The Delaware Law Series

M&A/PE and Governance Update

Gail Weinstein is senior counsel, and Steven Epstein and David L. Shaw are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Court of Chancery Enjoins a Controller-Led Merger Pending Corrective Disclosures—FrontFour v. Medley Capital

In FrontFour Capital Group, LLC et al v. Brooke Taube et al [Medley Capital] (March 11, 2019), the court determined that, based on the precedent set in the Delaware Supreme Court’s 2014 C&J Energy decision, it could order only a disclosure remedy and not more substantive relief (such as ordering that the company be shopped) in the context of what it viewed as a controller-led merger of three affiliated entities in a “deeply flawed” sale process. The judicial outcome turned on the court’s finding that the plaintiff had not proved (indeed, had offered no evidence whatsoever to prove) that the acquiring entity had aided and abetted what the court viewed as fiduciary breaches by the target company’s board. Vice Chancellor McCormick indicated that if the plaintiff had proved the aiding and abetting claim, then C&J would not have precluded the court from ordering a “curative shopping process.” The decision may be expected to encourage plaintiffs to make (and try hard to substantiate) aiding and abetting claims to avoid this application of C&J.


2019 Proposed Amendments to DGCL

John Mark Zeberkiewicz is a Director and Brigitte Fresco is Counsel at Richards, Layton & Finger, P.A. This post is based on their Richards, Layton & Finger memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Legislation proposing to amend the General Corporation Law of the State of Delaware (the “General Corporation Law”) has been released by the Corporate Council of the Corporation Law Section of the Delaware State Bar Association and, if approved by the Corporation Law Section, is expected to be introduced to the Delaware General Assembly. If enacted, the 2019 amendments to the General Corporation Law (the “2019 Amendments”) would, among other things, (i) add new provisions relating to the documentation of transactions and the execution and delivery of documents, including by electronic means, and make conforming changes to existing provisions; (ii) significantly revise the default provisions applicable to notices to stockholders under the General Corporation Law, the certificate of incorporation or the bylaws, including by providing that notices may be delivered by electronic mail, except to stockholders who expressly “opt out” of receiving notice by electronic mail; (iii) consistent with the foregoing, update the provisions governing notices of appraisal rights and demands for appraisal; (iv) update the procedures applicable to stockholder consents delivered by means of electronic transmission; (v) clarify the time at which a unanimous consent of directors in lieu of a meeting becomes effective; and (vi) make various other technical changes, including with respect to incorporator consents and the resignation of registered agents.


The Rise of Books and Records Demands Under Section 220 of the DGCL

Roger A. Cooper is partner and Vanessa C. Richardson, and Kimberly Black are associates at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In recent years, in part in response to decisions like Corwin that have raised the pleading standard for stockholder plaintiffs, the Delaware courts have encouraged stockholders to seek books and records under Section 220 of the Delaware General Corporation Law (DGCL) before filing stockholder derivative or post-merger damages suits, and—in response—each year more stockholders have done so. As a result of this trend, we have already seen several important decisions addressing books and records demands in 2019. These decisions have (i) clarified the types of documents that may be obtained, including (in some limited circumstances) personal emails or text messages; (ii) explained when a stockholder’s demand will be denied as impermissibly lawyer-driven (and when it will not be); and (iii) described the threshold showing of suspected wrongdoing that stockholders must make. As the plaintiffs’ bar makes more use of Section 220, these are important issues for boards of directors to consider.


Enhanced Scrutiny on the Buy-Side

Afra Afsharipour is Senior Associate Dean for Academic Affairs and Professor of Law at UC Davis School of Law; The Honorable J. Travis Laster is Vice Chancellor of the Delaware Court of Chancery. This post is based on their recent article, published in the Georgia Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

Empirical studies of acquisitions consistently find that public company bidders often overpay for targets, imposing significant losses on bidder shareholders. Research also indicates that the losses represent true wealth destruction in the aggregate and not simply a wealth transfer from bidder shareholders to target shareholders.

Numerous studies have connected bidder overpayment with managerial agency costs and behavioral biases that reflect management self-interest. Agency theorists in law, management, and finance argue that agency costs explain bidder overpayment—that is management pursues wealth-destroying acquisitions at the expense of shareholders. Numerous studies provide evidence that acquisitions offer significant benefits to bidder management—particularly bidder CEOs—in the form of increased compensation, power, and prestige. For example, studies have found that CEOs are financially rewarded for acquisitions in the form of large, new options and grants, but are not similarly rewarded for other types of major transactions. A second, complementary contributor to bidder overpayment is behavioral bias, such as overconfidence and ego gratification. Managers may overestimate their ability to price a target accurately or their ability to integrate its operations and generate synergies. They may also get caught up in the competitive dynamic of a bidding contest, leading to the winner’s curse. Studies have shown that social factors can undermine decision making and lead to poor acquisitions. These factors include the existence of extensive business or educational ties between the managers of the bidder and target firms, the presence of fewer independent directors on the bidder’s board, and the desire to keep up with peers.


Merger Agreement Termination based on Plain Contract Language

Paul J. ShimDavid I. Gelfand, 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 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 March 14, 2019], the Delaware Court of Chancery found that a target company in an agreed merger properly terminated the merger agreement following the passage of the specified “end date” where the buyer failed to exercise its right under the agreement to extend the end date. See Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019). The decision is a stark reminder that courts will enforce the terms of a merger agreement as written, and that the failure to comply with seemingly ministerial formalities can have severe consequences.


Vintage Capital Management, LLC and its affiliates (collectively, “Vintage”) entered into a merger agreement to acquire Rent-a-Center, Inc. (“Rent-a-Center”). As is customary, the merger agreement provided that if the merger were not consummated on or before a prescribed “end date,” either party would have the unilateral right to terminate the merger agreement. The parties agreed that the end date would occur six months from the signing date.


Will Aruba Finish Off Appraisal Arbitrage and End Windfalls for Deal Dissenters? We Hope So

William J. Carney is Charles Howard Candler Professor of Law Emeritus at Emory University School of Law and Keith Sharfman is Professor at St. John’s University School of Law. This post is based on their article, recently published in the Delaware Journal of Corporate Law.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.

The corporate law world has been abuzz of late about the commendable effort by Delaware’s courts to scale back “appraisal arbitrage”: a trading strategy predicated on deal dissenters receiving via appraisal litigation more for their shares than the deal prices from which they dissent. For years, parties engaging in appraisal arbitrage enjoyed the opportunity to initiate essentially risk free appraisal litigation with substantial upside potential, because it was assumed by courts and litigants that “fair value” entitled dissenters to at least the price of the deal they were rejecting and potentially more. But happily, this misunderstanding and misapplication of the law of appraisal now appears finally to have reached its end.

The Delaware Supreme Court struck two blows against appraisal arbitrage in 2017 in its DFC Global and Dell decisions, which both held that the Court of Chancery should not award fair value in excess of the deal price absent compelling evidence that the deal price is not a reliable indicator of fair value. Such evidence is inherently lacking when a sale is conducted at arms’ length, without conflicts, in a robust competitive process.


PE Professionals on the Boards of their Portfolio Companies

Glenn West is a partner and Miae Woo 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.

Private equity deal professionals frequently serve on the boards of the portfolio companies in which their fund invests. And many of those portfolio companies are incorporated under Delaware law. The role of the private equity professional as a board member of a Delaware corporation is fundamentally different than the role of the private equity professional acting on behalf of the fund as a shareholder. One of the most well-known of those differences is that the private equity professional, while acting as a director, typically has individual fiduciary duties (at least in the corporate context) to the portfolio company and its shareholders as a whole. A less well-known difference is the fact that, unlike communications among the private equity firm’s professionals concerning the status and performance of its investment in a portfolio company, communications among two or more board members serving on behalf of a private equity firm regarding their actions as board members may constitute “books and records of the company” for which any other director may, with a proper purpose, demand the right to inspect under Section 220 of the Delaware General Corporation Law (the “DGCL”). In this modern age, of course, those communications can include any of the various forms of electronic communications and social media now available, including text messages (by mobile carriers or via social media) and emails. And it matters not that those communications may have been sent through your or your firm’s phone, or on your firm’s email server or your private email account. Understanding this fact may cause some pause before pressing send on a text message to your colleague and fellow board member concerning another board member’s approach or competence in considering an appropriate course of action for the company.


2018 Year-End Securities Litigation Update

Brian Lutz, Monica Loseman, and Jefferson Bell are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Lutz, Ms. Loseman, Mr. Bell, Mark Perry, Shireen Barday, and Michael Kahn.

2018 witnessed even more securities litigation filings than 2017, in which we saw a dramatic uptick in securities litigation as compared to previous years. This post highlights what you most need to know in securities litigation developments and trends for the latter half of 2018, including:

  • The Supreme Court heard oral argument in Lorenzo v. Securities and Exchange Commission, and is set to answer the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim even though it would not be actionable as a Rule 10b-5(b) claim under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).
  • The Supreme Court granted the petition for writ of certiorari in Emulex Corp. v. Varjabedian to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent (as opposed to knowing or reckless) misstatements or omissions made in connection with a tender offer.
  • We discuss recent developments in Delaware law, including case law exploring, among other things, (1) appraisal rights, (2) the standard of review in controller transactions, (3) application of the Corwin doctrine, and (4) when a “Material Adverse Effect” permits termination of a merger agreement.
  • We review case law implementing the Supreme Court’s decisions in Omnicare and Halliburton II.
  • We review a decision from the Third Circuit regarding the obligation to disclose risk factors, and a decision from the Ninth Circuit regarding the utilization of judicial notice and the incorporation by reference doctrine at the motion to dismiss stage.


Farewell to Fairness: Towards Retiring Delaware’s Entire Fairness Review

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on a recent paper by Professor Licht 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 Fixing Freezeouts by Guhan Subramanian.

The entire fairness doctrine occupies a central place in Delaware’s accountability tools for corporate directors. In a standard formulation, it calls on directors to establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price” (Cinerama, Inc. v. Technicolor, Inc.). As Professor Lawrence Hamermesh and Chief Justice Leo Strine, Jr. recently pointed out, this doctrine undergoes constant transformation:

Like all common law doctrines, the Delaware law defining the fiduciary duties of corporate directors has evolved, often rapidly, in the face of commercial change and experience. It will continue to do so…, while reserving a role for active judicial scrutiny in situations in which such objective decision makers are either absent or impaired, through lack of pertinent information or otherwise, from making a truly voluntary decision (emphasis added).


Pre-Litigation Demand and Director Committees

Richard S. Horvath, Jr, is partner at Allen Matkins Leck Gamble Mallory & Natsis LLP. This post is based on his Allen Matkins memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On February 12, 2019, in the matter captioned City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, et al., C.A. No. 2017-0341-KSJM, Vice Chancellor McCormick of the Delaware Court of Chancery provided further guidance on the pre-litigation demand requirement. This decision reaffirms and applies the principle under Delaware law that, while a pre-litigation demand “tacitly concedes” a board of directors is disinterested and independent for purposes of responding to the demand that concession only goes so far. As such, the board, or a subcommittee designated with the task of investigating and responding to the demand, must still in fact act independently, disinterestedly, in good faith, and with due care. While the derivative claims in Corvi were ultimately dismissed, the Court’s decision provides a helpful outline of the steps a board of directors should take in responding to a pre-litigation demand.


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