Tag: Derivative suits


Court of Chancery Upholds Customary Release in Spin-Off Transactions

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on a Wachtell Lipton publication by Mr. Katz, 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 Court of Chancery last week validated a release of liability that extinguished certain claims a recently spun-off company may have had against its former parent and its directors. In re AbbVie Inc. Stockholder Derivative Litig., C.A. No. 9983-VCG (Del. Ch. July 21, 2015). The decision confirms that the mutual releases customary in spin-off arrangements are presumptively appropriate and enforceable.

Abbott Laboratories spun off AbbVie, its research-based pharmaceutical subsidiary, in January 2013. Before the spin, Abbott was a defendant in a False Claims Act action alleging unlawful off-label marketing of an AbbVie product. As part of the spin-off, AbbVie broadly released all claims it might have against Abbott or any Abbott affiliate relating to assets transferred to AbbVie, including liability for the False Claims Act claim.

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Binding Spincos to Parent Obligations Requires Specificity

Matt Salerno is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Salerno, Christopher Condlin, and Christina Prassas. 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 Miramar Police Officers’ Retirement Plan v. Murdoch [1] the Delaware Court of Chancery dismissed plaintiff’s claims, refusing to hold that an “unambiguous” boilerplate successors and assigns clause operated to bind a spun-off company to the terms of a contract entered into by its former parent company. The contract at issue generally restricted the former parent company from adopting a poison pill with a term of longer than one year without obtaining shareholder approval. The decision will serve as a reminder to practitioners to carefully consider the impact that significant corporate transactions could have on their clients’ contractual rights and obligations.

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Practice Points Arising From the El Paso Decision

John E. Sorkin is a partner in the corporate practice at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication authored by Mr. Sorkin, Philip Richter, Abigail Pickering Bomba, and Gail Weinstein. 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 Chancery Court recently ruled, in In re El Paso Pipeline Partners, L.P. Derivative Litigation (Apr. 20, 2015), that the general partner of a master limited partnership (MLP) was liable to the MLP for the $171 million by which the court determined that the MLP had overpaid for liquefied natural gas (LNG) assets purchased from its parent company for $1.4 billion in a typical “dropdown” transaction. In a separate memorandum (available here and discussed on the Forum here), we have discussed the decision and our view that it will have limited applicability given the unusual factual context. We note that the court’s extremely negative view of the conduct of the conflict committee and its investment banker offers a blueprint for how not to conduct a conflict committee process. We offer the following practice points arising out of the decision.

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Perspective on El Paso—No Increased Risk for Directors

Philip Richter is partner and co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication authored by Mr. Richter, Robert C. Schwenkel, Steven Epstein, and Gail Weinstein. 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.

For what we believe is the first time, the Delaware Chancery Court has held the general partner of a master limited partnership (MLP) liable to the MLP for the amount by which the court determined that the MLP had overpaid for assets purchased from its parent company in a typical “dropdown” transaction. Vice Chancellor Laster found, in In re El Paso Pipeline Partners, L.P. Derivative Litigation (Apr. 20, 2015), that the general partner of the El Paso MLP was liable to the MLP for the $171 million by which the court determined that the MLP had overpaid for liquefied natural gas (LNG) purchased from the El Paso parent company for $1.4 billion. The Vice Chancellor was extremely critical of the conduct of the conflict committee of the general partner’s board, as well as the conduct of the committee’s investment banker. Nonetheless—and notwithstanding commentary on the case suggesting otherwise—in our view, the decision does not indicate that the court will be more likely than in the past to find liability of MLP general partners or their bankers.

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Related Party Transactions—Lessons from the El Paso MLP Decision

Christopher E. Austin is a partner focusing on public and private merger and acquisition transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Austin. 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 his recent decision in In Re: El Paso Pipeline Partners, L.P. Derivative Litigation [1], Vice Chancellor Laster awarded $171 million in damages to the limited partners of a master limited partnership (“MLP”) that had challenged the MLP’s acquisition of assets from a related party. The transaction at issue—a so-called “dropdown” of assets—involved the sale to the MLP by its controller and general partner (El Paso Corporation) of certain LNG-related assets in exchange for approximately $1.41 billion in cash.

One of the important stated benefits of using MLP structures is the ability to “contract away” from normal Delaware fiduciary duty principles and instead provide that related-party transactions will be evaluated under standards specified in the partnership agreement for the MLP. The relevant standard for the El Paso MLP was on its face quite challenging for the plaintiffs. In particular, the partnership agreement simply

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Delaware Court: Compensation Awards to Directors Subject to Entire Fairness

Robert B. Schumer is partner, chair of the Corporate Department, and co-head of the Mergers and Acquisitions Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss Client Memorandum. 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 Calma v. Templeton, the plaintiff alleged that a board of directors breached their fiduciary duties in awarding themselves restricted stock units (RSUs) pursuant to a stockholder-approved equity incentive compensation plan. The Court of Chancery held on a motion to dismiss that (i) the directors were interested in the award of the RSUs, and (ii) although the stockholders had approved the plan under which the RSUs were awarded, stockholder approval of the plan could not act as ratification because the plan did not include enough specificity as to the amount or form of compensation to be issued. The court, therefore, held that the awards were to be reviewed under the non-deferential entire fairness standard, rather than under the business judgment rule, and declined to dismiss the plaintiff’s breach of fiduciary duty claim.

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Delaware Court of Chancery Revisits Creditor Derivative Standing

Paul K. Rowe and Emil A. Kleinhaus are partners at Wachtell, Lipton, Rosen and Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rowe, Mr. Kleinhaus, William Savitt, and Alexander B. Lees. 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 a significant decision, the Delaware Court of Chancery has rejected several proposed limitations on the ability of creditors to maintain derivative suits following a corporation’s insolvency. In doing so, however, the Court reaffirmed the deference owed to a board’s decisions, regardless of the company’s financial condition, and the high hurdles faced by creditors in seeking to prove a breach of fiduciary duty. Quadrant Structured Prods. Co. v. Vertin, C.A. No. 6990-VCL (May 4, 2015).

Quadrant, a creditor of Athilon Capital, brought a derivative action claiming that when Athilon was insolvent, its directors violated their fiduciary duties, including by authorizing repayments of debt owed to Athilon’s equity owner. The defendants moved for summary judgment on the basis that Quadrant lacked standing to sue under the Delaware Supreme Court’s decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (see memo of May 24, 2007), which permits creditors to sue directors for breach of fiduciary duty only on a derivative basis, and only once the corporation is insolvent.

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Delaware Court’s El Paso Pipeline Opinion Provides Lessons for Related-Party Transactions

The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Halper, Peter J. Rooney, and William J. Foley. 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 April 20, 2015, the Delaware Court of Chancery issued a decision awarding $171 million in damages to the common unitholders of a limited partnership against its general partner in connection with a “dropdown” transaction. The decision is the latest in a series of decisions by the Chancery Court concerning the conduct of directors and advisers in conflict of interest and/or sale of the company transactions. See also In re Rural/Metro Corp. S’holders Litig., No. 6350-VCL (Del. Ch. Oct. 10, 2014); Chen v. Howard-Anderson, No. 5878-VCL (Del Ch. April 8, 2014); In re Orchard Enter., Inc. S’holder Litig., No. 7840-VCL (Del. Ch. Feb. 28, 2014). The decision yet again highlights areas that should be of concern to boards and their advisers in such transactions.

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Delaware Court Faults Committee Process & Advisory Work in Finding Lack of Good Faith

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, Jonathan M. Moses, 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.

On April 20, 2015, the Delaware Court of Chancery entered a $171 million post-trial judgment after finding a master limited partnership overpaid for assets from its parent. In re El Paso Pipeline Partners L.P. Derivative Litig., C.A. No. 7141-VCL (Del. Ch. Apr. 20, 2015).

The case concerned a 2010 “dropdown” transaction in which El Paso Pipeline Partners L.P. purchased assets from its controlling parent entity, El Paso Corporation. The limited partnership agreement governing the MLP permitted such transactions so long as they were approved by a conflicts committee whose members believed in good faith that the transaction was in the best interests of the MLP. After the parent proposed a dropdown transaction, the MLP’s committee retained legal and financial advisors and negotiated revised terms. Although the committee members initially expressed reservations about aspects of the proposed transaction in light of an earlier dropdown deal, each testified that he ultimately concluded that the transaction was in the best interests of the MLP, stressing that it was immediately accretive to the holders of the MLP’s common units. After receiving a fairness opinion from its financial advisor, the committee approved the transaction and litigation ensued.

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Delaware Court Curtails Books & Records, Validates Board-Adopted Forum Selection Bylaws

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 A.J. Martinez. 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.

A unanimous Delaware Supreme Court yesterday reaffirmed the ability of Delaware companies to organize corporate litigation in the Delaware courts. United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014) (en banc).

The case involved an action to produce corporate books and records under Section 220 of the Delaware General Corporation Law, an increasingly frequent preliminary battleground in derivative litigation. Following a familiar pattern, stockholder plaintiffs demanded access to certain books and records of United Technologies Corporation, allegedly to assist in their consideration of potential derivative litigation. UTC asked that all demanding stockholders agree to restrict use of the materials obtained in the inspection to cases filed only in Delaware, pointing out that litigation had already been filed relating to the same matters in the Delaware courts and that any derivative lawsuit would be governed by Delaware law. Then, further evincing its concern to organize corporate governance litigation in the courts of Delaware, UTC’s board adopted a forum selection bylaw during the pendency of the Section 220 lawsuit.

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