1.2 SHARK REPELLENT AND STRIKE SUIT REPELLENT

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1 VII. BREAKOUT SESSIONS LEGAL 1.1 CHANGING FIDUCIARY STANDARDS? Presenters: Joe Dannenmaier, Thompson & Knight LLP Salil Virkar, J.C.Penney Company, Inc. 1.2 SHARK REPELLENT AND STRIKE SUIT REPELLENT Presenters: Robert L. Kimball, Vinson & Elkins LLP Luke Alverson, Flowserve. RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 1

2 VII. 1.1 CHANGING FIDUCIARY STANDARDS? Presenters: Joe Dannenmaier, Thompson & Knight LLP Salil Virkar, J.C.Penney Company, Inc. RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 2

3 In Re Rural/Metro Corporation Stockholder Litigation In Re El Paso Pipeline Partners, L.P. Derivation Litigation Both decided in the last year by Vice Chancellor Travis Laster Eye-catching damages: In Rural/Metro, RBC was liable for $76 million in damages for aiding and abetting fiduciary breaches by the Rural/Metro Board In El Paso, GP of MLP was liable for $171 million in a dropdown transaction Both cases are highly critical of the directors and financial advisors involved RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 3

4 Rural/Metro RBC had aided and abetted the Rural/Metro directors breach of the duty of care and duty of disclosure Running a flawed sale process and Failing to disclose material information, Including RBC s conflicts of interest RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 4

5 Rural/Metro Sale process fell outside range of reasonableness Flaws included: Special committee chair, representing a 22% interest, started a sale process after only being authorized to examine strategic alternatives RBC failed to disclose information about its conflicts Board failed to examine strategic alternatives Board failed to examine RBC s conflicts Board approved merger without adequate information RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 5

6 Rural/Metro RBC s knowing participation that induced directors breaches included: Failure to disclose its plan to get business in another transaction through its role in Rural/Metro Knew board was uninformed about value because of last minute valuation information Not disclosing to board its effort to win financing work with acquirer, which took place as it led negotiations on price RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 6

7 El Paso With so many MLPs and GPs headquartered in Texas, this Delaware case has significant regional interest Involves key part of typical strategy of GP/Sponsor and MLP: The GP s dropdown of assets to the MLP Reading the opinion, instead of listening or reading commentary, is essential for anyone lay or professional involved with dropdowns VC Laster uses very strong language with respect to directors and advisors Again, judgment against GP is $171 million RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 7

8 El Paso Plaintiffs challenged a Spring 10 dropdown and a Fall 10 dropdown, each from El Paso Corp. to El Paso MLP In spring, GP had sold the MLP a 51% interest in the Elba subs In fall, GP sold MLP remaining 49% Both dropdowns were approved by a conflicts committee of three directors of the GP s board The conflicts committee was advised by counsel and a financial advisor RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 8

9 El Paso Delaware courts have consistently upheld modifications of default fiduciary duties Modifications are customary in MLP agreements, with some variations VC Laster opinion makes clear that, in a conflicts transaction, a GP nonetheless can run afoul of contractual limitations in a MLP LPA The MLP LPA required that the committee members subjectively believe that the dropdowns were in the best interests of the MLP limited partners The court held that the committee members viewed the MLP as a controlled company that existed to benefit the GP and consequently failed to vigorously vet the deal or negotiate the best price The court also concluded that the financial advisor manipulated its financial analysis in order to make the transactions appear more favorable to the MLP than they were The court found that the GP breached the agreement RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 9

10 El Paso Committee Subordinated their independently held views to the [GP s] wishes Evidence showed that committee members had formed views on the fall transaction and communicated those views to one another, but then backed away with pressure from the GP Committee and its advisors need to negotiate forcefully on behalf of the entity they represent Financial advisor was engaged as a matter of course and engaged in back channel discussion with the GP Accretion is not the same as best interests RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 10

11 Calma v. Templeton DE Chancery Court decision Derivative action challenging equity grant to non-employee directors Grants made under stockholder-approved equity plan Plan did not contain limits on director equity awards RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 11

12 Plaintiff Claims Breach of fiduciary duty Corporate waste Court held Fiduciary duty claim subject to entire fairness standard rather than business judgment rule Board members were conflicted Plan did not contain meaningful limits on director compensation Plaintiff failed to state claim for waste RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 12

13 Calma decision follows prior decision in Seinfeld v. Slager In light of decisions in Calma and Seinfeld, Boards should consider including limits on director compensation in plans submitted to stockholders Limits potential claims to corporate waste Eliminates need to justify peer groups used in setting compensation RR DONNELLEY SEC HOT TOPICS INSTITUTE DALLAS, TX 13