Recent Developments in
Delaware Law
Stephen P. Lamb, Partner
Paul, Weiss, Rifkind, Wharton & Garrison LLP
500 Delaware Ave., Suite 200
Wilmington, DE 19899
(302) 655-4411
2010 OFII General Counsel Conference
Washington, D.C.
Overview
I.
Arbitration in the Court of Chancery
II.
Revlon (2010)
III. In re CNX Gas Corp.
IV. Top-Up Options
V.
Proxy Access & Delaware Law
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I.
Arbitration in the Court of Chancery
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Arbitration in the Court of Chancery
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Commenced by filing petition:
– Petition must set forth the nature of the dispute, parties, claims and remedies
sought.
– At least one party must be a Delaware business entity.
If claim is for monetary damages, amount in controversy must be specified and must
exceed $1 million.
The Chancellor appoints an arbitrator from among the judges and masters of the
Court of Chancery.
A consent to arbitrate included in an agreement is acceptable if it contains the
following language:
– "The parties agree that any dispute arising under this agreement shall be
arbitrated in the Court of Chancery of the State of Delaware, pursuant to 10 Del.
C. § 349."
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Arbitration in the Court of Chancery (cont'd)
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Proceedings are not part of the Chancery docket and remain confidential, unless
appealed to the Supreme Court of Delaware.
– Arbitration proceedings are appealed directly to the Supreme Court of Delaware.
Arbitration hearing occurs within 90 days of receipt of petition.
Proceedings are private and only parties and their representatives are permitted to
attend.
At any stage, the parties may agree to submit the matter for mediation in the Court of
Chancery.
Arbitrator is ineligible to adjudicate any subsequent litigation arising from the issues
raised in the petition.
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II. Revlon (2010)
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Revlon (2010)
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In In re Revlon, Inc. S'holders Litig., 2010 WL 985732 (Del. Ch. March 16, 2010), the
Court of Chancery replaced lead counsel for plaintiffs in a class action suit because
"plaintiffs' counsel failed to litigate the case adequately."
The court excoriated plaintiffs' lead counsel for failing to provide adequate
representation. The court contrasted the strength of the substantive claims with the
weakness of the prosecution of the claims.
– "The docket establishes that Old Counsel has acted only when there was a
dispute over control of the case and Old Counsel's path to a fee."
The court, therefore, replaced lead counsel:
– "Taking this conduct as a whole, I conclude that Old Counsel has not provided
adequate representation. This conclusion provides a sufficient grounding to
replace Old Counsel."
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III. In re CNX Gas Corp.
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In re CNX Gas Corp.
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CONSOL Energy Inc. owned approximately 80% of CNX Gas Corp., which was
formerly wholly-owned by CONSOL.
CONSOL proposed a tender offer to purchase the 16.5% of CNX stock not held by
CONSOL or the directors and officers of CONSOL and CNX.
T. Rowe Price held 6.3% of the stock of CNX and 6.5% of the stock of CONSOL.
CONSOL negotiated with T.Rowe Price for an agreement by T. Rowe Price to tender
its shares in the offer.
CNX formed a special committee of one director to evaluate the tender offer:
– Special committee did not have right to negotiate or consider alternatives.
– Special committee sought price increase, but price was not increased.
– Special committee remained neutral on tender offer.
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In re CNX Gas Corp.
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The court held that entire fairness applied because there were not protections at both
the board and stockholder levels
– "To receive business judgment review, such a transaction with the controlling
stockholder must be conditioned on (1) the recommendation of a fully functioning
special committee of disinterested and independent directors and (2) approval of
the transaction by a majority of the minority stockholders, which condition shall
be non-waivable."
The court was somewhat troubled by the potential conflict of T.Rowe Price because it
held stakes in both the target and acquiror and thus would not suffer from an
underpayment, but the court declined to make a definitive ruling on the preliminary
record.
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IV. Top-Up Options
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Top-Up Options
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Tender offers with top-up options have become commonplace. Olson v. ev3, Inc.
and In re Cogent, Inc. S'holder Litig. provide comfort that top-up options are
acceptable under Delaware law.
In Olson v. ev3, Inc., the Court of Chancery ruled on a motion to expedite litigation
relating to Covidien plc's acquisition of ev3, Inc. The acquisition was structured as a
tender offer with a top-up option.
– Top-up option
• Exercisable for the number of shares that, when added to tendered shares,
would result in Covidien holding 90% and enabling it to complete a short
form merger.
• Consideration was to be paid in cash equal to the aggregate par value with
the remainder paid in the form of a promissory note equal to the aggregate
value of the number of shares to be purchased (calculated at the offer price)
less the aggregate par value.
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Top-Up Options (cont’d)
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Plaintiffs attacked the top-up option on the basis that the shares may dilute the value
that could be attained in an appraisal. This could coerce stockholders into tendering.
The court granted the motion to expedite to address the issue, but suggested that this
issue could be addressed ex ante by an agreement that the consideration for and
shares issued in connection with the top-up option could be disregarded for appraisal
purposes.
Olson settled before a decision was reached, but the Court of Chancery addressed
the issue shortly thereafter in In re Cogent, Inc. S'holder Litig.
In Cogent, the court held that the inclusion of an agreement to disregard the top-up
option shares and consideration adequately addressed any coercion. The agreement
was that, "the fair value of the Appraisal Shares shall be determined in accordance
with § 262 without regard to the Top-Up Option, the Top-Up Option Shares or any
promissory note delivered by the Merger Sub."
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Top-Up Options (cont’d)
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In addition, the court in Cogent held that, based on testimony of a director, the board
was sufficiently informed about the operation of the top-up option to satisfy its
statutory duties under Sections 152, 153 and 157 of the DGCL.
The court also noted that the minimum tender condition in the offer required that a
majority of shares outstanding be tendered and that this condition could not be
waived without the target board's consent.
In addition, as a practical matter, the acquiror would have to receive a majority of the
minority outstanding shares.
Plaintiffs also alleged that the top-up option was a sham transaction because the note
given as consideration for the top-up option shares would never be collected upon,
but the court held that, consistent with Section 157, absent fraud the board has the
power to set the consideration payable for an option. No fraud had been alleged and,
"giving due respect to the corporate form," the note obligation would be an obligation
until it was nullified.
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V. Proxy Access & Delaware Law
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Proxy Access & Delaware Law
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Relationship of Delaware law to Proxy Access
– Due to the current stay of 14a-11, proxy access is unlikely to be an issue this
proxy season.
– Current SEC position is that stockholders must comply with Rule 14a-11 and a
company's advance notice bylaws. Rule 14a-11 is intended to be an avenue
through which stockholders exercise their state law right to nominate, but is not
intended to displace that right and related obligations that are consistent with
state law.
– Thus, if a stockholder nomination does not satisfy the state law advance notice
requirement, the nomination cannot proceed through the proxy access regime.
– In addition, directors must still meet state law based director qualifications in
order to be seated on the board.
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Revlon; Rights Plans
Stephen Fraidin, Partner
Kirkland & Ellis LLP
601 Lexington Avenue
New York, NY 10022
(212) 446-4840
2010 OFII General Counsel Conference
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Revlon Duties Revisited
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“Go shop” transactions
– Topps case
– Duration of shopping
– “Excluded Parties”
– Right to match
– Breakup fee
– Tender offers
– Why so few topping bids
Forgo v. Health Grades (CA 5716 Del. Ch. Sept 3, 2010)
– All cash tender offer by a PE firm
• Injunction denied
• Probability that target violated its Revlon duties
– No presigning market check
– No “go shop”
– Standard breakup fee
– 2 step deal – 30 days
– Likely that Chairman and CFO to continue / had a relationship with PE firm
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Dollar Thrifty Shareholder Litigation (Del. Ch. Sept 8, 2010)
Hertz to buy DT
– 5.5% premium ($41)
– No shop
– Matching right
– Antitrust divestitures
– 3.9% breakup fee and RTF
– Avis makes topping bid ($46.50), without committing to antitrust divestitures
– Avis was not invited to bid against Hertz
Revlon duties complied with:
– Bird in hand
– Board thought Avis not in position to bid
– Board tried to get highest price
– Hard bargaining
– Price near top of DCF
– No Avis RTF
– Value is not value if it is not ultimately paid
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Developments in Rights Plans
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Yucaipa American v. Riggio (Del. Ch. August 11, 2010)
– Yucaipa bought 18% of Barnes & Noble Stock
– Rights plan with 20% trigger
– Riggio was grandfathered at 30%
Entire fairness review not applicable since grandfathering Riggio did not constitute a
special benefit to him
No Blasius problem since shareholders not disenfranchised
Reasonably perceived threat of a creeping acquisition with no control premium
Proportionate response
Ebay v. Newmark (Del. Ch. Sept. 9, 2010)
– Rights plan adopted by privately held company – craigslist
– Ebay could not buy more shares or sell its shares to third parties
– Court rejected the “culture” touchy feely argument
– Rights plan ordered rescinded
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Developments in Rights Plans (cont’d)
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Selectica v. Versata (Del. Ch. Feb. 26, 2010)
– NOL rights plan (Sec. 382)
– Valid corporate objectives
– 4.9% trigger
– Versata refused to sign a standstill if it were exempted
– Upheld
Atmel Shareholder Litigation (Del. Ch. May 19, 2009)
– All cash offer to buy Atmel
– Amendment to rights plan
• 20% to 10%
• beneficial ownership includes derivatives
– Plaintiff claimed the amendment was too vague
• Lack of an objective calculation regarding trigger
• “Beneficial ownership” too unclear
• What is a “derivative”?
• Offer had been revoked; injunction denied
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