Bank and Corporate Governance Law Reporter

1361 Pages·2014·10.42 MB·English

Bank and Corporate Governance
Law Reporter
A Monthly JournAl of Articles, opinions, Briefs And orAl ArguMents
Editor-In-Chief: Neil J. Cohen, Esq.
Volume 53, Number 3 Washington, D.C. November 2014
HIGHLIGHTS Contents
Page
R T
The most significant Delaware court decisions ound able on
this month are the following:
F -S b
ee hiFTing ylawS ....................6
• In ev3, Inc. v. Lesh, No. 515, 2013 (Del. Septem-
ber 30, 2014), Delaware Supreme Court reversed
a jury verdict finding that ev3, Inc., the buyer of d Q :
elawaRe uaRTeRly
Appriva Medical, Inc. breached its contractual
R d
obligations to Appriva’s former shareholders to ecenT evelopmenTS
fund development of a medical device. Making it
d b
in elawaRe uSineSS
clear that “non-binding” means just that, the Court
held that the trial court erred in allowing Appriva’s S l
and ecuRiTieS aw ......................31
former shareholders to introduce the “non-binding”
funding provisions in the letter of intent to vary the
conflicting funding provision in the final merger
agreement. The Court said that the integration clause RecenT deciSionS ...........................69
in the final merger agreement stating that the letter of
intent was not superseded was meant to ensure that
the binding provisions of the letter of intent, such as
b b
confidentiality, continued to have effect, but it did eST oF The logS .......................181
not convert the non-binding funding provision into
a binding contractual obligation, especially where it
was inconsistent with the final merger agreement.
R d
ecenT evelopmenTS .............218
• In In re Crimson Exploration Inc. Stockholder
Litigation, Civil Action No 8541-VCP (Del. Ch.
Oct. 24, 2014), in a case alleging breach of fiduciary
d
ocumenTS
duties in the approval of a stock-for-stock merger,
the Court rejected Plaintiffs’ call to analyze the
case under the entire fairness standard. The Court
found little support for Plaintiffs’ argument that the Opinion, ev3, Inc. v. Lesh
alleged controller hedge fund and its allies actually
functioned as a controller, but found that even if
Opinion, In re Cornerstone
it did exercise control, the few benefits received
Therapeutics Inc.
were insufficient to show that the alleged controller
bargained for them in return for a lower price on its Stockholder Litigation
shareholdings.
(continued on page 4)
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Editorial Board
Roger D. Blanc, Esq. Joseph M. Hassett, Esq. Howard A. Sobel, Esq.
Willkie Farr & Gallagher Hogan Lovells LLP Latham & Watkins LLP
New York, NY Washington, DC New York, NY
Ronald J. Gilson, Esq. Richard D. Katcher, Esq. A. Gilchrist Sparks, III, Esq.
Stanford Law School Wachtell, Lipton, Morris, Nichols, Arsht
Stanford, CA Rosen & Katz & Tunnell LLP
New York, NY Wilmington, DE
Michael D. Goldman, Esq.
Potter Anderson & Corroon Jonathan W. Miller, Esq. Robert F. Wall, Esq.
Wilmington, DE Winston & Strawn LLP Winston & Strawn LLP
New York, NY Chicago, IL
Joseph A. Grundfest, Esq.
Stanford Law School Norman M. Monhait, Esq. John L. Warden, Esq.
Stanford, CA Rosenthal, Monhait Sullivan & Cromwell LLP
& Goddess, PA New York, NY
Lawrence A. Hamermesh, Esq. Wilmington, DE
Widener University
School of Law
Wilmington, DE Gilbert R. Serota, Esq.
Arnold & Porter LLP
San Francisco, CA
Volume 53, Number 3, November 2014. Copyright © 2014 Computer Law Reporter, Inc. All Rights Reserved.
3
• In Quadrant Structured Products Co., Ltd. v. Vertin, No. 6990-VCL (Del. Ch. Oct. 1,
2014), a creditor was able to plead breach of fiduciary claims against board members for
causing the allegedly insolvent company to pay interest unnecessarily on junior notes held
by the company’s sole shareholder and for authorizing excessive service and license fee
payments to an affiliate that the sole shareholder indirectly owned and controlled. Vice
Chancellor Laster held, however, that the plaintiff failed to adequately plead a breach of
fiduciary claim based on the board’s authorization of a more risky investment strategy that
potentially could benefit the sole shareholder, while all the risk for the strategy fell upon
senior creditors, including the plaintiff.
• In In re Rural Metro Corp. Stockholders Lit., No. 6350, (Del. Ch. Oct. 10, 2014), the
court found RBS liable for $75,798550, representing 83% of the liability to a shareholder
class. It analyzed the breaches and damages during two time periods: first, when the com-
pany was put in play without explicit Board consent and second, when the merger was
finally approved. The court held that the total liability could be divided equally between
the two parts; however, liability for the second part was also broken into two parts: 25%
for breaches that involved RBS’s misrepresentations to the Directors and 25% for misrep-
resentations that did not. This breakdown was needed because the unclean hands doctrine
prevented RBS from obtaining contribution from those it deceived.
• In Wolst v. Monster Beverage Corp., C.A. No. 9154-VCN (Del. Ch. Oct. 3, 2014), this
post-trial Chancery ruling is a another example of why a demand for books and records
based on DGCL Section 220 is often an unpredictable exercise, and not inexpensive. In this
decision, the Court rejected a Section 220 demand in light of the purpose for the demand
relating to actions taken about seven years ago–well beyond the typical three year statute
of limitations for derivative breach of fiduciary duty claims.
• In Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., No. 9587,
final report issued (Del. Ch. Sept. 30, 2014), the decision by a Master in Chancery is of
importance to the extent it is the first trial court decision to apply the recent Delaware
Supreme Court’s Wal-Mart decision, highlighted on these pages, in connection with the
types of data a shareholder can demand from a corporate board whose foreign subsidiary is
credibly accused of wrongdoing, pursuant to DGCL Section 220. This ruling is subject to
de novo review by the Court of Chancery.
• In ReCor Medical, Inc. v. Warnking, C.A. No. 7387-VCN (Del. Ch. May 14, 2014), this
letter opinion provides a helpful analysis of how the Court of Chancery awards attorneys’
fees based on a contract that provides for fees to be awarded to the prevailing party in a
dispute. The issue here was the amount of fees, not the right to have them awarded. The
4
essence of the objection to the amount of fees requested was that multiple lawyers worked
on similar tasks and attended the same hearings. The court observed that, in hindsight,
most legal services might benefit from greater efficiency, but the court concluded that the
efforts in this matter were reasonable and consistent with professional judgment. The court
applied a modest discount but granted most of the fees requested.
• In Salvatore v. Visenergy, Inc., C.A. No. 10108-CB (Del. Ch. Oct. 6, 2014), This short
letter ruling is noteworthy in passing as a reminder that in Section 225 cases, a trial date
will often be scheduled within 60 days of filing a complaint. The substantive issue in this
case surrounded a written consent of shareholders to elect board members, but this decision
related to a request for a continuance of the trial. In this decision, the court refused to post-
pone a trial date set for 45 days from the complaint being filed. The “intervening holidays”
and related excuses did not prevail. Nor did the fact that one party was pro se. DGCL Sec-
tion 225 allows for expedited proceedings to determine the validity of board elections. This
type of expedited proceeding is one of the “sweet spots” of Delaware corporate litigation.
• In Pontone v. Milso Industries Corp., C.A. No. 7615-VCP (Del. Ch. Oct. 6, 2014), the
decision of the Delaware Court of Chancery granted interlocutory appeals requested by
both parties due to the arguable inconsistency in cases applying the Delaware Supreme
Court decision in Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. 1992), regarding
what types of counterclaims are subject to advancement of fees.
• In In re Rural/Metro Corp. Stockholders Litigation, C.A. No. 6350-VCL (Oct. 10,
2014), the Delaware Court of Chancery issued a decision awarding nearly $76 million
in damages against a seller’s financial advisor. In an earlier March 7, 2014 opinion in the
case, In re Rural/Metro Corp. Stockholders Litigation, Vice Chancellor Laster found RBC
Capital Markets, LLC liable for aiding and abetting the board’s breach of fiduciary duty in
connection with Rural’s 2011 sale to private equity firm Warburg Pincus for $17.25 a share,
a premium of 37% over the pre-announcement market price. The recent decision reinforces
lessons from the March 7 decision and provides new guidance for directors and their advi-
sors in M&A transactions and related litigation.
• In In re Cornerstone Therapeutics Inc. Stockholder Litigation, No. 8922-VCG (Del. Ch.
Sep. 10, 2014), The Delaware Court of Chancery recently refused to dismiss disinterested
directors from a case challenging the merger of a company and its majority stockholder,
holding that the directors remained subject to trial in a freeze-out transaction governed by
the entire fairness standard of review. In re Cornerstone Therapeutics Inc. Stockholder
Litig., C.A. No. 8922-VCG (Del. Ch. Sept. 10, 2014).
5
Round Table on Fee-Shifting Bylaws
Publisher’s Introduction
by
Neil J. Cohen
This discussion starts with an article by Professor John Coffee that is equivalent to the
testimony he provided at an October 9 SEC Investor Advisory Committee. He focuses
on the SEC instead of the Delaware legislature because fee-shifting bylaws are a national
problem. Moreover, securities class actions cases take place in federal court where the by-
laws may run afoul of Federal Rule 11 and preemption by securities laws. After citing sev-
eral precedents on how federal judges might decide these issues, he concludes that the SEC
should play a determinative role by reasserting its position that private litigation is neces-
sary to enforcement and declaring now that “it will challenge fee-shifting provisions.”
The second piece is a review of Professor Larry Hamermesh’s article entitled “Consent
in Corporate Law,” which will soon appear in the Business Lawyer. He focuses on the ATP
case where the Delaware Supreme Court implied that a broad fee-shifting provision ad-
opted by a public company would be enforceable, because shareholders implicitly consent
to bylaws adopted for the legitimate purpose of “deterring litigation.” He concludes that
the Delaware legislature should preclude broad bylaws adopted after shareholders have in-
vested because those shareholders did not “consent” and the bylaws contravene traditional
shareholder expectations that there are no overwhelming barriers to enforcing fiduciary
obligations in the Delaware courts.
The third piece is an editorial by the publisher entitled “Is There a Legislative Compro-
mise to Fee-Shifting Bylaws?” The author believes that the notion of collective “consent”
must be made real by a shareholder vote. He further states that while in most situations
shareholders are just along for dividends and capital gains, when they lose money after a
scandal there must be a legal remedy. Broad fee-shifting bylaws impose an economic risk
on plaintiffs’ lawyers that prevent such meritorious suits from being filed. However, there
is a method to discourage frivolous cases and to encourage the strong ones to go forward.
First, the Delaware legislature should make such bylaws invalid after plaintiffs have sur-
vived a motion to dismiss. Next, defendants should be required to pay plaintiffs’ fees on
issues defendants lose in the trial court. These measures are necessary if the plaintiffs’ bar
is not to become an endangered species.
The last submission is from Harvey Pitt, former Chairman of the SEC. Mr. Pitt notes
that although the SEC used its “persuasive powers” to discourage compulsory arbitration
6
bylaws, he thinks that fee-shifting bylaws should be the exclusive province of the state
legislature and the Board. In his view, the Delaware legislature should require the Board
of Directors to appoint a Special Committee to weigh ten factors, with the help of experts,
to arrive at fair bylaws. At a minimum, the Board must require a shareholder vote and an
appraisal remedy for shareholders whose stockholdings predated the adoption of the bylaw.
He concludes that “One-sided fee-shifting bylaw provision should be proscribed.”
To make this Round Table generally available, we have created a link to it at www.
lawreporters.com/feeshifting.pdf. You may refer this link, or email the PDF edition, to
anyone you think would be interested in this subject.
John C. Coffee, Jr. .............................................................................7
Lawrence A. Hamermesh ................................................................17
Neil J. Cohen ...................................................................................20
Harvey Pitt. .....................................................................................22
Fee-Shifting and the SEC: Does It Still Believe in Private Enforcement?
John C. Coffee, Jr.*
Corporate law normally moves at a glacial pace, but sometimes there are periods of
rapid change, much of it invisible to the ordinary observer. 2014 may be witnessing such a
period of rapid, low-visibility change. Between May 29 and September 29, 2014, some 24
public companies adopted either bylaws or charter provisions mandating that an “unsuc-
cessful” plaintiff in shareholder litigation (whether in state or federal court or arbitration)
must pay the fees and expenses of all defendants. This list includes high profile examples,
such as the recent Alibaba IPO.1 Generally, “reporting” companies accomplish this result
through a board-adopted bylaw, while IPO companies place this provision in their charter
before they go public. The fee-shifting thereby mandated is considerably tougher than the
British “loser pays” rule because many of these provisions deem a plaintiff who is not en-
* John C. Coffee, Jr. is the Adolf A. Berle Professor of Law at Columbia University and Director of its Center
on Corporate Governance. This article originally appeared on Columbia Law School’s Blue Sky Blog (http://
clsbluesky.law.columbia.edu) Copyright © 2014 The Trustees of Columbia University in the City of New
York.
1 For the Alibaba example, see Section 173 (“Claims Against the Corporation”) of the Amended and Re-
stated Memorandum and Articles of Association of Alibaba Group Holding Limited, which is incorporated in
the Cayman Islands (available at http://www.sec.gov/Archives/edgar/data/1577552/000119312514333674/
d709111dex32.htm).
7
tirely successful on all claims and requested forms of relief to have been unsuccessful and
thus required to reimburse.2 Also, unlike the British rule, this approach is one-sided; that is,
a defendant who loses does not pay the successful plaintiff’s fees and expenses. Although
24 companies is not a large number, the trend is accelerating, and it resembles the first
trickle of water through a leak in a dam. Soon the dam breaks, and a cascade descends upon
those below. By the end of September, adoption of fee-shifting provisions was occurring
on a virtually daily basis. Moreover, many of the most prestigious law firms in the country
were helping their clients clear registration statements containing such provisions with the
SEC. This could quickly become part of the standard IPO game plan.
The timing of this sudden burst of new bylaws is not surprising. They all follow a de-
cision in May 2014—ATP Tour Inc. v. Deutscher Tennis Bund3—in which the Delaware
Supreme Court held that a very punitive fee-shifting bylaw was “facially valid” and could
be enforced against shareholder/plaintiffs who acquired their shares both before and after
2 For an example of how sweeping some of the bylaws can be, see Article Sixteenth of the Second
Amended and Restated Certificate of Incorporation of Smart & Final Stores, Inc., which may have been
the first company to adopt this approach in its IPO (available at http://www.sec.gov/Archives/edgar/
data/1563407/000104746914007436/a2221270zex-3_1.htm). The company is a West Coast food and supply
chain, which is incorporated in Delaware. Article Sixteenth reads as follows:
Notwithstanding anything in this Certificate of Incorporation to the contrary, to the fullest extent permitted
by law, in the event that (i) any current or prior stockholder or anyone on their behalf (a “Claiming Party”)
initiates any action, suit or proceeding, whether civil, criminal, administrative, or investigative, or asserts
any claim or counterclaim (each, a “Claim”) or joins, offers substantial assistance to or has a direct finan-
cial interest in any Claim against the Corporation (including any Claim purportedly filed on behalf of any
other stockholder) and/or any director, officer, employee or affiliate thereof (each, a “Company Party”), and
(ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in
whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that
substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be
obligated jointly and severally to reimburse the applicable Company Party for all fees, costs, and expenses
of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation
expenses) that the applicable Company Party may incur in connection with such Claim. If any provision (or
any part thereof) of this Article SIXTEENTH shall be held to be invalid, illegal or unenforceable facially
or as applied to any circumstance for any reason whatsoever: (1) the validity, legality and enforceability of
such provision (or part thereof) in any other circumstance and of the remaining provisions of this Article
SIXTEENTH (including, without limitation, each portion of any subsection of this Article SIXTEENTH
containing any such provision (or part thereof) held to be invalid, illegal or unenforceable that is not itself
held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (2) to
the fullest extent permitted by law, the provisions of this Article SIXTEENTH (including, without limitation,
each such portion containing any such provisions (or part thereof) held to be invalid, illegal or unenforceable)
shall be construed for the benefit of the Corporation to the fullest extent permitted by law so as to (a) give
effect to the intent manifested by the provision (or part thereof) held invalid, illegal, or unenforceable, and
(b) permit the Corporation to protect its directors, officers, employees and agents from personal liability in
respect of their good faith service. Any person or entity purchasing or otherwise acquiring any interest in the
shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions
of this Article SIXTEENTH.
Obviously, this provision goes beyond a “loser pays” rule and is in effect “a-less-than-100%-successful-
plaintiff-pays” rule.
3 91 A. 3d 554 (2014). This decision is fully consistent with other recent Delaware decisions upholding
board-adopted bylaws containing forum selection clauses requiring intracorporate litigation to be brought in
Delaware. See Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A. 3d 934 (2013) and City of
Providence v. First Citizens Bankshares, Inc., 2014 Del. Ch. LEXIS 168 (Del. Ch. Sept. 8, 2014). State court
decisions in Louisiana, New York, Illinois and elsewhere have recently upheld and enforced Delaware forum
selection clauses.
8
its adoption—unless the shareholder could show that the bylaw was adopted for an “im-
proper purpose.”4 But here the Delaware Supreme Court added that “the intent to deter
litigation…is not invariably an improper purpose.”5
One cloud on the horizon remains the attitude of Delaware. Last June, the Corporate
Law Section of the Delaware State Bar Association proposed legislation to overturn ATP
Tour by prohibiting charter or bylaw provisions from containing any provision that would
impose monetary liability on a shareholder. That legislation was blocked, but is being re-
fashioned. At hearings before the SEC Investor Advisory Committee last week, Professor
Lawrence Hamermesh, who is involved in that process, predicted that something might
emerge in early 2015, but offered no clues on the likely shape of new legislation. Delaware
is uniquely conflicted on this issue, because ATP Tour could imply a significant decline
in Delaware-based litigation, but such a decline would greatly benefit management and
directors of Delaware corporations. Never before have the interests of the Delaware bar
and its clients clashed so directly. Still, even if Delaware were to act, the issue would still
not disappear for three distinct reasons: (1) Delaware might only modestly limit the use of
such bylaws, still permitting a substantial chill on securities class actions; (2) Corporations
incorporated in other jurisdictions may adopt similar provisions (and the prestige of the
Delaware Supreme Court may lead other courts to accept its ruling, even if the Delaware
legislature were to reverse or amend it); and (3) Corrective action by Delaware might fuel
an interjurisdictional competition, as other, more conservative states (think, Texas) might
seek to lure companies to reincorporate there to exploit their tolerance for such provisions.
Still, the even larger question then is what will the SEC do—if anything at all. To date,
it has been standing passively on the sidelines. Indeed, in the Alibaba IPO, its staff missed
the forest for the trees, requiring no disclosure of the impact or scope of Alibaba’s charter
provision shifting fees to unsuccessful plaintiffs.
I. Fee-Shifting Provisions in Federal Court
What then is the status of such a board-adopted bylaw in federal court? Here, it is
important to note that the ATP Tour case was in fact brought in federal court in Delaware.
The plaintiff lost at trial,6 and the defendant moved for its costs pursuant to the bylaw.
The District Court denied this motion, effectively ruling that federal law preempts the
4 This “improper purpose” requirement dates back to Schnell v. Chris-Craft Industries, 285 A. 2d 437 (Del.
1971), which essentially holds that powers legitimately possessed may not be used for an inequitable purpose.
5 91 A.3d at 560.
6 For the treatment of the substantive claims, see Deutscher Tennis Bund v. ATP Tour, Inc., 610 F. 3d 820 (3d
Cir. 2010).
9