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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 174 posts in M&A.
Court of Chancery Addresses Stockholder Standing to Enforce Corporate Contracts, Declines to Dismiss Claim for Breach of Anti-Takeover Protections Akin to Section 203 of the DGCL
Ark. Teacher Ret. Sys. v. Alon USA Energy, Inc., C.A. No. 2017-0453-KSJM (Del. Ch. Jun. 28, 2019).
Section 203 of the Delaware General Corporation Law, an anti-takeover statute, prohibits a target from entering into a business combination with an acquirer for three years from the date that the acquirer first obtains 15% or more of the target’s stock, unless the target’s board pre-approves the transaction crossing the 15% threshold. Here, to avoid Section 203’s three-year anti-takeover period, an acquirer sought pre-approval of its acquisition of a 48% block of shares. The target’s board agreed, but on the condition that the acquirer enter into an agreement that retained Section 203’s three-year standstill period for one year. A stockholder-plaintiff later brought suit arguing the acquirer failed to comply with the one-year standstill, and thus breached the agreement. It also argued the acquirer’s breach of the agreement to shorten Section 203’s three-year standstill period to one year in effect revived the longer period, such that the merger was void ab initio under the DGCL. When the defendants moved to dismiss claiming the stockholder-plaintiff lacked standing to enforce the target corporation’s agreement with the acquirer, the Court held that the stockholder sufficiently alleged it had standing as an intended third-party beneficiary. The Court reasoned that provisions of the Delaware General Corporation Law have been likened to a contract that stockholders may enforce by suing directly. Section 203 in particular was enacted to benefit stockholders by limiting hostile takeovers and encouraging fair, non-coercive acquisition offers. Here, the target’s agreement with the acquirer adopted those protections for the same apparent purpose of directly benefitting stockholders. More ›
Citing Trulia and Walgreens Decisions, Federal District Court Orders Plaintiffs’ Counsel to Return Agreed-Upon Mootness Fee
House v. Akorn, Inc., Consol. Nos. 17-C-5018, 17-C-5022, 17-C-5026 (N.D. Ill. Jun. 24, 2019).
Disclosure-only settlements of stockholder class actions have received increased scrutiny following the Delaware Court of Chancery’s Trulia decision in 2016 and the Seventh Circuit Court of Appeals’ Walgreens decision later that year. Those decisions observed the problem of M&A strike suits, expressed disfavor of disclosure-only settlements in M&A class actions, and significantly raised the bar for getting the required court approval of such settlements. One consequence has been many M&A suits migrating from the Delaware Court of Chancery to federal courts around the country. Another has been defendants more frequently acting to voluntarily moot the claimed disclosure violations through supplemental disclosures. In that instance, the parties then face the choice of either litigating the appropriate mootness fee award to plaintiffs’ counsel for the supplemental disclosures prompted by their claims or, alternatively, privately negotiating the mootness fee award and thus avoiding the judicial process, provided no other stockholders object to the negotiated award. More ›
Merger Agreement’s Preservation of Privilege for Pre-Merger Communications Found to be Adequate, Notwithstanding that the Surviving Company Took Possession of E-Mails
This decision confirms that, in a post-merger dispute between an acquirer and the selling stockholders, broad contractual language can prevent a waiver of the acquired company's privileged pre-merger communications, even if the surviving company takes physical possession of the communications. RSI Holdco, LLC acquired Radixx Systems International, Inc. in 2016, and the merger agreement designated Shareholder Representative Services LLC as representative of Radixx's selling shareholders. As part of the merger, RSI Holdco acquired Radixx’s computers and email servers, which contained 1200 pre-merger emails between Radixx and its counsel; Radixx had not excised or segregated the communications from other data. However, the merger agreement contained a detailed provision that (1) preserved Radixx’s privilege, (2) assigned it the representative of selling stockholders, (3) required the parties to take steps to ensure that the privilege remained in effect, and (4) prevented RSI Holdco from relying on the privileged communications in post-merger litigation. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Court had found that privilege transferred to the surviving company in a merger as a matter of law pursuant to section 259 of the DGCL because (i) the parties did not address privilege in the merger agreement, and (ii) because the at-issue communications were turned over. Great Hill cautioned future parties to "use their contractual freedom" to exclude privileged communications from the transferred assets. Here, the Court rejected RSI Holdco's argument that the failure to excise the communications waived privilege in this circumstance, and the Court noted that even if the privilege had been waived, the merger agreement still prevented RSI Holdco from relying on the communications in the litigation. Thus, the Court concluded that the sellers "heeded the Great Hill court's advice" and found the detailed provision in the merger agreement preserved the privilege attached to the pre-merger communications.
Delaware Supreme Court Rejects MFW Defense Because of Delay in Safeguards
Olenik v. Lodzinksi, No. 392, 2018 (Del. Apr. 5, 2019).
Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), deferential business judgment review governs mergers between a controlling stockholder and the controlled corporation when the deal is conditioned “ab initio” on two procedural safeguards. Those are approval by (i) a special committee of independent directors, and (ii) an uncoerced, informed majority-of-the-minority stockholders’ vote. The reasoning goes, with so-called “MFW conditions” in place at the outset, a controller cannot dictate the economic terms or unduly influence the stockholder vote, thus ameliorating the concerns otherwise justifying the more exacting “entire fairness” review. More ›
Chancery Enjoins Unfair Merger Pending Corrective Disclosures, But Declines to Order a “Go Shop”
FrontFour Capital Grp. LLC v. Taube, C.A. No. 2019-0100-KSJM (Del. Ch. Mar. 11, 2019)
This decision involves an increasingly rare occurrence in Delaware: an expedited pre-closing fiduciary duty challenge to a proposed merger. Specifically, stockholders challenged a proposed combination of a publicly traded asset management firm (Medley Management) with two corporations that it advises pursuant to management agreements: Medley Capital Corporation and Sierra Income Corporation. The proposed transaction involved Sierra acquiring Medley Management, which is majority owned by the Taube brothers, and Medley Capital, of which the Taube brothers owned less than 15%. Medley Management stockholders were to receive cash and stock representing a 100% premium to its trading price. By contrast, Medley Capital stockholders were to receive only shares of Sierra stock providing no premium against its net asset value. When a Medley Capital investor brought suit in early February, the parties agreed to an expedited trial four weeks after the filing of the case, prior to a March 11 stockholder vote on the merger. More ›
Chancery Declines to Dismiss Claim that Acquirer Failed to Use “Commercially Reasonable Efforts” to Reach Earn-out Milestones
Himawan v. Cephalon, Inc., C.A. No. 2018-075-SG (Del. Ch. Dec. 28, 2018).
Parties in M&A transactions commonly include efforts clauses, like the obligation to use best efforts, commercially reasonable efforts, etc., to some end. Delaware law enforces such covenants and views them as creating affirmative duties. Exactly what duties an efforts clause creates is contextual, however, and courts sometimes wrestle with how to apply them. Parties on occasion try to bring clarity to their contract by defining what they intend their particular efforts clause to mean, like the parties attempted in this case. More ›
Court Of Chancery Explains Limits Of Incorporation By Reference In Disclosure Law
Zalmanoff v. Hardy, C.A. 12912-VCS (November 13, 2018)
This decision holds that it is acceptable to make the needed disclosures to stockholders by sending them both a Form 10-K and proxy statement at the same time. However, this does not mean that it is possible to rely on past SEC filings when a proxy statement omits material information that was disclosed previously. The key is that the various documents need to be disclosed together.
Court Of Chancery Clarifies Set Off Rights Under Acquisition Agreement
Post Holdings Inc. v. NPE Seller Rep LLC, C.A. 2017-0772-AGB (October 29, 2018)
Acquisition agreements frequently contain escrows to cover any claims for breach of the warranties in the agreements or other post-closing claims. But that does not mean that a buyer may set off an unliquidated claim against its post-deal payment obligations under the agreement. As this decision holds, to have that set off ability, the agreement must permit it as a matter of right.
Court Of Chancery Provides Definitive Explanation Of A Material Adverse Effect Clause
Akorn Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (October 1, 2018)
Merger agreements often permit the buyer to terminate items when a material adverse effect occurs. This 247 page opinion provides what may be the definitive analysis of such terms as “material adverse effect,” “reasonable best efforts” and “all actions necessary” that are often found in merger agreements. It is also a great source of the key reference materials that the Court of Chancery is increasingly turning to in interpreting what such terms mean in the real world. For example, it teaches that a MAE clause is focused on the target company’s own performance as different from the industry that it belongs to and explains the degree and length of a downturn needed to find an MAE. More ›
Court Of Chancery Again Holds Deal Price Establishes Fair Value
In Re PLX Technology Inc. Stockholders Litigation, C.A. 9880-VCL (October 16, 2018)
This massive decision is a primer on Delaware director fiduciary duty. It covers just about all the important issues, with an enormous amount of citations and explanation. It is particularly helpful in showing how directors must meet their disclosure obligations, both to their other directors and to stockholders. It is, of course, very much a product of its unique facts. More ›
Delaware Supreme Court Explains the Ab Initio Requirement of MFW
Flood v. Synutra Int’l, Inc., C.A. No. 101, 2018 (Del. Oct. 9, 2018)
Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), commonly referred to as MFW, a controller may gain the benefit of business judgment review when it conditions a transaction—from the outset (i.e., ab initio)—on two procedural protections. Those involve approval by (i) an independent special committee and (ii) a majority of the minority stockholders. The point of the timing requirement is that the controller disables its influence from the beginning, instead of using the option as a bargaining chip when negotiating economic terms. More ›
Court of Chancery Enforces Agreement to Use Independent Auditor
Enterprise Holdings Inc. v. Rolen Stockholder Representative LLC, C.A. No. 2017-0422-AGB (Del. Ch. June 27, 2018)
Merger agreements sometimes provide for post-merger purchase price adjustments to be made by an independent accounting firm. This is another decision, in the form of a bench ruling, where the Court of Chancery readily enforces such an agreement, albeit with some guidance to the accountant on what issues are for the accountant to decide and what issues must remain for the Court.
Court of Chancery Reviews Post-Closing Payments
Fortis Advisors LLC v. Stora Enso AB, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018)
Many merger agreements provide for additional payments after closing depending on the target’s performance. This decision examines certain language controlling the buyer’s obligations to achieve the post-closing milestones. The relevant language was subject to more than one reasonable construction, thus ambiguous, and extrinsic evidence would be necessary to resolve the dispute. Accordingly, the Court denied the buyer’s motion to dismiss.
Court Of Chancery Permits Validation Of Defective Merger
The Cirillo Family Trust v. Moezinia, C.A. 10116-CB (Del. Ch. July 11, 2018)
This is an interesting decision for three reasons. First, it gives a good discussion of when defective corporate acts can be cured under Section 205 of the DGCL. Even a defective merger is possibly subject to Section 205. Second, it has a good outline of when advice of counsel is a good defense to allegations of director liability. Third, it permits a claim to go forward against corporate officers. This is a good reminder that the Delaware exculpation statute does not apply to officers.
Court Of Chancery Upholds Exclusive Remedy Clause
PR Acquisitions LLC v. Midland Funding LLC, C.A. 2017-0465-TMR (April 30, 2018)
This is an important decision because it teaches two important lessons. First, when an asset sale agreement contains explicit requirements on how to give notice of a claim on an escrow account, those requirements must be followed or the claim will be waived. Second, absent fraud, a contractual provision will be enforced that provides that the exclusive remedy for a buyer is a claim on an escrow fund. Thus, for example, a separate breach of contract or negligent representation claim will be dismissed.