The Delaware Court of Chancery recently issued a preliminary injunction in In re Del Monte Foods Company Shareholders Litigation (i) blocking the shareholder vote to approve the sale of Del Monte to a group of private equity firms led by KKR for a period of 20 days and (ii) precluding the enforcement of the deal protection measures, including the no-shop, matching-right and break-up fee provisions during that period, pending the shareholder vote to approve the transaction.

The court applied the traditional tests for determining whether an injunction was warranted: whether the plaintiffs have demonstrated (1) a reasonable likelihood of success on the merits; (2) an imminent threat of irreparable injury; and (3) that an injunction would not threaten more harm than good. Based on the preliminary record and not findings of fact after a full trial, the Court found that plaintiffs had satisfied those requirements with respect to their claims that the Del Monte Board had breached its fiduciary duty by failing to provide adequate oversight over its financial advisor, Barclays who, as a result of conflicts of interest arising from contemporaneously providing sell-side advice to the Del Monte Board and seeking to provide financing to the potential acquirors of Del Monte, “secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buyside financing fees” and taking actions that “materially reduced the prospect of price competition for Del Monte.” According to the Court, the Board did not act reasonably in consenting to Barclays participating in the buy-side financing because the board did not inquire as to whether KKR could finance the transaction without Barclays and granted its consent “without some justification reasonably related to advancing shareholder interests.” In addition, the Court was highly critical of KKR and Vestar, two members of the private equity group that agreed to acquire Del Monte, for allegedly making a joint bid in violation of anti-clubbing restrictions in the confidentiality agreements they signed with Del Monte and of Barclays for allegedly facilitating and hiding Vestar’s participation in KKR’s bid from Del Monte.

The Del Monte case highlights the need for a Board of Directors to carefully monitor and supervise the process pursuant to which a company is sold, particularly where its financial or other advisors may be alleged to have a conflict of interest. More active oversight by the Board and the earlier and more substantial involvement of unconflicted advisors can substantially reduce the risk that the adequacy of the Board’s oversight will be brought into question.

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 Shandler v. DLJ Merchant Banking, Inc., a recent Delaware Court of Chancery decision, the court refused to apply the choice of law provision in an investment bank's engagement letter to a claim alleging that the investment bank had aided and abetted a breach of fiduciary. Noting that the choice of Ohio law would have been outcome determinative (Ohio law does not appear to recognize claims for aiding and abetting a breach of fiduciary duty, and the application of Ohio law would have required the dismissal of that claim against the investment bank), the Delaware court held that Delaware had the strongest interest when the claim was that a third party had been knowingly complicitous in a breach of fiduciary duty against a Delaware entity. This case is discussed further in a blog posted by Alston & Bird in DealLawyers.com.

In 3Com Corp. v. Diamond II Holdings, Inc., the Delaware Chancery Court addressed whether the presence of investment bankers in communications between a client and its counsel waives the attorney-client privilege. The answer often depends on which state's law applies, with Delaware being more lenient than many with respect to whether the legal privilege is preserved. However, such determinations are often fact specific and care should be taken to document the legal nature of the discussion and the benefits of the investment banker's presence to best defend against claims that the privilege was waived. This case is discussed further in a blog posted by Alston & Bird at PLI's Securities Law Practice Center.

A recent Delaware Chancery Court decision, In re Sunbelt Beverage Corporation Shareholder Litigation, should be of significant interest to both lawyers and investment bankers. In its decision, the court provided a detailed analysis of competing discounted cash flow and other valuation analyses . The court also described the fairness opinion as being “highly suspect” and “a mere afterthought, pure window dressing.” This case is discussed further in a blog posted by Alston & Bird on DealLawyers.com. 

Two blog postings by Alston & Bird on DealLawyers.com discuss issues regarding relative fairness opinions and third-party beneficiary rights of selling shareholders, both in the context of the ACS/Xerox merger. These postings can be read here  (December 17, 2009) and here (October 19, 2009).