fiduciary duty issues in m&a transactions - Jackson Walker LLP

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Byron F. EganBiographical InformationJackson Walker L.L.P. Phone: (214) 953-5727901 Main Street, Suite 6000 Email: began@jw.comDallas, Texas 75202Practice: Byron F. Egan is a partner of Jackson Walker L.L.P. in Dallas. He is engaged in a corporate,partnership, securities, mergers and acquisitions (“M&A”) and financing practice. Mr. Egan has extensiveexperience in business entity formation and governance matters, M&A and financing transactions in a widevariety of industries including energy, financial and technology. In addition to handling transactions, headvises boards of directors and their audit, compensation and special committees with respect to fiduciaryduty, Sarbanes-Oxley Act, special investigation and other issues.Involvement: Mr. Egan is a Vice Chair of the M&A Committee of the American Bar Association and servedas Co-Chair of its Asset Acquisition Agreement Task Force, which wrote the Model Asset PurchaseAgreement with Commentary (2001). Mr. Egan is a member of the American Law Institute and is a formerChairman of the Texas Business Law Foundation, of which he is currently a director and executive committeemember. He is also a former Chairman of the Business Law Section of the State Bar of Texas, and formerChairman of that section’s Corporation Law Committee. On behalf of these groups, Mr. Egan has beeninstrumental in the drafting and enactment of many Texas business entity and other statutes.Publications: Mr. Egan writes and speaks about the areas in which his law practice is focused, and is afrequent author and lecturer regarding M&A, corporations, partnerships, limited liability companies,securities laws, and financing techniques. Mr. Egan has written or co-authored the following law journalarticles: Corporate Governance: Responsibilities of Officers and Directors under Texas and Delaware Law,XXVI Corporate Counsel Review 1 (May 2007); Entity Choice and Formation: Choice of Entity DecisionTree After Margin Tax and Texas Business Organizations Code, 42 Texas Journal of Business Law 171(Spring 2007); Choice of Entity Alternatives, 39 Texas Journal of Business Law 379 (Winter 2004); Choice ofState of Incorporation – Texas Versus Delaware: Is it Now Time to Rethink Traditional Notions, 54 SMULaw Review 249 (Winter 2001); M & A: Asset Acquisitions: A Colloquy, X U. Miami Business Law Review145 (Winter/Spring 2002); Securities Law: Major Themes of the Sarbanes-Oxley Act, 42 Texas Journal ofBusiness Law 339 (2009); Communicating with Auditors After the Sarbanes-Oxley Act, 41 Texas Journal ofBusiness Law 131 (Fall 2005); The Sarbanes-Oxley Act and Its Expanding Reach, 40 Texas Journal ofBusiness Law 305 (Winter 2005); Congress Takes Action: The Sarbanes-Oxley Act, XXII Corporate CounselReview 1 (May 2003); and Legislation: The Role of the Business Law Section and the Texas Business LawFoundation in the Development of Texas Business Law, 41 Texas Journal of Business Law 41 (Spring 2005).Education: Mr. Egan received his B.A. and J.D. degrees from the University of Texas. After law school, heserved as a law clerk for Judge Irving L. Goldberg on the United States Court of Appeals for the Fifth Circuit.Honors: For over ten years, Mr. Egan has been listed in The Best Lawyers in America under Corporate, M&Aor Securities Law. He won the Burton Award for Legal Achievement in 2005, 2006 and 2008. Mr. Egan hasbeen recognized as one of the top corporate and M&A lawyers in Texas by a number of publications,including Corporate Counsel Magazine, Texas Lawyer, Texas Monthly, The M&A Journal (which profiledhim in 2005) and Who’s Who Legal.www.jw.com (214) 953-5727 began@jw.com4650454v.1
TABLE OF CONTENTSPageI. Introduction. ........................................................................................................................1II. Corporate Fiduciary Duties Generally. ...............................................................................2A. General Principles....................................................................................................2B. Applicable Law........................................................................................................4C. Fiduciary Duties in Texas Cases..............................................................................71. Loyalty. ........................................................................................................8a. Good Faith. ......................................................................................8b. Self-Dealing Transactions................................................................8c. Oversight..........................................................................................92. Care..............................................................................................................9a. Business Judgment Rule; Gross Negligence....................................9b. Reliance on Reports. ......................................................................11c. Charter Limitations on Director Liability. .....................................113. Other (obedience).......................................................................................11D. Fiduciary Duties in Delaware Cases......................................................................121. Loyalty. ......................................................................................................12a. Conflicts of Interest........................................................................12b. Good Faith. ....................................................................................13c. Oversight/Caremark.......................................................................15d. Candor............................................................................................282. Care............................................................................................................31a. Business Judgment Rule; Informed Action; Gross Negligence.....31b. Business Judgment Rule Not Applicable When Board Conflicted.32c. Inaction. .........................................................................................34d. Reliance on Reports and Records. .................................................34e. Limitation on Director Liability.....................................................34E. Fiduciary Duties of Officers. .................................................................................35F. Derivative Actions. ................................................................................................36G. Effect of Sarbanes-Oxley Act of 2002 on Common Law Fiduciary Duties. .........441. Overview....................................................................................................442. Shareholder Causes of Action....................................................................453. Director Independence. ..............................................................................45a. Power to Independent Directors.....................................................45b. Audit Committee Member Independence......................................51c. Nominating Committee Member Independence............................54d. Compensation Committee Member Independence........................55e. State Law. ......................................................................................564. Compensation. ...........................................................................................60a. Prohibition on Loans to Directors or Officers. ..............................60b. Stock Exchange Requirements. .....................................................62c. Fiduciary Duties.............................................................................635. Related Party Transactions. .......................................................................635446095v.1i
Page 1: FIDUCIARY DUTY ISSUES IN M&A TRANSA
Page 5 and 6: VII.C. The Board’s Consideration.
Page 10 and 11: In re Countrywide Financial Corpora
Page 12 and 13: Greater Southwest Community Hospita
Page 14 and 15: In re LNR Property Corp. Shareholde
Page 16 and 17: Paramount Communications, Inc. v. T
Page 18 and 19: Spiegal v. Buntrock, 571 A.2d 767 (
Page 20 and 21: I. Introduction.FIDUCIARY DUTY ISSU
Page 22 and 23: concepts of those duties in both Te
Page 24 and 25: It is essential to distinguish betw
Page 26 and 27: C. Fiduciary Duties in Texas Cases.
Page 28 and 29: director’s capacity with a second
Page 30 and 31: . Reliance on Reports.Directors may
Page 32 and 33: directors in office. In Delaware, a
Page 34 and 35: Moreover, these claims, if successf
Page 36 and 37: exemption from liability contained
Page 38 and 39: committee had considered, but faile
Page 40 and 41: conscious disregard for their respo
Page 42 and 43: Shortly thereafter, in In Re Citigr
Page 44 and 45: investment will be different that e
Page 46 and 47: designed to subject directors, even
Page 48 and 49: In another case later in 2007, Chan
Page 50 and 51: access to that Blockbuster informat
Page 52 and 53:
The Supreme Court found that the pl
Page 54 and 55:
E. Fiduciary Duties of Officers.Und
Page 56 and 57:
Board, 121 a disinterested Board wo
Page 58 and 59:
In Delaware, “in order to cause t
Page 60 and 61:
objectively pursue on the corporati
Page 62 and 63:
claims in Delaware, the fact that t
Page 64 and 65:
expressly permitted by state corpor
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These independent directors will be
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(3) NASDAQ. NASD Rule 4350(c)(1) re
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independence is intended to cover e
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The NYSE Audit Committee Charter Pr
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the committee is required by the be
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interest in the matter, and is cons
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Delaware draws a distinction betwee
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categories of personal loans by an
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c. Fiduciary Duties.In approving ex
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§ 21.418 mirrors these clarificati
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DGCL § 102(b)(7) in effect permits
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In 1985, Texas followed Delaware’
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In Texas a corporation’s director
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Owing fiduciary duties to the “wh
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It is well established that the dir
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In the intervening period, the Dela
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the trustee, or a representative of
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the CEO called only upon his “lon
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against the directors. The company
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entire fairness of transaction; (2)
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y the Delaware Supreme Court on Aug
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acquisition would be sufficient, wh
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naturally concerned that they be fu
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an officer; (d) in negotiating his
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Decisions from the Delaware Supreme
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elevantly, “for acts or omissions
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§ 141(e), which permits corporate
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facts that, if true, would show tha
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to provide them with protection aga
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Delaware has no public policy inter
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The Chancellor dismissed claims con
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three particular types of Board mal
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There is an important distinction b
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nature of a grant of stock options,
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7. Teachers’ Retirement System of
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arrangements, which placed the burd
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C. Non-Profit Corporations.The comp
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Grasso’s level of compensation an
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Given the extent of Delaware case l
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traditional conflict of interest wa
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and the merger was not a change in
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concluded that it would not be appr
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2. Being Adequately Informed.Althou
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“proof is materially enhanced . .
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committee should be formed prior to
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Retention of legal and financial ad
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eing active and being informed are
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contingently paid and possibly inte
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committee member, relying on advice
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offer represented a 45% premium ove
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However, the Chancery Court faulted
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summary judgment on what amounts to
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tried to negotiate better terms; th
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• When the Revlon duties become a
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stockholders by aggressively demand
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its burden of proving the entire fa
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(1) In Van Gorkom, 483 the Trans Un
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measures to protect against a hosti
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F. The Pursuit of a Sale.When a boa
Page 184 and 185:
The evidence that will support a fi
Page 186 and 187:
The plaintiff stockholders claimed
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agreements were in line with those
Page 190 and 191:
than, of course, its $350 million s
Page 192 and 193:
the directors themselves, taking in
Page 194 and 195:
Company to have declined the reques
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a statutory issue. The clear implic
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provisions in favor of one suitor p
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consequence, the board may find it
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6. Specific Cases Where No-Shops, L
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Electronics. 591 The merger agreeme
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eak-up fee of approximately 1% of t
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(being adequately informed and unde
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The record reflects that the defens
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The Court of Chancery determined th
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prospect of another bankruptcy. WCI
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uyer). After the Energy Partners Me
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defensive mechanisms to thwart an a
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H. Postponement of Stockholder Meet
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Federal courts applying Texas law h
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C. Business Combination Statutes.Bo
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affiliated shareholder if the trans
Page 228 and 229:
In analyzing cases involving negoti
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B. In re Emerging Communications, I
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Supreme Court has found that the ap
Page 234 and 235:
after signing the settlement agreem
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The Merger Agreement prohibits the
Page 238 and 239:
expected cash flows. Thus, I will e
Page 240 and 241:
technique was used in different mar
Page 242 and 243:
are being asked to make an importan
Page 244 and 245:
negotiate exclusively with Eisner (
Page 246 and 247:
and then digesting another company,
Page 248 and 249:
obtaining antitrust clearance, beca
Page 250 and 251:
stapled financing and would be comp
Page 252 and 253:
The plaintiffs recognize this reali
Page 254 and 255:
their fiduciary duties of care by h
Page 256 and 257:
share for Bear Stearns stock, a fig
Page 258 and 259:
shareholders therefrom, depended on
Page 260 and 261:
company found itself. No other bidd
Page 262 and 263:
willing to move forward without gov
Page 264 and 265:
without any specific preordained re
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if the directors did not recommend
Page 268 and 269:
But our case law does not do much t
Page 270 and 271:
other information concerning, any o
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corporation, at least without speci
Page 274 and 275:
There is, however, an exception in
Page 276 and 277:
In Gantler, the Court in effect hel
Page 278 and 279:
otherwise provides, no resolution b
Page 280 and 281:
appraisal rights, pointing out that
Page 282 and 283:
Delaware law does not extend apprai
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Thus, stated generally, DGCL § 262
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4. Valuation under DGCL.The DGCL es
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shareholder who fails to comply wit
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dissenting shareholder’s shares b
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2. Loyalty. The duty of loyalty req
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appellation. 864 Since TRPA and the
Page 296 and 297:
The Tex. LP Stats. state in part th
Page 298 and 299:
Unlike DRLPA, under Tex. LP Stats.,
Page 300 and 301:
Members in a Member-managed LLC to
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provisions that expressly emphasize
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Persons who control Members can be
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Appendix ASUMMARY OF THE SARBANES-O
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conceal a record or document so as
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generally accepted accounting princ
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of the second business day followin
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management of the issuer,” and SO
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audits into the auditors’ assessm
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Criminal and Civil Sanctions. SOX m
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Vocabulary.“At-the-money” optio
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announcements that the filing of SE
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Consequences. Backdating of options
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the options. The staff understands
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• Misleading SEC Filings. The res
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§ 409A, options that were in the m
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condition the closing of the transa
Page 334 and 335:
claims related to options backdatin
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Possible Illegal Acts. Auditors who
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egistration statement under the 193
Page 340 and 341:
Disclosure is also be required wher
Page 342 and 343:
meaningful comparisons from company
Page 344 and 345:
• What specific items of corporat
Page 346 and 347:
Compensation Discussion and Analysi
Page 348 and 349:
Summary Compensation Table: All Oth
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• Commuting expenses;• Discount
Page 352 and 353:
• Value realized on exercise of o
Page 354 and 355:
• Although not required, tabular
Page 356 and 357:
• By specific category or type, a
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