Tag: Controlling shareholders

Delaware’s Respect for Informed Stockholder Approval of Mergers

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Ryan A. McLeod, and Nicholas Walter. 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 important ruling last week, the Delaware Supreme Court reaffirmed that control of Delaware companies lies in the boardroom and held that the deferential business judgment rule is the “appropriate standard of review for a post-closing damages action” when a third-party merger “has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015) (en banc).

The ruling affirms the Court of Chancery’s dismissal of a case challenging KKR’s $2.6 billion acquisition of KKR Financial Holdings LLC (“KFN”), about which we previously wrote. Attacking the trial court’s ruling, stockholder plaintiffs argued that KKR was KFN’s controlling shareholder (notwithstanding its small equity stake) because a KKR affiliate managed KFN’s day-to-day operations pursuant to a management agreement. The Supreme Court disagreed and confirmed that a minority stockholder will not be considered a controller without “a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.” Because KKR was not a controlling stockholder, the transaction was not subject to entire fairness review.


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.


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.


Corporate Litigation: Disinterested Directors and “Entire Fairness” Cases

Joseph M. McLaughlin is a Partner in the Litigation Department at Simpson Thacher & Bartlett LLP. The post is based on a Simpson Thacher client memorandum by Mr. McLaughlin, 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.

Under Delaware law, where a controlling shareholder stands on both sides of a corporate transaction that is challenged by minority stakeholders, the controller presumptively bears the burden of proving the entire fairness of the transaction, i.e. “both fair dealing and fair price.” Conversely, disinterested directors—those with no financial stake in the transaction—may be liable for breach of fiduciary duty only where they have breached a non-exculpated duty in connection with the negotiation or approval of the transaction.

Delaware General Corporation Law §102(b)(7) authorizes corporations to include a provision in the certificate of incorporation exculpating their directors from money damages claims based on breach of the duty of care, but not the duty of loyalty. Delaware courts have long held that a §102(b)(7) charter provision “entitles directors to dismissal of any claims for money damages against them that are based solely on alleged breaches of the board’s duty of care.” [1] The overwhelming majority of Delaware corporations have adopted exculpatory provisions.


Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal)

Luca Enriques is Allen & Overy Professor of Corporate Law at University of Oxford, Faculty of Law.

Transactions between a corporation and a “related party” (a director, the dominant shareholder, or an affiliate of theirs) are a common instrument for those in control to divert value from a corporation, especially in countries with concentrated ownership. While direct evidence of value diversion via related party transactions (RPTs) is obviously hard to obtain, widespread use of RPTs has been observed for example in China (in the form of inter-company loans) and South Korea (also as a tool to transfer wealth from one generation of controllers to the next in avoidance of inheritance taxes), has been vividly reported for post-privatization Russia and Italy (where corporate scandals, such as Parmalat and, more recently, Fondiaria-Sai, often go together with significant RPT activity). Anecdotal evidence of value extraction via RPTs also exists with regard to the US (think of the Hollinger case and those reported in Atanasov et al.’s paper on law and tunneling, available here). Their (ab)use at Russian and East-Asian companies listed in the UK has recently prompted the UK Listing Authority to stiffen its already strict provisions on RPTs (see here; for a news report on RPTs at one of these East-Asian companies—Bumi, now renamed Asia Mineral Resources—see here).

In my article Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal), published in 16 European Business Organization Law Review 1 (2015), and available here (and here as a working paper), I provide a comparative and functional overview of how laws deal with RPTs and criticize a recent European Commission proposal for a harmonized EU regime on RPTs (see Article 9c of the Proposal for a Directive of the European Parliament and of the Council amending Directives 2007/36/EC and 2013/34/EU, available here).


Delaware Court Strengthens Protections for Independent Directors

J.D. Weinberg is a partner at Covington & Burling LLP. The following post is based on a Covington publication authored by Mr. Weinberg and Daniel Alterbaum. 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.

The Delaware Supreme Court held last week that a plaintiff seeking monetary damages from an independent, disinterested director protected by an exculpatory charter provision must specifically plead a non-exculpated claim against the director to survive a motion to dismiss. [1] This rule applies regardless of the standard of review applied to the board’s conduct in respect of a challenge to a corporate transaction and includes directors of any special committee negotiating a transaction with a controlling stockholder. As a result, for any corporation whose charter includes a director exculpation clause that mirrors Section 102(b)(7) of the Delaware General Corporation Law, an independent director can obtain dismissal of any claim seeking only monetary damages that does not specifically allege a breach of the fiduciary duties of loyalty and good faith or the prohibition against self-dealing.


Delaware Supreme Court Affirms Protections of Exculpatory Provisions

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, Paul K. Rowe, William Savitt, and Ryan A. McLeod. 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.

The Delaware Supreme Court yesterday [May 14, 2015] unanimously held that a claim for damages against independent, disinterested directors of corporations with exculpatory charter provisions must be dismissed absent allegations of disloyalty or bad faith—even in controlling stockholder cases and no matter what standard of review governs the challenged transaction. In re Cornerstone Therapeutics Inc. Stockholder Litig., No. 564, 2014 (Del. May 14, 2015).

Clarifying a long-uncertain area of Delaware law, yesterday’s opinion establishes that a plaintiff “must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.” Specifically, to survive dismissal, a plaintiff must plead “facts supporting a rational inference that the director harbored self-interest adverse to the stockholders’ interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith.” Chief Justice Strine’s opinion for the Court highlighted that “each director has a right to be considered individually when the directors face claims for damages in a suit challenging board action” and that “the mere fact that a director serves on the board of a corporation with a controlling stockholder does not automatically make that director not independent.”


Multiple Voting Shares and Private Ordering: Should Old Taboos Be Abolished? The Recent Italian Reform

The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

Italian Law No. 116 of 2014 introduced several rules designed to make corporate law more flexible, create incentives to corporations to go public, and might also allow controlling shareholders and directors to entrench themselves more effectively, limiting the risk of hostile acquisitions. The new rules, which became effective a few weeks ago, are both interesting and controversial. They can be seen as a response to the increase of regulatory competition in Europe, epitomized by the reincorporation of Chrysler-Fiat, which last year moved its registered seat from Italy to The Netherlands, thus becoming subject to Dutch law.


Comparative Study on Economics, Law and Regulation of Corporate Groups

The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

The phenomenon of the groups of companies is very common in modern corporate reality. The groups differ greatly as to structure, organization, and ownership. In the US, groups with 100-per cent-owned subsidiaries are common. In continental Europe, the parents usually own less of the subsidiaries, just enough to maintain control. In Germany and Italy pyramids are frequent, i.e., hierarchical groups with various layers of subsidiaries and subsidiaries of subsidiaries forming very complicated group nets. The empirical data on groups of companies are heterogeneous because they are collected for very different regulatory and other objectives, for example for antitrust and merger control regulation or for bank supervision.


Vice Chancellor Laster and the Long-Term Rule

The following post comes to us from Covington & Burling LLP and is based on a Covington article by Jack Bodner, Leonard Chazen, and Donald Ross. 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.

Vice Chancellor Laster has been writing for several years about the fiduciary duties of directors who represent the interests of a particular block of stockholders. In his opinion in the Trados Shareholder Litigation he found that directors, elected by the venture capital investors who held Trados’s preferred stock, had a conflict of interest in deciding on a sale of the corporation in which all the proceeds would be absorbed by the liquidation preference of the preferred and nothing would go to the common. [1] As a result of this finding, Vice Chancellor Laster applied the entire fairness standard of review to the Trados board’s decision. He concluded that while the directors failed to follow a fair process, the transaction was fair because the common stock had no economic value before the sale and so it was fair for the common stock to receive nothing from the sale. [2] In a recent Business Lawyer article which he co-authored with Delaware practitioner John Mark Zeberkiewicz, [3] Vice Chancellor Laster extended his Trados conflict of interest analysis to other situations in which directors represent stockholder constituencies with short-term investment horizons, including directors elected by activist stockholders seeking immediate steps to increase the near term stock price of the corporation. He states that such directors can face a conflict of interest between their duties to the corporation and their duties to the activists.


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