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Presenting a live 90-minute webinar with interactive Q&A
Going-Private Transactions: Deal Structure
Considerations, SEC Disclosure Obligations,
Fiduciary Duties and More Structuring Deals and Implementing Procedural Safeguards
to Withstand Heightened SEC and Stockholder Scrutiny
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, OCTOBER 15, 2015
Eva Davis, Partner, Winston & Strawn, Los Angeles
James D. Rosener, Partner, Pepper Hamilton, New York
Richard A. Silfen, Partner, Duane Morris, Philadelphia
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Going-Private Transactions: Deal
Structure Considerations, SEC Disclosure
Obligations, Fiduciary Duties and More
Structuring Deals and Implementing Procedural Safeguards to Withstand Heightened SEC and Stockholder Scrutiny
Eva Davis Winston & Strawn LLP [email protected]
James D. Rosener Pepper Hamilton LLP [email protected]
Richard A. Silfen Duane Morris LLP [email protected]
October 15, 2015
Overview
6
Overview and Current Trends
Fiduciary Duties and Deal Structure
Deal Considerations
Timing Considerations
Disclosure Obligations
Takeaways
Overview and Current Trends
Overview and Current Trends
In 2013-2014, 66 take private transactions closed, valued
at a total of $103.2 billion. Source: S&P’s Capital IQ.
Readily available acquisition financing on favorable terms,
the largest “overhang” of private equity dry powder in US
history, and excess cash on the balance sheets of US
strategies.
Prevalence of activist shareholders and pressure on
boards to maximize SH value (which often means
maximize opportunities to get cash).
Shareholder litigation is a virtual certainty.
8
• Directors of a Delaware corporation owe fiduciary duties to stockholders for all acts as directors, including in connection with a merger or other corporate transaction. See, e.g., Smith v. Van Gorkom, 488 A.2d 858, 889 (Del. 1985).
- Core fiduciary duties of directors – care and loyalty.
- Directors generally owe duties to all stockholders, as opposed to specific stockholders or classes who elected them.
• Controlling stockholders also owe fiduciary duties to minority shareholders.
Overview of Fiduciary Duties
9
Fiduciary Duties
and Deal Structure
• Potential for conflict of interest where
(1) directors realize benefits distinct from stockholders generally, or
(2) controlling holder stands on “both sides” of the transaction.
• Cash-outs of minority are generally permissible.
- Board may approve transaction intended solely or primarily to increase a majority-stockholder’s interest in a company or to eliminate minority stockholders. Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983). Obligation to treat minority with entire fairness.
Conflicts of Interest and Cash-Outs (I)
11
• Differing standards for disinterested (third party) and interested transactions (i.e., where affiliate or controlling stockholder seeks to acquire control or minority shares).
• Business judgment rule (“BJR”) generally applies to board actions. See, e.g., Van Gorkom.
• For interested transactions: “entire fairness” generally applies. Kahn v. Lynch Communication Systems, 638 A.2d 1110, 1115 (Del. 1994).
• Board may also seek to impose or redeem a poison pill or waive the application of state law anti-takeover protections, as applicable – heightened scrutiny may apply. See, e.g., Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
Conflicts of Interest and Cash-Outs (II)
12
• Generally, directors approving a third-party or disinterested transaction will be protected by the BJR, which provides that the acts of independent directors will be presumed to be taken in good faith and with appropriate care.
- No liability for directors if presumption applies.
- Presumption is rebuttable by specific allegations that directors acted in violation of duty of care or good faith.
Standard of Review for Third-Party Transactions
13
• Board of Directors:
- Where a majority of directors approving a transaction have a financial self-interest or are under control of a person who has such an interest, the directors approving the transaction will ordinarily bear the burden of proving it is “entirely fair” to stockholders. See, e.g., Weinberger; Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 109-10 (Del. 1952).
• Controlling Stockholders:
- Entire fairness also applies to a majority or controlling stockholder who is the proponent of a cash out transaction. See, e.g., Lynch.
- Finding of control generally requires (1) ownership of over 50% of voting equity, or (2) actual, not potential, control (even if stockholder owns less than 50% of equity).
Interested Transactions – Duty of Entire Fairness
14
• The duty of entire fairness entails both a duty of “fair dealing” and a duty to pay a fair price. Weinberger.
- Fair dealing – includes timing of transaction, how transaction was initiated, structured, negotiated, disclosed to directors and stockholders and how the approvals of board and stockholders were obtained.
- Fair price – relates to the economic and financial considerations of the transaction, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company’s stock.
• Excludes value arising from the consummation of the transaction or control premium.
• Test is not bifurcated – fairness must be examined holistically. Weinberger.
Duty of Entire Fairness – Elements
15
• Lynch provides that a fiduciary will be able to shift the burden of proof on the issue of entire fairness to the challenging party upon one of the following two conditions:
(1) Approval by an independent committee of directors, or
(2) Approval by an informed majority of minority stockholders.
• Option 1: Special Committee
- Use of a special committee of directors as safeguard of fairness dates at least to Weinberger.
- Viewed as “simulating” the role played by a disinterested board negotiating with a third party. See Lynch.
Entire Fairness – Burden Shifting (I)
16
• Option 1: Special Committee (continued)
- Majority of committee must be truly independent from financial and similar interests favoring the transaction proponent.
- Committee must be empowered, function independently in fact and must not be subject to interference or coercion by the proponent.
• “It is the duty of [committee members] to approve only a transaction that is in the best interest of the public stockholders, to say no to any transaction that is not fair to those shareholders and is not the best transaction available.” Lynch (quoting In re First Boston, Inc. Shareholders Litigation, C.A. No. 10338 (Del. Ch. June 7, 1990)).
• Option 2: Majority-of-Minority Vote
- Must be a condition of the transaction and must be sought after disclosure of all pertinent facts
Entire Fairness – Burden Shifting (II)
17
• Controlling Stockholder Mergers
- Delaware courts traditionally required demonstration of entire fairness under Lynch.
- Burden shifting available if special committee or majority-of-minority approved – but entire fairness remained applicable.
• Tender Offers
- By contrast, under a line of Chancery cases including Siliconix and Pure Resources, “non-coercive” tender offers by a controlling stockholder could avoid entire fairness review.
• BJR is applicable if, inter alia, (i) a non-waivable majority-of-the-minority condition existed and (ii) independent directors were permitted to evaluate offer with independent advisors and make recommendation to stockholders.
• Approval by independent directors not required.
Judicial Review of Going-Private Transactions
18
• In 2010, the Chancery Court suggested that a “unified standard” should apply to controlling stockholder mergers and two-step tender offer freeze-outs. In re CNX Gas Corp. S'holders Litig., 4 A.3d 397 (Del. Ch. 2010).
- Under CNX Gas Corp., BJR would apply in a tender offer if:
• (i) negotiated and affirmatively recommended by an special committee of independent directors (which should be empowered to consider alternatives), and
• (ii) conditioned on the affirmative tender of a majority of the minority.
- If either prong fails, entire fairness review applies.
• The Chancery in CNX Gas Corp. expressed that the same analysis should apply to controlling stockholder mergers (building on dicta in its 2005 case Cox Communications).
Tender Offers and the “Unified Standard” – CNX Gas Corp.
19
• In re Dole Food Co., Inc. Stockholder Litigation, C.A. No. 8703-VCL, (Del. Ch. August 27, 2015): V.C. Laster awarded stockholders $148M following from CEO David Murdock’s $1.2B management buyout structured as a merger.
• “[D]espite mimicking MFW’s form, Murdock did not adhere to its substance,” and the court reviewed the deal with the CEO-controlling stockholder under the entire fairness test.
- Among other things, Murdock and Dole Food’s general counsel deprived the special committee and stockholders of the ability to consider the transaction on a fully informed basis.
- Per the Court: “what the [c]ommittee could not overcome, what the stockholder vote could not cleanse, and what even an arguably fair price does not immunize, is fraud.”
Recent Application of MFW – In re Dole Food Co.
20
• Acevedo v. Aeroflex Holding Corp. et al., C.A. No. 9730-VCL (Del. Ch. July 8, 2015): At a hearing, V.C. Laster refused to approve a settlement consisting primarily of additional disclosures and a reduction to the transaction breakup fee. Laster thus found the “intergalactic" scope of the proposed release supported by insufficient consideration. Laster also expressed concern that the widespread use of global releases in settlements threatens Delaware’s “credibility as an honest broker in the legal realm”
• In re Riverbed Technology, Inc. Stockholders Litigation, Cons. C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015): V.C. Glasscock, in connection with a $3.6B going-private deal reluctantly approved a settlement, while indicating that the Chancery will use significant scrutiny in the future on settlements (and legal fees in connection therewith) in which the remedy is solely or primarily additional disclosure. Glasscock expressed concern with a broad release of claims in light of the modest benefit and stated the court’s deference to its formerly more favorable approach to additional-disclosure settlements "will be diminished or eliminated going forward."
Trends in M&A Litigation – Curtailing the “Deal Tax” and Disclosure Settlements
21
Fiduciary Duties of Directors
In re MFW Shareholders Litigation (Del. Ch. 2013), affirmed Kahn
vs. M&F Worldwide Corp. (Del. Sup. Ct. 2014)
6-part test for controlling stockholder to get less stringent
business judgment rule (BJR) in take-private transaction
The controlling stockholder conditions the transaction on both a special
committee approval and a majority-of-the-minority vote of stockholders
The special committee is independent;
The special committee is empowered to freely select its own advisors
and definitively say “no” to the transaction;
The special committee fulfills its duty of care in negotiating a fair price;
The vote of the minority stockholders is informed; and
There is no coercion of the minority stockholders.
22
Fiduciary Duties of Directors and Deal
Structuring
23
Business Decision: Whether to build a record to demonstrate all of the six factors – from the outset – in order to obtain less stringent BJR standard of review.
In particular, whether to subject a transaction to a majority-of-the-minority condition is a crucial business decision to be made by any board of directors and to be offered from the outset by any controlling stockholder.
May lead to a higher price being paid to the minority stockholders or may put the overall transaction at risk due to a failed stockholder vote (or delay as a higher price is negotiated in the face of an actual or threatened failed stockholder vote).
As a practical matter, the critical decision may be whether to pay more now (in order to achieve a majority-of-the-minority approval) or pay more later (through the time and expense of protracted litigation under the entire fairness standard of review).
Two-Step Merger and Section 251(h) of
the DGCL
Two Step Merger and Section 251(h) of DGCL
According to ABA 2014 Deal Points Study, 100% of all take
privates “opted in” to Section 251(h)
Comparison of One-Step Long Form-Merger and Two-Step
Tender Offer with Back-End Merger
24
• The target’s shares must be listed on a national
securities exchange or have more than 2,000
stockholders of record immediately prior to the
execution of the merger agreement.
• The buyer must be a corporation.
• The target’s certificate of incorporation must not
contain a requirement for a stockholder vote to
consummate a merger.
• The merger agreement must expressly provide
that it will be governed by Section 251(h) and be
approved by the target’s board.
• The merger agreement must provide that the
second-step merger be effected as soon as
practicable following the consummation of the
tender offer.
• The tender offer must be for any and all
outstanding stock of the target that, absent
Section 251(h), would be entitled to vote to
adopt the merger agreement.
• Following consummation of the tender offer, the
buyer must own at least the required percentage
of the outstanding shares of each class or series
of stock of the target that would have been
required to approve the merger agreement
(typically a majority).
• The consideration paid for shares in the second-
step merger must be the same amount and kind
of consideration paid to stockholders in the
tender offer.
• No party to the merger agreement may be an
“interested stockholder” as defined in Section
203 of the DGCL (i.e., a 15% owner, together
with its affiliates), at the time the merger
agreement is approved by the target’s board.
Two-Step Merger and Section 251(h) of the
DGCL In order to qualify for Section 251(h), the following conditions must be satisfied:
25
Pros
• Often utilized for mergers where the buyer is
financing the transaction with loans and the lenders
do not wish to provide bridge financing for the
purchase of shares in a first-step tender offer.
• In a transaction where the merger consideration
consists of shares of the buyer, the timing advantages
of a two-step merger are less pronounced.
• Beneficial structure if the transaction requires a
significant amount of time between signing and
closing to obtain 3rd-party approvals.
Cons
• SEC review
• Stockholder vote
Pros
• If the buyer is paying all cash, the two-step merger
can be completed quickly, without prior SEC review.
• Can opt-in to Section 251(h) and do not need to
obtain 90% in order to effect the back-end merger.
Eliminates the need for the top-up and dual-track
structure work-arounds.
• No stockholder vote; front-end speed; deal certainty
Cons
• If the target has debt or other obligations that will
become due upon the change of control, the buyer
must be prepared to refinance or pay the obligations
in full, which could be more difficult because the
buyer does not own 100 percent of the target.
• A financing closing condition requires an additional 5
business day notice period.
• Section 251(h) prohibits a 15% owner (together with
its affiliates) from being party to the merger
agreement.
Comparison of One-Step and Two-Step
Mergers
One-Step Merger Two-Step Merger
26
Deal Considerations
Deal Considerations
28
Considerations for forming (or not) special committee of
the board of directors
Empowerment of special committee when formed
No Shop vs. Go Shop
How long, how fulsome was initial marketing pre-deal?
Were likely financial buyers and strategic buyer contacted?
Break-Up Fees
Preclusive?
Interplay with No Shop and Go Shop
Relationship, if any, to Reverse Break-Up Fees
What’s Market?
Deal Considerations (cont.)
29
Deal Protection: No-Shop Provision
No solicitation:
Target may not solicit or encourage an acquisition proposal or
provide any nonpublic information about the target in connection
with a third party acquisition proposal.
Fiduciary exception:
Target not prohibited from providing nonpublic information if
expected to result in a superior offer
“Expected to Result in Superior Offer” (87%) v. “Actual Superior
Offer” (4%) v. any “Acquisition Proposal”*
*ABA 2014 Strategic Buyer/Public M&A Deal Points Study (which surveys 2013 deals)
Deal Considerations (cont.)
30
Deal Protection: No-Shop Provision
Must establish the existence of Superior Offer to engage with potential alternative bidder
Superior Offers
Target board must believe that negotiations with alternative bidder could be expected to result in Superior Offer
What percentage of target stock constitutes a Superior Offer?
92% of deals = 50% or greater but < all or substantially all
6% of deals = all or substantially all
Deal Protection: Go-Shop Provision
Definition: provision which allows target to solicit competing bids and provide confidential information for a specified time period following merger agreement.
Deal Considerations (cont.)
31
Go-shop prevalence in public M&A
Depends on market check conducted prior to execution of merger
agreement.
Full-blown auction unnecessary, but absent market check, there will be
strong preference for go-shop provision
89% of 2013 public deals did not have go-shop provision
Time Period—most common is 30 days
Deal Considerations (cont.)
32
Go-Shop Provision Transformations in 2013
Modified go-shop increase-two tier fee structure
Lower fee if deal terminated because of unsolicited proposal
Higher fee if deal terminated because of solicited proposal
Grandfather clauses increased
Target can continue negotiations past go-shop time period if bidder
proposal submitted during go-shop period
Go-shops in deals with strategic buyers increased
Go-shops in financial deals decreased
Deal Considerations (cont.)
33
Break-Up Fees; Reverse Break-Up Fees Devices to address risk of transaction not closing
Break-up fee—Payable by target in certain situations where target does not complete transaction Superior alternative proposal
Intervening event
Reverse Break-Up Fee—Payable by acquirer when it cannot complete transaction in certain circumstances Financing
Antitrust
Value of Break-up fee v. Reverse Break-up fee—No longer symmetrical Break-up fees—3% to 5% of equity value generally
Typically larger percentage in smaller transactions in order to cover expense reimbursement
Possible that in large, leveraged transaction, the debt component considered
See later charts for Reverse Break-up fees
Deal Considerations (cont.)
34
Target Break-Up Fee Triggers
Deal Considerations (cont.)
35
Reverse Break-Up Fees
Principal tool to allocate financing failure risk and/or antitrust
risk
If sole remedy for buyer breach is reverse break-up fee,
essentially an option
TPG Capital acquisition of Assisted Living Concepts, Inc. was
largest reverse break-up fee of 2013 (by percentage)
Fee = 14% of deal value if TPG Capital fails to close merger
Equity-financed deal (more typically in debt deals)
Deal Considerations (cont.)
36
Reverse Break-Up Fees/Antitrust Risk*
14 deals in 2013 included reverse break-up fee for not securing
antitrust approval (similar to 2012)
Change in 2013 in how risk is allocated
Ticking fee included in 2 deals: merger consideration increases each day
closing is delayed because of failure to obtain approval
Antitrust break-up fee as % of deal value*
5% (5 deals)
2-4% (6 deals)
7% (2 deals)
>8% (2 deals)
*PLC Deal Protections and Remedies: 2013 Analysis of Public Merger Agreements
Timing Considerations
Timing considerations – 1 Timing issues can affect “going private” transactions
Directional impact on process
Obligations of the board of directors/special committee and senior executives
Timing to respond to an offer
Opportunity to consider alternatives, including alternative transactions
Timing for SEC to review merger proxy versus tender offer
“Going private” transactions typically are initiated by: Board of directors / special committee – Launch “process” for sale or
seek “strategic alternatives”
Financial buyer – Seeks to acquire company (typically needs management)
Senior executives – Seek to take company private (typically with a financial partner)
Note: Senior executives should seek Board approval before initiating any process that diverts their attention from company business or causes the company to incur any expense.
38
Timing considerations – 2
Should senior executives initiate a process? Or wait to enter a process initiated by the board or special committee?
If senior executives initiate:
May create an immediate need for a special committee
Could limit optionality for senior executives
Likely will limit flow of information to senior executives
May otherwise disadvantage senior executives
May decrease the likelihood of a strategic acquiror
If senior executives wait to enter a process initiated by the board:
May defer the need to form a special committee
May allow executives to weigh-in on the process and potential acquirors
Should facilitate access to executives by all buyers (particularly financial acquirors)
May increase the likelihood of a strategic acquirors
39
Timing considerations – 3 When is the optimal time for management to initiate or enter a
“process”?
Key considerations to avoid premature disclosure Schedule 13G to Schedule 13D
Could affect founders or other key investors
“Passive” to “active” status
Absent company disclosure about a “process,” a Sch13D filing or amendment can be awkward
Possible “group” formation
Obligation to update Williams Act filings versus “umbrella” language
Timing of periodic filings “Duty to disclose” can be inconvenient and can raise uncomfortable issues during
“process”
Unless short, “exclusivity period” can raise difficult disclosure issues
Standard responses: “No comment.”
“As a matter of policy, we do not comment on market rumor.”
40
Timing considerations – 4
HSR premerger notification filing
Typical 30-day waiting period
Can be shorter for a cash tender offer
“Pull and refile” versus second request
41
Competing Offers
• Change of control or break-up of the company obligates directors to achieve the reasonably available immediate value for stockholders. See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
- Heightened scrutiny due to potential conflict. Cf. Unocal.
- Duties first attach when the decision is made to sell the company, or before, if sale is inevitable. See Lyondell Chem. Corp. v. Ryan, 970 A.2d. 235 (Del. 2009).
• Apply where a widely-held corporation is the subject of a cash-out merger. Revlon.
• Generally do not apply in stock-for-stock deals, if control remains in "fluid . . . public market." Paramount Commc'ns Inc. v. QVC Network Inc., 637 A.2d 34, 47 (Del. 1994).
• May apply in mixed consideration deals (fact-specific).
Competing Offers – Revlon Duties (I)
43
• Until a deal has been completed, board may have a fiduciary duty to evaluate alternative transactions or initiate a competitive bidding process.
• Board’s sales approach may be flexible – there are no legally prescribed steps. See, e.g., Lyondell; Barken v. Amsted Indus., Inc. 567 A.2d 1279, 1286 (Del. 1989).
- Should be appropriate to company’s circumstances (e.g., size/market visibility).
- Fiduciary out and breakup fee.
- Auction/active market check not always required.
- Fairness opinion.
- Special committee if majority of board not independent.
Competing Offers – Revlon Duties (II)
44
• Limits on Revlon – Companies with Controlling or Majority Holder
- If the majority stockholder is the proponent of a going-private transaction in which it will acquire the minority shares, no Revlon duties are ordinarily applicable. See, e.g., Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845 (Del. 1987);
- Where the majority holder has no present intention to sell its shares, there could be no alternative transaction, since its consent would be required.
Competing Offers – Revlon Duties (III)
45
Disclosure Obligations
Prior to Announcement
47
Possible announcement of the initiation of a “process” or “strategic alternatives”
Sale “process” rarely announced
Consideration of strategic alternatives often announced
Disclaim duty to update specific statements
Frequently used for process-related disclosures
Care should be taken to address ongoing or planned securities offerings – for example on Forms S-3 or S-8
Communications with investors and security analysts
“No comment” should be the standard response
Exercise caution in oral communications
Note: If responses to questions about merger negotiations ever have been “no,” then “no comment” means “yes.”
Prior to Solicitation – 1
48
Merger proxy-related communications – Pre-mailing
“Solicitation” is defined broadly to include communications –
even when no form of proxy is included
Certain customary communications typically are considered
“solicitations”
Presentations about the transaction to security analysts and holders
regarding equity – and debt – securities
Presentations to employees (typically)
Note: Separate rules apply to pre-solicitation communications if securities will
be offered as deal consideration, like in an exchange offer.
Prior to Solicitation – 2
49
Tender offer communications – Pre-commencement
Scope of applicability is similar to a proxy solicitation
By bidder:
Cannot include a means to tender
Must be filed under cover of Schedule TO
Must contain a required legend
By target:
Must be filed under cover of Schedule 14D-9
Must contain required legend
Note: Separate rules apply to pre-commencement communications if
securities are offered as deal consideration, like in an exchange offer.
Announcement through Solicitation
Proxy statement
Tender offer
Schedule TO:
Tender offer open at least 20 business days
Offer generally is required to remain open for at least five business days after disclosure of material information
Offer is required to remain open for at least 10 business days after
Withdrawal rights
Schedule 14D-9 within 10 business days after commencement
Subsequent offering period
No withdrawal rights
Must remain open for at least three business days
Bidder must promptly accept and pay for all securities tendered
50
The Solicitation – Applicable Regulations
51
Proxy statement – Regulation 14A
Offer to purchase – Regulation 14D/14E
“Going private” rules: Schedule 13E-3
Regulation M-A
The Solicitation – Specific Disclosures – 1
52
Background Background, initiation and design of the process
Contacts, discussions and negotiations among target and interested parties, bidders and acquiror, including their representatives
Discussion should address disposition of bidders to arrive at transaction with acquiror
Note: Keep detailed notes of every contact, discussion and negotiation relating to the deal, including persons present, topics discussed and decisions made.
Terms of the merger Summary term sheet for key transaction terms
General description of the merger agreement
Significant necessary regulatory and other approvals
Deal protection provisions – like ability to address competing proposals
Termination provisions – including “break-up” and any “reverse break-up” fees
Any voting or stock tender agreements
The Solicitation – Specific Disclosures – 2
53
Recommendation by target’s board of directors Analysis of transaction merits
Reasons for timing of transaction
Support for analysis of “procedural fairness,” as appropriate
Opinion of financial advisor Terms of engagement
Approach
Valuation methodologies
Support for financial fairness
Any conflicts of interest – with explanation – in rare situations that conflicts have arisen
For tender offers: Projections given to the acquiror
Information about the meeting (for proxy statements)
Required vote
Other required disclosures, including directors, officers and key shareholders
The Solicitation – Specific Disclosures – 3
54
Key additional disclosures required for a “Rule 13e-3 transaction:” Where the acquiror is an affiliate of the target
“Special Factors” – Greater level of detail than negotiated deals; higher level of scrutiny by SEC staff and analysts/investors
Purposes, alternatives, reasons and effects of transaction
Fairness to unaffiliated shareholders
Affirmative statement by target and affiliates filing the Schedule 13E-3
Disclosure of director dissents and abstentions
Detailed description of factors supporting fairness conclusions, including any weighting applied
Reasons for rejection of any other offers received
Reports, opinions, appraisals and negotiations
Reports – that is, presentations, by financial advisor – filed as an exhibit to Schedule 13E-3
Fairness opinion -- greater detail in analysis/description
Subsequent to Solicitation
Proxy statement
Additional solicitation materials
Interpreted broadly
Tender offers
Amendments to Schedule TO and/or Schedule 14D-9
Supplemental offer to purchase
55
Takeaways
Litigation Takeaways
57
Until recently, Entire Fairness Standard applied in all controlling stockholder (or other “interested”) transactions. Burden of proof lies with the defendants to demonstrate that transaction was
“entirely fair” – i.e., that it mirrored and arm’s-length negotiated transaction.
Fair dealing and fair price
In determining whether a stockholder is a controller, primary focus will be on assessing the extent to which the alleged controller influenced the board’s decision with respect to the transaction at issue. Relevance of stockholder’s control over the company’s day-to-day operations?
Given fact-specific nature of inquiry, dismissals at the pleading stage on this basis may be difficult to come by.
Where transaction is deemed to involve a controlling stockholder, Delaware Courts have now provided a pathway for avoiding entire fairness review. Court of Chancery’s decisions in both MFW and In re Orchard Enterprises (2014)
viewed this exception – conditioning the transaction at the outset on approval by an independent special committee and a majority-of-the-minority vote – as a potential avenue for controllers and directors to dispose of squeeze-out litigation at the pleading stage (i.e., prior to discovery).
Litigation Takeaways (cont.)
58
Delaware Supreme Court signaled a very different vision in its affirmance in MFW.
While the court blessed the advent of a mechanism by which controllers and target boards can secure business judgment protection in the freeze-out context, it also erected potential hurdles that could mitigate the benefits of constructing the procedural devices in the first instance.
The Supreme Court also stated that in order to avoid entire fairness, defendants are required to establish entitlement to business judgment protection – prior to trial, or be stuck with the entire fairness burden for the duration.
If, after discovery and summary judgment, “triable issues of fact remain about whether either or both of the dual procedural protections were established, or if established were effective, the case will proceed to a trial in which the court will conduct an entire fairness review.”
If followed to the letter, the holding would preclude business judgment protection in situations where it has been historically available.
Other Takeaways
59
Pathways exist that can enable application of the business judgment rule to board decisions – even for “going private” transactions.
Tools are available to enable boards / special committees to assure respect for process, value and shareholder rights.
Timing considerations: Affect the presentation of an offer to the target;
Tactics by the would-be acquiror; and
Allow boards / special committees room to maneuver.
Untimely disclosures can affect process and outcome adversely.
The nature of “going private” transactions causes them and their participants to be subject to stringent disclosure requirements.
Many of these required disclosures can affect: Litigation exposure arising from the transactions; and
As a result of investor and analyst scrutiny of the disclosures, the outcome for the transaction.
Prudent transaction teams prepare a plan for each deal element in the early stages and consider plan revisions in response to developments.
Eva Davis Chair, West Coast Private Equity
+1 (213) 615-1719
Los Angeles
For more than 20 years, Ms. Davis has advised her clients on U.S. and cross-border complex
business transactions with a particular focus on mergers and acquisitions and private equity. As
an advisor to strategics and private equity funds and their portfolio companies, Ms. Davis has
counseled domestic and international clients in public and private M&A transactions, public and
private debt and equity financing transactions, including initial public offerings, and distressed
sales and investments in and out of bankruptcy. Ms. Davis has also represented public
companies and their boards of directors and special committees in connection with enterprise -
transformative business opportunities and legal challenges, as well as providing corporate
governance advice.
Her transactional experience includes deals ranging from tens of millions of dollars (for initial
private equity investments and financings) to more than $1 billion (for acquisitions, industry
consolidations and dispositions).
In 2014 and 2015, Ms. Davis was recognized by Chambers USA in the Corporate/M&A/Private
Equity category and in 2014 was also honored with a “Client Choice Award” for her M&A work in
California. Recently, Ms. Davis was included in the 2016 edition of The Best Lawyers in
America. Ms. Davis’s clients describe her as “terrific in mid-market private equity M&A: very
straightforward, very knowledgeable and really gets to the meat of a negotiation process very
well,” and “a multi-faceted legal professional” who is “flexible and easy to work with, and has a
razor-sharp legal mind.” They go on to say “her responsiveness and effective use of time,
compared to what is billed, is outstanding,” and she is “able to offer astute commercial advice
alongside her legal recommendations.”
© 2015 Winston & Strawn LLP 60
Services
Corporate Governance
Mergers & Acquisitions
Private Equity Transactions
Securities and Capital
Markets
Sectors
Automotive
Energy
Financial Services & Banking
Food & Beverage
Health Care
Media & Entertainment
Pharmaceuticals
Retail & Consumer Products
Technology
Education
Harvard University, JD, cum
laude, 1990
Duke University, BA, summa
cum laude, 1987
Admissions
California
James D. Rosener
• Pepper’s International Practice Group chair and managing partner of New York office
• Practice is devoted primarily to international transactions, private equity funds, M&A and corporate financing
• Has represented domestic and foreign PE funds in transactions in more than 70 countries, including platform and follow-on acquisitions, distressed buyouts, including in bankruptcy, corporate carve-outs and restructurings
• Has represented U.S.-based companies in transactions throughout Europe, Latin America and Asia, as well as several European, Indian, South American and Japanese companies in M&A and financing transactions and joint ventures
• Also has represented management-led groups in the acquisition of businesses from divesting corporations
61
Partner, Commercial Department
212.808.2717
Richard A. Silfen
Richard Silfen practices in the area of corporate law with concentrations in mergers and acquisitions as well as
securities. Mr. Silfen also seeks to leverage his prior board service and senior executive experiences to benefit
clients of the firm.
In the area of M&A, Mr. Silfen regularly advises publicly traded and privately held companies, boards of directors
and special committees, and fund sponsors and their portfolio companies, in mergers and acquisitions. In
addition, Mr. Silfen advises clients in connection with control and non-control investments in publicly traded and
privately owned businesses.
In the area of securities, Mr. Silfen advises publicly traded companies in connection with public and private debt
and equity offerings and counsels privately owned companies in their efforts to enable their securities to become
traded publicly. He also works with clients to facilitate public reporting and analysis of operating results, and
advises on compliance with applicable securities regulations.
Mr. Silfen also assists emerging and private equity-backed companies to develop plans for the growth and
development of their businesses and technologies, including collaborative and strategic partnerships, and joint
venture arrangements.
Since 2009, during his prior tenure with Duane Morris, Chambers USA: America's Leading Lawyers for Business
included him as one of the leading corporate lawyers in Pennsylvania. Mr. Silfen has been included in two
categories of Chambers listings: Corporate/M&A & Private Equity and Corporate/M&A: Securities. Chambers
further described Mr. Silfen as a “a very smart lawyer.” Mr. Silfen rejoined Duane Morris in June 2015, having
served as executive vice president and general counsel of Vereit, Inc. (formerly American Realty Capital
Properties, Inc.) from March 2014 through May 2015.
Philadelphia | 215.979.1225 | [email protected]
Education
•The University of
Alabama School of
Law, J.D., 1987
•Baylor University,
B.A. - Physics, 1983
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