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2 Merger Litigation Overview 2

3 Merger Litigation According to a recent report, shareholders challenged 96% of mergers valued at over $500 million The lawsuit will be brought as a putative class action by a shareholder of the company being sold, seeking to represent all investors in the company Plaintiffs seek expedited discovery, including depositions of Seller s Board and investment bankers Hearing on Plaintiffs preliminary injunction motion where the court will be asked to rule on whether claims support extraordinary measure of stopping vote from taking place 3

4 Typical Claims & Allegations Typical Claims Plaintiffs assert breach of fiduciary duty claims against the Seller s Board of Directors and aiding and abetting claims against the Buyer Plaintiffs claim inadequate price and seek an injunction to stop the shareholders from voting on whether to approve the deal Typical Allegations Process Claims Includes, among other things, alleged (a) flaws in the way the target company was shopped and (b) conflicts of interest that kept Board from getting best deal for shareholders Disclosure Claims Shareholders need more information before being asked to vote on the proposed transaction Deal Terms Merger terms, known as deal protection measures, are preclusive and prevent other interested parties from coming forward 4

5 Post-Closing Litigation If the vote is not enjoined, Plaintiffs may voluntarily dismiss their claims or the Court may dismiss the claims Certain claims become moot after the deal closes like, for example, disclosure claims An increasing number of Plaintiffs are willing to take their chances litigating a damages case on the other side of the vote Duty of care claims usually barred by exculpation clause Generally must plead and prove that directors breached their duty of loyalty or acted in bad faith Shareholders who feel they have not received fair value may seek to exercise their appraisal rights 5

6 Process Claims 6

7 Process Claims Plaintiffs will often allege that the Board failed to maximize shareholder value through a flawed sales process or by involving conflicted parties in the negotiation. Revlon Duties When a board decides to enter into a transaction that involves the sale of the company in a change of control transaction, the directors have a duty to secure the best value reasonably attainable for the stockholders. As to the sales process, a market check or similar tool is not absolutely mandatory, but if a board fails to employ any traditional value maximization tool, such as an auction, a broad market check, or a goshop provision, that board must possess an impeccable knowledge of the company s business for the court to determine that it acted reasonably. In re Openlane, Inc. Shareholders Litig., No VCN, 2011 WL (Del. Ch. Sept. 30, 2011). 7

8 Process Claims (cont d) Process Held Unreasonable Koehler v. Netspend Holdings Inc., No VCN, 2013 WL (Del. Ch. May 21, 2013) Combination of lack of market check, reliance on a weak fairness opinion, agreement to forego a post-agreement market check, and agreement to strong deal protections But no injunction because of 45% premium and lack of competing bidder Process Held Reasonable In re Micromet, Inc. S holder Litig., No VCP, 2012 WL (Del. Ch. Feb. 29, 2012) In re Smurfit-Stone Container Corp. Shareholder Litig., No VCP, 2011 WL (Del. Ch. May 24, 2011) 8

9 Process Claims (cont d) Delaware courts have a continued focus on banker-related conflicts In re Del Monte Foods Co. Shareholder Litig., 25 A.3d 813 (Del. Ch. 2011) Injunction granted because the sale process was designed to permit Del Monte s banker to obtain lucrative buy-side financing fees. In re El Paso Shareholder Litig., 41 A.3d 432 (Del. Ch. 2012) Financial advisor conflicted because it owned 19% of buyer and controlled two of the buyer s board seats, but no injunction issued. Post-closing money damages potential left open. Case ultimately settled for $110 million, $26 million of which was for plaintiffs fees. In re Micromet Inc. Shareholder Litig., No VCP, 2012 WL (Del. Ch. Feb. 29, 2012) No requirement to disclose banker s holdings in buyer because relatively small compared to overall investment holdings. 9

10 Disclosure Claims 10

11 Disclosure Claims Disclosure claims Directors only need to disclose information that is material, and information is material only if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote. County of York Employee Ret. Plan v. Merrill Lynch Co., Inc., C.A. No VCN, slip op. (Del. Ch. Oct. 28, 2008). Types of disclosures Investment banker analysis Financial projections 11

12 Disclosure Claims (cont d) In re BioClinica, Inc. S holder Litig., 2013 WL (Del. Ch. Feb. 25, 2013) Plaintiffs sought to enjoin a merger on grounds of breach of fiduciary duty by the board of BioClinica, asserting, inter alia, the following two inadequate disclosure claims: (1) failure to disclose management projections and (2) failure to disclose why revisions were made to estimated capital expenditures. Neither of these claims were found to be colorable. Regarding (1), the Court of Chancery noted that the failure of a company to disclose management s financial projections in its proxy materials, when those projections have been relied on by a financial advisor to render a fairness opinion, is a material omission that will sustain injunctive relief, but went on to find that the only thing provided by management was financial information, not financial projections derived from that information. The court held that ʽ[management] cannot disclose projections that do not exist. Regarding (2), the Court of Chancery stated [o]ur law concerning proxy disclosures does not require such detailed disclosure. As such, the court held that Plaintiffs presume, incorrectly, that stockholders are entitled to something more than management s best estimates of future performance when those best estimates were the only forecasts used by a financial advisor in producing a fairness opinion. 12

13 Disclosure Claims (cont d) Dent v. Ramtron Int l Corp., C.A. No VCP (Del. Ch. Nov. 19, 2012) Plaintiffs sought to enjoin a shareholder meeting at which stockholders were to vote on a proposed merger, alleging that the Ramtron s board failed to disclose in its proxy certain financial projections it had provided to its financial advisor for the purposes of preparing a discounted cash flow ( DCF ) analysis. The Chancery Court declined to issue the injunction. The court noted that [t]here is no per se duty to disclose financial projections furnished to and relied upon by an investment banker. According to the court, [t]o be a subject of mandated disclosure, the projections must be material in the context of the specific case. In the present case, the court did not find any evidence that the undisclosed [financial projections were] inconsistent with, or otherwise significantly [different] from [Ramtron s financial advisor s DCF analysis. Hence, the court held that it is unlikely that a reasonable stockholder would find the projections to be important as opposed to merely helpful in deciding how to vote on the merger or whether to seek appraisal. 13

14 Deal Terms & Protections 14

15 Standstill Provisions Refresher Prohibits a potential buyer from taking certain actions to pursue an unsolicited acquisition of a target company Purposes Reduces the risk that a target company, by providing information is enabling a hostile transaction Allows target to maintain control of the negotiation Incents a buyer to put their highest number forth as part of a negotiation Don t Ask/Don t Waive Provisions neither you nor any of your affiliates will, without the prior written consent of the Company, request the Company or any of our Representatives, directly or indirectly, to amend or waive any provision of this paragraph Eliminates the ability of a buyer to ask for a waiver of the standstill in 15 order to rebid

16 Standstill Provisions Don t ask/don t waive Benefits How does the auctioneer (i.e. a board), extract top-dollar if everyone has a chance to rebid? Do buyers have an incentive to pay more if the risk of a topping bid is reduced? But how does the board balance this against its fiduciary duties? Interaction with go-shop/no-shop Build waiver into merger agreement? Disclosure To board To shareholders 16

17 Other Standstill Issues Fallaway/Sunset Provisions Provides that the restrictions of the standstill automatically terminate, or fallaway, on specified events Public announcement of a tender offer or other acquisition proposal Public announcement of a definitive agreement Limited or general Other preliminary issues Anti-clubbing Ability to contact financing sources 17

18 Delaware Treatment of Standstills No per se rule against don t ask, don t waive provisions In re Ancestry.com, Inc. Shareholders Litig., No CS (Del. Ch. Dec. 17, 2012) But the Delaware courts have been inclined to issue an injunction where don t ask, don t waive provisions are present In re Complete Genomics, Inc. Shareholders Litig., No VCL (Del. Ch. Nov. 17, 2012) Injunction issued because don t ask, don t waive provision impermissibly limited the board s fiduciary obligations to properly evaluate a competing offer Koehler v. Netspend Holdings Inc., No VCG, 2013 WL (Del. Ch. May 21, 2013) Court was going to enjoin don t ask, don t waive provisions, which had been incorporated into the merger agreement, but the parties withdrew the provisions after oral argument on the motion for preliminary injunction 18

19 Match Rights Duration Limited or unlimited After compliance with the [match right] with respect to any Superior Proposal, the Company shall have no further obligations under the [match right], and the Company Board shall not be required to comply with such obligations with respect to any other Superior Proposal. Alternative formulations Information rights Matching rights have been upheld in several instances. See In re Lear Corp. S holder Litig., 926 A.2d 94 (Del. Ch. 2007). 19

20 Crown Jewel Lockups Used historically, but courts were skeptical When the intended effect [of a crown jewel lock-up] is to end an active auction, at the very least, the independent members of the board must attempt to negotiate alternative bids before granting such a significant concession. MacMillan. Seen in some pharma, technology and biotech transactions Recent examples Complete Genomics, Comverge (loans to distressed targets) NYSE/ICE (agreement to be exclusive provider of clearing arrangements) 20

21 Crown Jewel Lockups (con t) Factors to Consider Benefits to target Independent business purpose Attractiveness to topping bidder Insistence by bidder Acquisition or option Legitimate business objectives of buyer outside of deterring a topping bid Financial distress of target 21

22 Other Deal Terms/Protections Several Delaware courts have upheld termination fees of less than 5%. See In re Dollar Thrifty S holder Litig., 2010 WL (Del. Ch. Sept. 8, 2010) (no-shop provision and break-up fee of 3.9% upheld); In re 3Com S holders Litig., 2009 WL (Del. Ch. Dec. 18, 2009) (upholding no-shop provision and break-up fee of 4% of the deal). Presence of no-shop provision in merger agreement is not generally indicative of breach of fiduciary duties. Force-the-vote provision are authorized under Delaware law even in a merger context. See La. Mun. Police Employees Ret. Sys. v. Crawford, 918 A.2d 1172 (Del. Ch. 2007). 22

23 Implications for D&O Insurance Policies 23

24 Jurisdiction Trends Prior to 2002, most M&A suits were filed in Delaware. Between , plaintiffs began to file in other states. Since 2009, the proportion of cases filed in Delaware has risen from 28% to 39%. It is more and more likely that a given transaction will trigger multiple lawsuits in multiple venues. The percentage of suits filed in multiple jurisdiction has risen from 8.6% in 2005 to 47% through Effects of Multi-forum Litigation Increased litigation costs. Potential for inconsistent judgments. Complicates negotiations due to the presence of multiple plaintiffs with differing interests. 24

25 Allergan / Botox Litigation Allergan paid $600 million and plead guilty to misdemeanor misbranding relating to allegations of off-label promotion of Botox. A series of derivative suits were filed in the Delaware Chancery Court and in California state and federal court. The California federal district court, analyzing Delaware state law, dismissed the case with prejudice based on a failure to plead demand futility. Delaware Chancery Court denied the MTD stating that there was a claim and that it was not bound by collateral estoppel as the plaintiffs were not in privity. Delaware Supreme Court reversed and held that Delaware was required to give a California federal judgment dismissing essentially the same complaint full faith and credit. 25

26 Settlements/Plaintiffs Fees Many cases settle before the vote occurs in exchange for additional disclosures about the transaction to shareholders In 2012, two-thirds of filed matters were settled with 81% of those settlements being disclosure-only settlements Defendants may also agree to modify certain merger terms like the deal protection measures Plaintiffs claim that shareholders benefited from these accommodations and argue that the Court should order payment of their attorneys fees Recent attorney fee awards to plaintiffs counsel in merger litigation have ranged from $0 to $300 million 26

27 Disclosure-Only Settlements Fees from disclosure-only settlements have dropped from an average of $730k in 2009 to $540k in 2012 Delaware has been predictable in awarding non-disclosure fees in the mid-6 figures Delaware could award fees in excess of $1 million if the disclosure is significant such as if the disclosure reveals a conflict of interest Outside of Delaware, it can become more unpredictable Tennessee state court awarded $9.2M in fees arising out of the buyout of HCA Florida state court awarded $4.9M in fees in buyout of OSI Restaurant Group New York state court awarded $4M in fees relating to the acquisition of Goodrich Corp. the additional disclosures revealed potential conflicts of interest involving Citi, Credit Suisse, and Wachtell (In re Goodrich Shareholders Litig., Nassau County Supreme Court, No /2011) 27

28 Litigation Trends and Fiduciary Responsibilities in M&A Transactions June 18, 2013 Presented By: Lisa Bugni Jessica Perry Corley Justin Howard Christopher Rittinger Alston & Bird LLP Alston & Bird LLP Alston & Bird LLP AIG Property Casualty 28

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