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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 254 posts in M&A.
Chancery Trims Contract Claims in Post-Merger Dispute
In Re P3 Health Group Holdings, LLC, Consol. C.A. 2021-0518-JTL (Del. Ch. Oct. 31, 2022)
Plaintiff Hudson Vegas Investment SPV, LLC asserted various claims after its minority interest in Defendant P3 Health Group Holdings, LLC was wiped out in a business combination between P3 and a SPAC. The Court of Chancery has issued several decisions in the case; this one dealt with Hudson’s various claims for breach of P3’s LLC agreement. More ›
Chancery Sustains M&A Fraud Claims Based On Near-Term EBITDA Projections
In re P3 Health Grp. Hldgs., LLC, C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022)
This recent decision addresses three points of interest relevant to fraud claims.
First, while fraud claims generally involve statements of fact, future projections can support a fraud claim. The statement of future projection must be sufficiently specific, and the plaintiff must plead that the projection was fraudulently conceived. In this case, the Court of Chancery found plaintiff had sufficiently pleaded a fraud claim based on a specific EBITDA projection figure for the current year in which the statement was made. According to the plaintiff, the company missed the projected EBITDA number by roughly $52 million, with a projected EBITDA of $12.7 million and actual year-end results of negative $40 million. Because it was a near-term projection, and one reasonably conceivable inference from the large difference was that the defendant knowingly made a false representation, the Court found the plaintiff sufficiently pleaded a fraud claim based on the EBITDA projection. More ›
Chancery Grants Specific Performance For Release of Escrowed Funds, Rejects Sellers’ Representative’s Arguments to Withhold Funds As Inconsistent With Purchase Agreement’s Plain Language and the Implied Covenant of Good Faith and Fair Dealing
Am. Healthcare Admin. Services Inc. v. Aizen, C.A. No. 2019-0793-JTL (Del. Ch. Nov. 18, 2022)
Parties to acquisition agreements often have discretion concerning when to instruct an escrow agent to distribute funds post-closing, but any such discretion is limited by the plain language of the agreement and implied covenant of good faith and fair dealing. This decision addresses the availability of an unclean hands defense to contract claims seeking equitable relief. More ›
Chancery Finds Asset Purchase Agreement Required Buyer to Indemnify Seller for Liability Under State Tobacco Settlement
ITG Brands LLC v. Reynolds Am., Inc., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022)
Plaintiff acquired four cigarette brands from the defendant under an asset purchase agreement. Prior to entering into the APA, the seller had been making annual payments to the State of Florida based on the annual volume of tobacco product sales under a preexisting settlement agreement. The purchaser did not join the settlement, and the seller stopped making payments to Florida. Florida sued both parties in a Florida court over the lack of payments and obtained a judgment that the seller must continue to make settlement payments based on the purchaser’s own sales of the acquired brands. The seller and purchaser brought claims against each other in the Court of Chancery to determine which party bore responsibility for the Florida judgment. More ›
Chancery Finds Personal Jurisdiction Over Individual Who Formed Delaware Entities in Connection with a Challenged Merger Transaction
In Re P3 Health Grp. Hldgs., LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 14, 2022)
The Court of Chancery rejected an individual defendant’s challenge to Delaware’s assertion of personal jurisdiction over him. Although the defendant portrayed himself as merely a shareholder of Delaware entities (which is not in itself a basis for personal jurisdiction), the Court found that he had transacted business in the state for purposes of Delaware’s Long Arm Statute because he also formed two entities as part of a planned merger. It did not offend due process to require the individual to defend litigation related to the merger in Delaware because there was a nexus between his contacts and the claims and because he should have reasonably anticipated that Delaware would exercise jurisdiction over him in litigation arising from the merger.
Chancery Concludes That Transaction Meets MFW Standard
In re Match Grp. Inc. Deriv. Lit., Cons. C.A. 2020-0505-MTZ (Del. Ch. Sep. 1, 2022)
Under the so-called MFW framework, a transaction with a controller is subject to business judgment review, rather than the more exacting entire fairness review, if the transaction satisfies all six procedural protections elaborated in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). In simple terms, the MFW framework mimics the two key protections that exist in a transaction with a third party by requiring an independent negotiating agent (i.e., a board committee) and approval by the majority of the non-controlling stockholders. But the standard can be difficult to meet because the failure to comply with a single condition is fatal. Nonetheless, here, the Court of Chancery concluded that the transaction satisfied all six elements of the MFW framework because the as-pled facts established that the special committee had necessary authority, that a majority of the special committee was sufficiently independent, that the special committee satisfied its duty of care in negotiating a fair price, and that the minority stockholders approved the transaction through an uncoerced and informed vote. Because the plaintiff did not plead any claim that would overcome the application of the business judgment rule, the Court dismissed the case.
Chancery Declines to Order Acquirer to Make Contingent Payments after Discontinuing Development of a Medical Product
Pavel Menn v. ConMed Corp., C.A. No. 2017-0137-KSJM (Del. Ch. June 30, 2022)
Plaintiff was a representative of stockholders who had entered into a stock purchase agreement (“SPA”), in which the defendant acquired a company engaged in developing a medical product. The SPA allocated the risk of continued development via a contingent payment structure, including milestone payments and earn-out payments. The defendant agreed to use “commercially best efforts” to maximize the payments, and to accelerate the payments to the stockholders if the defendant permanently discontinued development or sale of the product, except for certain reasons, including risk of injury to patients. After making several milestone payments, the defendant discontinued development due to concerns of the risk of injury to patients. The plaintiff demanded acceleration payments and brought claims when defendant declined to make these payments. More ›
Stockholder Lacks Standing to Enforce the Merger Agreement but May Be Able to Recover Lost Premium Through an Action for Damages
Crispo v. Musk, C.A. No. 2022-0666-KSJM (Del. Ch. Oct. 11, 2022)
Stockholders generally have standing as third-party beneficiaries of corporate contracts under only limited circumstances. As this decision notes, whether contractual language gives standing to stockholders can be “a thorny legal issue.” More ›
Delaware Supreme Court Explains Appraisal Rights and Finds Disclosure Violation Relating to Pre-Closing Dividend Contingent on a Merger
In re GGP, Inc. Stockholder Litig., C.A. No. 2018-0267 (Del. July 19, 2022)
Here, the defendants organized a merger so that a large majority of the total value of the merger would be granted as a pre-closing dividend to stockholders and that the remaining amount would be granted in return for the stockholder’s shares. In the resulting litigation, stockholders argued that the defendants’ structuring of the merger unlawfully denied or diluted the stockholders’ right to seek appraisal and that the defendants’ disclosures regarding the structuring were deficient. The defendants prevailed on a motion to dismiss before the Court of Chancery. On appeal, the Delaware Supreme Court found that the dividend conditioned on the merger’s consummation was part of the merger consideration for appraisal purposes under Delaware law, that receipt of the dividend did not disqualify stockholders from seeking appraisal, and that plaintiff’s claim regarding the structure, therefore, was properly dismissed. But the Supreme Court reversed the trial court’s dismissal of the related disclosure claim. The plaintiffs alleged that the director defendants, aided and abetted by the acquirer, had deprived stockholders of their appraisal rights by improperly describing what would be subject to appraisal. The Supreme Court agreed and held that the disclosures were confusing and materially misleading. The proxy stated that stockholders were entitled only to the amount that remained after the pre-closing dividend. But this was incorrect as a matter of Delaware law, as the stockholders were also entitled to appraisal for the pre-closing dividend. Two justices dissented from the majority’s holding regarding the disclosure claim.
Chancery Upholds Brophy Claim and Finds Post-Merger Direct Standing Based On Process Challenge
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. June 2, 2022)
This motion to dismiss decision upholds a Brophy claim against an activist investor and director who was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. The Court of Chancery found it was reasonable in the circumstances to infer materiality of the expression of interest, which represented a nearly 65% premium over the company’s trading price, and that the fiduciary was motivated to act upon it. The Court also found that a merger did not eliminate the plaintiff’s standing under the contemporaneous ownership requirement. The Court rejected the defendant's argument under Primedia regarding the asserted immateriality of the value of the plaintiff’s claims in the context of the merger. As the Court explained, under Parnes, a stockholder could may assert “a direct claim challenging a merger if the facts giving rise to what otherwise would constitute a derivative claim led either to the price or the process being unfair.” Here, the plaintiff’s allegations challenged the fairness of the sale process – a process that the activist allegedly delayed to serve his own interests at the expense of the Company running a better process or remaining independent.
Chancery Addresses Fiduciary Duty Claims Involving Activist Investor
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. May 26, 2022)
In this case, an activist investor and director was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. And others at the company were alleged to have manipulated the company’s projections to justify the deal price at a lower valuation. The Court of Chancery found well-pled fiduciary duty claims against the alleged wrongdoers and aligned parties that avoided a Corwin dismissal. Among other things, the Court’s decision illustrates constellations of facts sufficient to question the independence of otherwise disinterested fiduciaries. Here, such combinations involved directors’ symbiotic relationships with an activist investor that resulted in repeat directorships in targeted companies.
Court Rejects Franchisor’s Attempt Based on Business Effects of COVID-19 to Escape Contractual Obligation to Purchase Franchisee’s Assets
Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249-JRS (Del. Ch. March 1, 2022)
In this post-trial decision, the Court of Chancery awarded specific performance to Plaintiff/franchisee who sought to enforce Defendant/franchisor’s exercise of its contractual right to purchase Plaintiff’s assets, which included yoga studios in several states. Defendant exercised its right as of May 2019 but then delayed, and ultimately purported to back out, after the COVID-19 pandemic took hold in early 2020. The Court granted specific performance based upon the specific language of the parties’ agreement, finding Defendant failed to prove either a Material Adverse Effect or a violation of the ordinary course covenant when Plaintiff temporarily closed its yoga studios in response to COVID-19. Among other reasons, the seller was the franchisee, the buyer was the franchisor, and the seller had followed the buyer’s instructions concerning the operation of franchises. The Court also noted that the parties’ agreement contained no closing conditions or an express right to terminate.
Court of Chancery Holds That Exclusive Remedy Provisions Alone Are Not Enough To Bar Fraud Claims Based On Extra-Contractual Statements
Fortis Advisors LLC v. Johnson & Johnson, C.A. No. 2020-0881-LLW(Del. Ch. Dec. 13, 2021)
Delaware public policy respects freedom of contract, but it is also intolerant of fraud. These dueling policy aims are often pitted against one another in the context of complex commercial transactions, where the contracting parties agree to allocate risk – including limitations on the information relied on in entering the transaction. Delaware courts have struck a balance: contractual disclaimers of reliance are permitted, but they must be express and limited to the other party’s extra-contractual statements. Here, the Court of Chancery considered whether an exclusive remedies provision was alone sufficient to disclaim reliance on extra-contractual statements. More ›
Chancery Revived a Dismissed Claim after Discovery Revealed a Desire for Liquidity that Resulted in a Divergent Interest in M&A Sale Process
In re Mindbody, Inc., S’holder Litig., Cons. C.A. No. 2019-0442-KSJM (Del. Ch. Dec. 9, 2021)
A desire for liquidity can result in a divergent interest sufficient to plead fiduciary duty claims against a defendant protected by an exculpatory charter provision. More ›
Delaware Supreme Court Affirms that Seller’s Change of Business Operations in Response to the COVID-19 Pandemic Excused Buyer’s Obligation to Close
AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, No. 71-2021 (Del. Dec. 8, 2021)
This Supreme Court decision affirms the Court of Chancery’s decision below (reported here) that a buyer’s obligation to purchase a $5.8 billion group of hotel properties was excused due to the seller’s failure to comply with a covenant that, between signing and closing, it would operate “only in the ordinary course of business, consistent with past practice in all material respects.” More ›
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