In Olson v. EV3, Inc., the Delaware Chancery Court provides guidance for M&A practitioners in crafting top-up options. As set out in Vice Chancellor Laster’s recent opinion, the terms of a top-up option must first comply with the procedural requirements of the Delaware General Corporation Law for the issuance of shares of stock. This means the value of the consideration to be paid in exchange for the top-up shares on exercise of the option must be readily ascertainable, must be greater than or equal to the aggregate par value of the top-up shares, and must be approved by the issuing corporation’s board. Second, the merger agreement governing the second-step merger should make clear that in any appraisal proceeding to determine the value of a share of target corporation stock, neither the shares issued upon exercise of the top-up option nor the consideration provided in exchange for those shares will be considered.
A top-up option is an option designed to increase the grantee’s ownership in a corporation to at least 90%, allowing the grantee to acquire the granting corporation through a short-form merger under Section 251 of the DGCL. A short form-merger is attractive because it can be completed without the approval of the target’s stockholders and because the target’s stockholders’ sole recourse in the transaction is the appraisal of their shares under Delaware’s appraisal statute. Typically, top-up options are granted to an acquirer in connection with the acquirer’s launch of a tender offer. Once the acquirer obtains at least a majority of the target’s shares in the tender offer, the top-up option is triggered, and the target corporation issues the acquirer a number of shares sufficient to bring the acquirer’s ownership in the corporation to at least 90%. The acquirer then completes the acquisition via short-form merger, and those target stockholders that did not tender are entitled to receive in the merger the same consideration per share paid in the tender offer or to seek appraisal of their shares.
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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.
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Advancement and indemnification are concepts that so frequently appear together that there is a tendency to think of them as intertwined. However, the Delaware Chancery Court recently issued a transcript ruling in Katzman v. Comprehensive Care Corp., C.A. No. 5892-VCL (Del. Ch. Dec. 28, 2010) reminding practitioners to distinguish the two concepts and clarifying the nonexclusive nature of the right of advancement. The succinct discussion in the ruling includes citations to relevant Delaware case law, which should be helpful to practitioners in this area.
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The Delaware Supreme Court recently issued its opinion affirming the Chancery Court decision in Selectica, Inc. v. Versata, Inc. The Chancery Court held earlier this year that a “poison pill” shareholder rights plan with a 4.99% trigger, implemented by the board of Selectica to protect against the company’s net operating loss carryforwards (NOLs), met the Unocal standard of review and is valid under Delaware law. For a previous discussion by this blog of the Chancery Court’s decision, click here.
Versata and its parent, Trilogy, appealed the Chancery Court decision, asserting that the court erred in applying the Unocal test for enhanced judicial scrutiny and that the NOL poison pill, either individually or in combination with a classified board of directors, had a preclusive effect on the shareholders’ ability to pursue a successful proxy contest for control of the Company’s board. The Supreme Court affirmed the Chancery Court’s conclusion that Unocal is the appropriate test, concluding that (1) the board had reasonable grounds for concluding that the NOLs were an asset worth protecting, and (2) the use of the poison pill was not preclusive or coercive and was a reasonable response in relation to the threat identified. However, the Court cautioned that its holding is fact specific, noting “the fact that the [4.99% poison pill] was reasonable under the specific circumstances of this case, should not be construed as generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.”
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At a special meeting held on September 30, the shareholders of Dollar Thrifty voted against the proposed merger with Hertz, by a margin of approximately 8%. Hertz immediately announced that it had “started taking the necessary steps to cease activities related to the acquisition of Dollar Thrifty.” Avis, which has been in a bidding war with Hertz over the course of the summer for control of Dollar Thrifty, had most recently increased its offer to approximately $53 per share of Dollar Thrifty stock. Avis announced yesterday an intention to “diligently pursue antitrust clearance,” while commencing an exchange offer for Dollar Thrifty’s shares at the most recent offer price. Avis also offered publicly to include a $20 million reverse termination fee in a negotiated acquisition agreement with Dollar Thrifty, even though Avis had steadfastly refused to agree to such a fee in previous negotiations with the target. The merger agreement between Hertz and Dollar Thrifty included a reverse termination fee of $44.6 million. Dollar Thrifty announced its intention to continue evaluating other options while operating business as usual.
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On September 23, Avis announced that it has again raised its offer for Dollar Thrifty, this time by raising the cash portion per common share by 12%. The new Avis bid price is valued at about $53 per share, for approximately $1.5 billion in aggregate. The current merger agreement between Dollar Thrifty and Hertz provides the Dollar Thrifty stockholders with about $50.25 per share. Hertz issued a press release on September 24 stating that its current price is its “best and final offer.”
In its press release, Avis was critical of the Dollar Thrifty board of directors, stating: “Dollar Thrifty’s Board continues to disappoint. Not only have they once again failed to engage in any discussions with Avis Budget prior to entering into the new binding agreement with Hertz, but they have also failed to use the renegotiation with Hertz as an opportunity to create a level playing field for all potential bidders.” Will the increased bid bring Dollar Thrifty back to the negotiating table, or perhaps back into the Delaware courts? Avis wrote in its press release that it “would be willing to offer an even higher price in the absence of the break-up fee that Dollar Thrifty’s Board has provided for in its agreement with Hertz.” Dollar Thrifty stockholders are currently scheduled to vote on the proposed merger with Hertz on September 30.
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Earlier this month in In Re Dollar Thrifty Shareholder Litigation, the Delaware Chancery Court refused to block the proposed merger between Hertz and Dollar Thrifty despite the presence of a higher bid by Avis. The suit seeking to enjoin the proposed merger was brought not by Avis, but by the stockholders of Dollar Thrifty. The stockholder plaintiffs challenged the premium of the Hertz offer (5.5% over the market price) as insufficient and alleged that the board failed to conduct a pre-signing auction or market check.
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"More fortunate than Goliath, eBay leaves this field with only a gash across its forehead; less fortunate than David, Craigslist leaves this field with something less than total victory." - Chancellor William Chandler III
In 2004, eBay acquired a 28 percent stake in privately held Craigslist and became one of only three Craigslist stockholders. Soon after, eBay acquired competing international classified sites and ultimately unveiled a direct U.S. rival in 2007, Kijiji. In response, Craigslist (i) adopted a poison pill to prevent a hostile takeover, (ii) staggered board elections in a manner that made it impossible for eBay to unilaterally appoint a director and (iii) diluted eBay’s ownership percentage by granting additional shares to the majority stockholders (the founders of Craigslist) who, in return, granted a right of first refusal in favor of the company. eBay filed suit challenging all three of these actions in 2008.
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In Morgan v. Cash, the Delaware Chancery Court recently addressed whether a buyer aided and abetted an alleged breach of fiduciary duties by the selling company’s board of directors when the board approved a cash merger that resulted in the distribution of consideration only to the seller’s preferred stockholders and not to the common stockholders. The court dismissed the aiding and abetting claim, holding that a buyer in an arm’s length transaction is entitled to negotiate the price and is not duty bound to pay an amount that compensates the selling entity’s common stockholders.
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In Hampshire Group, Limited v. Kuttner, et. al., the Delaware Court of Chancery recently addressed fiduciary duties and standards of conduct applicable to corporate officers when those officers were involved in conduct that benefited their superior officer and consciously caused the company to violate the law. The court, finding that fiduciary duties were breached, also addressed remedies for such breaches.
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Yesterday, in an open meeting the SEC voted unanimously to issue for public comment a concept release focusing on a wide range of issues related to the U.S. proxy system. The concept release is intended to solicit public comment as to whether the SEC should consider revisions to its rules to promote greater efficiency and transparency in the U.S. proxy system and enhance the integrity and accuracy of the shareholder vote.
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In Arkansas Teacher Retirement System v. Anthony Caiafa, the Supreme Court of Delaware followed case law holding that a stockholder-plaintiff loses standing in a derivative suit when the corporation-defendant merges with another company, but suggested in dicta a broadening of the fraud exception to such case law.
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In Binks v. DSL.net, Inc., the Delaware Chancery Court found that the defendant’s board acted consistent with its fiduciary duties under Revlon when, facing no other alternatives to bankruptcy, it approved a financing transaction that ultimately led to the sale of the company in a short form merger. The court found that the board acted in good faith, that a majority of its members were disinterested and that it was well-informed by an independent advisor.
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A recently decided Delaware Chancery Court decision reinforces the validity and utility of the “poison pill” as a protective device available to a corporate board of directors. In Selectica, Inc. v. Versata Enterprises, Inc., Vice Chancellor John W. Noble upheld the decision of the Selectica board to adopt and use a poison pill to protect against the value of the company’s net operating losses (“NOLs”). The case involves a unique set of facts (among other things, this was the first intentional triggering of the modern poison pill) and offers several important lessons for practitioners.
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In Kelly v. Blum , the Delaware Court of Chancery affirmed the existence of fiduciary duties for managers and members of a Delaware limited liability company in the absence of provisions in the operating agreement explicitly eliminating such duties. The Court concluded that, while the Delaware Limited Liability Company Act grants the members of an LLC significant freedom to expand, limit or even eliminate the fiduciary duties which the managers and members of the LLC owe to one another and the LLC itself, in the absence of specific provisions in an operating agreement establishing the scope of or eliminating such fiduciary duties, the managers and controlling members of the LLC “owe the traditional fiduciary duties that directors and controlling shareholders in a corporation would.”
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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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