M&A in 2014: Recent mergers & acquisitions casesBrian Fenske - Partner, Fulbright & Jaworski LLP (Norton Rose Fulbright)

Mark Oakes - Partner, Fulbright & Jaworski LLP (Norton Rose Fulbright)

August 21, 2014

Speaker Brian FenskePartnerFulbright & Jaworski LLP (Norton Rose Fulbright)

Brian Fenske has a broad-based corporate and securities practice including extensive experience in mergers and acquisitions, IPOs and other public and private offerings of equity and debt securities and venture capital financings. He serves as outside general counsel for a wide variety of companies. His practice also includes the representation of public companies on a broad range of issues pertaining to federal and state securities laws and corporate governance, as well as the representation of public and private companies in connection with the negotiation and structuring of joint venture, strategic partnering, software and technology licensing and other general business agreements. His practice includes representation of clients in a broad range of industries including energy, technology, software, telecom, alternative energy, consumer products, retail, healthcare and others.

Brian has been involved in over 200 M&A transactions. He has also been involved in more than 50 public and private offerings of equity and debt securities, including IPOs, representing companies, investment bankers and venture capitalists. Brian routinely teaches seminars and classes on security laws and mergers and acquisitions.

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Speaker Mark OakesPartnerFulbright & Jaworski LLP (Norton Rose Fulbright)

Mark Oakes is a partner in the Austin office. His practice focuses on commercial and securities litigation, including shareholder class action defense, derivative litigation, SEC enforcement matters, internal corporate investigations, M&A and corporate governance litigation, and complex contract and commercial litigation.

Mark has experience representing issuers, officers and directors in all areas of securities and corporate litigation. Mark has defended companies and individuals in securities class actions premised on issues such as purportedly misleading financial guidance, alleged accounting fraud (including restatement cases), and alleged breaches of fiduciary duty in the sale of control context. Mark has also represented companies and their officers and directors in derivative litigation in various state and federal courts, and advises companies on corporate governance issues such as evaluating and responding to shareholder demands and books and records requests.

Mark has extensive experience performing internal investigations on behalf of audit committees and other board committees into a variety of issues including revenue recognition issues, cost accounting issues, suspected violations of United States trade sanction and embargo laws, internal control deficiencies, alleged false statements to the SEC and other government agencies, and suspected violations of the Foreign Corrupt Practices Act.

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Continuing education information

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ask an online question at any time throughout the program, click on the question mark icon located on the tool bar in the bottom right side of your screen. Time permitting, we will answer your question during the session.

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Lawsuits Guaranteed

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• In 2013, 94% of public M&A deals were challenged through shareholder litigation

• On average each deal attracts more than five lawsuits

• 62% of deal litigation was multi-jurisdictional

• Litigation resolved in 75% of the deals prior to close (mostly through settlement)

Cornerstone Research, Review of 2013 M&A Litigation, available at http://www.cornerstone.com

The Lawsuits• Lawsuits typically challenge the price, process, deal

protection provisions, and disclosures

• Most cases settle with a disclosure only settlement and attorney fee award

• Cases that end differently often involve allegations of significant conflicts of interest

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Post-Closing Appraisal Actions• Section 262(h) of the Delaware General Corporation Law

provides appraisal right – not available in stock for stock transaction

• Institutional and other large investors are increasingly exercising appraisal rights

• The Chancery Court has wide discretion to determine fair value

• Potentially perverse interest rate incentive under Delaware law

• CKx Decision – Merger price is relevant but not dispositive

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Post-Closing Appraisal Actions (Cont’d)• Acquiring company is bearing the risk in an appraisal action

even though the target company’s board, not the acquiring company, had the duty to negotiate a fair price

• Acquiring company can seek information about deliberative process during negotiation phase – but there is a tension with potential aiding and abetting claim

• Potential opportunity for acquiring company to address exercise of appraisal rights in merger agreement

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Controlling Stockholder Cases – Now Three Potential Standards of Review• Claims involving controlling stockholders are subject to entire

fairness standard of review

• In practice, this makes is very difficult to get a lawsuit dismissed at the pleading stage

• The largest judgments in merger cases come from controlling stockholder actions

• Delaware courts have long held that parties can shift the burden of persuasion in an entire fairness case if (1) the transaction was approved by a well-functioning committee of independent directors or (2) the transaction was approved by an informed vote of a majority of the minority

• M&F case presents a third option – business judgment rule review

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Controlling Stockholder Cases – M&F Requirements for Business Judgment Review• The controlling stockholder conditions the procession of the

transaction on the approval of both a special committee andapproval of a majority of the minority stockholders

• The special committee is independent

• The special committee is empowered to freely select its own advisors and to say no

• The special committee meets its duty of care in negotiating a fair price

• The vote of the minority is informed

• There is no coercion of the minority stockholders

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Recent Controlling Stockholder Case – Highland Capital• At the motion to dismiss stage the court held that a 48%

stockholder could be a controlling stockholder

• The transaction is not eligible for business judgment protection because the merger was not conditioned on the approval of a majority of the minority

• The target company created a special committee, which retained legal and financial advisors, but purportedly did not conduct sales efforts other than calling two potential suitors

• The court held that plaintiffs sufficiently alleged that the transaction was unfair

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Lessons from Highland Capital• Controlling shareholder analysis is contextual and does not

necessarily require majority ownership – consider debt ownership as well

• It is possible that the burden of showing entire fairness will not shift to the plaintiffs in this case given the Court’s criticisms of the Special Committee

• The standard of review employed from the outset is important – claims against one director defendant in the same case were dismissed because the director defendant was subject to the business judgment standard of review

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Rise of Forum Selection Provisions• What is it?

• A provision in a company’s charter or bylaws that provides that all litigation brought by shareholders against the company must be brought before a particular court.

• How can they do that?• Forum selection clauses have been around in corporate contracts for

decades.• A company’s charter and bylaws have long been held to be contracts

between the company and its stockholders.• Why now?

• In 2010, the Delaware Court of Chancery’s decision in In re Revlon, Inc. shareholders Litig., the court said in dicta that “...if boards of directors and stockholders believe that a particular forum would prove an efficient and value promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intracompany disputes.”

• That language coupled with the meteoric rise in multi-forum litigation in stockholder disputes has led hundreds of companies to adopt forum selection provisions.

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Mechanics of Adoption of Forum Selection Provisions• Where do you put them?

• Provision can be inserted in charter or bylaws

• How are they adopted prior to IPO?• Most IPO companies have these provisions included in their

public company charters or bylaws which are approved by their stockholders before the IPO.

• What about post-IPO?• Can seek shareholder approval for the provision. • Haven’t seen a lot of this except in companies with a high

percentage of insider stock ownership. • Companies can adopt the provision as a unilateral amendment

to its bylaws. In 2013, the Delaware Court of Chancery in Boilermakers Local 154 Retirement fund v. Chevron Corp. upheld this unilateral act as valid.

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2011 Challenge to Forum Selection Clauses

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• Do all courts agree with the Delaware Court of Chancery regarding the validity of these provisions?

• Prior to the 2013 Delaware decision, in 2011 a California federal court in Galaviz v. Berg reviewed a bylaw provision that was unilaterally adopted by Oracle’s board and held that Oracle “…failed to show that its bylaw is effective under federal law.”

Another Challenge to Forum Selection Provisions

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• In 2013 a stockholder of Edgen Group Inc. brought a breach of fiduciary duty suit in Louisiana state court. Edgen is a Delaware corporation that adopted its exclusive forum provision pro-IPO with stockholder approval. Edgen sought an anti-suit injunction in Delaware. The Delaware court upheld the forum selection clause but raised the issue of whether it had personal jurisdiction over the stockholder (a Canadian resident) since the provision did not contain an express consent to personal jurisdiction and determined that an anti-suit injunction was not the appropriate means to obtain enforcement of the provision. The Louisiana court ultimately dismissed the case on forum non conveniens grounds, but did not issue a written opinion or did not make clear whether they relied on the forum provision or more traditional forum non conveniens principles.

• Essentially, that leaves the corporation to fight it out in the other courts and try to get those courts to recognize the forum selection clause.

Oregon Affirms Facial Validity, With Caveat• On August 14, 2014, an Oregon court upheld the facial

validity of a bylaw forum selection clause in Roberts v. TriQuint Semiconductor, Inc. citing the 2013 Chevron in Delaware case and not adopting the 2011 Berg ruling in California.

• However, in this specific case, the TriQuint board approved the bylaw forum selection provision at the same meeting it approved the meeting. The Court ruled that the provision would have been valid if it had been adopted earlier and not repealed by the TriQuint shareholders.

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Proxy Advisory Firm Positions

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• ISS and Glass Lewis have typically been opposed to these provisions.

• Both have indicated some flexibility to support these provisions in limited circumstances, the bar seems to be set very high and companies should except opposition to such provisions.

• In addition, certain shareholder groups, including AFL-CIO and the Council of Institutional Investors have adopted corporate governance policies that oppose these provisions.

So Where Does that Leave Us?

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• There appears to be considerable potential benefit to such provisions despite the potential for some other courts not to uphold the provisions.

• Most IPO companies are including these provisions in their charters and having them approved by their stockholders prior to the IPO.

• For already public companies, it becomes a question of knowing your stockholder base and whether you can obtain stockholder approval in the face of likely opposition from the likes of ISS and certain shareholder groups.

• The provision should be adopted when there isn’t an imminent transaction or shareholder lawsuit.

Fee Shifting Bylaws• On May 8, 2014, the Delaware supreme court in ATP Tour, Inc. v.

Deutscher Tennis Bund upheld the facial validity of a fee-shifting bylaw of a non-stock Delaware corporation.

• Some very small Delaware stock corporations have adopted fee shifting bylaws.

• Delaware State Bar Association has prepared proposed legislation to prohibit such bylaws for stock corporations. This issue is still being evaluated and current expectations is that early 2015 would be the earliest that Delaware would vote on any such legislation.

• We suggest that a wait-and-see approach is probably best with this one as it is likely to be highly controversial and even if it isn’t prohibited by legislation, we expect proxy advisory firms to come out against such provisions.

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M&A Advisors Conflicts• In March 2014, the Delaware Chancery court in Rural/Metro

found third party M&A advisors are gatekeepers, thus expanding their liability when their actions threaten a board’s ability to serve investors.

• In Rural/Metro plaintiffs contend that RBC Capital markets steered the company into a lowball offer from a private equity investor in order to collect fees. The plaintiffs contend that RBC concealed that it was actively pitching to finance the acquiror’s purchase, thus making their advice tainted.

• The damages part of the case is still to come.

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New Justices in Delaware• In the last few months, Leo Strine, Jr. left his longtime post

as Chancellor of the Delaware Chancery Court to become Chief Justice of the Delaware Supreme Court.

• In May, another longtime Delaware Supreme Court Justice, Jack Jacobs, stepped down and was replaced by litigator Karen Valihura.

• Shortly thereafter Delaware Supreme Court Justice Carolyn Berger announced she would step down later this year.

• Only time will tell if these changes will have a material impact on future Delaware rulings.

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Questions?

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