M&A Developments

M&A activity has been robust in 2015 and is on track for another record year. According to Thomson Reuters, global M&A activity exceeded $3.2 trillion, with almost 32,000 deals during the first three quarters of 2015, representing a 32 percent increase in deal value and a 2 percent increase in deal volume, compared to the same period last year.ⁱ The record deal value mainly results from the increase in megadeals over $10 billion, which represented 36 percent of the announced deal value, particularly in the health care and life sciences sectors.ⁱⁱ While there are some signs of a slowdown in certain regions based on deal volume in recent quarters, global M&A is expected to carry on its strong pace in the beginning of 2016. To help directors prepare for possible M&A activity in the future, we highlight below recent M&A developments for boards to consider:

• Delaware case law developments. The Delaware courts churned out several noteworthy decisions in 2015 regarding M&A transactions that should be of interest to directors, including decisions on the court’s standard of review of board actions, exculpation provisions, appraisal cases and disclosure-only settlements:
  • Business judgment rule. In its first test of the deferential deal process standard relating to when the business judgment standard of review will be applied in controlling stockholder buyouts, as set forth in Kahn v. M&F Worldwideⁱⁱⁱ (the MFW standard), the Delaware Supreme Court recently affirmed in the SynQor case^iv the Court of Chancery’s earlier ruling dismissing a shareholder suit because the controlling buyout transaction met the MFW standard for business judgment review. Based on this decision, it seems that the MFW standard can provide boards with a relatively predictable way to ensure business judgment review, except in circumstances involving fraud, as discussed below.

Interestingly, in the recent Dole case,^v the Court of Chancery decided that, while the process for obtaining approval from the board technically followed the MFW standard, the misleading information that the Dole CEO and COO purposely provided to the board undermined the fairness of the process, and therefore, the court applied the entire fairness standard of review instead. The court also held that, although the final merger price was “arguably fair,” the stockholders were entitled to a “fairer price” because of the fraud.

In addition, in Corwin v. KKR Financial Holdings,^vi the Delaware Supreme Court clarified that in situations where entire fairness review does not apply (because the transaction did not involve a controlling stockholder), the fully informed, uncoerced approval of the disinterested stockholders invokes the business judgment rule standard of review instead of the heightened standards under Revlon or Unocal, even if that vote is required by statute.

• Exculpation. The Delaware Supreme Court held in In re Cornerstone Therapeutics Inc. Stockholder Litigation^vii that a claim solely for monetary damages against a disinterested and independent director of a corporation with an exculpatory charter provision, which provides that a director cannot be personally liable for damages resulting from breaches of the duty of care, can be dismissed regardless of the underlying standard of review (including in interested transactions subject to entire fairness review), unless the plaintiff has alleged facts to support an inference of disloyalty with respect to that director. This decision reversed the 2014 decisions in the Cornerstone Therapeutics and Zhongpin cases^viii and removed the resulting disincentive for independent directors to negotiate transactions with controlling stockholders.
• Appraisal cases. In several recent appraisal cases,^ix the Delaware courts have generally found that the merger price was the most reliable indicator of fair value.^x These decisions confirm the courts’ reluctance to substitute their own calculation of the “fair value” of a target company’s stock, including through a discounted cash flow analysis, for the purchase price derived through arm’s-length negotiations, as long as that price resulted from a thorough, informed and disinterested sales process.
• Disclosure-only settlements. Recently, the Court of Chancery seems to be reconsidering its prior practice of approving disclosure-only settlements involving a broad release of claims and payment of attorney fees in connection with stockholder suits brought over merger transactions. While it has continued to approve several of these settlements,^xi it has also rejected other proposed settlements or reserved judgment,^xii and, in In re Riverbed Technology, Inc. Stockholders Litigation,^xiii the court warned that, going forward, it would no longer grant broad releases in return for disclosure-only settlements and attorney fees. Since then, in In re Aruba Networks, Inc. Shareholders Litigation,^xiv the court declined to approve such a disclosure-only settlement and, for the first time, also dismissed a case on the basis of inadequate representation by counsel.

This uncertainty surrounding the approval of disclosure-only settlements may be having an impact on merger litigation. According to recent analysis by The Chancery Daily, the number of new merger objection lawsuit filings in the Chancery Court has begun to drop, which could be, at least in part, due to these recent rulings.^xv It will be interesting to see if this trend continues, and if so, the effect it may have on merger litigation, such as shifting such litigation to other jurisdictions. Or, if courts do not approve disclosure-only settlements, companies that would have otherwise quickly entered into such settlements and paid the related attorney fees could possibly end up mired in costly and time-consuming litigation.

• Representation and warranty insurance. The use of representation and warranty insurance (R&W insurance) has risen exponentially over the past few years, and this trend is expected to continue into 2016. While R&W insurance used to be a way to differentiate a buyer’s bid, buyers may now be at a competitive disadvantage if they do not use R&W insurance, particularly in middle-market transactions.^xvi R&W insurance typically provides coverage for a buyer’s indemnification claims for losses resulting from a seller’s breach of representations and warranties made in an acquisition agreement, allowing parties to shift some of the business risks to an insurer. Either the buyer or the seller can obtain R&W insurance, but buy-side policies are more customary than sell-side policies. The increased use of R&W insurance results from improved and more standardized terms (including longer policy periods, higher coverage limits and narrower exclusions), lower premiums, and greater acceptance and awareness among insurers and potential insureds. Boards are advised to familiarize themselves with the general terms and conditions of R&W insurance and to stay informed about this developing product.

This post was excerpted from our annual Top 10 Topic for Directors in 2016 alert. To read the full alert, please click here.

ⁱ Thomson Reuters, Mergers and Acquisitions Review (First Nine Months 2015).

ⁱⁱ Jeff Zalesin, “2015: A Blockbuster Year in Health, Life Sciences M&A,” Law360 (November 23, 2015).

ⁱⁱⁱ Kahn v. M&F Worldwide Corp. (Del. March 14, 2014). For further discussion of this case, see Akin Gump’s Top Five Delaware Case Developments in 2014 for M&A Practitioners.

^iv Swomley v. Schlecht, et al., 2015 WL 7302260 (Del. November 19, 2015).

^v In re Dole Food Co., Inc. Stockholder Litigation and In re Appraisal of Dole Food Company, Inc. (Del. Ch. August 27, 2015).

^vi Corwin v. KKR Financial Holdings, LLC (Del. October 2, 2015).

^vii In re Cornerstone Therapeutics Inc. Stockholder Litigation and Leal v. Meeks (Del. May 14, 2015).

^viii In re Cornerstone Therapeutics Inc. Stockholder Litigation (Del. Ch. September 10, 2014) and In re Zhongpin Inc. Stockholders Litigation (Del. Ch. November 26, 2014).

^ix See for example: Merion Capital LP and Merion Capital LP II v. BMC Software, Inc. (Del. Ch. October 21, 2015); Longpath Capital LLC v. Ramtron Int’l Corp. (Del. Ch. June 30, 2015); and Merlin Partners LP v. AutoInfo Inc. (Del. Ch. April 30, 2015).

^x Nevertheless, in Nathan Owen v. Lynn Cannon (Del. Ch. June 17, 2015), the Court of Chancery used the discounted cash flow method and pre-litigation management projections (instead of the merger price) to determine “fair value.”

^xi For example, In re Susser Holdings Corp. Stockholder Litigation (Del. Ch. September 15, 2015) and In re Vitesse Semiconductor Corp. Stockholders Litigation (Del. Ch. September 29, 2015).

^xii For example, Acevedo v. Aeroflex Holding Corp. (Del. Ch. July 8, 2015) and In re Trulia Inc. Shareholder Litigation (Del. Ch. September 16, 2015).

^xiii In re Riverbed Technology, Inc. Stockholders Litigation (Del. Ch. September 17, 2015).

^xiv In re Aruba Networks, Inc. Shareholder Litigation (Del. Ch. October 9, 2015).

^xv Kevin LaCroix, “Delaware Merger Objection Lawsuit Filings Decline in Response to Chancery Court’s Rejection of Disclosure-Only Settlements,” The D&O Diary (November 18, 2015).

^xvi Tom Zanki, “Reps and Warranties, Insurance Boom Reshaping PE Deals,” Law360 (August 24, 2015).