The Delaware Law Series

Mergers and Acquisitions—2019

Andrew Brownstein, Steven Rosenblum and Victor Goldfeld are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

As a whole, 2018 proved to be another strong year for M&A. Total deal volume reached almost $4.2 trillion globally, higher than the $3.7 trillion volume of 2017, but still less than the record of over $5 trillion set in 2015. Deals involving U.S. targets totaled over $1.7 trillion, compared to approximately $1.5 trillion in 2017. The number of large deals significantly increased in 2018, with 60 deals over $10 billion announced globally (compared to 46 deals in 2017). The technology sector saw the largest deal volume, followed by healthcare, oil and gas, and real estate. Private equity firms also had a banner year. As of late December, private equity buyout volume had reached almost $384 billion, the highest since the PE boom before the financial crisis. Although hostile and unsolicited M&A remained prevalent, the volume of these deals fell globally both in absolute terms, from $575 billion in 2017 to $522 billion in 2018, and in terms of share of overall deal volume, from 15% in 2017 to less than 13% in 2018.


Key 4Q 2018 Delaware Decisions

Gail Weinstein is senior counsel, and Philip Richter and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Christopher EwanSteven J. Steinman, and Warren S. de Wied. This post is part of the Delaware law series; links to other posts in the series are available here.

The major themes of the Delaware decisions issued in 2018 were (a) the continued rejection of fiduciary claims (with many fewer fiduciary cases filed than in the past), and (b) the continued emphasis on judicial interpretation of agreement provisions based on the “contractarian” approach (with more contract dispute cases filed than in the past). Notably, in the last quarter of the year, the Court of Chancery made a number of rulings of a type seen only infrequently—but these decisions at the same time reaffirmed the highly fact-specific nature of such rulings and the high bar to a plaintiff’s obtaining them.


Corwin’s Nuance

Meredith E. KotlerRoger A. Cooper, and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Kotler, Mr. Cooper, Mr. McDonald, and April Collaku, and is part of the Delaware law series; links to other posts in the series are available here.

In In re Xura, Inc. Stockholder Litigation, [1] decided earlier this week, the Delaware Court of Chancery denied the target CEO’s motion to dismiss claims that he breached his fiduciary duties by “steer[ing]” the company into an allegedly unfair acquisition by a private equity firm that promised to retain him post-acquisition, while knowing that his job was in jeopardy if the target remained independent. This case is yet another example of why disclosures are so important in the post-Corwin [2] era: Vice Chancellor Slights rejected the CEO’s argument that the claims against him were extinguished by the stockholder vote approving the transaction, finding that a number of material omissions precluded a finding that the stockholders’ vote was fully informed. The vote was thus ineffective to invoke the business judgment rule at the pleading stage.


California Courts and Forum Selection Bylaws

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Savitt, Mr. McLeod, and Ms. Reddy. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill.

[On December 21, 2018], the California Court of Appeal became the second appellate court outside of Delaware to recognize the enforceability of forum-selection bylaws adopted by Delaware corporations designating the Delaware Court of Chancery as the exclusive forum for the litigation of intracorporate and fiduciary disputes. Drulias v. 1st Century Bancshares, Inc., No. H045049 (Cal. Ct. App. 6th Dist. Dec. 21, 2018).

The appeal arose from Midland Financial’s acquisition of 1st Century Bancshares, a Delaware-chartered bank holding company. When 1st Century’s board approved the merger, it also adopted a bylaw establishing Delaware as “the sole and exclusive forum” for intracorporate disputes, including any action asserting a claim for breach of fiduciary duty. A 1st Century stockholder sued, alleging that the board had breached its duties in approving the merger and that the company’s financial advisor had aided and abetted the breach.


Fighting the Rising Tide of Federal Disclosure Suits

Alexandra C. Boudreau is counsel and Daniel W. Halston is partner at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on their WilmerHale memorandum.

In the past few years, there has been a dramatic rise in the number of M&A disclosure lawsuits filed in federal court. Recently, courts have begun to fight back against this nuisance litigation using different approaches. This post summarizes those developments.

Recently, many have reported on the increase in the number of lawsuits in Federal Court challenging public company mergers brought by shareholders alleging violations of Section 14(a), which prohibits false and misleading statements in proxy materials. It appears that after the Delaware Court of Chancery cracked down on reflexively filed M&A suits in In re Trulia Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), the plaintiffs’ bar diverted its flood of litigation following the public announcement of a merger into this previously quiet rivulet. The rush of 14(a) suits continues unabated this year.


Federal Exclusive Forum Provisions

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

In March 2018, in Cyan Inc. v. Beaver County Employees Retirement Fund, SCOTUS held that state courts continue to have concurrent jurisdiction over class actions alleging only ’33 Act violations by private plaintiffs and that defendants cannot remove actions filed in state court to federal court. (See this PubCo post.) Both before and especially after Cyan, to avoid state court litigation of ’33 Act claims (and forum shopping by plaintiffs for the most favorable state court forum), many companies adopted “exclusive forum” provisions in their charters or bylaws that designated the federal courts as the exclusive forum for litigation under the ’33 Act. Delaware law expressly permits the adoption of charter or bylaw provisions that designate Delaware as the exclusive forum for adjudicating “internal corporate claims,” i.e., claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. However, federal securities class actions are not expressly included. (See this PubCo post.)


Second Corwin Denial Due to Restatement Process

Meredith E. KotlerRoger A. Cooper, and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Kotler, Mr. Cooper, Mr. McDonald, and Kal Blassberger, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently denied Corwin cleansing [1] in a case involving the sale of a public company while it was engaged in a restatement of its prior audited financial statements. See In re Tangoe, Inc. S’holders Litig., C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018). If this sounds familiar, that is because it is the second time in two years that the Court of Chancery has denied a motion to dismiss shareholder litigation on Corwin grounds where the target was in the middle of a restatement process. [2] Together, these decisions suggest that if a board decides to sell the company while under a cloud of an ongoing restatement process, it would need to satisfy a heightened level of scrutiny of its disclosures in order to obtain the benefit of Corwin. The court in Tangoe, however, sought to reassure practitioners that it is not impossible to satisfy Corwin in a case involving an ongoing restatement by the target, and provided a checklist of the kinds of facts that, if disclosed, would result in pleading stage dismissal of a shareholder lawsuit in such a case.


Material Adverse Effect Clauses and the Delaware Supreme Court

Richard Slack is a partner and Joshua Glasser is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

[On December 7,] the Delaware Supreme Court issued a three-page order in Akorn, Inc. v. Fresenius Kabi AG, No. 535, 2018 (Del. Dec. 7, 2018), affirming the Court of Chancery’s 246-page opinion finding that Fresenius Kabi AG validly terminated its merger with Akorn, Inc., based on the existence of a material adverse effect (MAE). The affirmance confirms Fresenius’s ability to walk away from its announced $4.3 billion merger with Akorn based on the first court-approved MAE in Delaware history.

Specifically, the Court held that the factual record:


PLX, Burden of Proof for Damages, and the Internal Logic of Delaware Law

Holger Spamann is Professor of Law at Harvard Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

In his recent PLX decision, Delaware’s Vice-Chancellor (VC) Travis Laster refused to award monetary recovery on the grounds that plaintiffs did not carry their burden of proof on damages. [1] In this short comment, I argue that the burden of proof should not have been on the plaintiffs: once VC Laster found a breach of fiduciary duty, the internal logic of Delaware law demands that burden of proof shift to the defendants.

In PLX, VC Laster held activist hedge fund Potomac Capital Partners II, L.P. liable for aiding and abetting the breach by its principal, Eric Singer, of his fiduciary duty to Potomac’s portfolio company, PLX Technology Inc. Singer had joined PLX’s board on Potomac’s slate and oversaw its sale to Avago as chair of its “Strategic Alternatives Special Committee.” VC Laster took issue with various aspects of Singer’s behavior, above all that Singer withheld from his fellow PLX board members information about Avago’s intentions that he received from PLX’s investment banker after joining the PLX board, but long before start of the sale process with Avago. [2] Reasonable people may disagree as to whether this sale process was truly “flawed from a fiduciary standpoint,” as VC Laster found the plaintiffs to have proven. [3] I take no position on this question. The point I want to make concerns what follows a finding of a fiduciary breach: who should bear the burden of proof on damages? My argument is that in the rare case where a plaintiff can prove a violation of fiduciary duty, the internal logic of Delaware law demands that the burden on damages shift to the defendant.


Delaware Law Status of Bylaws Regulating Litigation of Federal Securities Law Claims

Lawrence A. Hamermesh is Professor Emeritus at Widener University Delaware Law School and Executive Director of the Institute for Law & Economics at the University of Pennsylvania law School. This post is based on a white paper issued by Professor Hamermesh and Professors Lucian Bebchuk, John Coates IV, John Coffee Jr., Wendy Gerwick Couture, James Cox, Michael Kaufman, Donald Langevoort, Ann Lipton, Joshua Mitts, Frank Partnoy, Brian JM Quinn, Joel Seligman, Dean Gordon Smith, James Spindler, Marc Steinberg, Randall Thomas, Robert Thompson, Urska Velikonja, David Webber, and Verity Winship.

As one commentator recently observed, “There has been renewed interest in whether the SEC should allow a U.S. company to conduct a registered initial public offering if its bylaws require shareholders to arbitrate federal securities claims.” [1] Responding to that interest, SEC Chairman Jay Clayton correctly observed that the validity of such bylaws “involves our securities laws, matters of other federal and state law, an array of market participants and activities, as well as matters of U.S. jurisdiction.” [2]

This submission focuses on only one of the elements identified by Chairman Clayton, namely the validity of such a bylaw under state law—and more specifically, Delaware corporate law. [3] The signatories to this submission hold a wide range of differing views regarding the utility of federal securities class actions. What they hold in common, however, is the view that Delaware corporate law does not permit a corporate bylaw (or charter provision, for that matter) to require that claims arising under the federal securities laws be resolved in arbitration or indeed in any specified venue. The reasoning supporting that view is set forth below. [4]


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