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Showing 13 posts from May 2011.

Court Of Chancery Explains Need To Plead Unfairness Of Conflicted Deal

Posted In Fiduciary Duty

The Ravenswood Investment Company LP v. Winmill, C.A. 3730-VCN (May 31, 2011)

Some may think that all you need to state a claim for breach of fiduciary duty is to allege the action under attack involved a conflicted board.  Not so.  At the very least, a plaintiff also needs to allege facts that show the deal was unfair to the company.  Once that is pled, then the burden does shift to the conflicted board to justify the transaction.

Court Of Chancery Explains How To Value A Derivative Claim In Merger

In re Massey Energy Company Derivative and Class Action Litigation, C.A. 5430-VCS (May 31, 2011)

When a company that is subject to derivative litigation is sold in a merger, the value of the derivative claim may be significant.  After all, in most cases, that claim passes to the buyer who arguably should pay something for it.  Here the Court carefully evaluated a derivative claim that it found would survive a motion to dismiss and explains why, in the circumstances of this case, that claim and its possible value did not mean the merger consideration was inadequate.

The way the Court does the analysis here is an excellent example of the way to value such a claim in the merger context.

Court Of Chancery Explains Lead Counsel Selection Process

Posted In Class Actions

Nierenberg v CKx, Inc., C.A. 5545-CC (May 27, 2011)

This decision involves the application of the familiar standards governing the appointment of lead counsel, but with a twist.  When multiple suits are filed over the same alleged misdeed, the Court of Chancery has encouraged the litigants to file a so-called "Savitt Motion."  That motion asks the various courts involved to confer as to which case should go forward while the others are stayed. Here, when the New York court decided the Delaware case should be the one to proceed, the lead lawyer in New York agreed to drop his suit and go to Delaware with his claim. That drew praise from the Delaware court and may have tipped the balance in having that lawyer appointed lead counsel.

Court Of Chancery Explains Class Certification Rules

Posted In Class Actions

In re Lawson Software Inc. Shareholder Litigation, C.A. 6443-VCN (May 27, 2011)

This decision explains in a clear way how the class certification process is to work and when the members of the class should receive more direct notice of the class action.

Chancery Decisions Highlight Importance of Independent and Disinterested Directors in Company Sale Transactions

Posted In Directors, News

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.
 

Court Of Chancery Explains Revlon Application In Mixed Consideration Offers

Posted In M&A

In re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. 6164-VCP (May 20, 2011, revised May 24, 2011)

When does the Revlon doctrine apply when a takeover offer involves a mix of cash and stock?  After all, at least one Supreme Court decision suggests that if the stockholders will continue as part of a mix of all minority stockholders in the acquiring company, they may still be able to get a control premimum later and so Revlon does not apply.  This decision explains that even when the stockholders are being asked to take stock for some but not all of their shares that they still will lose the ability to get a control premimum for those shares to the extent they are sold for cash. Hence, Revlon applies and the board is required to get the best price possible for the stockholders in that transaction.

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.
 

Court Of Chancery Denies Fruitless Inspection

Graulich v. Dell Inc., C.A. 5846-CC (May 16, 2011)

The Court denied a petition to inspect corporate records for the purpose of determining if a suit should be filed against the Board when the plaintiff lacked standing to file such a suit, the statute of limitations barred the claim, and the potential claim was already the subject of a settlement of a prior suit.  One has to wonder why this petition was ever filed.

Court Of Chancery Accepts Deal Protection Terms

Posted In M&A

In re Orchid Cellmark Inc. Shareholders Litigation, C.A. 6373-VCN (May 12, 2011)

In another decision reviewing whether deal protection agreements are impermissibly preclusive, the Court noted: " one of these days some judge is going to say "no more"..."   This decision and its recent companion decision,  In Re Answers Corporation Shareholders Litigation, C.A. 6170-VCN (April 11, 2011),  list many deal protection measures that the Court has accepted.

Since the Delaware Supreme Court's split decision in Omnicare, Inc. v. NCS Healthcare Inc., 818 A.2d 914 (Del. 2003) rejecting a lock up agreement with the majority owner, the Delaware courts have not overturned such deal protection measures in merger agreements.  Maybe this decision is a warning.   After all, the Chancellor's recent decision in Air Products and Chemicals Inc. v. Airgas Inc., 16 A.3d 48 (Del. Ch. 2011)  also expressed some doubts that Delaware should be so protective of a Board's power to block a takeover.  We shall see.

Superior Court Refuses to Permit "Pick Off" Of Class Representative

Posted In Class Actions

Stratton v. American Independent Insurance Company, C.A. 082-12-12 JRS CCLD ( May 11, 2011)

In this unusual fact pattern, a defendant paid the class representative the most the representative might have received for himself if the class claim were won and then argued the class action was moot.  The Court disagreed and did a careful analysis of why the class action could proceed despite the defense effort to "pick off" the class representative.

The Viability of the Disclosure Only Settlement

Posted In M&A, News

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.
 

'Material Adverse Change' Clauses Protect Against Loss of Customers and Suppliers

Posted In Case Summaries, M&A, News

Lewis H. Lazarus and Jason C. Jowers
This article was originally published in the Westlaw Journal Delaware-Corporate | May 4, 2011

In the article, Lewis H. Lazarus and Jason C. Jowers discuss the need for transactional and litigation attorneys who negotiate or litigate material adverse change clauses to focus on the particular language at issue as differences in phrasing could affect whether a seller is protected from a buyer's claim of breach.

Ignoring Chancery Court's Guidance on How to Act in Merger Transactions Could Jeopardize Deals

Posted In Case Summaries, M&A, News

Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | May 04, 2011

The Delaware Court of Chancery, mindful of its role as a pre-eminent business court, works hard to communicate its expectations of officers and directors and their advisers.  That facilitates predictability.  Companies can be bought or sold with reduced risk that proposed transactions will be enjoined.  The corollary is that when advisers and their boards do not follow the rules, they put their clients’ transactions at risk.  Two recent cases illustrate that the Delaware Court of Chancery will not hesitate to enjoin a transaction where parties ignore clear guidance from prior opinions.

In its Feb. 14 decision in In re Del Monte Foods Co. Shareholders Litigation, the Court of Chancery enjoined a merger transaction from closing for 20 days and voided the deal protection terms that would have made a competing bid more expensive during that time period.  It did so because of conflicts of interest by the seller’s investment adviser.  The conflict arose because the seller’s investment adviser worked with the buyer to develop its merger proposal without telling the board, in apparent violation of a confidentiality agreement arising out of a previous failed effort to sell the company.  It then sought a role in providing buy-side financing.  All this while acting as financial adviser to the seller.

In enjoining the transaction the court relied on In re Toys "R" Us Inc. Shareholder Litigation, a 2005 case in which the court held that generally "it is advisable that investment banks representing sellers not create the appearance that they desire buy-side work, especially when it might be that they are more likely to be selected by some buyers for that lucrative role than by others."

Here the court found the investment adviser failed to disclose its conversations with prospective buyers or that it sought from the beginning to provide financing to the buyers.  This prevented the board from taking steps to protect the integrity of the process.  It also caused the seller to incur greater fees because once it was disclosed that the investment adviser sought to provide buy-side financing, the conflict required the board to obtain a new investment banker to opine on the fairness of the transaction.  Thus, while "the blame for what took place appears at this preliminary stage to lie with Barclays, the buck stops with the Board," the court said in Del Monte.

The remedy the court fashioned was unique — voiding the deal protection terms while enjoining the closing to permit a 20-day go-shop — but reflects the traditional equity power of the court to fashion a remedy tailored to the breach.  The court had no problem voiding the contractually bargained-for deal protection terms where the buyer knowingly participated in the board’s breach of fiduciary duty.  In so doing, the Del Monte court emphasized, "After Vice Chancellor [Leo] Strine’s comments about buy-side participation in Toys 'R' Us, investment banks were on notice."

Three weeks later, in its March 4 decision in In re Atheros Communications Inc. Shareholders Litigation, the Court of Chancery enjoined another transaction where the board failed to disclose the nature and amount of the investment adviser’s fee.  In Atheros the court found that stockholders voting on a proposed merger transaction would find it important to know that the investment adviser who rendered the fairness opinion upon which the board relied would receive 98 percent of its fixed fee only if a transaction closed.  The court was not troubled by the contingent fee per se, but rather by the fact that more than 50 times the portion that was otherwise due would be received only if a transaction closed.  As the court held, "the differential between compensation scenarios may fairly raise questions about the financial adviser’s objectivity and self-interest."

An additional factor justifying the court’s entry of injunctive relief was that the board did not disclose how soon in the process the seller’s CEO, who actively participated in negotiating the transaction price, knew that he would be staying on and receiving compensation from the buyer.  The court thus required additional disclosure on this point, finding that information that the CEO knew he would receive an offer of employment from the buyer at the same time he was negotiating the offer price would be important to a reasonable stockholder in deciding how to vote.

Both of these cases demonstrate the vitality of the court’s observation in Del Monte, cited in Atheros, that "because of the central role played by investment banks in the evaluation, exploration, selection, and implementation of strategic alternatives, this court has required full disclosure of investment banker compensation and potential conflicts."

That guidance means that practitioners and advisers would be well-served to avoid conflicts, to counsel their clients to avoid them, and to disclose such conflicts promptly.  Boards must also ensure that possible conflicts on the part of management who participate in the sale negotiations are properly managed by the board and fully disclosed.  As these cases demonstrate, it is the board’s responsibility to manage the sale process and failure to follow clear guidance from the case law imperils prompt closing of potential transactions.

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.