What’s The Deal with Deal Litigation in Nevada?

1. What’s The Dealwith Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq.

2. Topics to Discuss • What is the Law? • Common Claims • Procedural Issues • Pre-Settlement • Post-Settlement

3. What is the Law? • Fiduciary Duties of Directors • Generally Applicable Duties • Special Duties in the Change of Control Context

4. What is the Law? (cont.) • Fiduciary Duties of Directors • Generally Applicable Duties • Delaware • Duty of Care: duty to make decisions on an informed and good-faith basis after evaluation of all reasonably relevant information • Duty of Loyalty: duty not to have a material conflict of interest • Nevada • Combines the duties of care and loyalty • "Directors and officers shall exercise their powers in good faith and with a view to the interests of the corporation." NRS 78.138(1).

5. What is the Law? (cont.) • Other Applicable Duties • Duty of Disclosure • Delaware • Duty of Care and Loyalty require directors to provide candid disclosure to stockholders in all communications • Must "disclose fully and fairly all material information within board's control." Gantler v. Stephens, 965 A.2d 695, 710 (Del. 2009). • Nevada • Nevada courts recognize duty of disclosure of material information on behalf of directors. In re Agribiotech, Inc., 291 F.Supp.2d 1186 (D. Nev. 2003). • Duty of Oversight • Duty of care and loyalty require directors to oversee corporate affairs

6. What is the Law? (cont.) • Special Duties • Delaware • Revlon duties • Directors must exercise their duties of care and loyalty for a specific objective: maximizing the sale price of the enterprise. • When Revlon applies: • A corporation initiates an active bidding process to sell itself; • A company abandons its long-term goals in response to a bidder's offer by seeking an alternative transaction, which would ultimately break-up the company; or • When a company otherwise pursues a sale of control (most popular).

7. What is the Law? (cont.) • Special Duties (cont.) • What Revlon Requires: • Directors must pursue a reasonable process designed to maximize the value stockholders will receive. Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989). • Nevada • Business Judgment Rule generally applicable to actions of directors. Shoen v. Amerco, 885 F. Supp. 1332 (D. Nev. 1994); NRS 78.138 (3) ("Directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation.").

8. Judicial Scrutiny of Director Decisions • Delaware • Three standards: • 1) Business Judgment Rule (Default) • Creates presumption that "in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company." Reis v. Hazelett Strip-Casting Corp., 2011 Del. Ch. LEXIS 11, at *23 (Del. Ch. Jan. 21, 2011). • 2) Enhanced Scrutiny (Intermediate) • Requires directors to act with “scrupulous concern for fairness to shareholders” • Applies in: • Sale-of-control, change of control, or break-up of the company contexts • Adoption of defense mechanisms or measures in response to threat to corporate control or policy • The presumption of the Business Judgment Rule does not apply in these contexts • Unocal Standard (applies to defensive measures) – Board Must Show: • "[R]easonable grounds for believing that a danger to corporate policy and effectiveness existed." • Action taken in response is neither preclusive nor coercive and is "reasonable in relation to the threat posed." - Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1995).

9. Judicial Scrutiny of Director Decisions (cont.) • Delaware • 3) Entire Fairness Test (Most Difficult) • Applies when: • Plaintiff overcomes business judgment rule • Board of directors fails to meet Unocal or Revlon Standard • In connection with certain transactions in which a controlling stockholder is buying out minority stockholders • Burden on company to prove "fair dealing and fair price." Kahn v. Lynch Commc'ns Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994).

10. Judicial Scrutiny of Director Decisions (cont.) • Nevada • Business Judgment Rule • Business Judgment Rule generally applicable to actions of directors. • No enhanced scrutiny under Unocal; instead receive presumption of the business judgment rule. See NRS 78.139(1)-(2). • NRS 78.139(2) provides business judgment rule applies when directors and officers are faced with a change of control that impedes the exercise of the right of the stockholders to vote for or remove directors: • must have reasonable grounds to believe that a threat to corporate policy and effectiveness exists; and • Action taken must be reasonable in relation to that threat. • Minimal case law explains these statutes. If the business judgment of the board is rebutted, assume that Delaware’s entire fairness test will be utilized. • Independent Committees • One avenue to keep the presumption of the business judgment rule if you have interested directors (discussed later). • Board of directors may designate one or more committees have an may exercise the powers of the bard of the directors in the management of the business and affairs of the corporation. NRS 78.125(1). • Each committee must include at least one director. Unless the articles of incorporation or the bylaws provide otherwise, the board of directors may appoint natural persons who are not directors to serve on committees. NRS 78.125(2). • Board may appoint alternates of a committee to replace disqualified or absent members. NRS 78.125(3).

11. Common Claims In Practice • Unfair Price • Conflicts of Interest • Unfair Process • Unreasonable Deal Protection Device • Transaction with Controlling Stockholders • Misleading or Inadequate Disclosure • Federal Claims

12. Common Claims In Practice-Unfair Price • Usually board of directors rely upon financial advisors to determine price information • Financial advisors may perform various analyses to value company • Plaintiff usually claims flaws with the methodologies, assumptions, data underlying cash-flow forecasts, and the risk premiums used • Except on a case based on review for entire fairness, no cause of action based solely on low price. Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 506-14 (Del. Ch. 2010).

13. Common Claims In Practice-Conflicts of Interest • Delaware • Director Conflicts • Business judgment rule protection will prevail unless self-interested directors: • Constitute a majority of the board of directors; • Control and dominate the board of directors as a whole; or • Fail to disclosure their interests in the transaction where a reasonable. • Director is interested when: • Has divided loyalties; • Receives a material personal benefit not shared equally by all stockholders; • Makes a decision to avoid a materially detrimental outcome as the director (but not the company or its stockholders). Cinerama Inc. v. Technicolor Inc., 663 A.2d 1134, 1168 (Del. Ch. 1994). • Possible saving measure: When directors are interested, delegation of decisions or evaluations to a committee may subject the decision to the business judgment rule (depending on the transaction). If a transaction with a controlling stockholder, delegation to a committee may not be sufficient.

14. Common Claims In Practice-Conflicts of Interest (cont.) • Management Conflicts • Plaintiffs must show that: • The incentive was material to the individual • The defendant took action to favor a prospective buyer or proceed in a way that tainted the board of directors' decision-making process • McMillan v. Intercargo Corp., 768 A.2d 492, 503-04 (Del. Ch. 2000). • Employment with or the potential for employment with resulting entity is not enough. Need more. • Interested directors who advise a board do not present a conflict on its face. In re Toys 'R' Us, Inc. S'holder Litig., 877 A.2d at 980 ("to be an inside or non-independent director is not a crime, it is a status."). • Financial Advisor Conflicts • Participation in buyer financing: when financial advisor receives fees from seller and buyer • Promise for future business by buyer, there is a risk that the financial advisor will favor that buyer • Transparency and mandatory disclosures are necessary for board to identify and address any competing interests in order to determine whether to retain advisor and/or disclose conflicts to stockholders

15. Common Claims In Practice-Conflicts of Interest (cont.) • Nevada • Pursuant to NRS 78.140(1)-(2), transactions involving "interested directors" are not void or voidable on its face. Both sections must be satisfied. • NRS does not contain a materiality standard for facts that must be disclosed to the board or stockholders in connection with the approval of transactions involving interested directors and/or officers.

16. Common Claims In Practice-Unfair Process • Two general claims • Failure to discharge Revlon duties; or • Use of procedures that unfairly interfere with the stockholders' decision regarding a transaction. • Should be viewed deferentially pursuant to the business judgment rule. • Examples: • Failure to shop the company • Distinction between different buyers – board showed favoritism to one buyer • Allegedly coercive transactions

17. Common Claims In Practice-Unreasonable Deal Protection Devices • Delaware • Subject to "enhanced scrutiny" and evaluated under the Unocal standard • Upheld where: protective of legitimate interest and reasonable to permit the company to favorable respond to a superior proposal from a third party. • Court’s options: • Injunction • "Blue penciling" of certain deal protections provisions • Terminating one of the deal protection provisions • Extended "go-shop" provisions to remedy prior flaws • In re Del Monte Foods Co. S’holders Litig., 2011 Del. Ch. LEXIS 30 (Del. Ch. Feb. 14, 2011).

18. Common Claims In Practice-Unreasonable Deal Protection Devices (cont.) • Examples: • Termination fees • No-Shop v. Go-Shop provisions • Support agreements • Matching rights • Limitations on right to change board of director’s recommendation • Nevada Distinction: Failure of a board to recommend the plan for stockholder approval effectively ends the merger or exchange process. See NRS 92A.120(2-3). The board may only send the plan to the stockholders without recommendation if they are unable to recommend it due to a conflict of interest or other special circumstances. Seeid. • Force the Vote provisions • Nevada Distinction: Nevada law prohibits so-called "force the vote" clauses. See NRS 92A.120(3) • Must define “Superior Proposal” carefully • Nevada • Minimal law in this area. Presume courts will look to Delaware law for guidance.

19. Common Claims In Practice-Transaction with Controlling Stockholders • Delaware • Presumptively subject to entire fairness test for controlling stockholders • Defendants can shift the burden to the business judgment rule by proving: • Approval of the transaction by a independent special committee or • Conditioning approval of the transaction on approval by a majority of those stockholders unaffiliated with the controlling stockholder ("majority of the minority") • In re CNX Gas Corp. S'holders Litig., 4 A.3d at 400. • Otherwise transaction subject to the entire fairness test • Nevada • Nevada Federal District courts have held that a majority stockholder of a closely held corporation may have a fiduciary duty to minority stockholders. Simon v. Mann, 373 F. Supp.2d 1196, 1199-1200 (D. Nev. 2005). The Nevada Supreme Court has not decided this issue.

20. Common Claims In Practice-Disclosure Problems • Delaware • To prevail, plaintiff must demonstrate defendants made a material misrepresentation to stockholders or withheld material information. Orman v. Cullman, 794 A.2d 5, 31 (Del. Ch. 2002). • Typical Areas of Disclosures Claimed: • Projections of Future Results • Benefits to Directors and Officers • Other Data or Analysis Underlying Fairness Opinions • Conflicts of Interests on Behalf of Financial Advisors • The Background to the Transaction • Opinions of Pre-Existing Litigation • Nevada • Pursuant to NRS 78.138(7), director or officer not individually liable unless: • Director's or officer's act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and • The breach of those duties involved intentional misconduct, fraud, or a knowing violation of law.

21. Common Claims In Practice-Federal Claims • Most claims alleged under Section 14 of the Securities Exchange Act: • 14(a) – fraud in relation with mergers • 14(e) - fraud in relation with tender offers • Discovery Issues: • Require heightened pleading standard • Mandatory stay of discovery and other proceedings during the pendency of any motion to dismiss. 15 U.S.C. § 78u-4(b)(3)(B). • Discovery may only occur upon a showing to preserve evidence or to prevent prejudice. Id.

22. Procedural Issues • Likely Parties • Forum • Preliminary Injunctions • Class Certification • Settlement Approval • Attorneys’ Fees

23. The Adversaries • Plaintiffs • Public Stockholders of the Target Company • Could be Individuals or Institutional Investors • Litigation is Driven by Plaintiffs’ Lawyers • Hostile Bidders • Defendants • Target Company’s Directors • Target Company’s Officers • Majority Stockholders • Financial Advisors • Acquiring Company

24. Choosing The Battleground • Venue Fights are Common • Determine decision makers and rules • Venue is Usually Proper in at least two places State of Incorporation and Location of Headquarters • Race to the Courthouse • Options when facing suits in multiple jurisdictions • Determine Best Available Forum • Motion to Dismiss/Stay in Disfavored Forum • “One Jurisdiction Motion” • Consent to Class Certification in Favored Forum • Forum Selection Clauses • Clauses in Merger Agreements only bind the Buyer and Seller • Clauses in Bylaws may be enforceable if approved by stockholders

25. Expedited Proceedings – Practical Considerations • Standard • Plaintiff Must Show (1) Colorable Claim & (2)Threatened Irreparable Injury • No Automatic Right - Plaintiff Bears the Burden of Demonstrating the Need to Expedite • Federal Court: Reform Act Protections • Discovery • Narrow Scope of Discovery • Anticipate the Need for Document Production and Deposition Testimony • Business Strategies Privilege • Hearing • Must occur before shareholder vote or tender offer • Often two to seven days before relevant event

26. Defending Against a Preliminary Injunction Request • Practical Considerations • Expedited Proceedings • Expedited Discovery • Standards for Granting Relief • Likelihood of Success on the Merits • Irreparable Harm • Balance of the Hardships • Bond Requirements

27. Standards for Granting Injunctive Relief • Likelihood of Success on the Merits • Usually the Most Important Element • Certainty Not Required • Irreparable Harm • No Adequate Remedy at Law • Harm Must be Imminent and Genuine • Balance of the Hardships • Harm to Defendant if Injunction Granted v. Harm to Plaintiff if Denied • Consider Presence of Multiple Offers • Bond Requirements

28. Class Certification • Rule 23(a) • Numerosity • Commonality • Typicality • Adequacy of Representation • Rule 23(b) • Must meet 23(a) Prerequisites AND • 23(b)(1) or 23(b)(2) • Generally Applies to Action for Equitable Relief • “Actions challenging the propriety of director conduct…are properly certifiable under …subdivisions (b)(1) and (b)(2).” • 23(b)(3) • Generally Applies to Action for Damages • Option to Opt Out is Required if Relief Sought is “wholly or predominantly for money judgment.”

29. Plaintiffs’ Goal is Settlement Most Deal Litigation Ends in Settlement Before a Preliminary Injunction Hearing • Plaintiffs’ Incentives • Going to Trial is Incompatible with Plaintiff Lawyer’s Business Model • Plaintiffs’ counsel can tout value of changes in deal structure or additional disclosures earned through negotiations • Judgment for damages is unlikely • Allows Plaintiffs’ Counsel to Recover Fees • Defendants’ Incentives • Settling for additional disclosures avoids the potential for a judicial stay that could delay or derail the pending deal • Avoid expense and distraction associated with litigating a claim through trial • Protect directors against potential finding of bad faith at trial.

30. Settlement Requirements and Limitations • What Constitutes Valid Settlement Consideration • Supplemental Disclosures • Changes to Deal Terms • Increased Monetary Consideration • Not required • Common Fund • Class Certification and Notice • Stipulate to Certification for Settlement Purposes Only • Class Members Receive Notice and Opportunity to Opt Out if Applicable • Releases • Generally dispose of all liability associated with the challenged transaction • Due Process Limits • Objections • Stockholders are provided with an opportunity to object

31. Judicial Approval • Settlement Approval in One Court Should Resolve the Same Claims in All Courts • Six Factors of Reasonableness • Validity of Claims • Apparent Difficulty of Enforcing the Claims Through the Courts • Collectability of any Judgment • Delay, Expense, and Trouble of Litigation • Amount of the Compromise vs. Amount and Collectability of the Judgment • Views of the Parties Involved

32. Attorneys’ Fees • Bases for an award of attorneys’ fees • Substantial Benefit Rule Applies where litigation achieves an increase in consideration given as non-monetary benefits • Common Fund Doctrine Applies where litigation results in creation of cash fund • Courts Apply “Rigorous Scrutiny” • Was the action meritorious when filed? • Did an ascertainable class receive a substantial benefit • Was there a causal connection between the legal actions and the benefit? • How much is too much? • Considerations: • Time and Effort Expended • Difficulty and Complexity of the Case • Reputation and Ability of Counsel • Contingent Nature of Litigation • Stage at Which Litigation Ended • Extent to Which Counsel’s Actions led to Benefit • Amount or Degree of Benefit Achievd • Resolved in Conjunction with Settlement Approval

33. What’s The Dealwith Deal Litigation in Nevada? Presented by: Patrick G. Byrne, Esq., John S. Delikanakis, Esq., and Richard C. Gordon, Esq.