Category Archives: Mergers & Acquisitions

An End to Disclosure-Only Settlements?

Monica K. Loseman is a partner in the Litigation Department at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication authored by Ms. Loseman, Nicholas A. KleinBrian M. Lutz, and Meryl L. Young. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In an opinion last week [September 17, 2015], the Delaware Court of Chancery, following other recent decisions from that Court, strongly signaled that stockholder lawsuits in Delaware attacking mergers may no longer be resolved by a corporate defendant providing additional disclosures to stockholders in exchange for a broad release of claims against all defendants. Signaling the end to what has become common practice in stockholder litigation routinely challenging mergers, Vice Chancellor Glasscock noted in his decision approving a settlement in In re Riverbed Technologies that, “in light of this Memorandum Opinion,” expectations that the court will approve such broad releases in exchange for additional disclosures “will be diminished or eliminated going forward.”

The settlement arose out of stockholder litigation concerning a going-private transaction. In the settlement, Riverbed agreed to make supplemental disclosures in an SEC filing prior to the stockholder vote and pay plaintiffs’ attorney’s fees, in exchange for defendants receiving a full release from liability for all claims arising out of the merger.


Banker Loyalty in Mergers and Acquisitions

Andrew F. Tuch is Associate Professor of Law at Washington University School of Law. This post is based on an article authored by Dr. Tuch, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

As recent decisions of the Delaware Court of Chancery illustrate, investment banks can face conflicts of interest in their role as advisors on merger and acquisition (“M&A”) transactions. In a trilogy of recent decisions—Del Monte[1] El Paso [2] and Rural Metro [3]—the court signaled its concern, making clear that potentially disloyal investment banking conduct may lead to Revlon breaches by corporate directors and even expose bank advisors (“M&A advisors”) themselves to aiding and abetting liability. But the law is developing incrementally, and uncertainty remains as to the proper obligations of M&A advisors and the directors who retain them. For example, are M&A advisors in this context properly regarded as fiduciaries and thus obliged to act loyally toward their clients; gatekeepers, and thus expected to perform a guardian-like function for investors; or simply arm’s length counterparties with no other-regarding duties? [4] The Chancery Court in Rural Metro potentially muddied the waters by labelling M&A advisors as gatekeepers and—in an underappreciated part of its opinion—by also suggesting they act consistently with “established fiduciary norms.” [5]


New Direction from Delaware on Merger Litigation Settlements

David A. Katz is a partner specializing in the areas of mergers and acquisitions and complex securities transactions at Wachtell, Lipton, Rosen & Katz; William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a series of rulings culminating in a recent memorandum opinion, the Delaware Court of Chancery has reset the rules for settling merger-related litigation. In re Riverbed Tech. Inc. S’holders Litig., C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015).

Nearly every public company merger now draws class action litigation, and the great majority of these suits have long been resolved by “disclosure-only” settlements in which the target company makes supplemental disclosures related to the merger in exchange for a broad class-wide release of claims. The only money that changes hands is an award of fees for the plaintiff’s lawyers. In recent bench rulings, members of the Court of Chancery have noted that these settlements seem to provide very little benefit to stockholders and questioned whether plaintiffs and their counsel had investigated their claims sufficiently to justify what some judges call the customary “intergalactic” release of all potential claims relating to a challenged merger.


The Board’s Prerogative and Mergers

Clare O’Brien and Rory O’Halloran are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Ms. O’Brien, Mr. O’Halloran, and Gregory Gewirtz. This article first appeared in the July/August 2015 issue of Thomson Reuters’ The M&A Lawyer. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Under Delaware law, the board of directors of each company executing a merger agreement is required to adopt a resolution approving the merger agreement and declaring its advisability, [1] although Delaware law also provides that a company may “agree to submit a matter to a vote of its stockholders whether or not the board of directors determines at any time subsequent to approving such matter that such matter is no longer advisable and recommends that the stockholders reject or vote against the matter.” [2] Further, under the Securities Exchange Act of 1934, for transactions involving a tender offer or exchange offer, the target is required to file a Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9, disclosing the target board’s position as to whether its stockholders should accept or reject the tender offer or defer making a determination regarding such offer. [3]


In re Dole Food Company, Inc. and the Cost of Going Private

James Jian Hu is an associate in the corporate and mergers & acquisitions practice at Kirkland & Ellis LLP. The views expressed in this post represent solely those of the author. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On August 27, 2015, Vice Chancellor Laster authored a widely anticipated opinion providing valuable guidance on steering clear of a flawed process in a going-private transaction. David H. Murdock, the CEO and Chairman of Dole and a 40% shareholder, and C. Michael Carter, the General Counsel, President and COO of Dole and characterized as Murdock’s right-hand man, were found personally liable for $148 million to Dole shareholders. A number of considerations detailed in the court’s opinion serve as valuable reminders for practitioners guiding a controlling stockholder in a going-private process in the interest of minimizing post-closing litigation risk and liability exposure.


The Disappearance of Public Firms

Gustavo Grullon is Professor of Finance at Rice University. This post is based on an article authored by Professor Grullon; Yelena Larkin, Assistant Professor of Finance at Penn State University; and Roni Michaely, Professor of Finance at Cornell University.

In our paper, The Disappearance of Public Firms and the Changing Nature of U.S. Industries, which was recently made publicly available on SSRN, we show that contrary to popular beliefs, U.S. industries have become more concentrated since the beginning of the 21st century due to a systematic decline in the number of publicly-traded firms. This decline has been so dramatic that the number of firms these days is lower than it was in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today.

We show that the decline in the number of public firms has not been compensated by other mechanisms that could reduce market concentration. First, private firms did not replace public firms, as the aggregate number of both public and private firms declined in over half of the industries, and the concentration ratio based on revenues of public and private firms has increased. Second, we examine whether the intensified foreign competition could provide an alternative source of rivalry to domestic firms, and find that the share of imports out of the total revenues by U.S. public firms has remained flat since 2000. Third, we show that the decrease in the number of public firms has been a general pattern that has affected over 90% of U.S. industries, and is not driven by distressed industries, or business niches that have disappeared due to technological innovations or changes in consumer preferences. Instead, it has been driven by a combination of a lower number of IPOs as well as high M&A activity.


Delaware Court Imposes Damages for Breach of Fiduciary Duties

Ariel J. Deckelbaum is a partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Deckelbaum, Justin G. Hamill, Stephen P. Lamb, Jeffrey D. Marell, and Frances Mi. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In In re Dole Food Co. Inc. Stockholder Litigation, in connection with a take-private transaction with the controlling stockholder, the Delaware Court of Chancery held in a post-trial opinion that the President of the company and its controlling stockholder undermined the sales process by depriving the special committee of the ability to negotiate on a fully informed basis and the stockholders of the ability to consider the merger on a fully informed basis. The court held that the President and the controlling stockholder intentionally acted in bad faith (with the President also engaging in fraud) and that they were jointly and severally liable for damages of $148,190,590. Because fiduciary breaches of this nature are not exculpable or indemnifiable under Delaware law, the controlling stockholder and the President are personally liable for the damages imposed.


Role of the Board in M&A

Alexandra R. Lajoux is chief knowledge officer at the National Association of Corporate Directors (NACD). This post is based on a NACD publication authored by Ms. Lajoux.

What is the current trend in M&A?

Right now, M&A deal value is at its highest since the global financial crisis began, according to Dealogic. In the first half of 2015, deal value rose to $2.28 trillion—approaching the record-setting first half of 2007, when $2.59 trillion changed hands just before the onset of the financial crisis. Global healthcare deal value reached a record $346.7 billion in early 2015, which includes the highest-ever U.S. health M&A activity. And total global deal value for July 2015 alone was $549.7 billion worldwide, entering record books as the second highest monthly total for value since April 2007. The United States played an important part in this developing story: M&A deal value in the first half of 2015 exceeded the $1 trillion mark for announced U.S. targets, with a total of $1.2 trillion.


Do Takeover Defenses Deter Takeovers?

Jonathan Karpoff is Professor of Finance at the University of Washington. This post is based on an article authored by Professor Karpoff; Robert Schonlau, Assistant Professor of Finance at Brigham Young University; and Eric Wehrly, Finance Instructor at Seattle University. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here), The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen, and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

The G-index and E-index are workhorses of empirical corporate finance research. Each counts the number of takeover defenses a firm has and is often used as a summary measure of the firm’s protection from unsolicited takeover bids. But do these indices actually measure takeover deterrence?

This is an important question because a substantial number of empirical findings and their interpretations are based on the assumption that takeover defense indices do indeed measure takeover deterrence. For example, researchers have used the G-index and E-index to examine whether takeover defenses are associated with various firm outcomes including low stock returns, low firm value, acquisition returns, takeover premiums, increased risk taking, internal capital markets, credit risk and pricing, operating performance, the value and use of cash holdings, and corporate innovation. Researchers also have used takeover indices to examine whether takeover defenses serve primarily to entrench managers at shareholders’ expense, or to increase firm value through bargaining or contractual bonding.


FTC Charges Activist Hedge Fund

Sabastian V. Niles focuses on rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles, Nelson O. Fitts, and Franco Castelli.

Yesterday [August 24, 2015], the Federal Trade Commission announced that Dan Loeb’s Third Point had settled a complaint charging violations of the notification and waiting period requirements of the Hart-Scott-Rodino Act in connection with purchases of Yahoo! stock in 2011.

The HSR Act requires that acquirors notify the federal antitrust agencies of transactions that meet applicable thresholds and observe a pre-acquisition waiting period. Acquisitions of up to 10% of a company’s voting stock are exempt if made solely for the purpose of investment, and the acquirer “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” Buyers who intend to be involved in the management of the target company or to seek representation on its board of directors are not eligible for the exemption. HSR requirements have historically been enforced strictly and narrowly against public companies, officers, directors, and investors, without deference or favor to any particular class of violator.


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