Delaware and federal courts issued a number of important opinions in the first half of 2012, dealing with business combinations and securities laws, among other things. This article briefly recaps some of the cases readers may want to remember when thinking about future transactions.
I. Business Combinations
Breach of Fiduciary Duty
Gerber v. Enterprise Products Holdings, LLC, C.A. No. 5989-VCN (Del. Ch. Jan. 6, 2012). The Court of Chancery dismissed all claims arising out of the sale of a subsidiary of Enterprise GP Holdings, L.P. (“EPE”) to an affiliate and the subsequent merger of EPE into that same affiliate. In doing so, the court enforced the contractual modification of fiduciary duties in EPE’s partnership agreement. Plaintiffs, who were public holders of limited partnership interests in EPE, challenged, among other things, the consideration EPE received from the transactions. After receiving fairness opinions from Morgan Stanley for each transaction, a committee of independent directors of EPE’s general partner approved the transactions.
The court reviewed EPE’s partnership agreement, which addressed transactions (such as the sale and merger) that presented potential conflicts of interest. The agreement provided that such transactions would not breach any fiduciary duties if they were, among other options, approved by a committee of the independent directors of EPE’s general partner. The court upheld this contractual modification of fiduciary duties and thus rejected plaintiffs’ claims for any breach of such duties. It went on to analyze the role of the implied contractual covenant of good faith and fair dealing with respect to the transactions. Plaintiffs claimed the directors acted in bad faith by choosing the independent director approval process instead of the other options provided for in the partnership agreement. The court noted that the agreement also provided that EPE’s general partner may consult with competent advisors and that any action taken in reliance upon an opinion of such advisors would be conclusively presumed to have been taken in good faith. Therefore, it found that the independent directors of EPE’s general partner conclusively acted in good faith when they relied on Morgan Stanley’s fairness opinions in approving the sale and merger transactions.
Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del. July 10, 2012). The Delaware Supreme Court affirmed a Court of Chancery decision temporarily enjoining Martin Marietta Materials, Inc. from pursuing a hostile bid for Vulcan Materials Co. because it breached two confidentially agreements by using confidential information in launching its hostile bid and disclosing confidential information in public filings and communications with the press and investors. Neither of the confidentiality agreements included an express standstill provision barring a hostile bid. However, the fairly-common contractual restrictions on the disclosure and use of confidential information created a de facto standstill restriction in this case. The fact that SEC rules may have required public disclosure of some of the confidential information in the Form S-4 registration statement for the exchange offer did not exempt those disclosures in this case, because the contractual exception permitting “legally required” disclosures was limited, as it often is, to disclosure made pursuant to a subpoena or other external demand in connection with legal proceedings (which was not the case) and after a contractually-prescribed notice and vetting process (which was not followed).
RAA Management, LLC v. Savage Sports Holdings, Inc., No. 577, 2011 (Del. May 18, 2012). The Delaware Supreme Court affirmed the Superior Court’s finding that a fraud claim brought by a private equity bidder, RAA Management, LLC (“RAA”), against a target business, Savage Sports Holdings, Inc. (“Savage”), was barred by the non-reliance and waiver clauses in the parties’ non-disclosure agreement (“NDA”). The NDA provided that (1) Savage would not be held liable for RAA’s reliance on information provided during due diligence; (2) Savage did not make any representations or warranties about the accuracy or completeness of the information it provided; and (3) RAA waived its right to bring claims against Savage except with respect to any representations and warranties that made it into a final agreement of sale. RAA alleged that, at the beginning of negotiations, Savage denied having any significant unrecorded liabilities, but during the course of diligence, Savage disclosed three such items. RAA sought to recover its due diligence costs, which it said it would not have incurred had Savage disclosed the matters at the beginning of the negotiations. It argued, among other things, that the non-reliance and waiver provisions should be limited to mistakes, oversights or simple disclosure negligence, but not to “willful falsehoods.” The court rejected these arguments and found that the non-reliance and waiver provisions were unambiguous and, by their plain language, were not limited to unintentional inaccuracies. Although the court decided the matter under New York law, it confirmed that the outcome would have been the same under Delaware law.
Deal Protection Devices
In re Celera Corporation S’holder Litigation, C.A. No. 6304-VCP (Del. Ch. Mar. 23, 2012). The Court of Chancery approved a settlement in a class action alleging breaches of fiduciary duties in connection with the acquisition of Celera Corp. by Quest Diagnostics, despite the fact that the lead plaintiff had sold its shares after entering into a memorandum of understanding and before the closing of the challenged transaction. The court also expressed its opinion that certain deal protections in the merger agreement and confidentiality agreements with other potential bidders were problematic. Specifically, the court focused on the no-solicitation provision in the merger agreement, which prohibited the Celera board from soliciting competing offers, and its interplay with provisions in confidentiality agreements that Celera had previously entered into with five other potential bidders. Those agreements contained “Don’t-Ask-Don’t-Waive” standstill provisions that prohibited the potential bidders from making an offer without an express invitation from Celera’s board and from asking the Celera board to waive this provision. Thus, the court noted, Celera could not seek competing offers from these parties (due to the no-solicitation provision in the merger agreement) and the potential bidders could not make a bid (due to the standstills). Despite these misgivings, the court emphasized that it was not making any blanket ruling on Don’t-Ask-Don’t-Waive standstill agreements, but did note that the likely remedy, had the case been fully litigated, would have been an injunction against enforcing the standstills.
Merger Agreement Consideration
Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012). The Court of Chancery denied motions to dismiss breach of fiduciary duty claims and ruled that a merger in which minority shareholders were cashed out and controlling shareholders received an interest in the surviving entity was subject to entire fairness review rather than the business judgment rule because appropriate procedural protections were not in place to protect the minority stockholders. Specifically, the court found that although the target board had appointed a special committee to negotiate the merger, it needed to condition the merger on a non-waivable vote of the majority of all minority stockholders in order to invoke the business judgment rule. The case reaffirmed the Court of Chancery’s 2011 opinion in In re John Q. Hammons Hotels Inc. S’holder Litigation.
Sale of Substantially All Assets
In re BankAtlantic Bancorp, Inc. Litigation, C.A. No. 7068-VCL (Del. Ch. Feb. 27, 2012). The Court of Chancery enjoined a transaction in which BankAtlantic Bankcorp, Inc. (a bank holding company) would sell all of its equity interest in BankAtlantic (a federal savings bank which was Bankcorp’s only substantial asset) in exchange for all the equity interests of a new entity that would own BankAtlantic’s non-performing loans, foreclosed real estate and other “criticized assets,” on the basis that the transaction would violate successor obligor covenants in eight Bankcorp debt indentures restricting sales of “all or substantially all” Bankcorp’s assets. Since seven of the indentures were governed by New York law, the court applied New York law’s quantitative and qualitative tests, and concluded the indenture covenants would be violated because “by the most conservative measure, Bankcorp will convey 85-90% of its assets, and the transaction will change fundamentally the nature of Bankcorp’s business.”
II. Securities Law
Richman v. Goldman Sachs Group, Inc., et al., 10 Civ. 3461 (S.D.N.Y. June 21, 2012). The District Court for the Southern District of New York dismissed investor claims against Goldman Sachs & Co. that its failure to disclose receipt of a Wells Notice—notifying it that the SEC staff intended to recommend enforcement action in connection with Goldman’s role in a specific collateralized debt obligation—violated Section 10(b) and Rule 10b-5 of the Exchange Act. In a case of first impression, the court held that Goldman did not have a duty under Section 10(b) or applicable SEC regulations to disclose the fact that it had received a Wells Notice. Noting that a Wells Notice “[a]t best, indicates not litigation but only the desire of the enforcement staff to move forward, which it has no power to effectuate,” the court concluded that “contingency need not be disclosed” to prevent Goldman’s existing disclosures of SEC investigations from being materially misleading. The court said disclosure would be triggered when “the regulatory investigation matures to the point where litigation is apparent and substantially certain to occur.”
Extraterritorial Reach of Federal Securities Laws
Absolute Activist Value Master Fund Ltd. v. Ficeto, No. 11-0221-cv (2d Cir. Mar. 1, 2012). The Court of Appeals for the Second Circuit overruled a district court’s dismissal of a complaint for lack of subject matter jurisdiction for claims arising from off-shore securities transactions that did not involve securities listed on a U.S. exchange. Noting there is significant ambiguity about what constitutes a “domestic transaction in other securities,” the panel concluded the plaintiffs should be allowed to amend their complaint to assert additional facts that might establish the transactions were covered by that phrase. The panel provided guidance on the issue, noting that under the Supreme Court’s decision in Morrison v. National Australia Bank, a “domestic transaction in other securities” consists of a transaction in which either irrevocable liability was incurred or title to securities was transferred within the United States.
In re Vivendi Universal, S.A., Sec. Litigation, No. 02 Civ. 5571 (S.D.N.Y. Jan. 27, 2012). The District Court for the Southern District of New York dismissed fraud claims against Vivendi Universal, S.A. brought by investors under both the Exchange Act and Sections 11, 12(a)(2) and 15 of the Securities Act, claiming Vivendi and its officers made materially false or misleading statements regarding Vivendi’s financial condition. The court concluded, consistent with two other Southern District of New York decisions, that the logic of the Supreme Court’s holding in Morrison v. National Australia Bank extends to cover the Securities Act, not just the Exchange Act, based in part on the fact that it is “part of the same comprehensive regulation of securities trading.”
Short Swing Profits
Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261 (U.S. Mar. 26, 2012). The Supreme Court of the United States unanimously held that the two-year statute of limitations for suits under the short-swing liability rules of Section 16(b) of the Exchange Act is not tolled by the failure to file the disclosure statement required by Section 16(a) of the Exchange Act, reversing a Ninth Circuit decision holding that the limitations period is tolled until the Section 16(a) disclosure statement is filed “regardless of whether the plaintiff knew or should have known of the conduct at issue.” The Court left open the possibility that the two-year period might be extended in limited circumstances, such as under traditional equitable-tolling principles, but acknowledged a split of opinion among the Justices whether the Section 16(b) limitations period is not subject to tolling at all.
Huppe v. WPCS Int’l Inc., No. 08-4463-cv (2d Cir. Jan 20, 2012). The Court of Appeals for the Second Circuit affirmed a district court ruling that two funds making investments through so-called “PIPE” (private investment in public equity) transactions were subject to the strict liability provisions of Section 16(b) of the Exchange Act for disgorgement of short-swing profits to WPCS International Incorporated in connection with transactions in which the funds’ open market sales during December 2005 and January 2006 were matched with their April 2006 purchase of shares in a PIPE transaction approved by WPCS’s Board. The panel agreed with the district court that:
- PIPE transactions are purchases covered by Section 16(b), notwithstanding the acquisition is made directly from the issuer, at its request and with the approval of its board, and they are not eligible for the narrow judicially-created disgorgement exception for “borderline” or “unorthodox” transactions.
- The funds, as beneficial owners of more than 10% of WPCS shares at all relevant times, were insiders for purposes of Section 16(b) liability, notwithstanding that the funds had delegated exclusive power to vote and dispose of the funds’ portfolio securities to the funds’ general partners, and ultimately to two individual members of those general partners, since those individuals acted as agents of the funds, and their actions bound the funds.
Summer Associate Christine Brozynski assisted with the research for this article.