Tag: Controlling shareholders


The Biases of an “Unbiased” Optional Takeover Regime

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University. This post is based on a recent article authored by Prof. Ventoruzzo and Johannes Fedderke, Professor of International Affairs at Pennsylvania State University School of International Affairs.

The conundrum of the perfect balance between mandatory and enabling rules and the role of private ordering in takeover regulation is one of the most relevant and interesting issues regarding the optimal regime for acquisitions of listed corporations. The issue is rife with complex questions and implications, both from a more technical legal perspective and in terms of public choice.

In a recent and compelling article (available here and published in the Harvard Business Law Review in 2014, and discussed on the Forum here), Luca Enriques, Ron Gilson and Alessio Pacces have argued the desirability of an optional, default regime to regulate takeovers particularly in the European Union. According to this approach, which the proponents call “unbiased,” listed corporations should be allowed to opt out of the default regime and use private ordering to tailor more desirable rules on the “pillars” of the European approach: mandatory bid, board neutrality, and breakthrough. More precisely, they suggest a dichotomy, distinguishing already listed corporations and new IPOs: for the former, the default regime should be the one currently in place; for the latter, a regime crafted against the interests of the existing incumbents should be introduced. With adequate protections and procedural rules, the theory goes, it would be easier to achieve a more efficient regulatory structure.

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Corporate Control and Idiosyncratic Vision

Zohar Goshen is the Alfred W. Bressler Professor of Law, Columbia Law School and Professor of Law at Ono Academic College. Assaf Hamdani is the Wachtell, Lipton, Rosen & Katz Professor of Corporate Law, Hebrew University of Jerusalem. This post is based on an article authored by Professor Goshen and Professor Hamdani.

Prominent technology firms such as Google, Facebook, LinkedIn, Groupon, Yelp, and Alibaba have gone public with the controversial dual-class structure to allow their controlling shareholders to preserve their indefinite, uncontestable control over the corporation. Similarly, in the concentrated ownership structure, a person or entity—the controlling shareholder—holds an effective majority of the firm’s voting and equity rights to preserve control. Indeed, most public corporations around the world have controlling shareholders, and concentrated ownership has a significant presence in the United States as well. Unlike diversified minority shareholders, a controlling shareholder bears the extra costs of being largely undiversified and illiquid. Why, then, does she insist on holding a control block?

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Economic Downsides and Antitrust Liability Risks from Horizontal Shareholding

Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on Professor Elhauge’s recent article, forthcoming in the Harvard Law Review.

In recent decades, institutional investors have grown and become more active in influencing corporate management. While this development has often been viewed as salutary from a corporate governance perspective, the implications for product market competition have become deeply troubling. As I show in a new article called Horizontal Shareholding (forthcoming in the Harvard Law Review), this growth in institutional investors means that a small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.

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Delaware Courts and the Law Of Demand Excusal

Justin T. Kelton is an attorney specializing in complex commercial litigation at Dunnington, Bartholow & Miller, LLP. 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. 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.

Delaware courts have recently issued critical guidance regarding the contours of the demand excusal doctrine. The following cases outline the Delaware courts’ recent analyses on the issue.

Delaware Supreme Court Clarifies Analysis For Determining Director Independence

In Del. Cty. Emps. Ret. Fund v. Sanchez, Del. No. 702, 10/2/15, the Delaware Supreme Court clarified that, in considering whether a complaint has sufficiently pleaded a lack of independence, the Court of Chancery should not parse facts pled regarding personal relationships and those pled regarding business relationships as categorically distinct issues. Rather, the Court of Chancery must “consider in fully context” all of the “pled facts regarding a director’s relationship to the interested party.” Taking all of the facts together, the Delaware Supreme Court found that the plaintiff’s allegations that “a director has been close friends with an interested party for a half century” was sufficient to raise a pleading stage inference of interestedness because “close friendships of that duration are likely considered precious by many people, and are rare.”

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Director Independence and Risks for M&A Financial Advisors

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 Gregory Beaman. 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 September 28 and October 1, 2015, the Delaware Court of Chancery issued decisions in Caspian Select Credit Master Fund Limited v. Gohl, C.A. No. 10244-VCN and In re Zale Corporation Stockholders Litigation, C.A. No. 9388-VCP. On October 2, 2015, the Delaware Supreme Court decided Delaware County Employees Retirement Fund v. Sanchez, No. 702. The outcome for the director defendants in each case differed: the claims against the Zale directors were dismissed, the claims against directors in Caspian largely survived at the pleading stage, and the claims against the directors in Sanchez, where the Chancery Court had granted the defendants’ motion to dismiss, were reinstated when the Supreme Court reversed. These contrasting results largely are attributable to the existence in Zale of an independent board of directors, whereas the pleadings in Caspian and Sanchez sufficiently alleged that a majority of the boards of the companies at issue lacked independence. In addition, the Zale decision underscores again the risks confronting financial advisors to sellers in merger transactions, since the aiding and abetting fiduciary breach claim against the board’s financial advisor survived even though the fiduciary duty claims against the directors themselves were dismissed.

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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.

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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.

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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.

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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.

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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).

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