Director Duties in M&A Transactions After Chen v. - - PowerPoint PPT Presentation

Director Duties in M&A Transactions After Chen v. Howard-Anderson

Navigating Recent Developments in Delaware Fiduciary Law, Revlon Duties and 102(b)(7) Exculpatory Provisions

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Presenting a live 90-minute webinar with interactive Q&A Jeffrey R. Wolters, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del. Ryan A. McLeod, Attorney, Wachtell Lipton Rosen & Katz, New York

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MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Navigating Recent Developments in Delaware Fiduciary Law, Revlon Duties and 102(b)(7) Exculpatory Provisions

December 16, 2014

Ryan A. McLeod RAMcLeod@wlrk.com Jeffrey R. Wolters jwolters@mnat.com

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

I. Introduction

• II. Factual Background
• III. Procedural Background and Posture

IV.Key Holdings

• V. Implications for Revlon Review

VI.Implications for Disclosure Practice VII.Conclusions

Agenda

New Castle County Courthouse 6

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• Occam was a DE corporation headquartered in

CA that developed, marketed, and supported products for the broadband access market.

• Occam’s board consisted of seven directors.
• Two of the directors (Krausz and Abbott) were

affiliated with investment funds that held 25% of Occam’s stock.

7

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• In 2009, Occam engaged Jeffries & Co. for advice
• n potential strategic transactions. The board

believed growth was necessary to enable Occam to compete, and it concluded its options were

• rganic growth, acquisitions, or a strategic

combination.

• Through 2009 and into 2010, Occam explored

strategic options.

8

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• The summary judgment record showed that Occam

treated its potential strategic partners differently throughout the sales process.

• Plaintiffs argued that this suggested Occam, and in

particular its directors affiliated with the 25% investors, favored Calix.

• Plaintiffs stressed that Occam held friendly meetings

with Calix resulting in proposed merger terms but rebuffed Adtran’s requests for information.

• And discovery suggested that Calix was willing to pay

more and had inside information.

9

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• The summary judgment record also showed that

Occam’s management created financial projections throughout the sales process.

• The projections showed robust growth and

substantially exceeded the estimates based on publicly available information.

• The Vice Chancellor found that the projections were

not given to the bidders and that “it is reasonable to infer that if Adtran had received the June Projections, then Adtran would have valued Occam more highly and been a more persistent suitor.”

10

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• By June 2010, Occam had received two potential bids:
• Adtran: all-cash at a 30-35% market premium
• Midpoint equates to $8.60 per share
• Calix: $7.72 per share in cash/stock mix
• When the board met in June, it was told by Jeffries that

the two bids were equivalent for “illustrative purposes.”

• In their depositions, the directors could not recall if the

board ever knew that Adtran’s bid was 11% higher.

• Moreover, Jeffries did not have access at this time to

management’s projections.

11

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• Right before the July 4 holiday, the board instructed the

CEO to give Adtran a 24-hour deadline to make a firm

• ffer.
• Adtran witnesses testified that this was a “24-hour gun

to our head” and that it precluded Adtran from making a firm offer.

• The board also instructed Jeffries to conduct a “24-hour

market check.”

• Jeffries sent emails to seven bidders. They did not

mention Occam by name. Five responded saying they were interested but needed more time.

12

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• Occam granted exclusivity to Calix, and extended this

exclusivity even as Occam outperformed.

• As Jeffries worked on a fairness opinion, it pushed

management for internal projections.

• Occam provided projections, but revised them

downward and deleted all projections for 2012. Management also did not revise projections to take account of more recent positive business developments.

13

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Factual Background

• In September 2010, Occam Networks and Calix,
• Inc. agreed to a transaction in which Calix would

acquire Occam for a mix of cash and stock.

• Occam stockholders received $3.83 in cash and

0.2925 shares of Calix stock–– $7.75 in value (49.6% cash).

• This amounted to an approximate 60% market

premium.

14

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Procedural Posture

• The transaction was challenged by stockholders

holding approximately 19% of the common stock.

• In January 2011, the Court of Chancery issued a

preliminary injunction blocking the deal from going to a vote until corrective disclosures were made.

• Once the disclosures were made, stockholders

approved the transaction (64% in favor, but only 50.5% of shares not bound by support agreements).

• The parties then took additional discovery (over 20

depositions and over 60,000 pages of documents)

15

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Procedural Posture

• Defendants moved for summary judgment.
• Rule 56 provides for judgment if “there is no

genuine issue as to any material fact.” The movant bears the initial burden, but, if met, the non-moving party must adduce “some evidence

• f a dispute of material fact.”
• Court must view all evidence in the light most

favorable to the non-moving party.

16

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Procedural Posture

• On April 8, 2014, Vice Chancellor

Laster issued a 78-page decision granting in part and denying in part the summary judgment motion.

Vice Chancellor J. Travis Laster 17

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Key Holdings

DISCLOSURES

• Proxy failed to disclose

reliable internal management projections.

• Proxy inaccurately described

information available to Jeffries.

• Proxy inaccurately described

sales process.

• Directors knowingly

approved false disclosures (thus no exculpation) SALE PROCESS

• Revlon reasonableness

review applies to the transaction despite split cash/stock consideration

• Certain board actions in the

sales process fell outside range of reasonableness

• Directors, but not officers,

were exculpated from liability by 102(b)(7) provision because no evidence of improper motive

18

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• What is the standard?
• “Enhanced scrutiny” standard of review
• Did board act reasonably to maximize value;

“range of reasonableness”

• When does the standard apply?
• 49.6% cash deal
• What are the potential remedies?
• Pre-closing: injunction
• Post-closing: damages
• Stockholder vote may effectively cure if fully

informed

19

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• Digression on “Entire Fairness”
• This heightened standard will apply if majority of board had a

conflict (not “independent and disinterested”)

• Under the facts, CEO had conflict due to change of control

severance payment

• Plaintiff argued that two fund representatives on the board

(25% of the stock) also had a conflict because fund was winding down and wanted liquidity

• Court credited this argument in theory, but not under the

facts: no inference that funds could not be extended or had particular need for cash; contrary inference that 25% holders presumably motivated to maximize value of their shares (i.e., alignment with stockholders generally)

20

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• Application of “reasonableness” scrutiny post-closing:

factual dispute over key board decisions in sale process precludes summary judgment

• Areas of concern:
• Apparent favoritism of winning bidder Calix, as

compared to 24-hour deadline given to other bidder Adtran despite Adtran’s having proposed a higher price

• “reasonable inference that the Board favored Calix

at the expense of generating greater value through a competitive bidding process”

• Mere 24 hour “market check” for other bidders over July

4 weekend: “fell outside the range of reasonableness”

21

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• Personal Damages against Directors
• Depends on whether the “breach of Revlon” was

grounded in violation of duty of care, or the duty of loyalty / good faith

• If “solely care,” a typical section 102(b)(7) charter

provision precludes damages against directors

22

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• But if nature of breach implicates loyalty or good faith,

personal damages based on “quasi-appraisal” (i.e., the higher price stockholders would’ve received but for the breach) may be awarded unless entire fairness established

• Loyalty generally means personal financial interest not

shared with stockholders generally (such as the CEO’s severance agreement)

23

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• But what about good faith?
• Lyondell suggested no violation of good faith in Revlon context

unless “utterly failed to attempt to obtain the best sale price”

• Thus, “conscious disregard of duty” = lack of good faith
• But Court in Chen said that lack of good faith may also be shown

by evidence that board had motive other than obtaining best price: “Greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge, … shame or pride …”

• Under facts in Chen, Court found no reasonable inference of any

such “non-stockholder-directed motive,” notwithstanding strong inference of conduct outside Revlon’s range of

• reasonableness. But door opened for next time …

24

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Revlon Review

• Liability for Officers
• Same duties: officers owe same fiduciary duties as directors
• Same personal jurisdiction: Delaware long-arm statute applies
• But less protection:
• No 102(b)(7) protection
• Standard of review less clear (business judgment rule?)
• Dual threat: direct breach of duty, or aiding and abetting

director breach

• Front lines exposure: dealing with bidders, revising projections
• Exposure for directors if they are also officers
• Plaintiffs catching on … starting to see more post-closing claims
• vs. officers
• Personal damages claims in Chen allowed to proceed vs.

CEO/director and CFO

25

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Disclosure Practice

• Delaware Law: fiduciary obligation to disclose all material facts when

seeking stockholder vote

• In Chen, Court focused on three alleged disclosure violations in the

proxy statement sent to stockholders voting on the deal:

• First, failure to disclose most recent projections; defendants

claimed not material because not reliable and not used in valuation, but Court found genuine factual dispute

• Second, misleading description of other projections and of what

projections were provided to the company’s financial advisor for valuation and fairness opinion

• Important context: Company did not provide its best

projections to bidders to try to increase the bids, and then CFO appeared to revise projections downward for fairness

• pinion
• Third, misleading description of sales process, including

statements that losing bidder was “equivocal” and unresponsive

26

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Implications for Disclosure Practice

• Possibility of damages against directors
• Fact question whether directors knew that disclosures

were misleading

• Directors “were in a position to review critically and

correct” the background section of the proxy

• Summary judgment precluded by factual questions re

possibility of loyalty/good faith violation

27

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

Conclusions

28