Shareholders win a new legal tool to
challenge M&A deals
Using the courts to wring a
higher price from buyers had been getting harder until now
Carl Icahn made a
'220 demand' at Sandridge Energy, where he is in dispute with
the management © Reuters
When Carl Icahn was upset in January
over what he claimed was mismanagement at the fracking company
SandRidge Energy, where he owned 13 per cent, he did not just
In a public letter, Mr Icahn also made a
“220 demand” upon Sandridge, using
an obscure section of the Delaware corporate law code under which
shareholders can request corporate books and records if they suspect
wrongdoing and want to find proof.
Obscure until now. Suddenly the 220
inspection demand is on the radar of shareholders’ lawyers, who want
to challenge the process and price of M&A deals. Plaintiffs’ lawyers
have increasingly been stymied when trying to use the courts to wring
a higher price from acquirers. But the 220 angle could swing the
A string of recent court decisions in
Delaware — the state where most American companies are incorporated —
have made lawsuits that challenge M&A transactions not only difficult
to win but tricky even to bring.
Broadly, this has been a welcome
development. The rulings have largely eliminated the nuisance lawsuits
that used to plague M&A, where companies were targeted the moment they
announced a deal by attorneys claiming the price was too low. This
scourge mostly faded because of a 2015 ruling involving the internet
company, Trulia (though clever plaintiffs’ attorneys are increasingly
trying their luck in federal courts).
More substantive cases have also got
harder. Since another landmark 2015 decision known as Corwin,
companies can have breach-of-fiduciary-duty lawsuits effectively
dismissed if shareholders had approved the deal in a fully-informed
The idea the Delaware courts now promote
is that, as long as shareholders know the key circumstances of
transactions and are comfortable with the terms of a deal, there is no
reason for judges to intrude upon a transaction. There is a general
feeling that the reforms enshrined in Trulia and Corwin that cull deal
litigation have been sensible.
Yet the worry is that instances of real
wrongdoing — for example, tainted M&A advice from the investment bank
RBC over the sale of ambulance company Rural/Metro cost the bank $100m
a few years ago — cannot be easily investigated if courts are quick to
Enter the 220 demand. Some Delaware
practitioners have alighted on this for getting aggrieved shareholders
a chance to determine if a company improperly sold itself on the
Traditionally, 220 demands have been
used by shareholders who want to sue a board of directors or
management, not for themselves as such but on behalf of the company in
a so-called derivative lawsuit, if they suspect wrongdoing or a breach
of duty. Shareholders, of course, are not ensconced in day-to-day
corporate affairs, so the 220 demand is a way for them to request
access to basic corporate records that could help them make their
It is easy to see how those corporate
records could be helpful for anyone trying to open up a case of the
And so it is easy also to see why
corporate defence lawyers are now trying to shut down the gambit.
The issue has just been raised in
Delaware Court of Chancery in the case of Apollo Global’s $2bn buyout
of telco West Corporation. West argued that, because it has received a
fully-informed shareholder ratification for the deal, as per the
Corwin standard, the court should deny shareholders’ books and records
skirmishes to come over exactly what information companies
should be forced to surrender
The judge disagreed. Shareholders could
not reasonably be expected to discover improprieties in the company’s
sale process just from public filings, vice-chancellor Joseph Slights
ruled in December, and the court had long encouraged high-quality
complaints from shareholders that used the “tools at hand” like 220
demands to do the hard work of investigating corporate wrongdoing.
Shareholders need only show a “credible basis” — the lowest burden of
proof — that wrongdoing occurred and that the information request is
essential for investigation.
With that, Delaware has opened up a new avenue for attorneys looking
to challenge M&A deals, and the next frontier in the never-ending war
between dissident shareholders and unrepentant companies.
Expect legal skirmishes to come over exactly what information
companies should be forced to surrender. Standard internal deal
documents might be unsatisfactory, particularly if companies are now
encouraged to keep board minutes and pitchbooks intentionally bland.
Litigants can be expected to fight for email correspondence among
board members as well, says Randall Baron, a prominent shareholders’
attorney. “The battle will be over what documents plaintiffs are
entitled to,” he said.
Carl Icahn can be dismissed at times as a grandstander, but with his
use of the 220 action, he might be on to the next big activist trend.
Copyright The Financial Times Limited 2018.