Advanced M&A Trends and Developments

Copyright 2017©
Opening Remarks
PLI Mergers & Acquisitions 2017:
Advanced Trends and Developments
Thursday, January 12, 2017
Kevin Miller
Alston & Bird LLP
New York, NY

- 2 -Copyright 2017©
Opening Remarks
So what are some of the significant trends and developments affecting M&A?

Opening Remarks (cont’d)
 As we discussed last year, over the last several years the Delaware Courts
have indicated a strong desire to get out of the business of reviewing
virtually every transaction so that they can focus on the transactions that are
most likely to generate meritorious claims benefitting from judicial review.
 First we noted the widespread adoption of legislatively authorized exclusive
venue bylaws which arguably emboldened the Delaware Courts to take a
harder line on motions and claims that lacked merit with less fear that they
will just pop up in another jurisdiction before judges less experienced in
applying Delaware law.

 Second, we noted the Delaware Supreme Court’s March, 2014 decision in
M&F Worldwide that created a path for the dismissal of breach of fiduciary
duty claims arising out of transactions with controlling stockholders by
permitting the application of the business judgment rule where the
controller conditions the transaction on the approval of both a special
committee and a majority of the minority stockholders and satisfies a
number of other conditions.

 Third, the Delaware Supreme Court’s May, 2015 decision in Cornerstone
Therapeutics permits the dismissal of claims seeking monetary damages
against directors for breaches of the fiduciary duty of care where the
directors are protected by a Section 102(b)(7) exculpatory provision, even
in circumstances where the transaction is subject to the entire fairness
standard of review.

 and Fourth, the Delaware Supreme Court’s October, 2015 decision in
Corwin v. KKR Financial confirmed that the business judgment rule is the
appropriate standard of review for a post-closing damages action when a
merger that is not subject to the entire fairness standard of review has
been approved by a fully informed, uncoerced majority of the disinterested
stockholders.

Those cases exemplified a sea-change affecting Delaware litigation that we
started to discuss at last year’s program.
 The Delaware Courts are getting out of the business of adjudicating
matters where the benefits don’t outweigh the costs either because the
underlying claims do not appear to have merit or because a fully informed,
uncoerced majority of disinterested stockholders with real skin in the game
have said they want to take the deal.

So what are the significant M&A trends and developments that occurred in
2016?

 First, although the Chancery Court had been warning that it was going to
crack down on disclosure only settlements, in In re Trulia, Inc. S’holder
Litig., CA 10020-CB (Del. Ch. Jan. 22, 2016), a decision which came down
only one week after last year’s program, the Delaware Court of Chancery
squarely rejected a disclosure-only settlement.
 The Court found that the supplemental disclosures obtained by the
plaintiffs were inadequate to support a broad release of class claims.
 In order to support a broad release of class claims, the supplemental
disclosures must be “plainly” material – i.e., significantly alter the total mix
of information made available.

 Trulia significantly reduced the incentives to bring weak disclosure claims in hopes
of obtaining attorneys fees for the corporate benefit allegedly resulting from
additional disclosures that, though possibly helpful, are not plainly material.
 The results were felt almost immediately. According to Cornerstone Research, in
the first half of 2016, only 64 percent of M&A deals valued over $100 million were
litigated as compared to 84% in 2015 which itself was the first time since 2009
that the rate dipped below 90%.
 The Trulia approach has since been adopted by other Courts including, most
significantly, the Seventh Circuit.
 In re Walgreen, No 15-3799 (7th Cir Aug. 10, 2016) (“The type of class action
illustrated by this case—the class action that yields fees for class counsel and
nothing for the class—is no better than a racket. It must end. No class action
settlement that yields zero benefits for the class should be approved, and a
class action that seeks only worthless benefits for the class should be
dismissed out of hand. . . . And so Trulia adopted a clearer standard for the
approval of such settlements, which we endorse, and apply in this case . . .”).

2016 was perhaps most notable for the number of cases interpreting Corwin
v. KKR Fin. Holdings, 125 A.3d 304 (Del. 2015).
 As you recall, Corwin confirmed that the business judgment rule is the
appropriate standard of review for a post-closing damages action when a
merger that is not subject to the entire fairness standard of review has been
approved by a fully informed, uncoerced majority of the disinterested
stockholders.

The Delaware Supreme Court subsequently applied Corwin in Singh v.
Attenborough, Case No.: 645, 2015 (Del May 6, 2016).
 In Singh v. Attenborough, the Supreme Court affirmed the Court of
Chancery’s decision finding that a fully informed, uncoerced vote of the
disinterested stockholders invoked the business judgment standard of
review. “When the business judgment rule standard of review is invoked
because of a vote, dismissal is typically the result.”

But Corwin and Singh v. Attenborough left a number of issues unresolved several of which
were addressed by the Court of Chancery during the course of 2016:
 First, under Corwin, is the Business Judgment Rule presumption rebuttable or irrebutable?
 In Re Volcano, CA 10485-VCMR (Del. Ch. June 30, 2016).
 “[R]ecent Supreme Court decisions confirm that the approval of a merger by a majority of a corporation’s
outstanding shares pursuant to a statutorily required vote of the corporation’s fully informed, uncoerced,
disinterested stockholders renders the business judgment rule irrebuttable”
 Larkin v. Shah (aka Auspex), CA No. 10918-VCS (Del. Ch. Aug. 25, 2016).
 “[T]he effect of disinterested stockholder approval of the merger is review under the irrebuttable business
judgment rule”
 In Re OM Group, CA 11216-VCS (Del. Ch. Oct. 12, 2016).
 “If their approval was the product of a fully informed, uncoerced vote, then, under Corwin v. KKR
Financial Holdings, LLC, the irrebuttable business judgment rule would apply and the OM Board’s
decision to approve the Merger would be ‘insulate[d] … from all attacks other than on grounds of waste.”’
 See also Chester County Retirement System v Collins (aka Blount), CA No. 12072-VCL (Del.
Ch. Dec. 6, 2016) citing Larkin.

 Second, does Corwin ever apply to mergers that are subject to the entire
fairness standard of review?
 City of Miami General Employees' and Sanitation Employees' Retirement
Trust v Comstock (aka C&J), CA No. 9980-CB (Del. Ch. Aug. 24, 2016).
 “[P]laintiff has not alleged facts showing that the challenged transaction, which
was approved by a majority of disinterested and independent directors, should be
subject to entire fairness review”.
 But see Larkin v. Shah (aka Auspex), CA No. 10918-VCS (Del. Ch. Aug.
25, 2016).
 “[i]n the absence of a controlling stockholder that extracted personal benefits, the
effect of disinterested stockholder approval of the merger is review under the
irrebuttable business judgment rule, even if the transaction might otherwise have
been subject to the entire fairness standard due to conflicts faced by individual
directors.”

 Does Corwin ever apply to mergers that are subject an entire fairness
standard of review (cont’d)?
 Just a week ago, in In Re Solera Holdings, CA 11524-CB (Del. Ch. Jan. 5,
2017), the Chancellor noted:
“After carefully reviewing the context of [the statement in Corwin that “when
a transaction not subject to the entire fairness standard is approved by a
fully informed, uncoerced vote of the disinterested stockholders, the
business judgment rule applies.”], Vice Chancellor Slights concluded in
Larkin v. Shah that the Supreme Court did not intend to suggest that every
form of transaction that otherwise may be subject to entire fairness review
was exempt from the potential cleansing effect of stockholder approval, but
that “the only transactions that are subject to entire fairness that cannot be
cleansed by proper stockholder approval are those involving a controlling
stockholder.”

 Third, does Corwin apply to two step mergers – e.g., pursuant to §251(h)?
 In Re Volcano, CA 10485-VCMR (Del. Ch. June 30, 2016).
 Court held that Corwin also applies to two step mergers pursuant to 251(h)
but ruling under appeal – oral argument scheduled for Feb. 8, 2017.

 And fourth, what is the impact of Corwin on aiding and abetting claims?
 Corwin (“An aiding and abetting claim[, however,] ‘may be summarily
dismissed based upon the failure of the breach of fiduciary duty claims
against the director defendants.”)
 Singh v. Attenborough (“Having correctly decided, however, that the
stockholder vote was fully informed and voluntary, the Court of Chancery
properly dismissed the plaintiffs’ claims against all parties.”)
 Comstock (aka C&J) (“A claim for aiding and abetting a breach of
fiduciary duty cannot survive if the underlying fiduciary duty claims do not.”)
 Blount (“Having failed to plead a claim for breach of fiduciary duty, the
plaintiff likewise has failed to plead a claim for aiding and abetting”)

Generally speaking, the 2016 decisions of the Court of Chancery applying
Corwin appear to imply that:
 In effect, absent a controlling stockholder triggering the entire fairness
standard of review, fully informed and uncoerced, stockholders only get one
bite at the apple – if a majority approve a transaction or tender their shares,
their claims are effectively extinguished by application of the business
judgment rule and they cannot then turn around and sue their directors or
executive officers for breach of fiduciary duty or, given the absence of a
predicate breach, pursue aiding and abetting breach of fiduciary claims
against buyers, advisors or other third parties.
However, it’s not clear that we have complete uniformity of views among
members of the Court of Chancery and we don’t know where the Delaware
Supreme Court will come out on all of the issues presented.

Other issues that will be discussed over the next two days include:
 The Court of Chancery decision in The Williams Companies v. Energy
Transfer Equity, CA No. 12168-VCG, CA No. 12337-VCG (Del. Ch. June
24, 2016), in which the Chancery Court held that ETE did not breach its
merger agreement with The Williams Companies as a result of its counsel's
determination that it could not provide an opinion that the transaction should
be treated as tax-free, thereby permitting ETE to terminate the merger
agreement once the drop-dead date had passed.
 Has the Chancery Court’s decision affected the prevalence of “tax opinion”
closing conditions in merger agreements?
 The Chancery Court’s decision has been appealed, oral argument was
heard yesterday and we await the Delaware Supreme Court’s decision.

And while the prevalence of claims alleging breaches of fiduciary duty in
connection with M&A transactions appear to be declining, the focus on
appraisal actions appears to be increasing, unresolved issues include:
 What is the difference between “fair value” and “fair market value”?
 In what circumstances will the Delaware courts defer to the merger price
or, alternatively, be skeptical that the merger price reflects fair value?
 The pending appeals of the Dell and DFC appraisal decisions may resolve
some of these questions.

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