In a recent ruling with important implications for parties structuring minority freeze-out transactions, Vice Chancellor Travis Laster of the Delaware Court of Chancery embraced a unified standard for reviewing such transactions, regardless of whether they are effected by means of a negotiated merger or a unilateral tender offer. In In re CNX Gas Corp. Shareholders Litig., C.A. No. 5377-VCL (Del. Ch. May 25, 2010), V.C. Laster held that a proposed two-step freeze-out transaction — a unilateral tender offer followed by a short-form merger — is subject to the strict entire fairness standard, rather than the deferential business judgment rule, unless the tender offer is both (1) recommended by a special committee of independent directors with the authority to negotiate with the controlling stockholder, and (2) subject to a majority-of-the-minority tender condition. V.C. Laster concluded that, because the Special Committee of CNX Gas had not recommended that stockholders tender, the transaction should be reviewed for entire fairness.
Topic: Corporate Governance
Preparing for the Conference: A Comprehensive Review of the Senate Financial Reform Bill
On May 20, 2010, after three weeks of floor debate, five cloture votes, and nearly a year of development, the "Restoring American Financial Stability Act of 2010" passed the Senate by a vote of 59-39. Three Republicans (Sens. Collins, Grassley and Snowe) voted with all but one present Democrat (Sen. Feingold) to pass the bill and move the center of the debate on to conference.
Corporate Governance and Executive Compensation Provisions in Senate Financial Regulatory Reform Bill
On May 20, 2010, the U.S. Senate passed the Restoring American Financial Stability Act of 2010 (the “Senate Bill”), the most significant financial regulatory reform legislation in decades. This legislation impacts not only the financial services industry but also all public companies. This memorandum focuses on the corporate governance and executive compensation provisions that will apply to public companies if the Senate Bill is enacted, and points out how the Senate Bill differs from the financial regulatory reform bill passed by the House of Representatives in December 2009 (the “House Bill”; available here). This memorandum also addresses the steps that companies should consider taking now in order to be prepared to comply with these provisions and the implementing rules and regulations to be adopted by the Securities and Exchange Commission (“SEC”) and the exchanges.
Restoring American Financial Stability Act of 2010 – A Comprehensive Review of the U.S. Senate Banking Reform Bill
On March 22, 2010, a bill seeking general reform of financial industry regulation in response to the recent financial crisis was adopted on a party-line vote by the Senate Banking Committee as the "Restoring American Financial Stability Act of 2010." It subsequently was reported to the Senate as Senate Bill 3217 (posted on the Committee’s website on April 15, 2010). The Senate Bill has been, and will continue in the near term to be, the subject of much public debate and partisan negotiation.
U.S. Sentencing Commission Amends Requirements for an Effective Compliance and Ethics Program
The United States Sentencing Commission voted unanimously on April 7, 2010 to modify the Federal Sentencing Guidelines for organizations, including the provisions that set forth the attributes of an effective compliance and ethics program. After considering a number of proposed changes to these Guidelines, the Commission voted to:
Financial Regulatory Reform: Chairman Dodd Releases New Legislation to Reform Financial Services Industry Regulation and Enhance Consumer Protection
Gibson Dunn is closely tracking government responses to the recent turmoil that has catalyzed a dramatic and rapid reshaping of our capital and credit markets. We are providing updates on key regulatory and legislative issues, as well as information on legal and oversight issues that we believe could prove useful as firms and other entities navigate these changing times.
Delaware Court of Chancery Validates Use of a Net Operating Loss Poison Pill
On February 26, 2010, the Court of Chancery of the State of Delaware issued an important opinion validating the use of a net operating loss (NOL) shareholder rights plan or poison pill.[1] The case, Selectica, Inc. v. Versata, Inc.,[2] arose out of the intentional triggering of Selectica’s NOL rights plan in December 2008 by its competitor Trilogy and Trilogy’s subsidiary, Versata Enterprises. The decision provides boards of directors of Delaware corporations with guidance as to the steps they should take in adopting and implementing an NOL rights plan. It also reflects Delaware courts’ continuing deference to well-informed boards that run a methodical and well-reasoned process, even in the face of the so-called Unocal enhanced standard of review.
Poison Pills Revisited
During the last decade, activist shareholders and corporate governance groups have been fairly successful in pressuring companies to voluntarily surrender a number of anti-takeover defenses, most notably the use of staggered boards and shareholder rights plans (also referred to as “poison pills”). In fact, according to FactSet SharkRepellent, between December 2002 and December 2009 the percentage of S&P 1500 companies with a staggered board decreased from 62.3% to 44.8%, and the percentage having a rights plan dropped from 61.6% to 23%. The success of activists and governance groups, at least as measured by these numbers, is partly attributable to the view held by certain groups that anti-takeover mechanisms are a reflection of poor corporate governance practices and, thus, antithetical to shareholder value. Also, given the healthy equity markets and high M&A transaction multiples, at least until recently companies may have been more willing to shed defense mechanisms as an easy give to appease activists and corporate governance groups. With respect to the termination of rights plans, companies also probably considered that, unless otherwise provided in the company’s organizational documents, the voluntary decision to terminate a rights plan did not restrict the board’s future ability to adopt a rights plan if it were to become the subject of an unsolicited tender offer.
SEC Re-opens Comment Period for Proxy Access Proposal
The Securities and Exchange Commission (the "SEC") recently announced that it is re-opening the comment period for its June 2009 proposal regarding shareholder access to company proxy materials for director nominations (also known as "proxy access").[1] The SEC’s proposed rules, if adopted, would establish a federal proxy access right and permit proxy access shareholder proposals in company proxy materials.[2]
SEC Adopts Final Rules on Enhanced Proxy Statement Disclosures about Risk, Compensation and Other Corporate Governance Matters
At an open meeting held on December 16, 2009, the Securities and Exchange Commission ("SEC") approved a set of proposed rules to enhance the information provided to shareholders in company proxy statements regarding a number of risk oversight, compensation, board leadership and composition and other corporate governance matters. The SEC approved the final rules by a 4-to-1 vote, with Commissioner Kathleen Casey dissenting. The SEC released the text of the final rules on the same date they were adopted, with the 129 page adopting release available here.