Presenting a live 90-minute webinar with interactive Q&A M&A 2017 Delaware Update: Standard of Deal Review, Appraisal Rights, D&O Fiduciary Duties Implications of Important Rulings for Planning, Negotiating and Drafting Deal Documents THURSDAY, SEPTEMBER 28, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Michael D. Allen, Director, Richards Layton & Finger , Wilmington, Del. Samuel T . Hirzel, Partner, Heyman Enerio Gattuso & Hirzel , Wilmington, Del. Patricia O. Vella, Partner, Morris Nichols Arsht & Tunnell , Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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M&A Key Delaware Law Updates for 2017 Public Company Developments September 28, 2017 Michael D. Allen
Standard of Review Corwin v. KKR Financial Holdings LLC , 125 A.3d 304 (Del. 2015) – absent a controlling stockholder, the business judgment rule applies following informed stockholder approval of a transaction. Singh v. Attenborough , 137 A.3d 151 (Del. 2016) – informed stockholder approval in transactions that do not include a controlling stockholder “irrebuttably” invokes the business judgment rule and precludes judicial review absent extreme allegations sufficient to state a claim for waste. Subsequent Court of Chancery decisions have characterized the standard of review under Singh as the “irrebuttable business judgment rule. ” See, e.g., City of Miami Gen. Emps. ’ v. Comstock , 2016 WL 4464156 (Del. Ch. Aug. 24, 2016). 6
Standard of Review In In re Volcano Corp. S’holder Litig. , 143 A.3d 727 (Del. Ch. 2016), the Court of Chancery held, and the Delaware Supreme Court affirmed, that the irrebutable business judgment rule also applies when a majority of uncoerced, disinterested and fully informed stockholders tender their shares in a two-step merger consummated under Section 251(h) of the DGCL. The Court dismissed fiduciary duty claims challenging the merger: “[t]he acceptance of a first-step tender offer by a fully informed, disinterested, uncoerced stockholders representing a majority of a corporation’s outstanding shares in a two-step merger under Section 251(h) has the same cleansing effect under Corwin as a vote in favor of a merger by a fully informed, disinterested, uncoerced stockholder majority. ” See also Larkin v. Shah , 2016 WL 4485447 (Del. Ch. Aug. 25, 2016). 7
Standard of Review In In re Solera Holdings, Inc. S’holder Litig. , 2017 WL 57839 (Del. Ch. Jan. 5, 2017), the Court of Chancery held that before determining whether a stockholder vote was uncoerced, disinterested and fully informed, the plaintiff bears the burden of identifying a deficiency in the operative disclosure document. ‐ The Court stated that allocating the burden of pleading disclosure deficiencies to defendants would “create an unworkable standard, putting a litigant in the proverbially impossible position of proving a negative. ” If the plaintiff satisfies its burden, then the burden falls to the defendant to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect of the stockholder vote under Corwin . 8
Standard of Review In The Huff Energy Fund, L.P. v. Gershen , 2016 WL 5462958 (Del. Ch. Sept. 29, 2016), the Court rejected a claim that the implementation and adoption of a plan of dissolution was subject to enhanced scrutiny under Revlon and Unocal . Instead, the Court held that because the plan of dissolution had been approved by a fully informed, non-coerced vote of the stockholders, the irrebutable business judgment rule under Corwin applied. The Court held that it was immaterial to a fully-informed stockholder vote that: ‐ (a) one director abstained from voting on the dissolution due to “the insufficiency of information and the rushed nature of the process” ; and ‐ (b) the director’s abstention and the reasons for such abstention were not disclosed to the stockholders. The Court reached this conclusion because (1) under Delaware law, a director need not state the grounds of his or her judgment for or against a proposed stockholder action and (2) adoption of the plan of dissolution did not require unanimous approval. 9
Standard of Review The Court held that Revlon did not apply because the underlying policy concern of Revlon , to protect and maximize value to stockholders of a company that agrees to a “final stage” transaction, is absent in a dissolution context because during dissolution a company continues its existence for a period of at least three years to wind up its affairs. Similarly, the Court noted that Revlon did not apply in a dissolution context because there is no change in control. Unocal did not apply because unlike other defensive measures, the adoption and implementation of a plan of dissolution avoids any specter of entrenchment due to the fact that following dissolution, the company is required to wind up its affairs. 10
Standard of Review In In re Saba Software, Inc. Stockholder Litigation , the Court of Chancery declined to apply business judgment review under Corwin to a merger for purposes of a motion to dismiss because the Court concluded that the complaint had plead facts allowing a reasonable inference that the stockholder vote approving the transaction was neither fully informed nor uncoerced. In determining that the vote was not fully informed, the Court focused on several material omissions from Saba’s proxy statement, including: ‐ The failure to describe the circumstances surrounding Saba’s failure to complete a financial restatement by the deadline to regain registered status with the SEC. ‐ The failure to disclose information regarding the likelihood that Saba could ever complete the financial restatement (which impacted stockholders’ ability to “meaningfully assess” the credibility of the management projections, which assumed the financial restatement would be completed). ‐ The failure to disclose information regarding Saba’s post-deregistration options Saba had other than the proposed merger. 11
Standard of Review The Court also found that the stockholder vote on the transaction was inequitably coerced. The Court noted that the coercion inquiry under Corwin in the deal context focuses on whether the stockholders have enough information to give them a free choice between maintaining their current status or taking advantage of the new status offered by the proposed deal. The Court concluded that the vote was coercive under the circumstances because, among other things: ‐ Saba repeatedly failed to restate its financials and rushed a sales process while the company was in turmoil. ‐ Saba failed to provide information in its proxy statement regarding the circumstances surrounding the restatement, leaving stockholders unable to meaningfully assess Saba’s value on a standalone basis. ‐ That, as consequence of the board’s allegedly wrongful action and inaction, the board forced stockholders to choose between a no-premium sale or holding potentially worthless stock. Because Corwin did not apply, the Court reviewed the transaction under Revlon ’s enhanced scrutiny standard and ultimately denied the defendants’ motion to dismiss. 12
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