Panel on Emerging Legal Trends

NACD Annual Meeting Washington, DC October 3, 2011

8:15 a.m. to 9:15 a.m.

The Panelists:

The Honorable Leo E. Strine, Jr. Chancellor, Delaware Court of Chancery Wilmington, DE

Randall J. Baron, Esquire Partner, Robbins, Geller, Rudman and Dowd LLP San Diego, CA Corporate Plaintiffs' Lawyer

Rachelle Silverberg, Esquire Partner, Wachtell, Lipton, Rosen & Katz New York, NY Corporate Defense Lawyer

Moderator:

The Honorable E. Norman Veasey Senior Partner, Weil, Gotshal & Manges LLP Chief Justice (Ret.) Delaware Supreme Court (1992-2004) Wilmington, DE

Introduction — Chief Justice Veasey

The introduction to the panel discussion will touch on some corporate governance issues and will "tee up" two main legal issues of concern to directors:

(A) The Board's managerial and advisor behavior in connection with merger and acquisitions (M&A) activity; and

(B) The Board's fiduciary duties of oversight and monitoring. The three panelists will briefly present these topics, followed by a panel discussion and questions from the audience.

Attached is a list of some representative cases that may be discussed by the panelists.

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II. A Judicial Overview — Chancellor Strine

Fiduciary duties of directors for business judgment decisions and corporate oversight, discussing some Delaware law issues, including:

A. The Board's overarching duties in all aspects of M&A, including timing and extent of board involvement; independence from managers of directors and advisors; and Board leadership when management may be interested; integrity of Board processes; and related issues.

B. The ongoing duties of directors to be vigilant in their oversight responsibilities in monitoring management's adherence to compliance responsibilities and risk assessment and risk management issues.

III. Some Potential Problems for Directors - Randall Baron, Esquire

Focus on director involvement in M&A transactions and the avoidance of process pitfalls that can sink a transaction or subject directors to liability

IV. Dealing with and Avoiding Some Potential Problems for Directors — Rachelle Silverberg, Esquire

Focus on directors' duties in monitoring compliance and governance issues that could raise problematic questions for directors (e.g. poison pills, staggered boards, and proxy access)

V. Brief Discussion Among Panelists

VI. Questions from the Audience

VII. Adjournment

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Case Citations and Summaries for NACD Panel

In re Massey Energy Co. Derivative and Class Action Litigation, 2011 Del. Ch. LEXIS 83 (Del. Ch. May 31, 2011) (Strine, V.C.): Plaintiff stockholders sought a preliminary injunction of a merger between Alpha Natural Resources and Massey based on a contention that the Massey board breached their fiduciary duties by failing to obtain from Alpha in the merger price the value of existing derivative claims. The underlying derivative claims sought to hold Massey's directors and officers liable for losses incurred by Massey as a result of the Upper Big Branch explosion, based on what plaintiffs contended was the directors' and officers' failure to make a good faith effort to ensure that Massey complied with mine safety regulations. The Court of Chancery declined to preliminarily enjoin the merger because, among other things, the court determined that the merger price would not likely be found after a trial to be unfair.

In reaching its decision, however, the court determined that the underlying derivative claims likely stated a claim against the directors under Caremark for liability for failure of oversight. The court described a culture at Massey "premised on the view that the company's management knew better than the law about what was necessary to run safe mines" and that routinely placed profits ahead of safety. The court identified numerous red and yellow flags that did or should have alerted the independent directors to rampant safety issues in Massey mines but determined that "instead of using their supervisory authority over management to make sure that Massey genuinely changed its culture and made mine safety a genuine priority, the independent directors are alleged to have done nothing of actual substance to change the direction of the company's real policy." Instead, the board "allowed itself to continue to be dominated by Blankenship," Massey's CEO. The court highlighted the riskiness of the approach taken by the board in light of Massey's history of safety violations, as follows:

To be plain, when a company already has been proven to have engaged in illegal conduct, it is a high risk strategy for it to embrace the idea that its regulators are wrong-headed and to view itself as simply a victim of a governmental conspiracy. Relatedly, when a company has a "record" as a recidivist, its directors and officers cannot take comfort in the appearance of compliance motion at the pleading stage, when the plaintiffs are able to plead particularized facts creating an inference that the Board and management were aware of a troubling continuing pattern of non-compliance in fact and of a managerial attitude suggestive of a desire to fight with and hide evidence from the company's regulators. As a kid, most of us are taught that it is not a good excuse to argue with the rules. Telling your parents that all the kids are getting caught shoplifting, cheating, or imbibing illegal substances is not, fortunately, a good excuse. For fiduciaries of Delaware corporations, there is no room to flout the law governing the corporation's affairs. If the fiduciaries of a Delaware corporation do not like the applicable law, they can lobby to get it changed. But until it is changed, they must act in good faith to ensure that the corporation tries to comply with its legal duties.

Airgas, Inc. v. Air Products & Chemicals, Inc., 8 A.3d 1182 (Del. 2010): Air Products initiated a tender offer for all Airgas stock. As part of Air Products's attempt to acquire Airgas, it sought through a proxy contest to gain control of Airgas's staggered board of directors by nominating three candidates for election to the Airgas board at Airgas's September 15, 2010 meeting and proposing three bylaw amendments. One of the bylaw amendments would move the date of the Airgas annual meeting from September to January. Thus, the next meeting would fall just four months after the September 2010 meeting. At the September 2010 meeting, Airgas's stockholders elected the Air Products nominees and approved the bylaw amendments. Airgas sought a declaration from the Court of Chancery that the bylaw was invalid. The Court of Chancery entered judgment for Air Products, holding that the bylaw was valid under state law and did not violate Airgas's certificate of incorporation. The Supreme Court reversed, holding that the bylaw would so extremely truncate the directors' three-year term that it would constitute a de facto removal that would be inconsistent with the Airgas charter.

Air Products & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011) (Chandler, C.): Air Products sought in the Court of Chancery to invalidate Airgas's poison pill, arguing that the board of directors was obligated to remove the pill and allow the Airgas stockholders to decide for themselves whether to accept Air Products's bid. Applying Unocal, the court determined that "the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors." The court held that the Airgas board had articulated a legally cognizable threat—an allegedly inadequate price, coupled with the likelihood that a majority of Airgas's stockholders would tender into the offer—and had taken defensive measures that were within the range of reasonable responses to that threat. The court therefore denied Air Products's requests for relief and dismissed all claims against the Airgas defendants.

In re Del Monte Foods Co. Shareholders Litigation, 2011 Del. Ch. LEXIS 30 (Del. Ch. Feb. 14, 2011) (Laster, V.C.): Plaintiff stockholders sought a preliminary injunction of a leveraged buyout of Del Monte by Blue Acquisition Group, an entity owned by three private equity firms led by KKR. The court determined that plaintiffs had demonstrated a reasonable likelihood of success on their Revlon claims and were reasonably likely to prove at trial that the directors breached their fiduciary duties by: 1) allowing KKR and another leading bidder to bid jointly, thereby giving up the best opportunity for price competition, without attempting to gain a benefit for Del Monte's stockholders; 2) allowing Del Monte's financial advisor to participate in buy-side financing, without determining whether that participation was necessary to the buyout group; 3) allowing the financial advisor to manage the go-shop process, despite the financial advisor's substantial financial interest in closing the KKR deal. The court also found a likelihood of success on aiding and abetting claims against the buyout group. The court granted a preliminary injunction 1) delaying the closing for twenty days and 2) setting aside the merger agreement's no-shop, termination fee, and matching rights provisions during that period.

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Yucaipa American Alliance Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010) (Strine, V.C.): Shortly after Yucaipa announced that it had acquired a 16.8% stake in Barnes and Noble (increased four days later to 17.8%), the Barnes and Noble board adopted a poison pill that would be triggered if a stockholder acquired beneficial ownership of more than 20% of the company's stock. The pill did not apply to the 30% stake owned by Riggio, the company's founder, but would be triggered if Riggio acquired additional shares. Some time later, Yucaipa increased its interest to 18.7% and another stockholder, Aletheia, increased its ownership from 6.37% to 17.44%. Yucaipa requested that the Barnes and Noble board grant an exception to the pill that would allow Yucaipa to increase its ownership to 37%, but the board refused. Yucaipa brought claims for breach of fiduciary duty and declaratory judgment in the Court of Chancery. The court dismissed those claims. Applying Unocal, the court held that the board had a reasonable basis for concluding that a threat to corporate policy and effectiveness existed because Yucaipa was potentially seeking to acquire a controlling stake—or join with Aletheia in forming a governing bloc—in order to put its own policies into place. The court also determined that the pill did not constitute a disproportionate response to the threat, because the 20% threshold was relatively high, Yucaipa and Aletheia could join together and overcome the Riggio advantage, and the pill did not restrict Yucaipa's ability to lobby the proxy advisory firms.

In re Kinder Morgan, Inc. Shareholders Litigation, Cons. Case No. 06 c 801, Report and Recommendation of Special Master (Dist. Ct. of Shawnee Kansas, Div. 12 Dec. 18, 2006), available at www.gcginc.com/cases/pdf/KMR/report_master.pdf. Stockholders challenged in Kansas court a proposed management buyout of Kinder Morgan, alleging unfair price and unfair process. Justice Walsh, as special master, found that the special committee formed to make a recommendation with respect to approval of the deal functioned effectively, was well informed, and made its recommendation in good faith. Thus, Justice Walsh concluded, the transaction was entitled to the protection of the business judgment rule, and plaintiffs therefore had not shown a substantial likelihood of success on the merits. He therefore recommended that the court deny the plaintiffs' request for a preliminary injunction. The court adopted that recommendation in December 2006, and the merger closed in May 2007.

Litigation proceeded following the closing, and the court ultimately approved a $200 million settlement of the claims in November 2010. See In re Kinder Morgan, Inc. Shareholders Litigation, Cons. Case No. 06-C-801, Journal Entry and Order Approving Settlement and Plan of Allocation (Dist. Ct. of Shawnee Kansas, Div. 12 Nov. 19, 2010, available at http://www. shawneecourt org/decisions/O6C8OlFreliminarySettlementApprovaLpdf

In December 2010, the court awarded plaintiffs' counsel attorneys' fees of $22,329,471, plus $1,766,797.39, from the settlement fund. In re Kinder Morgan, Inc. Shareholders Litigation, Cons. Case No. 06 C 801 (Dist. Ct. of Shawnee Kansas, Div. 12 Dec. 2, 2010), Memorandum Decision and Order.