The Delaware Law Series

Market Based Factors as Best Indicators of Fair Value

Jason Halper and Nathan Bull 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. Bull, Ms. Bussiere, and Monica Martin, 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Three recent Delaware Court of Chancery appraisal decisions offer a wealth of guidance not only regarding the determination of a merger partner’s fair value, but also regarding elements that potentially undermine a quality sale process and strategic considerations for litigating valuation and sale process issues.

Statutory appraisal litigation, initiated after virtually every sizeable merger, requires the Delaware Court of Chancery to determine the fair value of a target company’s shares, exclusive of any merger-created value, as of the effective date of the merger. Though the appraisal statute broadly empowers the Court to consider “all relevant factors” in determining fair value, the Delaware Supreme Court has clarified the particular importance of certain market-based factors, namely, unaffected market price and merger consideration. Though the unaffected market price is an “important indicator” of fair value (so long as the stock is trading in an efficient market), deal price that is the product of “a robust market check will often be the most reliable evidence of fair value[.]”


Activist Proxy Slates and Advance Notice Bylaws

Steven M. Haas is partner at Hunton Andrews Kurth LLP. This post is based on a Hunton Andrews Kurth memorandum by Mr. Haas, and is part of the Delaware law series; links to other posts in the series are available here.

In a recent bench ruling, the Delaware Court of Chancery enforced an advance notice bylaw and thereby precluded an activist investor from nominating a slate of directors and conducting a proxy contest at a company’s annual meeting.  The court enforced the plain terms of the advance notice bylaw, which required that notice of the nominations had to be given by a stockholder of record. The court found that the activist owned shares only in “street name” on the deadline for giving notice of its nominations, was aware of the bylaw’s requirements, and failed to meet such requirements, and that the corporation was not at fault for the activist’s mistake. The court also refused to give effect to a second notice submitted by the activist promptly after the deadline that had cured its share ownership deficiency.


Federal Forum Provisions and the Internal Affairs Doctrine

Dhruv Aggarwal is a J.D. Candidate at Yale Law School; Albert H. Choi is Professor of Law at the University of Michigan Law School; and Ofer Eldar is an Associate Professor of Law and Finance at the Duke University School of Law. This post is based on their recent paper. 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.

Should a company be allowed to dictate the forum in which its shareholders can bring suit? This has been one of the most vexing and controversial issues in corporate and securities laws in recent years. At least with respect to lawsuits based on corporate law and for corporations incorporated in Delaware, the issue seems fairly well settled by now. Since the seminal case of Boilermakers Local 154 Retirement Fund v. Chevron Corp., numerous corporations began including forum selection provisions in their charters or bylaws. A key element of the decision is that forum selection for claims under state corporate law is governed by the internal affairs doctrine. The doctrine states that only the state of incorporation has authority to regulate a corporation’s internal affairs, and these internal affairs include the forum for litigating claims under the state’s corporate laws.

Forum selection with respect to federal securities lawsuits, on the other hand, is more controversial, and an important debate has taken place over whether corporations can dictate the forum for lawsuits based on federal securities laws in their charters and bylaws. Since 2017, a growing number of firms have pushed the envelope by adopting exclusive federal forum provisions (“FFPs”) that seek to limit shareholders to bringing federal law claims under the Securities Act of 1933 in federal courts only. The 33 Act, which governs claims for material misstatements or omissions in initial public offerings, specifically commits jurisdiction over these claims to both state and federal courts. FFPs were adopted in high profile initial public offerings, such as that of Snap, Inc., with the specific goal of restricting lawsuits for material misstatements or omissions in the IPO documents to federal courts. Furthermore, as the paper shows, the rate of adoptions of the FFPs significantly accelerated following the 2018 Supreme Court decision in Cyan v. Beaver County Employees Retirement Fund, which expressly validated the plaintiffs’ right to bring 33 Act lawsuits in state courts.


Confidentiality and Inspections of Corporate Books and Records

Justin T. Kelton is a Partner at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP. This post is based on an Abrams Fensterman memorandum by Mr. Kelton and is part of the Delaware law series; links to other posts in the series are available here.

In Tiger v. Boast Apparel, Inc., — A.3d —, 2019 WL 3683525 (Del. Aug. 7, 2019), the Delaware Supreme Court recently ruled on an issue of first impression: whether Section 220 inspections of corporate books and records are presumptively subject to confidentiality orders. The Court’s decision, which reverses a recent line of cases that found a presumption of confidentiality, may significantly impact Section 220 demands and subsequent litigation arising from these proceedings.

Background and the Chancery Court’s Decision

In Tiger, the plaintiff delivered a Section 220 demand to the defendant, the stated purposes of which were to “value his shares, investigate potential mismanagement, and investigate director independence.” Id. at *2. The defendant responded by proposing a confidentiality agreement that would have barred the plaintiff from using the documents in subsequent litigation. The parties negotiated over the proposed confidentiality terms, but were unable to reach an agreement. Id. The plaintiff then filed a Section 220 action, and the Court of Chancery was called upon to decide the scope of the parties’ confidentiality obligations. Id. The Chancery court ordered “an indefinite confidentiality period lasting up to and until [the plaintiff] filed suit based on facts learned through his inspection, after which confidentiality would be controlled by the applicable court rules.” Id. The plaintiff appealed to the Delaware Supreme Court.


Appraisal Claim Waivers and Deal Covenants

Katherine Henderson, Amy Simmerman and Brad Sorrels are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Ms. Henderson, Ms. Simmerman, Mr. Sorrells, Ryan Greecher, Nate Emeritz, and Toni Wormald, 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 Appraisal After Dell by Guhan Subramanian and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here).

On May 15, 2019, Vice Chancellor Slights of the Delaware Court of Chancery issued a ruling addressing important issues related to private company deal litigation. Specifically, the decision addressed when a release of claims and covenant not to sue can bar ensuing appraisal and fiduciary claims by stockholders. The case, In re Altor BioScience Corporation, involved the acquisition of Altor BioScience Corporation (Altor) by an affiliate of a large stockholder of Altor by way of a merger. The plaintiffs asserted appraisal claims and breaches of fiduciary duty claims against the Altor board, including the chairman of Altor, who was also an indirect holder of 51 percent of Altor’s stock and the CEO, chairman, and 85 percent stockholder of the acquiror.


Recent Application of Caremark: Oversight Liability

Jason J. Mendro and Andrew S. Tulumello are partners and Jason H. Hilborn is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Hilborn, Mr. Mendro, Mr. Tulumello, Elizabeth A. IsingGillian McPhee and Ronald O. Mueller. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities. In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”

Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision. With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.” The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks.


Female Board Power and Delaware Law

Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post was prepared with the assistance and insights of Amy SimmermanRyan Greecher, Lisa Stimmell, and Jose Macias. This post is part of the Delaware law series; links to other posts in the series are available here.

Gender diversity in the corporate boardroom is receiving significant belated attention. Much of that attention has revolved around prescriptive legislation, academic research, and business results—and one point of focus is an increase in the number of female directors. This article, however, outlines options under Delaware corporate law for jumpstarting an increase in the influence of female directors on board decision making—i.e., female board power. [1] That is, while female board perspectives may remain outnumbered at least in the near term, these corporate mechanisms may leverage existing female board power to prevent the female board perspective from being outweighed. In footnotes to this article, there are illustrative form provisions related to these concepts of Delaware corporate law. [2]


Appraisal Update: Unaffected Market Price Makes a Comeback

Roger A. Cooper and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

After the Delaware Supreme Court’s recent Aruba decision, [1] many commentators predicted that, going forward, the Court of Chancery would not rely on the target’s unaffected market trading price to determine fair value in appraisal cases, other than as a “check” on other valuation methodologies. It may therefore come as a surprise that in a decision issued last Friday, the Court of Chancery determined fair value to be equal to the target’s unaffected trading price. See In re: Appraisal of Jarden Corporation, Consolidated C.A. No. 12456-VCS (Del. Ch. July 19, 2019). Although still subject to appeal, this decision is also notable because the fair value determination came out 18% below the deal price despite the petitioners having some success in attacking the target board’s sale process, which involved no pre- or post-signing market check.

The Decision

This case involves the acquisition of Jarden Corporation (“Jarden”), a consumer products company holding a diversified portfolio of over 120 brands, by Newell Rubbermaid, Inc. (“Newell”) on April 15, 2016. At closing, the non-dissenting stockholders of Jarden received cash and Newell stock worth $59.21. Petitioners, who acquired almost 2.5 million shares of Jarden stock after the deal was announced, instead elected to seek statutory appraisal of their shares.


Upcoming Amendments to the DGCL

Matthew M. Greenberg is a partner and Taylor B. Bartholomew, and Christopher B. Chuff are associates at Pepper Hamilton LLP. This post is based on their Pepper memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Governor John Carney recently signed legislation that will put into effect a variety of amendments to the Delaware General Corporation Law (DGCL), the Delaware Limited Liability Company Act (DLLCA), the Delaware Revised Uniform Limited Partnership Act (DRULPA), and the Delaware Revised Uniform Partnership Act, effective August 1, 2019. While the amendments make several changes to the statutes, the primary change is to expressly permit transactions (such as merger agreements, voting agreements, stockholder agreements, limited liability company agreements and partnership agreements) to be documented, signed and delivered electronically, including through the use of “DocuSign.”

The Safe Harbor Provisions

As noted above, the primary change to the statutes is the adoption of nonexclusive safe harbors that permit transactions to be documented through electronic means. Importantly, the governing documents of a Delaware entity (such as the certificate of incorporation or bylaws of a corporation, or the limited liability agreement of a limited liability company) can override the application of the safe harbor provisions, but the prohibition must be expressly stated. A provision that merely specifies that an act or transaction will be documented in writing, or that a document will be signed or delivered manually, will not prohibit application of the safe harbor provisions. Unless otherwise provided in the governing documents of a Delaware entity or as agreed upon by the sender and recipient, an electronic transmission is deemed delivered to a person when it enters an information processing system that the person has designated for the purpose of receiving the electronic transmission. An electronic transmission is deemed delivered even if no person is aware of its receipt. For instance, if sent by email, a document will be deemed delivered under the safe harbors at the time the email is sent.


Oversight and Compliance Reminder

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal, and is part of the Delaware law series; links to other posts in the series are available here.

Two recent developments in civil and criminal law highlight the importance of active, engaged board oversight in the areas of risk and compliance. The first is a Delaware Supreme Court decision allowing plaintiffs to proceed with a Caremark claim, and the second is a memorandum released by the Criminal Division of the U.S. Department of Justice noting the role of the board in ensuring that compliance programs are implemented effectively. While the Delaware case sends a warning message to directors, the DOJ memorandum provides guidance for directors as they work to fulfill their oversight responsibilities.


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