Rock Products

APR 2018

Rock Products is the aggregates industry's leading source for market analysis and technology solutions, delivering critical content focusing on aggregates-processing equipment; operational efficiencies; management best practices; comprehensive market

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56 • ROCK products • April 2018 LAW Chauncey M. Lane is a partner at Husch Blackwell LLP. As a member of the Energy and Natural Resources team, he assists with buy-side and sell-side mergers, divestitures, asset acquistions, going-private transactions, debt and equity offerings, corporate governance and corporate restruc- turings. Chauncey.lane@hus-, 214-999-6129. Steven F. Carman is a partner at Husch Blackwell LLP. Now serving as leader of the firm's Energy and Natural Resources industry team, Carman has structured mergers and acqui- sitions, strategic alliances and capital formation transactions in excess of $7 billion. Steve., 512-370-3451. It is more than a 90 percent likelihood in the mergers and acquisitions universe – within hours after a public company announces a sale of some or all of its business, a lawsuit is filed alleging violations of securities laws by the company, alleging breaches of fiduciary duties by its board, and seek- ing class status for the aggrieved (though yet unknowing) stockholders. Virtually identical complaints are then filed by other law firms. Those law firms spend most of their time on the matter trying to convince the assigned judge that they, and they alone, are well-positioned to obtain stockholder relief. Once the judge has selected a lead law firm for the stockholder class, that firm reads the target company's preliminary proxy and demands a dozen or two meaningless changes in disclosure. The defendants (both the corporation and its board mem- bers) agree with the law firm to make a small handful of the requested disclosure changes. Importantly, the law firm then demands outrageous compensation for the "valuable service" it has rendered to stockholders before agreeing to accept some percentage of the amount requested. Draft Settlement The two parties reflect that arrangement in a draft settlement agreement that, importantly for the defendants, includes a waiver of rights any non-objecting stockholder may have to individually challenge the transaction or to sue the board. The judge approves what has been agreed to, the stock- holders' lawyer gets paid, and the transaction proceeds to closing. The whole process having devolved into negotiation of a "transaction tax" payable to the plaintiff 's bar for the privilege of timely completing a corporate transaction. The good news is that several state courts are refusing to play their designated role in this well-choreographed dance. Led, as is frequently the case, by an opinion in Delaware, courts are refusing to approve these "disclosure only" settlements. That is, settlements in which the stockholders' law firm has: (i) negotiated disclosure changes described as gener- ally "of trivial value," and (ii) then obtained far less trivial compensation. In early 2016, the Delaware Chancery Court expressed a preference for stockholders' claims of deficient disclosure to either be litigated to resolution or made moot rather than be the subject of a settlement agreement. Further, the court articulated a heightened standard for approval of a proposed settlement, requiring that any agreed upon supplemental dis- closure to stockholders be "plainly material." Breach of Fiduciary Duty The court seemed to be discouraging stockholders from alleging a breach of fiduciary duty by board members unless they were ready to prove that allegation. In part, the court implied that immaterial additional disclosure would not be accepted as a cure for the breach initially alleged. Not surprisingly, this decision was well received by those representing public companies, their board members, and the insurance companies who were frequently on the hook for at least a portion of the settlement payment. Several other states have now adopted the standard articulated in Delaware and some evidence suggests that the "transaction tax" is being paid less often and in smaller amounts. Most recently, a New York trial court issued an opinion strongly supportive of the Delaware standard and encouraged New York appellate courts to adopt that standard lest New York Violation of Securities Laws Every Transaction in Which a Public Company Sells All or a Meaningful Portion of Its Business Should Be Approached as Though It Will Give Rise to Litigation. By Steven F. Carman and Chauncey M. Lane

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