United States: The Ropes Recap: Mergers & Acquisitions Law News - October 2014

Delaware Legislative Update

Amendments to DGCL Effective August 1, 2014

Several amendments to the Delaware General Corporation Law ("DGCL") went into effect on August 1, 2014, most notably amendments to Section 251(h), the "statutory top-up" provision enacted last year. The amendments are designed to eliminate limitations on use of the statutory top-up, including by eliminating the "interested stockholder" prohibition. The changes should further encourage the use of tender offers in connection with acquisitions of public company targets. In addition, amendments to DGCL Section 242 will allow a board to amend a company's Certificate of Incorporation without a stockholder vote to change the corporate name and to make certain technical changes:

  • Elimination of the "Interested Stockholder" Prohibition. As originally drafted, Section 251(h) was only available under circumstances in which a transaction did not involve a person who was an "interested stockholder," as such term is defined in DGCL Section 203, at the time the target's board of directors approved the merger agreement. Many practitioners interpreted this provision to preclude use of Section 251(h) under circumstances in which a 15% or more stockholder executed a tender and voting agreement in support of a proposed transaction. As amended, the "interested stockholder" restriction has been deleted from Section 251(h) altogether, thus expanding the availability of the provision.
  • Clarification of "Any and All" Shares Requirement. Formerly, Section 251(h) required that tender offers be for "any and all" of the target's voting stock. This requirement has been modified to exclude target stock owned at the commencement of the offer by the acquirer, the target, and certain affiliates of such parties. Moreover, the amendment provides practitioners with additional flexibility with respect to the treatment of such stock in connection with the back-end merger. The practical effect of these changes should be to make the rollover of equity more straightforward in the tender offer context.
  • "Guaranteed Delivery" Is No Longer Sufficient. As amended, Section 251(h) now provides that shares of stock tendered into an offer are not counted for purposes of determining whether the tender condition is satisfied unless irrevocably accepted for exchange and received by the depositary before the expiration of the offer (i.e., shares promised to be delivered pursuant to guaranteed delivery procedures can no longer be counted).
  • Section 251(h) "Opt-In" No Longer Exclusive. The amendments clarify that while Section 251(h) requires the parties to a merger agreement to explicitly elect to be subject to that provision, such election need not be preclusive to other back-end closing mechanics. As amended, parties to a transaction may now expressly "permit" the use of Section 251(h), while allowing for the potential abandonment of the mechanism in favor of consummation of the transaction under a different statutory provision.
  • Amendments to Certificates of Incorporation without Stockholder Approval under 242. DGCL Section 242 has been amended to authorize a corporation to amend its certificate of incorporation without stockholder approval (unless otherwise expressly required by the certificate of incorporation) to (1) change the corporate name, (2) delete historical provisions in the original charter naming the incorporator, the initial board of directors and/or the original subscribers for shares and (3) delete provisions relating to already effected changes in capital stock.

News from the Courts

Additional Guidance on Kahn v. M&F Worldwide Corp.

In Swomley v. Schlecht, a recent transcript ruling by the Delaware Court of Chancery, Vice Chancellor Laster provided additional guidance on the application of Kahn v. M&F Worldwide Corp., a decision discussed in the April 2014 edition of the Recap.

In Kahn v. M&F Worldwide Corp., the Delaware Supreme Court affirmed the Delaware Court of Chancery's decision to apply the deferential business judgment rule, rather than the more exacting "entire fairness standard," to review transactions involving a controlling shareholder. Business judgment rule review was made available provided the deal is conditioned at the outset on both (i) the approval of an independent, adequately-empowered and well-functioning special committee and (ii) the uncoerced, informed vote of a majority of minority stockholders. The Delaware Supreme Court permitted this more deferential approach to reviewing squeeze-out transactions if and only if (i) the controlling stockholder conditions the transaction on the approval of both a special committee and a majority of minority stockholders, (ii) the special committee is independent, (iii) the special committee is empowered to freely select its own advisors and say no definitively, (iv) the special committee fulfills its duty of care in negotiating a fair price, (v) the vote of the minority stockholders is properly informed and (vi) there is no coercion of the minority stockholders.

Kahn v. M&F Worldwide Corp. was welcomed by many practitioners as a way to reduce the leverage plaintiffs held to extract settlements of lawsuits challenging deals, given the time and cost required to defend cases under the "entire fairness" standard. But the decision left open questions regarding whether and how defendants could avail themselves of its protective framework at the pleading stage, using the framework to win dismissal of cases before discovery, particularly in the face of allegations of an inadequate purchase price.

In Swomley v. Schlecht, Vice Chancellor Laster provided helpful clarification. Granting a motion to dismiss, the Vice Chancellor held that plaintiffs are required to plead sufficient facts to call into question whether the six factors in the Kahn v. M&F Worldwide Corp. framework were met, rather than just to allege that they were not. Vice Chancellor Laster noted that "... the whole point of encouraging the [Kahn v. M&F Worldwide Corp.] structure was to create a situation where defendants could effectively structure a transaction so that they could obtain a pleading-stage dismissal against breach of fiduciary duty claims". In order to survive a motion to dismiss under the Kahn v. M&F Worldwide Corp. framework, he observed, a plaintiff "would have the burden [of] ... pleading facts that would undermine each of its elements". Separately, Vice Chancellor Laster noted that whether a company is private or public should have no bearing on whether the Kahn v. M&F Worldwide Corp. framework applies.

Although only a transcript ruling, Swomley v. Schlecht has significance as one of the first decisions to apply Kahn v. M&F Worldwide Corp., and will likely further encourage use of the Kahn v. M&F Worldwide Corp. framework in squeeze-out transactions where feasible.

Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014)

Exculpation Determined After Entire Fairness

Under Section 102(b)(7) of the Delaware General Corporation Law, a company may adopt a bylaw provision exculpating breaches of a director's duty of care. Many do. Such exculpation provisions often aid in winning dismissal of claims and cases that involve challenges to a board's decision-making process in connection with a transaction. Arguments under Section 102(b)(7) have long been used by defendants in cases under the business judgment rule. A recent Chancery Court case, In re Cornerstone Therapeutics Inc. Stockholder Litigation, will offer the Delaware Supreme Court an opportunity to discuss the application of Section 102(b)(7) to transactions involving a controlling stockholder that are subject to the stringent review of the "entire fairness" standard.

In a memorandum opinion dated September 9, 2014, Vice Chancellor Glasscock held that a determination of whether a director defendant is exculpated from paying monetary damages for breach of the duty of care can be made only after the question of entire fairness is resolved at trial. In other words, an exculpation provision cannot be used to defeat a claim at the motion to dismiss stage, even where a director is otherwise disinterested and independent.

The transaction at issue involved a sale process where a 65% controlling stockholder sought to acquire the remaining outstanding equity interests in a company. A special committee was formed, but approval of the transaction was not made contingent on the approval of a majority of the minority stockholders, making review under the business judgment rule (per Kahn v. M&F Worldwide Corp., discussed above) unavailable. The transaction was eventually approved by more than 80% of minority stockholders, but the court held that a decision as to director exculpation cannot be made until after the question of entire fairness is resolved at trial.

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