How to Prepare for and Defend Against Shareholder Litigation

How to Prepare for and Defend Against Shareholder Litigation

How to Prepare for and Defend Against Shareholder Litigation Stemming From Mergers & Acquisitions Jeffery A. Dailey Jordan S. Mersky Partner Akin Gu...

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How to Prepare for and Defend Against Shareholder Litigation Stemming From Mergers & Acquisitions Jeffery A. Dailey

Jordan S. Mersky

Partner Akin Gump Philadelphia

Deputy General Counsel American Water – Northeast Division

DELVACCA THANKS http://delvacca.acc.com

I. CURRENT LANDSCAPE

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Table from “Shareholder Litigation Involving Mergers and Acquisitions”, February 2013 Update, Cornerstone Research, Robert M. Daines and Olga Koumrain

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Table from “Shareholder Litigation Involving Mergers and Acquisitions”, February 2013 Update, Cornerstone Research, Robert M. Daines and Olga Koumrain

This is a significant change from 1999-2000 when 59% of merger related suits filed in the Delaware Court of Chancery were dismissed and only 28% settled. 4

Table from “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions”, March 2012 Update, Cornerstone Research, Robert M. Daines and Olga Koumrain

II. MERGER LITIGATION CASE STUDY Google acquisition of Motorola Mobility for $12.5 Billion

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A. Deal Announced • On August 15, 2011 Google announces an all-cash deal

to acquire Motorola Mobility for $12.5 billion, or $40 a share. • Price represented a 63% premium for Motorola Mobility’s Shareholders. • Within hours plaintiffs’ securities firms issue press releases that they are investigating whether the Board breached its fiduciary duties to shareholders.

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B. Litigation Announced

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C. The Litigation Multiplies in Number and Across Jurisdictions • 16 shareholder class actions were filed related to the

Google/Motorola Mobility deal. • 4 filed in Cook County, Ill., headquarters of MM’s former parent. • 8 filed in Lake County, Ill., where MM was based. • 3 filed in Delaware Chancery Court. • 1 filed in Illinois federal Court.

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• In general • Lawsuits often filed before the preliminary proxy is filed. • Suits are filed in state court because primary relief sought is injunctive and they tend to move faster than federal courts. • Additional cases usually filed in location of the headquarters or incorporation, so plaintiffs can try to avoid consolidation. • Complaints often amended to include allegations based on disclosures in proxy statement.

C. The Litigation Multiplies in Number and Across Jurisdictions (con’t)

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D. Litigation Allegations • All actions had same theory that MM, its Board and

Google had breached (or aided and abetted a breach) their duty to shareholders. Suits sought to enjoin the transaction. • Targets Generally • The target company • Directors and certain officers of the target • The Buyer • Advisors (maybe)

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D. Litigation Allegations (con’t) • Claims generally against: (1) target defendants for

breaches of fiduciary duties; and (2) buyers and advisors (sometimes) for aiding and abetting. • Common allegations: • Conflicts of interest. • • • •

Affiliates or large shareholder involvement Board acceleration of stock appreciation rights. Management negotiation of employment and compensation Advisors dealing on both sides of transaction.

• Transaction was rushed, ill-considered • Agreement inhibits higher offers with preclusive deal terms. • Company is being sold for too little in light of recent financial results. • Inadequate/misleading disclosures to shareholders • Deal is coercive to shareholders 11

• Transaction should be enjoined.

E. Procedural fights and Discovery • Fights to consolidate and stay matters in all but one

jurisdiction. • Injunction • Expedited Discovery • Expedited Production of Documents • Board minutes and presentations • Email • Third party discovery from advisors/outsiders

• Expedited Depositions • Experts

• All of this often overlaps with presenting the deal to shareholders

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F. Motions to Dismiss and Dispositive Challenges • Failure to state a claim. • Business judgment rule. • No demand futility. • Formation of special litigation committees.

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G. Settlement • Google/MM settlement was largely for modified

disclosures. • 8-K disclosed changes to proxy statement including: • A paragraph explaining that MM shareholder Carl Icahn tried to

negotiate for a portion of the reverse-breakup fee the company would receive if the deal did not go through, but the board turned him down, saying it was not willing to treat Icahn differently than other shareholders. • Details back and forth between MM’s lawyers and Google’s counsel over the termination and reverse-termination fees and equity grants to Motorola execs. • Disclosure of the $21 million in fees MM and its former parent have paid its financial adviser, Centerview, in the last two years. 14

G. Settlement (con’t) Evolution of Settlements in Merger Litigation • 1999 and 2000 • 52% of settlements included payments to shareholders. • Only 10% involved additional disclosures only. • 2010 and 2011 • Only 5% resulted in payments to shareholders. • 83% settled for additional disclosures only. • 13% included merger agreement changes other than payments to shareholders. • 7% resulted in modified deal protection provisions (such as termination

fees, no-solicitation, and matching rights) or inclusion of top-up option and appraisal rights. • 6% involved other terms, most often a delay of the shareholder vote.

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G. Settlement (con’t) Settlement Strategies • Standard Terms of Settlement • Deal modifications • Enhanced disclosures • Additional disclosures concerning the “Selected Company Analysis” and

“Selected Transaction Analysis” in the summary of the fairness opinion • Additional disclosure relating to the discounted cash flow analysis • Cash payments? • Reduced target company termination fee • Dismissal of the pending litigations • An agreement that plaintiffs’ counsel can seek fees up to a certain

amount subject to court approval

• Get carrier consent • Expect plaintiffs’ fees to be an issue with 16

carrier

Table from “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions”, March 2012 Update, Cornerstone Research, Robert M. Daines and Olga Koumrain

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G. Settlement (con’t) Why Do Some Settlements Result in Money Payments? • Negotiations by management for benefits not given to others • Prior to settlement of litigation relating to Delphi Financial Group sale to Tokio Marine Holdings, the Court found plaintiffs showed a likelihood of success because of the “troubling” actions of Delphi’s founder and CEO, who negotiated a premium price for his Class B stock compared to the price of the publicly owned stock.

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• Failure to identify and/or disclose advisor conflicts • $89 million Del Monte Foods settlement in October of 2011. • In February 2011, the Delaware Court of Chancery awarded a preliminary injunction of the shareholder vote. • The court focused on allegation that advisor Barclays helped with the buy-side financing and failed to disclose its relationship to the target. • Court found that Del Monte’s board “fail[ed] to provide the serious oversight that would have checked Barclay’s misconduct.” • Barclays paid $23.7 million of the $89.4 million settlement.

G. Settlement (con’t) Who Gets Paid When Cases Settle?

9%

87%

Table modified from “Anatomy of a Merger Litigation”, April 4, 2012, NERA Economic Consulting, Douglas J. Clark and Dr. Marcia Kramer Mayer

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New Lawsuits Challenging Annual Proxies

Table from “Shareholder Litigation Involving Mergers and Research, Robert M. Daines and Olga Koumrain

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Acquisitions”, February 2013 Update, Cornerstone

III. STEPS YOU CAN TAKE NOW TO MINIMIZE RISKS AND COSTS LATER

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1. Intra-Corporate Forum Selection Clauses • Most merger agreements have forum selection provisions

in the event there is a dispute between the parties to the merger agreement. • However, only a small percentage of companies are estimated to have intra-corporate forum selection clauses in charters or bylaws. • Clause will limit venues and number of filings when derivative actions brought.

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1. Intra-Corporate Forum Selection Clauses (con’t) • In re Revlon, Inc. Shareholders Litig., 990 A. 2d 940, 960

(Del. Ch. March 16, 2010) stated: “[I]f boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intraentity disputes.” • Boilermakers Local 154 Ret. Fund v. Chevron Corp., C.A. No. 7220-CS (Del. Ch. June 25, 2013), upheld the statutory and contractual validity of forum selection bylaws that are adopted by boards of directors without shareholder approval. 23

Joseph Grundfest, Oct. 6, 2010 Presentation to The Rock Center For Corporate Governance Standard, entitled “Choice of Forum Provisions in Intra-Corporate Litigation: Mandatory and Elective Approaches.

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Joseph Grundfest, Oct. 6, 2010 Presentation to The Rock Center For Corporate Governance Standard, entitled “Choice of Forum Provisions in Intra-Corporate Litigation: Mandatory and Elective Approaches.

2. Scrutinize Disinterested Directors and Structure of Deal • Utilize disinterested directors to evaluate • Where possible prohibit negotiation of future employment by

management until deal done. If part of deal, limit role of interested parties in evaluation process. • Use special litigation committees • After an objective and thorough investigation of the merits of a corporate claim by

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an independent committee to whom complete authority to act has been delegated, the committee may move on the name of the corporation to dismiss the suit on the ground that the committee has concluded, in a written report making specific findings, that dismissal is in the best interest of the corporation. See Zapata v. Maldonado, 430 A.2d 779 (Del. 1981). • Corporation has burden to show independence, good faith and reasonableness of investigation. • Carefully select special committee members and document inquiry into independence, including exploring financial and personal relationships. Make sure committee has latitude, money and advisors

3. Carefully Evaluate Types of Disclosures Previously Subjected to Litigation • Locate previously challenged disclosures and the

enhanced disclosures through settlement and compare to your planned disclosures. • Modeling your company disclosures after disclosures that were part of prior Court approved settlements may make it harder for plaintiffs to successfully challenge the adequacy. • Court approval of disclosure only settlements is different than monetary settlements. In theory, court is not approving disclosures that remain deficient.

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4. Vet and Supervise the Advisors • Del Monte Food case and undisclosed investment banker

conflicts resulted in $89 million payment • Avoid actions that could cause loss of business judgment rule (abdication of decision making to advisors or failure to supervise advisors)

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5. Segregate and Gather Documents During Deal Phase • Assume all actions and communications will be

scrutinized • When litigation hits, it is likely that deal will still be in process of being presented to shareholders. You will be busy enough with deal. By planning ahead, you can minimize disruption that expedited discovery will have. • Definite categories of documents that will be requested include: • Board minutes and presentations • Email • Third party discovery from advisors/outsiders

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Jeffery A. Dailey  Mr. Dailey is a partner in the Philadelphia office of Akin Gump Strauss Hauer & Feld LLP and a member of the firm’s Securities Enforcement and Litigation Practice Group.  His recent shareholder litigation matters include defending companies, officers, directors, accountants and other third parties against a variety of securities related claims. • Mr. Dailey has been published by Accounting Today, The Practical Litigator and

Securities Law360 and has presented on numerous occasions to in-house counsel groups about defense strategies and new developments in shareholder litigation. In addition, he was recently served as a member of the Editorial Advisory Board of Securities Law360. • Mr. Dailey can be reached at [email protected] or (215) 965-1325.

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Secondary Sources Consulted And Borrowed From 1.

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“What Motorola settlement says about shareholder M&A litigation”, Nov. 10, 2011, Alison Frankel, http://blogs.reuters.com/alison-frankel/2011/11/10/what-motorola-settlement-says-aboutshareholder-ma-litigation/ “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions”, March 2012 Update, Cornerstone Research, Robert M. Daines and Olga Koumrain, http://www.cornerstone.com /files/News/9e101f01-847a-47ff-a62d-b23e3d019cca/Presentation /NewsAttachment/5d699795-5f25-4864-8e7f-b656446965b5/ Cornerstone_Research_Shareholder_MandA_Litigation_03_2012.pdf “Shareholder Litigation Involving Mergers and Acquisitions”, February 2013 Update, Cornerstone Research, Robert M. Daines and Olga Koumrain, http://www.cornerstone.com/getattachment /199b1351-aba0-4f6d-92f0-24b50f4a4b29/Shareholder-Litigation-Involving-Mergers-andAcqui.aspx “Choice of Forum Provisions in Intra-Corporate Litigation: Mandatory and Elective Approaches”, Joseph Grundfest, Oct. 6, 2010 Presentation to The Rock Center For Corporate Governance, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1690561 “The History and Evolution of Intra-Corporate Forum Selection Clauses: An Empirical Analysis”, Joseph Grundfest, Working Paper Series No. 100, 37 Del. J. Corp. L. (Forthcoming 2012), available at http://ssrn.com/abstract=2042758 g “Anatomy of a Merger Litigation”, April 4, 2012, NERA Economic Consulting, Douglas J. Clark and Dr. Marcia Kramer Mayer, http://www.nera.com/67_7680.htm