This document summarizes the key aspects of merger objection lawsuits. It begins with a hypothetical scenario of a public company being acquired. It then discusses what merger objection lawsuits are, including their typical characteristics, outcomes, and standards applied by courts. It provides examples of case studies and discusses insurance implications. Merger objection lawsuits almost always follow the announcement of an acquisition and most result in supplemental disclosures and attorney fee payments for plaintiffs.

1. © 2013 Edwards Wildman Palmer LLP & Edwards Wildman Palmer UK LLP
Fundamentals of, and
Insurance Coverage for,
Merger Objection Suits
Presented by:
John Hughes, Partner in Edwards Wildman’s Insurance
and Reinsurance Department

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Introduction
♦ Typical characteristics of a merger objection lawsuit.
♦ Case Studies.
♦ Insurance implications.

3. “For better or worse, after the announcement of a merger or
acquisition, stockholder class action suits typically follow like
mushrooms follow the rain.”
-Dias v. Purches, 2012 WL 4503174 (Del. Ch. Oct. 1, 2012).
3
Introduction

4. Hypothetical:
♦ Public Company A is the target of an acquisition by Public Company
B.
♦ Company B offers a 30% premium over Company A’s current stock
price.
♦ This price is still below the previous 12 month high.
♦ Company A would become a subsidiary of Company B.
♦ All inside directors would remain employees.
♦ All inside directors would receive stock in Company B.
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What is a Merger Objection Lawsuit?

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The shareholders of Company A will almost definitely sue.
♦ These suits have “skyrocketed” in recent years.
♦ In 2007, litigation followed a merger/acquisition in:
♦ 53% of deals over $500 million*
♦ 21% of deals over $100 million*
♦ In 2012, litigation followed a merger/acquisition in:
♦ 96% of deals over $500 million.**
♦ 93% of deals over $100 million.**
♦ Roughly 2/3 of suits filed within 2 weeks of deal announcement.
♦ Settlement on average is reached within two months.
* Cornerstone Research, 3/2012 Report
**Cornerstone Research, 2/28/2013 Report
What is a Merger Objection Lawsuit?

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♦ Approximately 80% filed in state court.*
♦ Often a lower pleading standard after Ashcroft v. Iqbal, 556
U.S. 662 (2009).
♦ More plaintiff friendly.
♦ 72% of cases in 2012 filed in multiple states.
*NERA Economic Consulting Report 7/24/12
What is a Merger Objection Lawsuit?

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♦ Delaware law permits a forum-selection clause in the corporate charter.
♦ Chevron/FedEx case recently decided by Chancellor Strine.
♦ Delaware-only forum selection bylaws valid.
♦ Underwriting tip: Does your insured have this provision?
♦ More than 250 public companies have adopted these in the
past several years.
♦ 39% of M&A suits in 2012 were filed in Delaware. Uptick from just 25%
as recently as 2011.*
*Cornerstone Research 2/28/13
What is a Merger Objection Lawsuit?

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What is a Merger Objection Lawsuit?
♦ Without a forum selection clause, there is a risk of parallel litigation going
forward in different states simultaneously.
♦ See, e.g., NJ Carpenters v. NYSE Euronext, No. 654496/2012 (NY)
♦ Judge Kornreich in New York refused to stay the case despite a parallel case
pending before Chancellor Strine in Delaware, suggesting that courts “work
together” instead.
♦ In March 2013 New York’s First Department stayed the New York case for 60
days until after preliminary injunction hearing in Delaware; in May 2013,
Chancellor Strine denied the injunction.
♦ In June 2013, the shareholders approved the merger.
♦ See also Matter of Topps Co. Inc. Shareholder Lit., 2007 NY Slip Op 52543(U)
♦ “New York clearly has an overwhelming nexus to this controversy and is a
highly appropriate forum for its resolution.”
♦ Proceeded in New York and Delaware until settlement.

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♦ Shareholders allege that the directors of the target company breached
their fiduciary duties by failing to make an informed decision regarding
the adequacy of the purchase price or failed to “shop” the target.
♦ Frequently include claims for misrepresenting or omitting material
information in the proxy materials.
♦ These are direct, not derivative, claims because the injury is to the
shareholders, not the corporation. See Parnes v. Bally Entertainment Corp.,
722 A.2d 1243 (Del. 1999). But see Hannon’s Inc. vs. Berkshire Hathaway
Inc. and H.J. Heinz Company (PA law).
♦ The suits often allege an aiding and abetting claim against the acquiring
company/firm (e.g., a private equity firm).
What is a Merger Objection Lawsuit?

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Outcomes
♦ Of merger objection cases filed in 2012 that have been resolved:
♦ 64% settled.
♦ 33% were dismissed.
♦ 3% voluntarily withdrawn.*
♦ For securities class action cases in 2012:
♦ 28% settled prior to ruling on motion to dismiss (after 2.3 years of
litigation)
♦ 64% settled prior to ruling on summary judgment (after 3.5 years of
litigation)
♦ 6% after that (after 4.9 years of litigation).**
*Cornerstone Research, 2/28/13
**Cornerstone Research, 2012 Securities Class Action Settlements

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Outcomes
♦ In 81% of cases that settled in 2012, shareholders received only
supplemental disclosures and nothing else, and their attorneys were
paid their fees.
♦ Average attorneys’ fees $725,000.
♦ $540,000 for disclosure-only settlements.
♦ Fees influenced by size of settlement; number of suits filed; and overall
deal value, among other factors.
*All stats from Cornerstone Research, 2/28/13

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♦ In re Transatlantic Holdings Inc. Shareholder Litigation,
DE Chancery Court No. 6574-CS
♦ Bench ruling by Chancellor Leo E. Strine, Jr. on 2/28/13
♦ Harbinger of the future or merely a “bump in the road”?
♦ Plaintiffs sought to enjoin a vote by Transatlantic
stockholders on the Allegheny transaction in light of
alleged deficiencies in the proxy statement.
♦ Transatlantic filed an 8-K with supplemental disclosures.
♦ Strine found that these supplemental disclosures did not
“contradict or meaningfully affect the flow of information in
a way that is different from what the board is suggesting.”
♦ Plaintiffs’ request for attorneys’ fees denied.
Outcomes

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♦ Two large settlements in 2012 (for 2011 transactions):
♦ $136 million in El Paso/Kinder Morgan ($26 million of this was for
attorneys’ fees).
♦ $49 million in Delphi Financial/Tokio Marine.
♦ In September 2011, Del Monte settled for $89.4 million ($22.3 million
of this was for attorneys’ fees).
♦ Average settlement 2003-2009: $36 million.
♦ Average settlement 2010-2012: $78 million.
*All stats from Cornerstone Research, 2/28/13
Outcomes

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Back to the Hypothetical
♦ What should the board of Company A do?
♦ Evaluate the offer and make a recommendation
to the shareholders.
♦ A majority of the shareholders must approve the sale.
8 Del. C. § 271(a).
♦ What is the standard by which the offer should be
measured?
♦ What are the fiduciary duties the board members
are bound by?

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What is the Standard for the Price?
♦ Directors have a duty to seek and attain the highest immediate value
reasonably attainable to stockholders.
♦ Known as the “Revlon” duty. See Revlon v. MacAndrews & Forbes, 506
A.2d 173 (Del. 1985).
♦ A fairness opinion from a disinterested investment banker is crucial.
♦ Directors should perform a “market check” to be sure they are
getting the best price.

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What is the Standard for the Process?
Fiduciary Duties
♦ Duty of Care
♦ Duty of Good Faith
♦ Duty of Loyalty

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♦ Duty of care:
♦ Directors are required to act reasonably to maximize value for
shareholders.
♦ This usually means performing a pre- or post-signing market check
to assure the highest price available has been obtained.
♦ Section 102(b)(7) of the Delaware code protects directors from
monetary damages for breach of the duty of care (and only the
duty of care).
♦ Duty of good faith: “conscious disregard of duty.”
♦ In re Walt Disney Co., 906 A.2d 27 (Del. 2006).
What is the Standard for the Process?

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♦ Duty of Loyalty: Anti-conflict of interest rule.
♦ A majority of directors must be both (1) disinterested (money) and
(2) independent (relationships).
♦ Cede & Co. v. Technicolor, Inc.
♦ “Independence” means that the directors will not benefit financially,
or through job security or other intangibles, from their new position
at the acquirer.
♦ Absence of conflict applies to the board’s advisers: legal, financial.
♦ In re Del Monte Foods Shareholders Litigation, 25 A.3d 813, 831
(2011)
What is the Standard for the Process?

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♦ Delaware has three tiers for evaluating director decision making:
♦ The Business Judgment Rule
♦ Enhanced Scrutiny
♦ Entire Fairness
What is the Standard for the Court’s Evaluation?

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♦ As a suit begins, the court first asks:
♦ Was the board independent of the acquirer?
♦ Or, was there a special board committee that was independent?
♦ Did the board or the committee receive independent legal and financial
advice?
♦ If the directors can establish this independence, the decision of
the directors is entitled to the protection of the business
judgment rule.
♦ In re Synthes, Inc. Shareholder Litigation, 967 A.2d 640 (Del. Ch. 2008).
♦ In re MFW Shareholder Litigation, 67 A.3d 496 (Del. Ch. 2013) (BJR applies
to going private transaction with controlling stockholder where transaction
approved by independent special committee and subject to informed
majority-of-minority vote).
What is the Standard for the Court’s Evaluation?

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The Business Judgment Rule
♦ “The rule posits a powerful presumption in favor of actions taken by
the directors, in that a decision made by a loyal and informed board will
not be overturned by courts unless it cannot be attributed to any
rational business purpose…. A shareholder plaintiff assumes the burden
of providing evidence that directors…breached any one of the triad of
their fiduciary duty—good faith, loyalty or due care. If a shareholder
plaintiff fails to meet this evidentiary burden, the business judgment
rule attaches to protect corporate officers and directors and the
decisions they make, and our courts will not second guess these
business decisions.”
• Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993)

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Enhanced Scrutiny
♦ Enhanced scrutiny applies when directors face potentially subtle or
situational conflicts that do not rise to a level triggering entire fairness
review, but also do not comfortably permit expansive judicial deference,
i.e., the business judgment rule.
♦ In re Del Monte Foods Shareholders Litigation, 25 A.3d 813, 831
(2011)

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Entire Fairness
♦ If a majority of the board of directors or the committee were not
independent or did not get independent advice, the burden shifts
to the directors.
♦ Also invoked when the acquirer is already the majority
shareholder.
♦ The directors now have to demonstrate that the share price met
the two prongs of the “entire fairness” standard.
♦ Fair process: considering alternatives, consulting experts,
disclosing facts.
♦ Fair price: “within the range of fairness.”
♦ See, e.g., Weigand v. Berry Petroleum Co., C.A. No. 9316 (Del. Ch.
Mar. 27, 1991).

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Entire Fairness
♦ In deals that involve an acquisition by a controlling
shareholder, defendants can shift the burden of
proving “entire fairness” by showing either that the
transaction was approved by:
♦ A “well-functioning” committee of independent
directors; or
♦ An “informed vote” of a majority of the minority
shareholders.
♦ See, e.g., Americas Mining Corp. v. Thibeault, 51 A.3d
1213, 1218-19 (Del. 2012).

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Typical Procedural Posture
♦ Shareholders move to enjoin the transaction, alleging:
♦ Share price was too low.
♦ Board breached a duty by recommending a price based on conflicted or
bad advice.
♦ Recommendation made by the board was misleading because there were
insufficient/inadequate disclosures.
♦ In order to close the deal, the defendants will often:
♦ Agree to supplemental disclosures.
♦ Revise procedures relating to the transaction (i.e., an extended period to
solicit bids).
♦ Not oppose plaintiffs’ request for an award of attorneys’ fees.
♦ Attorneys’ fees awarded under the “corporate benefit doctrine.”

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♦ After the deal closes, the litigation often continues over
the recommendation of the board and plaintiffs can
seek damages based on the allegedly suppressed
purchase price.
Typical Procedural Posture

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Case Study: In re El Paso
Background facts
♦ El Paso to be sold to Kinder
Morgan for $21.1 billion.
♦ Plaintiffs alleged breach of
fiduciary duty due to two
conflicts, sought injunction
against deal:
♦ El Paso CEO negotiated the sale, but did not disclose that he wanted
to buy certain aspects of the El Paso business from Kinder Morgan.
♦ El Paso board relied on advice from Goldman Sachs, which owned
19% of Kinder Morgan.

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Outcome
♦ Injunction denied.
♦ Chancellor Strine: Shareholders could vote to deny, or seek money
damages, without court intervention.
♦ Sale went forward with 95% of shareholders approving.
♦ Kinder Morgan ultimately paid a total of $136 million.
♦ $110 million to El Paso shareholders.
♦ Goldman forewent $20 million fee; instead went to shareholders.
♦ $26 million in plaintiffs’ attorneys’ fees.
Case Study: In re El Paso

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Case Study: Del Monte
Background Facts
♦ PE firms KKR, Vestar, and Centerview sought to
buy Del Monte.
♦ Plaintiff shareholders sought preliminary
injunction, alleging that Barclays both advised
Del Monte and provided financing to the
buyers.
♦ Injunction granted; 20-day window to solicit
higher bids.

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Outcome
♦ No higher bids were made.
♦ Sale went forward with 75% of shareholders approving.
♦ Del Monte ultimately paid $65.7 million to shareholders.
♦ Barclays paid $23.7 million.
♦ $22 million in plaintiffs’ attorneys’ fees.
Case Study: Del Monte

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Insurance Issues
♦ Coverage under target company’s D&O Policy.
♦ Depending on timing of claim, coverage may fall under a run-off
endorsement: “The Insured shall have the right to a period of 6
years following the Effective Time in which to give written notice to
the insurer…”
♦ Acquiring company agrees to maintain
D&O insurance for the directors of the
target company if the target company is
to continue as a subsidiary of the
acquiring company.

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♦ Directors covered under Side A for either non-indemnifiable or non-indemnified
claims.
♦ Side B retention can be problematic for directors, depending upon trigger for Side A
coverage.
♦ Entity covered under Side B for indemnified claims.
♦ Entity coverage under Side C depends on how policy defines “Securities Claims.”
♦ “…a Claim…alleging a violation of any law…whether statutory or common law (including…the
purchase or sale or offer or solicitation of an offer to purchase or sell securities), which is: (a)
brought by any person or entity alleging, arising out of, based upon or attributable to the purchase
or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization; or (b)
brought by any security holder or purchaser or seller of securities of an Organization with respect
to such security holder’s, purchaser’s or seller’s interest in securities of such Organization.”
♦ “…a Claim…alleging a violation of any…regulation, rule or statute regulating securities…”
♦ Defense costs for the directors are likely covered.
Insurance Issues

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♦ In response to increased frequency of merger objection suits, some
insurers have increased the SIR.
♦ Example: “Section X, Limit of Liability and Retentions is amended by
adding the following: Solely with respect to any Merger or Acquisition
Claim made against any Insured for any actual or alleged Wrongful
Acts, the Insurer shall only be liable for the amount of Loss arising from
such Merger or Acquisition Claim which is in excess of the applicable
Retention amount stated below [higher than regular SIR for Side B and
Side C]. The Retention amount shall be borne by the Company with
regard to all such Loss, provided, however, no retention amount shall
apply with regard to any Loss under Coverage A of this Policy.”
♦ Underwriters report getting traction in market with SIRs of $1 - $1.5
million for mid-market insureds.
Insurance Issues: SIRs

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Insurance Issues: Bump-Up Exclusion
♦ Indemnity payments for an increase in the share price are likely not
covered under a “bump up” exclusion.
♦ Example: “In the event of a Claim alleging that the price or
consideration paid or proposed to be paid for the acquisition or
completion of the acquisition of all or substantially all the ownership
interest in or assets of an entity is inadequate, Loss with respect to such
Claim shall not include any amount of any judgment or settlement
representing the amount by which such price or consideration is
effectively increased; provided, however, that this paragraph shall not
apply to Defense Costs or to any Non-Indemnifiable Loss in connection
therewith.”

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Insurance Issues: Bump-Up Exclusion
If present in the target company’s D&O policy, does
the foregoing exclusion bar coverage for damages
caused by breach of fiduciary duty by the target
company’s directors?

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♦ No case has applied the bump-up exclusion to preclude coverage to
directors for breach of fiduciary duty claims.
♦ Bump-up exclusion has been applied to preclude entity coverage.
♦ Genzyme Corp. v. Federal Ins. Co., 2010 WL 3991739 (1st Cir. Oct.
13, 2010).
♦ Unusual facts.
♦ Exclusion there applied only to amounts paid to settle claims
against company, not for indemnity of Ds & Os.
♦ Delta Financial Corp v. Westchester Surplus Insurance Co., 378 F.
App’x 241 (3d Cir. 2010).
Insurance Issues: Bump-Up Exclusion

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♦ Award of plaintiffs’ attorneys’ fees not excluded.
♦ See, e.g., Carolina Cas. Ins. Co. v. Merge Health. Solutions,
2012 U.S. Dist. LEXIS 60765 (N.D. Ill. 2012), aff’d 2013 U.S. App.
LEXIS 14342 (7th Cir. July 16, 2013).
♦ Multiplied portion of attorneys’ fees covered because not
expressly precluded by policy.
♦ Other arguments
♦ Directors not liable for plaintiffs’ attorneys’ fee award in
breach of fiduciary duty cases. Cf. (§1983 claims; consumer
protection claims; employment discrimination claims).
Insurance Issues: Attorneys’ Fees

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♦ Suits are increasingly frequent with increasingly higher costs. Selected
filings from June – September 2013:
♦ Hulsebus et al. v. Belo Corp., et al. (Dallas County, TX) ($2.2B deal)
♦ Liu v. Asianfo-Linkage, Inc., et al. (Del. Chancery) ($890M deal)
♦ Crescente v. StellarOne Corp., et al. (W.D. VA) ($445M deal)
♦ Martin v. Warner Chilcott Public Ltd. Co. (D.N.J.) ($8.5B deal)
♦ Federman v. Maidenform Brands Inc., et al. (Del. Chancery) (575M deal)
♦ Fosket v. Brynes et al. (Del. Chancery) ($2.3B deal)
♦ Oliver v. Saks Inc., et al. (N.Y. Sup.) ($3B deal)
♦ Ansfield et al. v. Wren et al. (N.Y. Sup.) ($35B deal)
♦ Dyer et al. v. Minark et al. (Fla. 11th Judicial Circuit) ($285M deal)
♦ Josenhans v. Sourcefire Inc., et al. (D. Md) ($2.7B deal)
♦ Biedler v. Stein et al. (Del. Chancery) ($818M deal)
♦ Vicars et al. v. PNGS GP LLC et al. (Harris Cty, TX) ($750M deal)
Takeaways

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♦ High stakes cases litigated on an extremely expedited schedule, often
in multiple jurisdictions.
♦ Even if merger objection cases have a lower severity than securities
cases, primary insurers could be affected by their rate of recurrence.
Excess layers may have less exposure.
♦ From a claims handling perspective, an early opinion from defense
counsel on what standard of review the court will apply (business
judgment, enhanced scrutiny, or entire fairness), and the reasons
why, is critical.
♦ It is important to ask if there is anything that the board was advised
to do by its legal or financial advisors that it failed to do in advance of
the merger.
Takeaways

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QUESTIONS?

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Contact Us
John D. Hughes
Partner
Edwards Wildman Palmer LLP
Boston, MA
617.951.3373
JHughes@edwardswildman.com