Corporate Governance Issues Related to Mergers and Acquisitions of Delaware Corporations

Welcome everyone. Thank you for attending today's CLE webinar on corporate governance issues related to mergers and acquisitions of Delaware corporations. Your presenters today are Mr. Frank and Michael Vargas. Mr. Frank Vargas has more than 30 years of experience representing technology companies with regard to corporate law, mergers and acquisitions, and securities law, as well as complex contract and licensing issues. He has represented some of the largest technology companies in the world, as well as investment banks and venture and private equity funds. In addition, he spent time as the executive vice president and head of corporate transactions for a large investment bank. He has a JD/MBA from the University of California, Berkeley, and AAB from Harvard University with honors. Mr. Michael Vargas is a business and securities lawyer counseling primarily private and venture-backed companies from formation to exit. Michael counsels clients in a wide range of legal issues including corporate law, corporate finance, M&A, corporate governance, commercial transactions, and IPOs. In addition, Michael teaches corporate law for startups and business organizations at Santa Clara University and regularly publishes on issues of corporate law and governance. Michael is a graduate of the University of Minnesota Law School and received his bachelor's and master's from the University of Southern California. If you have questions during the presentation, please type them into the Q&A box. Please direct them to all the panelists. Questions will be addressed at the end of the webinar. A code will be shown during the presentation. Please write it down as you will need it in order to claim your CLE certificate. After the presentation, we will email you with instructions on how to claim your credits. This presentation will be recorded and will be posted on our websites for future reference. I will now give the floor to Mr. Frank Vargas.

Thanks, Sylvia. Good afternoon, everybody. I appreciate your joining the seminar today. I'm going to spend some time talking about corporate governance issues, fiduciary duties related to mergers and acquisitions, and focused on Delaware corporations. The reason for that is a substantial number of public companies are Delaware corporations, and in our practice, which is, you know, high technology, the same is true. Most of our clients are Delaware corporations, and other states look to Delaware for guidance in fiduciary duty analysis. With that, I want to start with— sorry, now we're having trouble. There we go. As most of you know, from your law school or practice, under Delaware and most states' laws, directors have two and possibly 3 duties. The first is duty of care, second is duty of loyalty, and sometimes some commentators have a duty of good faith. Others will put that under the duty of loyalty, but for the purposes of this conversation, we're assuming that is separate from the duty of loyalty. Because most of the case law that's happened in Delaware in the last 40 years has dealt with the duty of care. We're going to focus on that. We will spend some time on the duty of loyalty when we're talking about conflict of interest and controlling shareholders, but most of the discussion will relate to duty of care. As you know, the duty of care and the duty of loyalty are the standard, and the standard becomes the business judgment rule, and this has been in place for a long time. But if in certain situations, for example, conflicting interest or controlling shareholder, the board may lose the protection of the business judgment rule. And then the, the analysis which a judge will look at the transaction and look at the board's actions will change. These are called heightened scrutiny or entire fairness, and we'll talk more about those. The duty of loyalty is generally just taking an opportunity of the company for oneself. That's easy. Self-dealing, another easy one. The one that comes up most in mergers and acquisitions though is where a party is on both sides of a transaction. That's what the courts call conflict of interest, where you and I would see it. Yes, we do see this in day-to-day transactions as well, where a director may be involved involved in a company in which the corporation on which he sits as a board member may do a transaction, that is also a conflict of interest. But we're focusing on the mergers and acquisitions setting at this point. The duty of care, which we'll spend a lot of time on, in Delaware, unlike California and New York, for example, there's not a codified standard. Instead, the standard is set by the the Delaware courts, and there's a significant amount of court law out there for which we can look at for guidance. The law changes sometimes frequently, sometimes less so. The legislature steps in from time to time to make things easier if they see something that's making, possibly making it too difficult for a director, board of directors to do its job. The legislature might step in. But in any event, most of the duty of care that we've got is from case law. The other thing is normally— excuse me— the standard for duty of care is the ordinary prudent person. Like many standards in law in general, We're looking to the prudent person, but as case law has shown, that prudent person is someone with the skills necessary to act as a director. So keep that in the back of your mind. For example, in Caremark, which was a case from 1996, Caremark International Inc. Derivative Litigation, the judge in that case, for the probably the first time really set forth that directors have to make sure that there are in place information reporting systems to enable senior management and the board to be able to make informed business decisions. Before this, there was a lot of case law which hinted around this, but Caremark was the decision where really the judge in that case set forward. The judge also set forward the standard for the plaintiff, what the plaintiff has to prove in order to allege that they violated it. And that there's 3 parts to that. One is the directors knew or should have known that violations of the law were occurring. And in either event, the directors took no steps in good faith to prevent or remedy the situation. And such failure approximately resulted in the losses complained of. And if you think about that, that's a very high standard. So the duty of care, as in the— and combined with the business judgment rule, is very, very difficult to overcome. And it provides the protection that the courts and the legislature has tried to give to directors. They run— understand it's a tough job, and so they want to make sure that directors have the ability to make decisions without the worry that a judge with no business expertise will be able to second-guess them. The, uh, the courts have also said that even if supervision is required, they're not the ones to do that. They think business people should do that, the shareholders Directors should be managing themselves, that sort of thing, making sure that they get good people. The judges are not equipped. The moving now into the M&A setting, how does the duty of care and duty of loyalty affect decisions once a company has decided to be acquired or is acquiring or is being acquired? How does that affect? And the first is decision that most lawyers will look to is Revlon, and that decision, which was back in, trying to think of when that was, is Revlon versus McAndrews, and in Revlon, the court, first of all, they came and said as soon as the, the company makes a decision to sell itself, or if it's inevitable, and there have been lots of court cases trying to figure out what is inevitable, and there are more examples than I have time to talk about today, but that inevitable is something that, again, if you read Revlon, if you read, and you should, cases following Revlon, referring to Revlon, you'll see that the courts have gone further and further and tried to help people with this, this whole concept of when is the decision to sell, when does it occur, and also when is it inevitable. But certainly where the, the board has decided to sell and there's no question about that, then Revlon says that we're going to impose an enhanced scrutiny standard. So rather than the business judgment rule simpler standard enhanced scrutiny. And this will apply for mostly cash deals and then mixed transactions. So it doesn't normally apply in stock-for-stock deals. The reason for that is that the courts have said, look, if the shareholders are going to continue to be shareholders in a large, uh, organization with a lot of different shareholders then we don't feel that we need to be assessing this enhanced scrutiny. However, where they're being bought out, where they will no longer be part of a potential upside, whereas a stock-for-stock provides, or, you know, in that, in the case where, let's say for example, the company's being acquired, but there's a controlling shareholder on the other side, in that case, the courts might impose enhanced scrutiny also. Even though it's a stock-for-stock deal. And again, there's many, many cases which, you know, I encourage you to read, which talk about the analysis. And there's no clear-cut answer. It's almost a, the courts say, we know it if we see it. Also these mixed transactions where a lot of us do transactions where it's partially in stock, partially in cash. And the courts have again said, well, we can't really tell you a percentage. You know, there have been court cases where they've said 50%, if it's under 50% cash, you're fine. And there was a case that I saw where it was under 50% and they said no, enhanced scrutiny. And it was the facts of the case. They said because of the facts of the case, we need to look at this by enhanced scrutiny. So what does it mean when we say enhanced scrutiny? What it means is the court is gonna look at the totality of the deal. And this also goes to entire fairness, which I'll talk about later. But one of the things that I'll point out is a Unocal, the Unocal case, which occurred actually before Revlon, and it was a hostile takeover case involving Mesa Petroleum. The court was saying there's a lot of potential in an acquisition for the board to forget about the needs of the shareholders and instead focus on the needs of the board, the employees, creditors, somebody else. And Revlon, the other thing that Revlon said was Revlon reaffirmed that the only thing that the board needs to consider or should consider, the main thing, is maximizing return to shareholders. That's it. And Michael can talk a little bit about— more about this. He's actually the committee chair for the American Bar Association on social entrepreneurship. And this whole concept of maximizing shareholder value and social entrepreneurship has been an interesting episode for the Delaware legislature, which has created different types of companies to take care of that thing. And so is California, Minnesota, a number of other states. But anyway, Revlon says maximize shareholder value. That's it. The other thing that Unocal said was if the board takes action, for example poison pills, other protective provisions, they have to have a reasonable belief that there was a danger, uh, to the corporation that these protections were going to protect against. And those actions have to be reasonable. Um, so, you know, saying that, that you can't have any offers, that's going to be unreasonable. Um, or having an offer that really makes it obvious that the insider offer or another offer is better. Is it when we— I'll talk a little bit about negotiation outs and breakup fees, but if the breakup fee is so onerous that there's no way that it, it would make any kind of business sense to not do the deal, a court might look at that and say, no, that's not reasonable. You know, the, the board breached its duty. The next point is, as I said, there's the Revlon standard, which imposes this heightened scrutiny standard. The next level of standard up comes into place when you've got a sale of a controlling interest. And, uh, I'm sorry, the sale of controlling interest is important because again, yeah, under Revlon, the court is placing the burden on the board to obtain the highest value and if they don't, then they have the enhanced scrutiny. So let me, let me stop a minute and talk about, from a practical standpoint, those of us who are advising board members in a board meeting considering an acquisition. Many of us were taught when we were young associates that less is more. Put less information in the board minutes. Because we don't want plaintiffs' lawyers to get access to that information and somehow use it against the company and the board. In the case of an acquisition, the opposite is actually true, because what you want to do is to make sure, as the counsel to the company, that you are reflecting the intense deliberations, the significant deliberations that the board has taken place. And the things that you should counsel the company to do, to consider doing, and that you want to make sure that the board minutes reflect include the following list. And this is not exclusive, there are more things you can do, but these are ones that, that I think really, uh, and I consider are important, and I try to do whenever I can. Especially the first, a fairness opinion, especially if you're dealing with a public company, a fairness opinion is almost a must. And it's, it's very important because The Delaware code allows, and fiduciary duty allows you to rely on experts. If you're not an expert on valuation, being able to hire an expert is a great way for you, for the director, to push his fiduciary duty onto someone else, which then they can rely on. The second is early on figure out if there's any conflicts of interest. If there are, Is the majority of the board conflicted? If they are, consider creating a committee. The reason for that is because this— the court cases have said if a disinterested committee or disinterested majority of the board makes a decision, you can push back to the Revlon— to the business judgment standard. So that's really important that you understand, are there any conflicts? You might ask, well, what's a conflict? And unfortunately, we don't have time to go through all the different conflicts that you can have, but in general, the obvious ones are what you're looking for. Again, a director on both sides of the transaction, a director who's getting a fee— he's the investment banker, he's a partner in the investment bank. A director might be a partner in the law firm that's doing the transaction. Those are the type of conflicts that are obvious that you want to take care of, but there are non-obvious ones as well. You know, there are situations where, for example, a venture capital fund has a right to elect a director, and the venture capital fund is going to receive remuneration which is different than everybody else. That could create a conflict of interest for that director. As I said, interested directors should not be part of the negotiation. The board, once the decision to sell has been made, the board should be encouraged to look for additional purchasers and different types of buyers. You know, you can't say, oh, it's a big company, they're going to have bigger pool of buyers than a smaller company. You have to actually go out and do the work to find, and that's where retaining an investment bank whenever possible is helpful because again, the investment bank can go out there and do a search, and the board can then rely on that investment bank. And then what I do, and I think is a good policy, is to ask the investment bank during the board to, to give you a presentation of how they did the search. Who did they talk to? What did they find out? What were the results? You want this information in the board minutes to prove that the board of directors did its job. And the board should consider, again, the peculiarities of the company, the size, industry, because that may dictate a different path to get a great price. You might only have 2 potential buyers, and that's fine, as long as, again, the investment bank or whoever is doing the sale, it makes that clear. The board probes is that true, is that not true. So that's really important that as the counsel to the company that you guide the board. The only other thing that I will add is when I'm running a board meeting involving it, what I usually will try to do is I will poll each board member to ask them, you know, do they have any thoughts, do they have any questions, because I really want each board member to speak and I want to put that in the board minutes because I want to make sure then it's clear that each board member was involved and understood what was going on. One thing that's very important, and for anybody who doesn't use a standard boilerplate certificate of incorporation from Delaware, from, you know, PLC, Practical Law, or some other, you know, good well-known site, is consider putting in your certificate an exculpation provision allowed by Section 102B-7 of the Delaware Code. As most of you know who practice in Delaware, what this does is it says it exculpates the director for a breach of duty of care for monetary liability. And what that means is that even if a director is deemed to have breached their duty of care, the plaintiff can't get monetary remuneration, and they have to be able to prove a breach of duty of loyalty, um, or bad faith. And those are very difficult to do. It's, it's, uh, many cases say you basically, you basically have to prove that there was corporate waste. But that's something to keep in mind. And if you do have that, and there's— I was reading a commentator the other day who was saying the fact that you can get exculpation and quorum, which we'll talk about in a minute, really makes it very, very difficult today for a plaintiff's lawyer to prevail in a suit today, especially after the closing. As I said before, the conflict of interest or controlling shareholder, over and above Revlon, changes the fiduciary duty of the board, and it becomes what's called entire fairness. So if there's a conflict, if the board is conflicted, meaning a majority of the board has conflicts of interest— and keep in mind that they could be different conflicts of interest, so it's not everyone has the same conflict, it could be different ones— but if the majority of the board is conflicted or the transaction involves a controlling shareholder, then the courts will look at this entire fairness standard. And the entire fairness standard is a higher standard than the business judgment rule and more difficult than the enhanced scrutiny. Entire fairness looks at— it has to be both fairness and dealing. So they'll look at the structure, the negotiations, the timing, the disclosure to management and shareholders. They'll look at all those things, and they'll look to make sure— and this is important when we get to Corwin— they'll look to make sure that the information provided to shareholders is complete. What this means is, in your information statements, whether you're doing a proxy statement or otherwise, needs to be well-crafted, well thought out, and looked at with a little bit of a jaundiced eye, meaning you're looking for opportunities for someone to say your disclosure wasn't complete. That needs to be very well scrubbed by company counsel. And companies many times will often not want company counsel to get involved until the last minute because they're worried about cost. And this is where company counsel needs to be very careful to say, this is one of the times that you do wanna pay us because this is very important. The second area is fairness in price. You need to make sure that the price was brought about in a fair manner. And interestingly enough, some courts have said you can have an unfair dealing but a fair price. And that didn't make a lot of sense because people have thought, oh, it's got to be both fairness and dealing and fairness and price. But the court, a specific court, said no. If fairness and dealing, it wasn't fair, but the price was fair, and so therefore everything's fine. Corwin, which I've talked about, was a case in 2015, very important case. Which has furthered this movement towards further protecting the directors from liability, you know, absent situations of fraud or bad faith. Basically, Corwin allowed for cleansing in situations where there was a conflict of interest, and frankly, it applies in other situations, but specifically in an M&A transaction, it applies And what it said was, if you have a vote, if there's not a disinterested board, you can then say, we're going to have the disinterested shareholders approve the transaction. But again, they must be fully informed and it must be uncoerced. And again, that uncoerced is a fact situation where the courts will look at facts that may indicate that they were coerced. Where the only choice was this or something horrible. That might be a coerced vote. So, you need to be careful that Corwin says it really must be uncoerced and fully informed. Again, back to that information, must be provided the information. Again, back to Unicall. Again, in the heat of the battle of a contested transaction, the board may be tempted to put in place takeover protections. But again, as I stated before, you need to be careful to make sure that— sorry, you need to make sure that the company has good reasons for the poison pill or whatever else they might put into place. White Knight used to be called greenmail, now can't have that, although in some sense it is. Anyway, you need to have good reasons, and especially if these are going to be looked at enhanced scrutiny or entire fairness, these defensive measures need to be considered carefully. The fiduciary out— traditionally, those of us who've been practicing a long time, when I first started practicing, we would always see in letter of intents a standstill provision. For those of you who don't know, a standstill provision is just an agreement by the acquired party that they won't consider or talk to any other potential buyers for a period of time. However, the Delaware courts have said that type of provision may prevent the— under Revlon, may prevent the directors to obtain the highest price available. And therefore, that provision is not allowed. For public companies, for public companies, the way that public companies have dealt with this is they have what's called a fiduciary out. And usually it says, but we're, you know, the standstill, but we're allowed if we get other offers, we're allowed to consider them. And, you know, if you're the acquirer or potential acquirer, you may have spent quite a bit of money and time trying to put together a deal to do this deal and therefore don't want to allow the potential target to talk to a lot of people. So you're going to want to try and put something in place to at least recover your cost, to make it so that it's expensive. And so oftentimes there's this breakup fee. But again, keep in mind that the breakup fee can't be too large, or it can't be too onerous, because if it is, then the courts will say, well, it's not real. The, the fiduciary out is not real. The board really doesn't have an option. The shareholders really don't have an option. It just doesn't make it a fair deal. Now what I'd like to do is turn things over to Michael so he can talk about the developments in the most recent developments in this area of fiduciary duty. Michael?

Sure. So really fast before we, before we jump into the recent developments, we did get a question and so I want to answer it and then any other questions feel free to drop them in the Q&A or in the chat window, and we will try to answer them at the end of the webinar. But the one question we did get is, does fully informed mean that the shareholders are informed of the conflict of the directors? And the answer is yes. Yes, in order for the shareholders to be fully informed, you know, to get Corwin cleansing, they do have to be aware of the conflict of interest of the directors. You know, then that, and that applies regardless. In order for the shareholders to be fully informed in any, in any vote, they need to be informed of the conflicts of the directors if they exist. So, so that gets to that question. So, so moving on, I really just want to highlight these cases for you. I don't necessarily want to get fully into the details, although in Basho we will get into the, the facts of the case because they're are so important. But I just wanna highlight these cases for you so that you have an idea of what was going on in 2018 and what are the big developments that you need to keep an eye out for. So starting with Basho. So Basho, you've got this company called Basho Technologies. It was an innovative technology company founded in 2008. And the company brought in a number of investors, including a guy named Chester Davenport who created this Georgetown Basho Investors. As his personal investment vehicle. And so he invested, he had, you know, what, unbeknownst to the other people involved, he had a goal of selling the company by 2013. And this goal was obviously not shared by the founder or the CEO of the company at the time. And so, you know, over the course of a number of series of preferred stock, you know, Davenport and Georgetown eventually acquired significant holdings in the company and blocking rights. So they could block future transactions that they didn't like. And so that gave them, you know, a lot of control. And eventually the fundamental question here would end up being, did it create de facto control that led to a higher standard of review like Frank talked about? So the facts that led up to that question is that Georgetown started using its blocking rights to block important and very good investment opportunities for the company, which eventually forced the company to take out loans from Davenport and Georgetown rather than getting outside investment. And he continued to do this on a number of occasions, or Davenport, excuse me, continued to do this on a number of occasions. And Davenport was on the board, so he had insider information. He had the ability to sort of channel what was going on or channel the investment opportunities to Georgetown rather than to outside new investors. And of course, he was also protecting his control. So in 2013, the company needed another round of funding and Davenport, who now had control also over the company's financial advisor, sort of, was trying to steer the company into yet another round of loans from Georgetown that would be extremely onerous, and also a second financing by Georgetown. And the second financing was gonna carry a 3x liquidation participating preferred right, and an 8% cumulative dividend, the ability to convert shares into common with 10 voting rights each, extensive additional blocking rights, and 5 of the 7 seats on the board. So it was pretty— it was a pretty intense, intensely bad deal for Basho. A few days after, they got a better term sheet from an outside investor. And because Davenport was trying to protect himself, was trying to protect Georgetown, he used a lot of antagonistic and threatening and manipulative, you know, activities and behaviors to essentially sabotage that process. And the deal eventually did not go forward, and the company, out of sheer financial necessity, was forced into yet another deal with Georgetown. And so after, by the time the Series G occurred with Georgetown, the— excuse me— Davenport now had complete control, and he had real control. He controlled the board, he installed himself on an executive committee, and he started, you know, paying out handsome consulting fees to his allies and taking massive loans out from Georgetown, or forcing Basho to take out massive loans again from Georgetown. So, as I said, the big question here— eventually the company floundered and went into receivership. Because he drove it into the ground. So the big question here is whether Georgetown, as the investor, owed any fiduciary duties to Basho during this period when they didn't have actual control. And so the rule— Delaware does have a rule that says, normally stockholders are not going to be considered controlling if they don't have actual, you know, real control over the company. However, they will— we will assume that they are controlling shareholders if they exercise sufficient influence, quote, that they as a practical matter are no differently situated than if they had majority voting control. Now note here that potential control is not enough. The stockholder must actually wield that power. And so in other words, it's not whether you have the control, it's whether you use the control. So in this case, we got a decision from Vice Chancellor Laster, who's becoming kind of the new Chancellor Strein, for those who know a little bit about the judges in Delaware. And here, you know, Vice Chancellor Laster reminds us that there's no— in this case, if we're looking at control, whether or not someone is going to have control imputed on them, no one indicator is going to control. You have to look at a totality of the circumstances. And so if there's only one thing that says, yeah, maybe they had control. So for example, these blocking rights, you know, Vice Chancellor Lassner said no, blocking rights alone may not be enough. You need more than just that. But in the end, Lasser did give us 5 indicators that he said strongly suggested Georgetown exercised de facto control. And these— and the first one, and I think is again, you know, very important, is these blocking rights. The use of these blocking rights in a manner that left the company no other option than interested transactions with Georgetown and with Davenport. And there's this sentence in there that I think is so key, especially if you are representing venture-backed companies or venture investors, is Vice Chancellor Lasseter says, "When cash is like oxygen, self-interested steps to choke off the air supply provide a strong indicator of control," right? And so, so if you are in a— if you're representing a company that that is venture-backed and cannot survive without that funding, right, the use of these contractual rights is going to be more important in determining whether they have control. Whereas if this is a revenue-positive company, then use of blocking rights may not necessarily be as important because the company can survive on its own. It doesn't need that extra funding. So, moving on, there were other factors as well. You know, Laster pointed out, Second, Davenport's efforts to spread misinformation, Davenport's interference with management, Davenport's influence over the financial advisor, and his insistence on the Series G financing and his threatening and combative behavior. And so all of these things together told the vice chancellor, you know, this is an instance where Davenport and Georgetown have effective control. And so what that does is that bumps us up to entire fairness review rather than the business judgment rule. And for the same reasons that I just pointed out why Lasser found control, he also found that the process was not fair. And in the end, he also, again, because, you know, as Frank pointed out, fair price tends to be even more important to the court than fair procedure, Laster points out, hey, there was a superior term sheet on the table and everybody knew it was superior. Even Davenport admitted that it was superior. And so if you have that, you know, that is strong evidence that we didn't have a fair price in this case because you had a better term sheet and that got blocked for self-interested reasons. So in the end, Georgetown and Davenport got hit with $20 million in damages here. And so I think there's two observations here that I want to make because I think they're important. And the first one is, in discussions with Vice Chancellor Lassner and others at the last ABA meeting, the consensus seemed to be that this decision doesn't really change the fundamental advice for either businesses or investors. However, it does illustrate how de facto control can arise. And so this should be part of, if you are representing venture-backed companies or venture investors in an M&A deal or any kind of financing, it's important to have this case in mind when that— when the venture investor is exercising any blocking rights or any contractual rights, and remember to engage with the company in a manner that isn't going to trigger this case. And that kind of leads us into the second point I want to make here, is to really ask, you know, when you read this case, you can and if you read this case, you can decide for yourself. But what was the role that bad faith played here? The duty of good faith wasn't brought up by the vice chancellor here, but you gotta wonder whether that did play a role, because look at multiple of these factors that Laster came up with involved bad faith, involved misinform— director misinforming or the shareholder misinforming people, involved undue influence, involved combative and threatening behavior. And so it's interesting that bad faith didn't come into play here. But you gotta, you know, so perhaps another, some more advice that you might give a client in this situation might be, look, you know, in addition to being fair about using your blocking rights, also don't be a jerk, right? Don't exercise bad faith. And that is another thing that I get from this decision and that I think you know, when you read it, you'll see that Lasser was clearly harping on these points multiple times. And so it's something to think about. Let's see. So I think we had another question that says, does BASHA require a stockholder to exercise its blocking rights in good faith? As opposed to gaining leverage over the company. And so I think I pointed out something at the very end there that I think sort of answers that question, but I don't think it necessarily requires that you not use your blocking rights to gain leverage over the company. I think, again, it's a totality of the circumstances. And if you're exercising your rights in bad faith, that may be something that eventually snowballs into you being, having control imputed on you. So I think that would be my answer to that question. So let's jump forward while we still got a little time to Acorn versus Fresenius. And this is another Laster case and very similar. And I don't want to get too, too far into the details on this one. But I think this is, again, a case where you have the courts not necessarily changing the rule, but using an extreme set of facts to illustrate what the rule is at the extremes. And so by providing, you know, we've had other cases, then-Chancellor Strine has given us cases where a materially adverse change was not sufficient, or a change was not sufficient to constitute a materially adverse change. And now we've got a decision by Laster which says, okay, this— these circumstances do rise to that level. And so let's see. So this one is pretty straightforward. This case is pretty straightforward. There was a, you know, there were lots of issues going on in this company. As you can see at the very bottom, right, there was a breach of regulatory compliance that alone cost the company $900 million in value. There was a huge loss in market price, the EBITDA and EBIT. Both dropped significantly. And so, but that alone wasn't enough, right? The Vice Chancellor really harped over and over and over again on this idea of whether these changes were durationally significant. Did these changes, you know, were they going to continue for an extended period of time? Did they continue to continue for an extended period of time? And in this case, the material adverse changes that you can see here, Lasser did point out, look, these changes continued for a full year. And then, and all of the expert testimony was that they were expected to continue because this company, the company had said the result, these changes were the result of new competitors coming into the market. And, you know, the vice chancellor pointed out, hey, that's not going to change. Over the next couple of years. So this is clearly, this is clearly durationally significant. And so, yeah, so the chancellor sort of harped on that over and over and over again, and that really is an important piece to be keeping in mind when you're talking about a materially adverse change, right? Because before now, the courts had never recognized a MAC as being sufficient to block a deal before. And so this decision provides us, less than changing the rule, provides us an illustration of what is sufficient. And so that's the big one on that. So we can move forward.

All right.

So now we're getting— let's go— we're going back to the Corwin cases that we talked about, or that Frank talked about before. And so as Frank talked about, these are cases where a challenged transaction was approved by the shareholders. Recall that normally a fully informed shareholder vote can ratify otherwise tainted transactions. But the two cases we're going to be talking about here, Zura and Tango on the next slide, these cases are about whether or not the shareholders were sufficiently informed. About what was going on. And so we'll get, so these will illuminate some of what the Corwin standards applies to. But before I jump into them, I do wanna point out that these cases were, happened to be, happened to occur on denials of a motion to dismiss. So take them with a grain of salt. The judges are giving the plaintiffs the benefit of the doubt here. And so the facts may not necessarily be sufficient to, to prove anything one way or another, but given the benefit of the doubt, maybe there's something there. That's really what the vice chancellor— and it's the same vice chancellor on both cases— that's really what he's saying here. So in Zara, this is the case. You have a CEO who is negotiating a potential merger. And I was struck in reading the case by how mundane the CEO's actions were. To be fair, he was acting without, in a lot of cases, he was acting without the knowledge or approval of the board, and he clearly lied about certain things, and certain information was not included in the information to the shareholders. However, he was not doing anything necessarily that a particularly overzealous CEO looking for a potential acquirer wouldn't have done. You know, it's something that, you know, you might, as a reasonable shareholder, might shrug and say, okay, you know, maybe some of that information wasn't disclosed, but, you know, it's probably not material to us as long as it's a good deal. But the court, what seemed to have flipped the scenario on its head for the court in this case was one fact in particular, which was halfway through the negotiations the CEO discovered that a proxy fight was brewing and his job might be in jeopardy, right? And so the court said, okay, that changes things, right? We've gone from a potentially overzealous CEO here to a potentially self-interested CEO, right? Because if he didn't get them, if the merger didn't go through, he was likely going to lose his job. Whereas the acquirer that he ended up finding in the end promised to keep him on as the CEO, and eventually he got fired anyway. But that fact in and of itself could be sufficient. And again, we're on a motion to dismiss. So the question is whether it could be sufficient to prove self-interest. So that's— in this case, that was really the question. And whether— and since what we have here is sort of flipped on its head, right, because of that one fact, the CEO and the board lost Corwin cleansing in this case, right? And so it was— the entire thing was subjected to a higher standard of review. And so again, if you— because certain things weren't disclosed and because there was a potential self-interest issue, right, you lose Corwin cleansing. So again, it's that importance of disclosure here. And then the court also, worth mentioning here but not as important I think, is the court dismissed a complaint against the purchaser for aiding and abetting. And the reasoning for that is that there must be both, they both had to know that the CEO was violating his fiduciary duties, which they may or may not have known here. And they also had to participate in that breach. And there's no evidence here, and the vice chancellor points this out, there's no evidence here that the purchaser knew anything about this breach or that they participated in it. It was really the CEO that was, that was self-interested. So that's that case. We can move on to Tango here. So this case, in this case, again, it's a Corwin cleansing case. And in this case, the management of the company seems to have done something fishy. The entire series of events is is triggered by what looks like a major misrepresentation in their SEC filings requiring a restatement. Rather than focusing on the restatement though, the board starts looking for a strategic buyer. And here again, I think is the important part. And they begin to reward themselves with lavish compensation packages, much of which is contingent on finding a buyer, right? So they're incentivizing themselves to sell the company not to manage it properly for the shareholders with proper disclosure. And so the resulting lack of attention to the restatement results in the company getting delisted from NASDAQ and missing a number more SEC filings. So eventually, the board does find a strategic buyer, and the transaction is approved by the shareholders, right? And so the question again is whether we get Corwin cleansing here. Does the shareholder vote cleanse the problems, the self-interested actions of the board. And the chancellor, the vice chancellor here says no. And the reason for that is in part, you know, it seems very, you know, it's like it's coming full circle here because they failed on so many occasions to submit their financial information to the SEC, to NASDAQ, you know, and I think it was over like a 3-year period. That their financials were out of date or misrepresented, the court said, how could the shareholder vote possibly have been informed when they had no publicly available information about the financial condition of the company? And so in the end, the court's self-interested action sort of sabotaged themselves because they failed to do the restatement and the disclosures that would have allowed them to cleanse their actions. So that really— so I think that's probably the most important piece of that is again, harping on disclosure, disclosure, disclosure. If you want hormone cleansing, everything has to be disclosed. And so that's what's important about that case. And let's move on to the last case, which is Arthur Foote v. Synutra. So this is a case where timing is really the key issue to understanding the outcome of the case. So we got to start by going back to a case called Conn v. MF Worldwide. And so we'll call that MFW. So the court then held, in that case, the court held that a going private trend, in a going private transaction, the offer from the shareholder to buy the remaining shares must be predicated on the approval of a special committee of the board, right? Because that you don't, you can't have the decision makers can't be interested in the transaction. So you need that independent committee. And a majority of the minority votes. So again, cleansing of, you know, this idea again of cleansing, although in this case, as long as you have both of them, you're fine. So both of those elements are met, the court applies business judgment rule, right? And that's what you want. You want to get to the business judgment rule so you're not stuck with entire fairness. In this case, the initial offer did not include the required stipulation, right? So the shareholder came in and made the offer, but didn't have an explicit statement that both of these things would be required. One week later, the board appointed the special committee, and then it wasn't until a week after that that the shareholder came back, the dominant shareholder came back and submitted a second offer that did include our required language, our MFW language. So you've got a sort of a disconnect in the timetable. Here. And then for the next 6 months after that, the board committee conducted due diligence to determine whether the offer was fair. Only after the entire process was— the due diligence process was finished did the board instruct the financial advisor to start negotiations with the dominant shareholder for a better price, which eventually they did get a slightly better price. So a shareholder sued arguing that MFW kicks in at the first offer, right? So the argument here is that the first offer should have included those— that MFW language, and because it didn't, the entire thing should now be subject to entire fairness. And now we've got Chief Justice— now Chief Justice Strein disagreed, arguing that MFW kicks in only once substantive negotiations have begun. Now that's a big difference, right? Because if it's the first offer, that was, you know, 7 months before substantive negotiations kicked in, which was the point when the board said, yes, financial advisor, go start negotiating with the dominant shareholder. So a lot can happen between them, between those two points. And so this case, I think, is a reminder to both to follow the formalities, especially when you're in a going private transaction. Follow the formalities, and then, but also remember that substance matters here. It's not just, you know, the formalities here. You also have to remember, and, you know, Chief Justice Stein harps on this regularly, you know, it's also about the substance. It's also about making sure that you're actually doing things right. You're following the spirit of the law. So that's that one. Let's see, I think we had one other question. So in Xero, was the problem that the CEO failed, irrespective of the potential proxy fight, to disclose that he would continue as CEO after the negotiation? So I think that's certainly part of it, right? If you fail to make that disclosure, then obviously if you fail to make, as we said before, if you fail to make the disclosure, you know, of your interest, right? That's a problem in and of itself. But I think there was also, and you'll get more of this if you actually jump into the facts of the case and read the case, there was also, he had failed to disclose certain meetings with the purchaser, and they found that to be, and the court found that to be problematic. He had also failed to disclose, he had said that they had an independent review committee, a special committee set out. However, it turns out that that was actually not true, that one of the members of the special committee even said after the fact, I wasn't a part of this. I had no idea that I was even on this committee. So there were other disclosure failures involved in that case. But I was just, I was just trying to fly through these cases really to identify them for you. All right, so if there are any other questions, please let us know. Also, if you, you know, feel free to email us, either Frank or myself, or email Ramon if you need the CLE code. And is it possible to our team, is it possible to put up the code again, the CLE code again, so that people can see it one more time? There we go. All right, so there's the CLE code. Make sure to grab it before we finish up because you'll need that in order to claim your CLE credit. So I will hand it back to Sylvia if there's anything else. Otherwise, that's the end of it for us.

Thank you, everyone, for joining us today. And we hope you found this webinar fruitful. We will email you soon with next steps on how to claim your credits. Thank you again for your participation.