Joseph W. Bartlett
A lively debate is cascading through the U.S. Capital Markets, triggered by the success of well-heeled investors in public markets labeled “activists.”
Bebchuk vs. Lipton
On the one hand, the applause in favor of activists is led by certain academics, the chief being Professor Lucien Bebchuk, who has reported.
“Empirical studies show that attacks on companies by activist hedge funds benefit, and do not have an adverse effect on, the targets over the five year period following the attack.
“Only anecdotal evidence and claimed real-world experience show that attacks on companies by activist hedge funds have an adverse effect on the targets and other companies that adjust management strategy to void attacks.
“Empirical studies are better than anecdotal evidence and real-world experience.
“Therefore, attacks by activist hedge funds should not be restrained but should be encouraged.”
Guest Authors: Abigail Pickering Bomba, Steven Epstein, Arthur Fleischer, Jr., Peter S. Golden, David B. Hennes, Philip Richter, Robert C. Schwenkel, John E. Sorkin, and Gail Weinstein – Fried, Frank, Harris, Shriver & Jacobson LLP
In In re Family Dollar Stores, Inc. Stockholder Litigation (Dec. 19), the Delaware Court of Chancery continued its trend of increased deference to decisions of independent directors, whether under the business judgment rule or the enhanced scrutiny standard of Revlon. The court concluded that Family Dollar Stores, Inc. (“Family”) did not breach itsRevlon duty to maximize stockholder value when it decided not to negotiate with a competing bidder to seek to improve the terms of the competing bid. The court refused to grant the plaintiffs’ request that the court enjoin the stockholder vote on the proposed merger of Family with Dollar Tree, Inc. (“Tree”) until Family had negotiated in good faith with the competing bidder, Dollar General, Inc. (“Dollar”).
Guest post by Attorneys at Davis Polk & Wardwell LLP
On March 7, 2014, Vice Chancellor Travis Laster of the Delaware Court of Chancery found a financial advisor liable for aiding and abetting breaches of fiduciary duties by the board of Rural/Metro Corporation in connection with the company’s 2011 sale to an affiliate of Warburg Pincus LLC. In its 91-page, post-trial opinion, the Court concluded that the financial advisor allowed its interests in pursuing buy-side financing roles in both the sales of Rural/Metro and Emergency Medical Services (“EMS”) to negatively affect the timing and structure of the company’s sales process, that the board was not aware of certain of these actual or potential conflicts of interest, and that the valuation analysis provided to the board was flawed in several respects. Both the Rural/Metro board of directors and a second financial advisor to Rural/Metro settled before trial for $6.6 million and $5.0 million, respectively.
This opinion is the latest example of the Court of Chancery’s focus on conflicts of interest involving sell-side financial advisors, as most recently demonstrated in the Del Monte and El Paso decisions. Rural Metro thus underscores the very real and potentially significant liabilities to financial advisors. It also serves as a salient reminder that the actions of advisors, including those carried out unbeknownst to the board, may be imputed to boards that fail to exercise reasonable oversight of their so-called informational “gatekeepers” in a sale process.
Joseph W. Bartlett
Various attacks are mounted against the boards and managers of U.S. publicly held companies based on alleged deficiencies in the disclosure of financial results, the prosecution’s case buttressed by a emails discovered in the cloud from disgruntled insiders. The legal issues have been analyzed ad infinitum by the media and legal commentators. There is no effort from this corner to add to that enhanced commentary.
One point, however, strikes me as a prudent prophylactic for public companies and their managers who are reporting valuations and other material information to the marketplace, including but not limited to existing shareholders and creditors.
Guest post by attorneys at Fried, Frank, Harris, Shriver & Jacobson LLP
Abigail Pickering Bomba, Steven Epstein, Arthur Fleischer, Jr., Peter S. Golden, Philip Richter, David N. Shine, John E. Sorkin, and Gail Weinstein
In KKR Financial Holdings LLC Stockholder Litigation (Oct. 14, 2014), the Delaware Chancery Court has continued its march to the drumbeat of business judgment deference.
In a putative class action by shareholders of KKR Financial (KFN), who were claiming breach of fiduciary duty by KFN’s board in having approved a $2.6 billion merger with private equity firm KKR, Chancellor Andre Bouchard found that KKR had not been a controlling stockholder of KFN– because KKR held less than 1% of KFN’s voting power and had no right to appoint or remove directors or block board actions, even though KKR had “total managerial control” of KFN. The Chancellor also found that KFN’s directors had been independent of KKR (even though they had been nominated by and had various ties to KKR); and that KFN’s merger proxy statement had provided for a fully informed stockholder vote. The court applied business judgment review and dismissed the case at the pleading stage.