Securities Law Alert
In This Edition:• First Circuit Rejects Per Se Rule That a Special Litigation Committee Member’s Independence Is Compromised
If That Member (1) Is Named as a Defendant in the Derivative Suit or (2) Reviewed and Approved theStatements at Issue• First Circuit Determines That the Materiality and Scienter Analyses Are Linked, and Holds That a Statement’s
Marginal Materiality Can Weigh Against a Finding of Scienter• Delaware Supreme Court Affirms Chancery Court Decision to Rely on the Merger Price in a Section 262
Appraisal of CKx’s Shares• Delaware Chancery Court Relies on the Merger Price in Appraising Ancestry’s Shares
February 2015

First Circuit Rejects Per Se
Rule That a Special Litigation
Committee Member’s
Independence Is Compromised
If That Member (1) Is Named
as a Defendant in the
Derivative Suit or (2) Reviewed
and Approved the Statements
at Issue
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Simpson Thacher & Bartlett LLPOn February 4, 2015, the First Circuit
affirmed dismissal of a shareholder derivative
suit against Smith & Wesson’s officers anddirectors on the grounds that an independent
special litigation committee (“SLC”), acting
in good faith and with a reasonable basis for
its conclusions, had recommended against
filing any claims. Sarnacki v. Golden, 2015
WL 467547 (1st Cir. 2015) (Lynch, C.J.). The
court rejected plaintiff’s contention thattwo of the three SLC members “could not be
independent” because they were named as
defendants in the derivative suit, and also
because they had “reviewed and approved

many of the allegedly misleading statements”
at issue. The First Circuit determined that“[t]here are no per se rules holding that”
the independence of an SLC member “isdestroyed by either naming [that] member
as a defendant” in a derivative action, or by
virtue of the SLC “member’s past approval ofa disputed statement.”
The First Circuit explained that “[t]here aregood reasons to reject such per se rules.” Thecourt reasoned that “[i]f an SLC member’s
status as a defendant in the litigation
categorically subverted the independenceof the committee, a shareholder would be
able to manipulate the process: he or she
would be able to name SLC members as
defendants after the committee’s formation,
thereby undercutting the legitimacy of
its conclusions.” The First Circuit further
observed that “[t]he realities of corporate
governance, in which some corporations
have small boards, suggest that an SLC will
frequently include at least one director who
also approved the relevant transaction.”
The First Circuit acknowledged that its
rejection of such “per se rules” does not1

necessarily “mean that there is no cause
for concern” when an SLC member is either
a defendant in the action or approved thestatements at issue. The court recognizedthat “[t]hose who are asked to evaluate
conduct which they have approved may have atendency not to find fault.” However, the First
Circuit explained that under Delaware law,“a director is [considered] independent when
he is in a position to base his decision on the
merits of the issue rather than being governedby extraneous considerations or influences”(quoting Kaplan v. Wyatt, 499 A.2d 1184
(Del. 1985)). In the case before it, the First
Circuit found that plaintiff had “offer[ed] noevidence of actual bias affecting any [SLC
member] or of extraneous considerations
having motivated either the [SLC’s] process
or [its] ultimate recommendation.” The court
also found it significant that the SLC had“not use[d] in-house counsel, a disapproved
practice, but [instead had] chose[n]independent counsel.”
As to the scope of the SLC’s investigation,
the First Circuit determined that there was“inadequate evidence to permit a reasonablefinder of fact to conclude that [the] SLC
counsel [had been] conflicted, that the
SLC members [had] read too few discovery
materials, or that the SLC’s involvement [hadbeen] merely perfunctory.” To the contrary,
the court found that “the SLC [had] relied on
experienced independent counsel, reviewed
relevant discovery materials, and released alengthy final report, all indicia of a reasonable
process and good faith.” The First Circuit heldthat Smith & Wesson had proved both the
SLC’s independence as well as the SLC’s goodfaith and reasonable bases for its conclusions,and therefore affirmed dismissal of plaintiff’s
derivative suit.

First Circuit Determines That
the Materiality and Scienter
Analyses Are Linked, andHolds That a Statement’s
Marginal Materiality Can
Weigh Against a Finding of
Scienter
On February 6, 2015, the First Circuit
affirmed dismissal of a securities fraud
action against Abiomed on scienter grounds.

Fire and Police Pension Ass’n of Colorado
v. Abiomed, 2015 WL 500748 (1st Cir. 2015)(Lynch, C.J.). In evaluating plaintiffs’ scienter
allegations, the First Circuit explainedthat “the materiality and scienter inquiries
are linked.” The court found that “[t]hequestion of whether a plaintiff has pled facts
supporting a strong inference of scienter has
an obvious connection to the question of theextent to which the omitted information ismaterial.” The First Circuit noted that“[i]f it is questionable whether a fact ismaterial or its materiality is marginal,that tends to undercut the argument that
defendants acted with the requisite intent
or extreme recklessness in not disclosing
the fact.”
Here, plaintiffs claimed that Abiomed
had “fail[ed] to state that some of the[company’s] increased revenues were due
to off-label marketing” of the Impella 2.5,
a micro heart pump. The First Circuit
found “[t]he materiality of [this] impugned
omission” to be “marginal at best.” Thecourt explained that “[p]laintiffs’ contention
that the omission would have mattered toa reasonable investor depend[ed] on a long
chain of inferences, most of which [were] notsufficiently substantiated by the allegationsin the complaint.” While plaintiffs “allege[d]that off-label promotion was widespread,”the court pointed out that plaintiffs did “notstate or even suggest what proportion of sales
were made as a result of such efforts, or thesignificance of the contribution of those sales
to Abiomed’s stock price.” The First Circuit
concluded that “[t]he marginal materialityof the alleged statements and omissions
concerning revenues weigh[ed] against
an argument that defendants here [had]possessed the requisite scienter.”
As to allegations that Abiomed had mademisstatements concerning its compliancewith the FDA’s off-label marketing
regulations, the First Circuit determinedthat “[s]cienter [was] not established”
simply because there were “statements from
confidential witnesses [“CWs”] that Abiomed
management was in fact intentionallyviolating FDA regulations.” The court
explained that “even if the CWs’ statements
plausibly suggest[ed] that Abiomed [hadbeen] acting improperly, they [did] not showthat defendants’ statements about company
policy and the FDA’s inquiries [had been]
made with conscious intent to defraud or2

recklessly.” The First Circuit emphasized thatthe “key question” for scienter purposes “isnot whether defendants had knowledge of
certain undisclosed facts, but rather whether
defendants knew or should have known
that their failure to disclose those facts
present[ed] a danger of misleading buyers or
sellers.” Here, the court found that “far fromsuggesting an intent to defraud investors,”
the CWs’ statements “suggest[ed] instead that
Abiomed [had been] aggressively marketing
the Impella 2.5 ‘every which way’ in order tosell more units.”
Although the First Circuit recognized that
“Abiomed’s promotional and marketing
activities for its core product might havebeen a risky course in terms of its likelihoodof prompting sanctions from the FDA,”
the court emphasized that “allegations ofcorporate mismanagement are not actionable
under Rule 10b-5.” The First Circuit observedthat “[n]ot all claims of wrongdoing by acompany make out a viable claim that thecompany has committed securities fraud,”
and found that “[t]his case is an example.”
The court therefore affirmed dismissal ofplaintiffs’ complaint.

Delaware Supreme Court
Affirms Chancery Court
Decision to Rely on the
Merger Price in a Section 262
Appraisal of CKx’s Shares
Pursuant to Section 262 of the Delaware
General Corporate Law (“DGCL”),
stockholders in companies that engage incertain merger transactions may petition
the court for an appraisal of “the fair valueof [their] shares exclusive of any element ofvalue arising from the accomplishment or
expectation of the merger or consolidation.”
8 Del. C. § 262. The court may notpresumptively rely on the merger price in its
appraisal analysis. Golden Telecom v. Global
GT LP, 11 A.3d 214 (Del. 2010). Rather, thecourt must “take into account all relevant
factors” when “determining [the] fair value”
of the shares. If the court finds that the fairvalue exceeds the merger price, then thesurviving corporation must pay the differencein value to the petitioning stockholders.

In Huff Fund Investment Partnership v. CKx,
Inc. (Huff Fund), 2013 WL 5878807 (Del. Ch.
2013) (Glasscock, V.C.), the Chancery Court
relied on the merger price in assessing thevalue of shares of CKx, an entertainment
company that owns the rights to American
Idol, following Apollo Global Management’s
2011 acquisition of CKx. The court foundthe merger price to be “the most relevant
exemplar of valuation available” given that
other valuation methodologies were “either
unreliable or unavailable.” On February 12,2015, the Delaware Supreme Court issued atwo-paragraph order affirming the Chancery
Court’s appraisal determination. Huff Fund
Investment Partnership v. CKx, Inc., 2015
WL 631586 (Del. 2015) (Valihura, J.).

Chancery Court Explains That
the Merger Price Is Amongthe “Relevant Factors” Courts
May Consider in Section 262
Appraisal Actions
At the outset of its analysis, the Chancery
Court explained that the Delaware Supreme
Court “has interpreted the language ofSection 262(h) … to preclude the use of‘inflexible rules’ or presumptions favoring
any particular valuation method or analysis.”
Huff Fund, 2013 WL 5878807 (citing Golden
Telecom, 11 A.3d 214). Under Section 262,
courts have “‘significant discretion’ toconsider the data and use the valuation
methodologies they deem appropriate”(quoting Golden Telecom, 11 A.3d 214). A
court “has the latitude to ‘select one of theparties’ valuation models as its generalframework, or fashion its own, to determine
fair value in an appraisal proceeding’”(quoting Golden Telecom, 11 A.3d 214).
The Huff Fund court recognized that under
Section 262 and “the interpreting case law,”
courts may not “rely presumptively on theprice achieved by exposing the company
to the market.” Courts must “evaluate ‘all
relevant factors,’ and arrive at a goingconcern value inclusive of any assets notproperly accounted for in the sale, but
exclusive of synergy value that may havebeen captured by the seller.” Given the“complexity in valuing, marketing and selling
an ongoing corporate enterprise,” courts have“[t]ypically… relied on expert valuation, suchas those employing discounted cash flow andcomparable company analyses, to determine
statutory fair value.”3

Nevertheless, the Huff Fund court foundthat “market value―where reliably derived―
remains among the ‘relevant factors’ forarriving at fair value” for Section 262
purposes. The court explained that it has“previously recognized that ‘an arms-length
merger price resulting from an effective
market check is entitled to great weight inan appraisal’” (citing Global GT LP v. Golden
Telecom, Inc., 993 A.2d 497 (Del. Ch. 2010),
aff’d, 11 A.3d 214 (Del. 2010)). The Huff Fundcourt also pointed out that “[i]n at least
one case involving judicial appraisal under
Section 262, the [Chancery] Court decided
to place 100% weight on the merger price”(citing Union Illinois 1995 Inv. Ltd. P’Ship
v. Union Fin. Grp., Ltd. 847 A.2d 340 (Del.
Ch. 2004)).

Chancery Court Determines That
the Delaware Supreme Court’s
Decision in Golden Telecom v.
Global GT LP Does Not Preclude
Consideration of the Merger Pricein a Section 262 Appraisal Action
The Huff Fund court rejected petitioners’
contention that the Delaware Supreme
Court’s decision in Golden Telecom, 11
A.3d 214, stands for “the proposition thatmerger price is … irrelevant in an appraisal
context” and that courts must “accord [themerger price] no weight when determining
fair value.”
The Huff Fund court explained that thepetitioners in Golden Telecom “asked theSupreme Court to reform Delaware appraisal
law by imposing a new presumption infavor of merger price as evidence of fairvalue.” The Delaware Supreme Court
declined to “establish a rule requiring the
Court of Chancery to defer to the merger
price in any appraisal proceeding.” Golden
Telecom, 11 A.3d 214. The Delaware Supreme
Court reasoned that “[r]equiring the Courtof Chancery to defer―conclusively or
presumptively―to the merger price, evenin the face of a pristine, unchallenged
transactional process, would contravene theunambiguous language of the statute and thereasoned holdings of our precedent.”
The Huff Fund court determined that “theruling in Golden Telecom―like the appraisal
statute itself―is inclusive, rather than
exclusive.” Huff Fund, 2013 WL 5878807.
The Golden Telecom decision “recognizes

that differing circumstances may support
reliance on one or another valuation method
under the particular circumstances there
presented.” Pursuant to the “clear” “holding
and rationale of Golden Telecom,” courts
have “an obligation to consider all relevant
factors” in a Section 262 appraisal action.
“[N]o per se rule should presumptively or
conclusively exclude any of those factors fromconsideration[,]” including the merger price.

Chancery Court Holds That theMerger Price Is the Most Reliable
Indicator of the Value of CKx’s
SharesIn appraising CKx’s shares, the Huff Fundcourt determined that “the merger price [was]the most reliable indicator of value” giventhat “no comparable companies, comparable
transactions, or reliable cash flow projections
exist[ed].” The court found unreliable the“comparable companies” analysis presented
by petitioners’ expert because the expert“admitted at trial that he found no companies
he could describe as ‘comparable’ to CKx.”
The court also deemed unreliable petitioners’
expert’s discounted cash flow (“DCF”)
analysis because it was based on management
projections that were “not prepared in theordinary course of business.” The HuffFund court explained that “[t]he reliabilityof a DCF analysis … depends, critically, on
the reliability of the inputs to the model.”Management projections “are generally
deemed reliable” when they “are made in
the ordinary course of business.” However,
the Chancery Court “has disregarded
management projections where thecompany’s use of such projections was
unprecedented, where the projections werecreated in anticipation of litigation, or where
the projections were created for the purposeof obtaining benefits outside the company’s
ordinary course of business.”
Here, the CKx management projections
at issue were created “in connection withexpressions of interest from potential
acquirers” and were based on “an assumptionthat revenues under the to-be-negotiated
American Idol contract would increase
by approximately $20 million each year.”
The Huff Fund court found that the CKx
management projections reflected “little morethan guesswork” as to the likely outcome of
the American Idol negotiations. The court4therefore determined that “[t]he unreliabilityof the revenue estimates, both including andexcluding the $20 million estimate, [was]a serious impediment to creating a reliable
DCF analysis.”“In the absence of comparable companies ortransactions … and without reliable projections
to discount in a DCF analysis,” the Huff Fundcourt “rel[ied] on the merger price as the best
and most reliable indication of CKx’s value.”
The court explained that “[t]he sales
process here [had] been challenged, reviewed
and found free of fiduciary and processirregularities.” Moreover, “[t]he company
was sold after a full market canvas andauction.” Under the circumstances, theHuff Fund court determined that the sales
price was “the most reliable indication of
CKx’s value.” The Delaware Supreme Court
subsequently affirmed the Chancery Court’s
appraisal determination.

Delaware Chancery Court
Relies on the Merger Price inAppraising Ancestry’s Shares
On January 30, 2015, the Delaware Chancery
Court determined that the merger pricewas “the best indicator” of the fair value ofAncestry’s shares in a Section 262 appraisal
action brought in connection with Permira’s
2012 acquisition of Ancestry. In re Appraisalof Ancestry.com, Inc. (Ancestry), 2015 WL
399726 (Del. Ch. 2015) (Glasscock, V.C.).
The Ancestry court explained that, “given
Ancestry’s unique business[,]” “there [were]
no comparable companies to use for purposesof valuation.” Moreover, because Ancestry’s“management did not create projections in
the normal course of business,” the court
found that there was “reason to question
management projections, which were done
in light of the transaction and in the context
of obtaining a fairness opinion.” In view of
the inherent unreliability of management’s
projections, the court had no “great
confidence” in the discounted cash flow(“DCF”) analyses based on those projections.
The Ancestry court determined that “fairvalue in these circumstances [was] best
represented by the market price.” The court
found that the sales process “was reasonable,
wide-ranging and produced a motivatedbuyer.” Moreover, the court noted that themerger “ha[d] been approved of, as freefrom the taint of breaches of fiduciary, by
this [c]ourt.” In light of the “robust” natureof the sales process, the court concluded
that the merger price was “unlikely tohave left significant stockholder value
unaccounted for.”
The Ancestry court explained that in HuffFund Investment Partnership v. CKx, 2013
WL 5878807 (Del. Ch. 2013) (Glasscock,V.C.), the Chancery Court had “relied on themerger price as an indicia of fair value” where“the process leading to the transaction [was]a reliable indicator of value” and “mergerspecific value [was] excluded.”1 The court also
noted that in Highfields Capital, Ltd. v. AXA
Fin., Inc., 939 A.3d 34 (Del. Ch. 2007), theDelaware Chancery Court had stated that“a reviewing court should give substantial
evidentiary weight to the merger price as
an indicator of fair value” provided that“the transaction giving rise to the appraisal
resulted from an arm’s-length process
between two independent parties” and “nostructural impediments existed that mightmaterially distort the crucible of objective
market reality.”
Significantly, the Ancestry court did conduct
its own DCF analysis based on management
projections under two different scenarios, andarrived at a value just a few cents short of themerger price ($31.79 per share as compared tothe merger price of $32 per share). The court
explained that because its own DCF valuation
was “close to the market,” the court felt
“comfort[able] that no undetected factor [had]skewed the sales process.” The Ancestry court
therefore held “that the merger price of $32[was] the best indicator of Ancestry’s fairvalue as of the [m]erger [d]ate.”
1 Notably, Vice Chancellor Glasscock wrote

both the Huff Fund and Ancestry opinions.

The Securities
Law Alert is edited by
Paul C. Gluckow (pgluckow@
stblaw.com/212-455-2653), Peter
E. Kazanoff (pkazanoff@stblaw.
com/212-455- 3525) and
Jonathan K. Youngwood(jyoungwood@stblaw.
com/212-455-3539).

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