December 2014 – Duane Morris Delaware Business Law

December 23, 2014December 30, 2014 by Richard L. Renck

Delaware Supreme Court Issues Important Revlon Reminder

On December 19, 2014, the Supreme Court of Delaware issued an engaging opinion reminding readers of the historical origins of the Revlon doctrine in Delaware corporate jurisprudence and reversing the Court of Chancery’s grant of preliminary injunctive relief because it was based on an erroneous view of the doctrine’s requirements. In C&J Energy Services, Inc., et al. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, No. 655/657, 2014 (December 19, 2014), the Supreme Court reversed a mandatory preliminary injunction the Court of Chancery issued requiring C&J Energy Services, Inc. (“C&J”) to “go shop” itself after finding that a failure to shop the company either before or after the transaction made it “plausible” that the court would find a violation of the Revlon doctrine.

While deal-makers will find the opinion an interesting read for the discussion of a fairly unique deal structure, important to understanding the Supreme Court’s discussion of Revlon duties are the following salient facts: (1) the board was majority independent; (2) none of the directors had any prior relationship with the deal partner; and (3) C&J bargained hard for significant corporate governance concessions that inured to the benefit of the C&J stockholders. The corporate governance concessions included, among other things, a commitment in the by-laws of the new entity (which would be majority owned by the transaction partner for tax and purposes of domestication in Bermuda) that in the event of a future sale of the company, all shareholders would share equally and ratably in the proceeds of any such transaction.

Given the key facts noted, the Supreme Court found that “[a]lthough the record before us reveals a board process that sometimes fell short of ideal, Revlon requires us to examine whether a board’s overall course of action was reasonable under the circumstances as a good faith attempt to secure the highest value reasonably attainable.” The Supreme Court noted that “as the years go by, people seem to forget that Revlon was largely about a board’s resistance to a particular bidder and its subsequent attempts to prevent market forces from surfacing the highest bid.” Given that re-focus on the historical foundation for Revlon duties, the Supreme Court recited the following regarding the proper focus of a Revlon analysis:

Not only did the Court of Chancery fail to apply the appropriate standard of review, its ruling rested on an erroneous understanding of what Revlon requires. Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the [company’s] CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engaged in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable.

But Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, there is not single blueprint that a board must follow to fulfill its duties, and a court applying Revlon’s enhanced scrutiny must decide whether the directors made a reasonable decision, not a perfect decision.

In a series of decisions in the wake of Revlon, Chancellor Allen correctly read its holding as permitting a board to pursue the transaction it reasonably views as the most valuable to stockholders, so long as the transaction is subject to an effective market check under the circumstances in which any bidder interested in paying more has a reasonable opportunity to do so. Such a market check does not have to involve an active solicitation, so long as interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal. The ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context. (internal quotations omitted and italics in original)

This is an important opinion given its reminder that there are many ways for a board to satisfy its Revlon duties so long as the actions taken are reasonably calculated to achieve the best value reasonably attainable for the shareholders. The key factor, however, will be the Court’s assessment of the likelihood that superior alternative proposals–if any are available–had a fair opportunity to percolate to the top, and the board maintained the ability to present those alternatives to the shareholders.

December 16, 2014 by Richard L. Renck

“Per Capita” v. “Per Share” Voting in Agreements–Words Matter

In Salamone, et al. v. Gorman, No. 343, 2014 (Del. Dec. 9. 2014), the Supreme Court of Delaware writes for nearly 60 pages sorting out contradictory provisions in a voting agreement that was supposed to clearly spell out the rights of various investors and investor groups to elect directors to the board. It did not, and the Court was forced to resolve ambiguities in the document that made it unclear whether directors were to be elected and removed on a “per share” or a “per capita” basis by different classes of investors.

The voting agreement at issue intended to set forth a scheme by which, among other things, (1) one independent director was to be designated by “the majority of holders of the Series A Preferred Stock, and (2) two directors were to be “elected by the Key Holders,” who were defined in the agreement. The potential ambiguity in the wording of the director election provisions came to the fore when compared to the director removal clause which provided, in material part, that the removal of the two types of directors noted would only be valid where “such removal is directed or approved by the affirmative vote of the Person, or of the holders of more than fifty percent (50%) of the then outstanding Shares entitled under Section 1.2 to designate that director.”

The litigation centered upon the efforts of one of the stockholders, who controlled a majority of the voting shares, to single-handedly remove and replace the independent director and the two directors to be elected by the Key Holders based on that majority voting power. Such power would follow from a “per share” voting scheme. The opposing parties, however, argued that the voting agreement was designed to disaggregate voting power and to give particular investors an equal voice in selecting directors to represent their respective class of equity. Thus, they argued that the voting agreement set forth a “per capita” scheme pursuant to which the majority shareholder had just one of several votes, and thus must convince a majority of the individual investors that either held Series A Preferred or who were Key Holders to support his nominees.

After employing a host of contractual interpretation devices, the Supreme Court ultimately found that (1) the “majority of the holders” language regarding the independent director’s election referred to a “per share” basis for election and removal, and (2) that the Key Holders elected and removed their representative directors on a “per capita” basis. In so ruling, the Supreme Court’s decision seems to turn on two important points. First, the Supreme Court found that the election and removal provisions should be read as setting forth the same–rather than contradictory–methods for the election and removal of directors. Second, the Court applied the judicial presumption under Delaware law that, absent clear and convincing evidence to the contrary, the Court will not infer an intent to disenfranchise a majority stockholder by recognizing that “[a] court ought not to resolve doubts in favor of disenfranchisement.”

This facts presented in this case, and the Supreme Court’s efforts to bring order to the voting agreement’s terms, show that terms like “majority of the holders” can be ambiguous in application and that carefully considering such provisions can avoid the troubles presented in this litigation.

December 12, 2014 by Richard L. Renck

A Bit About Break-up Fees in M&A

In In re Comverge, Inc. Shareholders Litig., C.A. No. 7368-VCP, a decision on a motion to dismiss by Court of Chancery, Vice Chancellor Parsons provided practitioners and clients with a thorough and helpful analysis (essentially a road-map) of how the Court of Chancery reviews challenges to third-party sale transactions, that are approved by a disinterested board, under the enhanced scrutiny of Revlon. In addition to the primer on a Revlon analysis, the opinion is worth a read for its discussion of what the Court considers the outer bounds for break-up fees. The Vice Chancellor allowed claims challenging the break-up fees in this transaction to go forward because, when viewed in the aggregate, they could total north of 11% of the equity value. For purposes of this motion, the Vice Chancellor accepted the plaintiff’s argument that a convertible note held by the buyer, if converted, could add more than $3 million to the purchase price if another bidder emerged, and thus should be considered an enhancer of the termination fees. The Vice Chancellor held he could not dismiss this claims because it is reasonably conceivable that the plaintiffs might be able to show that this decision by the board was so far out of bounds as to be only explainable as “bad faith”—and thus not exculpable under a Section 102(b)(7) exculpatory clause.