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By Michael Greene
Feb. 6 — During a Feb. 5 Bloomberg BNA webinar, panelists discussed some of the key developments in Delaware corporate law over the last year, including the supreme court's recent analysis of the Revlon doctrine, the chancery court's analysis of controlling stockholder transactions and the recent uptick in forum selection bylaws.
According to the panelists, during that time the Delaware courts have shown that disinterested and independent directors decisions will receive deference, forum selection provisions continue to be upheld if they are facially valid and a less-than-majority equity holder can be determined a controller only when they have actual control over the board with respect to the transaction at issue.
In December, in overturning a chancery court decision, the Delaware Supreme Court held that under Revlon, directors do not have to actively shop for competing bids in change-of-control transactions.
Eric S. Klinger-Wilensky, a partner with Morris, Nichols, Arsht & Tunnell LLP, said that in the decision, the supreme court provides one of the more in-depth analyses of the Revlon doctrine.
He said that one the key takeaways from this decision is that when an independent and disinterested board negotiates for a passive market check and gives stockholders an opportunity to determine whether to take a deal, there is no Revlon violation. He added that the Supreme Court decision appears to signal “its willingness to accept a bit of strategy,” when there is an independent and disinterested board that has satisfied its duty of care.
However, Klinger-Wilensky cautioned that courts have indicated in other cases that they may be more skeptical when there is a private equity buyer.
According to the attorney, another key takeaway from this case is that the court reaffirmed its reluctance to blue-pencil commercial agreements.
Delaware courts have blue-penciled agreements in the past, but those cases involved viable aiding and abetting claims and there had been a trial for the court to review, he said.
Klinger-Wilensky also noted that the Delaware Chancery Court recently issued several opinions regarding whether a controlling stockholder can exist without majority control.
In an October 2014 ruling—In re KKR Financial Holdings LLC Shareholder Litigation—Chancellor Andre G. Bouchard rejected a claim that a 1 percent stockholder was a controller even though it managed the day-to-day operations of the corporation pursuant to a management agreement.
According to Klinger-Wilensky, the court determined that the pre-existing contractual obligations alone do not demonstrate that the alleged controller had coercive power so that the board could not fairly exercise its judgement.
In another October 2014 ruling—In re Crimson Exploration Inc. Stockholder Litigation—Vice Chancellor Donald F. Parsons Jr., citing KKR, determined that the focus of the controller analysis is whether the alleged controller dominated the board with respect to the transaction at issue.
“This case is interesting because its read more like a treatise,” said Klinger-Wilensky.
In re Crimson contains a detailed survey of cases where the Delaware courts have considered whether a controller exists, analysis of when the entire fairness standard is triggered and a discussion of when stockholders may be grouped together to determine the existence of a controller.
Because of its treatise-like qualities, the case provides a great place to start if you have this type of issue, he said.
The chancery court decision in City of Providence v. First Citizens BancShares Inc. affirmed that under Delaware law, exclusive forum selection bylaws may be adopted on the same day a merger is announced.
Klinger-Wilensky noted that since the chancery court's landmark decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., which found that exclusive forum selection bylaws can be valid, many corporations have begun to adopt similar provisions. Subsequently, many other jurisdictions have been deferring to the decision in dismissing challenges to similar, unilaterally adopted provisions, he said.
However, in a prominent August 2014 decision—Roberts v. TriQuint Semiconductor Inc.—the Oregon Circuit Court declined to enforce a provision adopted by the board on the same day the board approved a sale of the company.
According to Klinger-Wilensky, in City of Providence, decided less than a month after TriQuint, the chancery court determined that the TriQuint decision misunderstood Delaware law. A key takeaway from City of Providence is that the chancery court reinforced that forum selection bylaws still have to be tested on their facial validity, he said.
Klinger-Wilensky also observed that the Delaware court's decision was also important because it enforced a bylaw that designated a state other than Delaware as the exclusive forum.
A November 2014 Delaware Chancery Court ruling that invalidated an indemnification provision that places indefinitely at risk potentially all of the merger consideration a stockholder receives could raise some interesting issues if it is appealed, according to Jeffrey R. Wolters, a partner at Morris Nichols.
He also noted that many deals are structured similarly to the one in Cigna Health & Life Insurance Co. v. Audax Health Solutions Inc.
He posited that if a merger consideration must be “determinable,” how is the clawback provision in Cigna any different from large escrow and earn-out provisions that Delaware courts have previously endorsed.
The chancery court appeared to be concerned that the clawback period was indefinite, but even if that is true, the applicable statute of limitation provides an end date, said Wolters. You can never make a obligation last longer than applicable statute of limitations and Delaware General Corporation Law §8106(c) expressly allow parties to choose up to 20 years survival periods.
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