The New York Court of Appeals has followed Delaware in holding that the business-judgment rule applies to going-private mergers as long as certain shareholder-protective measures are met. The court’s May 5, 2016 decision in In the Matter of Kenneth Cole Productions, Inc. Shareholder Litigation, Case No. 54, adopts the standard set forth by the Delaware Supreme Court in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), and relaxes judicial scrutiny of controlling shareholders’ going-private mergers if the transactions provide certain protective conditions to safeguard the interests of minority shareholders.
When an enforcement action for a violation of the Hart-Scott-Rodino Act is announced, chances are the matter has already come to a close – by the time the action becomes public, the agency and the parties usually have agreed upon financial penalties and other sanctions to be levied. But that is not the case for ValueAct Capital and its affiliated investment funds. After the Department of Justice filed a complaint against ValueAct on April 4, the company did not take the allegations lying down. Instead, it vowed to vigorously defend its position.
The Delaware Court of Chancery last week dealt another blow to disclosure-only settlements of merger litigation and refused to approve a proposed class-action settlement arising from Zillow, Inc.’s acquisition of Trulia, Inc. The court’s decision held that the supplemental disclosures that formed the basis of the settlement were not “material…
An apparently frustrated Delaware Vice Chancellor recently approved yet another disclosure-only settlement of yet another challenge to a merger, but seemed intent on signaling that such proposed class-action settlements might not fare so well in the future. Vice Chancellor Glasscock’s September 17, 2015 decision in In re Riverbed Technology, Inc. Stockholders Litigation (Del. Ch. Ct.) repeatedly stressed that, while certain factors mildly favored approval of the proposed settlement, the weight of those factors would “be diminished or eliminated going forward in light of this Memorandum Opinion and other decisions of this Court.”
As previously reported, in NAF Holdings, LLC v. Li & Fung (Trading) Limited, 772 F.3d 740 (2d Cir. 2014), the Second Circuit certified to the Delaware Supreme Court an unusual question regarding whether the direct vs. derivative test for stockholder claims would bar a direct breach of contract claim by a parent corporation whose subsidiary was injured. The Delaware Supreme Court has now given its answer: the direct vs. derivative analysis for fiduciary breach claims does not apply and the parent company may sue directly to enforce its own contracts, regardless of its status as stockholder of an injured subsidiary.
The issue arose following a failed acquisition transaction. The proposed acquirer, NAF, contracted directly with defendant Li & Fung to provide services to the target company. NAF then formed two wholly-owned subsidiaries to effectuate the acquisition. Li & Fung allegedly repudiated its agreement, causing NAF to lose the financing it needed to fund the acquisition, which resulted in injury to the subsidiaries. Li & Fung argued that, under the test established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004), NAF’s contract claim could only be brought derivatively because NAF was a stockholder of the injured subsidiaries. In Tooley, addressing a typical minority stockholder claim of breach of fiduciary duty, the Delaware Supreme Court instructed that determining whether a stockholder’s claim is derivative or direct turns on “[w]ho suffered the alleged harm – the corporation or the suing stockholders individually – and who would receive the benefit of the recovery or other remedy?” 845 A.2d at 1035. To maintain a direct claim, “[t]he stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” Id. at 1039.
Following recent trends, the U.S. Securities and Exchange Commission brought an administrative proceeding against a U.S. issuer for the alleged corrupt activities of its foreign subsidiaries. Earlier this week, Goodyear Tire & Rubber Company agreed to pay the SEC over $16 million to settle charges alleging that it violated the accounting provisions of the Foreign Corrupt Practices Act by failing to prevent or detect over $3 million in bribes paid by its Angolan and Kenyan subsidiaries. Goodyear also must report its compliance remediation efforts to the SEC annually for the next three years.
The SEC’s Charges
According to the SEC’s cease and desist order, between 2007 and 2011, Goodyear’s downstream subsidiaries in Kenya and Angola bribed employees of both private and government-owned companies to obtain business. The subsidiaries also bribed police, tax authorities and other local officials, though the SEC’s order did not allege the purposes of those payments. The bribes “were falsely recorded as legitimate business expenses in the books and records of the subsidiaries, which were consolidated into Goodyear’s books and records.”
In NAF Holdings, LLC v. Li & Fung (Trading) Limited, 2014 WL 6462825 (2d Cir. Nov. 19, 2014), the Second Circuit considered, but did not decide, whether the usual direct/derivative analysis governing minority stockholder claims against corporate fiduciaries should also apply to bar a contract claim against an unaffiliated outsider. Finding itself unable to resolve this issue of first impression under applicable Delaware law, the Second Circuit certified the question to the Delaware Supreme Court.
This unusual question arose after a planned acquisition fell through. NAF, a Delaware LLC, planned to acquire Hampshire. NAF entered into a buying agent agreement with Li & Fung, which promised to serve as sourcing agent for Hampshire post-acquisition. Thereafter, as is commonly done in M&A transactions, NAF formed two wholly-owned subsidiaries to effectuate the acquisition, and they entered into the merger agreement with Hampshire. As NAF alleged in its complaint for breach of contract, Li & Fung wrongfully repudiated the buying agent agreement, which caused NAF to lose the financing commitments it needed to fund the subsidiaries’ acquisition of the Hampshire shares. The acquisition thus could not be completed, resulting in a $30 million loss.
The U.S. Department of Justice recently publicized its second Foreign Corrupt Practices Act Opinion Procedure Release of 2014. In the Release, the DOJ reiterated that an acquiring company may not inherit FCPA liability when the DOJ did not have jurisdiction over the target company’s prior corrupt activities.
The DOJ has repeatedly asserted that, through principles of successor liability, an acquiring company in an M&A transaction may assume FCPA liability for the pre-acquisition bribes paid by the target to foreign government officials. Out of concern for this potential avenue of liability, a U.S.-based consumer products company recently sought guidance from the DOJ on whether it would bring an enforcement action for the pre-acquisition corrupt activities of a wholly-foreign target company. The U.S. company sought this guidance by exercising a unique statutory procedure whereby companies can request a DOJ opinion on the FCPA enforcement ramifications of proposed conduct. See 15 U.S.C. §§ 78dd-1(e), -2(f).