Archive:2014

1
Laidler v. Hesco Bastion Environmental, Inc. (May 12, 2014)
2
ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (May 8, 2014)
3
Hamilton Partners, L.P. v. Highland Capital Management, et al., C.A. No. 6547-VCN (May 7, 2014) (Noble, V.C.)
4
Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.)
5
2009 Caiola Family Trust, et al. v. PWA, LLC, et al., C.A. No. 8028-VCP (Apr. 30, 2014) (Parsons, V.C.)
6
In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Apr. 25, 2014) (Parsons, V.C.)
7
In re ISN Software Corp. Appraisal Litigation, C.A. No. 8388-VCG (April 10, 2014)
8
Chen v. Howard-Anderson, C.A. No. 5878-VCL, decided on April 8, 2014
9
Kahn et. al. v. M&F Worldwide Corp. et. al., No. 334, 2013
10
Frank v. Elgamal, C.A. No. 6120-VCN (March 10, 2014) (Noble, V.C.)

Laidler v. Hesco Bastion Environmental, Inc. (May 12, 2014)

By Annette Becker and Naomi Ogan

In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.

Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.

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ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (May 8, 2014)

By David Bernstein and Elise Gabriel

In ATP Tour, Inc., the Delaware Supreme Court responded to certified questions from the United States District Court for the District of Delaware regarding the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws.  The bylaw at issue provides that any member that asserts a claim against the corporation or another member and does not “substantially achieve, in substance and amount, the full remedy sought” will be obligated to reimburse the corporation or the member for all fees, costs and expenses, including reasonable attorneys’ fees and other litigation expenses.  The Supreme Court answered, in relevant part, that such a fee-shifting provision is authorized by the Delaware General Corporation Law (“DGCL”), and therefore is facially valid, but whether it would be enforceable depends on the circumstances under which it is adopted and under which it is invoked.  The Delaware Supreme Court stated that bylaws that otherwise may be facially valid will not be enforced if adopted or used for an inequitable purpose. 

Here, two members of ATP Tour, Inc. (“ATP”), a Delaware membership corporation operating a professional tennis tour, had unsuccessfully sued ATP for breach of fiduciary duty and antitrust violations.  ATP then moved to recover its costs and attorneys’ fees pursuant to the bylaw provision described above.  The Federal District Court, in which the suit had been brought, found the issue of enforceability of a fee-shifting bylaw to be novel and certified four questions regarding its validity and its enforceability to the Delaware Supreme Court.  After stating that the bylaw provision was facially valid, the Delaware Supreme Court found that it could not answer the questions regarding enforceability because they depended on the circumstances under which the bylaw was adopted and was being invoked, which were not before the Supreme Court.  The fourth question was whether the bylaw could be enforced against a party that became a member before the bylaw was adopted.  The Delaware Supreme Court answered this in the affirmative because the member had agreed to be bound by rules that may be adopted or amended from time to time.

Although ATP was a non-stock membership corporation, the decision was based on provisions of the DGCL that apply to all corporations, and there is no reason to think the decision would have been different if ATP had been a stock corporation.

ATP Tour, Inc. v. Deutscher Tennis Bund

Hamilton Partners, L.P. v. Highland Capital Management, et al., C.A. No. 6547-VCN (May 7, 2014) (Noble, V.C.)

By David Bernstein

Plaintiff Hamilton Partners, L.P. challenged in the Delaware Chancery Court the fairness of a merger between a Nevada corporation, American HomePatient, Inc. (“New AHP”), a successor to a Delaware corporation of the same name (“AHP”), and Highland Capital Management, L.P. (“Highland”), which before the challenged transactions owned 48% of AHP’s stock and held most of its debt. The initial question was whether the validity of the actions was governed by Nevada law or by Delaware law. The Court said that most of the transactions took place under an agreement that was signed while the corporation was a Delaware corporation and that those transactions would be governed by Delaware law. However, transactions that were not approved by the Board until after the reincorporation in Nevada would be governed by Nevada law.

The Court then addressed whether the fairness of the merger should be determined under the business judgment rule or under the entire fairness test, which would apply if Highland was a controlling stockholder. The Court said that although there were prior Delaware decisions that made it possible that Highland’s 48% ownership interest alone might not have caused it to be viewed as a controlling person when determining whether the Board’s approval of the merger should be evaluated based on the business judgment rule or on the entire fairness test, the combination of Highland’s 48% stock interest and the fact that it had used its creditor position to force the corporation to engage in the series of transactions that was being challenged made it clear that Highland was a controlling person and that the entire fairness test should apply. Therefore, noting that it is almost never possible to dismiss a complaint in an instance in which the entire fairness test applies, the Court refused to dismiss the claim against Highland.

The Plaintiff also sued Joseph Furlong, the CEO and a director of AHP, claiming that he had a personal interest in the merger (he would receive a $6.5 million payment if it took place) and therefore his actions as a director should be evaluated under the entire fairness test. The Court said that because the Board consisted of three directors, and the other two directors, whose independence was not challenged and who were not claimed to have been dominated by Furlong, approved the merger, and their approval was governed by the business judgment rule, it made no difference whether Furlong’s approval was governed by the business judgment rule or was subject to the entire fairness test. The Court also pointed out that because the merger was approved by the Board after the corporation had reincorporated in Nevada, Furlong’s liability would be governed by a Nevada statute that exculpates a director from personal liability unless the director’s act or failure to act constituted a breach of fiduciary duties and the “breach of those duties involved intentional misconduct, fraud or a knowing violation of the law”. The Court found that the Plaintiff had not claimed that Furlong had been guilty of intentional misconduct, fraud or a knowing violation of law, and therefore Furlong was entitled to the protection of the Nevada exculpation statute. Accordingly, it dismissed the claims against Furlong.

hamiltonpartnersl p v highlandcapital1

 

Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.)

By David Bernstein and Meredith Laitner

On May 2, 2014, the Delaware Chancery Court issued its decision in Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.), denying plaintiffs’ motion for a preliminary injunction which, if granted, would have delayed the Sotheby’s annual stockholder meeting until the court could determine whether the members of the Sotheby’s Board violated their fiduciary duties by adopting a “poison pill” rights plan that would be triggered if anybody acquired 10% of Sotheby’s outstanding shares, except that a Schedule 13G filer (which must be a passive investor) could acquire up to 20%.  Third Point had accumulated 9.6% of Sotheby’s stock and had nominated three candidates, including Third Point’s CEO, Daniel Loeb, for election to the Sotheby’s Board.  Third Point had asked that it be permitted to acquire up to 20% of Sotheby’s shares, but the Sotheby’s Board denied the request.  Third Point claimed in the lawsuit that this adoption of the poison pill rights plan and refusal to grant the requested waiver was an impermissible effort by the Sotheby’s Board to obtain an advantage in the proxy contest. 

Third Point had commenced the lawsuit in March 2014 after a series of acrimonious public and private communications in which Loeb had referred to what he claimed was Sotheby’s deteriorating competitive position with regard to Christie’s, accused Sotheby’s of having “a sleepy board and overpaid executive team,” said he intended to replace the CEO of Sotheby’s, and told people inside and outside of Sotheby’s that he would shortly be running Sotheby’s.  In return, Sotheby’s had publicly listed what it viewed as Loeb’s failed efforts to remake companies after it got footholds on their boards.

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2009 Caiola Family Trust, et al. v. PWA, LLC, et al., C.A. No. 8028-VCP (Apr. 30, 2014) (Parsons, V.C.)

By Nick Froio and Marisa DiLemme

In this opinion, Vice Chancellor Parsons considers the parties’ cross motions for summary judgment as to the proper interpretation of a key provision of the operating agreement (the “Operating Agreement”) of Dunes Point West Associates, LLC (the “Company”), a Delaware limited liability company, relating to the Company’s management. The plaintiffs, together, own 90% of the Company, and are the only non-managing members of the Company. The defendants are PWA, LLC (“PWA”), the Company’s managing member and the holder of a10% interest in the Company, and Ward Katz, the managing member of PWA and sole owner of the Company’s property manager, Dunes Residential Services, Inc. (“DRS”). In July 2012, plaintiffs voted to terminate DRS as property manager. Shortly thereafter, the plaintiffs voted to terminate PWA as managing member for “Cause” due to PWA having materially breached the Operating Agreement by not implementing their decision to replace DRS with a new property manager.

The plaintiffs argued that Section 8.4(a) of the Operating Agreement allows the non-managing members to mandate removal of the property manager by majority vote since one of the actions upon which the non-managing members are entitled to vote under Section 8.4(a) included the termination of the management agreement under which DRS was appointed property manager. The defendants argued that Section 8.4(a) of the Operating Agreement only gives the non-managing members a limited veto right over those Company actions. The Court found Section 8.4(a) to be unambiguous and agreed with the defendant’s interpretation of the provision as granting only a limited veto power.

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In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Apr. 25, 2014) (Parsons, V.C.)

By Scott Waxman and Zack Sager

In In re Interstate General Media Holdings, LLC, the managing members of Interstate General Media Holdings, LLC, a Delaware limited liability company (the “Company”), sought judicial dissolution of the Company.  Both managing members agreed that the Company was deadlocked and judicial dissolution was necessary, but they disagreed about whether the Company should be sold at a private auction or a public auction.  The limited liability company agreement of the Company (the “LLC Agreement”) did not explicitly address how the Company was to be dissolved and liquidated.  Nonetheless, one of the managing members argued that the Court of Chancery should look to the intent and provisions of the LLC Agreement for guidance in fashioning an appropriate remedy.  The court rejected this argument holding that because the LLC Agreement did not explicitly address the procedures for dissolution and liquidation, it was essentially irrelevant in determining the issue.  Further, because the managing members sought judicial dissolution, which was not proscribed by the LLC Agreement, the Company submitted itself to the discretion of the court to determine how the Company was to be dissolved and liquidated.  The court ultimately ordered the dissolution of the Company and a sale of the Company via a private auction, finding that this method would maximize the value of the members’ limited liability company interests in the Company.

InReInterstate

In re ISN Software Corp. Appraisal Litigation, C.A. No. 8388-VCG (April 10, 2014)

By Kristy Harlan and Eric Taylor

This is a dispute about whether attorney-client privilege applies to certain draft documents, and whether a waiver of privilege was made with respect to certain other communications, in connection with an appraisal action. The petitioners are a number of venture capital funds seeking a determination of the fair value of their shares in ISN Software Corp. (“ISN”) following a freeze-outmerger in early 2013.

The petitioners contend that ISN has improperly claimed attorney-client privilege over certain draft documents, including draft board minutes, created by management but sent to legal counsel for review. The draft minutes in question were authored by management for meetings that legal counsel did not attend. ISN claimed privilege over the draft minutes because they were forwarded to counsel for review prior to finalization and are, according to ISN, therefore per se not discoverable. Citing its decision in Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426 (Del. Ch. Mar. 20, 1986), the Court held that this was incorrect–where drafts were not prepared by a lawyer in a setting in which they were intended to remain confidential and where attorneys did not gather the information contained therein, work-product doctrine does not shield documents from production.

The petitioners also sought to compel the production of documents reflecting otherwise-privileged communications evidencing how the ISN board arrived at its merger price. The petitioners sought to rely on the “at-issue” exception to privilege–that is, that the privileged communications are required in order to arrive at the truthful resolution of an issue injected into the litigation by a party–contending that ISN placed the merger price “at issue.” However, the Court disagreed and noted that the petitioners had adequate information sources to establish whether the merger price was indicative of fair value (including depositions of ISN managers and directors, board resolutions approving the merger agreement, and a valuation opinion obtained by the ISN board).

InreISNSoftware

Chen v. Howard-Anderson, C.A. No. 5878-VCL, decided on April 8, 2014

By Annette Becker and Jason Jones

In Chen v. Howard-Anderson, Vice Chancellor Laster considered a motion for summary judgment brought by certain officers and the Board of Directors of Occam Networks, Inc., (“Occam”), a public Delaware corporation seeking a determination by the Court that they did not breach their fiduciary duties. The plaintiffs (former stockholders of Occam) claim that the defendants breached their fiduciary duties “by (i) making decisions during Occam’s sale process that fell outside the range of reasonableness (the “Sale Process Claim”) and (ii) issuing a proxy statement for Occam’s stockholder vote on the Merger that contained materially misleading disclosures and material omissions” (the “Disclosure Claim”).

In 2009, Calix, Inc. and Occam (competitors in the broadband market) began discussing a potential business combination. In response, the Board of Occam determined that formal discussions with Calix were not appropriate at that time and retained Jeffries & Company for advice on strategic alternatives. By June 2010, Occam proposed to acquire Keymile International GmbH (“Keymile”) for $80 million, and Calix submitted a term sheet proposing to purchase Occam for $156 million (in a mix of cash and stock). Another suitor, Adtran, presented a third option by offering a slightly higher cash offer price to acquire Occam as compared with the Calix offer. Occam had a cool reaction to Adtran. Occam prepared April and June financial projections for 2010, 2011, and 2012 which were more positive than the estimates of the two public analysts who followed Occam. The projections were not shared with Adtran, and were materially higher than Adtran’s internal projections for Occam, and later projections that Adtran would create. Occam did not provide Calix with the June financial projections. On June 23, 2010 Calix submitted a revised term sheet increasing its offer to purchase Occam to $171.1 million (to be paid in a mix of cash and stock). Adtran confirmed its interest in acquiring Occam and on June 24, 2010 proposed an all cash offer at a premium of approximately 11% over Calix’s bid. On June 24, 2010 the Board met to consider the various alternatives – the cash and stock merger with Calix, the cash sale to Adtran, or remaining independent and acquiring Keymile. It was not clear that the Board was aware that Adtran’s bid was 11% higher than Calix’s offer. The Board directed Jeffries to conduct a 24 hour “market check.”

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Kahn et. al. v. M&F Worldwide Corp. et. al., No. 334, 2013

By Kristy Harlan and Porter Sesnon

In a much anticipated decision, on March 14, 2014 the Delaware Supreme Court sitting en banc unanimously affirmed then-Chancellor Strine’s decision in In re MFW Shareholders Litigation to dismiss a stockholder lawsuit related to the 2011 acquisition of M&F Worldwide Corp. (“MFW”) by its controlling stockholder, MacAndrews & Forbes Holdings, Inc. (“Holdings”). In upholding the dismissal, the Delaware Supreme Court confirmed that the business judgment standard of review, rather than an “entire fairness” standard of review, applies to controlling-party buyouts where the transaction is conditioned ab initio upon both: (1) the approval of an independent, adequately-empowered special committee that meets its duty of care and (2) the un-coerced, informed vote of a majority of the minority stockholders.

In May 2011, Holdings, which owned 43.4% of MFW’s common stock, began to explore the possibility of taking MFW private. In June 2011, Holdings delivered a written proposal to purchase the MFW shares not already owned by Holdings for $24 per share in cash, representing a premium to the prior day’s closing price of $16.96. Holdings’ proposal expressly stated that it would be subject to approval by a special committee of MFW’s board made up of independent directors, and included a non-waivable condition that a majority of the minority of stockholders approve the transaction.

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Frank v. Elgamal, C.A. No. 6120-VCN (March 10, 2014) (Noble, V.C.)

By Annette Becker and Claire White

In this opinion, Vice Chancellor Noble considered defendants’ motion for summary judgment in connection with various breach of fiduciary duty claims asserted by a former stockholder, Richard Frank, against the Board of Directors and two employees of American Surgical Holdings, Inc. (“ASH”), a public company, in connection with the merger of ASH with an affiliate of Great Point Partners I, L.P. (“GPP”).  In connection with the motion the Chancery Court examined:

• the “entire fairness” standard of review;

• the effect of a special committee on the standard of review;

• the standard of review for Revlon claims upon a motion for summary judgment, particularly where the target’s charter includes an exculpatory clause;

• a special committee’s examination of projections underlying a fairness opinion, including where multiple sets of projections are prepared; and

• the interaction between a shareholder’s unjust enrichment and breach of fiduciary duty claims upon a motion for summary judgment.

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