The “Going Private” Wave and the Delaware Courts

If corporations domiciled in Delaware are going to be affected by the wave of “going private” transactions, then Delaware courts want to make sure that they set the ground rules. In a May 9, 2007 decision in the In re Topps Company Shareholders Litigation in the Delaware Chancery Court (opinion here), Chancellor Leo Strine held, in a case involving the $385 million takeover of the Topps Company, that Delaware’s interests in maintaining its own laws were sufficiently important for the court to retain jurisdiction over the case even though a related case had been first-filed elsewhere.

As a recent post in Francis Pileggi’s Delaware Corporate and Commercial Litigation blog (here) explains, the basis of the Court’s ruling is the “internal affairs doctrine,” which holds that courts will refuse to allow actions to proceed against corporations from other jurisdictions if the shareholders have sufficient avenues to address malfeasance under the laws of the corporation’s domicile. By the same token, courts will retain jurisdiction under the doctrine if the corporation is domiciled in the court’s own jurisdiction.

This principle was tested in the Topps case because of a separate principle by which Delaware courts generally will decline jurisdiction if the same or similar case was previously filed elsewhere. In the Topps case, a shareholder suit challenging the takeover of the Topps company had been filed in New York one day before a substantially similar challenge to the transaction was filed in Delaware. (A New York Sun article discussing the Topps takeover and the nature of the shareholder controversy can be found here.)

Chancellor Strine found that policy interests weighed in favor of keeping the case in Delaware. As he observed in declining to defer in favor of the first-filed case, “the paramount interest is ensuring that the interests of the stockholders in the fair and consistent enforcement of their rights under the law governing the corporation are protected.” He went on to note that “when a corporation forms under the laws of a particular state, the rights of its stockholders are determined by that state's law and that the chartering state has a powerful interest in ensuring the uniform interpretation and enforcement of its corporation law, so as to facilitate economic growth and efficiency.”

The Topps opinion observes that the policy considerations behind the internal affairs doctrine are particularly compelling in light of the wave of private equity takeovers of publicly traded companies, since over half of the Fortune 500 companies are domiciled in Delaware. Chancellor Strine wrote that “the reality is that the Topps Merger is part of a newly emerging wave of going private transactions involving private equity buyers who intend to retain current management.” These transactions present interesting questions about how to address potential conflicts of interest "and how to balance deal certainty against obtaining price competition in a very different market dynamic." He further noted that "as with the phenomenon of stock options backdating, Delaware has an important policy interest in having its courts speak to these emerging issues in the first instance, creating a body of decisional authority that directors and stockholders may confidently rely upon."

The Topps opinion is the latest example where the Delaware Court of Chancery has evinced its willingness to use its authority to police “going private” transactions. In March 2007, Strine postponed a shareholder vote regarding the $115 million buyout of Netsmart Technologies Inc. until the company provided shareholders more information about future cash flow projections, and about why its board did not pursue strategic buyers. (The Netsmart opinion can be found here.) Netsmart's shareholders later approved the buyout (refer here).

In addition, Vice Chancellor Stephen Lamb refused last year to approve the settlement of a lawsuit involving a buyout of SS&C Technologies Inc. that was instigated by SS&C's CEO without prior authorization from its board. Lamb chastised the parties for failing to consult the court about a planned settlement based on supplemental proxy disclosures, and for failing to demonstrate that potential claims of shareholder plaintiffs had been adequately investigated. The opinion in the SS&C case can be found here.

The current buyout wave shows no signs of letting up, and litigation is an inevitable side effect of the wave. The Delaware court seem increasingly committed to making sure it is clear they are in charge.

A detailed discussion of the Topps decision can be found in this May 15, 2007 memorandum by the Potter Anderson & Corroon law firm, here.

A May 20, 2007 news article in the Wilmington News Journal discussing the Topps case can be found here. A May 17, 2007 post on the Harvard Law School Corporate Governance blog about the competition between states with respect to corporate law can be found here. Professor Larry Ribstein has an interesting commentary on the Topps decision in his Ideoblog (here).

In a recent post (here), I noted that the “internal affairs doctrine” may pose substantial hurdles for investors filing derivative actions in U.S. courts against foreign domiciled corporations.

You're the Topps, You're the Coliseum: According to Wikipedia (here), the recent takeover attempt is not the Topps company's first going private experience. The company first went public in 1972, but was acquired in a leveraged buyout in 1984 by Forstmann Little & Company. The company again went public in 1987. The latest takeover attempt is led by Michael Eisner. It will probably only be a matter of time before the company is once again taken public.

Topps of course makes the famous baseball trading cards (for details about which refer here). Bazooka bubble gum , which Topps also makes, originated the bubble gum comics, starring the iconic Bazooka Joe. It is no mystery, at least not to me, why grown-up little boys keep trying to buy the whole company. I would do it if I could.

In Two Hours, Blackstone Will Be Hungry Again: When Blackstone recently announced its plan to sell shares in an inital public offering (here), it seemed like the whole private equity thing had to have reached some kind of a peak. But now comes the announcement that China will invest $3 billion of its $1.2 trillion in reserves in an 9.9% equity position in Blackstone (here). Even though as part of the deal China agreed that it would not invest in a rival private equity firm for twelve months, it is hard to disagree with the Financial Times' assessment (here) that "the decision suggests China is testing the water for a much bigger investment in private equity. It could open the floodgates to a tide of money flowing into the sector at the precise moment regulators are becoming concerned it may be overheating." The private equity thing seems to have a lot further to run.

Updated Options Backdating Settlements: In a recent post (here), I took a look at a number of dismissal and settlements in options backdating-related lawsuits. In response to my post, readers brought additional settlements to my attention, which I have incorporated by updates into the original post. If any readers are aware of additional settlements, dismissals, or dismissal denials, please let me know and I will update the post as appropriate.