Benjamin P. Chapple
Widener’s Institute of Corporate & Business Law, in partnership with the law school’s Moot Court Honor Society, hosted the 25th Annual Ruby R. Vale Interschool Corporate Moot Court Competition. This year’s competition included a geographically diverse set of competitors, hailing from twenty different law schools. The competition lasted four days, with the final round on March 17, 2013, judged by Delaware Supreme Court Justice Jack Jacobs, Justice Joseph Walsh (retired), Vice Chancellor J. Travis Laster, Vice Chancellor Sam Glasscock, and Judge Jed S. Rakoff of the United States District Court for the Southern District of New York. We are extremely thankful for their generous participation. Judge Rakoff also provided a Distinguished Scholar Lecture, in which he discussed the International Court of Commerce of Iraq and the heroism of the judges of that court who do their part to promote economic stability despite daily threats of assassination. A summary of this year’s moot court problem and a list of award recipients are provided below.
The case appealed from involved the use of a “Don’t Ask, Don’t Waive” standstill agreement in the context of the sale of an entire company, Callison Inc., that is controlled by its 72% stockholder, Allen. Because Allen needed funds to purchase another business—which it is contractually obligated to buy—it became interested in monetizing its 72% stake in Callison. Allen approached Callison’s board of directors, expressing its interest in selling its holding through a sale of the entire company, and the Board—after forming an independent special committee—initiated a sale process for the Company that involved a private canvassing of the market of likely potential suitors. Of the suitors identified, only six agreed to sign a DADW standstill. Each of these six suitors was afforded a one-time opportunity to submit their highest and best bid to acquire the entire Company; however, each was contractually prevented—as a result of the DADW—from (1) making any further offers and (2) asking Callison’s Board for permission to do the same.
As a result of the bidding process, Vicente emerged as the highest bidder. The Board and Vicente entered into a merger agreement that provided for a market check, but notably excluded the five unsuccessful bidders from participating in the market check. One of these five unsuccessful bidders, Galena, approached Callison’s Board and privately requested that it waive the DADW provision so as to permit Galena to make a topping bid. The Board, after consulting legal counsel, however, held firm to the DADW and rejected Galena’s offer. As a result of this rejection, Galena took two actions. First, it filed suit challenging the validity of the DADW standstill agreement, in which Galena sought a preliminary injunction to prevent Callison and/or Callison’s Board from attempting enforcement. Second, on the same day, Galena launched a tender offer for $35.50—which is $1.50 more than the Vicente offer, representing a premium in excess of $120 million—conditioned on, inter alia, the judicial invalidation of the DADW standstill agreement.
In the hypothetical moot court problem, the Court of Chancery found the challenged DADW provision to be unenforceable under the Revlon/QVC “range of reasonableness” standard—thereby enjoining enforcement of the provisions. Accordingly, it was unnecessary for the Court of Chancery to consider Galena’s argument that the more exacting entire fairness should apply. The Delaware Supreme Court accepted an interlocutory appeal from the preliminary injunction order. The appeal implicated two principal issues relating to the fiduciary duties of the directors of a Delaware corporation in relation to the sale of the company. Both issues arose from the Board’s decision to accept Vicente’s indisputably lower offer in reliance upon the DADW agreement.
The first issue was the validity of the DADW standstill agreement as a matter of Delaware law. Previous decisions of the Court of Chancery have examined this question, and concluded that these provisions are highly problematic. In these prior decisions, the view has been that DADW standstill agreements “collectively operate to ensure an informational vacuum,” and prevent the board of directors from satisfying their duty to take care and remain informed of all material information reasonably available. Additionally, past decisions have found that DADW provisions prevent the board from satisfying its ongoing statutory and fiduciary obligation to provide a current, candid, and accurate merger recommendation to the shareholders. Notably, however, the Court of Chancery’s most recent decision that addressed the question—In re Ancestry.com—made clear that (1) these provisions are not per se invalid, and (2) the Court is “not prepared to rule out that [these provisions] can’t be [properly] used for value-maximizing purposes.” In re Ancestry.com Transcript, at 23.
Competitors, particularly in the final rounds, focused on Supreme Court precedent. Appellants, on the one hand, argued that the Court has made clear that there is no single “blueprint” for the board to follow to satisfy Revlon‘s value maximization directive. Additionally, Appellants stressed that the Appellee is a sophisticated party that knowingly entered into the DADW standstill. Furthermore, Appellants argued the DADW standstills, here, were used in a value-maximizing manner, because the bidders were encouraged to put their best foot forward up front, thus preventing a costly protracted auction. Appellees, on the other hand, argued that, although there is no single blueprint, Revlon and its progeny make clear that the Board’s role is to obtain the highest value reasonably available. To that end, Appellees argued that the Callison Board’s decision to accept Vicente’s offer, which was more than $120 million less than the opposing offer, is clearly not value maximizing. In response to Appellants’ reliance on the DADW standstill, Appellees argued contracts cannot limit a board’s fiduciary duties. This issue, in large part, comes down to balancing two concepts: one, the Revlon/QVC directive that the target board must maximize shareholder value; and two, how much flexibility will the Court allow target boards in creating a value-maximizing sales process to satisfy this directive.
The second issue—whether the more exacting entire fairness standard should apply—arose because Callison’s majority shareholder, Allen, would incur $60 million in liquidated damages if he failed to close an independent business acquisition. Relying on McMullin v. Beran, Appellee argued a conflict of interest was present because Allen (1) has an independent need for quick liquidity and (2) appointed all of Callison’s Directors. Furthermore, Appellee argued that Allen dominated the sales process, making the special committee a “rubber stamp.” Appellee’s argument, thus, implicates the duty of loyalty. Appellants denied there was any disqualifying conflict. They emphasized that under the Vicente offer Allen would be receiving the identical consideration (on a per share basis) as the minority, in a transaction that resulted from a deliberative process, involving a well-functioning independent special committee, which included an effective market check that allowed other topping bids to come forward to ensure value maximization. Appellees cogently argued, however, that the market check was illusory because it excluded those most likely to making a topping bid—the DADW-bidders.
Although there were many great competitors at this year’s competition, we would like to specifically recognize:
Georgetown University Law Center
Brooklyn Law School
The Donald E. Pease Best Brief Award
Michigan State University College of Law
Best Oral Advocate
Georgetown University Law Center