presentation for plus d&o symposium: recent developments in m&a litigation

Weil, Gotshal & Manges LLP

PRESENTATION FOR PLUS D&O SYMPOSIUM: RECENT DEVELOPMENTS IN M&A LITIGATION

John A. NeuwirthWEIL GOTSHAL & MANGES LLP767 Fifth AvenueNew York, New York 10153(212) 310-8000

Weil, Gotshal & Manges LLP 2

Recent Developments in M&A Litigation

￭ Deal litigation has surged over the last 5 years￭ Wall Street Journal: 27 deal cases in 2006; over 200 in 2010￭ Some (potentially) meritorious cases, e.g.:

￭ Board favoring one bidder over another￭ Controlling shareholder taking the company private at inadequate

price￭ Certain banker conflicts

￭ Non-meritorious claims: ￭ Where there was reasonable board process￭ Disinterested and independent board￭ Substantial premium to market price￭ No competing bids after the company was shopped￭ All material facts disclosed


Three Possible Venues for Cases:

￭ Delaware Court of Chancery￭ State of incorporation for many companies; therefore a proper venue

for litigation￭ 10 Del. C. § 3114 provides for jurisdiction over directors and officers

￭ State Court (where the target is headquartered)￭ Federal Court (where the target is headquartered)￭ Plaintiffs assert claims under §14(a) of the Securities Exchange Act

of 1934 and Rule 14a-9

Issue of multi-jurisdictional litigation and potential solutions

￭ Forum selection clauses?￭ One forum motions?


The Typical Case

￭ Breach of fiduciary duty claim against the target and its board members; aiding and abetting claim against the acquiror

￭ Price Claim:￭ “Revlon Duties” = duty to maximize value in sale of control of a

company

￭ Process Claim: e.g., number of potential buyers solicited; whether there was a robust auction/sale process; board/special committee independence; deal protection measures (e.g., “no shop” provision, matching rights and/or termination fees)


Proxy Disclosure Claims

￭ Plaintiffs’ duty of care and duty of loyalty claims often lack merit￭ Majority disinterested and independent board￭ Exculpatory charter provisions (e.g., DGCL § 102(b)(7))

￭ Plaintiffs often seek to obtain proxy disclosures￭ Under Delaware law, inadequate proxy disclosure may constitute

irreparable harm for injunction￭ Delaware courts have expressed a strong preference for addressing disclosure

claims before the shareholder vote￭ Plaintiffs have the potential ability to expedite proceedings

￭ Costly for defendants; risk of injunction￭ Amended complaints typically are filed shortly after the preliminary

proxy is filed to add disclosure claims


Proxy Disclosure Under Delaware Law

￭ “The Delaware fiduciary duty of disclosure is not a full-blown disclosure regime like the one that exists under federal law; it is an instrumental duty of fiduciaries that serves the ultimate goal of informed stockholder decision making.” Clements (Del. Ch. 2001)

￭ Delaware Disclosure Principles – a Balancing Act:￭ “Material” facts must be truthfully and accurately disclosed￭ A fact “is material if there is a substantial likelihood that a reasonable

stockholder would consider it important in deciding how to vote.”

￭ BUT, more disclosure is not necessarily “material and beneficial” disclosure. Zirn (Del. Ch. 1995, aff’d, Del. Sup. 1996)


Typical Disclosure Claims

￭ Plaintiffs frequently request additional disclosure concerning:￭ Financial projections underlying financial analyses and fairness opinion￭ Criteria used to select comparable companies and transactions for

financial analyses (e.g., transaction size, multiples, deal premium)￭ The criteria used to determine the multiples and/or discount rates utilized in

the banker’s DCF analysis￭ Alternative valuation methodologies that may not have been considered or

presented to the board, but are supposedly “standard”￭ Criteria used to determine which strategic buyers to contact￭ Reasons why the target decided not to solicit potential acquirors￭ Information regarding prior work performed by bankers


Disclosure Claims – Where Courts Enjoin

￭ Courts have enjoined transactions for additional disclosure concerning:

Projections/Inputs Underlying a Fairness Opinion￭ Maric Capital Master Fund, Ltd. (Del. Ch. 2010) (requiring disclosure of

future cash flows and banker-generated discount rate)￭ In re Netsmart Techs., Inc. S’holder Litig. (Del. Ch. 2007) (requiring

disclosure of management financial projections provided to bankers)


Disclosure Claims – Where Courts Enjoin (cont.)

Banker Interests/Conflicts￭ In re Atheros Commc’ns, Inc. (Del. Ch. 2011) (requiring disclosure that

contingent portion of banker’s fee was 50x greater than fixed portion)￭ In re Art Tech. Group, Inc. S’holders Litig. (Del. Ch. 2010) (requiring

disclosure of fees paid to target financial advisor by buyer in past)￭ David P. Simonetti Rollover IRA (Del. Ch. 2008) (requiring disclosure of

“peculiar benefits of the merger to UBS, beyond its expected fee”)

CEO/Other Party Interests￭ Maric Capital (“proxy statement . . . creates materially misleading

impression that management was given no expectations regarding” post merger employment prospects)

￭ Atheros (requiring disclosure that CEO understood post-merger employment with acquiror)


Disclosure Cases – Attorneys’ Fees

￭ Fees typically range from $250,000-$500,000￭ In Sauer-Danfoss (Del. Ch. 2011), V.C. Laster summarized reported

contested fee awards in Delaware:￭ $75,000-$225,000 for “[d]isclosures of questionable

quality”￭ $300,000-$525,000 for “one or two meaningful

disclosures, such as previously withheld projections or undisclosed conflicts faced by fiduciaries or their advisors”

￭ $800,000-$1.2mm for “particularly significant or exceptional disclosures”


Notable Recent Cases

Lyondell Chemical Corp. v. Ryan (Del. Sup. 2009)

￭ DE Supreme Court articulated Revlon standard as requiring challengers to demonstrate that the directors of the target board “utterly failed” to obtain the best price in the sale of the company

￭ This raises the bar for plaintiffs seeking to establish that independent and disinterested directors failed to comport with their Revlon duties

￭ In Revlon, the Court required directors of a target company selling corporate control to seek the highest price reasonably attainable for the shareholders

￭ Colloquially referred to as “Revlon duties,” the Delaware courts have recognized there is no single blueprint that directors must follow to fulfill their responsibilities￭ Rather, boards must engage in a reasonable – not perfect – process designed

to achieve the highest price for stockholders


Lyondell Chemical Corp. v. Ryan (Del. Sup. 2009) (cont.)

￭ The Lyondell Court clarified important aspects of Revlon, including:￭ when Revlon duties arise,￭ the absence of any specific steps that directors must take

when determining to embark on a sale of control transaction, and

￭ the heavy deference afforded independent and disinterested directors


In re Del Monte Foods Company Shareholders Litigation (Del. Ch. 2011)￭ The Court preliminarily enjoined private equity buyers – KKR, Centerview and

Vestar – from proceeding with a stockholder vote on a cash merger for 20 days during which defendants were enjoined from enforcing deal protection measures pending the stockholder vote￭ Included no-solicitation, termination fee and matching-rights

￭ Court found Del Monte board had “sought in good faith to fulfill its fiduciary duties” because: ￭ Majority of board was independent and disinterested￭ Board retained Barclays as a financial advisor￭ Fairness opinions obtained from Barclays and Perella Weinberg￭ Deal provided stockholders with a premium￭ Limited pre-signing market check and 45 day go-shop provisions￭ Modest deal protection measures￭ No other bidder has come forward


In re Del Monte Foods Company Shareholders Litigation (Del. Ch. 2011) (cont.)￭ However, the Court found that the board had been “deceived” by its financial advisor,

Barclays, which did not disclose conflicts of interest with the buyers that would have caused the board to hire a different bank. This deception tainted the board’s process in the proposed sale.

￭ Explaining that the “buck stops with the Board,” the Court held that plaintiffs had established a reasonable likelihood of success on their claims that the directors breached their fiduciary duties under Revlon because they:￭ agreed to allow KKR and Vestar to submit a joint bid, giving up Del Monte’s “best prospect for

price competition without making any effort to obtain a benefit for Del Monte and its stockholders,”

￭ acceded to Barclays’ request to provide buy-side financing without asking whether its participation was necessary to the buyout group, and

￭ delegated the go-shop process to Barclays, despite Barclays’ financial interest in ensuring KKR prevailed

￭ The Court enjoined a vote on the merger (as well as enforcement of the “no shop” provision, matching rights and termination fee) for a 20 day period because “the directors cannot escape the ramifications of Barclay’s conduct,” even though they faced little risk of money damages in light of Del Monte’s exculpatory clause (DGCL § 102(b)(7)) and their entitlement to reasonably rely on experts (DGCL § 141(e))


In re Southern Peru Copper Corp. (Del. Ch. 2011)

￭ The Court undertook an entire fairness review of the sale by a controlling stockholder of a NYSE-listed company of the controlling stockholders’ privately-held corporation to the NYSE-listed company. This review resulted in the controlling shareholder having to pay back to the NYSE-listed company the difference between the price that it had received and the price that would have been paid in an entirely fair transaction, as determined by the Court, a difference of $1.2 billion

￭ The Court’s fairness analysis consisted of examining and ultimately finding fault with several business decisions, despite the fact that the Special Committee was composed of individuals who it determined were “competent, well-qualified individuals with business experience” and who hired respected, top-tier financial and legal advisors and a mining consultant

￭ The Court found that the mandate of the Special Committee was narrowly defined to "evaluate" the transaction, not to negotiate it. As a result, its approach to negotiations was stilted and influenced by its uncertainty about whether it was actually empowered to negotiate. "A special committee must not only be independent and informed,” but also “well functioning”


In re Southern Peru Copper Corp. (Del. Ch. 2011) (cont.)

￭ The Court found that the financial advisor to the Special Committee utilized a “relative valuation” approach that ignored valuation metrics that did not support the price proposed by the controlling shareholder and, instead, focused on rationalizing the transaction proposed by the controlling shareholder, rather than aggressively testing the assumption that the transaction was a good idea in the first place￭ The Special Committee and the financial advisor failed

to re-evaluate the fairness of the transaction after announcement and prior to the shareholder vote, even though in the meantime the economics of the transaction had significantly worsened


In re Openlane, Inc. Shareholders Litigation (Del. Ch. 2011)

￭ The Court refused to enjoin an all-cash merger transaction negotiated by an actively engaged and independent board of directors, despite the fact that the sales process did not include customary features such as a fairness opinion or a provision that permitted the board from backing out of the deal if their fiduciary duties so required (i.e., a “fiduciary out”)

￭ The Court found that fiduciary outs are not a per se requirement of Delaware law, especially when shareholders are not forced to enter into a particular transaction via a voting agreement or deprived of receiving alternative offers

￭ In addition, the Court respected the reasonable, non-conflicted decision of a board with "impeccable knowledge" of the company's business, even when the board did not employ any traditional value maximization tool such as an auction or go-shop provision￭ Delaware courts will defer to a board's decision when such board is

independent and actively involved in both the day-to-day business of the company and the transaction process


In Air Products and Chemicals, Inc. v. Airgas, Inc. (Del. Ch. 2011)

￭ After trial, Ch. Chandler found that Airgas board did not breach its fiduciary duties and refused to order Airgas to redeem its “poison pill”

￭ Airgas reinforces the potency of a poison pill under Delaware law in resisting a hostile takeover bid

￭ While “[d]irectors of a corporation still owe fiduciary duties to all stockholders” – including short term arbitrageurs – “a board cannot be forced into Revlon mode any time a hostile bidder makes a tender offer that is at a premium to market value”


￭ Court held “the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors”

￭ But Court noted that “Airgas’s poison pill has served its legitimate purpose” by giving the Airgas board a year to express its views on Air Products’ offer and by pushing Air Products to raise its offer by $10 per share

￭ However, Court concluded that it was “constrained” to uphold the continued use of the pill by “binding Delaware [Supreme Court] precedent” “indicating that a board that has a good faith, reasonable basis to believe a bid is inadequate may block that bid using a poison pill, irrespective of stockholders’ desire to accept it”

￭ Court’s opinion “does not endorse” a board’s ability to “just say never” to a hostile takeover bid

In Air Products and Chemicals, Inc. v. Airgas, Inc.(Del. Ch. 2011) (cont.)


Biography


PracticeCorporate GovernanceSecurities Litigation

John A. Neuwirth is a partner in the firm's Litigation department and Securities Litigation practice group. Mr. Neuwirth's practice focuses on the nationwide litigation of securities, M&A, complex business and corporate matters at the trial and appellate levels in both federal and state courts, and before arbitration panels. Mr. Neuwirth also counsels boards of directors, board committees and senior management on M&A, corporate governance, securities, disclosure, regulatory and other issues, and provides representation in connection with governmental, regulatory and internal investigations, and proxy contests. Clients he has represented include: ExxonMobil, General Electric, General Motors, Goldman Sachs, Citigroup, The Walt Disney Company, Maxim Integrated Products, Thomas H. Lee Partners, Providence Equity Partners, UnitedHealth, Gentiva Health Services, Sanofi and Safran S.A.

Mr. Neuwirth is listed in Chambers USA 2011 as one of America's leading securities litigators. In 2010, Mr. Neuwirth was named in Legal 500 as a leading securities litigator in the United States. In each of 2008, 2009, 2010 and 2011, Mr. Neuwirth was named a New York “SuperLawyer” in the securities litigation area. In 2007, The New York Times named Mr. Neuwirth one of the "faces of Wall Street's future...who make up the next generation of deal makers." Also in 2007, Mr. Neuwirth was named by Securities Law 360 as one of "10 under 40" for his work in the securities litigation, corporate governance, class action and regulatory areas.

Mr. Neuwirth is a member of the firm’s Nominating Committee and Professional Development Committee.

Experience Providence Equity – Representing Providence Equity in shareholder class action litigation arising out of its $1.6 billion acquisition of Blackboard. Safran – Successful defense of Safran S.A. in shareholder class action litigation arising out of its $1 billion acquisition of L-1 Identity Solutions. The Walt Disney Company - Successful defense of Disney in multi-jurisdictional shareholder class action litigation arising out of Disney's $4 billion acquisition of

Marvel Entertainment. Cedar Fair - Successful defense of Cedar Fair in multi-jurisdictional shareholder class action litigation arising out of Apollo Global Management's $2.5 billion

proposed acquisition of Cedar Fair. Sanofi - Successful defense of Sanofi in shareholder class action litigation arising out of Sanofi's $1.9 billion acquisition of Chattem Inc.

Partner, New York

[email protected]

767 Fifth AvenueNew York, NY 10153-0119

Tel +1 212 310 8297Fax +1 212 310 8007

John A. Neuwirth


American Securities - Successful defense of American Securities in shareholder class action litigation arising out of American Securities' $673 million acquisition of GenTek Inc.

Sanofi - Counsel to France-based pharmaceutical company Sanofi in its $18.5 billion takeover offer for American biotechnology firm Genzyme whose products and services are focused on rare inherited disorders, kidney disease, orthopaedics, cancer, transplant and immune disease, and diagnostic testing.

Getty Images - Represented Getty Images and its board of directors in connection with Getty Images' $2.4 billion sale to private equity firm Hellman & Friedman. Provided extensive counseling to the Getty Images board of directors on fiduciary duty, securities law and other issues, and successfully defended multi-jurisdictional shareholder litigation seeking to enjoin the transaction.

NYMEX Holdings, Inc. - Represented NYMEX Holdings (the parent company of the New York Mercantile Exchange) and its board of directors in connection with NYMEX's $9.5 billion sale to CME Group, Inc. (the operator of the Chicago Mercantile Exchange), which created the world's largest and most dynamic exchange, including extensive counseling of the NYMEX board of directors on fiduciary duty, securities law and other issues, as well as the successful defense of expedited shareholder litigation seeking to enjoin the transaction.

Avaya - Represented Avaya in $8.3 billion sale to Silver Lake and TPG Capital, the largest leveraged buyout of a computer networking company to date, including defense of accompanying shareholder litigation.

Florida Rock - Represented Florida Rock in $4.6 billion sale to Vulcan Materials Company, including defense of accompanying shareholder litigation. Affiliated Computer Services - Representation of Special Committee of the Board of Directors of Affiliated Computer Services in connection with management

buyout proposal from Cerberus Capital Management and Darwin Deason, including successful defense of accompanying shareholder litigation (motion to dismiss granted).

In re Gentiva Securities Litigation – Representation of Gentiva in federal securities class actions arising out of home health Medicare reimbursement system. In re Maxim Securities Litigation - Represented Maxim in federal securities class action arising out of Maxim’s stock option granting practices. In re Exxon Mobil Corp. Securities Litigation - Motion to dismiss federal securities claims against ExxonMobil granted. Class action complaint dismissed without

leave to replead. Affirmed by Third Circuit. Levitz Securities Litigation - Motion to dismiss granted and affirmed by Second Circuit. In re Taro Pharmaceuticals Securities Litigation - Favorable settlement of Section 10(b) class action. In re NorthWestern Securities Litigation - Obtained favorable settlement in federal securities class action on behalf of underwriters including Morgan Stanley,

Merrill Lynch and CSFB after filing of motion to dismiss. In re AK Steel Securities Litigation - Defeated class certification in federal securities action; case favorably settled. Furst v. Feinberg (Goldman Sachs) - Obtained voluntary dismissal of Goldman Sachs from federal securities class action after filing of motion to dismiss. General Motors - Representation of GM in connection with chapter 11 sale of substantially all of GM’s assets to a government-sponsored purchaser. Goldman Sachs - Representation of Goldman Sachs in adversary proceeding in Delaware bankruptcy court in connection with chapter 11 case of Fedders.


Friendly's Ice Cream Corporation - Represented Friendly’s in sale to Sun Capital for $559 million, including defense of proxy contest. Citigroup/MetLife Structured Settlements Class Action Litigation - Motions to dismiss granted in several federal court class actions alleging illegal rebating in

connection with the use of structured settlements to settle insurance claims. Obtained a unanimous decision from the Connecticut Supreme Court decertifying a nationwide class in a related state court action.

M.D. Sass - Obtained a unanimous arbitration award from a three-member panel of industry experts on behalf of M.D. Sass, an asset management firm with billions under management, in an arbitration relating to a dispute with a 50% partner in M.D. Sass’ distressed securities business.

Coram Healthcare Bankruptcy Litigation - On behalf of Goldman Sachs and Wells Fargo Foothill (noteholders of Coram), secured confirmation of the bankruptcy trustee’s plan of reorganization, resulting in sole ownership of Coram by its noteholders following a contested confirmation trial in Delaware bankruptcy court.

Grupo Radio v. Hicks, Muse, Tate & Furst - Obtained favorable settlement on behalf of Hicks Muse following an extensive arbitration proceeding in a multi-hundred million dollar dispute over the termination of a stock purchase agreement pursuant to a material adverse change clause.

Harbinger Capital Partners Funds - Representation of Harbinger Capital Partners Master Fund I and Harbinger Capital Partners Special Situations Fund in a $280 million take-private of mobile satellite services provider SkyTerra Communications, Inc., including the successful defense of accompanying shareholder litigation.

Publications The Supreme Court In Stoneridge Refuses to Extend §10(b) Securities Fraud Liability To Secondary Actors (March 2008, The Metropolitan Corporate Counsel) The Supreme Court in Stoneridge Refuses To Extend § 10(b) Securities Fraud Liability to Secondary Actors (Weil Briefing, January 2008) The United States Supreme Court Deals a Blow to the Plaintiffs’ Bar in Dura (June 2005, Business & Securities Litigator) Inspire: Fifth Circuit Rejects Group Pleading Doctrine (November 30, 2004, New York Law Journal) United States Supreme Court To Address Private Securities Litigation Reform Act For The First Time (November 2004, Business & Securities Litigator) Pleading With Particularity Under the PSLRA: The Fifth Circuit Rejects the “Group Pleading” Doctrine (May 2004, Business & Securities Litigator) EducationNew York Univ Law, J.D. Hamilton College, B.A.

presentation for plus d&o symposium: recent developments in m&a litigation

Documents