panel members will be current and/or former judges of the District Court.
Participation is limited to FBA members. Current FBA members may register for the seminar by contacting Steve Brauerman via e-mail at sbrauerman@bayardlaw.com, by no later than May 14, 2012. Those interested in participating in the seminar who are not currently FBA members may contact Mr. Brauerman at the e-mail address listed above to obtain additional information about FBA membership.
Space for the seminar is limited and applicants will be accepted on a first-come, first-served basis. Applicants should be available to attend both sessions. Admission to the seminar is free and the FBA expects to apply for Continuing Legal Education credit in Delaware for both sessions.
Share17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas
Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.
The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.
The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:
Richard P. Beck
Litigation – Real Estate (1983)
Real Estate Law (1983)
John M. Bloxom IV
Real Estate Law (2010)
P. Clarkson Collins, Jr.
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)
Mary M. Culley
Elder Law (2008)
Keith E. Donovan
Personal Injury Litigation (2009)
Dennis D. Ferri
Medical Malpractice Law (2007)
Personal Injury Litigation – Defendants (2007)
Richard Galperin
Personal Injury Litigation – Defendants (2005)
Richard K. Herrmann
Information Technology Law (2003)
Technology Law (2003)
Francis J. Jones, Jr.
Personal Injury Litigation – Defendants (2008)
Personal Injury Litigation – Plaintiffs (2008)
Gretchen S. Knight
Family Law (2007)
Lewis H. Lazarus
Commercial Litigation (2006)
Corporate Law (2006)
Litigation – Mergers and Acquisitions (2006)
Mary B. Matterer
Litigation – Intellectual Property (2009)
Edward M. McNally
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)
Mark D. Olson
Tax Law (2011)
Bruce W. Tigani
Tax Law (2011)
David H. Williams
Education Law (2007)
Employment Law – Management (2007)
Labor Law – Management (2007)
Litigation – Labor and Employment (2007)
(Year indicates first year listed in practice area)
Share17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas
Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.
The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.
The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:
Richard P. Beck
Litigation – Real Estate (1983)
Real Estate Law (1983)
John M. Bloxom IV
Real Estate Law (2010)
P. Clarkson Collins, Jr.
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)
Mary M. Culley
Elder Law (2008)
Keith E. Donovan
Personal Injury Litigation (2009)
Dennis D. Ferri
Medical Malpractice Law (2007)
Personal Injury Litigation – Defendants (2007)
Richard Galperin
Personal Injury Litigation – Defendants (2005)
Richard K. Herrmann
Information Technology Law (2003)
Technology Law (2003)
Francis J. Jones, Jr.
Personal Injury Litigation – Defendants (2008)
Personal Injury Litigation – Plaintiffs (2008)
Gretchen S. Knight
Family Law (2007)
Lewis H. Lazarus
Commercial Litigation (2006)
Corporate Law (2006)
Litigation – Mergers and Acquisitions (2006)
Mary B. Matterer
Litigation – Intellectual Property (2009)
Edward M. McNally
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)
Mark D. Olson
Tax Law (2011)
James W. Semple
Commercial Litigation (2009)
Bruce W. Tigani
Tax Law (2011)
David H. Williams
Education Law (2007)
Employment Law – Management (2007)
Labor Law – Management (2007)
Litigation – Labor and Employment (2007)
(Year indicates first year listed in practice area)
ShareUnliquidated Derivative Claims Continue to Have Little Value
This article was original published in The Delaware Business Court Insider | 2011-07-06
On May 31, Vice Chancellor Leo E. Strine Jr. issued an opinion denying a motion for preliminary injunction to halt a merger between Massey Energy Company and an affiliate of Alpha Natural Resources Inc. One of the critical issues in the opinion was the value of the derivative claims Massey had against certain current and former directors and officers arising out of Massey's compliance with federal mining safety regulations.
Massey's attitude toward federal mining safety regulations arguably manifested itself in the Upper Big Branch mine disaster, which resulted in the loss of 29 lives. In his opinion, Strine found that the plaintiffs had probably stated a Caremark claim against the directors of Massey and criticized the board of Massey for failing to assess the value of the derivative claims but ultimately refused to enjoin the merger, concluding that the derivative claims did not have the value plaintiffs believed.
While this result has received some negative commentary, is it really a surprise? In fact, the court's analysis is consistent with prior analyses addressing the value of derivative claims in the context of a merger. The fact that the party here is more infamous than many others did not change the analysis under Delaware law.
The plaintiffs valued the derivative claims based on the "aggregate negative financial effect on Massey that the Upper Big Branch Disaster and its Fall-Out has caused." According to the plaintiffs' expert, these damages range from at least $900 million to $1.4 billion. The court, however, rejected this theory, in large part because the computation of the value of the derivative claims was far more complicated than the plaintiffs' theory.
First, even though the plaintiffs had stated a viable Caremark claim against the directors, because of the business judgment rule and the exculpatory provisions in Massey's certificate of incorporation, in order to obtain a monetary judgment against the directors, they would have to prove that the directors acted with scienter — a difficult standard to meet, particularly with independent directors.
Second, the court also found that even as to the autocratic former leader of Massey, Don Blankenship, who was arguably responsible for Massey's approach to mining safety, meeting this standard would be difficult. The court noted that there is a large gap between pushing the limits of federal regulations while accepting minimal loss of life and knowingly endangering the mine itself by putting its very operations at risk. Moreover, Blankenship was not directly in charge of any specific mine, and tying his policies directly to any disaster would be challenging.
Third, proving that the directors acted with scienter may entitle the corporation to a monetary judgment from the directors, but it would simultaneously expose the company to third-party civil liability and potential criminal liability, and potentially deprive the directors of the ability to rely on insurance coverage, all of which would harm the company.
Fourth, after the merger, Alpha will continue to have to address direct claims against Massey from its lost and injured miners, regulatory consequences of the company's mining safety approach, and other elements of the "Disaster Fall-Out." To the extent possible, Alpha will have every incentive to shift that liability to the former directors.
Fifth, it is impossible to determine the potential derivative liability of the directors until Massey's direct liability is determined. Indeed, it is not even in the interest of Massey's stockholders to press their claims of derivative liability now, before third-party civil and criminal adjudication, lest the plaintiffs expose the company to additional liability.
Sixth, the plaintiffs' expert put no value on the ability of the company or its stockholders to collect on a potential $1 billion judgment. The company's insurance policy, even assuming it is available to cover claims against the former directors, is only $95 million. While this is no small amount, it is, as the court put it, "not material in the context of an $8.5 billion merger."
While the vice chancellor was quick to note that the Massey board's approach to valuation of the derivative claims was less than ideal, because of the factors noted above, he found that the plaintiffs had not persuaded him that the merger was unfairly priced because of the failure to value separately the derivative claims. Was this conclusion so unprecedented, however, to justify criticism of the valuation?
Delaware courts previously have been asked to consider the value of unliquidated, contingent claims belonging to the company in the valuation context. These courts have never valued derivative claims at the full value of all potential damages, but instead have considered many of the factors Strine addressed in Massey.
For instance, in Onti Inc. v. Integra Bank Inc., petitioners in an appraisal action argued that their derivative claims should have been valued as an asset of the company in the appraisal proceeding. The stockholders' expert valued the claims at more than $19 million, while the company's expert valued the claims at negative $2.5 million. The court determined that the claims had no value. In reaching that conclusion, the court adopted the theory advanced by the company's expert, that all litigation factors should be considered, including the likelihood of success on the merits, the attorney fees necessary to obtain that result and any indemnification that the company would owe to its directors. Citing to prior precedent, the court noted that "there would be strong logic in including the net settlement value of such claims as an asset of the corporation for appraisal purposes."
Later that same year, the court took a similar approach in Bomarko Inc. v. International Telecharge Inc. The court valued the claim in that case by multiplying the probability of success by the likely amount of recovery while subtracting costs incurred to obtain that result.
More recently, in Arkansas Teacher Retirement System v. Caiafa, the Court of Chancery overruled an objection to a settlement that released claims that the board failed to ascribe any value to federal derivative claims in a merger. After noting that there is no case law supporting the proposition that the board was required to undertake a separate and discrete valuation of the derivative claims pending at the time of the challenged merger, the court reached the same result as Strine did in Massey, albeit with less analysis. That is, the court noted that the claims asserted in the federal action were difficult to win, and even those that had a higher probability of success could not have the $2 billion value the objectors claimed they did. On appeal, the Delaware Supreme Court affirmed the Court of Chancery's decision to overrule the objection for the reasons set forth in the Court of Chancery's opinion.
Given these precedents, is the result in Massey all that surprising? While some contingent claims have been given value, it is the exception, and not the rule, to assign material value to contingent derivative claims. Moreover, in the context of a merger worth billions of dollars, the likelihood is low that derivative claims have material value, particularly when reasonable defenses can be interposed.
But does this decision mean that boards can just eschew any analysis of the value of a derivative claim in the context of a merger? Probably not. The Court of Chancery certainly did not condone the practice, and had the court not been persuaded that the board otherwise acted properly, the failure to do so could have had more importance.
Further, because the exception to the derivative standing rule that entering into a merger for the purpose of extinguishing derivative claims remains viable, particularly in light of the Supreme Court's opinion in Caiafa, failure to value the claims could support the conclusion that a merger was negotiated simply to avoid liability. Finally, not all derivative claims are equal in this context. As Strine noted in Massey, if Massey had a liquidated claim against a former fiduciary reduced to a judgment but failed to get any value for this claim, he could see the substantial unfairness in failing to obtain value for that claim in a merger. Alternatively, if recovery on any derivative claim after a cash-out merger would inure solely to the benefit of the acquirer, then perhaps there would be value to the buyer in obtaining that claim.
Put simply, as with many issues of fiduciary law, the context of the situation is important. What is fairly clear, however, is that unliquidated contingent derivative claims are not ascribed much value, if any, in a merger context, unless a party can demonstrate a reasonable likelihood that the net value of the claim to the company is material.
Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
Will Delaware Survive Without A William In Charge?
This article was originally published in the Delaware Business Court Insider | June 29, 2011
There is trouble in Delaware. For over 40 years the esteemed Delaware Court of Chancery has been almost always headed by a Chancellor named “William.” From William Duffy, to William Marvel to William Quillen to William Allen and last in the line, William Chandler, the Court has been well served by its Williams. Now that Leo Strine is about to become the rare Chancellor not named William, concern abounds over his name. Of course, a past great Chancellor was named Grover, as in Grover Brown, but that was the exception that proves the rule. Apart from their common name, what made all these Williams special? That answer can be seen in looking at the characteristics of the last William, Chancellor Chandler who has just retired.
First of all, William Chandler was an honest man in an age when intellectual honesty is not common. By honesty, of course, I do not refer to financial integrity. All Delaware judges have had that in recent memory. Instead, honesty means following binding precedent even when you think it is wrong. Here, Chancellor Chandler always said what he thought and never hid his reasoning, but followed precedent even if he disagreed with the Delaware Supreme Court.
A great judge has intelligence. The scholarship of so many Chandler opinions is astonishing for a busy judge. Just look at the hundreds of footnotes in his recent Air Products decision issued soon after the last hearing and you must wonder how did he find the time. Intellectual ability made the difference. Past Chancellors such as William Allen have lasting reputations for their scholarship. So too will this Chancellor Chandler.
A great judge has energy. Being a judge requires paying attention to witnesses and lawyers droning on and on and then writing an opinion that decides a complicated case. That takes stamina. Chancellor Chandler’s frequent jogging kept him in shape and that was reflected in the energy he brought to the job.
A great judge is a good administrator. The Court of Chancery under this Chancellor was free from internal squabbling, had a hard working staff of reporters and administrators and consistently provided great service. While that is a tribute to that staff, it also reflects well on the person in charge – the Chancellor. This aspect of the job is often overlooked because it is not done in public or with great fanfare. Yet, it is vital to an effective court. Moreover, Chancellor Chandler has a great interest in technology. That has led the Court to be up-to-date not just with electronic fillings but with other innovations such as easy rapid transcription of hearings.
A great judge has patience. Chancellor Chandler is among the most patient of human beings. He was patient with wandering lawyers, pro se litigants, impossible deadlines and constant demands on his time with rarely a complaint. This characteristic is much more appreciated than some judges might think. Chancellor Duffy was a small man in stature, but had total command of the Courtroom through his calm, patient demeanor. Not for him was the sarcastic remark to put down the wrongheaded lawyer. Chancellor Duffy instead would gently show the errors of that lawyer’s position by his patient explanations. That is not easy and is often not acknowledged, but is important. Chancellor Chandler had a similar quiet but effective command of his courtroom.
A great judge is a good listener. This is more than just being patient. It is the knack of making the person talking to you feel that you are hearing and considering every word they say. Chancellor Chandler was the best listener I have ever seen. He made you feel that you were the only one in the room. On occasion at some Bar or judicial event, the Chancellor would need to participate in a conference call. When he did, the telephone literally seemed to be part of his anatomy and even if a streaker ran by he would not blink so intent was his concentration.
A great judge is a faithful public servant. The Court of Chancery did not need to volunteer to hold mediations and now arbitrations of business disputes in addition to its regular, full docket. But to keep Delaware as a leader in resolving business disputes, this Chancellor was an early advocate of these additional services to business litigants. That is a burden that he and the Court took on and that is all done in private without any public appreciation for that extra effort. That is real public service.
Finally, a great judge enjoys his job. The constant clamor of litigants and the demands of always being “fair” can make any judge irritable. That never happened with Chancellor Chandler. Sure he always ruled his courtroom and could be stern when that was needed. But day in and day out he was good to be with even in the toughest trial. Just the joy he took in the new courthouse in Georgetown was a pleasure to see, including giving tours of that courthouse when it first opened.
So what about the nominee to be Chancellor? Even though he is named “Leo” he is well-suited for this job as Chancellor. While not as patient as Chancellor Chandler (who is anyway?), Chancellor Strine has the intellectual honesty, intelligence, energy, administrative skills, and commitment to public service of the Williams who preceded him. The Delaware Bar expects that he will fulfill his promise.
Lewis Lazarus Authors Article on Plaintiffs' Pleading Burden in the Court of Chancery
Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 15, 2011
A plaintiff who pleads successfully that a transaction under attack is governed by the entire fairness standard of review instead of business judgment generally stands a good chance of defeating the defendant's motion to dismiss. That is because when a transaction is reviewed for entire fairness, defendants bear the burden in the first instance of proving at trial the fairness of the process and price.
In two recent cases - Ravenswood Investment Co. v. Winmill and Monroe County Employees' Retirement System v. Carlson - the Court of Chancery clarifies that a plaintiff must still make well-pleaded allegations that a transaction is unfair as to process and price if its complaint is to survive dismissal at the pleadings stage.
Ravenswood involved claims that defendant directors' adoption of a performance equity plan violated fiduciary duties by seeking to dilute the minority stockholders' percentage interest in non-voting Class A shares (only Class B shares had voting rights). The court noted that the entire fairness standard applied because "where the individuals comprising the board and the company's management are the same, the board bears the burden of proving that the salary and bonuses they pay themselves as officers are entirely fair to the company unless the board employs an independent compensation committee or submits the compensation plan to shareholders for approval."
Because the directors employed no such protective measures, the court held that the entire fairness standard of review applied. Still, citing Monroe County, the court held that the plaintiff "bears the burden of alleging facts that suggest the absence of fairness."
The court dismissed the plaintiff's complaint because it found he had failed to make well-pleaded allegations that the defendant directors' adoption of the performance equity plan was unfair. Critical to the court's reasoning was that dilution occurs upon the adoption of any options plan; the question is whether the manner in which the options were issued unfairly diluted the stockholders.
As the defendants in their motion to dismiss did not challenge the plaintiff's claim for unfair issuance of the options, the court found that the plaintiff's allegation of dilution did not suffice to state a claim for unfairness in the adoption of the performance equity plan.
This was so because the plaintiff alleged that "(1) the Performance Equity Plan only authorizes the Board to grant stock options with an exercise price not lower than the market value as of that event, (2) the Defendants already control all of the Company's voting rights through their ownership of its Class B shares, and (3) even if all options authorized under the plan were to be granted to the Defendants they would not obtain a majority interest in the Class A shares... ."
The court noted that although it was true that the Class A shares could vote to approve a merger, the plaintiff made no allegation in his complaint that the adoption of the performance equity plan impaired those voting rights. The court declined to comment on whether such an allegation may have sufficed to sustain this claim.
The Ravenswood court relied upon the court's holding in Monroe County. That case involved a challenge to an intercompany agreement that required the plaintiff's company to purchase services and equipment from its controlling shareholder on terms in conformity with (for services) or the same as (for equipment) what the controlling shareholder charged its other affiliates. The parties agreed that the arrangement the plaintiff attacked was governed by the entire fairness standard of review.
They disagreed as to whether the plaintiff's pleading sufficed to survive a motion to dismiss.
As summarized by the court: "Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved such that entire fairness review is in play, plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. (citations omitted). Simply put, a plaintiff who fails to do this has not stated a claim. Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. (citation omitted). Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness."
In reviewing the complaint, the court found no allegations that the price at which the controlling stockholder provided the services and equipment was unfair. Instead, the court found that plaintiff's allegations addressed only alleged unfair dealing.
In the absence of an allegation that the company could have obtained the services or equipment on better terms from a third party or any specific allegation of the worth of the services or equipment relative to what the company paid, the court found that the complaint did not make sufficient factual allegations that the intercompany agreement transactions were unfair. Because the plaintiff chose to stand on its complaint in response to the defendants' motions to dismiss rather than to amend, the court dismissed plaintiff's complaint with prejudice under Court of Chancery Rule 15(aaa).
Together, these two cases clarify that a plaintiff cannot survive a motion to dismiss simply by alleging that a transaction involving a controlling stockholder is unfair. A plaintiff instead must make particular factual allegations suggesting why the transaction was unfair. A plaintiff who cannot make such allegations and who stands on a conclusory complaint, as in Ravenswood, may find that its claims are dismissed with prejudice.
Lewis H. Lazarus (llazarus@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.
Why Do We Care About 'Poison Pills'?
This article was originally published in the Delaware Business Court Insider | June 08, 2011
Why do so many people care about whether the Delaware courts will continue to uphold the "poison pill" defense to a hostile takeover? After all, comparatively few lawyers practice merger and acquisition law. Few companies are subject to hostile takeover threats, especially in recent years. And who really stays up at night worrying about the fight between the two largely unknown companies that were the participants in Delaware's latest hostile takeover battle and the weapon of choice among defenders in such battles, the poison pill?
Yet, since the Feb.15 Court of Chancery decision in the Air Products case, there have been almost too-many-to-count blog postings, journal articles and symposia about that decision and its upholding of a poison pill. Who cares?
More ›
Chancery Decisions Highlight Importance of Independent and Disinterested Directors in Company Sale Transactions
Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | May 25, 2011
Two recent decisions from the Court of Chancery — In re Orchid Cellmark Inc. Shareholders Litigation and In re Answers Corp. Shareholders Litigation — illustrate how parties may reduce deal risk by ensuring that the directors responsible for managing a sale process are disinterested and independent. At the same time, while the court in both cases rejected challenges to the transactions based on allegedly excessive deal protection terms, the court also signaled that providing much more than the parties did in Orchid may break the court’s proverbial back.
Independence and Disinterest
The court decided each of these cases following an expedited preliminary injunction hearing at which the plaintiffs sought to enjoin the transactions based in part on an allegedly inadequate sales process. In this Revlon Inc. v. MacAndrews & Forbes Holdings Inc. context, the court is called upon "to assess carefully the adequacy of the sales process employed by a board of directors." A primary inquiry in assessing a transaction is whether the directors responsible for the negotiations are independent and disinterested.
In Orchid, the court noted that five out of the six directors were independent. Its board formed a special committee to negotiate the transaction. That committee included two independent directors and a third newly elected director who had been nominated by the company’s largest shareholder. In addition to the independence of the special committee, the court also found no reason to doubt the independence or credentials of the special committee’s financial adviser.
Likewise, in Answers, although the plaintiffs raised questions about the independence of two of the directors, the court found that those directors did not lead the negotiations. Moreover, four out of the seven directors who approved the transaction were disinterested and independent. Finally, the court held that the company’s financial adviser’s independence and qualifications were not seriously challenged. The independence of the directors and their advisers were significant factors in the court’s decision in both cases to uphold the reasonableness of the boards’ decision making.
Deal Protection Terms
The court noted that deal protection terms such as termination fees, expense reimbursements, and no-talk and no solicitation clauses are standard. The issue is whether cumulatively they are impermissibly coercive or preclusive of alternative transactions. In Answers, the court observed that the break-up fee of 4.4 percent of equity value was at the upper end of the "conventionally accepted" range.
However, the court stated that this is not atypical in a smaller transaction. The court also rejected the plaintiffs’ challenge that the court should measure the break-up fee in reference to enterprise value on the ground that "Our law has evolved by relating the break-up fee to equity value."
In Orchid, the parties' deal protection included not only standard no-shop and termination provisions, but also a top-up option, matching rights and an agreement to pull the company’s poison pill, but only as to the buyer. The court held that top-up options are standard in two-step tender offer deals. As to the termination fee, the court found it appropriate in reference to the equity value of the target and again rejected the plaintiffs' effort to measure the termination fee in reference to enterprise value. The court also recognized that the matching and informational rights might have a deterrent effect on a hypothetical bidder, but it found those provided in the merger documents would not preclude a serious bidder from stepping forward.
The court also found that the selective pulling of the pill was not impermissibly preclusive of alternative bids. The court reasoned that the merger agreement enables the board to redeem the pill if it terminates the merger agreement. Termination is permitted if the board receives a superior offer and withdraws its recommendation that the stockholders tender their shares. The court observed that the termination fee that would be owed if the board terminates the merger agreement for a bidder who makes a superior offer and then pulls the pill would be no greater than if the company accepts a superior offer or terminates the merger agreement for some other reason.
Finally, because "a sophisticated and serious bidder would understand that the board would likely eventually be required by Delaware law to pull the pill in response to a Superior Offer," the court ruled that the deterrent effect of these provisions likely was minimal.
In so holding, the court stated that deal protection measures evolve and cautioned that at some point incremental protection may prove too much:
"Deal protection measures evolve. Not surprisingly, we do not have a bright line test to help us all understand when too much is recognized as too much. Moreover, it is not merely a matter of measuring one deal protection device; one must address the sum of all devices. Because of that, one of these days some judge is going to say 'no more' and when the drafting lawyer looks back, she will be challenged to figure out how or why the incremental change mattered. It will be yet another instance of the straw and the poor camel's back. At some point, aggressive deal protection devices — amalgamated as they are — run the risk of being deemed so burdensome and costly as to render the 'fiduciary out' illusory."
Together, these two cases demonstrate the value of a disinterested and independent decision-making body running a sale process. Also, while the court rejected claims that the deal protection at issue was preclusive or coercive, the court also cautioned that counsel must be careful not to make an alternative transaction too burdensome or costly, lest any fiduciary out be deemed illusory. Counsel should carefully evaluate the context of each transaction in determining appropriate deal protection, lest an added straw of protection is found to be the one that breaks the court’s proverbial back.
Lewis H. Lazarus (llazarus@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm's clients.
Delaware's Complex Civil Litigation Court: One Year Later
Edward M. McNally
This article was originally published in the Delaware Business Court Insider | May 18, 2011
On May 1, 2010, the Delaware Superior Court established a specialized "division" within that court to handle business disputes, known as the "Complex Civil Litigation Division" (or "CCLD"). The CCLD complements the Court of Chancery by offering a specialized business court to handle cases for monetary damages where jurisdiction would not exist in the Court of Chancery. Three specially assigned judges handle the cases assigned to the CCLD. Now that a year has passed, it is time to review the work of the CCLD and to assess its future. The CCLD is off to a good start, but remains an underutilized resource for businesses faced with civil litigation.
For a number of years, civil litigation involving business disputes has been plagued by inefficiency, escalating costs and delay. Three areas in particular caused much of the trouble with business litigation. First, discovery of electronically stored information caused litigation costs to escalate even beyond the amounts in dispute. Second, delays from crowded court dockets frustrated businesses with a problem to resolve. Third, discovery disputes over privileged communications and the testimony of expert witnesses that are often involved in business disputes also increased litigation costs and delays.
The CCLD addresses each of these areas of concern. It utilizes judges experienced in business disputes who, by a Case Management Order ("CMO") entered at the outset of litigation, keep the litigation on track to a fixed trial date. The CMO also controls the discovery process and the collateral disputes that otherwise often derail a case. Discovery of electronically stored information ("e-discovery") is subject to a set of guidelines that require litigants to cooperate in e-discovery and to reduce its costs. Other protocols are imposed to limit disputes over the discovery of privileged communications and expert witnesses, with the goal of further reducing litigation costs.
None of these special aspects of the CCLD are groundbreaking innovations. The Federal Rules of Civil Procedure, for example, require case management conferences and court orders establishing pretrial and trial schedules. Those rules also were recently amended to better control e-discovery and expert witness discovery. Federal Rule of Evidence 502 also was added to better control attorney-client privilege disputes. The CCLD has freely borrowed from these innovations of the federal courts.
Moreover, the CCLD for the most part has chosen to characterize its special procedures as guidelines for litigants to adopt or modify as they choose by their own agreements. Thus, the parties may opt out of the expert witness, e-discovery and privileged communication guidelines of the CCLD if they wish. The court has made it clear that it will accept any reasonable proposal the parties choose.
Now that the CCLD has been in place for one year, it makes sense to see if its new procedures for Delaware’s Superior Court have succeeded in resolving the problems confronting business litigation.
As the awareness of the CCLD has grown, business for the CCLD has picked up speed. To date, 49 substantial business disputes have been assigned to the CCLD and its three judges. Our review of the dockets of those 49 cases (together with our direct participation in 25 percent of these cases) leads us to conclude the CCLD is making progress, but is still an underutilized resource.
The 49 cases fall into four categories: (1) those matters diverted from the CCLD by voluntary settlement, bankruptcy stays or removal to federal court; (2) those matters just recently filed whose history is too short to be analyzed; (3) those matters subject to motions to dismiss; and (4) those matters being actually litigated. In our experience this breakdown is typical of business litigation. For example, the CCLD attracts many insurance coverage disputes that are usually resolved by determinations of the scope of an insurance policy, often in the context of a motion to dismiss. Full litigation including discovery is not common in those cases.
Of the cases actually going forward in the full litigation process, the large majority are subject to some form of CMO, including protocols on expert and privileged document discovery. Delays caused by discovery disputes seem to have been avoided, with savings in time and expense. Thus, as to those cases, the CCLD is working out as planned. Of course, a more complete review of how CCLD is working must await a significant number of CCLD cases going to trial or at least going through the full litigation process.
The mere existence of the CCLD protocols as guidelines also may be having a positive effect even if the parties to the litigation do not choose to explicitly adopt them. E-discovery is an example. The CCLD has a detailed set of "E-Discovery Plan Guidelines." Those guidelines require that the parties submit an "e-discovery" plan to the court, unless "the parties otherwise agree." The parties are reaching agreements on e-discovery and thus the guidelines are having their intended effect of reducing e-discovery costs.
Of course, as with anything new, there are some problems that the CCLD is working to address. Motions to dismiss a complaint sometimes delay assignment of a matter to the CCLD. If it was a defendant who requested assignment to the CCLD, that assignment was planned to occur after an answer to a complaint was filed. If there was no answer but instead a motion to dismiss, assignment was delayed in these cases. Motions to dismiss have also delayed entry of a CMO. That is understandable given that granting such a motion will save the court from entering a useless CMO. Such a delay in ultimate case disposition when a motion to dismiss is eventually denied is a problem in all civil litigation. The CCLD is expected to address these issues shortly.
Finally, the CCLD appears to be an underutilized resource as it passes its first-year anniversary. We are told that the CCLD judges are able to go to trial on almost any schedule the parties choose. While that capacity may not last forever, it is a big advantage to litigants. Given Delaware’s predominance as a corporate domicile where jurisdiction over Delaware entities is established, companies interested in efficient resolution of business disputes before specially-focused judges should more frequently file their claims in the CCLD. If businesses are serious about improving the efficiency and predictability of business litigation, they will choose the Delaware Superior Court’s CCLD more frequently. We are confident that as the CCLD’s reputation grows, its docket will grow as well.
Edward M. McNally (emcnally@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He practices primarily in the Delaware Superior Court and Court of Chancery handling disputes involving contracts, business torts and managers and stakeholders of Delaware business organizations. The views expressed herein are his alone and not those of his firm or any of the firm’s clients.
The Viability of the Disclosure Only Settlement
This article was originally published in the Delaware Business Court Insider | May 11, 2011
For corporations facing stockholder litigation challenging a proposed business combination, negotiating a settlement in which the corporation agrees to provide additional disclosures without any increased consideration can be an efficient means of avoiding the risk of litigation. The benefit created by the additional disclosures means the plaintiff’s lawyer can apply for a fee while the corporation and its directors get a release of all claims.
Some recent decisions of the Court of Chancery, however, have cast some doubt on the ability of a "disclosure only" settlement to serve as the sole consideration for a settlement or a substantial fee. Practitioners on both sides should be aware of these developments when negotiating a settlement of litigation challenging transactions.
Although the Court of Chancery has not recently issued a written opinion refusing to approve a "disclosure only" settlement, there is precedent for doing so — e.g., the Delaware Court of Chancery's 2006 opinion in In re SS & C Technologies Inc. The issue most recently came to light in Scully v. Nighthawk Radiology Holdings Inc., a much discussed case in which the court appointed special counsel to report on whether the settlement in that case was collusive and improper.
There, the plaintiffs sought expedited proceedings to enjoin a merger between Nighthawk Radiology Holdings Inc. and another party based solely on claims of inadequate disclosures. The court denied the motion, in part, because the court felt the disclosure claims were not meritorious and, indeed, would not support a "disclosure only" settlement. The corporation then reached a "disclosure only" settlement with the plaintiffs in a parallel proceeding in Arizona and agreed to present the settlement for approval to that court. The Court of Chancery viewed this as an attempt to avoid its earlier admonition that a disclosure only settlement would not be adequate consideration to support a release for defendants, and appointed special counsel to investigate the matter.
While the special counsel in Nighthawk ultimately concluded that no collusion was present, the healthy skepticism of "disclosure only" settlements expressed by the Court of Chancery should be noted. Courts appear to be scrutinizing closely "disclosure only" settlements as part of a Delaware court’s independent duty to ensure that a settlement is fair and reasonable — e.g., the Chancery Court's 2005 opinion In re Cox Communications Inc. Shareholders Litigation. That skepticism is most clearly manifested in recent decisions analyzing fee requests in which disclosures were part of the benefit created.
For instance, on April 30's In re Sauer-Danfoss Inc. Shareholder Litigation, Consol, the Court of Chancery considered a request for $750,000 by plaintiffs’ attorneys who claimed they caused the corporation to issue corrective disclosures before the transaction was ultimately abandoned. After first determining that the plaintiffs were entitled to credit for only one of the purported 11 additional disclosures, the court began its discussion of the fee to which the plaintiffs were entitled by noting that "all supplemental disclosures are not equal." When quantifying the fee award for additional disclosures, the court "evaluates the qualitative importance of the disclosures obtained." While one or two meaningful additional disclosures might merit an award of $500,000, prior precedent in contested fee cases reveals that less meaningful disclosures yield much lower awards. With that in mind, the court awarded $80,000, in large part because the disclosures were not particularly meaningful and the plaintiffs had not actively litigated the case after filing, instead seeking to negotiate a settlement.
The court used three recent opinions to support its conclusion that an award of only $80,000 was sufficient under the circumstance. In the 2006 case In re Triarc Companies Shareholders Litigation, the court awarded $75,000 in fees and expenses for the additional disclosure that the chairman of the special committee thought the deal price was inadequate where the plaintiffs had done nothing after the disclosure mooted the claims in the amended complaint to create any benefit.
In the 2009 Chancery Court case In re BEA Systems Inc. Shareholders Litigation, the court awarded fees and expenses of $81,297 where supplemental disclosures were made before discovery, preliminary injunction briefing and hearing, but the injunction was denied.
Finally, in 2010's Brinckerhoff v. Texas Eastern Products Pipeline Co., the Chancery Court awarded fees and expenses of $80,000 to an objector to a settlement who settled his objection in exchange for additional disclosure from the corporation as Form 8-K.
The consistent thread throughout these opinions, including the recent Sauer-Danfoss decision, is that non-meaningful disclosures that were agreed to after little work by plaintiffs will not merit substantial fee awards.
What effect, then, does the court’s reluctance to award large fees for additional disclosures combined with the court’s criticism of "disclosure only" settlements have on class action and derivative litigation going forward?
First, it may provide a disincentive for plaintiffs firms to continue to file litigation in Delaware challenging transactions. The data showing a decrease in the number of lawsuits filed in the Court of Chancery has been readily available for some time now. While smaller fee awards and higher criticism of "disclosure only" settlements cannot be the sole basis for the decrease in filings in the Court of Chancery, it likely plays some role.
Second, the use of the "disclosure only" settlement may become a thing of the past due to the risk for both sides. Plaintiffs may not be willing to enter into a "disclosure only" settlement because they know they are at risk they will not be awarded a substantial fee. Defendants may not be willing to enter into a "disclosure only" settlement because they do not want to put at risk their global release if the settlement is rejected as unfair.
To be clear, there is nothing in the Court of Chancery’s current jurisprudence to suggest that a "disclosure only" settlement is per se impermissible. What is clear, however, is that to the extent that the parties to stockholder litigation challenging a business combination believed they could settle a case for the relatively inexpensive cost of making additional information available to the stockholders, that path must be followed carefully while keeping in mind the authorities cited above.
Peter B. Ladig (pladig@morrisjames.com) is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group. He represents both stockholders and directors in corporate litigation. The majority of his practice is in the Delaware Court of Chancery, although he has extensive experience in the other state and federal courts in Delaware and has been involved in over 50 published decisions. The views expressed herein are his alone and not those of his firm or any of the firm's clients.
