Tag: Fiduciary duties

Opening Remarks at the 75th Anniversary of the Investment Company Act and Investment Advisers Act

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks on the 75th Anniversary of the Investment Company Act and Investment Advisers Act. The full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. Thank you for coming today [September 29, 2015], and welcome to the SEC, both those here in person and through our webcast. Before I say anything else, I would like to acknowledge staff from the Division of Investment Management for their hard work in putting this anniversary program together. In particular, kudos go to Director Dave Grim, Jennifer McHugh, Bridget Farrell and Jamie Walter. I also would like to thank my fellow Commissioners who are introducing the panels, and all of the stellar panelists who will be sharing with us their insights throughout the day.

Today, we celebrate 75 years of the Investment Company Act and the Investment Advisers Act—two pieces of legislation that came to shape the financial markets as we know them. And this event is more than an anniversary celebration—it is a day to reflect on this extraordinary regulatory system that has facilitated the management and growth of assets for millions of Americans and other investors from around the world. In these opening remarks, my assignment is to first take us on a brief historical tour and then come back full circle to today where we see just how powerful and alive these Acts are in the modern markets.

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.


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.


Fiduciary Duty Proposal

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Adam Gilbert, Genevieve Gimbert, and Armen Meyer.

With fewer than 18 months left in office, President Obama has asserted that the Department of Labor’s (“DOL”) proposed fiduciary standard for retirement account advisors is a major priority. The DOL completed public hearings last week on this proposal, and we believe that the rule will be finalized early next year with the proposal’s core framework intact.

The DOL’s final rule is set to transform the competitive landscape and disrupt current business models, particularly for financial institutions that are reliant on traditional broker-dealer activities which are currently not covered by the existing Employee Retirement Income Security Act (“ERISA”) fiduciary standard.


Delaware Court Awards Damages to Option Holders

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Peter J. Rooney. 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 July 28, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it criticized in particularly strong terms the analysis performed by a financial firm that was retained to value companies that were being sold to a third party or spun off to stockholders (the “valuation firm”). See Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del Ch. July 28, 2015)CDX is just the latest decision in which the Chancery Court has awarded damages and/or ordered injunctive relief based in part on a financial firm’s failure to discharge its role appropriately. Calling the valuation firm’s work “a new low,” Vice Chancellor Laster’s opinion is another chapter in this cautionary tale that lays bare how financial firms can be exposed not only to potential monetary liability but, as importantly, significant reputational harm from flawed sell side work on M&A transactions.


Scrutiny of Private Equity Firms

Veronica Rendón Callahan is a partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum.

On June 29, 2015, the U.S. Securities and Exchange Commission charged Kohlberg Kravis Roberts & Co. with misallocating more than $17 million in broken deal expenses to its flagship private equity funds in breach of its fiduciary duty as an SEC-registered investment adviser. KKR agreed to pay nearly $30 million to settle the charges. This action represents a continuing and robust focus by the SEC on fee and expense allocation practices and disclosure by private equity fund advisers, many of which are relatively newly registered with the SEC following passage of the Dodd-Frank Act. It serves as a reminder of the need for private equity firms and other advisers to private investment funds to consider bolstering their compliance and disclosure policies and procedures related to the allocation of fees and expenses.

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