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Delaware limits appraisal rights, but at what cost?

Back in August 2016, Delaware amended Section 262 of the Delaware General Corporation Law to address the rise of the appraisal arbitrage strategy where certain sophisticated investors would find a target company that is involved in a merger or acquisition, buy stock in the target company, and then invoke appraisal rights under Section 262. The main goal of the strategy is to strong-arm management to settle for a higher sale price in order to avoid litigation costs and/or gain from receiving statutory interest that accrued on the court-appraised amount. The idea behind the 2016 amendments was to curtail this appraisal arbitrage strategy by limiting a shareholder’s appraisal rights under Section 262 in two main respects: (i) by allowing surviving corporations to prepay dissenting shareholders prior to a final court determination in order to avoid paying statutory interest on the final appraisal value,[1] and (ii) by taking away appraisal rights from de minimis shareholders who hold stock that is listed on a national security exchange.[2]

A recent study published by the Harvard Law School has analyzed the effect of the 2016 amendments on appraisal actions in Delaware since the amendments went into place one year ago. The study found that appraisal actions did, in fact, decrease by 33 percent in 2017 as compared to the same period in 2016. The analysis also found that, surprisingly, the average deal premium fell from 28.3 percent in 2016 to 22.4 percent in 2017, the lowest of any year since at least 2005. …

Some thoughts on mimicking a corporate governance structure in Ohio LLCs

Part One

It is quite common for members of a recently formed LLC accustomed to a corporate governance structure (that is, one having directors, a board of directors and officers versus members and managers) to direct their attorney to draft their operating agreement so that the LLC will have a corporate governance structure too. The intention being to permit the members to continue to use the governance structure with which they are most familiar. (Some clients even enjoy holding board of directors meetings and the formalities of decision making.) Ordinarily, this is accomplished by a provision inserted into the operating agreement that states, more or less, that:

The members agree that the company shall be governed by a board of directors [or managers] (the board) acting collectively; and not by its members. The board shall be comprised of three (3) directors appointed by the members [or by the company’s managers if the company is manager-managed] designated on the attached Exhibit A. The foregoing is an express delegation to the board by the members of their individual right to manage the company including all powers and authority necessary for, ancillary to, or implied by such delegation to direct, manage and control the company’s business and affairs. The board may appoint one or more officers having such titles, rights and duties as are commonly given to them and as prescribed in Chapter 1701 of the Ohio Revised Code. . .

The Ohio Limited Liability Company Act (the Act), Revised Code Chapter 1705, …

Delaware Courts continue scrutiny of “disclosure only” settlements in M&A litigation

On Jan. 22, 2016, the Delaware Court of Chancery released its opinion in In re Trulia Stockholder Litigation in which it rejected a “disclosure only” settlement of a shareholders’ suit challenging an M&A transaction. This decision confirms the trend of increasing hostility of the Delaware courts towards “disclosure only” settlements and serves as a warning to plaintiffs firms that they will find it increasingly difficult to extract attorneys’ fees from companies in these types of settlements.…

Recent Delaware case questions ability of common stockholders to prospectively waive appraisal rights; strictly enforces notice requirement to use drag along right

Drag along rights and an accompanying waiver by a minority stockholder of appraisal rights in connection with a change in control transaction approved by the majority stockholder are common features in stockholders agreements among majority stockholders and minority stockholders. The recent case of Michael C. Halpin, Et. Al. v. Riverstone National, Inc., No. 9796–VCG (Del. Ch. Feb. 26, 2015) highlighted the following issues that are important for M&A practitioners:

1. The court called into question, while refusing to answer, whether common stockholders can contractually commit to waive in advance their appraisal rights associated with a change in control transaction; and

2. Failure by a majority stockholder to strictly follow the notice procedure and timing requirements of a drag along right will prohibit the majority stockholder from exercising that drag along right.…

Recent Delaware case reminds of importance of litigation expense advancement provisions in organizational documents

Much to the chagrin of corporate lawyers, there are still some companies that do not have provisions in their articles of incorporation, bylaws or operating agreements that provide for advancement of litigation expenses to directors and officers. The recent case of White v. Kern, No. 7872-VCG (Del. Ch. Jan. 24, 2014) (Transcript) illustrates that courts may prohibit the advancement of expenses to defendant directors and officers in the absence of these provisions.…

Lessons from In re Trados: Conflicting Interests of Preferred and Common Stockholders

In our previous post about In re Trados, we provided some background on the facts, outcome and usefulness of the Trados case. In this installment, we will discuss the conflict of interest between the preferred stockholders and the common stockholders of Trados and the related analysis conducted by the Delaware Court of Chancery.

Divergence in Interests of Preferred and Common Stockholders

Due to the liquidation preference of preferred stock, preferred stockholders and common stockholders can have diverging interests in exit transactions. “Because of the preferred shareholders’ liquidation preferences, they sometimes gain less from increases in firm value than they lose from decreases in firm value. This effect may cause a board dominated by preferred shareholders to choose lower-risk, lower-value investment strategies over higher-risk, higher-value investment strategies.1…

Fiduciary Duties in M&A Exit Transactions: Lessons from In re Trados

On Aug. 16, 2013, the Delaware Court of Chancery issued an opinion1 finding that the directors of TRADOS Inc. (Trados) did not breach their fiduciary duties in deciding to sell Trados despite the common stockholders receiving no sale consideration; (ii) a majority of the directors approving the transaction having a conflict of interest; (iii) the court’s review under the entire fairness standard; and (iv) the directors’ failure to follow a fair process, because the common stockholders received a fair price (i.e. the value of the common stock immediately prior to the merger was zero and the common stockholders received zero in the merger).

Though In re Trados is not groundbreaking in the sense that it does not present any novel legal issues, it nonetheless serves as an important illustration of common conflict of interest and fiduciary duty issues that arise in a typical exit transaction fact pattern, particularly for venture capital or private equity backed companies. Through the next several weeks, we will discuss in more detail some of the important takeaways from In re Trados in a series of blog posts.…

Wall Street Journal: Judges in Delaware Taking a Hard Look At Fee Awards in M & A Derivative Cases

On Tuesday, July 19, 2011, the Wall Street Journal ran an interesting article by Gina Chon entitled "Judges Making Lawyers Earn It," discussing trends in fee awards in lawsuits challenging mergers and acquisitions in the Delaware Court of Chancery, finding that:

In recent months … the court’s judges have been more discerning, according to plaintiffs and defense lawyers as well as court officials. In several cases, they have been less willing to sign off on standard fees for lawyers who have done relatively little and more willing to grant high payouts when they think lawyers have worked to earn them. 

The article is available on line here.…

Changes For Delaware Corporations in 2008

As of January 1, 2008, Delaware corporations seeking to discontinue their corporate existence in Delaware, either through dissolution, merger or conversion, must be current in (a) filing their Annual Franchise Tax Reports (“Annual Reports”) and (b) payment of any required franchise tax (this is not a new requirement). The State of Delaware will reject any dissolution, merger or conversion filing if the Delaware corporation that is dissolving, merging out of existence, or converting to an entity not subject to the Delaware Franchise Tax has not filed all of its Annual Reports and paid all of the required franchise tax due up to the time in which the dissolution, merger or conversion is to become effective.…

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