Vice Chancellor Laster of the Delaware Court of Chancery recently enjoined two separate acquisitions, each pending additional disclosures regarding financial advisors.

In In re Art Technology Group, Inc. Shareholders Litigation, the court enjoined Oracle Corporation’s acquisition of Art Technology Group, Inc. (“ATG”).  ATG’s financial advisor in the merger, Morgan Stanley, had also worked for Oracle for a number of years.  The court required the parties to disclose a description of the type of services Morgan Stanley had performed for Oracle, and the aggregate compensation paid by Oracle to the advisor for the four years prior to the merger.  Noting that the disclosures were not related to the merger price, the court permitted the additional disclosures to be made in a public filing with the SEC (rather than a supplemental proxy mailing), per mitted the merger to proceed in only ten days after the disclosures were made, and did not require a bond before issuing the injunction.

However, the enhanced disclosures required by the court exceed the disclosure requirements of the SEC (see Item 1015(b)(4) of Regulation MA under the Securities and Exchange Act of 1934) and FINRA (see FINRA Rule 5150).  To the extent these rules require disclosure of material relationships between financial advisors and the parties, such disclosures are required only for the two previous years, and neither requirement has generally been interpreted to require quantification of the fees paid.

In Steinhardt v. Howard-Anderson, the court enjoined the acquisition of Occam Networks, Inc. by Calix, Inc., pending additional disclosures, including information regarding Occam’s financial advisor, Jefferies & Co., Inc.  The court required Occam to disclose additional information with respect to (i) the role of Jefferies in shopping the company (specifically relating to certain contacts the court thought were “misleadingly described”) and in negotiating the mix of cash and stock consideration (specifically, the effect of the road show on reducing the cash portion), and (ii) the accretion/dilution analysis conducted by Jefferies, which the court concluded was “summarized incompletely and partially in the proxy.”

The court also questioned discrepancies between preliminary books prepared by the advisor for the Occam board of directors and the final board book. Vice Chancellor questioned what he referred to as “longitudinal changes from previous Jefferies’ books that resulted in the final book making the deal look better than it would have had the same metrics been used that were used in prior books.” In that connection, the court ordered that Jefferies make available for a deposition a managing director involved in the transaction, rather than a junior banker who had only been involved in the deal at the end of the process. The court ordered that the transaction could not close until ten days after the required disclosures and deposition.

In a recent hearing on a motion to expedite discovery and the scheduling of a preliminary injunction in Steamfitters Local Union 447 v. Walter, et al., Chancellor Chandler concluded that, based on the parties’ briefings and arguments, he did not believe that the disclosure of the target’s free cash flows would meaningfully alter the total mix of information that is available through the definitive merger proxy. In so doing, Chancellor Chandler distinguished the facts presented from the facts in Vice Chancellor Strine’s recent Maric decision and earlier Netsmart decision, but expressed an appreciation and understanding of the plaintiff’s arguments “that Delaware law ought to require as a per se rule that free cash flow estimates going out into the future be provided, disclosed” and invited the plaintiff to file an interlocutory appeal to the Delaware Supreme Court:

“I would be, in the interests of clarification of Delaware law, and in the interests of perhaps leading to the creation of a bright-line rule in disclosure, which I think would be a good thing in some ways – I would be happy, Mr. Liebesman [[plaintiff’s counsel], to sign, today, an order certifying an interlocutory appeal to the Delaware Supreme Court on this question.”

For a discussion of the spectrum of views expressed by the Delaware courts that created the present uncertainty, see the blog posted by Alston & Bird at the PLI Securities Law Practice Center.

On July 15, 2010, final Congressional approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act occurred, when the Senate passed the bill by a vote of 60 to 39. President Obama is expected to sign the legislation next week. Embedded in the over 2,200-page Dodd-Frank Act are a number of provisions addressing executive compensation and corporate governance reforms. These provisions appear in Title IX of the Act, which may be cited separately as the Investor Protection and Securities Reform Act of 2010.   Below is a brief summary of the executive compensation and corporate governance provisions in the Act that are applicable to all public companies. (Certain other provisions of the Act relate specifically to the governance of financial institutions.)   A more detailed discussion, including observations regarding effects of the Act, can be found here. 

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On April 7, the Second Circuit Court of Appeals affirmed that merger negotiations generally need not be disclosed by public companies. The case, Vladmir v. Bioenvision, involved allegations by a shareholder that several of the company’s statements between February and May 2007 were rendered materially misleading by the company’s failure to disclose that it was engaged in merger negotiations.

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Vice Chancellor Strine’s May 13, 2010 decision in Maric Capital Master Fund, Ltd. is likely to be controversial because the court’s holding (consistent with its prior holding in Netsmart) that cash flow projections are material and required to be disclosed appears inconsistent with the Delaware Supreme Court’s decision in Skeen and Chancellor Chandler’s decision in CheckFree.

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In the recent Delaware case In re 3Com Shareholders Litigation, Chancellor Chandler denied plaintiffs’ motion for expedited discovery to garner facts necessary to support a motion to enjoin Hewlett Packard’s proposed acquisition of 3Com Corporation. The plaintiffs argued that expedited discovery should be granted, in part, because management failed to make adequate disclosure regarding its projections, alternatives considered and the analysis performed by its financial advisor, Goldman, Sachs & Co., in its proxy statement recommending that shareholders vote to approve the merger.

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This advisory discusses yesterday's SEC adoption of amendments to the disclosure requirements related to executive compensation and other corporate governance matters in proxy and information statements, annual reports and registration statements. The adopted amendments will require disclosure of compensation policies as they relate to risk, the potential conflicts of interest of compensation consultants, director and nominee qualifications, board leadership structure, and diversity policies relating to board membership.

The SEC also adopted amendments to require the disclosure of stockholder voting results in a Form 8-K, and to revise the disclosure of stock and option awards in the summary compensation tables and director compensation tables.

The advisory is provided in PDF on the Alston & Bird web site: http://www.alston.com/securities_law_SECform

Two cases in the Delaware Supreme Court and Delaware Court of Chancery highlight the disclosure obligations of Delaware corporations in two situations: when notifying stockholders of appraisal rights related to a short-form merger, and when notifying stockholders of a written consent action. The rulings apply to all Delaware corporations, but are of particular note for those that are privately held. Public companies will in all likelihood satisfy Delaware’s disclosure standards by complying with applicable federal securities laws. In contrast, many privately held companies are not in the habit of carefully evaluating the level of information disclosed to their stockholders. Further, the rulings mandate disclosure beyond that expressly required on the face of the Delaware General Corporation Law, so a simple read of the applicable statutes will not reveal all applicable disclosure requirements.

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