M&A 2016 Delaware Update: Standard for Deal Review, D&O Fiduciary Duties, Private Company Mergers, Appraisal Rights

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A M&A 2016 Delaware Update: Standard for Deal Review, D&O Fiduciary Duties, Private Company Mergers, Appraisal Rights Implications of Important Rulings for Planning, Negotiating and Drafting Deal Documents THURSDAY, FEBRUARY 11, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Michael D. Allen, Director, Richards Layton & Finger, Wilmington, Del. Samuel T. Hirzel, Partner, Proctor Heyman, Wilmington, Del. Patricia O. Vella, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del. 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 M&A Key Delaware Law Updates for 2016 Public Company Developments February 11, 2016 Michael D. Allen

6 Controlling Stockholder Transactions 6

7 Controlling Stockholder Transactions MFW Going Private Transactions In MFW (Kahn v. M&F Worldwide Corp., 88 A.3d 65 (Del. 2014)), the Delaware Supreme Court affirmed the Court of Chancery s grant of defendants motion for summary judgment in an action challenging a merger of M&F Worldwide with its controlling stockholder. The Court held that the business judgment standard of review applies to a controlling stockholder merger when it is conditioned, ab initio, on: Negotiation and approval by an independent, fully functioning and duly empowered special committee that fulfills its duty of care; and The uncoerced, fully informed vote of a majority of the minority stockholders. 7

8 Controlling Stockholder Transactions MFW Going Private Transactions Thus, under the MFW framework, in controller buyouts, the business judgment standard of review will be applied if and only if: the controller conditions the transaction on the approval of both a special committee and a majority of the minority stockholders from the outset; the special committee is independent; the special committee is empowered to freely select its own advisors and to say no definitively; the special committee meets its duty of care in negotiating; the vote of the minority is fully informed; and there is no coercion of the minority. Importantly, if a plaintiff can plead facts showing that any or all of these conditions did not exist, the complaint would state a claim for relief. MFW would have survived a motion to dismiss based on allegations attacking the fairness of the price. 8

9 Controlling Stockholder Transactions Post-MFW Going Private Transactions In Swomley v. Schlecht, No VCL (Del. Ch. Aug. 27, 2014) (TRANSCRIPT), the Court of Chancery granted a motion to dismiss breach of fiduciary duty claims in an MFW-structured going-private transaction. The Court noted that the point of the MFW structure is to assist in obtaining dismissal at a preliminary stage. Swomley highlights gross negligence standard on duty of care analysis. 9

10 Controlling Stockholder Transactions Post-MFW Going Private Transactions In In re Cornerstone Therapeutics Inc., No VCG (Del. Ch. Sept. 10, 2014) the Court of Chancery denied a motion to dismiss in a goingprivate transaction conditioned upon both special committee and majority of the minority stockholder approval. The transaction was not conditioned from the outset on a majority of the minority vote. The Court certified to the Delaware Supreme Court the question of the appropriateness of the Court s decision not to dismiss the disinterested directors at the motion to dismiss stage. 10

11 Controlling Stockholder Transactions Post-MFW Going Private Transactions In In re Cornerstone Therapeutics Inc., S holder Litig., Nos. 564, 2014 & 706, 2014 (Del. May 14, 2015), the Delaware Supreme Court held that in an action for damages against corporate fiduciaries, plaintiffs must plead non-exculpated claims against the disinterested independent directors to survive a motion to dismiss, regardless of the underlying standard of review for the board s conduct. [T]he mere fact that a plaintiff is able to plead facts supporting the application of the entire fairness standard to the transaction, and can thus state a duty of loyalty claim against the interested fiduciaries, does not relieve the plaintiff of the responsibility to plead a non-exculpated claim against each director who moves for dismissal. 11

12 Controlling Stockholder Transactions Post-MFW Going Private Transactions In In re Dole Food Co., Inc., C.A. No VCL (Del. Ch. Sept. 10, 2013) (TRANSCRIPT), the Court of Chancery denied stockholder plaintiffs motion to expedite proceedings relating to the going-private transaction by Dole s 40% stockholder that fit within the MFW framework. The Court of Chancery held that plaintiffs failed to show irreparable injury because plaintiffs could litigate a post-closing damages case rather than pursuing expedited proceedings for supplemental disclosures or deal modifications. However, in In re Dole Food Co., Inc. S holder Litig., C.A. No VCL (Del. Ch. Feb. 5, 2015), the Court of Chancery denied defendant s motion for summary judgment under MFW because plaintiffs identified evidence that raised disputed issues of material fact about whether defendants satisfied all of the requirements of MFW in connection with the merger. In a post-trial decision, In re Dole Food Co., Inc. S holder Litig., C.A. No VCL (Del. Ch. Aug. 27, 2015), the Court of Chancery held that two defendants, including Dole s 40% stockholder, breached their duty of loyalty and were liable to the class for $148,190,590.18, representing damages of $2.74 per share. 12

13 Controlling Stockholder Transactions: KKR Effect of Stockholder Vote on Standard of Review In Corwin v. KKR Financial Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015), the Delaware Supreme Court affirmed the Court of Chancery s grant of defendants motions to dismiss with prejudice a suit challenging the acquisition of KKR Financial Holdings LLC ("KFN") by KKR & Co. L.P. ("KKR"). In December 2013, KKR and KFN executed a stock-for-stock merger agreement. Merger was subject to approval by a majority of KFN shares held by persons other than KKR and its affiliates. Requisite vote was obtained after full disclosure. 13

14 Controlling Stockholder Transactions: KKR Effect of Stockholder Vote on Standard of Review Plaintiffs claimed that KFN s directors breached their fiduciary duties by agreeing to the merger and that KKR breached its fiduciary duty as a controlling stockholder. The Court of Chancery held: KKR, which owned less than 1% of KFN's stock, was not a controlling stockholder. Although KKR controlled KFN s day-to-day operations through an investment advisory agreement, it could not dictate the composition of the Board and the Board remained free to reject the proposed merger. Business judgment standard of review would apply to the merger "because it was approved by a majority of the shares held by disinterested stockholders of KFN in a vote that was fully informed. 14

15 Controlling Stockholder Transactions: KKR Effect of Stockholder Vote on Standard of Review The Delaware Supreme Court affirmed the holding that KKR was not a controller, as plaintiffs did not plead facts sufficient to support an inference that KKR could prevent the KFN board from freely exercising its independent judgment in considering the proposed merger. The Delaware Supreme Court also affirmed the holding that where a transaction is not subject to entire fairness, a fully informed, uncoerced vote of the disinterested stockholders invokes the business judgment rule standard of review, even if that vote is required by statute. The Delaware Supreme Court confirmed the Court of Chancery s conclusion that Gantler v. Stephens is a narrow decision focusing on the definition of ratification, not on the standard of review. 15

16 Mandatory Injunctions/Market Checks 16

17 Mandatory Injunctions - Market Checks C&J In C&J Energy Services, Inc. v. City of Miami General Employees and Sanitation Employees Retirement Trust, 107 A.3d 1049 (Del. 2014), the Delaware Supreme Court reversed the Court of Chancery s decision to grant an unusual 30-day preliminary injunction of the merger between C&J Energy Services, Inc. and a division of Nabors Industries Ltd., a Bermuda company. As an inversion transaction, the merger was structured such that C&J would acquire a subsidiary of Nabors and manage the surviving company, but Nabors would retain a majority of the surviving company s equity. Although it was technically the buyer, C&J bargained for a passive, postsigning fiduciary out to accept a superior proposal and for a relatively low termination fee. 17

18 Mandatory Injunctions - Market Checks C&J Although the Court of Chancery found that C&J s board was fully informed as to C&J s value, and there was no finding that the board was conflicted, the Court of Chancery found it was plausible that the board had violated its duties under Revlon to seek the highest immediate value reasonably available, because the board did not engage in an active pre- or postsigning market check. The Court of Chancery enjoined the stockholder vote for 30 days and required C&J to shop itself, stating that the solicitation of proposals during that period would not breach the merger agreement. C&J appealed. 18

19 Mandatory Injunctions - Market Checks C&J The Delaware Supreme Court held the Court of Chancery s analysis was based on the incorrect proposition that a company selling itself is required to conduct an active marketing process for its board to satisfy its duties under Revlon. The Court reiterated that there is no single blueprint that a board must follow when conducting a sales process. The Supreme Court also held that the Court of Chancery s mandatory preliminary injunction was improper, in part, because it stripped an innocent third party (Nabors) of its contractual protections while simultaneously binding that party to consummate the transaction. 19

20 Investment Banker Regulation 20

21 Investment Banker Regulation: Rural Metro In In re Rural Metro Corp., 88 A.3d 54 (Del. Ch. 2014), the target s primary investment banker, RBC Capital Markets, LLC, was held liable for aiding and abetting the directors breach of fiduciary duty, in part because of the banker s conflict of interest in attempting to sell the corporation and providing stapled-financing. The directors and a second banker settled prior to trial, leaving only RBC in the case. 21

22 Investment Banker Regulation: Rural Metro The Court of Chancery found that RBC was liable as an aider and abettor because: It created an unreasonable process and information gaps; It knew that it had done so; Its actions caused damage in the form of an ill-timed sale, uninformed board approval and a manipulated fairness opinion; and The stockholders relied on misleading disclosures in the proxy statement in the form of false information that the banker presented to the board in its financial presentation. 22

23 Investment Banker Regulation: Rural Metro With respect to the predicate fiduciary breach by the board, the Court of Chancery held that the board breached its Revlon duties by, among other things: Allowing the special committee to initiate a sale process before the special committee was authorized to do so; Failing to maintain an active and direct role in the process; Permitting its banker to pursue only financial buyers; Making decisions on the timing of the sale that effectively shut out a competing bidder and were at odds with initial strategy; and Failing to monitor or impose meaningful restrictions on the banker s conduct. 23

24 Investment Banker Regulation: Rural Metro In assessing damages, the Court found RBC would be required to pay 83% of the total damages. Relying on a DCF model, the Court found the fair value of Rural Metro to be $4.17 per share more than the merger price. Allocating responsibility for the various claims (process and disclosure), the Court entered judgment for $75.8 million against RBC. 24

25 Investment Banker Regulation: Rural Metro In RBC Capital Markets, LLC v. Jervis, 2015 WL (Del. Nov. 30, 2015), the Delaware Supreme Court affirmed the Court of Chancery s holdings that: The Rural/Metro board breached its Revlon duties; The directors violated their fiduciary duty of disclosure by making materially false statements in the proxy statement; RBC aided and abetted those breaches; and Those breaches resulted in damages to the stockholders. The Supreme Court also upheld the Court of Chancery s calculation of damages and allocation of liability. 25

26 Investment Banker Regulation: Rural Metro The Supreme Court made the following significant finding: Finally, we reject RBC s contention that the trial court erred by finding a due care violation without finding gross negligence. RBC argues that intermediate scrutiny under Revlon exists to determine whether plaintiff stockholders should receive pre-closing injunctive relief, but it cannot be used to establish a breach of fiduciary duty that warrants post-closing damages. When disinterested directors themselves face liability, the law, for policy reasons, requires that they be deemed to have acted with gross negligence in order to sustain a monetary judgment against them. That does not mean, however, that if they were subject to Revlon duties, and their conduct was unreasonable, that there was not a breach of fiduciary duty. The Board violated its situational duty by failing to take reasonable steps to attain the best value reasonably available to the stockholders. We agree with the trial court that the individual defendants breached their fiduciary duties by engaging in conduct that fell outside the range of reasonableness, and that this was a sufficient predicate for its finding of aiding and abetting liability against RBC. 26

27 Investment Banker Regulation: Rural Metro Although it affirmed the Court of Chancery s judgment, the Delaware Supreme Court emphasized that its holding is a narrow one and does not suggest that the failure by a financial advisor to prevent a breach of the duty of care will give rise to an aiding and abetting claim in every case. Based on the contractual nature of the financial advisor/client relationship, the Delaware Supreme Court described the role of a financial advisor as more limited than the gatekeeper role described by the Court of Chancery: Rational and sophisticated parties dealing at arm s-length shape their own contractual arrangements and it is for the board, in managing the business and affairs of the corporation, to determine what services, and on what terms, it will hire a financial advisor to perform in assisting the board in carrying out its oversight function. 27

28 Investment Banker Regulation: Rural Metro The Delaware Supreme Court found that the presence of the second investment banker did not remedy RBC s conduct, due to: The secondary role played by the second banker; and The fact that the second banker was paid on the same contingent basis as the primary bank. Other Investment Banker Cases Zale: Initial denial of motion to dismiss as to aiding and abetting, but subsequent dismissal following reargument after KKR Financial decision. Tibco: Denial of motion to dismiss aiding and abetting claim against Goldman Sachs following $100 million valuation mistake. 28

29 For Additional Information Michael D. Allen Director This presentation and the material contained herein are provided as general information and should not be construed as legal advice on any specific matter or as creating an attorney-client relationship. Before relying on general legal information or deciding on legal action, request a consultation or information from a Richards, Layton & Finger attorney on specific legal needs. Copyright 2016 Richards, Layton & Finger, P.A. All rights reserved. 29

30 M&A 2016 Delaware Update: Recent Developments in Private Company Mergers February 11, 2016 Patricia O. Vella Morris, Nichols, Arsht & Tunnell LLP

31 PRIVATE COMPANY MERGERS Binding Nonsignatory Stockholders Are target stockholders bound by release in letter of transmittal or postclosing indemnification? Disclaimers of Reliance What language is required to bar claims based on extra-contractual misrepresentations? Fraud Exceptions What does a fraud exception to a sole remedy provision mean? Liability for Fraud When a corporation makes fraudulent representations, will directors, officers or stockholders face liability? 31

32 BINDING NONSIGNATORY STOCKHOLDERS 32

33 Cigna v. Audax Health Solutions (Del. Ch. Nov. 26, 2014) Background: Motion to dismiss. Private company merger agreement required stockholders to sign letter of transmittal ( LOT ) with release of claims to receive merger consideration. All stockholders were subject to indemnification clawback of merger consideration: Indemnification for loss caused by breach of company reps; imposed directly by merger agreement; Most reps survived months, but certain fundamental reps survived indefinitely ; Some holders signed support agreements, agreeing to indemnification obligations, release of claims, and appointment of stockholder representative. Cigna did not sign support agreements, vote in favor of the merger, or sign an LOT, but sued demanding payment for its Audax shares. 33

34 Letter of Transmittal: Court held release in LOT not enforceable due to no additional consideration for the release. Clawback: Clawback literally complied with facts ascertainable concept under DGCL Section 251, which provides any terms of a merger agreement may be made dependent on facts ascertainable outside of such agreement. But clawback violated implicit requirement of Section 251 that merger consideration be determinable with reasonable degree of precision. Court held that, to the extent the clawback was uncapped and applied for indefinite duration, it was not permissible. Court Implicitly Upheld: Escrows (i.e., holdback instead of clawback); and Clawback for post-closing price adjustment if limited to 36 months or less (no ruling). 34

35 Interesting Issues Raised: If merger consideration must be determinable, is a large escrow really any different from a clawback? What about earn-outs? Most deals with escrows also include a clawback above escrow often indefinite and uncapped for certain breaches. Court s main concern appeared to be that clawback was indefinite, but Delaware law will impose the applicable statute of limitations as an end date. New Section 8106 expressly allows parties to choose up to 20 year survival periods. See Bear Stearns Mortgage Funding Trust SL1 v. EMC Mortgage LLC (Del. Ch. Jan. 12, 2015). 35

36 Structuring Indemnity After Audax: Contractual Approach Pre-closing joinder or support agreement as a condition to closing, structured as a true contract with pre-closing consideration. Should work for releases as well. Statutory Approach Holdback placed into escrow. Clawback for formulaic purchase price adjustment. Clawback limited to 36 months or less? If the merger consideration is a security, embed adjustment terms in the security (e.g., deduct indemnification losses from liquidation preference). Pre-Existing Drag-Along Rights Use the proxy. See Halpin v. Riverstone National, Inc. (Del. Ch. Feb. 26, 2015). Hybrid Statutory / Contractual Approach Merger agreement provides for a percentage of the consideration to be held in escrow for a specified period, to be released early to any holder who contractually agrees to a clawback. 36

37 DISCLAIMERS OF RELIANCE AND FRAUD 37

38 TrueBlue, Inc. v. Leeds Equity Partners IV, LP (Del. Super. Sept. 25, 2015) Background: Motion to dismiss. Private equity fund (PE Seller) sold Target to Buyer pursuant to SPA. A subsidiary of Target was obligated to make earn-out payments pursuant to a pre-existing acquisition agreement. After the closing of the SPA, the earn-out payments came due. Retained liabilities: The Buyer claimed that the PE Seller retained responsibility for making the earn-out payments. The Court rejected the Buyer s claims that the terms of the SPA required the PE Seller to make the earn-out payments and held that earn-out payments were not among the liabilities retained by the PE Seller. 38

39 Extra-Contractual Misrepresentations: The Buyer argued that the PE Seller s extra-contractual promises to make the earn-out payments fraudulently induced the Buyer to enter into the SPA. The Court refused to dismiss the Buyer s fraud claim based on the extracontractual promises, finding that the combination of a standard integration clause and a no-extra-contractual representations provision in which the Buyer acknowledge[d] and agree[d] that the contractual representations superseded any other representations, whether written or oral, was insufficient to bar a fraud claim based on extra-contractual misrepresentations. The Court held that the contractual provisions could not overcome the Buyer s justifiable reliance on the extra-contractual misrepresentations. The Court noted that in order to disclaim reliance on extra-contractual representations, the contractual provisions must clearly state that the parties disclaim reliance upon extra-contractual statements. (citing Anvil Holding Corp. v. Iron Acquisition Co.). 39

40 Scope of Fraud Exception: The Court further found that the fraud exception in the SPA, which provided that nothing in the SPA would limit a claim for actual fraud, was also enough to preserve extra-contractual fraud claims (and citing dicta in Airborne v. SquidSoap for the notion that drafters ought to specify whether the fraud claims they mean to preserve are based on the contract or are extra-contractual). 40

41 Prairie Capital III, LP v. Double E Holding Corp. (Del. Ch. Nov. 24, 2015) Background: Private equity fund (PE Seller) sold one of its portfolio companies (Target) to another private equity fund (PE Buyer) pursuant to SPA. The PE Seller sued the PE Buyer to compel the release of escrowed funds. The PE Buyer filed counterclaims against the PE Seller and certain directors and officers of Target, including claims of fraud based on the Target s alleged falsification of invoices to inflate sales in the month before closing. The fraud claims arose out of extra-contractual representations and omissions as well as specific representations in the SPA. 41

42 Scope of Fraud Exception: The SPA also included a fraud exception to the exclusive remedy provision. The Court noted that while such an exception allows the parties to pursue remedies outside the SPA s indemnification framework when claiming fraud, it does not expand the universe of representations on which a party can base its fraud claim. The Court held that the universe of representations is set by the Exclusive Representations provision. Who is Liable for Fraud? The Court allowed certain fraud claims based on representations made in the SPA to survive the motion to dismiss. The Court noted that even though the allegedly false representations in the SPA were made by the Target, the defendants the PE Seller and individual directors and officers of the Target could be held accountable for such alleged misrepresentations. 42

43 Key Takeaways Transaction planners can limit their risk by using tested formulations, but they need not employ magic words (Prairie) Disclaimers of Reliance Drafters should clearly express any intent to limit misrepresentation claims to the four corners of the contract. Although Delaware law does not require magic words to disclaim reliance on extracontractual representations, there are cases such as TrueBlue (see also Aviation West Charters, LLC v. Freer, 2015 WL (Del. Super. July 2, 2015), which hold that a nonreliance provision must clearly state that the parties disclaim reliance upon extra-contractual statements. Drafters seeking to limit claims should include an integration clause, a no-extra contractual representations provision and a clear anti-reliance provision (that covers misrepresentations and omitted information). Fraud Exceptions When drafting fraud exceptions to exclusive remedy provisions or otherwise creating contractual exceptions for fraud, drafters should be mindful to specify that the fraud claims they mean to preserve are those based only on contractual representations, not on extracontractual representations or omissions. 43

44

45 Samuel T. Hirzel, Esq. Proctor Heyman Enerio LLP (302)

46 8 Del. C. Section 262 provides the statutory process for a judicial determination of the fair value of the shares of a Delaware corporation that is a party to certain types of M&A transactions. 8 Del. C. Section 262 has two main components: (1)Perfection of Appraisal Rights, and (2) Valuation. 46

47 Shareholder does not vote in favor of the merger and demands appraisal. Shareholder can withdraw demand and receive the merger consideration for 60 days after the effective date of the merger if they have not commenced or joined an appraisal action. Shareholder does not need to separately file a petition to become part of a quasi-class. Typical course of litigation with fact discovery and expert discovery culminating in a battle of the experts (and their foundations) trial. Claims of breach of fiduciary duty in connection with the transaction giving rise to the appraisal may be pursued together with the appraisal. Entire fairness turns on fair process and fair price, and therefore there is significant overlap on the price component. 47

48 The appraisal petitioner is entitled to a proportionate share of the fair value in the going concern on the date of the merger but is not entitled to elements of value arising from the accomplishment or expectation of the merger, e.g., synergies. DGCL grants the Court significant discretion to determine the fair value of the shares and take into account all relevant factors. Historical preference for discounted cash flow analysis ( DCF ) based valuations using contemporaneous management projections, but comparable transactions and comparable company analyses are also traditionally accepted approaches. The Delaware Supreme Court has specifically rejected any presumption in favor of the merger consideration as evidence of fair value in an appraisal action even if it was the result of an arms -length negotiation. Golden Telecom, Inc. v. Global FT Ltd., 11 A.3d 214 (Del. 2010). A number of recent cases, however, have given this data point greater weight absent evidence of a tainted process. 48

49 Costs appraisals are expensive. Fees fee shifting is rarely granted. Time it could take years for resolution. Security Petitioner is an unsecured creditor and bears the company s credit risk. Uncertainty the appraised value could be higher or lower than the merger consideration. 49

50 Transkaryotic decision In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL (Del. Ch. May 2, 2007) (opening the door for investors to buy into an appraisal action by upholding appraisal rights for shareholders who acquired shares after the record date, so long as the number of shares for which appraisal is sought does not exceed the total number of street name shares held by the record holder that were not voted in favor of the transaction). Trends Economic trends lead to increased holdings in the hands of institutional investors. Observed trend of event driven funds buying into and filing appraisal actions. See Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of Public Company M&A, 92 Wash U. L. Rev at Figures 1 & 3 ( ) (see next two slides). 50

51 51

52 52

53 Characterizing buying into an appraisal action shortly after announcement of a merger as unseemly. Describing appraisal arbitrage as a ploy to obtain statutory interest rate in a low interest rate environment. Noting appraisal arbitrage threatens deal certainty and creates risk for buyers. 53

54 The Council of the Corporation Law Section of the Delaware State Bar Association ( the Council ) forms a Subcommittee in February The Subcommittee s purpose is to study appraisal arbitrage and the desirability of amending Section 262 including whether to eliminate or modify the statute to address appraisal arbitrage. 54

55 Chief Justice Strine chided appraisal critics at the annual Tulane conference criticizing arguments of appraisal arbitrage critics as overblown. Fried Frank M&A Briefing New Activist Weapon, The Rise of Delaware Appraisal Arbitrage: A Survey of Cases and Some Practical Implications, % %20TOC%20Memo%20- %20New%20Activist%20Weapon-- %20The%20Rise%20of%20Delaware%20Appraisal%20Arbitrage. pdf Kobi Kastiel, Why Delaware Appraisal Awards Exceed the Merger Price, 55

56 In March 2015, the Subcommittee released an explanatory paper for its proposed amendments relating to (a) a de minimis exception and (b) an option to tender undisputed amounts to the petitioner and limit the accrual of interest. Explanatory Paper titled Section 262 Appraisal Amendments (Mar. 6, 2015). The explanatory paper also provided an explanation for the proposals the Council did not recommend including the Council s decision not to recommend amendments to limit appraisal arbitrage. 56

57 The De Minimis Exception: A proposed amendment to 262(g) that would permit the Court to dismiss an appraisal proceeding if the shares are listed on a national exchange and either: (1) the total number of shares does not exceed one percent of the shares entitled to appraisal, or (2) the value of the consideration provided in the merger or consolidation for such total number of shares is less than one million dollars. A Corporation s Option to Pay and Limit the Accrual of Interest: A proposed amendment to Section 262(h) would permit corporations to limit the accrual of interest on appraisal awards by allowing a corporation to pay a sum of money (of its choosing) to the appraisal petitioners in advance. Interest at the statutory rate of 5 percent over the Federal Reserve discount rate would only accrue on a judicial award that exceeds the amount the corporation paid to the appraisal petitioners in advance. 57

58 The Council ultimately concluded appraisal arbitrage does not upset the balance between corporations ability to engage in valueenhancing transactions and stockholders rights to dissent and seek appraisal and does not encourage frivolous litigation. 58

59 In April 2015, a group of law firms Cravath, Davis Polk, Latham, Skadden, Simpson Thacher, Sullivan & Cromwell and Wachtell that typically represents parties in M&A deals sends a letter to Council (perhaps with the Delaware legislature as the intended audience) challenging the Council s findings. Korsmo & Myers article defends appraisal as shareholder litigation where the merits actually matter and defending appraisal arbitrage as reassuring and a form of beneficial specialization by players with skin in the game. Charles R. Korsmo & Minor Myers, Shareholder Litigation that Works New York Times (Apr. 16, 2015). 59

60 Council elected not to introduce the proposed amendments to the Delaware General Assembly in

61 61

62 In re Appraisal of Dole Food Company, Inc., 114 A.3d 541 (Del. Ch. 2014). Vice Chancellor Laster grants motion to compel internal valuations from institutional investor petitioners. Rejects view of this material as lay opinion. Grants fees to respondent on the grounds that the failure to provide discovery was not substantially justified. Concludes that contemporaneous views of sophisticated parties dealing with real money are relevant and admissible in connection with squaring often divergent expert opinions and may temper the adversarial hyperbole that inevitably influences and expert s opinion in valuation proceedings. 62

63 In re Appraisal of Ancestry.com., Inc., 2015 WL 66825, (Del. Ch. Jan. 5, 2015); Merion Capital LP v. BMC Software, Inc., 2015 WL 67586, (Del. Ch. Jan. 5, 2015). Vice Chancellor Glasscock declines to impose share-tracing requirements or other obligations on the beneficial stockholder, continuing to require only of the record owner that it perfect appraisal rights by not voting in favor of the deal and making a timely demand for appraisal, thus facilitating appraisal arbitrage. 63

64 In re Appraisal of Dell, Inc., 2015 WL (Del. Ch. July 13, 2015). Results in the dismissal of close to a million shares from the Dell appraisal case where the shareholder duly noticed their appraisal demands but whose stock certificates were re-titled before the effective date of the merger to their own custodians names. Vice Chancellor Laster noted if it were up to him the stockholder of record in the appraisal statute would include the DTC participant list, not just Cede. The Court noted it was not the intention to undercut the practice of appraisal arbitrage, explaining it was not clear to me why the law should treat a stockholders right to seek an appraisal differently than how it treats other rights In a market economy, the ability to transfer property is generally thought to be a good thing; it allows the property to flow to the highestvaluing bidder, thereby increasing societal wealth. Id. at

65 Mannix v. PlasmaNet, Inc., 2015 WL (Del. Ch. July 21, 2015). Chancellor Bouchard held the Court can approve a settlement between surviving company and non-appearing dissenters who did not file or join in appraisal action even if those terms are not made available to all dissenters who perfected appraisal rights. 65

66 In re Appraisal of Ancestry.com, Inc., 2015 WL (Del. Ch. Jan. 30, 2015) (electing to defer to the deal price even after Vice Chancellor Glasscock conducted DCF analysis and finds a valuation close to the deal price). Huff Fund Investment P ship v. CKx, Inc., 2013 WL (Del. Ch. Nov. 1, 2013) aff d 2015 WL (Del. Feb. 12, 2015) (affirming the Court of Chancery has discretion to use the merger consideration as an indicator of fair value). Merlin Partners LP v. AutoInfo, Inc., 2015 WL (Del. Ch. Apr. 30, 2015) (Vice Chancellor Noble rejects DCF based on management projects that were not used in the ordinary course of business, but that were prepared for the investment bankers in favor of the negotiated merger price) LongPath Capital, LLC v. Ramtron Int'l Corp., 2015 WL (Del. Ch. June 30, 2015) (relying on the merger price even after Vice Chancellor Parsons noted the projections were unreliable, notwithstanding their propriety, and concluding fair value was below deal price due to synergies that are not available to an appraisal petitioner). Merion Capital LP v. BMC Software, Inc., 2015 WL (Del. Ch. Oct. 21, 2015) (relying on merger price generated in the market even after a vigorous sales process as evidence of fair value even after Vice Chancellor Glasscock conducted his own DCF analysis and lamenting wildly divergent expert opinions as to value). 66

67 In re Dole Food Co., Inc. S holder Litig., 2015 WL (Del. Ch. Aug. 27, 2015) The Court awarded a 20% premium based on strong findings of fraud by buyer / chairman and CEO. Court concluded that the decision likely renders the appraisal proceeding moot. Owen v. Cannon, 2015 WL (Del. Ch. June 17, 2015). Chancellor Bouchard s first appraisal opinion awarding a 60% premium over deal price. Bucking the trend of relying on the merger price reverting to DCF. Rejecting post-hoc projections in favor of contemporaneous management projections. 67

68 Continued possibility of proposed Anti-Transkaryotic amendments to prohibit appraisal for shares purchased after the record date. Submission of the Council s proposed amendments to the legislature regarding a de minimis exception and partial tender to limit the accrual of statutory interest. Continued trend of rejection of contemporaneous management projections in favor of the negotiated price in untainted auctions. Synergies when rely on merger price. Effect of Fed rate increases. Contingency fees. 68