Showing 11 posts from September 2010.
In this definitive review of when post merger arbitration is required, the Court held that it would determine the issue of arbitrability, not the arbitrator. While affected by the gross delay in seeking arbitration, the decision is noteworthy more for its careful analysis of the case law dealing with such merger agreements and the types of disputes they submit to arbitration.Share
In this continuation of a long saga, the Court held that when a stockholder representative is designated to act for the stockholders in calculating a post merger adjustment, then the stockholders are stuck with what their representative does. Big surprise.Share
Delaware Supreme Court's Determination That Record Does Not Permit Interlocutory Review of Court of Chancery's CNX Gas Decision Leaves for Another Day Questions Concerning Standard of Review in Two-Step Unilateral Freeze-out Transactions
The standard of review applicable to two-step unilateral freeze-out transactions remains uncertain following the Delaware Supreme Court’s decision to deny interlocutory review of the Court of Chancery’s decision to refrain from enjoining a majority shareholder’s tender offer even though the Court of Chancery had certified the Injunction Decision for interlocutory review. In the Interlocutory Appeal Decision, the Court outlined its views of conflicts in the Court of Chancery’s determination of the appropriate standard of review as a factor that would justify interlocutory appeal. Although the Supreme Court declined interlocutory review, for practitioners seeking guidance among the competing standards, the Court of Chancery’s Interlocutory Appeal Decision provides a clear overview.
The Court of Chancery will apply one of three standards of review to a unilateral two-step freeze-out transaction: (i) entire fairness unless the transaction is structured to simulate arms’ length third party approvals by both the board and the stockholders (“Cox Communications test” or “Unified Standard”); (ii) no substantive review as long as the transaction is subject to a non-waivable majority of the minority condition; the controlling stockholder promises to consummate a short-form merger at the same price if it obtains more than 90% of the shares; the controlling stockholder makes no retributive threats; and the independent directors have free rein and adequate time to react to the tender offer (“Pure Resources test” or “Hybrid Standard”); and (iii) no substantive review for entire fairness unless the transaction is structurally coercive (“Siliconix test”).
Standard of Review May Determine Outcome
As the Court noted in its Interlocutory Appeal Decision, the standard the court applies may be outcome-determinative. Thus, the Court of Chancery in its Interlocutory Appeal Decision states that the outcome in Siliconix would have differed because had either the Hybrid or Unified Standard applied, the Siliconix defendants would have failed both tests, primarily because the controlling stockholder did not commit to a cash-out merger on the same terms as the tender offer. The Interlocutory Appeal Decision also noted similar deficiencies in other cases that preceded and followed Siliconix and were not substantively reviewed, but would not have passed muster under the Hybrid or Unified standards.
Cases Differ in What Constitutes “Inherent Coercion”
The Interlocutory Appeal Decision also identified conflicts in the case law concerning whether inherent coercion is present when a controlling stockholder tenders to buy the stock held by minority stockholders. The Court noted that certain cases pre- and post-Siliconix held that unlike in a cash-out merger by a controlling stockholder, a controlling shareholder’s tender offer was not coercive as long as the majority shareholder did not unduly pressure the minority such as by threatening to de-list if the tender offer failed. But the Court of Chancery in other cases found no distinction between the inherent coercion that the Delaware Supreme Court has recognized in single-step freeze-out transactions by controlling stockholders and that present when a majority shareholder tenders for the shares it does not own. Compare Siliconix and Pure Resources. The Court also noted that the Injunction Decision, Cox Communications and Pure Resources may conflict with Kahn v. Lynch Communication Systems Inc., 638 A.2d 1110 (Del. 1994) over the effect that protective devices such as independent director or majority of minority approval may have on the standard of review. Lynch held that the possibility of retribution if the stockholders defied the wishes of the majority stockholder required the application of the more searching entire fairness standard of review even if the transaction were negotiated with a committee of independent directors and approved by a majority of fully informed minority stockholders. By contrast, Pure Resources, Cox Communications and the Injunction Decision would allow for the application of business judgment review if the controlling stockholder’s transaction is negotiated and approved by disinterested and independent directors and a fully informed majority of the minority stockholders.
Cases Differ in Role of the Board in Responding
to a Tender Offer by a Controlling Stockholder
The Court also pointed out a conflict in the proper role of the board under the past decisions. The Siliconix line of cases holds that the target board has no necessary role, the Pure Resources line of cases provide for an advisory role, and the Injunction Decision holds that the target board has the same role responding to a controlling stockholder’s tender offer as it does in responding to a third-party tender offer. The Court emphasized that its holding in the Injunction Decision was grounded on its understanding of the board-centric foundation of Delaware corporate law with which the Siliconix line of cases was inconsistent.
Court Cites Scholarly Research Finding that Stockholders
Receive Greater Consideration in Single-Step Freeze-outs
Finally, the Court cited scholarly work indicating that stockholders receive greater consideration in single-step freeze-outs and in negotiated two-step freeze-outs than in unilateral two-step freeze-outs. The Court thus concluded that:
All else equal, a legal regime that makes it easier for controllers to freeze out stockholders will increase the number of transactions but result in lower premiums. Conversely, a legal regime that imposes greater procedural requirements will enable target stockholders to receive higher premiums but reduce the overall level of transactional activity. Either approach is legitimate and defensible. Either approach could result in the greatest aggregate benefits for stockholders, depending on the typical premium and overall level of deal activity.
Interlocutory Appeal Decision at *12.
Supreme Court Declines Interlocutory Appeal
So Foregoing Differing Approaches Will Remain
Notwithstanding the Court of Chancery’s delineation of the conflicts in the lower court concerning the proper standard to apply, on July 8, 2010 the Delaware Supreme Court determined in its discretion that the application for interlocutory review should be denied “based upon the current state of the record.” CNX Gas III at *1. In the absence of definitive guidance, practitioners would be well-advised to review the Court’s Interlocutory Appeal Decision for a concise statement of the standards of review that may apply to unilateral two-step freeze-out transactions with controlling stockholders.
 In Re CNX Gas Corporation Shareholders Litigation, 2010 WL 2690402 (July 8, 2010) (“CNX Gas III”)
 In Re CNX Gas Corporation Shareholders Litigation, 2010 WL 2349097 (May 26, 2010)(“Injunction Decision”)
 In re CNX Gas Corporation Shareholders Litigation, 2010 WL 2705147 (July 5, 2010) (“Interlocutory Appeal Decision”).
 In Re Cox Communications, Inc. Shareholders Litig., 879 A.2d 604 (Del. Ch. 2005)
 This is the standard the Court of Chancery applied in the Injunction Decision.
 In Re Pure Resources, Inc. Shareholders Litig., 808 A.2d 421 (Del. Ch. 2002)
 In Re Siliconix Inc. Shareholders Litig., 2001 WL 716787 (Del. Ch. June 19, 2001)
There are many decisions pointing out that a board of directors may have a duty to accept a higher offer even after it has signed a merger agreement. However, as this decision points out, if there is no violation of fiduciary duty in entering into an agreement not to solicit other offers, then the company is obligated to honor its commitment.Share
It should come as no surprise that the Court of Chancery will not interfere in an on-going arbitration proceeding by issuing discovery orders or disqualifying counsel.Share
It is becoming increasingly clear that Court of Chancery judges believe the Delaware Uniform Contribution Among Tortfeasors Act ("DUCATA") applies to breach of fiduciary duty claims. E.g., Hampshire Group Ltd. v. Kuttner, 2010 WL 2739995, at *54 (Del. Ch. July 12, 2010); J. Travis Laster & Michelle D. Morris, Breaches of Fiduciary Duty and the Delaware Uniform Contribution Act, 11 Del. L. Rev. 71 (2010). In light of this development, attorneys representing directors alleged to have breached their fiduciary duties should make sure to address the effects of DUCATA when drafting settlement agreements. Attorneys should include language providing that settling defendants are not liable for contribution to defendants who do not settle.
An example of language addressing Section 6304 of DUCATA might include language like the following: "In accordance with 10 Del. C. 6304(b), this settlement agreement reduces the damages that the plaintiff may recover against tortfeasors other than the settling defendants by the pro rata share of the settling defendants' liability. This language is intended to comply with 10 Del. C. 6304(b) so as to preclude any liability of the settling defendants to any other alleged tortfeasors, for contribution or otherwise."Share
A frequently asked question is how does the Court of Chancery determine the interest due on a judgment when the Court is not bound by the legal rate imposed by other courts. This decision explains how the Court searches for a fair rate.Share
This decision is well worth reading for its careful explanation of what standard of review the Court will apply when director action adversely affects minority stockholders. In short, it depends on the facts of each case. For example, when the majority already controls who is elected to the board, the adoption of a staggered board does not really affect the rights of minority stockholders and the business judgment rule applies.
The decision is also noteworthy for its rejection of the idea that preservation of a unique corporate "culture" justifies defensive action under the Unocal test. The lesson here is that if you want to run your company as a hobby, then do not take money from investors who do not support that hobby.Share
Everyone knows that the Revlon decision says that a board has to seek the best deal when the company is for sale. This decision clearly explains how the Court will review the board's actions.
First, the Court will review the process used. Adequate advice, full information, careful consideration and independent decision makers are all important.
Second, the Court will decide if the path chosen by the board was reasonable. Note that the board has the burden of proof on this issue. The opinion is particularly helpful in explaining what is a "reasonable" board action and carefully points out that standard is less forgiving than the rational basis test used in a business judgment analysis.Share
This post was written by Edward M. McNally and Katherine J. Neikirk.
This is the latest in a series of Court of Chancery decisions enforcing the discovery rules. In this case, plaintiff challenged his disassociation from the defendant. The defendant's privilege log used five vague descriptions for 97% of the withheld documents. In all of these descriptions, defendant simply referred to plaintiff's matter with no additional detail, such as whether the description related to plaintiff's resignation, his compensation or a partnership vote. The defendant also failed to identify any of the attorneys on the privilege log, despite plaintiff's requests, until briefing before the Court. Vice Chancellor Laster held these deficiencies were an improper assertion of privilege that resulted in waiver of the privilege. Accordingly, the Court ordered production of the documents withheld for privilege and inadequately described on the privilege log. The Court denied defendant's request for certification of an interlocutory appeal, but granted a limited stay of production of the documents while defendant sought certification of an interlocutory appeal with the Supreme Court.
The opinion clearly sets out what must be on the privilege log. Failure to comply is now certain to bring a similar sanction.Share