Every year at around this time, the Mintz Levin securities lawyers are busy collaborating with our December fiscal year-end clients to prepare for the annual year-end reporting season, involving a flurry of 10-Ks, proxy statements, governance review and upkeep, and related matters. Pam Greene and I have worked together for several years now (more than we would care to admit!) on what we fondly refer to as the “year-end kickoff memo,” which you can find here. Each year, we focus on a combination of new developments, reminders of things to keep in mind, and anticipated “hot topics” from the perspective of regulators, shareholders and companies themselves. We are pleased this year to have some terrific contributions to the memo from our partner Bret Leone-Quick, who focuses on securities litigation and related governance issues. We welcome your questions on the memo and look forward to working with all of you on this important annual process.
Delaware recently enacted new legislation to prohibit stock corporations from adopting fee-shifting bylaws and charter provisions, among other amendments to the Delaware General Corporation Law. The fee-shifting ban ends a long-running controversy over whether Delaware corporations should be permitted to adopt rules enabling them, and their officers and directors, to recover their attorneys’ fees from shareholder plaintiffs who pursued unsuccessful lawsuits for breaches of fiduciary duty or related claims. The new legislation also authorizes Delaware corporations to adopt Delaware-only forum selection provisions for litigation involving companies’ internal affairs, and modifies the procedures for statutes concerning ratification of defective corporate acts and issuance of new corporate stock, among other changes. The new law was signed by Governor Jack Markell on June 24, 2015 and will take effect on August 1st. A synopsis of its provisions and its legislative history can be found here.
Home Depot was recently hit with a books-and-records suit in the Delaware Court of Chancery, Frohman v. Home Depot, which seeks documents relating to the giant retailer’s data security breach last September. The plaintiff, a Home Depot shareholder, is requesting information concerning how the company first learned of the breach, any analysis of how the breach occurred, and what steps it took thereafter, among other topics. Continue Reading Data Security Breach Documents Sought in Home Depot Books-and-Records Suit
The Council of the Corporation Law Section of the Delaware State Bar Association recently released proposed amendments to the Delaware General Corporation Law (DGCL) that would prohibit fee-shifting provisions in a corporation’s charter or bylaws for litigation involving the corporation’s internal affairs, but authorize Delaware forum selection provisions. The proposal to ban fee-shifting provisions is particularly controversial and has generated significant debate over whether it is necessary to protect shareholder litigation or improperly deprives corporations of a needed tool to deter meritless suits. But the forum selection amendment also contains a thought-provoking element; while it permits Delaware corporations to designate courts in Delaware as the exclusive forum for certain types of corporate litigation, it would effectively prohibit them from selecting some other jurisdiction as the exclusive forum for that litigation. Continue Reading Delaware Bar Proposes Amendments to Ban Fee-Shifting Provisions and Allow Delaware-Only Forum Selection Provisions in Corporate Charters and Bylaws
The Delaware Rapid Arbitration Act, House Bill 49, was recently introduced in the Delaware General Assembly. The proposed Act would establish a streamlined arbitration procedure to resolve disputes involving Delaware business entities, effectively replacing a previous statute that was invalidated on constitutional grounds. The Act states that its purpose is “to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective, and efficient manner, through voluntary arbitration conducted by expert arbitrators, and to ensure rapid resolution of those business disputes.” Continue Reading Delaware Legislature Introduces Rapid Arbitration Act
Please join us at 12:30 p.m. on March 10, 2015 for a webinar titled, “Preparing for and Addressing Activist Shareholders: A Case Study from the Valeant/Pershing Square Bid for Allergan.” My colleague Joel Papernik and I will be discussing a topic that rose to prominence for many public companies in 2014 and that shows no signs of abating in 2015. Joel will begin the presentation with an overview of the existing landscape of shareholder activism, and then will launch into a discussion of the general defensive measures companies are taking even before being targeted by an activist shareholder. During the second half of the presentation, I will use the highly-publicized tender offer that Valeant and Pershing Square made to Allergan as a case study for exploring how the federal securities laws can be implicated in a proxy contest and tender offer. We are presenting this webinar in conjunction with the Northeast Chapter of the Association of Corporate Counsel. We hope you can tune in!
An increasingly popular hedge fund strategy, commonly referred to as “appraisal arbitrage,” recently received a significant boost from the Delaware Court of Chancery. Appraisal arbitrage refers to the practice of buying shares in a target corporation following announcement of a buyout transaction, and seeking value above the buyout price through the appraisal process. In In Re Appraisal of Ancestry.com, Inc. (January 5, 2015), the Court found that a beneficial owner had standing to seek appraisal in respect of an acquisition even though it had purchased its shares in the open market after the record date for the stockholder vote and was unable to show that its shares were not voted in favor of the transaction. In denying Ancestry’s motion for summary judgment, the Court reasoned that the record holder of the shares (here Cede & Co.) only needed to show that enough shares were not voted in favor of the acquisition to cover the number of shares for which it demanded appraisal. Once this hurdle is met, a beneficial owner of such shares (here Merion) does not need to show that its specific shares were among those not voted in favor of the acquisition in order to file the appraisal petition. Thus Merion had standing to pursue appraisal. As money continues to flow toward this strategy, it may result in more appraisal petitions and increased closing risk, as well as erosion of shareholder value in public M&A.
Previously we have discussed Delaware court decisions upholding forum selection bylaws requiring suits involving a corporation’s internal affairs to be filed in a specified court, such as the Delaware Court of Chancery (see posts here and here). Last week the Delaware Supreme Court gave corporate management another potential tool for controlling the forum for shareholder litigation, holding in United Technologies Corp. v. Treppel that the Delaware Court of Chancery has authority to limit the litigation forum where information obtained in a books and records action under Section 220 of the Delaware General Corporation Law can be used. Continue Reading Delaware Supreme Court Holds That Court of Chancery Can Restrict Forum Where Books and Records Can Be Used
Directors of an insolvent corporation face a host of difficult questions. Should they wind up operations or file for bankruptcy to preserve assets for creditors, or chart a riskier course that could lead the company back to profitability and possibly create value for shareholders? If they choose the riskier course and it fails, will the directors be potentially liable to creditors?
The opinion issued by Vice Chancellor Laster of the Delaware Court of Chancery earlier this month in Quadrant Structured Products Co., Ltd. v. Vertin, C.A. No. 6990-VCL, slip op., 2014 Del. Ch. LEXIS 193 (Del. Ch. Oct. 1, 2014), reconsideration denied, 2014 Del. Ch. LEXIS 214 (Del. Ch. Oct. 28, 2014), addresses these issues in depth and makes it clear that directors’ strategic decisions about how best to maximize the value of an insolvent Delaware corporation are protected by the business judgment rule, even though they benefit the corporation’s shareholders while putting creditors at risk:
“[W]hen directors make decisions that appear rationally designed to increase the value of the firm as a whole, Delaware courts do not speculate about whether those decisions might benefit some residual claimants more than others.”
Where directors approve direct transfers of value from an insolvent corporation to a controlling shareholder or related party, however, they risk liability to creditors. To learn more, click here.
Earlier this week a federal district court in New Jersey dismissed with prejudice a shareholder derivative suit, Palkon v. Holmes, No. 14-CV-01234 (SRC) (D.N.J.), that tried to blame the directors and officers at hospitality company Wyndham Worldwide Corporation (“Wyndham”) for a series of data breaches. The court’s decision is notable because it illustrates some of the steps that directors and officers can take to help shield themselves from liability in cybersecurity litigation.