Securities Law Alert
In This Edition:• Second Circuit: American Pipe Tolling Does Not Apply to the Five-Year Statute of Repose for Claims
Brought Under Section 10(b) and Rule 10b-5• Tenth Circuit: Failure to Disclose Project Delays and Cost Overruns Reflected “Benign Optimism” Rather
Than Scienter• Eastern District of New York: Confidential Witness Allegations Too Vague to Form the Basis of a
Securities Fraud Claim• Delaware Chancery Court: Business Judgment Rule Applies to Two-Step Section 251(h) Mergers If theTarget Corporation’s Fully-Informed, Uncoerced Stockholders Tender a Majority of the Company’s Sharesin a First-Step Tender Offer• Delaware Chancery Court: No Material Breach of “Commercially Reasonable” Efforts Clause in a Merger
Agreement Where Defendant Did Not Actively Interfere with Meeting the Condition Precedent
July 2016

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offers “[g]lobal capacity
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2016

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Second Circuit: American Pipe
Tolling Does Not Apply to theFive-Year Statute of Repose
for Claims Brought Under
Section 10(b) and Rule 10b-5
In American Pipe & Construction Co. v.
Utah, 414 U.S. 538 (1974), the Supreme Court
held “the commencement of a class actionsuspends the applicable statute of limitations
as to all asserted members of the class who
would have been parties had the suit been
permitted to continue as a class action.”

The Second Circuit explained that in Police &Fire Ret. Sys. of City of Detroit v. IndyMac
MBS, 721 F.3d 95 (2d Cir. 2013) (IndyMac),
it previously held American Pipe tollinginapplicable to the three-year statute of
repose set forth in Section 13 of the Securities
Act of 1933, which governs claims brought
under Sections 11 and 12(a) of that Act. The
IndyMac court reasoned that if American
Pipe tolling is “viewed as a form of equitable
tolling,” then it “does not apply to Section 13
because ‘a statute of repose is subject only
to legislatively created exceptions, and not
to equitable tolling.’” SRM Global, 2016 WL
3769735 (quoting IndyMac, 721 F.3d 95).

On July 14, 2016, the Second Circuit
determined “American Pipe tolling does
not apply to” 28 U.S.C. § 1658(b)(2), which
establishes a five-year statute of repose forsecurities fraud claims brought under Section
10(b) and Rule 10b-5. SRM Global MasterFund Ltd. P’ship v. Bear Stearns Cos., 2016
WL 3769735 (2d Cir. 2016) (Lohier, J.).

The IndyMac court further determined
American Pipe tolling could not apply to
Section 13 if it were “legal in nature andbased on Rule 23 of the Federal Rules of Civil
Procedure.” Id. (discussing IndyMac, 721 F.3d
95). The IndyMac court found that applying
American Pipe tolling to Section 13 would
violate the Rules Enabling Act, which “forbids
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interpreting Rule 23 to ‘abridge, enlarge, ormodify any substantive right.’” Id. (quoting
IndyMac, 721 F.3d 95). The IndyMac courtemphasized that “statutes of repose create asubstantive right in those protected to be freefrom liability after a legislatively-determined
period of time.” Id. The IndyMac court
found that “[p]ermitting a plaintiff to file acomplaint . . . after the repose period set forthin Section 13 of the Securities Act has run
would therefore necessarily enlarge or modify
a substantive right and violate the Rules
Enabling Act.” Id.
For the same reasons set forth in IndyMac,
the Second Circuit held “American Pipetolling does not apply to § 1658(b)(2)’s fiveyear statute of repose.” The court explainedthat “as a statute of repose, § 1658(b)(2) is
not subject to equitable tolling.” Moreover,the court found § 1658(b)(2) “creates a
substantive right in defendants to be freefrom liability after five years—a right that
American Pipe tolling cannot modify without
running afoul of the Rules Enabling Act.”
Notably, the Second Circuit rejected plaintiff’s
contention that IndyMac was distinguishable
because of “textual differences between
Section 13 and § 1658(b)(2)—in particular,
Section 13’s ‘in no event’ language.”1 The court
found IndyMac was not based on Section 13’s
“in no event” language, and therefore appliedwith equal force to § 1658(b)(2).

Tenth Circuit: Failure to
Disclose Project Delays andCost Overruns Reflected“Benign Optimism” Rather
Than Scienter
On July 6, 2016, the Tenth Circuit affirmed
dismissal of a securities fraud action against
Spirit AeroSystems Holdings and several of its
executives for allegedly misrepresenting cost
overruns and production delays. Anderson
v. Spirit Aerosystems Holdings, 2016 WL
3607032 (10th Cir. 2016) (Bacharach, J.).
The Tenth Circuit found plaintiffs’ allegations
failed to raise a strong inference of scienter.
The court determined it was “more probable
1. Section 13 provides that “[i]n no event shall any . . . action bebrought to enforce a liability . . . more than three years after the
security was bona fide offered to the public, or . . . more than
three years after the sale.” 15 U.S.C. § 77m (emphasis added).
28 U.S.C. § 1658(b)(2) does not include the words “in no event.”

that the Spirit executives were overly
optimistic and failed to give adequate weight
to financial red flags.”

BackgroundSpirit Aerosystems “agreed to supply parts forthree types of aircraft,” including the Boeing
787. The company “managed production of
the parts through three projects,” each ofwhich “encountered production delays andcost overruns.” In periodic public reports in2011 and 2012 concerning the progress ofthese projects, “Spirit acknowledged risks but
expressed confidence about its ability to meetproduction deadlines and ultimately breakeven on the projects.” However, on October25, 2012, Spirit disclosed “that it expected tolose hundreds of millions of dollars on thethree projects.” Following the announcement,
Spirit’s share price fell approximately
thirty percent.
Spirit’s shareholders brought suit in theDistrict of Kansas alleging that Spirit andseveral of its executives knew long before
the October 2012 announcement that “thethree projects were behind schedule and weregenerating so much in additional costs that aloss would be inevitable.” The district court
dismissed plaintiffs’ complaint for failure toallege facts showing scienter, among othergrounds. Plaintiffs appealed.

Tenth Circuit Finds Plaintiffs’
Allegations Insufficient to Raise aStrong Inference of Scienter
On appeal, the Tenth Circuit observedthat “Spirit’s executives [allegedly] knewthat Spirit had encountered problems incontaining costs and meeting production
deadlines.” The court also “assume[d](without deciding) that Spirit did notadequately communicate these problems
to the public.” The Tenth Circuit found thatthe key question here was why. The court
noted at the outset that plaintiffs did notallege that “defendants had a particularized
motive for committing securities fraud.”
While the court explained that this was notdispositive, the court found “the absenceof a motive allegation . . . relevant” to thescienter analysis.
The court found plaintiffs had “suppl[ied]little reason to suspect malevolence rather
than benign optimism.” The court held
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plaintiffs’ allegations inadequate to “create acogent, compelling inference of scienter.”
Testimony of Lower-Level Employees Does Not
Support High-Level Executives’ Scienter

The Tenth Circuit deemed insufficient
plaintiffs’ “generalized descriptions ofinternal meetings, cost reports, delays, andmismanagement” bolstered by the allegationsof “ten corroborating witnesses.” The court
found the corroborating witnesses “weretoo far removed” in the corporate hierarchy
from the four Spirit executives named as
defendants, and these witnesses “did notprovide sufficiently particularized accounts ofwhat the Spirit executives must have known.”
Plaintiffs also alleged that one of the Spirit
executives “had a culpable intent.” However,the court found plaintiffs did “not tie [his]potentially culpable state of mind to any
public disclosures.”“Core Operations” Theory Is Not Sufficient,Standing Alone, to Allege Scienter

The Tenth Circuit rejected plaintiffs’ effort
to allege scienter based on the executives’alleged involvement in monitoring andoverseeing the company’s “core operations.”
The court explained that it could not “infer
scienter based only on a defendant’s position
in a company or involvement with a particular
project.” Similarly, the court stated that “mereattendance at meetings does not contributeto an inference of scienter.” The Tenth Circuit
held that it could infer from plaintiffs’ “coreoperations” allegations “only that the four
executives were overly optimistic about
Spirit’s ability to achieve the forecasted
production schedules and cost reductions.”
The court found plaintiffs did not “provide[ ]a good reason to believe that the executives
knew that the projects were unlikely tomeet forecasts.”
Company’s Implementation of a Project“Recovery Plan” Does Not Establish Scienter

The Tenth Circuit also found meritlessplaintiffs’ efforts to allege scienter based ona “recovery plan” adopted in July 2012 to
put the Boeing 787 project back on schedule.
Plaintiffs’ asserted that “the existence of thisplan show[ed] that Spirit executives knew that
their subsequent representations about the
Boeing 787 project were false or misleading.”
However, the court found plaintiffs’

allegations did not “support [the] logical leap”
that “Spirit executives knew that the recovery
plan could not accomplish the plan’s statedobjectives.” The Tenth Circuit acknowledgedthat the company’s “eventual announcementof a forward loss suggest[ed] that Spirit had
placed too much confidence in the recovery
plan.” But the court explained that “the same
[could] always be said when a company delays
announcement of a forward loss based on
remedial efforts to increase profitability or
production.”
The Tenth Circuit noted that it had “addressed
an analogous issue in In re Zagg, Inc. Sec.
Litig., 797 F.3d 1194 (10th Cir. 2015).”2 There,
a company “adopted a corrective policy
restricting executives’ pledges of corporateshares” after the company “allegedly failed
to disclose that [its] chief executive officer
had pledged approximately half of his sharesin the corporation as collateral in a personal
margin account.” Spirit Aerosystems, 2016
WL 3607032 (discussing In re Zagg, 797
F.3d 1194). The In re Zagg court rejected
plaintiffs’ contention that “adoption of thepolicy showed that the corporation had afraudulent intent.” Id. Rather, the In re Zagg
court determined that “the new policy showed
only that the corporation had ‘identified abetter way of doing things moving forward.’”Id. (quoting In re Zagg, 797 F.3d 1194).
Finding In re Zagg “instructive,” the Tenth
Circuit stated that Spirit’s implementation ofa recovery plan indicated that the company
had “identified an interim step to reduce
costs and expedite production on the Boeing
787 project.” The court determined thatrather than inferring scienter, “[t]he stronger
inference is that the Spirit executives thought
they had ‘identified a better way of doing
things.’” Id. (quoting In re Zagg, 797 F.3d
1194).
Disclosure of Project-Related Risks Does Not
Indicate ScienterWith respect to defendants’ disclosure of
project-related risks, plaintiffs claimed
that “these warnings suggest[ed] a culpable
mental state because the four executives
must have known that the risks had alreadymaterialized.” Plaintiffs asserted that “themore a defendant speaks about a topic, thelikelier it is that [the defendant] knows about
the topic.” The Tenth Circuit “disagree[d],”2. Please click here to read our prior discussion of the In re Zagg
decision.
3and explained that “[o]rdinarily, a defendant’s
warnings weaken an inference of scienter.”CEO’s After-the-Fact Explanation Suggested an
Honest Mistake, Not Scienter

After Spirit announced a forward loss,
the company’s CEO publicly explained
why the loss had occurred. Among otherfactors, the CEO “acknowledged that
Spirit had mistakenly projected Spirit’s
ability to improve efficiency and that Spirit
ultimately learned that it could not meetprojections.” Plaintiffs contended that the
CEO’s “statements show[ed] that Spirit [had]recklessly ignored production delays and cost
overruns.” However, the Tenth Circuit found
the CEO’s statements only “suggest[ed] anhonest mistake in predicting Spirit’s future
production and costs, not an inferenceof scienter.”
Size of Forward Loss Does Not Support anInference of Scienter

The Tenth Circuit also rejected plaintiffs’
contention that “because the forward loss was
so large, the executives must have known long
before October 2012 that Spirit would incura loss.” The court stated that “[t]he loss of$434.6 million was undoubtedly significant,”
but found that “[t]he size of the loss does
not suggest that the four executives knew or
recklessly disregarded the risks that Spirit
was eventually going to lose money on thethree projects.”

Judge Lucero, Dissenting in Part,
Opines Plaintiffs Adequately
Pled Scienter as to Statements
Concerning Then-Present Facts
Judge Lucero concurred with the majority
opinion with respect to “statements regarding
Spirit’s projected ability to meet cost targets.”
However, he “part[ed] ways with the majority
with respect to the portion of plaintiffs’ claim
based on false statements . . . regarding thethen-current performance of Spirit’s 787
project” which did “not rely on any prediction
as to future costs.”
Judge Lucero observed that according toplaintiffs, “defendants stated both ‘we will be
on budget’ and ‘we are on budget.’” He notedthat although “[t]hese two statements differ
markedly for purposes of a securities fraudclaim . . . the majority opinion focuse[d] itsscienter analysis exclusively on the former.”

Eastern District of New
York: Plaintiffs’ Confidential
Witness Allegations Too
Vague to Form the Basis of a
Securities Fraud ClaimOn July 22, 2016, the Eastern District of
New York dismissed a securities fraud action
against VOXX International in which a “single
confidential witness” provided “nearly all of
the information [d]efendants allegedly failed
to disclose in their public statements.” Ford v.
Voxx Int’l, 2016 WL 3982466 (E.D.N.Y. 2016)(Seybert, J.). The court held “the statements
and opinions attributed to” the confidential
witness were “too vague to form the basis of afraud claim.”
The court also rejected plaintiffs’ attempt
to plead securities fraud based on VOXX’s“ambitious” fiscal guidance. Finally, the court
found inactionable alleged misstatementsof opinion concerning the value of thecompany’s goodwill and trademark assets.

Background
In March 2011, VOXX acquired Klipsch
Holding, a company that produces homeaudio speaker systems and headphones.
Klipsch had an increase in net sales of 1.7%
in 2012, and 2.6% in 2013. For 2014, VOXX
projected a 9% increase in Klipsch’s net sales,
but instead net sales declined that year by
3.7%. When VOXX announced its financial
results for the fourth quarter of 2014, VOXX’s
share price fell by 25%. VOXX also took a$57.6 million impairment charge in the fourth
quarter of 2014 consisting largely of writedowns to Klipsch’s goodwill value and the
impairment of certain trademarks.
Plaintiffs subsequently brought the
instant securities fraud action alleging
that VOXX and two of its executives had
made misrepresentations with respect
to (1) Klipsch’s financial prospects andperformance, and (2) the value of VOXX’s
goodwill and asset value. Defendants moved
to dismiss for failure to plead actionable
misstatements or omissions.

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Court Finds Plaintiffs’ Confidential
Witness Allegations Too Vague toMeet the Particularized Pleading
Requirements for a Securities
Fraud Claim
Plaintiffs relied on statements by a single
confidential witness to support their claims
that defendants misrepresented Klipsch’s
financial prospects and performance.
The court explained that “to the extent
a complaint relies upon confidential
witnesses to show that company insiders
made fraudulent public statements, theinformation must be alleged with sufficientparticularity to demonstrate that the insiders’statements were actually false.” The VOXX
court noted that other “courts have dismissed
securities fraud claims that [were] solely
based upon vague allegations supplied byconfidential sources.” For example, in Cityof Roseville Employees’ Retirement System
v. Energysolutions, 814 F. Supp. 2d 395(S.D.N.Y. 2011), the court declined to rely on
confidential witness statements in considering
allegations that a company had overstatedthe value of certain trust fund assets in its
registration statement. The court “foundthe information supplied by the confidential
witness to be overly vague because the witness
did not provide any information about theperiod over which the [trust fund] balance
declined, the amount of the decline, or theaccuracy of the statements in the registration
statement.” Id. (discussing Energysolutions,
814 F. Supp. 2d 395).
In the case before it, the VOXX court
similarly found plaintiffs’ confidential
witness allegations “too vague to form thebasis of a [securities] fraud claim.” First,
the confidential witness represented “thatKlipsch’s sales [had been] ‘flat or declining
for years.’” The court found these statements“overly vague because there [was] no
indication of the time period to which thestatements refer[red], the magnitude of
the alleged decline in sales, or the extent towhich the decline impacted the [c]ompany’s
reported sales figures.”
Second, the confidential witness opinedthat (1) Klipsch’s “products were too
expensive relative to the competition” and(2) the company’s “advertising campaigns‘did not generate the recognition or
increase in sales that Klipsch had hoped.’”The court explained that “[a]s a generalmatter, the mere opinions of confidential
witnesses . . . are not actionable in securities
fraud cases.” Moreover, the court found theconfidential witness’s “opinions about theprice point of [Klipsch’s] products and theeffectiveness of its advertising campaigns[were] untethered to any particular facts
about how [the company’s] pricing andadvertising actually affected sales,” andtherefore “lack[ed] the particularity necessary
to allege [falsity].”
Finally, the confidential witness statedthat Klipsch “started to lose market sharewith headphones/earbuds [in 2012].” Thecourt observed that given the witness’s roleat the company, the confidential witness
was “plausibly in a position to know the[c]ompany’s standing in the market forheadphones relative to competitors.”
Nevertheless, the court deemed theconfidential witness’s “market shareclaims . . . too vague to support a cause ofaction under Rule 9(b).” The court foundit significant that the confidential witness“provide[d] no information about whether[the company’s] position in the market
changed during the [c]lass [p]eriod or towhat extent its reported sales figures during
the [c]lass period were impacted by its
market position.”

Court Finds Allegations of
Ambitious Earnings Estimates,
Standing Alone, Insufficient to
Support a Securities Fraud Claim
Plaintiffs “place[d] great weight upon[d]efendants’ 2014 financial guidance as abasis for their securities fraud allegations.”
The court explained that statements
projecting “future performance may beactionable under Section 10(b) or Rule10b-5 if . . . the speaker does not genuinely
or reasonably believe them.” The court
acknowledged that defendants’ “estimated
9% growth rate [for Klipsch] was lofty”
considering “Klipsch’s 1.7% growth rate
in 2012 and 2.6% growth rate in 2013.”
However, the court observed that “Klipsch’s
past performance was publicly known at
the time [d]efendants issued their 2014
financial guidance.”
The court explained that plaintiffs cannot
allege fraud simply by asserting defendants’“financial estimates were unreasonable in5light of publicly available information.”
Instead, plaintiffs “must set forth specific facts
showing why [d]efendants’ fiscal guidance
was false or misleading, and not merely
ambitious.” Here, the court held plaintiffs“failed to meet this burden.”Court Holds Plaintiffs Failed toAllege a Misstatement of Opinion
Concerning the Value of VOXX’s
Intangible Assets

test” of the company’s goodwill assets several
months earlier than the company reported
an impairment charge. Following the Second
Circuit’s precedent in Fait, the CBS court“held that the plaintiffs failed to state a claim
because they did not plead any facts which‘plausibly demonstrate[d] that defendants
knew, nor even had reason to know . . . it wasmore likely than not that the goodwill of any
specific reporting unit was overvalued.’” Id.
(quoting CBS, 679 F.3d 64).

Plaintiffs claimed that VOXX’s statements ofopinion concerning the value of its goodwill
and trademark assets were “materially false
or misleading because the reported values
were inflated.” According to plaintiffs,
VOXX should have tested these assets for
impairment no later than the third quarter offiscal 2013 rather than waiting until the fourth
quarter of fiscal 2014 to report an impairment
charge.
The VOXX court explained that in order“[t]o state a fraud claim based upon a
misstatement of opinion” under the Supreme
Court’s decision in Omnicare v. Laborers’
Dist. Council Constr. Indus. Pension Fund,
135 S. Ct. 1318 (2015),3 plaintiffs must
allege “material facts that call the basis forthe [c]ompany’s opinion into question and‘whose omission makes the opinion statement
at issue misleading to a reasonable person
reading the statement fairly and in context.’”
Id. (quoting Omnicare, 135 S. Ct. 1318). The
VOXX court noted that prior to Omnicare,
the Second Circuit in Fait v. Regions Fin.
Corp., 655 F.3d 105 (2d Cir. 2011)4 held thata complaint asserting “a misstatement of acompany’s goodwill assets . . . must ‘plausibly
allege that defendants did not believe thestatements regarding goodwill at the timethey made them.’” Id. (quoting Fait, 655 F.3d
105).
The VOXX court also found “instructive” theSecond Circuit’s decision in City of Omaha,
Nebraska Civilian Ems.’ Ret. Sys. v. CBS
Corp., 679 F. 3d 64 (2d Cir. 2012).5 In thatcase, plaintiffs contended that “various
publicly-known ‘red flags,’ should have caused
the defendants to perform an impairment
3. Please click here to read our prior discussion of the Supreme
Court’s decision in Omnicare.
4. Please click here to read our prior discussion of the Second
Circuit’s opinion in Fait.

In the case before it, the VOXX court similarly
found plaintiffs’ complaint did “not containfacts suggesting that [d]efendants knew at any
point during the [c]lass [p]eriod that VOXX’s
goodwill or trademark assets were inflated
and should have been tested for impairment.”
Although VOXX “lowered its sales guidance inthe third quarter of 2013,” the court held that“lower than expected sales [do] not implicate
the kind of adverse market conditions
that should have triggered an impairment
test.” As to the fact that “the reported valueof VOXX’s intangible assets exceeded its
market capitalization,” the court held this“insufficient to show [d]efendants made anactionable misstatement of opinion absent
factual allegations regarding ‘the inquiry
the [defendants] did or did not conduct or
the knowledge [they] did or did not have.’”Id. (quoting Omnicare, 135 S. Ct. 1318). The
VOXX court concluded plaintiffs’ allegations
fell “short of what is needed to plead an
actionable misstatement of opinion” under
Omnicare and Fait.

5. Please click here to read our prior discussion of the Second
Circuit’s opinion in CBS.
6

Delaware Chancery 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 theCompany’s Shares in a FirstStep Tender Offer

Volcano stockholders subsequently broughtsuit alleging the Volcano board breached its
duties of care and loyalty in connection withthe merger. Defendants moved to dismiss thecomplaint.

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

The court first considered “what standard ofreview to apply in evaluating [d]efendants’
alleged fiduciary duty breaches.” The court
determined “the business judgment ruleirrebuttably applie[d] to the [m]erger because
Volcano’s disinterested, uncoerced, fully
informed stockholders tendered a majority ofthe [c]ompany’s outstanding shares into the[t]ender [o]ffer.”

On June 30, 2016, the Delaware Chancery
Court held that “the acceptance of a first-steptender offer by fully informed, disinterested,uncoerced stockholders representing amajority of a corporation’s outstanding
shares in a two-step merger under Section
251(h) has the same cleansing effect under”
the Delaware Supreme Court’s decision in
Corwin v. KKR Financial Holdings LLC, 125
A.3d 304 (Del. 2015),6 “as a vote in favor ofa merger by a fully informed, disinterested,uncoerced stockholder majority.” In re
Volcano Corporation S’holder Litig., 2016
WL 3583704 (Del. Ch. 2016) (MontgomeryReeves, V.C.). Under Corwin, claims of
fiduciary duty breaches against the target
corporation’s directors must be dismissed
absent allegations of waste.

Background
On December 16, 2014, Volcano Corporation’sboard approved a cash-out merger by Philips
Holding USA, to be consummated as a
two-step merger under Section 251(h) of
the DGCL.
Volcano’s stockholders tendered 89.1% of thecompany’s outstanding shares into the firststep tender offer. On February 17, 2015, after
the expiration of the tender offer, Volcano
and Philips consummated the merger without
a stockholder vote, as permitted under
Section 251(h).

6. Please click here to read our prior discussion of the Delaware
Supreme Court’s decision in Corwin.

Chancery Court Holds the Business
Judgment Rule Applies Because
Volcano’s Fully-Informed,
Uncoerced Stockholders Approved
the Merger by Tendering a Majorityof the Company’s Shares

The Volcano court explained that “recent[Delaware] Supreme Court decisions confirm
that the approval of a merger by a majorityof a corporation’s outstanding sharespursuant to a statutorily required vote of
the corporation’s fully informed, uncoerced,
disinterested [stockholders] renders thebusiness judgment rule irrebuttable.” Id.
(citing Corwin, 125 A.3d 304, and Singh v.
Attenborough, 2016 WL 2765312 (May 6,2016)7). The Volcano court further noted“such an approved transaction can only bechallenged on the basis that it constituted
waste.” Id. (citing Attenborough, 2016
WL 2765312).
The Volcano court “conclude[d] thatstockholder approval of a merger under
Section 251(h) by accepting a tender offer has
the same cleansing effect as a vote in favorof that merger.” The court rejected plaintiffs’
contention that “stockholder acceptance of atender offer and a stockholder vote differ ina manner that should preclude the cleansing
effect articulated by the [Delaware] Supreme
Court in Corwin from applying to tender
offers.”First, the court found meritless plaintiffs’
claim that there is no explicit role for a target
corporation’s board of directors in responding
to a tender offer. The court explained that“[a] target board’s role in negotiating a
7. Please click here to read our prior discussion of the Delaware
Supreme Court’s decision in Attenborough.
7

two-step merger subject to a first-step tender
offer under Section 251(h) . . . is substantiallysimilar to its role in a merger subject to a
stockholder vote under Section 251(c) of
the DGCL.” A target corporation’s board
must “negotiate, agree to, and declare theadvisability of the terms of both the firststep tender offer and the second-step merger
in a Section 251(h) merger, just as a target
corporation’s board must negotiate, agree
to, and declare the advisability of a merger
involving a stockholder vote under Section
251(c).” Moreover, “[t]he target board also
is subject to the same common law fiduciary
duties, regardless of the subsection underwhich the merger is consummated.”
The Volcano court found similarly baselessplaintiffs’ suggestion that “a first-steptender offer in a two-step merger . . is morecoercive than a stockholder vote in a onestep merger.” The court explained that
“Section 251(h) . . . alleviates the coercion thatstockholders might otherwise be subject to ina tender offer because (1) the first-step tender
offer must be for all the target company’s
outstanding stock, (2) the second-step merger
must ‘be effected as soon as practicablefollowing the consummation of the’ first-steptender offer, (3) the consideration paid in
the second-step merger must be of ‘the sameamount and kind’ as that paid in the firststep tender offer, and (4) appraisal rights
are available in all Section 251(h) mergers,
subject to the conditions and requirements ofSection 262 of the DGCL.” Id. (quoting Del. C.
tit. 8 § 251(h)).
Finally, the Volcano court found “the policy
considerations underlying the [Delaware
Supreme Court’s] holding in Corwin do notprovide any basis for distinguishing between
a stockholder vote and a tender offer.” The

Volcano court reasoned that “[a] stockholder
is no less exercising her ‘free and informed
choice to decide on the economic merits of atransaction’ simply by virtue of accepting atender offer rather than casting a vote.” Id.
(quoting Corwin, 125 A.3d 304). The Volcano
court further noted that “judges are just as‘poorly positioned to evaluate the wisdom of’stockholder-approved mergers under Section
251(h) as they are in the context of corporatetransactions with statutorily required
stockholder votes.” Id. (quoting Corwin, 125
A.3d 304). In concluding that “the [Delaware]
Supreme Court did not intend that its holdingin Corwin be limited to stockholder votes
only,” the Volcano court found it significant
that the Corwin court included a caseinvolving a two-step merger with a firststep tender offer among the cases it cited as
support for its decision.

Court Holds Plaintiffs Failed toState Breach of Fiduciary Duty
Claims Against Volcano’s Board
Because the court found “the businessjudgment rule irrebuttably applie[d]” to
the Volcano-Philips merger, the court
determined the transaction could “only . . . bechallenged on the basis that it constituted
waste.” The court noted that it was “logicallydifficult to conceptualize how a plaintiff[could] ultimately prove a waste . . . claimin the face of a decision by fully informed,
uncoerced, independent stockholders to
ratify the transaction, given that the [t]est
for waste is whether any person of ordinary
sound business judgment could view thetransaction as fair.” The court held that“[b]ecause the [m]erger did not constitutewaste, the [c]omplaint fail[ed] to state a valid
breach of fiduciary duty claim against the[Volcano] [b]oard.”

8Delaware Chancery Court:
No Material Breach of“Commercially Reasonable”
Efforts Clause in a Merger
Agreement Where Defendant
Did Not Actively Interferewith Meeting the Condition
Precedent
On June 24, 2016, the Delaware Chancery
Court considered the requirement in a merger
agreement that the parties use “commerciallyreasonable” efforts to obtain a tax opinion asa condition precedent to the consummationof the merger. The Williams Cos. v. Energy
Transfer Equity, 2016 WL 3576682 (Del. Ch.
2016) (Glasscock, V.C.). In the case before thecourt, intervening economic circumstances
allegedly changed both the buyer’s desire to
consummate the merger and the designatedlaw firm’s willingness to issue the favorable
tax opinion mandated by the merger
agreement. The court found the buyer had notbreached the requirement to use “commercial
reasonable” efforts to obtain the tax opinion
because there was no evidence that thebuyer’s “activity or lack thereof caused, or
had a material effect upon” the law firm’s“inability” to issue the necessary tax opinion.

BackgroundPursuant to the terms of a merger agreement
dated September 28, 2015 (the “Merger
Agreement”), Energy Transfer Equity (the“Partnership”) was to acquire The Williams
Companies in an “unusual structure” inwhich Williams was to merge into Energy
Transfer Corp (“ETC”), an entity createdby the Partnership. The acquisition was tobe accomplished in multiple steps: “ETC
would . . . transfer the former Williams
assets and 19% of ETC’s common stock to
the Partnership, in return for partnership
units equivalent in value to the ETC stock
on a one-share-for-one-unit basis, together
with $6 billion in cash” that “would thenbe distributed to the former Williams
stockholders.”
The Merger Agreement made “it clear . . . thata tax-free transfer of the Williams [a]ssets
between ETC and the Partnership wasnecessary for the deal to make economic
sense.” The parties “conditioned

consummation of the deal on the opinion ofa third party—Latham [& Watkins]—that thetransaction ‘should’ survive an IRS challenge
and be considered tax free under Section
721(a)” (the “721 Opinion”). At the time thedeal was struck, the transaction “involved
assets of equivalent value” and Latham would
have been “able, under those conditions, toissue an opinion that the transaction should
be considered a tax-free event.”
Williams and the Partnership were both in
the gas pipeline business. Sometime after
the execution of the Merger Agreement,“the energy market—and thus the value of
assets used in the transport of energy, of thetype held by Williams and the Partnership—
experienced a precipitous decline.” Themerger “quickly became financially
unpalatable to the Partnership” because it
would have “resulted in a value discrepancy
amounting to a $3 to $4 billion overpayment
by the Partnership.” Latham & Watkins
subsequently determined that it could notissue the requisite 721 Opinion because theunderlying transaction no longer involved
equivalent assets and thus there was “asufficient likelihood” that the transaction was
not tax free.
The Partnership attempted to terminate theMerger Agreement based on Latham’s failure
to issue the 721 Opinion. Williams thenbrought suit asserting that “the Partnership[had] breached the Merger Agreement by
failing to use commercially reasonable efforts
to obtain the 721 Opinion” and therefore
could not “rely on the failure of Latham todeliver the 721 Opinion as a basis to terminate
the Merger Agreement.” The parties
conducted expedited discovery and the court
held a two-day trial to consider the issues.

Court Finds No Material Breach
Because the Partnership’s Actions
Did Not Cause Latham to Refuse to
Issue the Tax Opinion
As an initial matter, the court determinedthat Latham’s refusal to issue the 721 Opinion
was not in bad faith but instead, reflected thechanged economics of the deal. In reaching
this conclusion, the court found it significant
that Latham’s change of position was “not in
the reputational interest of the individual tax
attorneys at Latham, nor the interest of thefirm generally.”

9The court then considered whether thePartnership was in “material breach” of its
obligation to use “commercially reasonable
efforts” to obtain a 721 Opinion from
Latham. The court observed that the term“commercially reasonable efforts” wasneither “defined in the Merger Agreement”
nor “addressed with particular coherencein [Delaware] case law.” In the absenceof guidance on the meaning of the term,
the court found that “by agreeing to make‘commercially reasonable efforts’ to achieve
the 721 Opinion, the Partnership necessarily
submitted itself to an objective standard—that is, it bound itself to do those things
objectively reasonable to produce the desired
721 Opinion, in the context of the agreement
reached by the parties.”
The court recognized that the Partnership
had “experienced a bitter buyer’s remorse.”
However, the court explained that Williams
could “point to no commercially reasonable
efforts that the Partnership could have taken
to consummate the [merger].” Williams did
not suggest that there were “actions available
to the Partnership that would have caused
Latham, acting in good faith, to issue the721 Opinion” either based on “the current
structure of” the merger or “any alternative
structure suggested to date.” Finding that
there were “no such actions available to thePartnership,” the court held the Partnershipwas not in “material breach” of the Merger
Agreement “[d]espite [its] motivations.”
Significantly, the Williams court
distinguished an earlier decision in Hexion
Specialty Chemicals v. Huntsman Corp.,
965 A.2d 715 (Del. Ch. 2008). There, theChancery Court held that a buyer who nolonger wished to consummate an agreed-uponmerger had breached its obligation to use“reasonable best efforts” to obtain financing
for the transaction as required under themerger agreement. The Williams court foundthat in Hexion, “the buyer [had] actively
and affirmatively torpedoed its ability tofinance” the merger by, among other actions,“knowingly” providing its financial advisor
with “misleading or inaccurate information”
concerning the transaction. Here, however,the Williams court found no evidence that“the Partnership [had] instructed Latham,
directly or indirectly,” to refuse to issue thenecessary tax opinion. The court explainedthat “[i]f the record here reflected affirmativeacts by the Partnership to coerce or mislead
Latham, by which actions it prevented
issuance of the 721 Opinion, the facts here
would more resemble Hexion, and theoutcome here would likely be different.”
The court therefore denied Williams’ request
to enjoin the Partnership from terminating
the Merger Agreement based on Latham’s
failure to issue a Section 721 tax opinion.

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.

10

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