Miramar Police Officers’ Retirement Plan v. Murdoch: Not Bound By The Past

In a recent Court of Chancery case, Miramar Police Officers’ Retirement Plan v. Murdoch, Chancellor Bouchard held that a spinoff corporation was not bound by the settlement agreement entered into by the parent corporation. In a blog essay written for the Delaware Journal of Corporate Law, DJCL Manuscript Editor Justin Forcier examines the opinion and concludes that the Chancellor’s well-reasoned holding reflects the most principled outcome for the case.

Read more at www.djcl.org/blog.

Material or Not: Can Failure to Disclose Under S-K Item 303 Give Rise to a Fraud Class Action?

The Second and Ninth Circuit Courts of Appeals are directly opposed on a fine point of securities litigation: whether a failure to disclose a “known trend or uncertainty” under Item 303 of Regulation S-K can give rise to a fraud class action under Section 10(b) of the Securities and Exchange Act of 1934. In a blog essay written for the Delaware Journal of Corporate Law, DJCL staff editor Sabrina Hendershot discusses the circuit split and concludes that although no shareholders have been successful on this potential cause of action, issuers should take great care in deciding whether to disclose certain trends to the SEC to ensure compliance and avoid litigation.

Read more at www.djcl.org/blog.

Amendments to Delaware’s Public Benefit Corporation Statute

The Delaware legislature is considering amendments to Delaware’s public benefit corporation statute. If enacted, these amendments stand to make Delaware more open to B corporations such as Etsy, one of the first certified B corporations to go public. In a blog essay written for the Delaware Journal of Corporate Law, DJCL Articles Editor John Gentile analyzes the potential issues that could arise with a company like Etsy trying to balance pursuing societal responsibilities and maximizing shareholder profits.

Read more at www.djcl.org/blog.

Accelerated Arbitration Rejuvenation: State Passes the Delaware Rapid Arbitration Act

Two years removed from the Third Circuit’s dismantling of Delaware’s arbitration process, the state has now enacted the Delaware Rapid Arbitration Act to ensure the speedy resolution of business disputes for parties looking to avoid litigation. In a blog essay written for the Delaware Journal of Corporate Law, DJCL staff editor Alexander Bonder discusses the DRAA’s innovative provisions and the implication for parties looking to avoid litigation.

Read more at www.djcl.org/blog.

Proposed Amendments to Delaware’s Appraisal Statute: How Much Do They Matter?

Delaware appraisal litigation has been receiving its fair share of attention from commentators and the judiciary. In a blog essay written for the Delaware Journal of Corporate Law, DJCL staff editor Jacob Fedechko addresses the proposed legislative amendments to Delaware’s appraisal statute, specifically a proposed “de minimis exception” for publicly traded shares and a proposed “option to pay and limit the accrual of interest.” He concludes that while the de minimis exception may not have a significant impact in practice, the option to pay amendment has a good chance of yielding material results.

Read more at www.djcl.org/blog.

2015 Ruby R. Vale Corporate Moot Court Competition

From Thursday March 12, 2015 to Sunday March 19 2015, the Widener Moot Court Honor Society hosted the 2015 Ruby R. Vale Interscholastic Corporate Competition. Eighteen teams participated in the competition, which is the only corporate moot court competition in the country.

Paul L. Regan, Associate Professor of Law and Associate Director of the Institute of Delaware Corporate and Business Law authored the competition problem.

The appeal challenged a Preliminary Injunction Order by the Court of Chancery that enjoined the application of a corporate bylaw adopted by the board of directors (the “Board”) of Talbot Inc. (the “Company”) (collectively “Appellants”). The Board consisted of nine members, only one of whom—CEO Timothy Gunnison—was an officer of the Company. The Board-adopted bylaw required a dissident shareholder group who launches an ultimately unsuccessful proxy contest to reimburse the Company for reasonable professional fees and expenses incurred in resisting the proxy contest. The bylaw also included the possibility that the Board could waive the fee-shifting after the fact. The Board adopted the proxy contest fee-shifting bylaw in December 2014 in response to a Schedule 13D filing by Appellee Alpha Fund Management L.P. (“Alpha” or the “Alpha Fund”), in which Alpha had disclosed its 7% ownership stake in the Company and its intention to nominate up to four candidates for election to the Company’s nine-person Board at the next annual meeting of stockholders in May 2015. The appeal raised two primary issues for the Delaware Supreme Court: (1) whether the board-adopted proxy fee-shifting bylaw is facially under the Delaware General Corporation Law; and (2) whether the board adopted the bylaw for an inequitable purpose.

    Facial Validity of a Board-Adopted Proxy Fee-Shifting Bylaw

Teams representing Appellants were expected to argue that the board-adopted proxy fee-shifting bylaw is facially valid because it is similar to the fee-shifting bylaw upheld as valid in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), the board-adopted exclusive forum bylaws upheld as valid in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013) and City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014), and other valid board-adopted bylaws affecting the domain of stockholder rights.

First, similar to the fee-shifting bylaw in ATP, the Proxy Fee-Shifting Bylaw is facially valid and enforceable under the DGCL because it merely allocates risks concerning the costs of a proxy contest among the principal parties in a particular context, and therefore satisfies “the DGCL’s requirement that bylaws must ‘relate to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.’” ATP, 91 A.3d at 558 (citing 8 Del. C. § 109(b)). Second, like forum selection bylaws, the Proxy Fee-Shifting Bylaw is a procedural rule for the operation of the Company adopted to facilitate the convenient functioning of business, in this instance, the business of managing a contested election of directors. Appellants relied on the Court of Chancery’s reasoning in Chevron to argue that the Proxy Fee-Shifting Bylaw does not touch on substantive issues and plainly relates to the business of the corporation because it merely enables the Company to be reimbursed for expenses reasonably incurred in resisting a “meritless” proxy challenge. Chevron, 73 A.3d at 951. Finally, the Proxy Fee-Shifting Bylaw is similar to valid Advance Notice Bylaws, Director Qualification Bylaws, and the “Poison Pill” Rights Plan in Moran v. Household International Inc., 500 A.2d 1346 (Del. 1985), because they all have a measure of restrictive influence on a proxy contest. The Proxy Fee-Shifting Bylaw has no greater regulatory effect on a proxy contest than the bylaws and Rights Plan that have been upheld as valid despite the imposition of some degree of regulatory impact on the exercise of the stockholder franchise.

On the other hand, teams representing Appellees were expected to argue that the Proxy Fee-Shifting Bylaw is facially invalid because it has an improper chilling effect on the stockholders’ exercise of their rights to undertake a proxy contest against management, and it disturbs the allocation of authority between the Board and the stockholders by moving beyond the procedural realm of bylaws and impermissibly touching on substantive issues, i.e., the stockholder franchise. The Board improperly limited the stockholders’ fundamental right to nominate and promote (by proxy contest) candidates for election by artificially and substantially raising the financial stakes of an electoral challenge to their incumbency; thus any resulting vote on an uncontested slate would be an empty exercise. The election of directors and the power to oust unsatisfactory incumbent directors who stand for elections is the sole province for stockholders. The enactment of a fee-shifting penalty for not being sufficiently victorious in a proxy contest is therefore an affront to the director-stockholder relationship that violates the DGCL because the directors are effectively intruding into the stockholders’ sphere of power.

Appellees were also expected to argue that the Proxy Fee-Shifting Bylaw is facially invalid because it is fundamentally different and distinguishable from the fee-shifting bylaw in ATP, and that various provisions of the DGCL support a corporate statutory framework designed to protect the stockholder franchise from board interference. ATP can be factually distinguished in a vital way from the Proxy Fee-Shifting Bylaw because there is a fundamental difference between proxy contests, which implicate the stockholder franchise, and mere intra-corporation litigation, which is not a fundamental stockholder right of the same ilk as the stockholder franchise. Because the electoral process is fundamental to the underpinnings of corporate governance, it should be viewed differently, and far more guardedly, than a board adopted fee-shifting bylaw in the litigation context.

In contrast to statutory provisions that require that substantive limitations or restrictions on the rights of stockholders be set forth in the certificate of incorporation, e.g., DGCL Sections 102(a)(4) and 151(a), Section 109(b) only permits the adoption of bylaws “not inconsistent with the law or the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs [etc] . . . .” Because the phrase “relating to” in Section 109(b) confirms that bylaws may only “relate to” stockholder rights and cannot go so far as to impose substantive “qualifications, limitations or restrictions,” the Proxy Fee-Shifting Bylaw is invalid because it does not merely “relate to” a stockholder’s right to conduct a proxy contest, but rather purports to impose substantial financial restrictions on an attempt to exercise that right. Additionally, DGCL Sections 228(a) and 141(d) provide powerful statutory corroboration that any limitation or restriction on the fundamental power of the stockholders to remove, replace, or reelect the board of directors must be set forth in the certificate of incorporation or a stockholder-adopted bylaw.

    Inequitable Purpose

Appellants were expected to argue that the Proxy Fee-Shifting Bylaw was adopted in an informed manner and for a proper corporate purpose as a legitimate response to concerns over the substantial costs of defending against a proxy contest. The facts showed that, before adopting the Proxy Fee-Shifting Bylaw, the Board had hear presentations from a senior officer, the Company’s general counsel and outside legal counsel. The Court of Chancery has also concluded that the Board was “well-informed” in its decision to adopt the Proxy Fee-Shifting Bylaw.

Any improper purpose was secondary, and not the Board’s primary purpose, and the bylaw’s definition of “success” shows the Board’s intent to distinguish between valid challenges and meritless “nuisance” challenges. Further, even if the Board’s primary purpose was to discourage or perhaps thwart a proxy challenge, the Proxy Fee-Shifting Bylaw should nevertheless be upheld and enforced as valid because mitigating the potential adverse financial impact of proxy contests is a sufficient justification to find that the Board’s adoption of the Proxy Fee-Shifting Bylaw was equitable, and the possibility of waiver embodied in the bylaw is sufficient to cure any inequity in the Board’s initial adoption of the bylaw.

Moreover, this is not a case of “unilateral board action intended to inequitably manipulate the corporate machinery” because stockholders still have a full and fair opportunity to exercise their right to vote at the upcoming May 2015 election. Additionally, at the May 2015 election, Alpha could ask the stockholders to repeal the Proxy Fee-Shifting Bylaw, which would cure any inequity. Finally, the compelling justification standard espoused in Blasius does not apply here because nothing about the Proxy Fee-Shifting Bylaw prevents an insurgent from prevailing in a proxy context or otherwise thwarts the effective exercise of the stockholder franchise.

Appellees, on the other hand, were expected to argue that the Board adopted the Proxy Fee-Shifting Bylaw primarily, if not solely, for the improper purpose of thwarting Alpha’s right to fully and fairly participate in the electoral process when it adopted the bylaw in reaction to Alpha’s Schedule 13D filing. The record showed that four of the nine directors explicitly saw the adoption of the Proxy Fee-Shifting Bylaw as a deterrent to dissuade Alpha from undertaking its proxy contest at all. The Board’s reserved power to waive fee-shifting does not affect the fundamental impropriety of the adoption of the bylaw in the first instance. Further, here, the Board had resolved not to waive the fee-shifting for the expected Alpha proxy contest.

Additionally, the ex-ante deterrent effect of the Proxy Fee-Shifting Bylaw is a complete answer to any asserting that the bylaw would not affect Alpha’s ability to win a proxy contest against the incumbent Board. Because it was adopted primarily for the purpose of interfering with the effectiveness of a stockholder vote, the Proxy Fee-Shifting Bylaw should be reviewed under a compelling justification standard. Here, there is no such compelling justification, and the bylaw should be held unenforceable in equity. Any good faith reason for enacting the bylaw is irrelevant because even well-meaning directors are not permitted to disrupt the exercise of the stockholder franchise.

    Final Arguments

The teams from the University of Oklahoma College of Law and Ohio State University Moritz College of Law argued before a final bench comprised of the Honorable Karen Valihura and the Honorable James T. Vaughn, justices on the Delaware Supreme Court, the Honorable J. Travis Laster and the Honorable Donald F. Parsons, Jr., vice chancellors on the Delaware Court of Chancery, and Donna M. Nagy, Executive Associate Dean and Professor of Law at Indiana University Maurer School of Law, who delivered the Distinguished Scholar Lecture.

The University of Oklahoma College of Law team, represented by Kendra Norman, David Postic, and Ruthie Stevens, prevailed in the final round. The team from Ohio State University Moritz College of Law, Ryan Edmiston, Katie Kalbacher, and Susan Restrepo, won the second place prize. Michael Mullavey and Caroline Mockler, from the University of Florida Levin College of Law, won the Donald E. Pease Award for Best Brief. Brian Kesten, from Georgetown University Law Center, was named the competition’s Best Oral Advocate.

The competition, now in its 27th year, is named for Ruby R. Vale, who lived in Milford, Del. and practiced law in Philadelphia, specializing in corporation, banking, and insurance law.

Alumni Spotlight: Kevin R. Shannon

Kevin Shannon

Kevin Shannon, an alumnus of the 1992 class, is a nationally recognized corporate attorney at Potter Anderson and Corroon. He is the immediate past chair of the firm’s Corporate Group. His practice includes business and commercial litigation and corporate counselling and governance.

Mr. Shannon has substantial experience in litigating stockholder class, derivative, and other actions in the Delaware Court of Chancery, as well as providing advice on various proceedings under the Delaware General Corporation Law. He has won favorable rulings in notable cases, including In re Ancestry.com, Inc., No. CV 8173-VCG, 2015 WL 399726, (Del. Chan. Jan. 30, 2015), and Air Products and Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Chan. 2011).

In Ancestry.com, Mr. Shannon and co-counsel represented Ancestry.com in an appraisal action. Following trial, the Court of Chancery adopted Ancestry’s proposed $32-per-share merger price as the fair value of the stock, and rejected the $47 valuation proposed by hedge fund shareholders. Commentators have observed that Ancestry.com could be seen as a blow to the investment strategy known as appraisal arbitrage, where stock is purchased after a merger is announced with the intent to seek appraisal by the court.

In Airgas, Mr. Shannon and co-counsel represented Airgas, the target corporation in an attempted hostile takeover that had lasted for over a year. Following two trials, and a successful appeal to the Delaware Supreme Court, the Court of Chancery issued a 153-page opinion ruling in favor of Airgas and its board of directors, and reaffirming Delaware Supreme Court precedent that “the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors.” Mr. Shannon commented that he was particularly pleased with the Airgas victory because it was hard fought case and it is very unusual for a target company to successfully defend against an offer at a substantial premium to the market price.

Mr. Shannon has also been involved in numerous cases involving partnerships, limited partnerships, and LLCs. He frequently counsels directors, stockholders, and other parties on their rights and obligations under Delaware law. He has been named among the Best Lawyers in America for 2015, the 2014 Delaware Super Lawyers in Business Litigation, and, in the 2014 edition of Chambers USA, one of America’s Leading Lawyers for Business for his work in the Court of Chancery.

Recently, Mr. Shannon moderated a panel on “Books and Records Demands and Other Shareholder Demands on Boards” at the Second Annual Delaware Law Issues Update, sponsored by the Society of Corporate Secretaries & Governance Professional. The Honorable Carolyn Berger, Douglas Chia, and Stuart M. Grant served on the panel.

Mr. Shannon is a member of both the Delaware Court of Chancery Rules Committee and the Delaware Supreme Court Rules Committee. He also served on the state Board of Bar Examiners for six years.

Mr. Shannon continues to live in Wilmington. He has four children.

Tax Avoidance Trends Among Multinational Enterprises: An Examination of Intellectual Property Transaction and Corporate Income Tax Avoidance

It is no secret that large multinational enterprises (“MNEs”), a large percentage of which are Delaware corporate entities, have long been on the cutting edge of clever ways to minimize, if not avoid, tax liability. Information and misinformation abound with respect to how the world’s most sophisticated tax strategists plan to minimize or eliminate their tax liability. In a blog essay written for the Delaware Journal of Corporate Law, DJCL staff editor Brian King explores tax avoidance strategies employed by MNEs, particularly in the technology sector. By utilizing creative intellectual property licensing agreements and oversees affiliates, large MNEs are able to largely avoid taxation. The essay describes what is being done about these measures and assesses their likelihood of success.

Read more at www.djcl.org/blog.

Stock-Based Compensation as a Factor in the Discounted Cash Flow Analysis—Parsons’s Side of the Table

Appraisal litigation relies on many different factors in determining the appropriate value of a company, and attorneys must present evidence illustrating how a particular factor impacts the value of the company. In a recent Court of Chancery opinion, Merion Capital, L.P. v. 3M Cogent, Inc., No. 6247-VCP, 2013 WL 3793896 (Del. Ch. 2013), Vice Chancellor Donald F. Parsons specifically addressed stock-based compensation and its impact on the value of a company. In a blog entry written for the Delaware Journal of Corporate Law, DJCL staff editor Alexander Faris comments on the importance of an attorney’s duty to present evidence that stock-based compensation has a significant impact on the value of a company.

Read more at http://www.djcl.org/blog.

What Corporate Law Can Teach Us About Government Ethics

On March 13, 2015, Donna M. Nagy, Executive Associate Dean and Professor of Law at Indiana University Maurer School of Law, delivered the annual Ruby R. Vale Distinguished Scholar Lecture as part of the 2015 Ruby R. Vale Interscholatic Corporate Moot Court Competition.

Nagy’s lecture began by observing that acts of governing, whether in Congress or in the boardroom, implicate a host of agency issues. Conflicts of interest and other issues of ensuring that agents are acting in the best interest of the principals can exist in both contexts. But while corporate law has safeguards regarding conflicted directors, the discipline of the electoral process is often cited as the reason why there is no need for robust laws against self-dealing in the political context. Yet, directors also stand for election. In practice, Nagy asserted, elections often fail to provide a check: in the corporate context, challenges rarely succeed even where there is high shareholder dissatisfaction, and in politics, incumbency has large structural benefits.

Nagy identified two specific instances that raise questions regarding the ethics of lawmakers: congressional insider trading and the broader use of material non-public information for personal gain, and financial conflicts of interest.

Regarding congressional insider trading, Nagy suggested that the courts and federal prosecutors look to corporate law for an analogy because federal officials serve the public in a fiduciary capacity. According to Nagy, the Stock Act, a 2012 law that bans insider trading by Congress, was not necessary. The Stock Act amended the Securities Exchange Act so that all federal officials owe duties (e.g., of trust and confidence). Though conceding that the Stock Act improved on the status quo by creating a more effective system of transparency, Nagy nevertheless maintained that it was not necessary to amend the SEA to reflect what most ordinary people believe—that federal officials serve the public in a fiduciary capacity.

As to the broader issue of the use of material non-public information by elected officials, Nagy asserted that the Stock Act did not resolve the access that state officials have to inside information, or the ability, even on a federal level, to purchase real estate, or any other property not constituting a security, using material non-public information. Because an elected official’s self-serving use of material non-public information to profit from real estate has already been prosecuted, federal prosecutors should be able to draw upon an analogy from corporate law.

Regarding financial conflicts of interests and the widespread practice of holding personal investments in companies that are the subject of legislation, Nagy noted that members of Congress continue to own interests in companies directly affected by legislation, and disproportionately own interests in industries under their purview. Despite well-established fiduciary principles, Congress’ internal rules insulate financial conflict of interest practices.

In the corporate context, statutory provisions allow for three ways to justify an interested director transaction: (1) full disclosure and approval by disinterested directors; (2) approval by a majority of disinterested directors; (3) entire fairness to stockholders.

For government fiduciaries in the executive branch, there are strict regulations that mostly exceed the prophylactic rules of fiduciary law. 18 U.S.C. 208 is a criminal statute that includes broad anti-conflict regulation. It criminalizes conflicted actions even if it is unlikely that the conflict will influence the executive’s actions. Rather, the mere presence of conflict is sufficient for criminal liability.

In the judiciary, federal judges are prohibited by statute from hearing matters in which their impartiality could be affected. The statute mandates recusal where a judge’s financial interests are implicated, and broadly defines “financial interests” so much so that the ownership of one share of stock is enough to mandate recusal.

Congressional officials, however, are allowed to work and vote on legislation so long as they are not the sole beneficiary. This “sole beneficiary” provision in the rules of Congressional ethics places a gloss on their fiduciary obligations. The commentary to the Congressional rule explains that the rule is intended to be construed narrowly. There is a strong presumption that the lawmaker is working in the public interest and that any personal gain is incidental. Interested directors, however, are not granted any presumption that they are working in the best interests of the stockholders, and the business judgment rule applies only with disinterested transactions. Therefore, Nagy concluded, when personal financial interests are involved, political judgments—at least Congressional judgments—are more insulated than business judgments.

Nagy concluded the lecture by submitting that unlike in other branches of government, however, recusal is not an optimal solution for Congress. Nevertheless, Congress can, and should, prohibit members from holding interests in industries on which committees they serve. Notably, added Nagy, this rule is already applied to committee staffers, who are prohibited from holding interests in industries substantially affected by committee work. A stricter rule would prohibit members of Congress from holding securities interests except for general (mutual) funds.

Upon the conclusion of Nagy’s lecture, Professor Luke Scheuer commented that an outright ban on securities activities for Congressional members sounds attractive because, unlike the corporate context where stockholders can sue as a remedy for director ethical breaches, private suits alleging ethical violations would be problematic in the political sphere. Nagy responded that she has not yet advocated for derivative litigation in politics, but House and Senate rules would empower congressional ethics committee to take action.

In response to a question from Professor James May regarding analogies beyond the corporate context, Nagy noted that the United States is unique in that insider trading regulation is derived from interpretation of anti-fraud statutes, whereas other countries have direct statutory bans. In those jurisdictions that more specifically and explicitly ban uses of material non-public information, public officials can simply be added to the list.

Finally, Professor Lawrence Hamermesh noted that a ban on stock ownership may not face the same challenges as campaign finance laws because there is no First Amendment protections to own stock, whereas campaign contributions are now a form of protected political speech.