Merger & Acquisition Law Update

Transcription

1 Merger & Acquisition Law Update June 2014 Delaware Cases Impact Whether Deals will be Upheld and Whether Directors, Officers and Advisors will be Liable Mitch Woolery Partner Kutak Rock LLP Kansas City Office

2 Executive Summary Four Delaware cases decided in 2014 have a big impact on whether a deal will be upheld by the courts and whether directors, officers and advisors will be exculpated (i.e., not liable for ) duty of care breaches. These have important implications for how deals are structured and whether directors, officers and advisors will face personal liability. 2

3 Executive Summary 1. Where the target company has a controlling stockholder who is on both sides of the deal, the board friendly Business Judgment Rule will be applied if the deal is approved by both (i) a true special committee; and (ii) a majority of the minority stockholders. Kahn (Del. 2014) (which also added a few other procedural safeguards). 2. Section 102(b)(7) exculpation provisions do not apply at summary judgment stage if there s a controlling stockholder and evidence of unfairness. Orchard Enterprises (Del. Ch. 2013). 3

4 Executive Summary (cont.) 3. An investment banker (who aided and abetted a board s duty of care breaches) cannot claim exculpation under the Section 102(b)(7) exculpation provisions. Rural Metro (Del. Ch. 2014) 4. Section 102(b)(7) exculpation provisions protect directors, not officers. Chen (Del. Ch. 2013) 4

5 New Reality: You will get sued in M&A In 2013, public shareholders filed suit in more than 90 percent of M&A deals valued over $100 million. True for large public deals (>$1bn) and small public deals (>$100mm but <$1bn). Source: Cornerstone Research (2014) Private company M&A litigation is increasing too. 5

6 Review: Three Fiduciary Standards in Delaware 1) Business Judgment Rule 2) Enhanced Scrutiny 3) Entire Fairness 6

7 Business Judgment Rule Traditional analysis Duty of care Duty of loyalty Rational business purpose 7

8 Enhanced Scrutiny Intermediate scrutiny Problem: Potential conflicts of interest Solution: Directors decision-making must be reasonable and directors actions must be reasonable. Poison Pill (Unocal) Sale of the Company (Revlon) 8

9 Entire Fairness Highest scrutiny Problem: Either board interests are different from stockholders interests, or Controlling stockholder is on both sides of the deal. 9

10 Entire Fairness (cont.) Solution: Directors must prove the transaction was entirely fair to the corporation (fair price and fair process). Mitigating factors: Independent committee M.O.M. (approval by majority of minority) Full disclosure 10

11 Review Section 102(b)(7) A company may add Del. Code Section 102(b)(7) exculpation provisions to certificate of incorporation. Exculpation (you are not liable for ). Exculpates breach of duty of care but not duty of loyalty. Exculpates directors, not officers or advisors. 11

12 Kahn v. M&F Worldwide Corp. (Del. 2014) Facts: Going-private deal where the 43% owner acquired the remaining 57% of the common stock. Special Committee negotiated and approved the sale. A majority of the disinterested minority also approved the sale. 12

13 Kahn (cont.) Kahn is case of 1 st impression. Court applied Business Judgment Rule rather than Entire Fairness Standard. 13

14 Kahn Holding In controller buyouts, apply Business Judgment Rule if and only if: i. the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; ii. the Special Committee is independent; iii. the Special Committee is empowered to freely select its own advisors and to say no definitively; 14

15 Kahn Holding (cont.) In controller buyouts, apply Business Judgment Rule if and only if: iv. the Special Committee meets its duty of care in negotiating a fair price; v. the vote of the minority is informed; and vi. there is no coercion of the minority. 15

16 Orchard Enterprises Inc. Stockholder Litigation (Del. Ch. 2014) Facts: Squeeze out merger by majority stockholder Entire Fairness standard applied because: - Independent committee chair would get $300k annual consulting fee with post-merger entity - Committee improperly included a large liquidation preference for the majority stockholder 16

17 Orchard Enterprises (cont.) Entire Fairness standard applied because (cont.): - Committee allowed majority stockholder to negotiate a competing deal - Proxy statement disclosures incomplete and inaccurate 17

18 Orchard Enterprises Holding Section 102(b)(7) exculpatory provisions don t apply at summary judgment stage if: a) Controlling stockholder b)evidence of procedural and substantive unfairness 18

19 Rural Metro Corp. Stockholders Litigation (Del. Ch. 2014) Facts: Cash-out merger to a financial acquirer Enhanced Scrutiny standard applied because: - Special committee exceeded authority - Special committee failed to adequately supervise investment banker and the banker s self-interests - Valuation obtained just hours before approval of transaction 19

20 Rural Metro (cont.) Enhanced Scrutiny standard applied because (cont.): - Special committee initiated sales process knowing that it precluded logical buyers engaged in a related transaction 20

21 Rural Metro Holdings 1. Directors (who settled prior to trial) found to have breached their duty of care and (but for their settlement) would have received the benefit of Section 102(b)(7) exculpation. 2. But investment banker liable for aiding and abetting directors duty of care breaches. 3. And investment banker, as aider and abettor, is not protected by Section 102(b)(7) exculpation. 21

22 Chen v. Howard-Anderson (Del. Ch. 2014) Facts: Cash-out merger Enhanced Scrutiny applied because: Board favored cash-and-stock deal over substantially higher all cash deal 24-hour ultimatum to make a bid 24-hour market check over July 4th weekend Received several IOIs but neglected to pursue them 22

23 Chen (cont.) Enhanced Scrutiny applied because (cont.): Inadequate disclosures and incomplete valuation 23

24 Chen Holdings 1. Even though Enhanced Scrutiny applied, directors get benefit of Section 102(b)(7) exculpation. a) True even though board failed to maximize value! 2. No indication they violated duty of loyalty, e.g., by entrenching themselves or management. 24

25 Chen Holdings (cont.) 3. Directors (who own substantial stock) are permitted to maximize value of own investments, so long as interests aligned with stockholders. 4. Section 102(b)(7) exculpatory provisions protect directors only, not officers. 25

26 Sources Stephen B. Brauerman, When Business Judgment Isn t Enough: The Impact of the Standard of Review on Deal Litigation, Business Law Today (2014), _insider.html (accessed June 7, 2014) Cornerstone Research, Shareholder Litigation Involving Mergers and Acquisitions: Review of 2013 M&A Litigation 4b3c-a75f-40830eab34b6/Shareholder-Litigation-Involving- Mergers-and-Acqui.aspx (accessed June 7, 2014) 26

27 Sources (cont.) Chen v. Howard-Anderson, 87 A.3d 648 (Del. Ch. 2014) Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) In re Orchard Enterprises Inc. Stockholder Litigation, 88 A.3d 1 (Del. Ch. 2014) In re Rural Metro Corp. Stockholders Litigation, 88 A.3d 54 (Del. Ch. 2014) 27

28 About Kutak Rock LLP Kutak Rock LLP is a national law firm of more than 500 lawyers in 16 offices from coast to coast. Our M&A team consists of more than 50 attorneys. While our M&A representations span from Fortune 100 companies to smaller transactions, we have developed a significant niche practice in Middle Market M&A, especially those with an enterprise value of $50- $750 million. 28

29 Contacting Kutak Rock LLP This publication is provided by Kutak Rock LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Kutak Rock LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jodi L. Kopke ( ; jodi.kopke@kutakrock.com) in our Denver office. Disclaimer per Missouri Rules of Professional Conduct: The choice of a lawyer is an important decision and should not be based solely upon advertisements. 29

30 Contacts Name Office Phone Number Michael W. Alvano Omaha (402) Steven P. Amen Omaha (402) Paul E. Belitz Denver (303) Glenn E. Borkowski Little Rock (501) Michael K. Bydalek Omaha (402) Brian V. Caid Denver (303) Robert L. Cohen Omaha (402) James C. Creigh Omaha (402) David C. Cripe Denver (303)

31 Contacts Name Office Phone Number Mark A. Ellis Omaha (402) Edward P. Gonzales Omaha (402) Rayburn W. Green Fayetteville (479) H. Watt Gregory, III Little Rock (501) Arkan Haile Denver (303) L. Keith Harvey Little Rock (501) Daniel L. Heard Little Rock (501) Christopher S. Heroux Denver (303) Nathan P. Humphrey Denver (303) Stephen J. Ismert Denver (303)

32 Contacts Name Office Phone Number Jeremy T. Johnson Washington (202) Joseph O. Kavan Omaha (402) Robert B. Keim Kansas City (816) Jeffrey S. Makovicka Omaha (402) Christopher C. May Fayetteville (479) C. David McDaniel Little Rock (501) Matthew S. McElhiney Denver (303) Carol J. Mihalic Denver (303) Jolyn J. Moses Denver (303)

33 Contacts Name Office Phone Number Debby Thetford Nye Fayetteville (479) Peggy A. Richter Denver (303) Gil B. Rosenthal Denver (303) Robert C. Roth, Jr. Denver (303) Lee F. Sachnoff Denver (303) Lisa A. Sarver Omaha (402) Anthony D. Scioli Omaha (402) Jennifer K. Sewell Omaha (402) David A. Smith Little Rock (501) Mitch Woolery Kansas City (816)