Director Duties in M&A Transactions After Chen v. Howard-Anderson

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Director Duties in M&A Transactions After Chen v. Howard-Anderson Navigating Recent Developments in Delaware Fiduciary Law, Revlon Duties and 102(b)(7) Exculpatory Provisions TUESDAY, DECEMBER 16, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Jeffrey R. Wolters, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del. Ryan A. McLeod, Attorney, Wachtell Lipton Rosen & Katz, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Navigating Recent Developments in Delaware Fiduciary Law, Revlon Duties and 102(b)(7) Exculpatory Provisions December 16, 2014 Ryan A. McLeod Jeffrey R. Wolters

6 Agenda I. Introduction II. Factual Background III. Procedural Background and Posture IV.Key Holdings V. Implications for Revlon Review VI.Implications for Disclosure Practice VII.Conclusions New Castle County Courthouse 6

7 Factual Background Occam was a DE corporation headquartered in CA that developed, marketed, and supported products for the broadband access market. Occam s board consisted of seven directors. Two of the directors (Krausz and Abbott) were affiliated with investment funds that held 25% of Occam s stock. 7

8 Factual Background In 2009, Occam engaged Jeffries & Co. for advice on potential strategic transactions. The board believed growth was necessary to enable Occam to compete, and it concluded its options were organic growth, acquisitions, or a strategic combination. Through 2009 and into 2010, Occam explored strategic options. 8

9 Factual Background The summary judgment record showed that Occam treated its potential strategic partners differently throughout the sales process. Plaintiffs argued that this suggested Occam, and in particular its directors affiliated with the 25% investors, favored Calix. Plaintiffs stressed that Occam held friendly meetings with Calix resulting in proposed merger terms but rebuffed Adtran s requests for information. And discovery suggested that Calix was willing to pay more and had inside information. 9

10 Factual Background The summary judgment record also showed that Occam s management created financial projections throughout the sales process. The projections showed robust growth and substantially exceeded the estimates based on publicly available information. The Vice Chancellor found that the projections were not given to the bidders and that it is reasonable to infer that if Adtran had received the June Projections, then Adtran would have valued Occam more highly and been a more persistent suitor. 10

11 Factual Background By June 2010, Occam had received two potential bids: Adtran: all-cash at a 30-35% market premium Midpoint equates to $8.60 per share Calix: $7.72 per share in cash/stock mix When the board met in June, it was told by Jeffries that the two bids were equivalent for illustrative purposes. In their depositions, the directors could not recall if the board ever knew that Adtran s bid was 11% higher. Moreover, Jeffries did not have access at this time to management s projections. 11

12 Factual Background Right before the July 4 holiday, the board instructed the CEO to give Adtran a 24-hour deadline to make a firm offer. Adtran witnesses testified that this was a 24-hour gun to our head and that it precluded Adtran from making a firm offer. The board also instructed Jeffries to conduct a 24-hour market check. Jeffries sent s to seven bidders. They did not mention Occam by name. Five responded saying they were interested but needed more time. 12

13 Factual Background Occam granted exclusivity to Calix, and extended this exclusivity even as Occam outperformed. As Jeffries worked on a fairness opinion, it pushed management for internal projections. Occam provided projections, but revised them downward and deleted all projections for Management also did not revise projections to take account of more recent positive business developments. 13

14 Factual Background In September 2010, Occam Networks and Calix, Inc. agreed to a transaction in which Calix would acquire Occam for a mix of cash and stock. Occam stockholders received $3.83 in cash and shares of Calix stock $7.75 in value (49.6% cash). This amounted to an approximate 60% market premium. 14

15 Procedural Posture The transaction was challenged by stockholders holding approximately 19% of the common stock. In January 2011, the Court of Chancery issued a preliminary injunction blocking the deal from going to a vote until corrective disclosures were made. Once the disclosures were made, stockholders approved the transaction (64% in favor, but only 50.5% of shares not bound by support agreements). The parties then took additional discovery (over 20 depositions and over 60,000 pages of documents) 15

16 Procedural Posture Defendants moved for summary judgment. Rule 56 provides for judgment if there is no genuine issue as to any material fact. The movant bears the initial burden, but, if met, the non-moving party must adduce some evidence of a dispute of material fact. Court must view all evidence in the light most favorable to the non-moving party. 16

17 Procedural Posture On April 8, 2014, Vice Chancellor Laster issued a 78-page decision granting in part and denying in part the summary judgment motion. Vice Chancellor J. Travis Laster 17

18 Key Holdings SALE PROCESS Revlon reasonableness review applies to the transaction despite split cash/stock consideration Certain board actions in the sales process fell outside range of reasonableness Directors, but not officers, were exculpated from liability by 102(b)(7) provision because no evidence of improper motive DISCLOSURES Proxy failed to disclose reliable internal management projections. Proxy inaccurately described information available to Jeffries. Proxy inaccurately described sales process. Directors knowingly approved false disclosures (thus no exculpation) 18

19 Implications for Revlon Review What is the standard? Enhanced scrutiny standard of review Did board act reasonably to maximize value; range of reasonableness When does the standard apply? 49.6% cash deal What are the potential remedies? Pre-closing: injunction Post-closing: damages Stockholder vote may effectively cure if fully informed 19

20 Implications for Revlon Review Digression on Entire Fairness This heightened standard will apply if majority of board had a conflict (not independent and disinterested ) Under the facts, CEO had conflict due to change of control severance payment Plaintiff argued that two fund representatives on the board (25% of the stock) also had a conflict because fund was winding down and wanted liquidity Court credited this argument in theory, but not under the facts: no inference that funds could not be extended or had particular need for cash; contrary inference that 25% holders presumably motivated to maximize value of their shares (i.e., alignment with stockholders generally) 20

21 Implications for Revlon Review Application of reasonableness scrutiny post-closing: factual dispute over key board decisions in sale process precludes summary judgment Areas of concern: Apparent favoritism of winning bidder Calix, as compared to 24-hour deadline given to other bidder Adtran despite Adtran s having proposed a higher price reasonable inference that the Board favored Calix at the expense of generating greater value through a competitive bidding process Mere 24 hour market check for other bidders over July 4 weekend: fell outside the range of reasonableness 21

22 Implications for Revlon Review Personal Damages against Directors Depends on whether the breach of Revlon was grounded in violation of duty of care, or the duty of loyalty / good faith If solely care, a typical section 102(b)(7) charter provision precludes damages against directors 22

23 Implications for Revlon Review But if nature of breach implicates loyalty or good faith, personal damages based on quasi-appraisal (i.e., the higher price stockholders would ve received but for the breach) may be awarded unless entire fairness established Loyalty generally means personal financial interest not shared with stockholders generally (such as the CEO s severance agreement) 23

24 Implications for Revlon Review But what about good faith? Lyondell suggested no violation of good faith in Revlon context unless utterly failed to attempt to obtain the best sale price Thus, conscious disregard of duty = lack of good faith But Court in Chen said that lack of good faith may also be shown by evidence that board had motive other than obtaining best price: Greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge, shame or pride Under facts in Chen, Court found no reasonable inference of any such non-stockholder-directed motive, notwithstanding strong inference of conduct outside Revlon s range of reasonableness. But door opened for next time 24

25 Implications for Revlon Review Liability for Officers Same duties: officers owe same fiduciary duties as directors Same personal jurisdiction: Delaware long-arm statute applies But less protection: No 102(b)(7) protection Standard of review less clear (business judgment rule?) Dual threat: direct breach of duty, or aiding and abetting director breach Front lines exposure: dealing with bidders, revising projections Exposure for directors if they are also officers Plaintiffs catching on starting to see more post-closing claims vs. officers Personal damages claims in Chen allowed to proceed vs. CEO/director and CFO 25

26 Implications for Disclosure Practice Delaware Law: fiduciary obligation to disclose all material facts when seeking stockholder vote In Chen, Court focused on three alleged disclosure violations in the proxy statement sent to stockholders voting on the deal: First, failure to disclose most recent projections; defendants claimed not material because not reliable and not used in valuation, but Court found genuine factual dispute Second, misleading description of other projections and of what projections were provided to the company s financial advisor for valuation and fairness opinion Important context: Company did not provide its best projections to bidders to try to increase the bids, and then CFO appeared to revise projections downward for fairness opinion Third, misleading description of sales process, including statements that losing bidder was equivocal and unresponsive 26

27 Implications for Disclosure Practice Possibility of damages against directors Fact question whether directors knew that disclosures were misleading Directors were in a position to review critically and correct the background section of the proxy Summary judgment precluded by factual questions re possibility of loyalty/good faith violation 27

28 Conclusions 28