what’s the deal with deal litigation in nevada? presented by: patrick g. byrne, esq., john s....

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What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq.

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Page 1: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What’s The Deal with Deal Litigation in Nevada?

Presented by:

Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and

Richard C. Gordon, Esq.

Page 2: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Topics to DiscussTopics to Discuss

• What is the Law?• Common Claims • Procedural Issues

◦ Pre-Settlement◦ Post-Settlement

Page 3: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What is the Law?What is the Law?

• Fiduciary Duties of Directors◦ Generally Applicable Duties◦ Special Duties in the Change of Control

Context

Page 4: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What is the Law? (cont.)What is the Law? (cont.)

• Fiduciary Duties of Directors◦ Generally Applicable Duties

- Delaware• Duty of Care: duty to make decisions on an

informed and good-faith basis after evaluation of all reasonably relevant information

• Duty of Loyalty: duty not to have a material conflict of interest

- Nevada• Combines the duties of care and loyalty

◦ "Directors and officers shall exercise their powers in good faith and with a view to the interests of the corporation." NRS 78.138(1).

Page 5: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What is the Law? (cont.)What is the Law? (cont.)

• Other Applicable Duties◦ Duty of Disclosure

- Delaware• Duty of Care and Loyalty require directors to provide candid

disclosure to stockholders in all communications• Must "disclose fully and fairly all material information within

board's control." Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009).

- Nevada• Nevada courts recognize duty of disclosure of material

information on behalf of directors. In re Agribiotech, Inc., 291 F.Supp.2d 1186 (D. Nev. 2003).

◦ Duty of Oversight- Duty of care and loyalty require directors to oversee

corporate affairs

Page 6: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What is the Law? (cont.)What is the Law? (cont.)

• Special Duties ◦ Delaware

- Revlon duties• Directors must exercise their duties of care and

loyalty for a specific objective: maximizing the sale price of the enterprise.

- When Revlon applies:◦ A corporation initiates an active bidding process

to sell itself;◦ A company abandons its long-term goals in

response to a bidder's offer by seeking an alternative transaction, which would ultimately break-up the company; or

◦ When a company otherwise pursues a sale of control (most popular).

Page 7: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What is the Law? (cont.)What is the Law? (cont.)

• Special Duties (cont.)- What Revlon Requires:

• Directors must pursue a reasonable process designed to maximize the value stockholders will receive. Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989).

◦ Nevada- Business Judgment Rule generally applicable to

actions of directors. Shoen v. Amerco, 885 F. Supp. 1332 (D. Nev. 1994); NRS 78.138 (3) ("Directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation.").

Page 8: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Judicial Scrutiny of Director DecisionsJudicial Scrutiny of Director Decisions

• Delaware◦ Three standards:

- 1) Business Judgment Rule (Default)• Creates presumption that "in making a business decision the directors of a

corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company." Reis v. Hazelett Strip-Casting Corp., 2011 Del. Ch. LEXIS 11, at *23 (Del. Ch. Jan. 21, 2011).

- 2) Enhanced Scrutiny (Intermediate)• Requires directors to act with “scrupulous concern for fairness to shareholders”• Applies in:

◦ Sale-of-control, change of control, or break-up of the company contexts◦ Adoption of defense mechanisms or measures in response to threat to

corporate control or policy◦ The presumption of the Business Judgment Rule does not apply in

these contexts• Unocal Standard (applies to defensive measures) – Board Must Show:

◦ "[R]easonable grounds for believing that a danger to corporate policy and effectiveness existed."

◦ Action taken in response is neither preclusive nor coercive and is "reasonable in relation to the threat posed." - Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1995).

Page 9: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Judicial Scrutiny of Director Decisions Judicial Scrutiny of Director Decisions (cont.)(cont.)

• Delaware- 3) Entire Fairness Test (Most Difficult)

• Applies when:◦ Plaintiff overcomes business judgment rule◦ Board of directors fails to meet Unocal or

Revlon Standard◦ In connection with certain transactions in

which a controlling stockholder is buying out minority stockholders

◦ Burden on company to prove "fair dealing and fair price." Kahn v. Lynch Commc'ns Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994).

Page 10: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Judicial Scrutiny of Director Decisions Judicial Scrutiny of Director Decisions (cont.)(cont.)

• Nevada◦ Business Judgment Rule

- Business Judgment Rule generally applicable to actions of directors. - No enhanced scrutiny under Unocal; instead receive presumption of the business

judgment rule. See NRS 78.139(1)-(2).- NRS 78.139(2) provides business judgment rule applies when directors and officers

are faced with a change of control that impedes the exercise of the right of the stockholders to vote for or remove directors:• must have reasonable grounds to believe that a threat to corporate policy and effectiveness

exists; and • Action taken must be reasonable in relation to that threat.

- Minimal case law explains these statutes. If the business judgment of the board is rebutted, assume that Delaware’s entire fairness test will be utilized.

◦ Independent Committees- One avenue to keep the presumption of the business judgment rule if you have

interested directors (discussed later).- Board of directors may designate one or more committees have an may exercise the

powers of the bard of the directors in the management of the business and affairs of the corporation. NRS 78.125(1).

- Each committee must include at least one director. Unless the articles of incorporation or the bylaws provide otherwise, the board of directors may appoint natural persons who are not directors to serve on committees. NRS 78.125(2).

- Board may appoint alternates of a committee to replace disqualified or absent members. NRS 78.125(3).

Page 11: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In PracticeCommon Claims In Practice

• Unfair Price• Conflicts of Interest• Unfair Process• Unreasonable Deal Protection Device• Transaction with Controlling

Stockholders• Misleading or Inadequate Disclosure• Federal Claims

Page 12: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Unfair PriceCommon Claims In Practice-Unfair Price

◦ Usually board of directors rely upon financial advisors to determine price information

◦ Financial advisors may perform various analyses to value company

◦ Plaintiff usually claims flaws with the methodologies, assumptions, data underlying cash-flow forecasts, and the risk premiums used

◦ Except on a case based on review for entire fairness, no cause of action based solely on low price. Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 506-14 (Del. Ch. 2010).

Page 13: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Conflicts of Common Claims In Practice-Conflicts of InterestInterest

• Delaware◦ Director Conflicts

- Business judgment rule protection will prevail unless self-interested directors:• Constitute a majority of the board of directors;• Control and dominate the board of directors as a whole; or• Fail to disclosure their interests in the transaction where a reasonable.

- Director is interested when:• Has divided loyalties;• Receives a material personal benefit not shared equally by all stockholders;• Makes a decision to avoid a materially detrimental outcome as the director

(but not the company or its stockholders). Cinerama Inc. v. Technicolor Inc., 663 A.2d 1134, 1168 (Del. Ch. 1994).

- Possible saving measure: When directors are interested, delegation of decisions or evaluations to a committee may subject the decision to the business judgment rule (depending on the transaction). If a transaction with a controlling stockholder, delegation to a committee may not be sufficient.

Page 14: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Conflicts of Common Claims In Practice-Conflicts of Interest (cont.)Interest (cont.)

◦ Management Conflicts- Plaintiffs must show that:

• The incentive was material to the individual • The defendant took action to favor a prospective buyer or proceed in a way that

tainted the board of directors' decision-making process ◦ McMillan v. Intercargo Corp., 768 A.2d 492, 503-04 (Del. Ch. 2000).

- Employment with or the potential for employment with resulting entity is not enough. Need more.

- Interested directors who advise a board do not present a conflict on its face. In re Toys 'R' Us, Inc. S'holder Litig., 877 A.2d at 980 ("to be an inside or non-independent director is not a crime, it is a status.").

◦ Financial Advisor Conflicts- Participation in buyer financing: when financial advisor receives fees

from seller and buyer- Promise for future business by buyer, there is a risk that the financial

advisor will favor that buyer- Transparency and mandatory disclosures are necessary for board to

identify and address any competing interests in order to determine whether to retain advisor and/or disclose conflicts to stockholders

Page 15: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Conflicts of Common Claims In Practice-Conflicts of Interest (cont.)Interest (cont.)

• Nevada

◦ Pursuant to NRS 78.140(1)-(2), transactions involving "interested directors" are not void or voidable on its face. Both sections must be satisfied.

◦ NRS does not contain a materiality standard for facts that must be disclosed to the board or stockholders in connection with the approval of transactions involving interested directors and/or officers.

Page 16: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Unfair Common Claims In Practice-Unfair ProcessProcess

• Two general claims◦ Failure to discharge Revlon duties; or◦ Use of procedures that unfairly interfere with

the stockholders' decision regarding a transaction.

• Should be viewed deferentially pursuant to the business judgment rule.

• Examples:◦ Failure to shop the company◦ Distinction between different buyers – board

showed favoritism to one buyer◦ Allegedly coercive transactions

Page 17: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Unreasonable Common Claims In Practice-Unreasonable Deal Protection DevicesDeal Protection Devices

• Delaware◦ Subject to "enhanced scrutiny" and evaluated

under the Unocal standard- Upheld where: protective of legitimate interest and

reasonable to permit the company to favorable respond to a superior proposal from a third party.

◦ Court’s options: - Injunction - "Blue penciling" of certain deal protections

provisions - Terminating one of the deal protection provisions - Extended "go-shop" provisions to remedy prior

flaws • In re Del Monte Foods Co. S’holders Litig., 2011 Del.

Ch. LEXIS 30 (Del. Ch. Feb. 14, 2011).

Page 18: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Unreasonable Common Claims In Practice-Unreasonable Deal Protection Devices (cont.)Deal Protection Devices (cont.)

◦ Examples: - Termination fees - No-Shop v. Go-Shop provisions- Support agreements - Matching rights- Limitations on right to change board of director’s

recommendation• Nevada Distinction: Failure of a board to recommend the plan

for stockholder approval effectively ends the merger or exchange process. See NRS 92A.120(2-3). The board may only send the plan to the stockholders without recommendation if they are unable to recommend it due to a conflict of interest or other special circumstances. See id.

- Force the Vote provisions• Nevada Distinction: Nevada law prohibits so-called "force the

vote" clauses. See NRS 92A.120(3) ◦ Must define “Superior Proposal” carefully

• Nevada◦ Minimal law in this area. Presume courts will look to

Delaware law for guidance.

Page 19: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Transaction Common Claims In Practice-Transaction with Controlling Stockholderswith Controlling Stockholders

• Delaware◦ Presumptively subject to entire fairness test for controlling

stockholders- Defendants can shift the burden to the business judgment rule by

proving:• Approval of the transaction by a independent special committee or• Conditioning approval of the transaction on approval by a majority of those

stockholders unaffiliated with the controlling stockholder ("majority of the minority")

◦ In re CNX Gas Corp. S'holders Litig., 4 A.3d at 400.◦ Otherwise transaction subject to the entire fairness test

• Nevada◦ Nevada Federal District courts have held that a majority

stockholder of a closely held corporation may have a fiduciary duty to minority stockholders. Simon v. Mann, 373 F. Supp.2d 1196, 1199-1200 (D. Nev. 2005). The Nevada Supreme Court has not decided this issue.

Page 20: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Disclosure Common Claims In Practice-Disclosure ProblemsProblems

• Delaware◦ To prevail, plaintiff must demonstrate defendants made a material

misrepresentation to stockholders or withheld material information. Orman v. Cullman, 794 A.2d 5, 31 (Del. Ch. 2002).

◦ Typical Areas of Disclosures Claimed:- Projections of Future Results- Benefits to Directors and Officers- Other Data or Analysis Underlying Fairness Opinions- Conflicts of Interests on Behalf of Financial Advisors- The Background to the Transaction- Opinions of Pre-Existing Litigation

• Nevada◦ Pursuant to NRS 78.138(7), director or officer not individually liable

unless:- Director's or officer's act or failure to act constituted a breach of his or

her fiduciary duties as a director or officer; and- The breach of those duties involved intentional misconduct, fraud, or a

knowing violation of law.

Page 21: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Common Claims In Practice-Federal Common Claims In Practice-Federal ClaimsClaims

• Most claims alleged under Section 14 of the Securities Exchange Act:

◦ 14(a) – fraud in relation with mergers◦ 14(e) - fraud in relation with tender offers◦ Discovery Issues:

- Require heightened pleading standard- Mandatory stay of discovery and other

proceedings during the pendency of any motion to dismiss. 15 U.S.C. § 78u-4(b)(3)(B).

- Discovery may only occur upon a showing to preserve evidence or to prevent prejudice. Id.

Page 22: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Procedural IssuesProcedural Issues

• Likely Parties• Forum• Preliminary Injunctions• Class Certification• Settlement Approval• Attorneys’ Fees

Page 23: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

The AdversariesThe Adversaries

• Plaintiffs◦ Public Stockholders of the Target Company

- Could be Individuals or Institutional Investors- Litigation is Driven by Plaintiffs’ Lawyers

◦ Hostile Bidders• Defendants

◦ Target Company’s Directors◦ Target Company’s Officers◦ Majority Stockholders◦ Financial Advisors◦ Acquiring Company

Page 24: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Choosing The BattlegroundChoosing The Battleground

• Venue Fights are Common◦ Determine decision makers and rules◦ Venue is Usually Proper in at least two places

State of Incorporation and Location of Headquarters◦ Race to the Courthouse

• Options when facing suits in multiple jurisdictions◦ Determine Best Available Forum◦ Motion to Dismiss/Stay in Disfavored Forum◦ “One Jurisdiction Motion”◦ Consent to Class Certification in Favored Forum

• Forum Selection Clauses◦ Clauses in Merger Agreements only bind the Buyer and

Seller◦ Clauses in Bylaws may be enforceable if approved by

stockholders

Page 25: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Expedited Proceedings – Practical Expedited Proceedings – Practical ConsiderationsConsiderations

• Standard◦ Plaintiff Must Show (1) Colorable Claim & (2)Threatened

Irreparable Injury◦ No Automatic Right - Plaintiff Bears the Burden of

Demonstrating the Need to Expedite◦ Federal Court: Reform Act Protections

• Discovery ◦ Narrow Scope of Discovery ◦ Anticipate the Need for Document Production and

Deposition Testimony◦ Business Strategies Privilege

• Hearing- Must occur before shareholder vote or tender offer- Often two to seven days before relevant event

Page 26: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Defending Against a Preliminary Defending Against a Preliminary Injunction RequestInjunction Request

• Practical Considerations◦ Expedited Proceedings◦ Expedited Discovery

• Standards for Granting Relief◦ Likelihood of Success on the Merits◦ Irreparable Harm◦ Balance of the Hardships◦ Bond Requirements

Page 27: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Standards for Granting Injunctive ReliefStandards for Granting Injunctive Relief

• Likelihood of Success on the Merits◦ Usually the Most Important Element◦ Certainty Not Required

• Irreparable Harm◦ No Adequate Remedy at Law ◦ Harm Must be Imminent and Genuine

• Balance of the Hardships◦ Harm to Defendant if Injunction Granted v.

Harm to Plaintiff if Denied◦ Consider Presence of Multiple Offers

• Bond Requirements

Page 28: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Class CertificationClass Certification

• Rule 23(a)◦ Numerosity◦ Commonality◦ Typicality◦ Adequacy of Representation

• Rule 23(b)◦ Must meet 23(a) Prerequisites AND

- 23(b)(1) or 23(b)(2)• Generally Applies to Action for Equitable Relief• “Actions challenging the propriety of director conduct…are

properly certifiable under …subdivisions (b)(1) and (b)(2).”- 23(b)(3)

• Generally Applies to Action for Damages• Option to Opt Out is Required if Relief Sought is “wholly or

predominantly for money judgment.”

Page 29: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Plaintiffs’ Goal is SettlementPlaintiffs’ Goal is Settlement

Most Deal Litigation Ends in Settlement Before a Preliminary Injunction Hearing

◦ Plaintiffs’ Incentives- Going to Trial is Incompatible with Plaintiff Lawyer’s

Business Model- Plaintiffs’ counsel can tout value of changes in deal

structure or additional disclosures earned through negotiations

- Judgment for damages is unlikely- Allows Plaintiffs’ Counsel to Recover Fees

◦ Defendants’ Incentives- Settling for additional disclosures avoids the potential for a

judicial stay that could delay or derail the pending deal- Avoid expense and distraction associated with litigating a

claim through trial- Protect directors against potential finding of bad faith at

trial.

Page 30: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Settlement Requirements and LimitationsSettlement Requirements and Limitations

• What Constitutes Valid Settlement Consideration◦ Supplemental Disclosures◦ Changes to Deal Terms◦ Increased Monetary Consideration

- Not required◦ Common Fund

• Class Certification and Notice◦ Stipulate to Certification for Settlement Purposes Only◦ Class Members Receive Notice and Opportunity to Opt Out if

Applicable• Releases

◦ Generally dispose of all liability associated with the challenged transaction

◦ Due Process Limits• Objections

◦ Stockholders are provided with an opportunity to object

Page 31: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Judicial ApprovalJudicial Approval

• Settlement Approval in One Court Should Resolve the Same Claims in All Courts

• Six Factors of Reasonableness◦ Validity of Claims◦ Apparent Difficulty of Enforcing the Claims

Through the Courts◦ Collectability of any Judgment◦ Delay, Expense, and Trouble of Litigation◦ Amount of the Compromise vs. Amount and

Collectability of the Judgment◦ Views of the Parties Involved

Page 32: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

Attorneys’ FeesAttorneys’ Fees

• Bases for an award of attorneys’ fees

◦ Substantial Benefit Rule

Applies where litigation achieves an increase in consideration given as non-monetary benefits

◦ Common Fund Doctrine

Applies where litigation results in creation of cash fund

• Courts Apply “Rigorous Scrutiny”

◦ Was the action meritorious when filed?◦ Did an ascertainable class receive a substantial benefit◦ Was there a causal connection between the legal actions and the benefit?

• How much is too much?

◦ Considerations:

- Time and Effort Expended- Difficulty and Complexity of the Case- Reputation and Ability of Counsel- Contingent Nature of Litigation- Stage at Which Litigation Ended- Extent to Which Counsel’s Actions led to Benefit- Amount or Degree of Benefit Achievd

• Resolved in Conjunction with Settlement Approval

Page 33: What’s The Deal with Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq

What’s The Deal with Deal Litigation in Nevada?

Presented by:

Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and

Richard C. Gordon, Esq.