31st Annual Page Keeton Civil Litigation Conference October 25-26, 2007 Austin, Texas
An Introductory Primer on
Corporate Buyout Litigation
-Is it the new strike suit? -
Michael K. Oldam Jeremy L. Doyle Gibbs & Bruns LLP Gibbs & Bruns LLP 1100 Louisiana, Suite 5300 1100 Louisiana, Suite 5300 Houston, Texas 77002 Houston, Texas 77002 713-751-5268 (phone) 713-751-5233 (phone) 713-750-0903 (fax) 713-750-0903 (fax) [email protected] [email protected]
Note: This paper was converted from a scanned image. The conversion has been reviewed for accuracy; however, minor spelling or text-conversion errors may still be present. TABLE OF CONTENTS
I. Introduction 1
II. Setting the Stage: Basic Overview of Corporate "Going Private" Transactions, and Dynamics That Lead to Litigation 2
A. Buying Power of Hedge Funds and Other Private Equity Groups 2
B. Deal Structure 2
C. Stockholder Concerns 4
D. A Litigation "Filing Olympiad" 6
III. Some Basic Guiding Principles 7
A. Such transactions are not automatically/categorically a "bad thing": 8
B. Disinterested directors must control a fair process: 8
C. Full and Fair Disclosure to Shareholders is Imperative: 8
IV. Common Preliminary Legal Skirmishes 8
A. Ripeness 8
B. Venue 12
C. Standing: Class Actions vs. Derivative Actions 15
V. Fiduciary Duties in the Context of Corporate Buyouts 19
A. The Revlon Standard Under Delaware Law 19
B. Does a Revlon-Type Standard Apply to Fiduciaries of a Texas Corporation? 23
VI. Preliminary Injunctive Relief - A Powerful Tool for Buyout Opponents 24
VII. More Target Companies Deferring "Market Check" Until After a Merger Agreement is Signed 26
ii A. "Go-shop" provisions 26
B. "No Shop" provisions 27
C. Arguments Regarding The Effectiveness of Post-Agreement Market Checks 27
VIII. Return of the Tender Offer: SEC amendment of the "best price" rule 30
IX. Antitrust Considerations 32
A. Antitrust inquiries by the Justice Department 32
B. Antitrust Class Action 32
X. Recent Delaware Cases Have Begun to Shape the Landscape of Corporate Buyout Litigation 33
A. In re SS&C Technologies, Inc. Shareholders Litig., 911 A.2d 816 (Del. Ch. 2006) (Vice Chancellor Lamb) 34
B. In re NetSmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch. 2007) (Chancellor Strine) 36
C. In re Topps Co. Shareholders Litigation, 924 A.2d 951 (Del. Ch. 2007) (Vice Chancellor Strine) and 926 A.2d 58 38
D. In re Lear Shareholders Litigation, 926 A.2d 94 (Del. Ch. June 15, 2007) (Vice Chancellor Strine) 42
XI. A Sampling of Recent Significant Buyout Litigation in Texas 44
A. Kinder Morgan ... 44
1. The Offer 44
2. Kinder Morgan Buyout Litigation 44
a. Shareholder Class Actions 44
b. ERISA Class Action 45
c. Derivative Claims 45
3. The Buyout Proceeded, but Litigation Continues 46
iii B. TXU Corp 46
1. Background for the TXU Buyout 47
2. TXU Merger Agreement 48
3. TXU Buyout Litigation 48
a. Federal Derivative Actions.. 48
b. State Derivative Actions 49
c. Federal Class Action 49
d. State Class Actions 50
e. Settlement 50
C. Freescale Semiconductor Inc 50
1. Background for the Freescale Buyout 50
2. Freescale Buyout Litigation 52
D. Clear Channel Communications, Inc 53
1. Stub Equity 53
2. Background for the Clear Channel Buyout 53
3. Clear Channel Buyout Litigation 54
a. State Court Actions 54
b. Federal Court Actions 54
iv I. Introduction
Recent years have seen a steady stream of public companies going private through leveraged buyouts, often led by or involving corporate insiders. That stream invariably carries a wave of litigation beginning the moment a buyout offer is publicly announced.
This paper offers an overview of common procedural and substantive issues that arise in such litigation, including recent cases in Texas and significant decisions from the
Delaware Chancery Court.
The recent trend of "buyout litigation" is still new and developing; there are few definitive answers or battle-proven strategies for those proposing or opposing a corporate buyout. Therefore, significant uncertainty remains for any aggressive strategy, and litigation is virtually certain. However, cases that have been litigated to date offer several insights to common arguments and procedural tactics that are likely to arise (or that you may want to champion).
And as usually is true for any newly-developing area of litigation, we can and should determine how to handle "buyout litigation" by applying traditional and well- established legal principles from other related types of cases. Basic issues of ripeness, standing, and venue apply readily to the context of corporate buyout litigation.
Substantive challenges to going-private transactions invariably focus on the officers' and directors' fiduciary duties-duties that we all know and understand, but that are malleable enough to fit differently with each emerging set of circumstances. II. Setting the Stage: Basic Overview of Corporate "Going Private" Transactions, and Dynamics That Lead to Litigation A. Buying Power of Hedge Funds and Other Private Equity Groups
In recent years the financial markets have witnessed a growing wave of buyouts taking public companies private, a trend that has only accelerated post-Sarbanes Oxley.
More and more, buyout transactions are led by hedge funds and other private equity groups. Private equity firms have been able to raise staggering sums of money, which in turn gives them the scale and financial wherewithal to buy entire public companies. In
2005, the volume of private equity buyouts of US targets totaled nearly $135 billion. In
2006, that number had increased to a record $432.9 billion. These deals have truly hit the major leagues: $33 billion buyout of HCA by Bain, Kohlberg, Kravis Roberts and
Merrill Lynch in 2006; $36 billion buyout of Equity Office Property Trust by Blackstone
Group in 2006; and the whopping $45 billion buyout of TXU Corporation (a new record!) by private equity firms Texas Pacific Group and Kohlberg, Kravis Roberts.
B. Deal Structure
In many instances, members of the target company's management participate in the buyout transaction with the private equity group. A senior officer, for example, may work with a private equity firm to put together a bid for the purchase of a company.
Those discussions may involve an agreement by the senior officer to continue employment with the new entity, contribute stock to and receive stock from the new entity, and vote his or her shares of the target company in favor of the buyout transaction
(invariably subject to certain conditions or caveats intended to permit that officer's compliance with fiduciary duties to the public shareholders).
Negotiation of a potential buyout transaction can begin in any number of ways:
The Company may signal that it is willing to consider a merger and solicit bidders;
2