Securities Law Alert
Year in Review:• Supreme Court: SEC Claims for Disgorgement in Enforcement Actions Are Subject to Section
2462’s Five-Year Statute of Limitations• Supreme Court: American Pipe Tolling Is Inapplicable to Section 13’s Three-Year Statute of
Repose, Which Governs Claims Under Sections 11 and 12 of the Securities Act• Circuit Court Decisions Addressing Class Certification in Securities Fraud Actions• Circuit Court Decisions Applying the Supreme Court’s Decision in Omnicare• Circuit Court Decisions Addressing Actionable Misrepresentations• Circuit Court Decisions Addressing Scienter• Circuit Court Decisions Addressing ERISA Actions• Circuit Court Decisions Addressing the Scope of Insider Trading Liability• Significant Delaware Supreme Court Decisions

Supreme Court: SEC
Claims for Disgorgement in
Enforcement Actions Are
Subject to Section 2462’s FiveYear Statute of Limitations
On June 5, 2017, the Supreme Court
unanimously held that disgorgement in an
SEC enforcement action for violation of
the securities laws is a “penalty” subject toSection 2462’s five-year statute of limitations.1
Kokesh v. SEC, 137 S. Ct. 1635 (2017).
1. Section 2462 states: “Except as otherwise provided by Act ofCongress, an action, suit or proceeding for the enforcement of any
civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not
be entertained unless commenced within five years from the datewhen the claim first accrued.”

Simpson Thacher & Bartlett LLP

2017
The Court found that disgorgement redresses
a public wrong; it is a violation against theUnited States, not a particular individual.
The Court also concluded that disgorgement
is imposed primarily as a deterrent. The
Court observed that there is no statutory
requirement that courts distribute disgorgedfunds to a defendant’s victims, and courts
infrequently do so. Accordingly, the Court
held that disgorgement “bears all thehallmarks of a penalty” and “[t]he 5-year
statute of limitations in § 2462 therefore
applies when the SEC seeks disgorgement.”

Supreme Court: American
Pipe Tolling Is Inapplicable
to Section 13’s Three-Year
Statute of Repose, Which
Governs Claims Under
Sections 11 and 12 of the
Securities Act
On June 26, 2017, the Supreme Court heldthat American Pipe tolling does not apply tothe three-year statute of repose set forth in
Section 13 of the Securities Act of 1933, whichgoverns claims brought under Sections 11 and
12 of that Act.2 California Public Employees
Ret. Sys. v. ANZ Securities, 137 S. Ct. 2042
(2017).
The Court first reaffirmed that Section
13’s three-year bar sets forth a statuteof repose. The Court reasoned that thestatutory language “admits of no exception
and on its face creates a fixed bar against
future liability.” The Court emphasizedthat “[t]he purpose of a statute of repose isto create ‘an absolute bar on a defendant’s
temporal liability’” that “is in general not
subject to tolling.” Id. (quoting CTS Corp.
v. Waldburger, 134 S. Ct. 2175 (2014)).
With this framework, the Court held that“the American Pipe tolling rule does not
apply to the 3-year bar mandated in § 13.”
The Court explained that “the object of astatute of repose, to grant complete peace
to defendants, supersedes the applicationof a tolling rule based in equity” such as theAmerican Pipe tolling doctrine.

Circuit Court Decisions
Addressing Class Certificationin Securities Fraud Actions
Second Circuit: (1) Individual
Morrison Determinations May
Preclude Class Certification
Where the Securities Were Not
Traded on a Domestic Exchange;and (2) Ascertainability Does
Not Require a Showing of
Administrative Feasibility
On July 7, 2017, the Second Circuit relied on
Morrison v. National Australia Bank, 561
U.S. 247 (2010)3 to vacate certification of twoclasses to the extent they included purchasersof notes that were not traded on a domestic
exchange. In re Petrobras Securities,
862 F.3d 250 (2d Cir. 2017). The Second
Circuit held that the district court “erred in
conducting its predominance analysis without
considering the need for individualized
Morrison inquiries” as to the “domesticity” ofeach note purchase.
The Second Circuit explained that “aplaintiff may demonstrate the domesticity
of a particular transaction by producing
evidence ‘including, but not limited to, facts
concerning the formation of the contracts,
the placement of purchase orders, thepassing of title, or the exchange of money.’”
Id. (quoting Absolute Activist Value MasterFund v. Ficeto, 677 F.3d 60 (2d Cir. 2012)).
The Second Circuit held that “the potential
for variation across putative class members—
who sold them the relevant securities, howthose transactions were effectuated, and whatforms of documentation might be offered insupport of domesticity” would likely “generate
a set of individualized inquiries that must
be considered within the framework of Rule23(b)(3)’s predominance requirement.”4
The Second Circuit further held that Rule 23’s
implied ascertainability requirement5 does
3. Please click here to read our prior discussion of the Supreme
Court’s decision in Morrison.

2. Section 13 establishes a one-year statute of limitations and athree-year statute of repose for claims under Sections 11 and 12.
The statute provides in relevant part that “[i]n no event shallany … action be brought to enforce a liability created under[Section 11] or [Section 12(a)(1)] … more than three years after
the security was bona fide offered to the public, or under [Section
12(a)(2)] … more than three years after the sale.” 15 U.S.C. § 77m.

4. Rule 23(b)(3) requires that “questions of law or fact common
to class members predominate over any questions affecting only
individual members.”
5. Rule 23 includes “an implicit threshold requirement thatmembers of a proposed class be readily identifiable, often
characterized as an ascertainability requirement.” Petrobras, 862
F.3d 250.
2

not demand “a showing of administrative
feasibility at the class certification stage.” Thecourt rejected the Third Circuit’s “heightened”
two-part ascertainability test, pursuant towhich “plaintiffs must not only show that ‘theclass is defined with reference to objective
criteria,’ but also that ‘there is a reliable andadministratively feasible mechanism fordetermining whether putative class members
fall within the class definition.’” Id. (quoting
Byrd v. Aaron’s, 784 F.3d 154 (3d Cir. 2015)).
The Second Circuit joined the Sixth, Seventh,
Eighth and Ninth Circuits in so holding.

Second Circuit: (1) AffiliatedUte Presumption of Reliance
Does Not Apply If Plaintiffs’
Claims Are “Primarily Based on
Misstatements,” and (2) Plaintiffs
May Be Able to Establish Market
Efficiency Without Direct Evidenceof Price Impact
On November 6, 2017, the Second Circuit heldthat the presumption of reliance establishedin Affiliated Ute Citizens of Utah v. UnitedStates, 406 U.S. 128 (1972) for omissionbased Section 10(b) claims “does not apply”
if plaintiffs’ claims “are primarily based on
misstatements.”6 Waggoner v. Barclays, 875
F.3d 79 (2d Cir. 2017). The court underscoredthat “[t]he Affiliated Ute presumption does
not apply to earlier misrepresentations mademore misleading by subsequent omissions,or to what has been described as ‘halftruths,’ nor does it apply to misstatements
whose only omission is the truth that thestatement misrepresents.”
6. The Second Circuit explained that Affiliated Ute “allows theelement of reliance to be presumed in cases involving primarily
omissions, rather than affirmative misstatements, because
proving reliance in such cases is, in many situations, virtually
impossible.” Waggoner, 875 F.3d 79.

The Second Circuit further held that “direct
evidence of price impact is not always
necessary to demonstrate market efficiency.”
In addition, the court ruled that “defendants
seeking to rebut” the presumption of relianceestablished in Basic v. Levinson, 485 U.S. 224(1988) “must do so by a preponderance ofthe evidence.”

Circuit Court Decisions
Applying the Supreme Court’s
Decision in Omnicare
Ninth Circuit: Omnicare’s PleadingStandards for Opinion-Based
Section 11 Claims Apply to Claims
Alleging Misstatements of Opinion
Under Section 10(b) and Rule 10b-5
On May 5, 2017, the Ninth Circuit held thatthe pleading standards for alleging a Section
11 claim based on a misstatement of opinion
set forth in Omnicare v. Laborers Dist.
Council Const. Industry Pension Fund, 135
S. Ct. 1318 (2015),7 apply to opinion-based
claims brought under Section 10(b) and Rule10b-5. City of Dearborn Heights Act 345
Police & Fire Ret. Sys. v. Align Technology,
856 F.3d 605 (9th Cir. 2017).
The Ninth Circuit determined that Omnicare
overruled its prior decision in Reese v.
Malone, 747 F.3d 557 (9th Cir. 2014)8 to
the extent that Reese permitted plaintiffs toallege the falsity of a statement of opinion by

7. Please click here to read our prior discussion of the Court’s
decision in Omnicare.
8. Please click here to read our prior discussion of the Ninth
Circuit’s decision in Reese.

3pleading that the speaker had “no reasonablebasis for the belief” expressed. Id. (quoting
Reese, 747 F.3d 557). The Ninth Circuit statedthat under Omnicare, “pleading falsity byalleging that ‘there is no reasonable basis
for the belief’ is permissible only under anomissions theory of liability.” To assert anomission-based claim after Omnicare, aplaintiff must “‘call into question the issuer’sbasis for offering the opinion’” by alleging“‘facts about the inquiry the [issuer] did or
did not conduct or the knowledge it did or
did not have.’” Id. (quoting Omnicare, 135
S. Ct. 1318). The Ninth Circuit found Reese’s“no reasonable basis for the belief” standard“clearly irreconcilable” with Omnicare.

Ninth Circuit: Expressing a
Favorable Opinion Concerning FDA
Clearance May Be Misleading If the
Speaker Does Not Disclose Relevant
Adverse FDA Developments
On August 18, 2017, the Ninth Circuit
reversed dismissal of securities fraud claims
where defendants allegedly represented
that “FDA clearance risk has been achieved”
without disclosing that the company had not
obtained clearance for one of the key products
discussed. In re Atossa Genetics Sec. Litig.,
868 F.3d 784 (9th Cir. 2017).
The Ninth Circuit found the statement at
issue to constitute an opinion, rather thana statement of fact, but found plaintiffs
adequately alleged that the opinion did not“fairly align[ ] with the information in [thecompany’s] possession at the time” under
the standard set forth in Omnicare. The

court observed that “the omitted facts [were]
strikingly similar to [the] hypothetical theSupreme Court offered in Omnicare” of “anissuer [who] publicly stated, ‘we believe
our conduct is lawful,’ but did not disclose
the issuer’s knowledge that the Federal
Government took the opposite view.”

Circuit Court Decisions
Addressing Actionable
Misrepresentations
D.C. Circuit: (1) Distributing aStatement Authored and Approvedby a Superior Does Not Constitute“Making” a Statement Under Janus,
But (2) Liability Under Rules
10b-5(a) and (c) Is Not Limited to“Makers” of Statements
On September 29, 2017, the D.C. Circuit
held that a broker who had copied, pasted,and distributed false statements that his
boss authored could not be liable under Rule10b-5(b) as a “maker” of those statements
within the meaning of the Supreme Court’s
decision in Janus Capital Group v. First
Derivative Traders, 564 U.S. 135 (2011).9
Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir.
2017). The D.C. Circuit deemed it significant
that the broker’s boss had “approved themessages for distribution.” The court foundthis demonstrated the boss’s “ultimate
authority over the substance and distributionof the emails.”
The D.C. Circuit further held that the broker
could nevertheless be liable under Rules 10b5(a) and (c) and Section 17(a)(1)10 because
those sections “do not speak in terms of anindividual’s ‘making’ a false statement.” The
D.C. Circuit stated that “Rules 10b-5(a) and(c), as well as Sections 10(b) and 17(a)(1),
9. In Janus, 564 U.S. 135, the Supreme Court held that “the makerof a statement is the person or entity with ultimate authority
over the statement, including its content and whether and how tocommunicate it.” Please click here to read our prior discussion of
the Court’s decision in Janus.
10. Under Rule 10b-5(a), it is unlawful to “employ any device,scheme, or artifice to defraud … in connection with the purchaseor sale of any security.” Rule 10b-5(c) prohibits individuals
and entities from “engag[ing] in any act, practice, or course ofbusiness which operates or would operate as a fraud or deceit
upon any person … in connection with the purchase or sale of any
security.” Section 17(a)(1) renders it “unlawful for any person in
the offer or sale of any securities … to employ any device, scheme,or artifice to defraud.”
4may encompass certain conduct involving
the dissemination of false statements even
if the same conduct lies beyond the reach ofRule 10b-5(b).”Ninth Circuit: CEO’s Failure
to Comply with “Aspirational”
Corporate Ethics Code Does Not
Give Rise to a Claim for Securities
Fraud Under Section 10(b) andRule 10b-5
On January 19, 2017, the Ninth Circuit heldthat a CEO’s violation of the company’s ethics
code did not give rise to a claim for securities
fraud under Section 10(b) and Rule 10b-5 on
the grounds that corporate ethics codes are“inherently aspirational.” Retail Wholesale& Dep’t Store Union Local 338 Ret. Fund v.
Hewlett-Packard, 845 F.3d 1268 (9th Cir.
2017). The court explained that “a code of
conduct … expresses opinions as to what
actions are preferable, as opposed to implyingthat all staff, directors, and officers always
adhere to its aspirations.”
The Ninth Circuit held that corporate ethics
statements cannot constitute affirmative
misrepresentations for Rule 10b-5 purposes.
The court reasoned that a “contrary
interpretation” would be “simply untenable”
because it would allow plaintiffs to frame
virtually any claim of corporate wrongdoing
as a securities fraud violation.

Ninth Circuit: (1) PSLRA’s Safe
Harbor Does Not Protect NonForward-Looking Representations
Included in a Forward-Looking
Statement, and (2) Cautionary
Language Must Specifically
Address the Possible Inaccuracyof Such Non-ForwardLooking Representations

a statement contains some reference to a
projection of future events cannot sensibly
bring the statement within the safe harbor
if the allegation of falsehood relates to nonforward-looking aspects of the statement.” Id.
(quoting In re Stone & Webster Sec. Litig.,
414 F.3d 187 (1st Cir. 2005)). The Ninth
Circuit joined the First, Second, Third, Fifth,
and Seventh Circuits in so holding.
The Ninth Circuit further stated that in order“[f]or cautionary language accompanying
a forward-looking portion of a mixed
statement to be adequate under the PSLRA,
that language must accurately convey
appropriate, meaningful information about
not only the forward-looking statement but
also the non-forward-looking statement.”
The court underscored that “[i]f the nonforward-looking statement is materially false
or misleading, it is likely that no cautionary
language—short of an outright admissionof the false or misleading nature of thenon-forward-looking statement—wouldbe ‘sufficiently meaningful’ to qualify thestatement for the safe harbor.”

Circuit Court Decisions
Addressing ScienterFirst Circuit: Alleging Defendants’
Knowledge of Undisclosed Facts
Is Insufficient to Plead Scienter;
Plaintiffs Must Also Allege
Defendants Knew or Should Have
Known the Omissions Would
Mislead Investors
On April 7, 2017, the First Circuit held that
defendants’ alleged knowledge of undisclosed
facts is not sufficient, standing alone, to

On July 28, 2017, the Ninth Circuit held that“a defendant may not transform non-forwardlooking statements into forward-looking
statements that are protected by the safe
harbor provisions of the” Private Securities
Litigation Reform Act (“PSLRA”) “by
combining non-forward-looking statements
about past or current facts with forwardlooking statements about projected revenues
and earnings.” In re Quality Sys. Sec.
Litig., 865 F.3d 1130 (9th Cir. 2017). The
court reasoned that “[t]he mere fact that5

raise an inference of scienter. Brennan
v. Zafgen, 853 F.3d 606 (1st Cir. 2017).
Rather, plaintiffs must also allege that
defendants “knew or should have known that
their failure to disclose those facts risked
misleading investors.”

Fourth Circuit: Allegations
Sufficient to Raise an Inferenceof the Speaker’s Knowledge ofa Statement’s Falsity Do Not,
Standing Alone, Satisfy the Scienter
Pleading Requirement
On November 15, 2017, the Fourth Circuit
held that allegations raising an inference ofa CEO’s knowledge of a statement’s falsity
were not “sufficient to show that [the CEO]
acted intentionally or recklessly to deceive,
manipulate, or defraud.” Maguire Fin. v.
PowerSecure Int’l, 876 F.3d 541 (4th Cir.
2017). The Fourth Circuit reasoned that“scienter and knowledge with respect tomisrepresentation are distinct components of
the requisite analytical framework.” The court
stated that “[t]o conflate the two … would
read the scienter element out of the analysis
in contravention of the … exacting pleading
standard” established by the PSLRA.

Circuit Court Decisions
Addressing ERISA Actions
Fourth and Sixth Circuits: ERISA
Fiduciaries May Rely on theMarket Price of a Publicly-Traded
Stock as an Assessment of theStock’s Riskiness
In April 2017, both the Fourth and Sixth
Circuits applied the Supreme Court’s decisionin Fifth Third Bancorp v. Dudenhoeffer, 134
S. Ct. 2459 (2014)11 to hold that an ERISA
fiduciary may rely on the market price of apublicly-traded stock as an assessment of thestock’s riskiness.
On April 28, 2017, the Fourth Circuit heldthat a prudent fiduciary may consider public
information concerning a stock’s riskiness
when determining whether to divest. Tatum
v. RJR Pension Investment Committee, 855
F.3d 553 (4th Cir. 2017). The court held
11. Please click here to read our prior discussion of the Court’s
decision in Fifth Third.

that “in an efficient market, a fiduciary canrely on the market price to reflect the public
information about risk of loss, even if, inthe beneficiaries’ view, the market valuation
is not properly accounting for the truerisk of loss.” The court further found thatERISA does not require “a more compelling
reason for divestment decisions than forinvestment decisions.”
On April 7, 2017, the Sixth Circuit ruled that afiduciary’s failure to investigate the accuracyof a publicly-traded company’s stock priceis not a “special circumstance” within themeaning of the Fifth Third decision. Saumer
v. Cliffs Natural Resources, 853 F.3d 855(6th Cir. 2017). The court explained that Fifth
Third “plainly holds that a fiduciary may rely
on market price as an unbiased assessmentof a security’s value,” including its riskiness.
The court found “that even if the specialcircumstances exception encompasses morethan market inefficiency, it doesn’t include afiduciary’s failure to independently verify theaccuracy of the market’s pricing.”

Tenth Circuit: Plaintiffs Asserting
ERISA Breach of Fiduciary Duty
Claims Bear the Burden of Proving
Loss Causation
On June 5, 2017, the Tenth Circuit heldthat the burden to prove loss causation in
an ERISA breach of fiduciary duty action“falls squarely on the plaintiff.” Pioneer Ctrs.
Holding Co. Employee Stock Ownership Plan
and Tr. v. Alerus Fin., 858 F.3d 1324 (10thCir. 2017).
Pursuant to 29 U.S.C. § 1109(a), “a fiduciary
who breaches its duties under ERISA shallbe personally liable for ‘any losses to theplan resulting from each such breach.’” Id.
(quoting 29 U.S.C. § 1109(a)). The court notedthat “the statute is silent as to who bears theburden of proving a resulting loss.” The Tenth
Circuit explained that “[w]here a statute issilent on burden allocation, ‘the ordinary
default rule [is] that plaintiffs bear the riskof failing to prove their claims.’” Id. (quoting
Schaffer ex rel. Schaffer v. Weast, 546 U.S.
49 (2005)). The Tenth Circuit determinedthat none of the exceptions to the default
rule apply to ERISA breach of fiduciary
duty claims. Moreover, the court found that
adopting a “burden-shifting framework could
result in removing an important check on
the otherwise sweeping liability of fiduciaries
6under ERISA.” The Tenth Circuit’s decision
deepened a circuit split on this issue.

Circuit Court Decisions
Addressing the Scope ofInsider Trading Liability
First Circuit: Country Club Member
Expected to Receive a “Personal
Benefit” for Tipping a Fellow
Club Member
On February 24, 2017, the First Circuit
affirmed the insider trading conviction ofa country club member (the “tippee”) who
received a tip about an upcoming bankacquisition from a fellow country clubmember. United States v. Bray, 853 F.3d 18(1st Cir. 2017). The court found that evidenceof a friendship between the tipper and thetippee, together with the tipper’s testimonythat he believed the tip would enhance
his reputation with the tippee, provided areasonable basis for the jury to conclude thatthe tipper expected to receive a “personal
benefit” for his tip as required under theSupreme Court’s decision in Dirks v. SEC,
463 U.S. 646 (1983).

by the insider followed by a gift of the profits
to the recipient, whether or not there was a‘meaningfully close personal relationship’
between the tipper and the tippee.”

Significant Delaware
Supreme Court Decisions
Delaware Supreme Court: Business
Judgment Rule Applies to Two-Step
Section 251(h) Mergers If the Target
Corporation’s Fully-Informed,
Uncoerced Stockholders Tender a
Majority of the Company’s Sharesin a First-Step Tender Offer
On February 9, 2017, the Delaware Supreme
Court adopted the Chancery Court’s
reasoning in affirming a June 2016 Chancery
Court decision holding that the businessjudgment rule applies to two-step Section
251(h) mergers if the target corporation’s
fully informed, uncoerced stockholders
tender a majority of the company’s sharesin a first-step tender offer.14 In re Volcano
Corp. Stockholder Litig., 2017 WL 563187(Del. 2017). The Chancery Court found that

Second Circuit: Supreme Court’s
Decision in Salman Abrogated
Newman’s “Meaningfully Close
Personal Relationship” Test for
Tipping Liability
On August 23, 2017, the Second Circuit
held that the “meaningfully close personal
relationship” test established in United States
v. Newman, 773 F.3d 438 (2d Cir. 2014)12 forthe personal benefit requirement for tipping
liability “is no longer good law” in view of theSupreme Court’s decision in Salman v. UnitedStates, 137 S. Ct. 420 (2016).13 United States
v. Martoma, 869 F.3d 58 (2d Cir. 2017).
“[I]n light of Salman,” the Martoma court heldthat “an insider or tipper personally benefits
from a disclosure of inside information
whenever the information was disclosed ‘withthe expectation that the recipient’ would tradeon it, and the disclosure resembles trading
12. Please click here to read our prior discussion of the Second
Circuit’s decision in Newman.
13. Please click here to read our prior discussion of the Supreme
Court’s decision in Salman.

“the acceptance of a first-step tender offer
by fully informed, disinterested, uncoerced
stockholders representing a majority ofa corporation’s outstanding shares in a

14. Pursuant to Section 251(h) of the Delaware General
Corporation Law, companies may complete two-step mergers
without a target company stockholder vote if the acquiring
corporation consummates a first-step tender offer.

7two-step merger under Section 251(h) has thesame cleansing effect under” the Delaware
Supreme Court’s decision in Corwin v. KKR
Fin. Holdings, 125 A.3d 304 (Del. 2015)15 “asa vote in favor of a merger by a fully informed,
disinterested, uncoerced stockholder
majority.” In re Volcano Corp. Stockholder
Litig., 143 A.3d 727 (Del. Ch. 2016).

Delaware Supreme Court:“Commercially Reasonable
Efforts” Clause in a Merger
Agreement Imposes an Affirmative
Obligation on the Parties toTake All Reasonable Steps toEnsure Performance
On March 23, 2017, the Delaware Supreme
Court held that a “commercially reasonable
efforts” clause in a merger agreement “placed
an affirmative obligation on the parties to takeall reasonable steps to” satisfy the condition
precedent. Williams Cos. v. Energy Transfer
Equity, 159 A.3d 264 (Del. 2017).
The Delaware Supreme Court found theChancery Court had erroneously interpreted
the “commercially reasonable efforts” clauseat issue “as imposing only a negative duty
not to thwart or obstruct performance …
rather than an affirmative duty to help ensure
performance.” The Delaware Supreme Court
explained that in Hexion Specialty Chemicals
v. Huntsman Corp., 965 A.2d 715 (Del. Ch.
2008), the Chancery Court recognized thatsuch covenants “impose obligations to takeall reasonable steps to solve problems andconsummate the transaction.”

Delaware Supreme Court: Directors
Have No Obligation to Disclose
Details About Offers the Directors
Deemed Not Worth Pursuing
On March 23, 2017, the Delaware Supreme
Court affirmed a Chancery Court decisionholding that a company’s board of directors
had no obligation to provide shareholders
with details concerning possible bidders
whose potential offers the directors did notconsider. City of Miami Gen. Employees’ andSanitation Employees’ Ret. Trust, 2017 WL
1093185 (Del. 2017). The Chancery Court
found that “Delaware law does not require
disclosure of a play-by-play of negotiations
15. Please click here to read our prior discussion of the Delaware
Supreme Court’s decision in Corwin.

leading to a transaction or of potential offersthat a board has determined were not worth
pursuing.” City of Miami Gen. Employees’
and Sanitation Employees’ Ret. Trust v.
Comstock, 2016 WL 4464156 (Del. Ch. 2016).

Delaware Supreme Court:(1) Deal Price “Will Often Be” theBest Evidence of Fair Value in anArm’s-Length Transaction
Following a “Robust” Sale Process,and (2) There Is No Basis for a“Private Equity Carve Out” toReliance on the Merger Price
On August 1, 2017, the Delaware Supreme
Court stated that “the sale value resulting
from a robust market check will often be themost reliable evidence of fair value, and that
second-guessing the value arrived upon by thecollective views of many sophisticated parties
with a real stake in the matter is hazardous.”
DFC Global Corp. v. Muirfield Value
Partners, 172 A.3d 346 (Del. 2017). However,the court did not adopt a presumption thatthe sale price is the best evidence of fairvalue “in certain cases involving arm’s-length
mergers” because it found that 8 Del. C.
§ 262(h),16 the Delaware appraisal statute,vests the Chancery Court with discretion todetermine fair value “in the first instance.”
Significantly, the Delaware Supreme Court
rejected two arguments frequently used
to challenge reliance on the merger price.
First, the court held that market forces canadequately account for regulatory risk. The
court reasoned that “the market’s assessmentof [a company’s] future cash flows necessarily
takes regulatory risk into account as it doeswith all the other reasonable uncertain factorsthat affect a company’s future.” Second,the court found no basis in the “economic
literature” or the record for the impositionof a “‘private equity carve out’ … in which
the deal price resulting in a transaction won
by a private equity buyer is not a reliableindication of fair value.”
16. Delaware’s appraisal statute provides in relevant part asfollows:[T]he Court shall determine the fair value of theshares exclusive of any element of value arising fromthe accomplishment or expectation of the merger orconsolidation, together with interest, if any, to be paid
upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into
account all relevant factors.
8 Del. C.§ 262(h).
8Delaware Supreme Court: Chancery
Court Abused Its Discretion in
Placing No Weight on the Deal Pricein a Transaction Resulting From a
Robust Sales Process

circumstances, the Delaware Supreme Court
found the Chancery Court’s decision to place
no weight on the market price “abuse[d] even
the wide discretion afforded the Court ofChancery in these difficult cases.”

On December 14, 2017, the Delaware
Supreme Court reversed and remanded awidely covered appraisal decision in which
the Chancery Court placed no weight oneither the stock price or the deal price, butinstead relied on its own discounted cash
flow (“DCF”) analysis to arrive at a fair value
substantially higher than the deal price. Dellv. Magnetar Global Event Driven MasterFund Ltd., 2017 WL 6375829 (Del. 2017).
Based on the record before it, the Delaware
Supreme Court found “the deal price deserved
heavy, if not dispositive, weight.”

Although the Delaware Supreme Court did
not hold “that the market is always the bestindicator of value, or that it should always
be granted some weight,” its opinion—
particularly when read in conjunction with
its earlier guidance in DFC Global Corp.
v. Muirfield Value Partners—signals that
greater deference should be given to thedeal price resulting from an appropriate saleprocess.

The Delaware Supreme Court found that
there was “compelling” “evidence of market
efficiency, fair play, low barriers to entry,
outreach to all logical buyers, and the chance
for any topping bidder to have the supportof [the CEO’s] own votes.” Under these

The Delaware Supreme Court instructed thaton remand, the Chancery Court may “enterjudgment at the deal price … with no further
proceedings.” If the Chancery Court instead“chooses to weigh a variety of factors inarriving at fair value,” the court must “explainthat weighting based on reasoning that is
consistent with the record and with relevant,accepted financial principles.”The Securities Law Alertis edited by Paul C. Gluckow
pgluckow@stblaw.com /+1-212-455-2653, Peter E. Kazanoffpkazanoff@stblaw.com /+1-212-4553525 and Jonathan K. Youngwood
jyoungwood@stblaw.com /+1-212-455-3539.

9

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aturner@stblaw.com

Deborah L. Stein+1-310-407-7525
dstein@stblaw.com

Paul C. Gluckow+1-212-455-2653
pgluckow@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Palo Alto

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com

David Elbaum
Senior Counsel+1-212-455-2861
david.elbaum@stblaw.com

Linton Mann III+1-212-455-2654
lmann@stblaw.com
Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com
Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Janet A. Gochman
Senior Counsel+1-212-455-2815
jgochman@stblaw.com

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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lawyers who authored it are rendering legal or other professional advice or opinions on specific facts
or matters, nor does the distribution of this publication to any person constitute the establishment of an
attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
10SimpsonThacherWorldwide

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11