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

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a. Stock Exchanges. ...........................................................................63b. Interested Director Transactions —TBOC § 21.418; TBCA Art.2.35-1; and DGCL § 144. ..............................................................63H. Contractual Limitation of Corporate Fiduciary Duties..........................................651. Limitation of Director Liability. ................................................................662. Renunciation of Corporate Opportunities..................................................673. Interested Director Transactions................................................................68III. Shifting Duties When Company on Penumbra of Insolvency. .........................................69A. Insolvency Can Change Relationships...................................................................69B. When is a Corporation Insolvent or in the Vicinity of Insolvency? ......................72C. Director Liabilities to Creditors.............................................................................74D. Business Judgment Rule/DGCL § 102(b)(7) During Insolvency..........................83E. Deepening Insolvency............................................................................................86F. Conflicts of Interest................................................................................................90G. Fraudulent Transfers. .............................................................................................90IV.Executive Compensation Process......................................................................................90A. Fiduciary Duties.....................................................................................................90B. Specific Cases. .......................................................................................................911. Walt Disney. ..............................................................................................91a. Facts. ..............................................................................................92b. May 28, 2003 Chancery Court Opinion.........................................92c. September 10, 2004 Chancery Court Opinion (Ovitz’ FiduciaryDuties Regarding His Employment Agreement). ..........................92d. August 9, 2005 Chancery Court Post Trial Opinion......................93e. June 8, 2006 Supreme Court Opinion............................................952. Integrated Health........................................................................................993. Sample v. Morgan....................................................................................1024. Ryan v. Gifford. .......................................................................................1055. In re Tyson Foods, Inc. Consolidated Shareholder Litigation.................1086. Desimone v. Barrows...............................................................................1137. Teachers’ Retirement System of Louisiana v. Aidinoff ..........................1158. Valeant Pharmaceuticals v. Jerney ..........................................................1159. In Re Citigroup Inc. Shareholder Derivative Litigation ..........................118C. Non-Profit Corporations. .....................................................................................119V. Standards of Review in M&A Transactions....................................................................121A. Texas Standard of Review. ..................................................................................121B. Delaware Standard of Review. ............................................................................1231. Business Judgment Rule. .........................................................................1232. Enhanced Scrutiny. ..................................................................................124a. Defensive Measures.....................................................................124b. Sale of Control. ............................................................................1253. Entire Fairness. ........................................................................................127C. Action Without Bright Lines. ..............................................................................127VI. M&A Transaction Process. .............................................................................................128A. Statutory Framework: Board and Shareholder Action........................................128B. Management’s Immediate Response. ..................................................................1295446095v.1ii
VII.C. The Board’s Consideration. .................................................................................1291. Matters Considered. .................................................................................1302. Being Adequately Informed.....................................................................131a. Investment Banking Advice.........................................................131b. Value of Independent Directors, Special Committees.................132c. Significant Recent Process Cases. ...............................................139D. Value of Thorough Deliberation..........................................................................158E. The Decision to Remain Independent..................................................................1591. Judicial Respect for Independence...........................................................1602. Defensive Measures.................................................................................162F. The Pursuit of a Sale............................................................................................1631. Value to Stockholders..............................................................................1632. Ascertaining Value...................................................................................1643. Process Changes.......................................................................................1694. Disparate Treatment of Stockholders.......................................................1755. Protecting the Merger. .............................................................................178a. No-Shops......................................................................................179b. Lock-ups ......................................................................................181c. Break-Up Fees. ............................................................................1826. Specific Cases Where No-Shops, Lock-ups, and Break-Up FeesHave Been Invalidated.............................................................................1837. Specific Cases Where No-Shops, Lock-ups and Break-Up FeesHave Been Upheld. ..................................................................................1848. Post Signing Market Check/“Go-Shop”. .................................................187G. Dealing with a Competing Acquiror....................................................................1881. Fiduciary Outs..........................................................................................189a. Omnicare, Inc. v. NCS Healthcare, Inc. ......................................189b. Orman v. Cullman........................................................................193c. Optima International of Miami, Inc. v. WCI Steel, Inc. ..............194d. Energy Partners, Ltd. v. Stone Energy Corp................................196e. Johnson & Johnson v. Guidant Corp. ..........................................1972. Level Playing Field..................................................................................1983. Match Rights............................................................................................1994. Best Value................................................................................................200H. Postponement of Stockholder Meeting to Vote on Merger. ................................201Responses to Hostile Takeover Attempts........................................................................202A. Certain Defenses. .................................................................................................202B. Rights Plans. ........................................................................................................202C. Business Combination Statutes............................................................................2051. DGCL § 203.............................................................................................2052. Texas Business Combination Statutes. ....................................................206VIII. Going Private Transactions .............................................................................................207A. In re Pure Resources Shareholders Litigation......................................................207B. In re Emerging Communications, Inc. Shareholders Litigation ..........................211C. In re PNB Holding Co. Shareholders Litigation..................................................212D. In re SS&C Technologies, Inc. Shareholder Litigation .......................................2145446095v.1iii
Page 1 and 2: FIDUCIARY DUTY ISSUES IN M&A TRANSA
Page 3: TABLE OF CONTENTSPageI. Introductio
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
Page 66 and 67:
These independent directors will be
Page 68 and 69:
(3) NASDAQ. NASD Rule 4350(c)(1) re
Page 70 and 71:
independence is intended to cover e
Page 72 and 73:
The NYSE Audit Committee Charter Pr
Page 74 and 75:
the committee is required by the be
Page 76 and 77:
interest in the matter, and is cons
Page 78 and 79:
Delaware draws a distinction betwee
Page 80 and 81:
categories of personal loans by an
Page 82 and 83:
c. Fiduciary Duties.In approving ex
Page 84 and 85:
§ 21.418 mirrors these clarificati
Page 86 and 87:
DGCL § 102(b)(7) in effect permits
Page 88 and 89:
In 1985, Texas followed Delaware’
Page 90 and 91:
In Texas a corporation’s director
Page 92 and 93:
Owing fiduciary duties to the “wh
Page 94 and 95:
It is well established that the dir
Page 96 and 97:
In the intervening period, the Dela
Page 98 and 99:
the trustee, or a representative of
Page 100 and 101:
the CEO called only upon his “lon
Page 102 and 103:
against the directors. The company
Page 104 and 105:
entire fairness of transaction; (2)
Page 106 and 107:
y the Delaware Supreme Court on Aug
Page 108 and 109:
acquisition would be sufficient, wh
Page 110 and 111:
naturally concerned that they be fu
Page 112 and 113:
an officer; (d) in negotiating his
Page 114 and 115:
Decisions from the Delaware Supreme
Page 116 and 117:
elevantly, “for acts or omissions
Page 118 and 119:
§ 141(e), which permits corporate
Page 120 and 121:
facts that, if true, would show tha
Page 122 and 123:
to provide them with protection aga
Page 124 and 125:
Delaware has no public policy inter
Page 126 and 127:
The Chancellor dismissed claims con
Page 128 and 129:
three particular types of Board mal
Page 130 and 131:
There is an important distinction b
Page 132 and 133:
nature of a grant of stock options,
Page 134 and 135:
7. Teachers’ Retirement System of
Page 136 and 137:
arrangements, which placed the burd
Page 138 and 139:
C. Non-Profit Corporations.The comp
Page 140 and 141:
Grasso’s level of compensation an
Page 142 and 143:
Given the extent of Delaware case l
Page 144 and 145:
traditional conflict of interest wa
Page 146 and 147:
and the merger was not a change in
Page 148 and 149:
concluded that it would not be appr
Page 150 and 151:
2. Being Adequately Informed.Althou
Page 152 and 153:
“proof is materially enhanced . .
Page 154 and 155:
committee should be formed prior to
Page 156 and 157:
Retention of legal and financial ad
Page 158 and 159:
eing active and being informed are
Page 160 and 161:
contingently paid and possibly inte
Page 162 and 163:
committee member, relying on advice
Page 164 and 165:
offer represented a 45% premium ove
Page 166 and 167:
However, the Chancery Court faulted
Page 168 and 169:
summary judgment on what amounts to
Page 170 and 171:
tried to negotiate better terms; th
Page 172 and 173:
• When the Revlon duties become a
Page 174 and 175:
stockholders by aggressively demand
Page 176 and 177:
its burden of proving the entire fa
Page 178 and 179:
(1) In Van Gorkom, 483 the Trans Un
Page 180 and 181:
measures to protect against a hosti
Page 182 and 183:
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
Page 188 and 189:
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
Page 196 and 197:
a statutory issue. The clear implic
Page 198 and 199:
provisions in favor of one suitor p
Page 200 and 201:
consequence, the board may find it
Page 202 and 203:
6. Specific Cases Where No-Shops, L
Page 204 and 205:
Electronics. 591 The merger agreeme
Page 206 and 207:
eak-up fee of approximately 1% of t
Page 208 and 209:
(being adequately informed and unde
Page 210 and 211:
The record reflects that the defens
Page 212 and 213:
The Court of Chancery determined th
Page 214 and 215:
prospect of another bankruptcy. WCI
Page 216 and 217:
uyer). After the Energy Partners Me
Page 218 and 219:
defensive mechanisms to thwart an a
Page 220 and 221:
H. Postponement of Stockholder Meet
Page 222 and 223:
Federal courts applying Texas law h
Page 224 and 225:
C. Business Combination Statutes.Bo
Page 226 and 227:
affiliated shareholder if the trans
Page 228 and 229:
In analyzing cases involving negoti
Page 230 and 231:
B. In re Emerging Communications, I
Page 232 and 233:
Supreme Court has found that the ap
Page 234 and 235:
after signing the settlement agreem
Page 236 and 237:
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
Page 266 and 267:
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
Page 272 and 273:
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
Page 284 and 285:
Thus, stated generally, DGCL § 262
Page 286 and 287:
4. Valuation under DGCL.The DGCL es
Page 288 and 289:
shareholder who fails to comply wit
Page 290 and 291:
dissenting shareholder’s shares b
Page 292 and 293:
2. Loyalty. The duty of loyalty req
Page 294 and 295:
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
Page 302 and 303:
provisions that expressly emphasize
Page 304 and 305:
Persons who control Members can be
Page 306 and 307:
Appendix ASUMMARY OF THE SARBANES-O
Page 308 and 309:
conceal a record or document so as
Page 310 and 311:
generally accepted accounting princ
Page 312 and 313:
of the second business day followin
Page 314 and 315:
management of the issuer,” and SO
Page 316 and 317:
audits into the auditors’ assessm
Page 318 and 319:
Criminal and Civil Sanctions. SOX m
Page 320 and 321:
Vocabulary.“At-the-money” optio
Page 322 and 323:
announcements that the filing of SE
Page 324 and 325:
Consequences. Backdating of options
Page 326 and 327:
the options. The staff understands
Page 328 and 329:
• Misleading SEC Filings. The res
Page 330 and 331:
§ 409A, options that were in the m
Page 332 and 333:
condition the closing of the transa
Page 334 and 335:
claims related to options backdatin
Page 336 and 337:
Possible Illegal Acts. Auditors who
Page 338 and 339:
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
Page 350 and 351:
• 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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