Chancery Court Declines to Dismiss Caremark Claim Arising from Botox Sales
The Delaware Court of Chancery found that plaintiffs’ allegations that the board of directors of Allergan, Inc. (“Allergan”) knowingly approved and oversaw a business plan that required company employees to market Allergan’s Botox product for uses that were not approved by the Food and Drug Administration (the “FDA”) stated a claim for breach of fiduciary duty. In so finding, the Court concluded that plaintiffs’ success in stating a claim that corporate fiduciaries knowingly caused the corporation to commit illegal acts to obtain profits was attributable to plaintiffs’ use of a Section 220 books and records demand, which demand permitted plaintiffs to obtain materials reviewed by Allergan’s board that promoted the marketing of Botox for non-FDA approved uses. According to the Court, only the extremely rare complaint will be able to establish the necessary linkage between the occurrence of illegal conduct (in this case, off-label marketing of Botox) and board level action without having referred to internal corporate documents. The Court noted that because plaintiff cannot otherwise seek “discovery” at the pleading stage, the Section 220 action is plaintiff’s key “tool at hand” for obtaining the particularized facts necessary for a complaint to survive a motion to dismiss. See slip op. at p. 51 n. 22.
The Court also addressed whether a Rule 23.1 dismissal (for failure to make a demand or plead demand futility) has preclusive effect on a subsequent derivative action brought by a different plaintiff. Contrary to the Chancery Court decision in In re Career Educ. Corp. Derivative Litig., C.A. No. 1398-VCP (Del. Ch. Sept. 28, 2007), the Court held that the earlier Rule 23.1 dismissal does not have preclusive effect because, as the earlier Rule 23.1 decision itself established, the prior plaintiff lacked authority to sue on behalf of the corporation and therefore was not in privity with the corporation or its other stockholders.
Chancery Court Finds Delivery of Notice on a Stockholder Representative Is Effective as to All Stockholders
Document: Pryor v. IAC/InterActiveCorp, C.A. No. 6884-CS (Del. Ch. June 7, 2012)
The Delaware Court of Chancery held that the delivery of notice of an arbitral award to a person appointed as a stockholder representative under a stockholders’ agreement was effective notice as to the other stockholder parties to the agreement. The stockholders’ agreement did not contain an express provision designating the stockholder representative as the other stockholders’ attorney-in-fact for all matters arising under the agreement. However, the stockholders’ agreement did confer exclusive authority on the stockholder representative to decide whether and when to exercise, on behalf of all stockholder parties to the agreement, the put right at issue in this case. In addition, the stockholders’ agreement granted the stockholder representative the exclusive role to act on behalf of the other stockholders in valuation and arbitration proceedings arising from the exercise of the put right. Accordingly, the Court found that service of notice of an arbitral award on the stockholder representative was effective notice on all stockholder parties for purposes of determining the timeliness of plaintiff’s challenge to an arbitral award arising from the stockholder representative’s exercise of the put right.
Paul v. Delaware Coastal Anesthesia, LLC, C.A. No. 7084-VCG (Del. Ch. May 29, 2012)
Document: Paul v. Delaware Coastal Anesthesia, LLC, C.A. No. 7084-VCG (Del. Ch. May 29, 2012)
The Delaware Court of Chancery dismissed plaintiff’s claim that an action by written consent of three of the four members of Delaware Coastal Anesthesia, LLC (“Coastal”) was ineffective to remove him as a member. Coastal’s operating agreement provided that a member could be removed upon the “vote” of members holding a seventy-five percent interest in Coastal provided that notice was given. Plaintiff argued that the use of the word “vote” and the requirement of notice in Coastal’s operating agreement effectively supplanted the statutory default rule allowing action by written consent. Specifically, Section 18-302 of the Delaware Limited Liability Company Act provides that action may be taken by written consent of members without a meeting, without notice and without a vote “unless otherwise provided in [the] limited liability company agreement[.]” The Court disagreed with plaintiff.
Delaware Supreme Court Affirms Chancery Court’s Dismissal of Section 220 Action
Central Laborers Pension Fund v. News Corp., C.A. No. 682, 2011 (Del. May 29, 2012)
The Delaware Supreme Court affirmed the Chancery Court’s dismissal of plaintiff’s action to inspect the books and records of defendant News Corporation (“News Corp.”), under Section 220, but found that the Chancery Court should not have addressed whether plaintiff had shown a proper purpose for making an inspection demand prior to resolving whether plaintiff’s demand complied with Section 220’s procedural standing requirements.
In March 2011, Central Laborers Pension Fund (“Central Laborers”) delivered a demand letter to News Corp. requesting to inspect books and records relating to News Corp.’s proposed acquisition of Shine Group Limited. However, the letter contained several critical errors. First, the demand letter specified that Central Laborers was seeking to inspect the books and records of Viacom Inc., not News Corp. In addition, the demand letter identified Central Laborers as the beneficial owner of 14,110 News Corp. shares, but failed to attach evidence of Central Laborer’s beneficial ownership of such shares as required by Section 220. The Chancery Court did not address these procedural deficiencies when defendant subsequently moved to dismiss the Section 220 action. Instead, the Court dismissed plaintiff’s Section 220 action for failure to state a proper purpose because plaintiff filed a derivative action subsequent to filing the Section 220 action and thereby conceded that a books and records inspection was unnecessary.
On appeal, the Delaware Supreme Court found that the Chancery Court should not have resolved the motion to dismiss on a substantive issue prior to considering whether Central Laborers’ demand complied in form and manner with Section 220. According to the Court, Section 220’s procedural requirements ensure the maintenance of a proper balance between the interests of stockholders and the interests of corporate management. Accordingly, the Court affirmed the Chancery Court’s decision dismissing plaintiff’s Section 220 action, but on the alternative basis that Central Laborers did not establish its standing to inspect News Corp.’s books and records.
Chancery Court Finds That an Operating Agreement Did Not Supplant Statutory Default Permitting Action by Written Consent
Chancery Court Approves Settlement Subject to Objectors Making a Topping Bid
The Delaware Court of Chancery determined that it would enter an order approving a proposed settlement of a long-running derivative action in 60 days unless objectors to the settlement posted a bond in the amount of the value of the proposed settlement ($13.25M) and applied to take over the case prior to such time. If the objectors posted the bond, pursued the underlying derivative claims and recovered less than $13.25 million, then the nominal defendant would have the ability to execute on the bond for the amount of the shortfall. The Court explained that its novel approach was intended to balance the risk of losing the settlement against the possibility that the settlement consideration was inadequate.
Chancery Court Enjoins Proxy Contest and Hostile Takeover
Document: Martin Marietta Materials, Inc. v. Vulcan Materials Co., C.A. No. 7102-CS (Del. Ch. May 4, 2012)
The Delaware Court of Chancery enjoined Martin Marietta Materials, Inc. (“Marietta”) from prosecuting a proxy contest and pursuing a hostile bid for Vulcan Materials Company (“Vulcan”) for a period of four months because Marietta breached a confidentiality agreement with Vulcan. The confidentiality agreement did not contain a standstill provision and had expired the day before the Court’s decision.
Marietta and Vulcan are industry rivals and had discussed a business combination many times over the years. In the interest of keeping their discussions confidential, Marietta and Vulcan entered into a non-disclosure agreement (the “NDA”) in May 2010. After friendly negotiations stalled, Marietta launched a hostile takeover bid and proxy contest in December 2011. In this action, Vulcan alleged that Marietta breached the NDA, inter alia, by (1) using protected information in formulating its hostile bid, (2) disclosing confidential information in public filings by unilaterally invoking an exclusion in the NDA for legally required disclosures in a manner which was inconsistent with the NDA’s notice and consent process, and (3) disclosing confidential information to journalists and financial analysts covering its hostile bid. Although the Court found the NDA to be ambiguous as to whether the actions described in (1) and (2) above were actually prohibited, the Court found in favor of Vulcan after reviewing the extrinsic evidence in the case to determine the meaning of the NDA. Next, the Court considered how to remedy Marietta’s breach of the NDA. Although the NDA did not contain a standstill provision, the Court found that the balance of the equities favored the issuance of a limited injunction—Marietta would be thwarted from running a proxy contest and its hostile bid would be delayed for some minimum period of time during which Vulcan’s protected information could not be used to forcibly effect a transaction.
Chancery Court Declines to Dismiss Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing
Document: JPMorgan Chase & Co. v. American Century Companies, Inc., C.A. No. 6875-VCN (Del. Ch. Apr. 26, 2012)
The Delaware Court of Chancery found that JPMorgan Chase & Co. (“JPMorgan”) stated a claim for breach of the implied covenant of good faith and fair dealing by American Century Companies, Inc. (“American Century”) in connection with the repurchase by American Century of American Century stock owned by JPMorgan. In 1998, JPMorgan made a $900 million equity investment in American Century, a privately-held company. The relationship quickly soured. As part of a settlement agreement, JPMorgan gave American Century the right to repurchase its shares at their fair market value as determined by third-party appraiser Duff & Phelps (“D&P”). In July 2011, American Century purported to exercise its repurchase option.
Thereafter, JPMorgan initiated this action challenging American Century’s exercise of its repurchase right as set forth in the repurchase agreement. According to JPMorgan, American Century violated the terms of the repurchase agreement, inter alia, by failing to provide D&P with the requisite information to value certain claims held by American Century against JPMorgan pursuant to an arbitration proceeding (the “Arbitration Claims”). The Court rejected JPMorgan’s argument and found that the repurchase agreement did not expressly address what information D&P was required to consider in valuing American Century. However, the Court did find that JPMorgan stated a claim for violation of the implied covenant of good faith and fair dealing. According to the Court, it was reasonable for JPMorgan to presume that American Century would be providing D&P with the information necessary to value its shares, which included information regarding the value of the Arbitration Claims.
Chancery Court Expedites Action Seeking to Enjoin the Enforcement of An Advance Notice Bylaw
Document: Icahn Partners LP v. Amylin Pharmaceuticals, Inc., C.A. No. 7404-VCN (Del. Ch. Apr. 20, 2012)
The Delaware Court of Chancery granted plaintiffs’ motion to expedite an action seeking to enjoin the enforcement of an advance notice bylaw in connection with the annual meeting of defendant Amylin Pharmaceuticals, Inc. (“Amylin”). Plaintiff Icahn Partners Master Fund LP and affiliates (collectively, “Icahn”) argued that Amylin’s board should be enjoined from enforcing the bylaw because Amylin radically altered the course of the company’s future and its stockholders’ expectations by rejecting, without considering, an acquisition proposal from Bristol-Myers Squibb Company (“Bristol-Myers”) after the advance notice deadline had passed. According to plaintiffs, the outlook for the company had been tied to securing a value-maximizing transaction, and Amylin’s stockholders would be irreparably harmed if they were denied the opportunity to vote on a slate of directors that would pursue a potential sale of the company at a premium. The defendants argued, inter alia, that plaintiffs had not stated a claim for breach of fiduciary duty and therefore the action should not be expedited. The Court found that the narrow issue on the motion for expedite was not whether the board was structurally unassailable, but whether the board’s refusal to engage in negotiations with Bristol-Myers was so misaligned with the expectations of Amylin’s stockholders that it warranted the reopening of the nomination process. The Court found that plaintiffs had met their burden of proof and expedited the action.
Chancery Court Denies Defendants’ Motion To Dismiss Revlon Claims
Document: In re Answers Corp. S’holder Litig., C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012)
The Delaware Court of Chancery declined to dismiss a complaint alleging that the directors of Answers Corporation (“Answers”) breached their fiduciary duties under Revlon in connection with the acquisition of Answers by an affiliate of the private equity firm Summit Partners L.P. (“Summit”), on the basis that a majority of the members of Answers’ board were either interested in the merger or had acted in bad faith in approving the merger. Prior to the merger, Answers’ President and CEO, Robert Rosenschein, held one board seat, and Redpoint Ventures (“Redpoint”), Answers’ largest stockholder, controlled two seats. The remaining five seats on the board were held by unaffiliated directors.
Plaintiffs alleged that Answers’ board approved the merger at an inadequate price and using an inadequate process to accommodate Redpoint’s desire for liquidity. Answers’ stock was thinly traded which made it difficult for Redpoint to sell its 30% interest absent a sale of the entire company. According to the plaintiffs, Redpoint threated to replace Answers’ entire management team, including Rosenschein, if Answers was not sold quickly. Redpoint facilitated a meeting with Summit in March 2010, and Answers focused its sales efforts almost solely on Summit, with the exception of a two-week market check period that coincided with the December holidays. Plaintiffs argued that the market check was wholly inadequate because, inter alia, Answers’ financial and operating performance had steadily been improving since the time of Summit’s initial bid, but those results had not yet been disclosed publicly. In other words, the market and potential bidders did not have a complete picture of the company’s financial position.
The Court found that the plaintiffs had stated a claim for breach of the duty of loyalty as applied in a transaction implicating Revlon. Specifically, the complaint alleged that: (1) Rosenschein was interested in the merger because he would lose his job if a sale were not consummated; (2) the Redpoint directors were interested in the merger because the merger furthered their employer’s need for liquidity; and (3) the remaining members of the board approved the sales process in bad faith because they knew that Summit’s offer undervalued the company.
Chancery Court Declines to Remove Sitting Director Prior to the Adjudication of Claims Against Him
Document: Shocking Technologies, Inc. v. Michael, C.A. No. 7164-VCN (Del. Ch. April 10, 2012)
The Delaware Court of Chancery dismissed a claim brought by Shocking Technologies, Inc. (“Shocking”) against one of its directors seeking the director’s removal from Shocking’s board of directors by the Court prior to an adjudication of liability for breach of the fiduciary duty of loyalty. Under Section 225(c) of the Delaware General Corporation Law (“Section 225(c)”), the Delaware Court of Chancery is empowered to remove a director of a corporation if such director has been found by “prior judgment on the merits” to have breached his fiduciary duty of loyalty. Plaintiff argued, and the Court did not completely reject the proposition, that the Court had the inherent equitable power to remove a director for a breach of fiduciary duty in an action not brought in accordance with Section 225(c). However, the Court found that the action before it was not so unusual or pressing that it would be inclined to exercise any inherent equitable powers (if they existed) to remove a sitting director who had not been adjudicated liable of any wrongdoing. The Court also noted in a footnote that there was significant authority for the proposition that it not have the power to remove a sitting director other than as granted by statute.
Court of Chancery Upholds Contractual Modification of Fiduciary Duties in Limited Partnership Context
The Delaware Court of Chancery dismissed claims that, inter alia, the general partner of a publicly-traded Delaware limited partnership, K-Sea Transportation Partners L.P. (“K-Sea”), and the general partner’s directors breached their fiduciary duties in approving a merger of K-Sea with an unaffiliated third party in which the general partner received a separate payment for certain partnership units it held exclusively. The Court found that K-Sea’s limited partnership agreement effectively eliminated the fiduciary duties of the general partner and its directors, with the exception of the duty to act in good faith. Further, the Court upheld a provision in the limited partnership agreement creating a conclusive presumption of good faith for decisions made by the general partner and its directors in reliance on expert opinions. Here, the general partner and its directors relied on a fairness opinion obtained by the general partner’s conflicts committee. Finally, the Court held that the plaintiffs could not state a claim for breach of the implied covenant of good faith and fair dealing where the defendants acted in a manner that ensured that they were entitled to a conclusive contractual presumption of good faith.
Frank v. Elgamal et al., C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012)
Document: Frank v. Elgamal et al., C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012)
The Delaware Court of Chancery held that four officers (the “Control Group”) of defendant American Surgical Holdings, Inc. (“American Surgical”) collectively constituted a “controlling stockholder” in connection with American Surgical’s acquisition by a private equity fund because each member of the Control Group (which collectively held 71% of American Surgical’s voting power) agreed to vote in favor of the merger and accepted employment with, and an interest in, the surviving entity.
In December 2010, American Surgical entered into a merger agreement with Green Point Partners, I LP (“Green Point”). As in many private equity transactions, Green Point used lucrative employment agreements and equity interests in the surviving entity to incentivize key American Surgical officers (the Control Group) to stay on following the consummation of the merger. In return, the members of the Control Group agreed to vote in favor of the merger. Plaintiff alleged, inter alia, that the board and the members of the Control Group breached their fiduciary duties in approving/negotiating a merger in which insiders received a benefit not shared equally with the corporation’s remaining stockholders. Defendants moved to dismiss the complaint, inter alia, on the grounds that the plaintiff had not rebutted the business judgment presumption.
The Court disagreed with the defendants. Specifically, the Court found that (1) the Control Group constituted a controlling stockholder for the reasons identified above; and (2) mergers between a controlled corporation and an unaffiliated third party in which the controller receives an interest in the surviving entity and the minority stockholders are cashed out are subject to entire fairness review absent robust procedural protections. While the merger had been negotiated by a special committee of independent and disinterested directors, the transaction had not been subject to a majority of the minority vote. According to the Court, the procedural protections of a special committee and a majority of the minority vote are required to avoid entire fairness review.
Zimmerman v. Katherine D. Crothall et al., C.A. No. 6001-VCP (Del. Ch. Mar. 27, 2012)
Document: Zimmerman v. Katherine D. Crothall et al., C.A. No. 6001-VCP (Del. Ch. Mar. 27, 2012)
The Delaware Court of Chancery found that certain commonalities often shared by venture capital investors supported a reasonable inference that two venture capital investors in Adhezion Biomedical LLC (“Adhezion”) were a controlling stockholder group. As a result, the transactions at issue in which the investors received additional interests in Adhezion were held to be subject to entire fairness review.
Adhezion is an early-stage medical products company with two principal venture capital investors who hold preferred units: Liberty Ventures II, L.P. (“Liberty”) and Originate Ventures, LLC (“Originate” and, together with Liberty, the “VC Investors”). The VC Investors jointly possess more than 66% of Adhezion’s voting power and their representatives hold two of five seats on Adhezion’s board. Plaintiff, a co-founder and former CEO of Adhezion, alleged that Adhezion’s directors (aided and abetted by the VC Investors) breached their fiduciary duties of care and loyalty in approving a number of transactions in which the VC Investors made additional investments in the cash-strapped company on terms not offered to Adhezion’s common unitholders. The defendants moved for summary judgment on all counts.
The Court commenced by finding that plaintiff had failed to meet his burden of pleading with respect to the duty of care claims – i.e., the evidence did not show that the Adhezion board acted irrationally or recklessly in its capital raising efforts. The board contacted over 40 potential investors in a seven-month period and considered a range of funding options, including licensing deals and the sale of the entire company, before it approved the challenged transactions with the VC Investors.
However, the Court denied defendants’ motion for summary judgment on plaintiff’s duty of loyalty claims. Specifically, the Court found that the defendants had approved self-dealing transactions in which a controlling stockholder received additional equity interests in the company on terms that were not available to the common unitholders. In reaching the conclusion that the VC Investors jointly constituted a controlling stockholder, the Court focused on the fact that Originate and Liberty were Adhezion’s two largest investors, had invested in Adhezion at around the same time and each had one designee on the board. Further, the Court looked to e-mails and board minutes in which the VC Investors communicated similar concerns and solutions with respect to Adhezion’s capital raising efforts as evidence that they were acting in concert with respect to, and exercising actual control over, such efforts.
The Court also found that the challenged transaction constituted an interested transaction because a majority of the members of the board participated in the financings at issue. Accordingly, at trial, defendants would have to prove that the challenged transactions met the exacting entire fairness standard.
Chancery Court Finds Board’s Decision to Give Controller Disparate Merger Consideration Likely Violates Fiduciary Duties
Document: In re Delphi Fin. Group S’holders Litig., C.A. No. 7144-VCG (Del. Ch. Mar. 6, 2012)
The Delaware Court of Chancery found that plaintiffs had established a reasonable likelihood of success on the merits of their claims that Robert Rosenkranz (“Rosenkranz”), the controlling stockholder and founder of Delphi Financial Group (“Delphi”), breached his fiduciary duties in extracting more merger consideration for himself than for Delphi’s minority stockholders in connection with a proposed acquisition of Delphi by Tokio Marine Holdings, Inc. (“TMH”). However, the Court declined to grant plaintiffs’ request to enjoin the merger because Delphi’s minority stockholders would receive a substantial premium for their shares, no other potential purchaser had emerged, and money damages would be an available and adequate remedy.
Delphi had a dual-class structure: (1) Class A stock, held largely by public stockholders, and (2) Class B stock, held by Rosenkranz. Delphi’s certificate of incorporation required equal treatment of the Class A and Class B stock in a merger. However, Rosenkranz would not agree to any merger unless he received a control premium. As a result, the merger with Delphi was conditioned on a charter amendment being approved by stockholders that removed the equal treatment requirement. The merger was also conditioned on a vote of a majority of the minority stockholders; however, the Court found that the vote would be potentially coerced given Rosenkranz’s demand for a price differential. Although a controlling stockholder is entitled to negotiate for a control premium, the prohibition in Delphi’s post-IPO certificate of incorporation on disparate merger consideration presumably reflected that Rosenkranz had already received a control premium in connection with the sale of the Class A shares.
Accordingly, having found that the plaintiffs had established a reasonable likelihood of success on the merits of their claims, the Court turned to the issues of irreparable harm and the balance of the equities. Finding that the holders of Class A stock might suffer irreparable harm if an injunction were issued because they would lose a 76% premium, the Court denied the request for injunctive relief.
Delaware Supreme Court Affirms Superior Court Decision Interpreting Preferred Stock
Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. 442, 2011 (Del. Mar. 5, 2012)
The Delaware Supreme Court upheld the Delaware Superior Court’s decision to reject plaintiffs’ claim that they were entitled to receive their liquidation preference as holders of Series C preferred stock of Omneon, Inc. (“Omneon”) in connection with Omneon’s acquisition by Harmonic, Inc. (“Harmonic”). Plaintiffs’ Series C preferred stock had been converted into common stock the day before the merger under a forced conversion provision. In the merger, the plaintiffs received the consideration payable to holders of common stock, which was less than their liquidation preference. Plaintiffs argued that they were entitled to their liquidation preference because the conversion of their shares of Series C preferred stock into common stock was part and parcel of the merger, a “Liquidation Event,” under Omneon’s certificate of incorporation. The Superior Court disagreed.
On appeal, the Delaware Supreme Court upheld the Superior Court’s ruling for the following reasons. A “Liquidation Event” was defined by Omneon’s certificate of incorporation to include an acquisition of Omneon by any person or entity “by means of any transaction or series of related transactions” in which Omneon’s stockholders immediately prior to the transaction owned less than 50% of Omneon after the transaction. According to the Court, plaintiffs’ interpretation was unreasonable because Harmonic played no role and received no voting power in the conversion.
Chancery Court Rejects Disclosure and Revlon Claims
Document: In re Micromet, Inc. S’holders Litig., C.A. No. 7197-VCP (Del. Ch. Feb. 29, 2012)
The Delaware Court of Chancery found that plaintiffs had not shown a reasonable likelihood of success on the merits of their claims that the directors of Micromet, Inc. (“Micromet”) breached their fiduciary duties under Revlon in agreeing to be acquired by Amgen, Inc. (“Amgen”) in an all-cash, negotiated tender offer. Accordingly, the Court denied plaintiffs’ request for a preliminary injunction.
Micromet, an early stage pharmaceutical research and development company, received an initial bid of $9.00 per share from Amgen in July 2011, which the Micromet board deemed inadequate. Amgen continued to court Micromet over the next five months with offers that Micromet rejected, while Micromet pursued strategic partnerships. In January 2012, Amgen increased its offer price to $11.00 per share, and the Micromet board authorized Goldman Sachs, its banker, to conduct a market check. None of the companies contacted by Goldman Sachs made an offer, and Micromet and Amgen entered into a definitive agreement.
Plaintiffs alleged that Micromet’s sales process was wholly deficient under Revlon. First, plaintiffs challenged the board’s decision to eschew private equity buyers. According to the Court, the board acted reasonably in focusing on large pharmaceutical companies that would have both the capital and technical expertise necessary to commercialize and distribute Micromet’s technologies. Plaintiffs also alleged that the market check was deficient because potential buyers had been given only a week to conduct due diligence. However, six of the seven potential buyers had conducted limited due diligence on Micromet during its partnering process. Given the prior access and the fact that Amgen only had access to due diligence materials over a two-week period, the Court held that the Micromet board acted reasonably.
The Court also rejected all of plaintiffs’ disclosure claims. The claims rejected by the Court included a claim that Micromet was required to disclose management’s “upside case” projections. The projections were not relied upon by Goldman Sachs, and Micromet’s management testified that the projections were not reliable.
Chancery Court Finds Goldman Sachs and El Paso’s CEO Likely Tainted Merger Process
Document: In re El Paso Corp. S’holder Litig., C.A. No. 6949-CS (Del. Ch. Feb. 29, 2012)
The Delaware Court of Chancery found that plaintiffs were reasonably likely to succeed on the merits of their claims that the CEO of El Paso corporation (“El Paso”) and El Paso’s directors breached their fiduciary duties under Revlon in approving an acquisition of the company by Kinder Morgan, Inc. (“Kinder Morgan”) where El Paso’s two principal negotiators had interests inimical to the interests of El Paso’s stockholders. Specifically, El Paso’s CEO had secretly made a bid to acquire a part of El Paso’s business from Kinder Morgan if Kinder Morgan acquired the entire company as planned. In addition, El Paso’s investment banker, Goldman Sachs, owned 19% of Kinder Morgan. Furthermore, the lead Goldman Sachs banker advising El Paso owned approximately $340,000 in Kinder Morgan stock, a fact which he failed to disclose during negotiations. While Goldman Sachs brought in Morgan Stanley to issue the fairness opinion, if appropriate, Morgan Stanley would not be paid unless it found the transaction to be fair.
The Court found that it was difficult to conclude that the board’s less than aggressive negotiating tactics, failure to conduct a pre-signing market check and agreement to aggressive deal protection measures were not related to the conflicts of El Paso’s key negotiators described above. However, the Court declined plaintiffs’ request for injunctive relief because no alternative bidder had emerged, and El Paso’s stockholders were well-positioned to vote against the merger should they decide that the merger price was inadequate.
Chancery Court Enjoins Asset Sale Because It Would Likely Breach IndentureO
Document: In re BankAtlantic Bancorp, Inc. Litig., C.A. No. 7068-VCL (Del. Ch. Feb. 27, 2012)
The Delaware Court of Chancery enjoined defendant BankAtlantic Bancorp, Inc., a bank holding company (“Bancorp”), from consummating a sale of its only substantial asset, BankAtlantic, a federal savings bank (“BankAtlantic”), on the basis that the sale would violate eight substantially identical indentures governing Bancorp’s debt securities. Specifically, each indenture prohibited Bancorp from selling all or substantially all of its assets unless the purchaser assumed Bancorp’s obligations under the indenture. Bancorp had entered into an agreement for the sale of its stock (the “Sale”) in BankAtlantic to BB&T Corporation (“BB&T”), and it was undisputed that BB&T was not assuming Bancorp’s obligations under the indentures. In determining whether the Sale would constitute a sale of all or substantially all of Bancorp’s assets, the Court analyzed the effects of the Sale on both a quantitative and qualitative basis as it was required to, under New York law, which governed all but one of the indentures. On a quantitative basis, the Court looked at book value and found that BankAtlantic constituted 85-90% of Bancorp’s book value. In so finding, the Court rejected defendant’s argument that the value of the consideration that Bancorp was receiving from BB&T for BankAtlantic’s stock should be subtracted from the numerator when calculating the percentage of Bancorp’s book value represented by BankAtlantic. On a qualitative basis, the Court found that the Sale would constitute a watershed event. Following consummation of the Sale, Bancorp would exit the banking business and lose its status as a federally regulated bank holding company. Accordingly, after finding that plaintiffs would suffer irreparable harm if the Sale were not enjoined and that the balance of the equities favored an injunction, the Court enjoined the Sale.
Chancery Court Dissolves A Public Company
Williams v. Calypso Wireless, Inc., C.A. No. 7140-VCL (Del. Ch. Feb. 8, 2012)
The Delaware Court of Chancery took the extraordinary step of appointing a receiver to dissolve a publicly traded corporation that was essentially defunct, under Section 322 of the Delaware General Corporation Law (the “DGCL”), which by its terms allows the Court of Chancery to appoint a receiver where a corporation fails to follow a court order. In this case, Calypso Wireless, Inc. (“Calypso”) had failed to hold an annual meeting since 2002 despite being ordered to hold a meeting in 2008. While the plaintiff in this action merely sought the appointment of a receiver to hold a meeting of stockholders, the Court ordered Calypso to be dissolved because of its flagrant violation of Delaware law and apparent violation of federal securities laws. Calypso had not filed an annual report on Form 10K in nearly four years, had no income or revenues and was likely insolvent on a balance sheet basis. Accordingly, the Court determined that there was no realistic possibility that Calypso could comply with the meeting order even under the direction of a receiver. However, the Court proceeded with the appointment of a receiver solely in order to dissolve the company.
Chancery Court Interprets Mandatory Indemnification Provisions
Document: Hermelin v. K-V Pharmaceutical Co., C.A. No. 6936-VCG (Del. Ch. Feb. 7, 2012)
The Delaware Court of Chancery considered, interalia, whether a former corporate officer was entitled to be indemnified for expenses under Section 145(c) of the DGCL on the basis that he had been “successful on the merits or otherwise” in defending three proceedings. The proceedings all stemmed from investigations relating to the manufacture of defective prescription drugs by the plaintiff’s former employer, defendant K-V Pharmaceutical Company (“KV”). The Court rejected plaintiff’s claim that he was “successful” in a criminal proceeding because he pled guilty to every charge against him, paid a substantial fine and served time. The Court also rejected plaintiff’s argument that he was entitled to be indemnified for expenses incurred in defending a proceeding brought by the Department of Health and Human Services (“HHS”). Because HHS banned plaintiff for twenty years (but could have imposed a lifetime ban and fines), plaintiff argued that the twenty year ban was a successful outcome under Section 145(c). The Court found that a twenty year ban was not a success. However, the Court found that plaintiff was entitled to be indemnified for expenses incurred in defending an investigation brought by the Food and Drug Administration (the “FDA”). As a result of the FDA investigation, KV entered into a consent decree with the FDA pursuant to which KV and its affiliates agreed not to manufacture any drugs until their operations were in compliance with federal standards. The consent decree did not apply to plaintiff unless he was rehired by KV. Because plaintiff avoided a personally negative result, the Court found he was entitled to be indemnified.