Tag: Fiduciary duties


So You’re Thinking of Joining a Public Company Board

David A. Katz is a partner specializing in the areas of mergers and acquisitions, corporate governance and activism, and crisis management at Wachtell, Lipton, Rosen & Katz. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal.

Candidates for directorships on public company boards have much to consider. Potential exposure to legal liability, public criticism, and reputational harm, a complex tangle of applicable regulations and requirements, and a very significant time commitment are facts of life for public company directors in the modern era. The extent to which individuals can effectively manage the risks of directorship often depends on company-specific factors and can be increased through diligence and thoughtful preparation on the part of the director and the company.

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Chancery Court on Disclosure-Only Settlements

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, Peter J. Rooney, and Gregory Beaman. This post is part of the Delaware law series; links to other posts in the series are available here.

It’s a familiar story in M&A transactions. A merger is announced and, within days, the plaintiffs’ bar scrambles to file suits on behalf of the selling company’s stockholders, alleging that the seller’s board agreed to an inadequate price and made misleading disclosures about the deal. After going through “the motions”—the plaintiffs file a motion for preliminary injunction and the defendants produce certain agreed-upon documents—a settlement is reached whereby the plaintiffs give defendants a broad release in exchange for (often immaterial and unhelpful) supplemental disclosures and the defendants’ agreement to pay (and not to oppose court approval of) a “six-figure” fee award to plaintiffs’ counsel. According to the Trulia Court, the result is tantamount to a deal “tax” on M&A transactions.

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Negotiation in Good Faith—SIGA v. PharmAthene

Philip Richter is a partner and Co-Head of the Mergers & Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Richter, Peter Simmons, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court’s decision in SIGA Technologies Inc. v. PharmAthene Inc. (Dec. 23, 2015) has increased the risk associated with entering into a “preliminary agreement”—i.e., an agreement to negotiate in good faith a definitive agreement based on, for example, a term sheet or letter of intent, where some material terms have been set forth and others remain to be negotiated.

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Delaware Court Guidance on Merger Litigation Settlements

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Mirvis, 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.

In an opinion last week, the Delaware Court of Chancery rejected a disclosure-only settlement of a putative stockholder class-action lawsuit challenging a merger. In re Trulia, Inc. Stockholder Litig., C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016). Continuing and perhaps completing its recent reevaluation of merger litigation settlement practice, the Court made clear that it “will be increasingly vigilant in scrutinizing” such settlements in the future and that disclosure claims should be litigated (if at all) outside the settlement context.

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Designated Lender Counsel in Private Equity Loans

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 Rob McKenna.

Recent media reports have expressed alarm at the use of “designated lender counsel” in private equity-sponsored leveraged loan transactions. [1] The phrase refers to the practice of a private equity firm instructing the investment bank arranging its syndicated loan as to which law firm the private equity firm would like the investment bank to use as the bank’s counsel. According to the press reports, the practice (also known as “sponsor designated counsel”) has become prevalent in the syndicated loan market. The question raised in the press is whether this practice creates a material conflict of interest, because the law firm representing the investment bank arguably generates fees based on the strength of its relationship with the private equity firm across the table. If it does, the next question is whether that conflict could be argued to adversely affect the lending arrangement, with potential negative consequences for investors in the loan.

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Failure-of-Oversight Claims Against Directors

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Emil A. Kleinhaus, C. Lee Wilson, and Noah B. Yavitz. This post is part of the Delaware law series; links to other posts in the series are available here.

Last week, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of purported shareholder derivative claims alleging that directors of JPMorgan Chase, a Delaware corporation, failed to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme. Central Laborers v. Dimon, No. 14-4516 (2d Cir. Jan. 6, 2016) (summary order). The decision represents a forceful application of Delaware law holding that, when directors are protected by standard exculpation provisions in the corporate charter, they will not be liable for alleged oversight failures absent a particularized showing of bad-faith misconduct.

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Delaware Supreme Court on Potential Financial Advisor Liability

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, Peter J. Rooney, and Gregory Beaman. This post is part of the Delaware law series; links to other posts in the series are available here.

In November 30, 2015, the Delaware Supreme Court issued a 107-page opinion affirming the Court of Chancery’s post-trial decisions in In re Rural/Metro Corp. Stockholders Litigation (previously discussed on the Forum here). In the lower court, Vice Chancellor Laster found a seller’s financial advisor (the “Financial Advisor”) liable in the amount of $76 million for aiding and abetting the Rural/Metro Corporation board’s breaches of fiduciary duty in connection with the company’s sale to private equity firm Warburg Pincus LLC. See RBC Capital Mkts., LLC v. Jervis, No. 140, 2015, slip op. (Del. Nov. 30, 2015).The Court’s decision reaffirms the importance of financial advisor independence and the courts’ exacting scrutiny of M&A advisors’ conflicts of interest. Significantly, however, the Court disagreed with Vice Chancellor Laster’s characterization of financial advisors as “gatekeepers” whose role is virtually on par with the board’s to appropriately determine the company’s value and chart an effective sales process. Instead, the Court found that the relationship between an advisor and the company or board primarily is contractual in nature and the contract, not a theoretical gatekeeping function, defines the scope of the advisor’s duties in the absence of undisclosed conflicts on the part of the advisor. In that regard, the Court stated: “Our holding is a narrow one that should not be read expansively to suggest that any failure on the part of a financial advisor to prevent directors from breaching their duty of care gives rise to” an aiding and abetting claim. In that (albeit limited) sense, the decision offers something of a silver lining to financial advisors in M&A transactions. Equally important, the decision underscores the limited value of employing a second financial advisor unless that advisor is paid on a non-contingent basis, does not seek to provide staple financing, and performs its own independent financial analysis.

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The Long-Term Value of the Poison Pill

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Daniel A. Neff, David A. Katz, Mark Gordon, and William Savitt. This post is part of the Delaware law series; links to other posts in the series are available hereRelated research from the Program on Corporate Governance about poison pills includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here), and  The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

Nearly six years ago, Air Products made an unsolicited all-cash bid to acquire Airgas for $60 per share (later increased to $70), to which the board of directors of Airgas said “no.” Based on the Airgas directors’ unanimous judgment—informed by months of thoughtful review and analysis—that Airgas was worth more than Air Products was offering, whether on a standalone basis or in the hands of another industry player, this “no” was made possible by bedrock principles of Delaware law. These principles recognize that it is the role of the board, and not raiders or short-term speculators, to determine whether and when a company should be sold, and authorize the use of appropriate measures—most notably, the poison pill—to ensure the board has the opportunity to perform this essential function.

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Putting RBC Capital In Context

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision, the Delaware Supreme Court upheld Chancery Court decisions requiring RBC Capital—a unit of the Royal Bank of Canada—to pay $76 million to Rural/Metro shareholders based on RBC Capital’s advisory work for Rural/Metro in its 2011 sale to Warburg Pincus. RBC Capital sought a buy-side financing role for Warburg Pincus, a private equity firm, while giving Rural/Metro sell-side advice, and sought to leverage its role in the Rural/Metro deal for work in an unrelated deal without disclosing that fact to Rural/Metro’s board. As a result, under the Revlon standard the Court applied to the case, RBC Capital “aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corporation,” said the Court, even as it sought to limit the holding by stating that “a board is not required to perform searching and ongoing due diligence on its retained advisors … to ensure that the advisors are not acting in contravention of the company’s interests….”

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The Soviet Constitution Problem in Comparative Corporate Law

This post comes to us from Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, The Soviet Constitution Problem in Comparative Corporate Law: Testing the Proposition that European Corporate Law is More Stockholder Focused than U.S. Corporate Law, issued as Discussion Paper of the Program on Corporate Governance and forthcoming in the Southern California Law Review. Related research from the Program on Corporate Governance includes Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, by Chief Justice Strine; and The Case for Increasing Shareholder Power, by Lucian Bebchuk.

Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an essay that is forthcoming in the Southern California Law Review. The essay, titled The Soviet Constitution Problem in Comparative Corporate Law: Testing the Proposition that European Corporate Law is More Stockholder Focused than U.S. Corporate Law, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

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