The Delaware Law Series


The Lipton Archive

Lawrence A. Hamermesh is Executive Director of the Institute for Law and Economics at the University of Pennsylvania Law School; Theodore N. Mirvis is partner at Wachtell, Lipton, Rosen & Katz; Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is Of Counsel at Wachtell, Lipton, Rosen & Katz; a Senior Fellow at the Harvard Law School Program on Corporate Governance; Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; and Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School. This post is based on their Wachtell memorandum.

Last week, the University of Pennsylvania Carey Law School, and its Institute for Law and Economics, unveiled a new affiliated website, “The Lipton Archive.” The Lipton Archive is a living corporate law and governance history site focusing on the thought leadership of Martin Lipton of Wachtell, Lipton, Rosen & Katz.

The website has a searchable index of Lipton’s iconic memos from their inception and continuing into the future, as Lipton continues to address the emerging issues of this century. The memos are coded by key SSRN topics, can be searched by key words, and by date. In addition, all of Lipton’s scholarly articles, and several of his important yearly writings (e.g., his Spotlight on Boards series) are available in chronological order.

The site also has a narrative of Lipton’s career and thought leadership, which contains citations not only to his own work, but those of leading thinkers with whom he has engaged in constructive dialogue. Likewise, the site links to the rich materials on Penn Law’s Delaware Corporate Law Resource Center, https://www.law.upenn.edu/delawarecorporatehistory/, so that scholars, teachers, students, and practitioners may use them to conduct research, design interesting classroom and executive and legal education sessions, and deepen their understanding of the history and traditions of corporate governance.

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Introducing the Debevoise & Plimpton Special Committee Report

Jeffrey J. Rosen, Gregory V. Gooding, and William D. Regner are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Rosen, Mr. Gooding, Mr. Regner, Michael Diz, Jonathan E. Levitsky and Maeve O’Connor, and is part of the Delaware law series; links to other posts in the series are available here.

Special committees of boards of directors play an essential role in many corporate transactions. Nevertheless, they are often imperfectly understood. Special committees are both underutilized—not deployed in circumstances where their use could have protected conflicted parties from liability—and over-utilized—formed in circumstances where no obvious conflict exists or where their use provides no meaningful legal benefit. Moreover, the case law is replete with examples of special committees being formed in a manner that undermines their purpose, not being given the authority necessary to provide their intended benefit, or behaving in a manner that results in potential liability both to the members of the committee and to other affiliates of the company.

The Debevoise & Plimpton Special Committee Report is intended to assist controlled companies, corporate boards, financial advisors and other transaction participants to better understand how and when special committees are used and how to ensure that they function as intended. The Report will—on a periodic basis—catalog recent transactions involving special committees and summarize recent judicial decisions concerning special committees. We expect to identify trends involving the use of special committees and comment on issues relevant to the use (and misuse) of special committees.

Although future editions of this Report will cover special committee activity and cases in the prior period, this post covers the entirety of 2020.

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A New Theory of Material Adverse Effects

Robert T. Miller is Professor of Law and F. Arnold Daum Fellow in Corporate Law at the University of Iowa College of Law. This post is based on his recent paper, forthcoming in Business Lawyer, 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 New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In a paper forthcoming in Business Lawyer, I propose a new, systematic understanding of material adverse effects that resolves the major outstanding problems in the Delaware caselaw on MAEs.

As is well known, business combination agreements almost never define the phrase “material adverse effect,” and so the meaning of that key expression derives primarily from a line of Delaware cases starting with In re IBP Shareholders Litigation. In that case, the court said that a material adverse effect requires an event that substantially threatens the overall earnings potential of the target in a durationally-significant manner. In implementing this standard in IBP and subsequent cases, the courts have had to determine how the target’s earnings should be measured (e.g., by EBITDA or by some other measure of cashflow), how changes in earnings should be determined (e.g., which fiscal periods should be compared with which), and how large a diminution in earnings must be in order to count as material. Neither IBP nor subsequent cases have provided clear and compelling resolutions of these issues. On the contrary, later cases have introduced yet new problems, such as whether it matters that the risk that has materialized and adversely affected the target’s business was known to the acquirer at signing, whether material adverse effects should be measured in quantitative ways, qualitative ways, or both, and whether a material adverse effect must be felt by the company within a certain period of time after the occurrence of the event causing the effect.

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Fair Price for Delaware Fiduciary Actions Can Exceed Appraisal Fair Value

Gilbert E. Matthews is Chairman and Senior Managing Director of Sutter Securities Financial Services, Inc., and Matthew L. Miller is an associate at Abrams & Bayliss LLP. This post 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here); and Appraisal After Dell by Guhan Subramanian.

Can fiduciaries of Delaware corporations breach their duties and face damages for a merger that provides stockholders with the equivalent of fair value in a judicial appraisal? The answer, which may surprise some, is yes. On March 1, 2021, the Delaware Court of Chancery issued an opinion, In re Columbia Pipeline Group, Inc. Merger Litigation, 2021 WL 772562 (Del. Ch. Mar. 1, 2021) (the “2021 Decision”) that expressly stated that breaches of fiduciary duty can lead to damages that exceed appraisal fair value.

Background

It has long been accepted that Delaware courts use the same valuation methodologies to determine fair value in a judicial appraisal and fair price in a fiduciary duty action. [1] There is no real debate that, “in general, the techniques used to determine the fairness of price in a non-appraisal stockholder’s suit are the same as those used in appraisal proceedings.” Gesoff v. IIC Industries, Inc., 902 A.2d 1130, 1153, n.127 (Del. Ch. 2006). However, the precise relationship between fair price in a fiduciary duty action and fair value in a related appraisal action is often unclear.

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Delaware Supreme Court Holds That Fraud Is Insurable Under D&O Policy

Andrew J. Noreuil and Michael J. Gill are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court unanimously affirmed a trial court judgment requiring a directors and officers (D&O) excess insurer to pay a claim for losses predicated on fraudulent conduct of the director and CEO of a corporation, holding that such losses are insurable under Delaware law and coverage is not barred by Delaware public policy.

The Court also held that Delaware law applied to the insurance policy in the case, stating that a choice of law analysis for a D&O policy will most often reveal that a corporation’s state of incorporation has the most significant relationship to the insurance policy.

Background

The insurance coverage at issue in RSUI Indemnity Company v. Murdock (March 3, 2021) [1] involved claims for breach of fiduciary duty and federal securities law violations under a $10 million excess D&O liability insurance policy issued by RSUI Indemnity Company to Dole Food Company, Inc. In November 2013, affiliates of David Murdock, the CEO and a director of Dole, completed a transaction to take Dole private for $13.50 per share. In 2015, the Delaware Chancery Court issued a memorandum opinion finding, among other things, that Murdock had breached his duty of loyalty and engaged in fraud in connection with the transaction, which drove down Dole’s premerger stock price, undermining it as measure of value and affecting the Dole Special Committee’s negotiating position. The Chancery Court awarded damages to unaffiliated stockholders in an amount equal to $2.74 per share (approximately $148 million in the aggregate). Dole then informed its insurers it was engaging in settlement negotiations, to which all responded by reserving their rights regarding coverage. Thereafter, Dole negotiated a settlement without further involvement of its D&O insurers, and Murdock paid the settlement amount in full.

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Corporate Officers Face Personal Liability for Steering Sale of the Company to a Favored Buyer

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, Warren S. de Wied, Brian T. Mangino, and Roy Tannenbaum, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In In re Columbia Pipeline Group, Inc. Merger Litigation (Mar. 1, 2021), the Delaware Court of Chancery held that the CEO-Chairman and the CFO (“Skaggs” and “Smith,” respectively; together, the “Officers”) of Columbia Pipeline Group, Inc. (the “Company”) may have breached their fiduciary duties in connection with the $13 billion merger in 2016 of the Company with TransCanada Corporation (the “Merger”).

Vice Chancellor Laster found it reasonably conceivable, at the pleading stage of litigation, that the Officers had tilted the sale process to favor TransCanada, and that they were motivated by their plans to retire and their desire to receive their change-in control benefits that would be triggered on the Company’s sale. The court held that Corwin “cleansing” of the breaches was not available because the disclosure to stockholders relating to the Merger was inadequate. In addition, the court held that TransCanada may have aiding and abetting liability as it was reasonably conceivable that it knew that the Officers were violating their fiduciary duties in connection with the sale process and it “exploited the resulting opportunity.”

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Poison Pills After Williams: Not Only for When Lightning Strikes

Ethan Klingsberg and Paul Tiger are partners and Elizabeth K. Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Mr. Tiger, Ms. Bieber, and Victor Ma, 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 Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

The board of The Williams Companies (“Williams”), in March 2020, became the only board among the S&P 500 companies to respond to the volatility of the pandemic by adopting a shareholder rights plan (also known as a poison pill). [1] On February 26, 2021, Vice Chancellor McCormick of the Delaware Court of Chancery enjoined the Williams poison pill in her post-trial opinion in The Williams Companies Stockholder Litigation. [2] Vice Chancellor McCormick’s thorough opinion about the extraordinary pill adopted by the Williams board is worth reflecting upon from the perspective of over three decades of poison pill litigation.

Background and key terms of the Williams pill

The Williams board adopted the shareholder rights plan with a one-year term when the Williams stock price was hitting an all-time low, although the company’s market cap remained above $10 billion and there were no indications of hostile actors in the stockholder profile or on the takeover front. The pill provided that if an “acquiring person” were to either “beneficially own” more than 5% of Williams stock or commence a tender offer to increase its beneficial ownership in excess of 5%, then the acquiring person would be subject to the massive dilution that results from the triggering of a poison pill. Pills adopted by other companies to protect their NOLs from being unwound by a change of control under the federal tax laws have had thresholds in the 5% range. But, as the Court observed, a pill with a threshold as low as 5% is otherwise virtually unheard of. The Williams board wanted to be different.

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Delaware Court Enjoins Poison Pill Adopted in Response to Market Disruption

Mark McDonald, James Langston, and Kyle Harris are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. McDonald, Mr. Langston, Mr. Harris, Roger Cooper, and Pascale Bibi, 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 Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

On February 26, 2021, the Delaware Court of Chancery (McCormick, V.C.) issued a memorandum opinion in The Williams Companies Stockholder Litigation enjoining a “poison pill” stockholder rights plan adopted by The Williams Companies, Inc. (“Williams”) in the wake of extreme stock price volatility driven by the double whammy of COVID-19 and the Russia-Saudi Arabia oil price war. While the pill adopted by the board in this case had unusual features (such as a 5% trigger and a broad “acting in concert” provision), the Court’s decision provides important reminders for boards in considering whether (and when) to adopt a poison pill in the face of a threat to the corporation. This includes the types of “threats” that will justify the adoption of a pill, and the scope of protections that will be considered a “proportionate” response to those legitimate threats.

Although the Court struck down the pill in this case, that should not prevent boards from considering adoption of a pill in a situation where they are facing an identifiable threat, whether from a potential takeover or activist shareholder, and tailoring the terms of such a pill to the threat posed.

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Delaware Chancery Court Invalidates “Anti-Activist” Poison Pill

Lori Marks-EstermanSteve Wolosky, and Andrew Freedman are partners at Olshan Frome Wolosky LLP. This post is based on their Olshan 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 Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

On February 26, 2021, the Delaware Court of Chancery issued a landmark decision invalidating a stockholder rights plan, commonly known as a “poison pill,” that was adopted by the board of directors of The Williams Companies, Inc., an NYSE listed company (“Williams” or the “Company”), at the outset of the COVID‑19 pandemic. Steve Wolosky, the co-chair of Olshan’s Shareholder Activist Group, was a lead plaintiff in the class action lawsuit seeking to invalidate the pill. The Williams pill was one of many rights plans adopted by dozens of public companies during the pandemic, purportedly in response to specific control threats and/or precipitous drops in share price due to extreme market volatility.

The Williams pill, however, was “unprecedented” in that it was adopted purely as an “anti-activist pill” and contained a series of extreme features, including a 5% trigger and expansive “acting in concert” language that included a “daisy chain” provision. In the class action lawsuit, the certified class of plaintiffs asserted that the board of directors of the Company (the “Board”) breached its fiduciary duties when adopting the pill. In an 89-page opinion written by Vice Chancellor McCormick, the Court held that this unprecedented pill could not be justified given the Board’s motivations for its adoption and the “extreme combination of features” it possessed.

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Delaware Court of Chancery Allows Merger-Based Breach of Fiduciary Duty Claims to Proceed

Jason Halper and Jared Stanisci are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Ms. Bussiere, Victor Bieger, and Victor Celis, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

On January 29, 2021, Vice Chancellor Laster of the Delaware Court of Chancery refused to dismiss a shareholder class action stemming from the 2019, $2.2 billion sale of Presidio, Inc., an IT solutions provider specializing in digital infrastructure and cloud and security solutions, to BC Partners Advisors L.P. (“BCP”), a private-equity firm. In Firefighters’ Pension System of the City of Kansas City v. Presidio, Inc., a shareholder of Presidio filed suit against Presidio’s CEO, its board of directors, Apollo Global Management LLC (Presidio’s controlling shareholder, owning approximately 42% of its outstanding common stock), LionTree Advisors, LLC (financial advisor to both Presidio and Apollo), and the acquiror, BCP.

The shareholder claimed that Apollo, Presidio’s CEO, and LionTree all favored—out of their own self-interests—a sale to BCP rather than a more competitive sales process. Apollo was allegedly seeking an exit from its investment in Presidio and favored a quick sale to BCP rather than a drawn-out bidding war. Presidio’s CEO allegedly favored steering the sale to BCP because BCP had promised him a lucrative post-sale pay package. As for LionTree, it allegedly was motivated by ongoing, lucrative relationships with both BCP and Apollo and tipped off BCP to another incoming bid so that BCP could stave-off a bidding war. The shareholder claimed that, as a result, Apollo, Presidio’s CEO, and the board breached their fiduciary duties and that LionTree and BCP aided and abetted the fiduciary duty breaches.

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