Securities Snapshot
May 19, 2020

U.S. Bankruptcy Court for District of Delaware Refuses to Dismiss Debtor's Pending Bankruptcy Case Despite Debtor's Failure to Seek Consent of Stockholder With Blocking Rights

U.S. Bankruptcy Court for District of Delaware Refuses to Dismiss Debtor’s Pending Bankruptcy Case Despite Debtor’s Failure to Seek Consent of Stockholder With Blocking Rights; New York State Court Dismisses Securities Class Action Against AT&T Arising From Time Warner Merger; Court of Chancery Determines That Shareholder Representative is Real Party in Interest and Shareholders are Not Subject to Party Discovery in Post-Closing Dispute; Delaware Supreme Court Affirms Chancery Court’s Limited-Stay Order Requiring Production of Certain AmerisourceBergen Books and Records Relating to Opioid Crisis in Response to Stockholders’ Section 220 Demand.

On May 5, 2020, in In re Pace Industries, the U.S. Bankruptcy Court for the District of Delaware declined a shareholder’s motion to dismiss the pending Chapter 11 bankruptcy of Pace Industries, an Arkansas-based manufacturer of certain auto-industry metals, despite that Pace had not sought the consent of Macquarie Septa I LLC—a shareholder that claimed to hold blocking rights—to seek Chapter 11 protection. In return for Macquarie Septa’s $37 million investment, Pace’s certificate of incorporation was amended to require Macquarie Septa’s consent before undertaking certain actions, including “any voluntary bankruptcy or similar filing.” When Pace entered bankruptcy proceedings without first securing Macquarie Septa’s permission, Macquarie Septa moved to dismiss the Chapter 11 proceedings.

At a hearing on the motion to dismiss, the court stated that, although there were no prior cases denying a motion to dismiss in these circumstances, it was “prepared to be the first court to do so” because “a lack of access to the bankruptcy code and the bankruptcy courts would violate the federal public policy to allow a debtor to file for bankruptcy.” In so ruling, the court expressly “decline[d] to follow” a Fifth Circuit case, In re Franchise Services of North America, which allowed an investor to invoke blocking rights to stop a corporation from seeking bankruptcy protection.The Fifth Circuit declined to address the public-policy issue as not squarely presented in that case, and construed Delaware state law to allow modification of corporate charters to include such blocking-rights provisions.


On May 5, 2020, the New York State Supreme Court dismissed a putative class action in Hoffman v. AT&T Inc. et al., filed on behalf of former Time Warner Inc. shareholders alleging that AT&T misled shareholders into approving AT&T’s June 2018 acquisition of Time Warner. Plaintiff alleged that AT&T made material misstatements and omissions in violation of Sections 11, 12 and 15 of the Securities Act of 1933 regarding AT&T’s nascent DirecTV Now (“DTVN”) business in its registration statement, which became effective in January 2017, over a year before the acquisition was completed. Specifically, plaintiff alleged that AT&T misleadingly touted a “strong” launch of DTVN with impressive subscriber growth without disclosing that those subscriptions resulted from unsustainable promotional practices—such as costly giveaways and low initial rates that quickly ballooned—that caused subscription rates to fall leading up to the acquisition. Plaintiff further alleged that AT&T was required to update its registration statement to give shareholders this information between the registration statement’s January 2017 effective date and the June 2018 acquisition pursuant to SEC regulations requiring updates for “facts or events” that “represent a fundamental change in the information set forth in the registration statement.”

The court held that AT&T’s description of its DTVN launch as “strong” was inactionable corporate puffery and that AT&T had no “obligation to disclose its various promotions for increasing DTVN subscriptions, even if they were flawed as plaintiff alleges.” Although plaintiff’s complaint contained allegations that, leading up to the acquisition, AT&T began to realize that its promotions were resulting in declining rates, the court dismissed these as improper fraud-by-hindsight allegations, noting that Section 11 liability must be determined as of the effective date of the registration statement in January 2017. The court also rejected plaintiff’s duty-to-update argument for two reasons. First, according to the court, there were no “specific representations” in the registration statement about the “viability or success of [the sector] of AT&T’s business” that included DTVN. Second, the court held that declining DTVN subscription rates did not “represent a fundamental change in the information set forth in the registration statement” because AT&T’s DTVN represented less than 1% of AT&T’s video-subscriber business, which itself was only a small part of AT&T’s overall business. The court dismissed the Section 12 and 15 claims as “moot” given its finding that the registration statement did not contain any material misstatements or omissions.


On May 14, 2020, in Fortis Advisors LLC v. Allergan W.C. Holding, Inc., the Delaware Court of Chancery issued a letter ruling that denied Allergan W.C. Holding, Inc.’s motion to compel former shareholders of Oculeve, Inc. (which Allergan had acquired in a 2015 merger) to “participate in discovery as real parties in interest” or to compel Fortis Advisors LLC, the shareholder representative, to obtain and produce discovery from the shareholders in a post-closing dispute brought by Fortis against Allergan.

The court noted that the 2015 merger agreement appointed Fortis as the Oculeve shareholders’ “sole, exclusive, true and lawful agent, representative and attorney-in-fact” and did not “empower Fortis to compel [the shareholders’] participation in litigation.” Allowing a motion to compel discovery from the shareholders “would be contrary to the language and purpose of the Merger Agreement’s shareholder representative structure,” the court reasoned. Furthermore, the court held that Fortis had “no obligation to produce [the shareholders’ documents] in discovery” because the agreement did not “give Fortis any right to compel [the shareholders] to produce documents.”

The court was guided in its decision by the merger agreement’s language, which did “not include the discovery rights [Allergan] seeks to enforce, and which limit[ed] itself to the enumerated rights” in the agreement. “The fact that the Merger Agreement [did] not give Fortis control over the [shareholders] and their discovery is not Fortis’s ‘fault’ or ‘problem,’” the court concluded, but “is a result that Allergan bargained for.” This decision clarifies that, under Delaware law, a shareholder representative is the real party in interest in a post-closing dispute with a buyer—and parties should closely examine merger agreement language describing the metes and bounds of shareholder representatives’ obligations, including in the discovery context.


On April 29, 2020, in AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund et al., the Delaware Supreme Court upheld a Delaware Chancery Court ruling that required drug wholesaler AmerisourceBergen Corp. (“ABC”) to produce books and records to stockholders, including lead plaintiff Lebanon County Employees’ Retirement Fund, regarding ABC’s alleged failures in identifying and addressing suspicious orders of opioids. The Chancery Court had concluded in January 2020 that plaintiffs had a “proper purpose” for the section 220 inspection because “the flood of government investigations and lawsuits relating to [ABC’s] opioid-distribution practices is sufficient . . . to suspect wrongdoing warranting further investigation.” In ruling on ABC’s interlocutory appeal seeking a stay pending full appellate review, the Delaware Supreme Court held that, although ABC might claim that it would be harmed if it were ordered to produce documents during the pendency of ABC’s appeal, ABC had undercut its own argument by producing a subset of the very same documents to an individual investor plaintiff in a federal lawsuit involving claims similar to those brought by the pension funds. In denying ABC’s request for an order staying its production of documents, the court reasoned that ABC’s harm argument “is undermined because it has already produced the . . . materials to the federal plaintiff and the production of [those] materials in this case would likewise be subject to a mutually agreeable confidentiality order.”

In a Chancery Court order granting a limited stay pending ABC’s interlocutory appeal in March 2020, Vice Chancellor Laster included an observation that ABC’s decision to provide books and records voluntarily to the individual federal plaintiff, while resisting a similar production to the pension plaintiffs, “reflects a preference by the prospective defendants to litigate against the former rather than the latter,” adding that “it is not uncommon for defendants to take action to favor the opponent that they would prefer to face.” Although the Delaware Supreme Court did not address ABC’s apparent preference, it found that Vice Chancellor Laster did not abuse his discretion by ordering the company to produce its books and records to the pension plaintiffs.