Mergers & Acquisition Law News - A Quarterly Recap Of Merger Law News

NEWS FROM THE COURTS

Refinement re "Don't Ask, Don't Waive" Standstill Agreements

The Delaware Court of Chancery has issued another ruling on "Don't Ask, Don't Waive" standstill agreements. These provisions prohibit bidders from requesting a target to waive standstill restrictions in order to permit the bidder to submit a higher bid. Chancellor Strine found that Don't Ask, Don't Waive Standstills can be a breach of the board's fiduciary duties in an auction unless they are considered by the Board on an informed basis (for example, as part of a planned strategy to elicit a "best and final" offer from all bidders participating in an auction).

This ruling offers a helpful refinement of the state of the law following the Court of Chancery's November ruling in In Re Complete Genomics. As we reported in the last edition of the Ropes Recap, Vice Chancellor Laster's ruling in Genomics called into question the enforceability of Don't Ask, Don't Waive Standstills generally. However, Chancellor Strine read the Genomics ruling as fact-specific, and observed that "there is a role that bench opinions play, and I don't think it's to make per se rules." In Strine's view, Don't Ask, Don't Waive Standstills are potent enough in restricting the bidding process that they can easily cause a board to violate its fiduciary duties, but whether the board actually violated its duties is a fact-specific inquiry. For more in-depth information about this case from Ropes & Gray attorneys, see our January 8 Client Alert. (In Re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS (Del. Ch. Dec. 17, 2012))

In a related development, the Superior Court of the State of Washington in Snohomish County denied a shareholder plaintiff's request for an injunction on a shareholder vote for a merger between Honeywell and Intermec. The Washington Court acknowledged the Delaware cases regarding Don't Ask, Don't Waive standstill provisions. However, instead of applying Delaware law, the Court conducted a fact-specific inquiry and ultimately concluded that the only parties who signed standstill provisions containing a Don't Ask, Don't Waive provision were not serious bidders and therefore were unlikely to have submitted subsequent higher bids. While this ruling was narrowly tailored, it does show the risk of inconsistent outcomes as complex corporate governance issues are adjudicated outside of Delaware. (In re Intermec, Inc. S'holder Litig., No. 12-2-01841-1 (Wash. Super. Ct. Mar. 15, 2013))

Proposed Delaware "Medium-Form Merger" To Create an Alternative to Top-Up Options

There is currently proposed legislation before the Corporation Law Section of the Delaware State Bar Association concerning amendments to the DGCL. Among these proposed amendments is the addition of a "medium-form merger" procedure which would obviate the need for a stockholder vote for a back-end merger following a public tender or exchange offer. Currently, the only way for a corporation to avoid the shareholder vote requirement is to undergo a short-form merger which requires the acquisition of 90% of the target's outstanding stock, which is often accomplished by the issuance of stock to the acquirer after the closing of the tender offer through a so-called "top-up option". The proposed legislation provides that stockholders of a target corporation whose shares are listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the signing of the merger agreement would not have to authorize the back-end merger if: (1) the merger agreement states it is governed by the new procedure and the merger is to be effected as soon as practicable following the consummation of a qualifying tender or exchange offer; (2) an acquirer consummates a tender or exchange offer for all of the outstanding stock of the target corporation, on the terms provided in the merger agreement, which would otherwise have been subject to a shareholder vote; (3) following the completion of the offer, the acquirer owns at least the percentage of the stock of the target corporation that would otherwise be required to approve the merger under the DGCL and the target's certificate of incorporation; (4) the acquirer is not an "interested stockholder" (as defined in Section 203 of the DGCL) of the target corporation; and (5) the shares of the target corporation that are canceled in the back-end merger are converted into the right to receive the same consideration paid for shares in the tender or exchange offer. The prohibition on the acquirer being an "interested stockholder" applies regardless of whether the target corporation has waived the Section 203 takeover defense, making this type of merger applicable only to true third-party merger scenarios. The effect of this legislation would be to eliminate the need to satisfy the short-form merger 90% ownership requirement to substantially reduce costs and delay associated with a stockholder vote and to eliminate the need for "dual-track" structuring in acquisitions, whereby acquirers undertake a friendly tender offer and commence the proxy solicitation / shareholder meeting process at the same time to try to speed up acquisition process. If enacted, the proposed amendment would become effective on August 1, 2013. (An Act to Amend Title 8 of the Delaware Code Relating to the General Corporation Law, § 6 (2013))

Court Rejects Settlement of Transatlantic Deal Litigation

On February 28, Chancellor Strine refused to approve a proposed settlement of the deal litigation challenging Alleghany Corporation's 2012 acquisition of Transatlantic Holdings, Inc. ("Transatlantic"). The litigation settled when Transatlantic agreed to make limited supplemental disclosures. The shareholders subsequently approved the transaction, with 99.85% of the voting shares voted in favor. Chancellor Strine had two major issues with the proposed settlement. First, plaintiffs' counsel was unable "to explain in any rational way why the disclosures that they had obtained were in any meaningful way of utility to someone voting on the merger." As a result he concluded that the supplemental disclosures were inadequate consideration for a class-wide release. Second, he concluded that the lead plaintiffs were inadequate class representatives. Both lead plaintiffs were individual shareholders, and neither held a substantial stake in Transatlantic (one lead plaintiff held only held two shares). Neither lead plaintiff could remember how, or even whether, they had voted on the transaction. Thus, Chancellor Strine stated that he did not "have any confidence . . . that there was a real plaintiff behind this monitoring counsel."

Chancellor Strine expressed sympathy for the defendants, whom he acknowledged faced an "imponderable situation" and had responded by issuing immaterial supplemental disclosures to settle unmeritorious claims. However, he noted that the court has a paramount duty to "look out for the class." This decision exemplifies the real concerns that many M&A defendants face when seeking to resolve deal litigation. There continues to be a real risk that the courts will not approve disclosure only settlement terms in some situations. (In Re Transatlantic Holdings, Inc. Shareholders Litigation, C.A. No. 6574-CS (Del. Ch. Feb. 28, 2013))

Chancery Confirms Contractual Waiver of Fiduciary Duties in Delaware Limited Partnerships

In Gerber v. EPE Holdings, the Delaware Court of Chancery dismissed an action that attempted to circumvent the provisions of a Delaware limited partnership agreement. The LP agreement provisions waived fiduciary duty claims in favor of explicit contractual obligations.

In 2009, the partnership, EPE, purchased units of another partnership, Tepco LP, for approximately $1.1 billion. The GPs of both EPE and Tepco were controlled by the same family. Just two years earlier, another entity controlled by the same family had purchased units of Tepco for a much lower per unit price. The sale to EPE implied a more than tripling in value of Tepco in that time. The plaintiff challenged the transaction on behalf of EPE unit-holders, alleging that EPE's purchase of Tepco units was at an inflated price that advantaged the controlling family, and claiming that the transaction was not "fair and reasonable" as required by the LP agreement. Defendants argued that the "fair and reasonable" standard was met by obtaining a "Special Approval" provided for in the LP agreement, in which three independent directors on a "Conflicts Committee" would approve the transaction. That committee was only required by the LP agreement to act "in good faith."

The Plaintiff argued that the Conflicts Committee could not have acted in...