UK: Corporate Law Developments (February 17, 2017): Allergen Pays For Tender Offer Violations; Delaware Continues To Apply The Business Judgment Rule To Merger Transactions; And Delaware Fee-Shifting Bylaw Declared Invalid

This week's corporate law news roundup includes discussions of Allergen's $15 million SEC penalty for tender offer violations; the Delaware Court of Chancery's decision in In re Solera Holdings, Inc. Stockholder Litigation that the business judgment rule applies to merger transactions approved by a fully informed, uncoerced vote of disinterested stockholders; and Delaware Court of Chancery's decision in Solak v. Sarowitz, that fee-shifting bylaws are facially invalid.

ALLERGAN TO PAY $15 MILLION SEC PENALTY FOR TENDER OFFER VIOLATIONS

On January 17, 2017, the SEC announced that Allergan Inc. had agreed to pay a $15 million penalty and admit to securities law violations for failing to disclose information about potential merger transactions that it was negotiating in response to a hostile takeover bid from Valeant Pharmaceuticals and co-bidders in June 2014. SEC Rule 14d-9 requires a public company that is the subject of a tender offer to express a position on the tender offer in its Schedule 14D-9, including negotiations in response to the tender offer that relate to an extraordinary transaction. The SEC found that Allergan initially reported that it was not engaging in any negotiations that could result in an extraordinary transaction and failed to amend that report even when Allergan entered into material negotiations with another company. It found that Allergan also did not disclose its merger talks with Actavis plc until a merger agreement was already executed, despite repeated SEC communications informing Allergan that (to the extent that Allergan was engaged in merger negotiations) Schedule 14D-9 required those negotiations to be disclosed. Even though the SEC has taken a flexible approach to the disclosure of preliminary merger negotiations in other settings (for example, it generally takes the position that the MD&A "known trends" disclosure requirement does not require disclosure of preliminary merger negotiations), the SEC's findings make clear that, if a tender offer is involved and a company engages in negotiations with another bidder, the company has an obligation to disclose even preliminary merger negotiations. For more information, see https://www.sec.gov/news/pressrelease/2017-16.html and https://www.sec.gov/litigation/admin/2017/34-79814.pdf.

DELAWARE CONTINUES TO FIND THAT THE BUSINESS JUDGMENT RULE APPLIES TO MERGER TRANSACTIONS APPROVED BY A FULLY INFORMED, UNCOERCED VOTE OF DISINTERESTED STOCKHOLDERS

In January 2017, the Delaware Court of Chancery decided the most recent case in a series of cases consistently applying the 2015 holding in Corwin v. KKR Financial Holdings. The Corwin court had held that the business judgment rule is the standard of review for a merger transaction that is not subject to the entire fairness standard of review and is approved by a fully informed, uncoerced vote of disinterested stockholders. In the Delaware Court of Chancery's most recent post-Corwin case, In re Solera Holdings, Inc. Stockholder Litigation, a former stockholder of Soltera Holdings challenged a private equity firm's acquisition of Soltera. The former stockholder alleged that the directors had violated their Revlon duties, concentrated on private equity buyers over strategic buyers, favored the acquiror over other bidders and created a conflict of interest that was not disclosed to the stockholders by changing Soltera's bonus program to one that incentivized management to sell Soltera. Notably, in Soltera, before considering the merits of the case's disclosure issues, the court clarified that when applying Corwin, the burden of pleading disclosure deficiencies lies with the plaintiff – and only after that would the burden fall to defendants to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect of a fully informed, uncoerced vote of disinterested stockholders. For more information, see http://courts.delaware.gov/Opinions/Download.aspx?id=251000.

DELAWARE FEE-SHIFTING BYLAW DECLARED FACIALLY INVALID

On December 27, 2016, the Delaware Court of Chancery held that, under Delaware General Corporation Law (DGCL) Section 109(b), fee-shifting bylaws are facially invalid. In Solak v. Sarowitz, the court explained that Section 115 was added to the DGCL in 2015 in response the court's Boilermakers Local 154 Retirement Fund v. Chevron Corp decision to permit the adoption of bylaws requiring that internal corporate claims be filed exclusively in Delaware. Simultaneously, DGCL Section 109(b) was amended in response to the court's ATP Tour, Inc. v. Deutscher Tennis Bund decision to make it clear that bylaws may not contain any provision that would impose liability on a stockholder for attorneys' fees or expenses of the company or any other party in connection with an internal corporate claim. In 2016, the Paylocity Holding board adopted two new bylaws: (1) an exclusive forum bylaw that required internal corporate claims to be filed in Delaware state or federal courts and (2) a fee-shifting bylaw that shifts fees to a stockholder who files an internal corporate claim outside of Delaware without company consent, unless the stockholder is successful on the merits of the claim. In Solak, a Paylocity stockholder sought a declaratory judgment that the fee-shifting bylaw was invalid under the DGCL and that the Paylocity directors had breached their fiduciary duties by adopting the fee-shifting bylaw. After finding that the stockholder's claims were ripe, the court rejected arguments that the simultaneous amendment of Section 109(b) and enactment of Section 115 required those provisions to be read together to permit fee-shifting for actions that violated Section 115, arguments that fee-shifting remains permissible under common law and arguments that the fee-shifting bylaw savings clause carved out interpretations inconsistent with the DGCL. For more information, see http://courts.delaware.gov/Opinions/Download.aspx?id=250680 and http://delcode.delaware.gov/title8/c001/sc01/.

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