Cooley M&A Team News - September 2014

Cooley M&A Team News
IN THIS ISSUE SEPTEMBER 2014

LEGISLATIVE DEVELOPMENTS

Amendment to Delaware Statute of Limitations Rules—Drafting Tips
Recent amendment to Delaware law clarifies certain statute of limitations rules as used in M&A indemnification.

JUDICIAL DEVELOPMENTS

Understanding Attorney-Client Privilege in Internal Business Investigations
DC Court of Appeals clarified the scope of attorney-client privilege in the context of a business's internal investigation and described four aspects of an internal investigation that may vary while leaving the privilege intact.

SEC DEVELOPMENTS

SEC Issues Guidance on Proxy Voting and Proxy Advisory Firms—Will this Change Proxy Voting Behavior or the Role of Proxy Advisers?
Recent SEC regulatory guidance regarding proxy voting responsibilities, roles of proxy advisory firms and use of advisory firm advice.

LITIGATION UPDATE

Exclusive Forum Provisions
Exclusive forum provisions are intended to address multi-forum litigation—a well known and particularly vexatious problem in the context of mergers and acquisitions.

COOLEY DEAL ACTIVITY

91 signed M&A deals with an aggregate value of $30.7 billion

Thomson Reuters Global M&A Legal Advisor Review
#6 for representing US targets on announced deals based on volume

Bloomberg 1H 2014 M&A Legal Rankings
#7 for counsel to principal of US announced deals

Mergermarket H1 2014 Trend Report
#8 for M&A by volume: US

The Deal H1 M&A League Tables
#10 for deals larger than $100 million

View additional deal rankings below

LEGISLATIVE DEVELOPMENTS
Amendment to Delaware Statute of Limitations Rules—Drafting Tips

A recent amendment to Delaware law clarifies certain statute of limitations rules, providing parties with increased flexibility to control survival periods for acquisition agreement indemnity provisions and related breach-of-contract claims.

The amendment to the Delaware General Corporation Law (the "DGCL") is described below, along with drafting tips for successfully incorporating these new concepts in your indemnification provisions.

Delaware Statute of Limitations for Breach-of-Contract Claims

Under Delaware law, breach-of-contract claims are generally subject to a three-year statute of limitations period (or four years, in the case of a contract governed by the UCC). Recent case law from the Delaware Court of Chancery highlighted the application of this restriction to the representations and warranties in an acquisition agreement. Accordingly, parties could not contractually agree to a longer claims period, even for breaches of certain "fundamental" representations and warranties, for which parties often want to extend the time period in which indemnity claims may be raised. In response, Delaware recently amended its code by adopting §8106(c), which expressly permits parties to a contract involving at least $100,000 to contractually extend the time period for making claims, up to a maximum of 20 years.

Drafting Tips for Claims Periods in Acquisition Agreements

  • The clearest way to extend the claims period beyond 3 years is to state a specified time period (e.g., "the fifth anniversary of the Closing Date").
  • Using the word "indefinitely" is expected to be interpreted in Delaware as an intent to extend the claims period to the longest permitted time and should result in a claims period that expires on the 20th anniversary of the Closing Date.
  • Using "statute of limitations" to define the claims period could result in defaulting to the existing 3 year statute of limitations period for breach of contract claims under Delaware law or, depending on how drafted, could result in the application of another period.
    • Using the phrase "applicable statute of limitations" is, because of prior case law, expected to default to the original 3 year statute of limitations.
    • Adding a parenthetical such as "(as used in this Section [___], "statute of limitations" does not mean the three year statute of limitations applicable to a claim for breach of contract)" will indicate an intent to extend the claims period beyond three years. What the claims period will be will depend on the words used to modify "statute of limitations".
    • Using the phrase "statute of limitations applicable to the subject matter of the underlying representation" is inherently ambiguous as applied to most representations (what does it mean when applied to the "Material Contracts" representation, for example).

Given the various approaches parties take on these provisions, we encourage you to work with our Cooley M&A team on specific questions regarding these provisions.

RECENT PUBLICATIONS

High-Tech Mergers: Top of the Antitrust Enforcement Agenda
An extract from The Antitrust Review of the Americas 2015. By Jacqueline Grise and Howard Morse.

RECENT TRANSACTIONS

(includes pending transactions)

 Cariomems acquired by St. Jude Medical  CIma-news-2014-09-deal-cie-gamesE Games acquired by Glu Mobile  Clearlake Capital acquisition of ConvergeOne Holdings  Gray Television acquisition of ABC-affiliates WJRT-TV and WTVG-TV  HelloWallet acquired by Morningstar  Horizon Pharma acquisition of Vidara Therapeutics International  Meredith acquisition of WGGB-TV

JUDICIAL DEVELOPMENTS
Understanding Attorney-Client Privilege in Internal Business Investigations

In a recent DC Circuit case, In re: Kellogg Brown & Root, Inc., No. 14-5055 (June 27, 2014), the DC Court of Appeals clarified the scope of the attorney-client privilege in the context of a business's internal investigation and described four aspects of an internal investigation that may vary while leaving the privilege intact.

The doctrine of attorney-client privilege protects confidential communication between an attorney and client if the communication was made for the purpose of obtaining or providing legal advice to the client. The Supreme Court determined in Upjohn Co. v. United States, 449 U.S. 383 (1981) that attorney-client privilege protects clients that are corporations, and found that the communications between attorneys and employees in the course of the company's internal investigation were confidential and protected by attorney-client privilege.

The district court in In re: Kellogg Brown & Root attempted to distinguish the case from Upjohn in several ways. The DC Court of Appeal's dismissal of these distinctions provides the following four takeaways concerning the DC Circuit's interpretation of Upjohn and the scope of attorney-client privilege in the context of an internal business investigation:

  1. In-house versus outside legal counsel: Companies do not need to consult outside legal counsel as a prerequisite for attorney-client privilege to apply. An internal investigation conducted solely by in-house counsel does not dilute the privilege.
  2. Attorney versus non-attorney interviews: The conduct of interviews by non-attorneys does not negate attorney-client privilege if attorneys direct the internal investigation.
  3. Explicit disclosure versus employee knowledge: Employees being interviewed do not need to be expressly informed that the interview's purpose is to assist the company in obtaining legal advice for the interview communications to be protected by attorney-client privilege, so long as the employees know that the company's legal department is conducting a sensitive investigation and that information the employees disclose would be protected.
  4. Purpose of the internal investigation: The internal business investigation does not need to be instigated at the company's discretion; attorney-client privilege can apply even if the investigation is initiated in order to comply with regulations. For the privilege to apply, obtaining or providing legal advice needs to be a significant purpose of the investigation, but it does not need to be the sole purpose.
 Paratek Pharmaceuticals reverse merger with Transcept Pharmaceuticals  ProteinSimple acquired by Techne Corporation  URS acquired by Aecom Technology
COOLEY M&A TEAM NEWS

Read prior editions of Cooley M&A Team News:

June 2014

March 2014

January 2014

December 2013

October 2013

SEC DEVELOPMENTS
SEC Issues Guidance on Proxy Voting and Proxy Advisory Firms—Will this Change Proxy Voting Behavior or the Role of Proxy Advisers?

The Securities and Exchange Commission (SEC) recently issued regulatory guidance (see related Q&A) regarding proxy voting responsibilities, including the role of proxy advisory firms and use of advisory firm advice. Implicit in the staff's guidance is the expectation that firms and advisers incorporate updates to their voting policies and processes prior to the 2015 proxy season.

As part of its ongoing focus on proxy voting matters generally, recent SEC Division of Corporate Finance and Division of Investment management guidance (see Q&A) clarifies the responsibilities of funds and other investment advisers with respect to proxy voting. Historically, many investment funds and institutional investors followed the voting recommendations of proxy advisory firms (e.g., ISS and Glass Lewis) as a "safe harbor" for required fiduciary obligations with respect to matters subject to proxy voting. The recent staff guidance makes it clear, however, that any investment adviser that wishes to rely on the advice of an advisory firm, in discharge of its fiduciary duties, may do so only with increased oversight and more active monitoring. Investment adviser responsibilities include:

  • Prior to retention, conducting diligence on the advisory firm's capacity and competency to adequately assess proxy issues;
  • Establishing measures designed to identify any advisory firm conflicts on an ongoing basis, as well as requiring advisory firms to proactively disclose interests in companies about which the firm is providing advice;
  • Regular review of voting guidelines to ensure consistency in implementation of client best interests;
  • Timely feedback to advisory firms regarding the quality of service, including feedback about inadequate or incorrect analysis;
  • Periodic assessment of advisory firm performance (staffing, analytic process, conflict disclosure process, error rates, regulatory compliance, etc.).

Notably, the SEC guidance also permits institutional investors to abstain from voting on proxy matters or automatically vote for company management positions. Increased flexibility to create their own voting policies will permit managers and advisers to more appropriately tailor voting for their own clients and less routinely vote only in conformance to advisory firm recommendations.

Although the full impact of the new guidelines will need to be monitored as we move towards the next proxy season, many companies hope that more diverse voting practices by institutional investors will be advantageous in the face of strategic events and contested director and governance campaigns. Given the new dynamics at play for fund and other advisers, when faced with a key proxy event, companies should consult early and often with legal and other advisers in order to maximize positive shareholder response.

 

LITIGATION UPDATE
Exclusive Forum Provisions

Exclusive forum provisions (in a corporation's bylaws or charter) designate a specific court(s) to serve as the exclusive venue(s) for intra-corporate litigation—e.g., derivative suits; actions (including class actions) asserting breach of fiduciary duty by a director, officer, or other employee to the corporation or its shareholders, and other disputes asserting claims under the internal affairs doctrine. These provisions are intended to address multi-forum litigation – a well known and particularly vexatious problem in the context of mergers and acquisitions. For example, in 2013, 94 percent of all U.S. mergers and acquisitions over $500 million resulted in litigation, with an average of 6.2 lawsuits per deal and over 60% of deals litigated in more than one court. By contrast, in 2007, only 53% of public company deals over $500 million resulted in litigation. By adopting an exclusive forum provision, a corporation seeks to avoid the costs and uncertainty of parallel litigation, the risk of inconsistent rulings, and the possible misapplication of law (typically Delaware corporate law) by a foreign court(s).

In 2010, in response to this strike-suit trend and to Vice-Chancellor Laster's comments in In re Revlon Inc. Shareholders Litigation, public companies began adopting exclusive forum provisions in their bylaws and charters. 990 A.2d 940 (Del. Ch. 2010) (suggesting that boards could promote efficiency and add value by adopting exclusive forum provisions in their corporate charters). However, the bylaw adoption (which typically requires only unilateral board action and not stockholder approval) of these provisions came to a screeching halt in 2012 after 12 nearly identical lawsuits were filed in the Court of Chancery for the State of Delaware challenging the validity of exclusive forum bylaw provisions.

Although 10 of the 12 defendant corporations repealed their bylaw provisions, Chevron and FedEx opted to litigation. And last year, in Boilermakers Local 154 Retirement Fund v. Chevron Corp., the Delaware Chancery Court upheld the facial validity and enforceability of exclusive forum bylaw provisions. 73 A.3d 934 (Del. Ch. 2013) ("Chevron"). In that case, then-Chancellor Strine (now Chief Justice of the Delaware Supreme Court) ruled that the boards of directors of Chevron and FedEx (Delaware corporations) were authorized to unilaterally amend the company's bylaws to designate a specific court as the "exclusive forum" for certain intra-corporate litigation (e.g., derivative actions, breach of fiduciary duty claims, actions under the DGCL, cases involving the internal affairs doctrine). Plaintiffs appealed the decision to the Delaware Supreme Court, but subsequently abandoned that appeal (presumably to avoid a binding precedent from the highest court, who many expected to uphold the decision).

In the wake of this decision, over 150 Delaware corporations adopted or announced plans to adopt such a provision. (See, e.g., Claudia Allen, "Trends in Exclusive Forum Bylaws," Director Notes of The Conference Board Governance Center, January 2014.) Further, since the Chevron decision, courts in New York, Louisiana, Illinois, and California have upheld exclusive forum selection provisions and dismissed shareholder litigation as a result. See, e.g., HEMG Inc. v. Aspen Univ., No. 650457/13, 2013 WL 5958388 (N.Y. Sup. Ct. Nov. 4, 2013); Genoud v. Edgen Group Inc., No. 625,244 (19th Jud. Dist. Ct., East Baton Rouge, La., Jan. 17, 2014); Miller v. Beam Inc., No. 2014 CH 00932 (Ill. Cir. Ct. March 5, 2014); Groen v. Safeway Inc., No. RG14716641 (Cal. Super. Ct. Alameda County May 14, 2014).

The most recent endorsement came from the Delaware Chancery Court, who, in City of Providence v. First Citizens BankShares, Inc., again upheld the validity of a forum selection bylaw provision. C.A. No. 9795-CB (Del. Ch. Sept. 8, 2014) (slip op. available at here). In that case, the board of directors adopted a forum selection bylaw which was virtually identical to the provisions upheld in Chevron, with one notable exception: it selected the state and federal courts of North Carolina, instead of Delaware, as the exclusive forum. In rejecting the plaintiff's challenge to the validity of the provision, Chancellor Brouchard declared that he was "compelled by the logic and reasoning of the Chevron decision," and held that "nothing in the text or reasoning of Chevron can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws."

In light of these developments, we recommend that all public company boards strongly consider adopting an exclusive forum bylaw (or charter) provision. We recommend they do so during a formal meeting (rather than by way of UWC), that they consult with counsel, thoroughly discuss whether such a provision would be in the best interest of the corporation and its stockholders, and create a written record of the board's informed, independent, and disinterested consideration. We also recommend that boards adopt an "elective" forum selection provision, which generally begin with the language: "Unless the Corporation consents in writing to the selection of an alternative forum …" See Chevron, 73 A.3d at 954 (stating that the elective consent language allows boards "to meet their obligation to use their power only for proper corporate purposes").

Further, we recommend that, if possible, boards adopt an exclusive forum bylaw provision on a "clear day"—i.e., in advance of any sales process or anticipated shareholder litigation, or when the board is already aware of misconduct—to avoid a possible challenge predicated on inequitable conduct. See, e.g., Roberts v. TriQuint SemiConductor, Inc., No. 1402-02441 (Or. Cir. Ct. Aug. 14, 2014) (refusing to enforce forum selection bylaw provision that was adopted in connection with approval of a stock-for-stock merger transaction and denying defendants' motion to dismiss). Boards should also consider the potential reaction of proxy advisory firms. For example, if an exclusive forum bylaw provision is adopted by unilateral board action, then the adoption will not, by itself, cause ISS to recommend voting against the directors. Glass Lewis will, however, recommend withholding votes from the chair of the governance committee at the next shareholder meeting. Lastly, for those companies incorporated in Delaware, we recommend that they specifically designate the Delaware Chancery Court as the exclusive forum for intra-corporate disputes, but that they also include a carve-out (designating a state or federal court in Delaware) for situations in which the Chancery Court lacks jurisdiction.

 
 

RANKINGS
Cooley 1H 2014 Deal Activity

Cooley closes 97 deals with an aggregate value of $36.9 billion

Cooley continues to be a leading law firm for clients seeking to transform their businesses through strategic transactions. In the first half of 2014, we advised on 91 signed M&A deals with an aggregate value of $30.7 billion. Year to date, we have advised 115 deals with an aggregate value of more than $37.7 billion.

In addition, Cooley is consistently a leader in the M&A league tables. Below is a selection of the rankings. Note that deal numbers in the various league tables differ based on whether the table will consider deals with a publicly undisclosed purchase price.


Thomson Reuters Global M&A Legal Advisor Review

  • #6 in US for representing targets on announced deals based on volume
  • #22 worldwide for announced deals based on volume
  • #24 worldwide for completed deals based on volume

Thomson Reuters Global M&A Mid-Market Legal Advisory

  • #4 in US for deals with undisclosed values & values up to $500 million
  • #15 worldwide for deals with undisclosed values & values up to $500 million

Bloomberg 1H 2014 M&A Legal Rankings

  • #7 for counsel to principal of US announced deals
  • #8 for US M&A legal advisor

Mergermarket H1 2014 Trend Report – Global Legal Advisor Tables

  • #8 for M&A by volume: US
  • #10 for M&A by volume: Americas

The Deal H1 M&A League Tables

  • #10 for deals larger than $100 million
Related Contacts
Barbara Borden Partner, San Diego
Craig Menden Partner, Palo Alto
Jamie Leigh Partner, San Francisco
Related Practices & Industries

Mergers & Acquisitions