Delaware Court Ruling on Trading Price and Fair Value Appraisal

David Berger and Brad Sorrels are partners and Phillip Sumpter is an associate at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Mr. Sorrells, and Mr. Sumpter, and is part of the Delaware law series; links to other posts in the series are available here.

On February 15, 2018, the Delaware Court of Chancery issued its post-trial decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.[1] a statutory appraisal proceeding arising from Hewlett-Packard’s 2015 acquisition of Aruba Networks. [2] The court concluded that the “most persuasive evidence” of Aruba Networks’ fair value was its 30-day average unaffected market price of $17.13 per share—significantly lower than the merger price of $24.67 per share. This decision comes in the wake of the Delaware Supreme Court’s recent decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. [3] and DFC Global Corporation v. Muirfield Value Partners, L.P.[4] which endorsed the use of the merger price as evidence of fair value in appraisals involving publicly traded companies sold in arm’s-length transactions. Heeding the Delaware Supreme Court’s admonition in those cases that market indicators should be given significant weight over “exercises of human judgment” such as the Delaware courts’ historical reliance on discounted cash flow analyses, Vice Chancellor Laster—who was the trial court judge in Dell—concluded that, under the circumstances presented, Aruba Networks’ unaffected stock price was the most persuasive evidence of fair value over even the merger price.

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SEC Year-in-Review and a Look Ahead

Alex Janghorbani is a Senior Attorney and Anne E. Coxe is an Associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Janghorbani and Ms. Coxe.

2017 brought marked challenges to the SEC’s ability to aggressively enforce the securities laws, including the Supreme Court limiting the SEC’s ability to seek disgorgement and court action endangering the validity of its oft-used administrative proceedings. 2017 also saw a decrease in the SEC’s total enforcement statistics. [1] However, there is reason to believe that 2018 will see an uptick in enforcement actions and perhaps some clarity on the use of administrative proceedings. The SEC enters 2018 with a full complement of Commissioners and most senior Enforcement leadership positions filled, and it now has clearly articulated areas of focus, including protecting retail investors and prosecuting cyber cases. A recent Supreme Court cert grant should also help move to closure questions surrounding the use of administrative proceedings, historically an important enforcement mechanism. Below are a few observations from the past year, as well as key enforcement areas to keep an eye on in 2018.

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Eclipse of the Public Corporation or Eclipse of the Public Markets?

Craig Doidge is Professor of Finance at the University of Toronto. This post is based on a paper authored by Professor Doidge; Kathleen M. Kahle, Thomas C. Moses Professor in Finance at the University of Arizona; Andrew Karolyi, Harold Bierman, Jr. Distinguished Professor of Management at Cornell University; and René Stulz, Everett D. Reese Chair of Banking and Monetary Economics at Ohio State University.

In 1989, Jensen wrote that “the publicly held corporation has outlived its usefulness in many sectors of the economy.” He published in the Harvard Business Review an article titled “The Eclipse of the Public Corporation.” Jensen argued that the conflict between owners and managers can make the public corporation an inefficient form of organization. He made the case that new private organizational forms promoted by private equity firms reduce this conflict and are more efficient for firms in which agency problems are severe. Though the number of public firms did not initially fall following Jensen’s prediction, it eventually did, and dramatically so.

One might conclude that this dramatic drop in the number of public corporations represents the eclipse of the public corporation as predicted by Jensen. However, large and highly profitable public companies such as Google, Apple, Amazon, Microsoft, and Facebook, have arisen and flourished. Paradoxically, we have some of the most profitable and successful companies in the history of U.S. capital markets at the same time we are witnessing a collapse in the number of public firms. One common characteristic of these firms is that they have vastly more intangible than tangible capital. In our paper, Eclipse of the Public Corporation or Eclipse of the Public Markets?, we argue that U.S. public markets are not well-suited to satisfy the financing needs of young firms with mostly intangible capital. In that sense, what we are really witnessing is not an eclipse of the public corporation, but of the public markets as the place where young American companies seek their funding.

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Current Developments in California Shareholder Litigation

Boris Feldman is a partner at Wilson Sonsini Goodrich & Rosati. This post is a version of Current Developments in Shareholder Litigation in California, a whitepaper Mr. Feldman partnered with AIG Financial Lines on producing and publishing. Wilson Sonsini Goodrich & Rosati is a member of AIG Financial Lines’ Management Liability Panel Counsel Program.

The dominant features in the shareholder litigation environment in California today are fragmentation and uncertainty:

  • Plaintiffs’ bar fragmentation means ‘too small to sue’ no longer applies
  • Uncertainty as to whether IPO lawsuits can be brought in state court or only Federal
  • Uncertainty in the evolution of merger and fiduciary duty suits
  • Uncertainty as to the strength of the Safe Harbor for forward looking statements
  • Uncertainty as to the evolving risk profile for private companies, which historically were less concerned about shareholder lawsuits

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Activism and Takeovers

Mike Burkart is Professor of Finance at the London School of Economics and Samuel Lee is Assistant Professor of Finance at Santa Clara University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

Hostile takeovers have long been considered the quintessential disciplinary governance mechanism, but a similarly confrontational strategy has lately come to prominence by way of activist hedge funds that buy into poorly run firms and use the threat of hostile tactics to pressure management into accepting specific proposals to improve shareholder value. This paper compares these two governance mechanisms within a unified framework where any outside investor—bidder or activist—faces a dual free-rider problem since target shareholders neither contribute to the cost of intervention nor sell their shares unless the price fully reflects the anticipated value improvement.

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ISS QualityScore: Environmental and Social Metrics

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu.

Along with its four pillars for governance which score companies on a one to ten scale, ISS has launched Environmental & Social (E&S) QualityScore to measure corporate disclosure on environmental and social issues. Similar to the Governance QualityScore, the measures are relative based on peer companies within a specific industry group.

An initial set of 1,500 companies is being covered globally, including Energy, Materials, Capital Goods, Transportation, Automobiles & Components, and Consumer Durables & Apparel. It is expected that by Q2 2018, an additional 3,500 companies across 18 industries will be included. The scores will be part of the companies’ proxy voting reports, but like all of the QualityScores, will not impact the vote recommendations.

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SEC Enforcement in Financial Reporting and Disclosure—2017 Year-End Update

David WoodcockJoan E. McKown, and Henry Klehm III are partners at Jones Day. This post is based on a Jones Day publication by Mr. Woodcock, Ms. McKown, Mr. Klehm, David Bergers, and Laura Jane Durfee.

We are pleased to present our annual review of enforcement activity relating to financial reporting and issuer disclosures. Much like prior reviews, this update focuses principally on the Securities and Exchange Commission (“SEC”) but also discusses other relevant trends and developments.

Acting on the vision outlined by new Chairman Jay Clayton, the SEC has adopted a more measured enforcement posture and articulated a heightened focus on specific initiatives and programs. In the SEC’s year-end enforcement overview, the Enforcement Division’s Co-Directors reiterated Chairman Clayton’s guiding message that the mission of the SEC “starts and ends with the long-term interests of the Main Street investor.” The other core principles outlined by the Co-Directors, which are discussed in various portions of this post, include: focusing on individual accountability, keeping pace with technological change, imposing sanctions that further enforcement goals, and constantly assessing the allocation of the SEC’s resources. Newly confirmed Commissioners Hester Peirce and Robert J. Jackson, Jr., whose confirmations now give the SEC a full commission for the first time since 2015, suggested that these principles will continue to be the pillars of enforcement moving forward into 2018.

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Sustainability and Liability Risk

Tom Riesenberg is Director of Legal Policy & Outreach at the Sustainability Accounting Standards Board; Elisse Walter is Former SEC Chair and a member of SASB’s Foundation Board. This post is based on a SASB publication by Mr. Riesenberg and Ms. Walter. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

As the Sustainability Accounting Standards Board (SASB) marches forward with its standard-setting efforts, public companies are not always receptive, with responses that are reminiscent of the rabbi’s prayer in Fiddler on the Roof: “May God bless the Czar, and keep him far away from us.” In our experience the three reasons most often given by public companies for wanting to maintain their distance from SASB are: it is not clear that investors really want or need this information or that the information is material; it would be too expensive to provide accurate information; and there are too many legal uncertainties.

The response to the first of these concerns is that there is a mountain of evidence that investors want better, more standardized, more useful information about a company’s sustainability. Much of this evidence is available in various forms on SASB’s website. [1] And the crux of SASB’s standard-setting approach is to identify, through extensive research and analysis, information that is reasonably likely to be material to companies within a particular industry. In this regard, although sustainability disclosures are often referred to as non-financial information, they are best characterized as descriptions of a company’s long-term risks and thus perhaps more accurately described as pre-financial statement information.
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Capital Gains Lock-In and Governance Choices

Scott Weisbenner is the William G. Karnes Professor of Finance at the University of Illinois. This post is based on a recent paper authored by Professor Weisbenner; Stephen G. Dimmock, Associate Professor of Finance at Nanyang Technological University; William Christopher Gerken, Assistant Professor of Finance at University of Kentucky Gatton College of Business and Economics; and Zoran Ivkovich, Professor of Finance at the Michigan State Eli Broad College of Business.

Does liquidity—the ability of shareholders to sell their shares easily—improve or harm corporate governance? Coffee (1991) and Bhide (1993) argue that liquidity is harmful for corporate governance because investors can more readily take the “Wall Street Walk” by selling their shares and thus avoid engaging in costly governance activities. In contrast, others have argued (see the review by Edmans (2014)) that liquidity can improve corporate governance because the threat of exit constrains management, and this threat is more credible when shares are liquid.

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Overseeing Cyber Risk

Paula Loop is Leader at the Governance Insights Center, Catherine Bromilow is Partner at the Governance Insights Center, and Sean Joyce is US Cybersecurity and Privacy Leader at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop, Ms. Bromilow, and Mr. Joyce.

Directors can add value as their companies struggle to tackle cyber risk. We put the threat environment in context for you and outline the top issues confronting companies and boards. And we identify concrete steps for boards to up their game in this complex area.

You don’t need us to tell you that cyber threats are everywhere. Breaches make headlines on what seems like a daily basis. They also cost companies—in money and reputation. Indeed, cyber threats are among US CEOs’ top concerns, according to PwC’s 20th Global CEO Survey.

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