DELAWARE CASE LAW UPDATE

Transcription

1 DELAWARE CASE LAW UPDATE Michael J. Barry Director Lee D. Rudy Partner U. Seth Ottensoser Partner

2 Overview: 1Increased Scrutiny Over Settlements Issues: Controlling Stockholders And Controlled Companies Developments: Third Party Liability Legislative Update: Fee Shifting and Appraisal Reform Q&A

3 Increased Scrutiny Over Settlements

4 Deal Litigation in Delaware Since 2005, there has been a dramatic rise in deal litigation: in 2005, 39.3% of deals resulted in litigation in 2013, 97.5% of deals over $100 million resulted in litigation With increase in litigation, criticism has mounted questioning need to reign in litigation Reasons behind increase are complex: decrease in securities filings defendants willingness to pay settlements for global releases lack of meaningful judicial oversight

5 Deal Litigation in Delaware 2015 saw significant increase in judicial scrutiny over, and outright rejection of, disclosure only settlements: In re Riverbed Technology Inc. Stockholders Litig. (Glasscock) Acevedo v. Aeroflex Holding Corp. (Laster) In re InterMune Stockholder Litig. (Noble) But therapeutic recoveries remain important and can be substantial: In re Athlon Energy, Inc. Stockholder Litig. (Glasscock)

6 Deal Litigation in Delaware Implications Going Forward Nonmonetary settlements will face greater scrutiny Negotiated therapeutic benefits should be real Scope of release should be measured against consideration Sometimes, a settlement isn t the answer Deal litigation remains important check against conflicts of corporate boards and financial advisors Forum selection bylaws will only be effective in reducing deal litigation if enforced by corporations Therapeutic reforms can be important Evaluate cases carefully

7 Issues Involving Controlling Stockholders And Controlled Companies

8 Who Has to Prove Entire Fairness? Longstanding precedent held that the controlling stockholder has to demonstrate entire fairness of transaction Motions to dismiss rarely filed in such cases Cornerstone decision, however, clarified that only the controlling stockholder has to prove entire fairness Independent directors can be dismissed from the case unless plaintiff alleges sufficient facts against them Bad faith, breach of loyalty

9 Entire Fairness and Controlling Stockholders Controlling stockholders generally required to demonstrate their challenged conduct is entirely fair Defendants need to prove both: fair price fair process Burden of proof shifts to defendants Can be outcome determinative

10 When Does Entire Fairness Review Apply? Recent decisions: In re Cornerstone Therapeutics Inc. (May 2015) In re Dole Food Co. (August 2015) Corwin v. KKR Financial Holdings LLC (Oct. 2015) Del. Cty. Empl Ret. Fund v. Sanchez (Oct. 2015) Swomley v. Schlect (Nov. 2015) 2015 developments regarding: MFW exception to entire fairness Pleading standards Who is a controlling stockholder?

11 Dole: Trial Victory for Stockholders David Murdock = Dole s controlling stockholder Proposed buying out public stockholders for $12/share Independent directors negotiated with Murdock Murdock agreed to raise his price to $13.50/share 50.9% of the public stockholders voted in favor March 2015 trial: Murdock must prove deal was entirely fair VC Laster ruled for plaintiffs, awarded $148m in damages In Dole s defense, my daughter Eliza wanted it noted that she likes Dole s fruit cups

12 MFW Exception to Entire Fairness Dole defendants tried to get the case dismissed under Kahn v. M&F Worldwide (Del. S.Ct. 2014) MFW held that controlling stockholders could avoid entire fairness review if they subjected transactions to two main protections: approval by a special committee of independent directors acting in good faith; and informed, voluntary vote of the majority of minority stockholders

13 Dole s Motion for Summary Judgment Under MFW Was Denied Plaintiffs presented evidence that: Murdock interfered with Committee, gave them false info, committed fraud stockholders weren t fully informed But in Swomley v. Schlect (Nov. 2015), the DE S.Ct. affirmed the dismissal of litigation challenging a controlling stockholder buyout on the pleadings, before discovery, under MFW; dangerous precedent: superficial compliance with MFW can lead to dismissal without any judical inquiry Dole, e.g.: Despite mimicking MFW s form, Murdock did not adhere to its substance.

14 Non-controlling Controllers? KKR and Sanchez decisions In both cases, stockholder plaintiffs alleged that the transaction should be subject to entire fairness because it was proposed by a controlling stockholder KKR was dismissed, and Sanchez was allowed to proceed

15 Corwin v. KKR Financial Holdings KKR & Co. ( KKR ) is a public company involved in leveraged buyouts KKR Financial Holdings ( Holdings ) is a public company that finances KKR s leveraged buyouts. Holdings has no employees. KKR proposes to buy out public stockholders of KKR Financial Holdings KKR & Co. KKR Financial Advisors ( Advisors ) manages Holdings according to a management agreement that can only be terminated if Holdings pays KKR a sizable fee. KKR Financial Advisors KKR Financial Holdings

16 KKR Litigation Dismissed Plaintiff alleges that KKR = controlling stockholder of Holdings KKR controls Holdings through management agreement KKR Court disagrees KKR only owns 1% of Holdings stock Holdings has an independent board of directors Advisors Holdings

17 Del. Cty. Empl. Ret. Fund v. Sanchez Sanchez family owns 100% of Sanchez Resources, LLC Sanchez Family Sanchez family owns 21.5% of public company Sanchez Energy Corp. Litigation challenges Sanchez family causing public company to overpay for assets from private company Sanchez Energy (public) Sanchez Resources (private)

18 Sanchez Litigation Survives Defendants say Sanchez is just like KKR Chancery court grants motion to dismiss SCT reverses, but not because Sanchez is a controlling stockholder Based on board composition 2 of 5 board members are Sanchez family If a majority of board is conflicted, litigation won t be dismissed 3rd board member Alan Jackson lifelong friend of Chairman Sanchez Employed by IBC Insurance Agency Provides insurance brokerage services to Sanchez companies Jackson s brother also works there IBC Insurance Agency is a subsidiary of IBC Chairman Sanchez is IBC s largest stockholder SCT held that Jackson s independence is in question; case proceeds

19 Recent Delaware Developments in Third Party Liability

20 Aiding and Abetting Liability To state a claim for aiding and abetting, a plaintiff must allege facts that satisfy the four elements of an aiding and abetting claim: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary's duty, (3) knowing participation in that breach by the defendants, and (4) damages proximately caused by the breach. In re Novell, Inc. Shareholder Litigation, 2013 WL , at *16 (Jan. 3, 2013)

21 Question Does the application of exculpatory provisions for directors under Delaware law limit monetary liability for third-party advisors who have aided and abetted breaches of fiduciary duty?

22 Recent Cases In re Rural Metro Corp. Shareholders Litig., 105 A.3d 990 (Del. Supr. 2014) In re TIBCO Software Inc. S'holders Litig., Consol. C.A. No CB (Del. Ch. Oct. 20, 2015) In re Zale Corp. Stockholders Litig., Consol. C.A. No VCP (Oct. 1, 2015) In re Dole Food Co., Inc. Stockholder Litig., Consol. C.A. No VCL (August 27, 2015)

23 In re Rural/Metro Corporation Stockholders Litigation The Court Supreme Court affirmed that, while Section 102(b)(7) of the Delaware General Corporation Law (the DGCL ) insulates directors from monetary damages stemming from a breach of the duty of care, the protections of DGCL Section 102(b)(7) are not applicable to third parties, such as advisors, aiding and abetting such breaches.

24 In re TIBCO Software Inc. S'holders Litig. Because of the exculpatory provision in TIBCO s charter, a claim for breach of fiduciary duty against the board could be pursued only if there was a credible allegation that the board acted in bad faith and there was no such allegation here. However, consistent with Rural/Metro, the court held that an allegation that TIBCO s board breached its fiduciary duty could still serve as a predicate for a claim that Goldman Sachs aided and abetted such a breach.

25 In Re Zale Corporation Stockholders Litigation Initial Decision Although directors were insulated from claims through an exculpatory provision in its corporate charter (but were found to have violated Revlon), Merrill Lynch was unable to dismiss the aiding and abetting claim. Reconsideration - Shortly thereafter, the Court reconsidered it s ruling. The Delaware Supreme Court had affirmed in the KKR Financial Holdings LLC case that the fully informed vote of a majority of disinterested stockholders invokes a business judgment rule review in cases in which Revlon otherwise would apply. Because the vote was informed, and the business judgment applied, and the defendant directors did not breach their fiduciary duties, Merrill Lynch could not have aided and abetted a breach of fiduciary duty.

26 In Re: Dole Food Co., Inc. Stockholder Litigation The court found that the "knowing participation" element for Deutsche Bank had not been proven at trial. "Knowing participation" required a showing that Deutsche Bank provided "substantial assistance" to Murdock and Carter in the breaches that had caused their fiduciary liability. The court ruled that while Deutsche Bank had provided assistance to them to help formulate the going-private bid, it had not knowingly participated in the actions that formed the basis for liability, especially the creation of the false projections.

27 Legislative Update: Recent Amendments To Delaware Law

28 2015 Amendments On June 24, 2015, Delaware Governor Jack Markell signed into law amendments to the General Corporation Law of the State of Delaware (8 Del. C. 101 et seq.) (the "DGCL"), including amendments involving fee shifting and forum selection. Fee Shifting Sections 102, 109(b) and 114(b) of the DGCL have been amended in response to the Delaware Supreme Court's decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014). In that case, the Court upheld as valid a bylaw imposing liability for legal fees of a nonstock corporation on certain members of the corporation participating in the litigation. The amendments to Section 114(b) leave the Court's ruling untouched with respect to nonstock corporations, but a new subsection (f) of Section 102 and a new sentence added to Section 109(b) invalidate any provision in the charter or bylaws of a stock corporation that purports to impose liability on a stockholder for attorney's fees or expenses of the corporation or any other party in connection with an internal corporate claim. New Section 115 of the DGCL defines internal corporate claims to include claims of breach of fiduciary duty by current or former directors, officers or controlling stockholders or against persons who aid and abet such a breach.

29 2015 Amendments On June 24, 2015, Delaware Governor Jack Markell signed into law amendments to the General Corporation Law of the State of Delaware (8 Del. C. 101 et seq.) (the "DGCL"), including amendments involving fee shifting and forum selection. Forum Selection A new Section 115 has been added to the DGCL to confirm (as held in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013)), that the certificate of incorporation or the bylaws of a corporation may require, consistent with applicable jurisdictional requirements, that "internal corporate claims" may be brought solely and exclusively in any or all of the courts of the State of Delaware. New Section 115 further provides that the charter and bylaws may not prohibit such claims from being brought in Delaware courts.

30 Proposed Amendments to 8 Del. C. 262 Certain changes to the appraisal statute 8 Del. C. 262 were proposed in 2015 and then withdrawn These related to the standing and interest provisions of appraisal proceedings May be considered again in the future

31 Proposed Amendment to Section 262(g) If immediately before the merger or consolidation the shares of the class or series of stock of the constituent corporation as to which appraisal rights are available were listed on a national securities exchange, the Court shall dismiss the proceedings as to all holders of such shares who are otherwise entitled to appraisal rights unless (1) the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of the class or series entitled to appraisal, (2) the value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million, or (3) the merger was approved pursuant to 253 or 267 of this title.

32 Proposed Amendment to Section 262(h) At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest shall accrue thereafter as provided herein only upon the difference, if any, between the amount so paid and the fair value of the shares as determined by the Court.

33 Q&A Michael J. Barry Director Lee D. Rudy Partner U. Seth Ottensoser Partner