Source: https://lawprofessors.typepad.com/mergers/litigation/
Timestamp: 2019-04-20 11:12:35+00:00

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Boston University School of Law, in conjunction with the University of Illinois College of Law, UCLA School of Law, and the University of Richmond School of Law, invites submissions for the Seventh Annual Workshop for Corporate & Securities Litigation. This workshop will be held on Friday, September 27 and Saturday, September 28, 2019 at Boston University School of Law.
This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible, including securities class actions, fiduciary duty litigation, and comparative approaches. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress.
Authors whose papers are selected will be invited to present their work at a workshop hosted by Boston University. Hotel costs will be covered. Participants will pay for their own travel and other expenses.
If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to corpandseclitigation@gmail.com by Friday, May 24, 2019. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by late June.
Any questions concerning the workshop should be directed to the organizers: David Webber (dhwebber@bu.edu), Verity Winship (vwinship@illinois.edu), Jim Park (James.park@law.ucla.edu), and Jessica Erickson (jerickso@richmond.edu).
What does ab initio mean anyway?
Since Kahn v. M&F Worldwide there have been a series of challenges to the application of the business judgment presumption in the context of controller squeezeout transactions. The crux of these challenges was M&F's ab initio requirement.
You'll remember that in M&F, the court tried to iron out the problems associated with the Kahn v. Lynch standard that were essentially flypaper for litigation in controller squeezeout transactions. It didn't matter how good a job you might have done in structuring a transaction to look like an arm's length deal, under Lynch your deal was still going to be subject to entire fairness review and you were going to get sued. Although entire fairness was the standard of review for a controller squeezeout with robust procedural protections (approval by disinterested special committee or stockholders), Lynch shifted the pleading burden to plaintiffs rather than the board. That was a mistake by the Del. Supreme Court. Rather than reward boards and give controllers an incentive to do the right thing, shifting the burden of proving entire fairness to plaintiffs simply ensured plaintiffs would sue and demand their day in court - guaranteeing that even meritless litigation had settlement value.
[B]usiness judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.
So, perhaps this is the beginning of the end of litigation in properly structured controlling shareholder transactions.
Over the past couple of years something has been happening in appraisal litigation. For a long time, appraisal litigation was something of a backwater: experts battling over which variables a judge must insert into a discounted cash flow model and the proper level for beta. Shoot me.
Anyway, as I said, something is happening. Appraisal litigation is getting more interesting. In part this is a response to the growing interest in appraisal proceedings by investment funds. Myers and Korsmo wrote about this trend in their 2015 paper Appraisal Arbitrage and the Future of Public Company M&A. As they laid out in their paper, there has been an explosion in investor interest in appraisal proceedings. Appraisal arbitrage, it turns out, is good business.
As the number of appraisal actions has increased (partly also in response to the Corwin ruling having some bite), so too has attention to how fair value is determined by the courts. In the last couple of years, at the Chancery Court, chancellors have started moving away from the view that the court will determine fair value without regard to the merger price. Now, in certain circumstances (where the deal price is a product of a competitive or robust sales price) chancellors may consider merger price as one of the relevant factors for purposes of determining fair value.
Now this question has found its way to the Delaware Supreme Court and the parties are lining up on both sides. There are even amici! Two sets of amici have rolled up: on the one side there are law professors arguing that the court should be able to presumptively rely on merger price to determine fair value in an appraisal proceeding unless that price does not result from arm's length bargaining (DFC Holdings - Bainbridge, et al). On the other are law professors arguing requiring a court to rely on merger price to determine fair value would run counter to the language of the statutory appraisal remedy and also not always reflect fair value (DFC Holdings - Talley, et al). Read both briefs. They are a great review of the issues relating to this issue.
Exploiting the staggered adoption of universal demand (UD) laws by 23 states between 1989 and 2005 as quasi-natural experiments, we show that reduced shareholder litigation threat improves corporate takeover efficiency. Using a difference-in-differences approach, we find that acquirers from states that adopt UD laws experience significantly higher abnormal announcement returns. We also document that UD laws are associated with better long-run post-merger operating performances. Taken together, our findings suggest that the threat of shareholder litigation leads to inefficient mergers and acquisitions and therefore destroys value ex ante.
This is a pretty good example of what financial economists do, I suppose. Except, here's the thing. The authors are focused on the effect of universal demand in derivative litigation on efficiency of the takeover market. OK, I get it. Transaction related litigation is bad. So, if we raise the hurdles to bringing transaction related litigation, then we should improve efficiency of the market. But...transaction related litigation of the type that one reasonably believes is value reducing is never brought as derivative litigation. It's brought as direct litigation. There's a difference.
In the paper, the authors point to two examples of derivative litigation in the context of a merger as an example of what they are talking about. The two examples are Oracle's acquisition of Pillar (100% owned by Oracle CEO Ellison) and the FreePort-McMoRan Copper acquisition of MMR. Excuse me, but neither of those pieces of litigation are examples of value-reducing litigation. Thank goodness for derivative litigation in those cases!
The challenge for everyone in this business isn't transaction-related derivative litigation. It's the direct litigation. Example: an independent board, sells control of the corporation to a third party in an arm's length deal that has been fully-shopped. Shareholders file direct litigation claiming that the board violated its duties under Revlon to get them the highest price in the sale. There's a very good argument that this kind of litigation is value-reducing, but this kind of litigation, which makes up the vast majority of transaction-related litigation, is not covered by this study.
Notwithstanding the fact that the authors are measuring the effect of an irrelevant variable they find the variable to be significant. OK. Well. There you go.
In that regard, if the corporation’s certificate contains an exculpatory provision pursuant to 8 Del. C §102(b)(7) barring claims for monetary liability against directors for breaches of the duty of care, the complaint must state a nonexculpated claim, i.e., a claim predicated on a breach of the directors‟ duty of loyalty or bad faith conduct.
So, unless the suit you are filing immediately upon announcement of a deal can allege that directors didn’t act in good faith or a majority of directors were interested and that the disqualifying interest was material, then, well your claim isn’t going very far and it's going to get the business judgment presumption. Revlon is a high bar for plaintiffs.
The ubiquity of transaction-related litigation is, I think, a real problem. By now, 94%+ of announced mergers end up with some litigation. I think that most reasonable people can agree that not all 94% of transactions where there are lawsuits do the facts suggest that something has gone wrong. Much of the litigation is really just flotsam intended to generate a settlement -- a settlment that directors are all too willing to grant in exchange for a global release.
The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board’s authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.
(a) In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.
Clearly, such a bylaw, if adopted and upheld, would bring the transaction-related litigation train to a screeching halt or at the very least dramatically alter the settlement dynamics.
This bylaw ended up in front of the Delaware Supreme Court as a certified question from the federal district court in Delaware. You'll remember that Delaware is one of the few state supreme courts that will accept certified questions of law. The question before the court was whether the unilaterally adopted fee-shifting bylaw above was valid under Delaware law.
That such a provision is legal under Delaware law isn't all that surprising, really. What is surprising is that court would agree to wander into this hornet's nest of an issue entirely of voluntarily. Whether or not to accept a certified question is entirely within the discretion of the court and the court could have avoided deciding the question altogether had it wanted to. But, apparently it wanted to decide the issue.
The reaction to the opinion has been pretty incredible. For example, Delaware litigator Stuart Grant remarked,"The Delaware Supreme Court seems to have caused Delaware to secede from the union." A little over the top, sure. But, the just because plaintiffs hate the result, don't think that the defense bar is jumping up and down claiming victory and recommending widespread adoption of these provisions. They're not. In fact, many worry that adopting such provisions might just put their clients in the cross hairs. No one wants a fight if they can avoid it. And anyway, the global releases their clients get from settling otherwise trivial transaction challenges are valuable security blankets for directors.
A provision imposing personal liability for the debts of the corporation on its stockholders based solely on their stock ownership, to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts.
The effect of the proposed amendment would make fee shifting impermissable under the DGCL and therefore rule it out as a bylaw. If approved by the legislature in Delaware, the amended 102(b)(6) would go into effect on August 1. Now that's swift justice.
The battle against transaction-related litigation will have to be fought on other ground.
WHYY reports that the Delaware Supreme Court has begun to post mp4/video recordings of all arguments. Right now, video recordings are available back to October 9. You can find them at the Delaware Supreme Court's website. Going forward the video recordings will be posted as a matter of course, although they will be one or two days delayed. Nevertheless, they will be a great resource for lawyers, students, and others interested in the corporate law.
Even though, one can now watch the arguments from afar, I'm still likely going to find myself going to Dover for the arugments in the pending MFW and Cooper appeals (December 18/19). Corporate geek.
Attorneys for Delaware and the Chancery Court could have demanded that all the judges on the U.S. Third Circuit Court of Appeals review the case, a procedure called an “en banc” review, but the deadline to make that request expired Nov. 6, leaving only a possible appeal to the U.S. Supreme Court, which must be done by January 21.
We'll see. My personal opinion: Delaware should permit the arbitration procedure to go forward, but require the proceedings to remain open to the public.
Now, Mr. Genoud has not responded to the complaint. Extraordinary efforts have been made by Mr. Slights and his colleagues to track down Mr. Genoud, including the hiring of two process servers and the hiring of a private investigator. His residential address cannot be found.
The Louisiana counsel who represent Mr. Genoud for purposes of that action have declined to accept service. And the Robbins Geller firm, a firm that I generally have great respect for, has engaged in unsatisfying and, dare I say, pathetic representational contortions in which they have maintained that although they represent Mr. Genoud for purposes of challenging the merger and bringing the lawsuit in Louisiana, they do not represent Mr. Genoud for the clearly-related subject matter of this proceeding.
Now, anyone remotely familiar with this type of stockholder litigation understands that Robbins Geller is not taking its direction from a nominal client on these issues but rather is calling the shots itself. And the idea that Robbins Geller and Louisiana counsel have not been able to reach their client, even though they sued in Louisiana and sought expedited proceedings and have a status conference tomorrow, is either, one, not credible, or two, confirmatory that Robbins Geller is not taking direction from its client about how to handle this litigation.
Frankly, it's quite disappointing behavior from a firm that otherwise has done a great deal to build up reputational capital and credibility with the Delaware courts. It would not have been, I think, any impairment at all to enter an appearance and reserve the ability to fight the jurisdictional issue. It is much more credibility-straining to claim that you can't contact your client, and that although you have been engaged to handle a broad and expedited attack on a merger and to sue in a jurisdiction internationally removed from your client's residence, you have nevertheless not been retained to handle a related proceeding in another court that, although I haven't done the math, is probably equidistant, if not closer, to the plaintiff's residence.
The Louisiana court held a hearing in this case yesterday. I'm assuming the plaintiff (or his counsel) turned up for that hearing. No word yet on the outcome of that hearing.
In 1995, Congress solved the problem of professional plaintiffs in shareholder litigation — or so it thought. The Private Securities Litigation Reform Act (PSLRA) was designed to end the influence of shareholder plaintiffs who had little or no connection to the underlying suit. Yet it may have failed to accomplish its goal. In the wake of the PSLRA, many professional plaintiffs simply moved into other types of corporate lawsuits. In shareholder derivative suits and acquisition class actions across the country, professional plaintiffs are back. They are repeat filers involved in dozens of lawsuits. They are the attorneys’ spouses, parents, and children. They may even be entities created for the primary purpose of filing litigation. These new professional plaintiffs have flown almost entirely under the radar of corporate law scholarship. This Article pulls back the curtain on professional plaintiffs, examining court filings and other public records in the first comprehensive study of professional plaintiffs’ role in corporate law. In most instances, professionalism is a good thing — but not when it comes to choosing plaintiffs.
Download the paper and meet the "mythical" Alan Kahn, as well as Doris & Steven Staehr among others!
Whether, under the “fraud exception” to Delaware’s continuous ownership rule, shareholder plaintiffs may maintain a derivative suit after a merger that divests them of their ownership interest in the corporation on whose behalf they sue by alleging that the merger at issue was necessitated by, and is inseparable from, the alleged fraud that is the subject of their derivative claims.
Short answer: No, affirming Lewis v Anderson. While shareholders' direct claims survive the merger, deritivate claims are extinguished. In answering the certified question, the Supreme Court takes the time to remind us all that dictum is, well, just dictum, not new law.
[Updated] Here are a handful of law firm memos on the MFW Shareholders Litigation (in which the Delaware Court of Chancery held that the Business Judgment Rule applied to a freeze-out merger that was conditioned on the approval of both an independent Special Committee and a Majority-of-the-Minority stockholder Vote). Brian discussed the same case here.
Thinking about it now, it turns out that the 2011 settlement approval of In re Sauer Danfoss Shareholder Litig is an important case. Why? Did it set out any special new points in the law? No. But it did one thing of real value for the courts. In Appendix A to the opinion, it set out a chart of recent settlements with identification of the work accomplished by plaintiffs counsel, the benefit achieved, and the fee approved by the court. It's a price list. And, like a price list, the Delaware courts are now regularly referring to it when they are reviewing requests for attorneys fees in disclosure only cases. I suppose that's a good thing. The downside? Well, now Vice Chancellor Laster has to remember to update the appendix every now and again!
(b) Rules adopted under this chapter must provide that in a class action, if any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney's fees awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.
The court ruled that where the only benefit for shareholders in a settlement is additional disclosure, then attorneys cannot be awarded fees. Now, another Texas court has done it again. This time in Kazman v Frontier Oil the plaintiffs will get nothing following a disclosure settlement. So, if a case if typical merger related flotsam, the plaintiffs might be hoping to get a couple of minor disclosures and/or reduction in a termination fee in exchange for legal fees and giving the board a global release. In Texas, that kind of settlement will no longer result in fees for plaintiffs counsel. That pretty much makes such cases -- or settlements in Texas -- a non-starter from now on.
The coupon settlement legislation in Texas appears to be having a big impact on the development of merger litigation Texas. One only need to look at Dell. To be honest, I was a little surprised by the low number of Texas suits followed in connection with this transaction. Of the 25 suits filed, only 5 of them were filed in Texas. Of course, coupon settlement legislation is not the answer to multiforum litigation, but it does make Texas uneconomic as a forum for a lot of transaction related litigation.
The decision, in In re Transatlantic Holdings Inc. Shareholders Litigation , Case No. 6574-CS, signals that the Chancery Court will carefully scrutinize the terms of negotiated settlements to ensure that named stockholder plaintiffs are adequate class representatives and that the additional disclosures provided some benefit to the purported stockholder class. At the same time, the decision represents an unmistakable warning to plaintiffs’ firms that they cannot continue to count on paydays through the settlement of meritless lawsuits filed in the wake of announced deals.
I'll admit to being disappointed by the work ethic of the plaintiff's bar -- so far only 6 complaints have been filed against the Dell transaction. My guess was 9. Six, though, is still above average. Steven Davidoff and Matt Cain have released their statistical compendium of transaction-related litigation for 2012 (SSRN: Takeover Litigation in 2012). This is the second iteration of this statistical compilation and it has quickly become a must read for those of us interested in the issue of transaction-related litigation.
We see the steady upwards trend in transaction-related litigation and how it has really exploded since 2005. Now, almost 92% of all transactions are accompanied by litigation of some sort and 50% of that involved multi-forum litigation. Davidoff and Cain also report median attorneys’ fees for settlements of $595,000 in 2012.
Michael Dell, the special committee of the company’s board and their advisers are finalizing details of the equity financing while making sure they have explored all possible alternative options, including a sale to other buyers, said two of the people familiar with the situation. Given the potential for conflicts in a deal where Michael Dell helps take his company private, financial advisers and Dell’s board are being extra cautious, said these people.
Evercore Partners Inc. (EVR), which is advising the special committee of the board, has approached other potential buyers and no alternative bids have emerged so far, said one of the people. Dell and its advisers have also explored the possibility of a dividend recapitalization, which would involve taking on debt to help pay for a special dividend, as a way to increase shareholders’ value, said another person.
What's the over/under on the number of suits filed once this transaction is announced regardless of how good the process? I say 9.
For all you law students out there who are mystified by the procedural niceties of derivative litigation (actually, I should include a pile of politicians and media types in this group as well), AIG has filed a copy of its demand refusal with the SEC. It's right here. You'll also find a copy of the plaintiff's demand letter that kicked this whole thing off. I'll probably be using these materials in the future when I next walk through derivative litigation.
What does the filing tell us? Well, after plaintiffs filed their demand that the board took its time and didn't rush its decision with respect to the litigation. When it took up the litigation, it had informed itself of the issues and decided that pursuing Starr's claims in any form wouldn't be in the best interests of the corporation. That's pretty straightforward.
For those of you paying attention to the back and forth related to the H-P/Autonomy acquisition, the question of the potential liability of advisors has popped up more than a couple of times. How could H-P's advisors (investment bankers, lawyers, and accountants) let slip by the alleged accounting fraud that caused H-P to write down more than $5 billion? Close on the heels of that question is whether the advisors should face any liability for not picking up on the fact that Autonomy might not be a good candidate for an acquisition.
Well, for a partial answer as to the liability exposure of M&A advisors when the transaction goes wrong look no further than Baker v. Goldman Sachs, just decided by a jury in federal district court in Boston. There, the founders with Goldman's assistance sold their company, Dragon Systems to Belgium-based Lernout & Hauspie for $580 million in L&H stock. Not long after the transaction closed, fraud at the acquirer was discovered and the acquirer quickly went bankrupt leaving Dragon stockholders holding worthless stock.
Having lost everything, including their tech company, founders Janet and Jim Baker sued Goldman for allegedly failing in its duties to them, their clients, when it brokered the deal. Here's the original complaint (Baker v Goldman) - filed in state court and then removed to federal district court. The jury heard the evidence and the arguments in this case and found that Goldman had not breached any duties to the Bakers.
If H-P is thinking about going after its advisors for its ill-fated Autonomy deal, it will have to be more successful than the Bakers were in convincing a jury that M&A advisors should bear liability for a deal gone wrong.

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