Entire Fairness Does Not Require Perfection
The Delaware Supreme Court recently held in In re Tesla Motors Stockholders’ Litigation, ___ A.3d ___, 2023 WL 3854008 (Del. Jun. 6, 2023) (“Tesla”), that an entire fairness analysis does not require perfection, so long as the acquisition itself was the result of fair dealing and fair price. Practitioners and boards engaging with a potentially conflicted transaction would be well served to study this opinion with care, particularly where the potential acquiror cannot (or chooses not to) employ a special committee of independent directors to handle negotiations.
The Board as Activist
The universal proxy rules, which went into effect on September 1, 2022, have shifted the landscape of shareholder activism by allowing shareholders to “mix and match” their votes across proxy cards in contested elections. Since September, the move to candidate-based (rather than slate-based) voting has encouraged activists to nominate smaller, more targeted slates, and the added leverage in settlement negotiations has ultimately resulted in activists winning a larger number of board seats.
Chancery Cancels Corwin for Post-Close Claims for Injunctive Relief
Earlier this month, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery issued a decision regarding an unsettled question of Delaware corporate law: whether an uncoerced and fully informed vote of disinterested stockholders may ratify and defeat a post-close claim seeking to enjoin certain governance measures and alleged entrenchment devices negotiated by a company’s board as part of a transaction. The court concluded that such a vote, known commonly as “Corwin cleansing,” does not apply to post-close claims for injunctive relief under Unocal Corp. v. Mesa Petroleum Co. The court’s decision, at least for now, will have immediate significance for company boards and their advisors when negotiating transactions or stockholder agreements that include measures that may be characterized as defensive or entrenching existing management or directors.
Good Fences Make Good Neighbors and Preserve Attorney-Client Privilege in the Boardroom: A Word of Caution for Boards Navigating Potential Disputes Among Directors or With Funds They Manage
The boardroom frequently presents attorney-client privilege and work product protection issues. The Delaware Court of Chancery’s recent decision in Hyde Park Venture Partners Fund III, LP v. FairXchange, LLC, C.A. No. 2022-0344-JTL (Del. Ch. March 9, 2023), provides a reminder of the importance of vigilance in considering when and how to limit a director’s access to privileged materials in circumstances where directors’ interests may diverge – particularly where directors manage, or are affiliated with, investment funds owning stock of the Company.
Bylaw Amendments, Shareholder Activism, and Flying Close to the Sun
A case presently before the Delaware Court of Chancery challenging a corporation’s advance notice bylaw amendments, initiated by activist investor Politan Capital Management LP in October 2022,[2] brings to mind the storied Icarus. In the legend, a master craftsman creates wings of feathers and wax for himself and his son to escape danger. He cautions his son Icarus not to fly too close to the sun, lest the wings melt. Icarus, carried away with this device figuratively and literally, flies too high and tumbles into the sea.
Activist Investing Today: Zaba Sees M&A Activism Amid Uncertainty
In the recent podcast episode with The Deal, Derek Zaba, co-chair of Sidley’s Shareholder Activism and Corporate Defense practice, explains why an insurgent investor might be more willing to push for M&A than seek out an operational thesis in today’s volatile markets.
ISS Provides Guidance on the Universal Proxy Card, Puts “Weakest” Directors on Notice
On August 23, 2022, Institutional Shareholder Services (ISS), the leading global proxy advisory firm, issued a special situations research note on the new, mandatory “universal proxy card” rules instituted by the U.S. Securities and Exchange Commission.
In its note, ISS declared the new rules the “superior” way for shareholders to exercise their voting franchise and observed that this system will make it “dramatically easier” and “cheap” for activist shareholders to launch proxy fights. ISS also offered perspectives on how the new system could help activists in their campaigns. Public companies should pay close regard to these perspectives in light of the weighty influence of ISS’s proxy voting recommendations on the outcomes of contested director elections. The most notable of ISS’s perspectives are that under the new framework, directors’ individual qualifications may come into greater focus relative to the merits of an overall slate and that a board’s “weakest” members may now become more vulnerable in a proxy contest.
“Twice Tested” and Still Fair, and the Ongoing Relevance of Schnell
This blog recently discussed the Delaware Supreme Court’s decision in Coster v. UIP Companies, Inc., wherein the Court held that a stock sale that satisfied the entire fairness standard — the most rigorous in Delaware’s corporate law — should undergo still further review to assess the board’s motivations in approving the sale. The Court reversed the decision of the Court of Chancery, which had assumed that entire fairness was the “end of the road” for judicial review, and instead invoked the seminal 1971 decision in Schnell v. Chris-Craft to explain that “inequitable action does not become permissible merely because it is legally possible.” Under Delaware law, therefore, board actions are “twice tested”: first for legal authorization, and second to determine whether such action was equitable. (more…)
Sidley Perspectives on M&A and Corporate Governance
Sidley is pleased to share the March 2022 issue of Sidley Perspectives on M&A and Corporate Governance, a quarterly newsletter designed to keep you current on what we consider to be the most important legal developments involving M&A and corporate governance matters. (more…)
Court to Activists (Again): Follow The Rules Or Suffer The Consequences
On February 14, 2022, Vice Chancellor Lori W. Will issued a post-trial decision affirming the Lee Enterprises, Inc. board of directors’ rejection of a shareholder nomination of directors because, in contravention of Lee’s bylaws, the notice neither was submitted by a stockholder of record, nor utilized the company’s required nominee questionnaire forms. This decision in Strategic Investment Opportunities LLC v. Lee Enterprises, Inc. further underscores the Court of Chancery’s recent decision in Rosenbaum v. CytoDyn, Inc., in which (as this blog previously reported here) the Court upheld a board’s decision to reject a nomination notice for failure to comply with information requirements in the governing bylaws. (more…)
