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

The Delaware Code subjects directors and officers of Delaware corporations to personaljurisdiction in the Delaware Court of Chancery over claims for violation of a duty in theircapacities as directors or officers of Delaware corporations. 20 Texas does not have a comparablestatute.20merger in which the preferred stock was converted into cash but the corporation survived); see also Matulich v. AegisCommunications Group, Inc., 942 A.2d 596 (Del. 2008) (where certificate of designation of preferred stock providedthat holders of the preferred stock had no voting rights but had the right of approval and consent prior to any merger,the holders of the preferred stock did not have any statutory right to vote on a merger, but had only a distinguishablecontractual right to approve of and consent to mergers; thus since plaintiff’s preferred stock was not entitled to vote onthe merger, the holder of over 90% of the stock entitled to vote on the merger could approve a short form merger underDGCL § 253 and does not have to establish the entire fairness of the merger). In contrast, in Elliott Assocs. v. AvatexCorp., 715 A.2d 843 (Del. 1998), the certificate of incorporation provision expressly gave preferred stockholders aclass vote on the “amendment, alteration or repeal, whether by merger, consolidation or otherwise” of provisions of thecertificate of incorporation so as to adversely affect the rights of the preferred stock, and preferred stock was convertedinto common stock of the surviving corporation of a merger. The Court in Elliott, for purposes of its opinion, assumedthat the preferred stock was adversely affected, distinguished Warner because the charter contained the “whether bymerger, consolidation or otherwise” language, and held that the preferred stock had a right to a class vote on the mergerbecause the adverse effect was caused by the repeal of the charter and the stock conversion. The Court in Elliottcommented that the “path for future drafters to follow in articulating class vote provisions is clear”: “When acertificate (like the Warner certificate or the Series A provisions here) grants only the right to vote on an amendment,alteration or repeal, the preferred have no class vote in a merger. When a certificate (like the First Series Preferredcertificate here) adds the terms ‘whether by merger, consolidation or otherwise’ and a merger results in an amendment,alteration or repeal that causes an adverse effect on the preferred, there would be a class vote.” Id. at 855. SeeBenchmark Capital Partners IV, L.P. v. Vague, 2002 Del. Ch. LEXIS 90, at *25 (Del. Ch. July 15, 2002) (“[A court’sfunction in ascertaining the rights of preferred stockholders] is essentially one of contract interpretation.”), aff’d subnom. Benchmark Capital Partners IV, L.P. v. Juniper Fin. Corp., 822 A.2d 396 (Del. 2003); and Watchmark Corp. v.Argo Global Capital, LLC, et al, C.A. 711-N (Del. Ch. November 4, 2004). (“Duties owed to preferred stockholdersare ‘primarily . . . contractual in nature,’ involving the ‘rights and obligations created contractually by the certificate ofdesignation.’ If fiduciary duties are owed to preferred stockholders, it is only in limited circumstances. Whether agiven claim asserted by preferred stockholders is governed by contractual or fiduciary duty principles, then, depends onwhether the dispute arises from rights and obligations created by contract or from ‘a right or obligation that is not byvirtue of a preference but is shared equally with the common.’”)Under Texas law and unless the charter otherwise provides, approval of a merger or other fundamental businesstransaction requires the affirmative vote of the holders of two-thirds of (i) all of the corporation’s outstanding sharesentitled to vote voting as a single class and (ii) each class entitled to vote as a class or series thereon. TBOC § 21.457;TBCA art. 5.03.F. Separate voting by a class or series of shares of a corporation is required by TBOC § 21.458 andTBCA art. 5.03.E for approval of a plan of merger only if (a) the charter so provides or (b) the plan of merger containsa provision that if contained in an amendment to the charter would require approval by that class or series under TBOC§ 21.364 or TBCA art. 4.03, which generally require class voting on amendments to the charter which change thedesignations, preferences, limitations or relative rights or a class or series or otherwise affect the class or series inspecified respects. Unless a corporation’s charter provides otherwise, the foregoing Texas merger approvalrequirements (but not the charter amendment requirements) are subject to exceptions for (a) mergers in which thecorporation will be the sole survivor and the ownership and voting rights of the shareholders are not substantiallyimpaired (TBOC § 21.459(a); TBCA art. 5.03.G), (b) mergers affected to create a holding company (TBOC §§ 10.005,21.459(b); TBCA art. 5.03.H – 5.03.K), and (c) short form mergers (TBOC §§ 10.006, 21.459(b); TBCA art. 5.16.A –5.16.F).The California courts, however, tend to uphold California statutes against internal affairs doctrine challenges. SeeFriese v. Superior Court of San Diego County, 36 Cal. Rptr. 3d 558 (Cal. Ct. App. 2005), in which a California courtallowed insider trading claims to be brought against a director of a California based Delaware corporation and wrote“while we agree that the duties officers and directors owe a corporation are in the first instance defined by the law ofthe state of incorporation, such duties are not the subject of California’s corporate securities laws in general or[Corporate Securities Law] section 25502.5 in particular…. Because a substantial portion of California’s marketplaceincludes transactions involving securities issued by foreign corporations, the corporate securities laws have beenconsistently applied to such transactions.”10 Del. C. § 3114(a) and (b) provide (emphasis added):(a) Every nonresident of this State who after September 1, 1977, accepts election or appointment asa director, trustee or member of the governing body of a corporation organized under the laws of this5446095v.16