Search results for: dole

As reported in Law360, Dole shareholders have settled their class action arising from the Company’s 2013 take-private deal for a $114 million payout.  In August 2015, the Delaware Chancery Court had awarded Dole shareholders $148 million, in a combined appraisal and entire fairness action.  The settlement thus disposes of the Dole shareholders’ appraisal case as well as the shareholder class claims.

In a related story, Law360 has also reported that two California investment funds filed a complaint in Delaware federal court on Wednesday accusing Dole executives of a fraud designed to drive down the company’s price before the 2013 take-private deal, similar to the class claims that were settled earlier this week.

The Harvard Business Law Review (whose articles we’ve covered before) has published a piece concerning Delaware allowing blockchain to be used for company stock ledgers. While we have written about blockchain repeatedly, the new HBLR article examines how blockchain-based securities could fundamentally change corporate governance. Using Dell and Dole as examples, the author discusses how blockchain can solve delayed settlement and unrecorded transfers issues – issues that can be critical when it comes to determining the entitlement to appraise.

The author notes that blockchain implementation may create value for the economy as a whole but would not necessarily distribute the gains evenly. This issue–effectively a tragedy of the commons–could be resolved through government action. But markets may also play a role. As readers of this blog know, the majority of large U.S. companies are incorporated in Delaware, a state with less than 1 percent of the U.S. population. Part of the reason for that is a market for legal rules–Delaware law, and the Delaware courts, are a more hospitable environment for incorporation than other places. Likewise with blockchain. If early adopters find distributed ledgers result in lower transaction costs – and thus additional investors, more liquidity, easier (and cheaper governance) or similar – this may encourage regulatory reform in states looking to compete with Delaware.  Regulatory reform may, in turn, beget further adopters.

We expect continuing developments with blockchain, and its use with securities, in the future.

 

We’ve already seen other states apply their own appraisal statutes; we’ve covered Nevada before, for example.  We’re now also seeing other courts look to Delaware courts for the tools and methods behind valuation methods as well, not only in appraisal actions.  Thus, for example, an Arizona appeals court has cited Delaware appraisal cases in adjudicating the complex fraud and breach of fiduciary claims before it.

In Kottayil v. Insys Therapeutics, Inc., 2017 WL 3712196 (Ariz. Ct. App. Aug. 29, 2017), Arizona’s Court of Appeals upheld the discounted cash flow analysis employed by the trial court to award a minority shareholder a higher valuation than the company had determined in resolving the shareholder’s breach of fiduciary duty claim.

A minority shareholder of Insys had challenged Insys’ reverse stock split and Insys’ prior debt-to-equity conversion as diluting his shares.  After a bench trial to decide the shareholder’s breach of fiduciary duty claim, the trial court determined that the share price for the debt-to-equity conversion was fair but the reverse stock split was not.  In determining the fair value of the reverse stock split, the trial court found that traditional valuation methods proved unreliable and that the best approach was to define a range of values instead.  The trial court set the low end of the range at $53.2 million, based on discounted cash flow analyses performed by third parties between 2004 and 2009, and the high end of the range at $151.5 million, based on IPO valuations.  The trial court ultimately awarded the minority stockholder damages based on a valuation of $151.5 million, the highest value in that range.  The Court of Appeals upheld the trial court’s ruling, finding that the discounted cash flow analyses the trial court relied upon for both the debt-to-equity conversion and the reverse stock split used reasonable inputs and methodology.

In discussing the valuation analysis, the appellate court found that valuation is not purely a matter for experts and that valuations by the company could be relevant to the determination as well, citing the well-known Delaware Dole decision.  The appellate court also cited Delaware appraisal law in rejecting certain discounts to fair-value analysis that the parties urged the court to consider.

Delaware appraisal continues to impact other courts’ determinations of valuation approaches throughout the country and outside the US as well.

In a recent article on PolicyHolder Pulse attorneys from Pillsbury explore whether Directors and Officers (“D&O”) insurance covers, or could be considered to cover, Delaware appraisal claims.  Critical to this analysis is whether an appraisal case raises issues of “Wrongful Acts” by the Board – including, for example, collusive behavior, or other process defects.  The Pillsbury authors note that appraisal claims are often (though not always) coupled with breach of fiduciary duty claims (something that occurred in Dole), which involve claims of wrongdoing.  Of course no proof of wrongdoing, or even of defective process, is necessary for a successful appraisal action.  They also suggest Securities Claim coverage may be available, depending on the terms of the specific policy.  D&O Diary, after discussing the arguments made, summarizes the article as finding that there “may be substantial grounds” for arguments in favor of coverage.

As we have previously covered, Delaware has been considering whether to allow Delaware corporations (with Delaware being the site of the vast majority of appraisal litigation) to use blockchain platforms to issue and trade shares.  As of July 21, that has become the law with Delaware’s governor signing a bill allowing blockchain to be used for the maintenance of corporate records, including stock ledgers.  Blockchain is a concept of distributed ledger, as opposed to the centralized ledger system of DTCC.  From JD Supra: “One practical reason for using blockchain technology to track the transfer of corporate securities stems from a long-standing uncertainty surrounding the property rights of investors who ‘ultimately have no identifiable relationship with the corporate issuers of investment securities’ that they purportedly hold.”

Continue Reading Delaware Gov. Signs Blockchain Bill – Possible Impact on Appraisal

When the Delaware legislature recently struck down fee-shifting bylaws — those internal corporate laws that force losing plaintiffs to pay the company’s legal fees — it prompted a slew of commentary (e.g., here and here) suggesting Delaware may lose its place as the top venue to incorporate.  Nevada has been making a play to provide a Delaware-style business-friendly climate.  (See “Delaware’s loss of certainty could be Nevada’s gain.”)  Whether Nevada supplants Delaware as the leading corporate venue remains to be seen.  But it got us thinking — what does appraisal rights litigation (called “dissenters’ rights” in Nevada) look like for professional investors in Nevada corporations?  As it turns out, Nevada is not nearly as friendly a place as Delaware for professional investors whose shares are at risk of being cashed out for an amount below the going-concern value of their investment.

First and foremost, holders of securities in an exchange-listed Nevada corporation without a controlling shareholder (10% or greater) are not entitled to dissenters’ rights at all.  Nevada law allows for exceptions where the articles of incorporation provide otherwise or at least part of the merger consideration is not cash or shares of most kinds of corporate stock, but by default there are no appraisal rights.  In contrast, Delaware appraisal rights are generally available in a consolidation or merger for any series or class of stock.

Moreover, an investor still needs to clear several hurdles to get an appraisal claim before a Nevada judge.  Indeed, the investor and the corporation need to exchange three separate notices before a dissenter’s petition is even filed in court.  Initially, investors wishing to dissent from a merger or other business combination subject to appraisal rights must first, before the merger vote, deliver a written notice.  Investors must also be sure not to vote their shares in favor of the merger or consolidation.

The shareholder’s notice prompts a response from the subject corporation, to which the investor must respond by (i) demanding payment, (ii) certifying that he or she was actually a beneficial owner, and (iii) surrendering his or her stock certificates as formal evidence of stock ownership.  The company is then required to tender payment to the shareholder of an amount that it considers to be the fair value of the shares.  The company is highly incentivized to follow this procedure — if it does not, only then may an investor file its action directly and, if the investor prevails, he or she is entitled to recover the expenses of the lawsuit.

Presumably, the corporation’s payment will be insufficient.  But even then, an investor cannot go directly to a judge.  Instead, the investor has to object in writing and make a demand for what he or she thinks is the fair value of the shares.  Only then, with the payment demand unsettled, will a petition be filed in court.  Also, it is the company — not the investor, as in Delaware — that files the petition, and the company can wait two months to do so.

Two other considerations bear mention.  First, unlike Delaware, Nevada does not provide for an interest rate floor on appraisal awards (Delaware appraisal awards accrue at 5% above the Fed’s discount rate and are compounded quarterly).  Nevada law instead says that a dissenter’s award will be for fair value “plus interest.”  Second, there are very few decisions interpreting Nevada’s dissenters’ statute, making litigation in Nevada much more unpredictable for investors and companies alike.

Accordingly, professional investors who utilize appraisal rights to maximize their investment returns will not cheer on Nevada to supplant Delaware as the seat of American corporate law.