This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The law school professor widely regarded as the “dean” of Delaware corporate law told a gathering of the state’s bench and bar in Wilmington Nov. 8 that he was just fortunate to be in the right place at the dawn of the age of hostile takeover litigation.
At the 35th Annual Francis G. Pileggi Distinguished Lecture in Law at the Hotel duPont, Widener University Delaware Law School Professor Emeritus Lawrence A. Hamermesh presented his unique perspective on more than 40 years of legal trends in an interview with fellow Widener professor Paul L. Regan. The law school provided an excellent overview of the event on their website.
Hamermesh said in 1976, he was fresh out of Yale Law School and working for the law firm Morris Nichols Arsht & Tunnel in Wilmington when he was assigned to a minority shareholder’s appraisal suit over the value of the stock of Kirby Lumber Corp.
He said that low-profile case involved issues that were common to later high-stakes hostile acquisition litigation that dominated the docket of the Delaware Chancery Court for decades. Bell v. Kirby Lumber Corp. 413 A 2d 137 (Del. 1980).
Morris Nichols frequently defended companies and their officers and directors, who usually took the position that the company’s worth should be based on its revenue — in Kirby’s case, about $120 a-share — but the plaintiff said its assets were worth $770 a-share.
Hamermesh said as merger and acquisition battles heated up through the 1980’s, hostile bidders seeking control of a bare majority of a target company’s stock so they could profitably sell off its pieces were focused on asset value.
“The court struck a compromise and averaged Kirby’s stock value between those two value extremes but that was just the beginning” of a long, see-saw battle between corporate officers and directors on one side and hostile bidders and activist investors on the other, he said.
Often, he faced his interviewer, Prof. Regan, in those battles during Regan’s stint at firm Skadden Arps, before Hamermesh traded the courtroom for the Widener classroom in 1994, where the two have steered the corporate law department.
They said they have witnessed the evolving struggle between corporate operating value and break-up asset value proponents put takeover litigation and the Delaware business courts in the national spotlight.
Often, the threat of a takeover that would bust up a company and its business made strange bedfellows out of traditional adversaries, such as management and labor who would be forced to put aside their differences to present a united front against a hostile bidder, Hamermesh noted.
Spotlight shifts to Delaware
After the U.S. Supreme Court decided in Green v. Santa Fe that merger challenges were the province of state law and not classic federal securities laws because they focused on fiduciary duty, not securities deceit and fraud, the Delaware state courts rose to prominence, the professors agreed. Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977)
They discussed the key Delaware decisions in the 1980’s that tried to balance the right of the directors to manage their companies, against the right of investors, as the owners, to decide the company’s ultimate fate.
Unocal and Revlon’s effect
The Delaware Supreme Court’s Unocal decision for the first time imposed an “enhanced duty” on directors to show that their takeover defense was a reasonable response to a threat to the corporation by a hostile bidder, they said. Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)
One year later, the high court’s Revlon ruling said in a sale-of-control battle the directors effectively become the auctioneers of the company and must take a hostile bidder’s higher offer, because the board’s defenses could be the product of conflicted interests. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)
“The Supreme Court said the board has to take the highest offer in a sale situation if its the end of the line for the business, but what if it will live on in some other form?” Hamermesh asked. In those cases, the board could consider other constituencies, including the interests of constituencies such as employees, creditors and suppliers. Compare generally, Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL, Slip op. at 30-31 and n.8 (Del. Ch. Oct. 7, 2019)(recent Chancery decision noting considerations that can be taken into account consistent with fiduciary’s obligation to act in best interests of stockholders.)
The takeover battles evolved into a struggle between long-term revenue proponents and the hedge funds, private equity companies and other activist investors who pushed for changes that would generate quick, short-term profits, he said.
Investing with grandchildren in mind
Today, the issue is still “shareholder primacy”, versus other interests – such as the environment — because “companies can benefit by dumping on the world, but what about my grandchildren — what kind of world will they inherit?” because of investor decisions, he asked.
The professor said like many investors, his stock holdings are through “investment intermediaries” whose short-or-long-term influence on the companies in their portfolio can be hard to gauge.
The iconic Delaware court rulings mainly address the fiduciary duties of corporate officers and directors, “but what duty do investment companies owe to shareholders?” he asked. The focus has been on the agency costs directors and officers incur in running the company, “but what are the investment intermediaries’ agency costs?”
Responding to Regan’s “where is shareholder litigation going?” question, Hamermesh applauded the Chancery Court’s 2016 Trulia decision that effectively stopped what he called “merger tax” lawsuits in which plaintiff law firms reaped attorney fees for quick settlements that provided no benefit beyond unimportant added deal information. In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 894 (Del. Ch. 2016).
In hindsight, he said, whatever his contribution has been to his field, his choice of corporate over criminal law meant that, “I was basically representing people fighting about money, and no one was going to die.”