The last year saw courts hand down significant decisions in the area of corporate law, many of which are discussed in the ABA Business Corporate and Litigation Committee's forthcoming Annual Review of Developments in Business and Corporate Litigation.
Decisions of import to corporate transactions practitioners included Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011), in which the U.S. District Court for the Northern District of California declined to enforce an exclusive forum selection bylaw adopted by the board of directors of Oracle Corporation, calling into doubt the utility of such provisions at least where they are not approved by stockholders. In Olson v. ev3, Inc., 2011 WL 704409 (Del. Ch. Feb. 21, 2011), the Delaware Court of Chancery also generally approved of so-called "top-up options"--common merger agreement provisions requiring the issuance of shares sufficient to enable an acquirer to close a short-form merger. In GRT, Inc. v. Marathon GTF Technology, Ltd., 2011 WL 2682898 (Del. Ch. Jul. 11, 2011), the court enforced a provision in a purchase agreement governed by Delaware law that in effect shortened the statute of limitations to bring an action for a breach of certain representations, remarking that Delaware law is "more contractarian than that of many other states." In addition, in In re Smurfit-Stone Container Corp. S'holder Litig., the Court of Chancery held that so-called Revlon duties and accompanying heightened scrutiny apply to sales transactions where stockholders receive a roughly even mix of cash and the acquirer's stock. 2011 WL 2028076 (Del. Ch. May 24, 2011).
Other decisions of general interest (also addressed in the Annual Review) include King v. Verifone Holdings, Inc., 12 A.3d 1140 (Del. 2011), in which the Delaware Supreme Court held that a stockholder's filing of a derivative complaint does not preclude her from later invoking statutory rights to inspect corporate records relating to the same alleged wrongdoing. Although it involved a limited liability company (LLC) rather than a corporation, the Delaware Supreme Court's decision in CML V, LLC v. Bax, 28 A.3d 1037 (Del. 2011), holding that creditors of an insolvent Delaware LLC lack standing to bring a derivative action--unlike creditors of an insolvent Delaware corporation--is also noteworthy.
Perhaps the most significant corporate law decisions of 2011, however, involved fiduciary duty litigation in the mergers and acquisitions context pitting investors against incumbent directors and members of management. The year 2011 saw a string of remarkable Delaware decisions in this regard--from the Court of Chancery's February 2011 decision in Airgas to its December decision in In re Southern Peru Deriv. Litig.--that in many respects were favorable to investor-litigants. Because of their importance, these decisions are discussed in greater detail below.
Air Products & Chemicals, Inc. v. Airgas, Inc.
Perhaps the most widely discussed corporate law decision of the year was the Delaware Court of Chancery's holding in Air Products & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011). In Airgas, former Chancellor William B. Chandler, III (who would retire from the bench later in 2011 after 25 years of service), addressed whether a board of directors may use a poison pill indefinitely to prevent stockholders from tendering into a premium all-cash, all-shares offer--specifically in order to preclude stockholders from choosing to sell where their selling could jeopardize long-term growth prospects for higher value. The Airgas court expressed sympathy for the argument that such a choice by stockholders was not a cognizable "threat" justifying continued use of a poison pill, but ultimately felt compelled by precedent and powerful facts favorable to the board to defer to the board's judgment.
In summary, the 16-month-long attempt by Air Products & Chemicals, Inc. to acquire Airgas began when Air Products repeatedly made unsolicited acquisition offers, at first privately and then in public all-cash, all-shares tender offers. The Airgas board repeatedly consulted with management and outside financial advisors and rejected the offers. The board relied heavily upon the company's strategic plan, which included projections of future performance. When Air Products ran a successful proxy contest to have three nominees elected to Airgas's nine-member classified board, in a remarkable turn of events the new directors quickly agreed with their fellow board members that the offers were inadequate. Air Products eventually made a "best and final" offer of $70 per share. The Airgas board again concluded that the $70 per share offer was inadequate and that, based on its business plan, Airgas was worth at least $78 per share.
Air Products argued that continued use of the poison pill in these circumstances was not justified. The court agreed the offer was not "structurally coercive"--such as inadequately financed offers or front-loaded offers. The court also found that the Airgas stockholders were "a sophisticated group" with "an extraordinary amount of information available to them with which to make an informed decision[.]" Airgas argued, however, that many stockholders purchased when Air Products first began making offers (and Airgas's stock price was lower), and so would be tempted to sell for a quick profit. The court agreed that "a majority of stockholders might be willing to tender their shares regardless of whether the price is adequate or not"--and this created a "risk" of compromising the board's long-term plan. That this constituted a cognizable threat was compelled, in the court's view, by precedent such as "powerful dictum" in Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990): "[d]irectors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy." The court so held despite stating that, in the Chancellor's "personal view, Airgas's poison pill had served its legitimate purpose." Air Products declined to appeal, and withdrew its tender offer.
As the Court indicated, the Airgas decision should not be read as permitting a board to "just say no" in all circumstances. Some unique key facts that may serve to distinguish Airgas from future cases include (1) the Air Products' nominees' concurrence (after joining the board) that the Air Products offers were inadequate; (2) the board's reliance on opinions of several independent financial advisors; (3) Airgas's detailed business plan and its track record of meeting the plan's benchmarks; (4) the significant spread between the $70 offer and the board's view that Airgas was worth at least $78 per share; and (5) the fact that almost all of the Airgas board members were non-employee, independent directors. In addition, despite the apparent breadth of the legal reasoning in support of the board's managerial prerogatives, future jurists may disagree that precedent truly compelled the Airgas result. For example, as the Chancellor acknowledged, the above-quoted passage from Paramount is dicta. In any event, Paramount and other decisions could reasonably be read to support that there must be a real threat of stockholder confusion regarding the fairness of price--likely absent in the Airgas facts--before such an offer could constitute a threat. Factors such as these could, in a future case, cause a court to concur with the Chancellor's "personal view" and hold that well-informed stockholders should have the right to consider a premium tender offer.
In re Del Monte Foods Co. S'holders Litig.
Stockholder challenges to M&A transactions, and resulting judicial scrutiny, have shown an increased focus on conflicts of interest suffered by sellers' financial advisors. Directors rely upon financial advisors to assist them in satisfying their duties under Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 172 (Del. 1986), to act reasonably to obtain the best price when selling a company. Such professionals often advise boards of directors on the sales process and negotiating strategy, and may opine on the adequacy of offers and the financial fairness of transactions. In turn, stockholders rely upon the work of financial advisors in deciding whether to approve a sale. For these reasons, potential financial advisor conflicts are scrutinized. In In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813 (Del. Ch. 2011), the Delaware Court of Chancery's scrutiny of financial advisor conflicts led it to enjoin the $5.3 billion sale of Del Monte Foods Company to a group led by Kohlberg, Kravis, Roberts & Co. (KKR).
In summary, Del Monte's longtime financial advisor, Barclays Capital, had repeatedly pitched an acquisition of Del Monte to its financial clients without Del Monte's knowledge or approval. Barclays secretly planned to provide buy-side financing to any acquirer. Barclays then structured a sales process consistent with this goal and recommended that KKR (a Barclays client) be included in a small group of bidders. Barclays secretly met with and helped partner KKR with another bidder, Vestar Capital Partners. This reduced the chances for competitive bidding and violated agreements that prohibited both firms from partnering to bid. When Barclays later approached the Del Monte board to ask permission to include Vestar as a bid sponsor, the board agreed. In addition, Barclays sought (and received) permission to provide buy-side financing--even though Del Monte and KKR had not yet agreed on price. This conflicted role would result in fees to Barclays at least as high as the fees for serving as Del Monte's financial advisor. Barclays also ran a post-signing "go-shop" period, despite its financial interest in supporting the KKR/Vestar deal.
The Del Monte court held that, due largely to such conflicts of interest, the Del Monte board likely breached its fiduciary duties. The board made unreasonable decisions in permitting (1) KKR to pair with Vestar; and (2) Barclays to provide buy-side financing while negotiations were ongoing and there was still a "go-shop" period to run. The court found that the board "sought in good faith to fulfill its fiduciary duties, but failed because it was misled by Barclays." The court noted that, while the board's good faith and reliance upon experts would likely shield its members from monetary liability, those who aided and abetted breaches of fiduciary duty would not have this protection. As a remedy, the court enjoined the closing of the sale for a period, during which the deal protections of the merger agreement would not be enforced.
Following the injunction, the court awarded plaintiffs' counsel $2.75 million as an interim fee award for uncovering the misconduct by Barclays and obtaining corrective disclosures to stockholders in this regard. The parties subsequently entered into a settlement agreement requiring a payment of $89.4 million. Under the agreement, $23.7 million of this amount was to be funded by Barclays--an amount which reportedly was in addition to over $20 million in professional fees Del Monte withheld. Consistent with a focus on rewarding significant and meritorious litigation efforts by plaintiffs' counsel working on a contingency basis (discussed further below in connection with the Southern Peru case), the Court of Chancery approved a large fee award of $22.3 million to be paid from the settlement fund.
William Penn Partnership and KKR Cases
A pair of 2011 decisions by the Delaware Supreme Court--William Penn Partnership v. Saliba, 23 A.3d 831 (Del. 2011) and Kahn v. Kolberg Kravis Roberts & Co., 13 A.3d 749 (Del. 2011) (KKR)--emphasize the broad discretion courts have to fashion a liberal remedy in cases where fiduciaries have acted disloyally, but where a resulting actual economic loss can not be proven with reasonable certainty. Corporate fiduciaries and those who advise them should remain mindful that courts are vigilant in policing misconduct by self-interested fiduciaries and will not hesitate to craft an equitable remedy.
In Saliba, the defendants were managers and 50 percent interest holders of an LLC who sold the company's only significant asset to another entity they controlled. The process leading to this self-interested transaction was flawed. When the plaintiffs, who held minority interests in the LLC, learned of the planned sale, they offered to buy the majority's interest. Instead of promoting bidding or another fair sales process, the managers then proceeded to closing without a vote required under the company's operating agreement. Because the defendants stood on both sides of the transaction, the sale was subject to entire fairness review. While the defendants clearly did not deal fairly with plaintiffs, independent experts appointed by the court valued the asset at less than the price paid by the defendants. Because the sale price objectively exceeded its fair market value, the plaintiffs were left without a "typical damage award." The Delaware Court of Chancery nevertheless awarded plaintiffs their attorneys' fees, expert expenses, and costs based on the managers' unfair dealing and disloyal conduct in the sales process. The Delaware Supreme Court affirmed, reasoning the remedy imposed "was supported by Delaware law in order to discourage outright acts of disloyalty by fiduciaries."
In KKR, which involved a stockholder derivative claim alleging insider trading based on material, nonpublic information (a so-called "Brophy claim" after Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949))--Delaware's high court again reinforced that when corporate fiduciaries breach the duty of loyalty a remedy is warranted even without a showing of actual economic harm. KKR indirectly controlled a majority of the common stock of Primedia, Inc. and its designees served on Primedia's board. KKR's Primedia directors authored an advisory memo to KKR's investment committee containing nonpublic information, allegedly including (1) Primedia's earnings would be better than forecasted; and (2) Primedia would seek to repurchase outstanding shares of its preferred stock. KKR then sought permission from Primedia's board to purchase Primedia preferred shares, and obtained a written consent from Primedia authorizing a purchase of up to $50 million preferred shares. The plaintiffs alleged KKR then purchased over $75 million in preferred stock before the favorable information it knew was made public. The Court of Chancery granted a motion to dismiss based on a 2010 decision, Pfeiffer v. Toll, 989 A.2d 683 (Del. Ch. 2010), which held that, to state a Brophy claim under Delaware law, a corporation must suffer actual harm. The Delaware Supreme Court reversed, reasoning that "[e]ven if the corporation did not suffer actual harm, equity requires disgorgement" of the profit flowing to the fiduciary from the breach. Similar to the rationale in Saliba, the Delaware Supreme Court in KKR emphasized the "the public policy of preventing unjust enrichment based on the misuse of confidential corporate information" by a fiduciary wrongdoer.
In re Southern Peru Copper Corp. Deriv. Litig.
In re Southern Peru Copper Corp. Deriv. Litig ., 2011 WL 6440761 (Del. Ch. Dec. 20, 2011), involved a self-interested transaction in which a controlling stockholder caused its corporation to purchase a separate business it owned, and where a special committee formed to consider the transaction exhibited, in the words of Chancellor Leo E. Strine, Jr., "the altered state of a controlled mindset." While the Delaware Court of Chancery's criticism of the special committee was noteworthy, the case would not have received the attention it did were it not for the sheer magnitude of the damages and fees involved: (1) a damages award of over $1.3 billion, which with pre-judgment interest totaled over $2 billion, and (2) an approximate $304 million fee award to plaintiffs' counsel, the court's highest yet.
In summary, the controlling stockholder of Southern Peru Copper Corporation, Grupo México, S.A.B. de C.V., proposed that Southern Peru buy Grupo México's 99 percent interest in Minera México, S.A. de C.V., with 72.3 million shares of newly issued Southern Peru stock. The offer to sell Minera assumed an equity value of $3.05 billion based on the market value of Southern Peru's publicly traded shares. In response, Southern Peru formed a special committee to evaluate the proposal, rather than to negotiate or consider alternative transactions. While the committee hired respected advisors, it appeared focused on ensuring that Grupo Mexico's preferred terms were defensible, rather than considering what was in Southern Peru's best interests. The mid-range of the special committee's initial analysis suggested a value for Minera of only $1.7 billion. Even using assumptions unduly favorable to Minera, its highest valuation was $2.8 billion. But rather than attempting to leverage this, the special committee ultimately adjusted its analysis to reflect a lower value for Southern Peru. Also notable, the special committee and its advisors never performed revised or updated valuations of Southern Peru after it experienced better than projected financial performance. Rather, the special committee ultimately approved a sale for a number of shares implying a value in excess of Grupo México's initial $3.05 billion "ask." In the court's view, the special committee's "cramped perspective" caused the company to "give away over $3 billion worth of actual cash value in exchange for something worth demonstrably less." The purchase of Minera was unfair to Southern Peru, compelling the conclusion that Grupo México and the Southern Peru directors who were beholden to it breached their fiduciary duties. As a remedy, the court awarded damages in an amount equal to the difference between its view of the fair value of Minera and the price that the special committee agreed to pay--over $1.3 billion.
While the court's later $300 million fee award to plaintiffs' counsel was remarkable, the amount is consistent with the court's apparent intent to reward counsel's pursuit of a large recovery for the class, with all the risks attendant at trial, rather than reaching a quick compromise for a fraction of that amount. As significant as it was, the fee award as a percentage of the total recovery was smaller than in some prior cases. Regardless, consistent with the fee award in Del Monte, the Southern Peru result sends a clear message that counsel representing investors on a contingent fee basis will be rewarded for their significant litigation efforts in pursuit of meritorious claims. As of this writing, it remains to be seen whether the judgment or fee award will be appealed to the Delaware Supreme Court.
Conclusion
The year 2011's most important corporate law decisions, summarized in the Annual Review, included significant victories in Delaware courts for investors asserting fiduciary duty claims. Saliba and KKR emphasized that broad remedies are always possible for breaches of the fiduciary duty of loyalty, even absent a traditional showing of harm. The year that was also saw independent directors found in breach when they failed to effectively bargain on behalf of minority stockholders (as with Southern Peru's special committee) or when their advisors suffered from conflicts that tainted a sales process (as in Del Monte). 2011 was marked by large fee awards to counsel for successful investor-plaintiffs--large incentives for the bringing of successful claims. Even in the year's most notable victory for director-defendants, the Airgas decision, the Court of Chancery suggested that the law should be changed to permit well-informed stockholders to consider non-coercive tender offers. Thus, while some have indicated that the Delaware courts may not be the best forum for investor-plaintiffs bringing fiduciary duty claims, decisions such as these may prompt a reassessment and alter the perceived trend of plaintiffs' counsel seeking alternative jurisdictions.