Delaware Docket – Page 47 – Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

Chancery Court Finds that Deal Price Represents Fair Value of Shares in Appraisal Proceeding

Feb 02 2015

In response to demands for appraisal of Ancestry.com shares, the Chancery Court found that the agreed upon merger price, which was greater than the price determined by the Court’s discounted cash flow analysis, represented the fair value of the shares.

On January 30, 2015, the Delaware Chancery Court in In re: Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. January 30, 2015) (Glasscock, V.C.) issued its determination as to the fair value of shares held by petitioners at the time of Ancestry’s acquisition by Permira Advisors. Ancestry stockholders received merger consideration of $32 per share; petitioners in this case sought appraisal under Section 262 of the Delaware General Corporation Law.

In an appraisal proceeding, because neither the petitioner nor the respondent has a burden of proof, the burden falls on the Court to establish fair value. The Court said that the statute requires it to consider all relevant factors, and while the agreed upon price is one of the relevant factors, the Court must go beyond that.

With respect to sale itself, the Court found Ancestry’s auction process sufficiently robust to make the price it generated a reliable and relatively untainted indicator of value. However, it also made its own discounted cash flow analysis, after dissecting discounted cash flow analyses presented by petitioners’ and Ancestry’s experts, whose valuations differed significantly. Among other things, Vice Chancellor Glasscock found the experts’ analyses problematic because they were based on projections prepared by Ancestry’s management for the purpose of selling the company and for the purpose of making it possible to obtain a fairness opinion with regard to the price a buyer was likely to pay. In the end, Vice Chancellor Glasscock came up with a discounted cash value that was slightly below the agreed upon merger price. He then ruled that the sale price (i.e., the merger price) best represented the fair value, and said his discounted cash value analysis gave him comfort that no undetected factor skewed the sale process. It is noteworthy that if the Vice Chancellor had determined that the value of the Ancestry shares was the value yielded by his discounted cash flow analysis, the petitioners would have received less than the price paid in the merger.

In re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. January 30, 2015)(Glasscock, V.C.)

Differential Voting Rights for Directors of a Delaware Corporation Must Be Set Forth in the Certificate of Incorporation

Jan 29 2015

By William Axtman and Dotun Obadina

In addressing a request for a preliminary injunction seeking the invalidity of a resolution adopted by the defendant directors through the exercise of disproportionate voting rights, the Delaware court reaffirmed that differential voting rights for directors of a Delaware corporation must be set forth in the certificate of incorporation.

In Sinchareonkul v. Fahnemann, the plaintiff, a director of Sempermed USA, Inc. (the “Company”), brought suit against two other directors of the Company, seeking declaratory judgments invalidating bylaw provisions that conferred disproportionate voting power on the defendants who are also directors of the Company. Semperit Technische Produkte Gesellschaft m. b. H. (“Semperit”), Sri Trang Agro-Industry Public Co., Ltd. (“Sri Trang”), and Siam Sempermed Corporation Ltd. (“Siam Sempermed”) agreed to form the Company in 1998 for the purposes of manufacturing latex surgical gloves and then distributing and selling them in the United States market.

Chancery Court Denies Motion to Expedite on Speculative Disclosure Claims

Jan 14 2015

By Annette Becker and Eric Jay

On January 12, 2015, Vice Chancellor Glasscock issued an opinion in Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) on a Motion to Expedite brought by Amy Parsons on behalf of similarly situated public stockholders (“Plaintiff”) as to disclosure claims concerning an imminent merger. The ruling on the disclosure claims was deferred after the Vice Chancellor denied Plaintiff’s Motion on December 31, 2014 as it related to Revlon claims raised, in order to allow Plaintiff to submit a supplemental brief clarifying why such claims would be material to stockholders.

The Motion was brought by Plaintiff against the Board of Directors of Digital River, Inc. (the “Company”) for breaches of fiduciary duties arising in connection with the Agreement and Plan of Merger entered into with Siris Capital Group, LLC, dated October 23, 2014 (the “Merger Agreement”). On November 18, 2014, Plaintiff initiated a class action to enjoin the proposed merger on the grounds that the Company was undervalued and that the Board of Directors failed to provide the stockholders with material information regarding the deal process.

Of the numerous disclosure claims raised by Plaintiff in the Motion to Expedite, Vice Chancellor Glasscock focused primarily on the claim regarding management retention, both because it was the most significant and it had not been rendered moot by the Company’s subsequent filing of a definitive proxy statement. Vice Chancellor Glasscock concluded that Plaintiff sought expedited discovery on the grounds that the disclosures were “simply not credible” without providing a factual basis for such assertion.

Because the disclosure claim was speculative, Vice Chancellor Glasscock found that the chance of receiving injunctive relief to be low and that the value of potential disclosure did not outweigh the cost of expedition. The Plaintiff’s Motion to Expedite was denied.

Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) (Glasscock, V.C.)

Chancery Court Confirms Standing of Record Holder as of Appraisal Demand Date to Pursue Appraisal

Jan 07 2015

By David Bernstein and Meredith Laitner

In Merion Capital LP v. BMC Software, Inc., the Chancery Court held that a person who became the record owner of shares after the record date for voting on a merger could seek appraisal with regard to those shares so long as that person did not vote the shares in favor of the merger, without having to demonstrate that the shares had not been voted in favor of the merger by a prior record owner.

On January 5, 2015, the Delaware Chancery Court issued its ruling in Merion Capital LP v. BMC Software, Inc., C.A. No. 8900-VCG (Del. Ch. January 5, 2015) (Glasscock, V.C.), finding that petitioner Merion Capital LP had standing to seek an appraisal with regard to shares of which it became the record owner after the record date for voting on a merger without having to prove that those shares had not been voted in favor or the merger.

DGCL §220 Does Not Limit Court’s Ability to Restrict Shareholder Inspection Rights

Jan 07 2015

By Eric Freedman and Eric Taylor

In an en banc decision, the Delaware Supreme Court reversed a decision of the Delaware Court of Chancery holding that the court lacked the authority to impose a specific restriction on a shareholder’s inspection of a corporation’s books and records under section 220(c) of the Delaware General Corporation Law (the “DGCL”). United Technologies Corp. (“UnitedTechnologies”) had sought to restrict the use of information obtained in an inspection of the company’s books and recordsby its shareholder Lawrence Treppel (“Treppel”). Specifically, United Technologies asked Treppel to sign a confidentiality agreement that would require Treppel to bring any legal action “arising out of” the inspection in a Delaware court. Treppel refused to sign the agreement and filed a section 220 action seeking access to United Technologies’ books and records without any such restriction. United Technologies challenged whether Treppel had a “proper purpose” for the information request (as required by section 220(b) of the DGCL), but also asked the Court of Chancery to use its legal authority under section 220(c) to limit the use of information gained from Treppel’s books and records inspection to action in a Delaware court. Section 220(c) grants the court the discretion to “prescribe any limitations or conditions with respect to [an] inspection,” or award such further relief as the court deems proper.

Chancery Court Confirms Beneficial Owner’s Standing to Pursue Appraisal Action

Jan 06 2015

By David Bernstein and Meredith Laitner

Amid debates around the merits of “appraisal arbitrage,” the Chancery Court held in In re: Appraisal of Ancestry.com, Inc. that the hedge fund petitioner did not need to prove that the Ancestry.com shares of which it became the beneficial owner after the record date for voting on an Ancestry merger had not been voted in favor of the merger in order to pursue appraisal rights with regard to those shares. The Court said any problems with DGCL Section 262 itself should be solved by the legislature, not the courts.

On January 5, 2015, the Delaware Chancery Court issued its ruling in In re: Appraisal of Ancestry.com Inc., C.A. No. 8173-VCG (Del. Ch. January 5, 2015) (Glasscock, V.C.), finding that petitioner Merion Capital L.P., the beneficial owner of Ancestry.com, Inc. shares, did not need to prove that the specific Ancestry shares with respect to which petitioner seeks appraisal were not voted in favor of an Ancestry merger in order to have standing to seek appraisal.

A Corporation’s Advancement of Legal Fees and Expenses to Its Officers and Directors

Dec 31 2014

By Holly Vance and Sophia Lee Shin

This case involves a plaintiff who sought advancement for his legal fees and expenses in connection with insider trading charges. In opining on the defendant’s motion to dismiss or stay the action and the plaintiff’s motion for summary judgment, the Court considered various issues, including the four-factor analysis of McWane and the difference between advancement and indemnification.

Nipro Diagnostics, Inc. (“Nipro”), the defendant, acquired Home Diagnostics, Inc. (“HDI”) on March 15, 2010. Soon after the merger, the SEC began an investigation of George H. Holley (“Holley”), the founder and chairman of HDI and the plaintiff in this case, for suspicious trading in HDI stock around the time of the merger announcement (the “SEC Investigation”). On May 20, 2010, Holley requested that HDI advance his expenses in the SEC Investigation, and executed an undertaking (required with any advancement) promising to repay HDI for any advanced expenses if it were ultimately determined that Holley was not entitled to indemnification. From June 2010 to November 2010, Nipro advanced Holley’s expenses relating to the SEC Investigation. On January 13, 2011, the SEC commenced an action against Holley for violating federal securities laws by disclosing information about the merger (the “SEC Action”). On February 4, 2011, Holley was indicted in the U.S. District Court for the State of New Jersey for insider trading (the “Criminal Action”). On August 19, 2011, the New Jersey U.S. Attorney’s Office obtained a stay of the SEC Action. Holley eventually pled guilty to two counts of insider trading in the Criminal Action.

Delaware Supreme Court Reverse Chancery Court Decision on Revlon Obligations

Dec 29 2014

By Lisa Stark and Lauren Garraux

In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, C.A. No. 655/657, 2014 (Del. Dec. 19, 2014) (Strine, C.J.), the Delaware Supreme Court reversed the Delaware Court of Chancery’s decision to (1) enjoin the stockholder vote on a merger between C&J Energy Services, Inc. (“C&J”) and a division (Nabors CPS) of Nabors Industries Ltd. (“Nabors”) for 30 days, and (2) require C&J to shop the company during the injunction period. The Chancery Court determined that the C&J board’s decision to forego actively shopping the company in favor of a passive, post-signing market check constituted a plausible breach of its Revlon obligations. On appeal, the Delaware Supreme Court found that the Chancery Court erred by: (1) applying an improper standard for a preliminary injunction, (2) holding that a company must affirmatively shop itself under Revlon absent possessing “impeccable knowledge” of the market, and (3) issuing a mandatory injunction on a preliminary record.

This action arose from the proposed acquisition by C&J of a subsidiary of Nabors, which contained the assets of Nabors’ CPS division, for $2.86 billion. To gain favorable tax treatment, Nabors will retain a majority interest (53%) in the entity surviving the merger (“New C&J”), and New C&J will be domiciled in Bermuda. C&J’s stockholders will own the minority interest. To mitigate the loss of control, a supermajority vote of New C&J’s stockholders will be required to effect major corporate actions. In addition, C&J stockholders will have the right to (1) designate a majority of the members of New C&J’s board, and (2) receive the same pro rata consideration as Nabors in any subsequent sale of New C&J. C&J’s current Chairman, CEO and chief negotiator, Joshua Comstock, also negotiated for the right to be New C&J’s CEO at a higher compensation level.

Fiduciary and Contractual Claims Arising from LLC Management Dispute Survive a Motion to Dismiss

Dec 23 2014

By Scott Waxman and Ryan Drzemiecki

In an ongoing dispute between the members of a Delaware limited liability company, Vice Chancellor Parsons was tasked with resolving pre-trial motions filed by both the managing member defendants and the non-managing member plaintiffs. Except for plaintiffs’ claim of waste, V.C. Parsons denied the defendants’ Rule 12(b)(6) motion to dismiss finding that, drawing all reasonable inferences in favor of plaintiffs, facts have been pleaded that make the defendants’ inappropriate at this stage of the litigation. In addition, V.C. Parsons denied plaintiffs motion of summary judgment, which sought to remove the defendant LLC from its position as managing member, finding that the plaintiffs have not yet produced evidence sufficient to meet their burden of showing that they are entitled to judgment as a matter of law.

This case involves an ongoing dispute between the managing member and non-managing members of Dunes Point West, LLC, a Delaware limited liability company (the “Company”). The Company was formed in 2006 to acquire and operate an apartment complex in in the State of Kansas (the “Apartment Complex”). Presently, Louis Cortese and the 2009 Caiola Family Trust (“Plaintiffs”) collectively hold 90% of the membership interests in the Company. Defendants include the Company’s managing member and holder of 10% of its membership interests, PWA, LLC, a Kansas limited liability company (“PWA”) and Ward Katz, the managing member of PWA.

2015 Proxy Season Preview: Chancery Court Declines to Order Waiver of Advance Notice Bylaws

Dec 19 2014

By William Axtman and Caitlin Howe

Can an activist shareholder avoid compliance with advance notice bylaw provisions to run a dissident slate of directors at a fast-approaching annual meeting? The answer, which is discussed in our summary of AB Value Partners, often hinges on the actions of the board.

In AB Value Partners, LP v. Kreisler Manufacturing Corp., Vice Chancellor Parsons denied AB Value’s request for a temporary restraining order to enjoin enforcement of Kreisler’s advance notice bylaw provisions. AB Value, a hedge fund that owned approximately 11% of Kreisler’s shares, sought to run a competing slate of director’s at Kreisler’s annual meeting. The bylaws of Kreisler required that stockholders provide advance notice within a 60-90 day window prior to the anniversary date of the preceding annual meeting of any business that the stockholders wanted to address at Kreisler’s annual meeting. AB Value failed to propose its slate of directors within this required timeframe.