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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Showing 277 posts in M&A.
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 ›
Chancery Applies Plain Language of a Merger Covenant To Dismiss Acquirer’s Untimely Indemnification Claim and Deny Sellers’ Request for Detailed Annual Reports
Supernus Pharms., Inc. v. Reich Consulting Grp., Inc., C.A. No. 2020-0217-MTZ (Del. Ch. Oct. 29, 2021)
Supernus Pharmaceuticals, Inc. acquired biotech startup Biscayne Neurotherapeutics, Inc. pursuant to a 2018 merger agreement. In 2019, Supernus submitted indemnification claim notices to Reich Consulting Group, Inc., the security holder representative for Biscayne. Subsequently, Supernus filed an indemnification action against Reich in the Court of Chancery. Following trial, plaintiff Supernus’s only remaining indemnification claim was based on a provision in the merger agreement that required Biscayne to operate in the ordinary course of business during a specific period of time (“Ordinary Course Covenant”). More ›
Delaware Supreme Court Upholds Contractual Waiver of Statutory Appraisal Rights
Manti Holdings, LLC, et al. v. Authentix Acquisition Co., Inc., No. 354, 2020 (Del. Sept. 13, 2021)
This decision arose out of the acquisition of Authentix Acquisition Company, Inc. and a subsequent appraisal proceeding brought by dissenting stockholders under 8 Del. C. § 262. As a condition of an earlier merger involving the private equity firm Carlyle, the petitioners were parties to a stockholders agreement binding the corporation and all of its stockholders that purported to waive the stockholders’ statutory appraisal rights. At the trial court level, the Court of Chancery enforced the contractual waiver and granted the company’s motion to dismiss. On appeal, alongside other contentions, the petitioners argued that statutory appraisal rights are one of the fundamental features of corporate identity and should be found nonwaivable under Delaware law and public policy. More ›
Chancery Examines Cornerstone Standard for Establishing Non-Exculpated Fiduciary Duty Claims
In Re BGC Partners, Inc. Derivative Litigation, Consol. C.A. No. 2018-0722-LWW (Del. Ch. Sep. 20, 2021)
A director protected by an exculpatory provision is entitled to dismissal in a breach of fiduciary duty action unless the plaintiff advances a non-exculpated claim. Under In re Cornerstone Therapeutics Inc. Shareholder Litigation, 115 A.3d 1173 (Del. 2015), to establish a non-exculpated claim plaintiff must show that a director: (1) “harbored self-interest adverse to the stockholders’ interests”; (2) “acted to advance the self-interest of an interested party from whom they could not be presumed to act independently”; or (3) “acted in bad faith.” This decision explains Cornerstone’s second prong. More ›
Chancery Addresses When an Efforts Clause-Based Earnout Claim May Ripen
S’holder Representative Servs., LLC v. Alexion Pharm., Inc., C.A. No. 2020-1069-MTZ (Del. Ch. Sep. 1, 2021)
Mergers and sale agreements frequently include earn-out provisions that entitle one party to future compensation if certain business or financial goals are met within a defined period. In return, the other party often must use a defined level of effort—such as “commercially reasonable” efforts—to achieve the goals that trigger the earn-out. This case addresses a practical threshold question: If the party entitled to the earn-out believes that the other party has breached its duty to use commercially reasonable efforts, may that party sue immediately, or must that party wait until the earn-out period ends? More ›
Chancery Rejects MFW Defense Based on Failure to Disclose That a Conflicted Controller Participated in Arbitration Proceedings Potentially Impacting the Company’s Value
Ligos v. Isramco, Inc., C.A. No. 2020-0435-SG (Del. Ch. Aug. 31, 2021)
Under MFW, a conflicted controller transaction may get the benefit of business judgment review when conditioned on two procedural protections involving: (i) approval by an independent special committee; and (ii) approval by a fully informed, uncoerced majority of the minority stockholders. At issue in Ligos was whether the shareholders were fully informed regarding the value of an arbitration concerning certain royalties when they approved a merger. More ›
Chancery Enforces Parties’ Merger Agreement That Barred Claims Upon Termination of the Agreement
Yatra Online, Inc. v. Ebix, Inc., C.A. No. 2020-0444-JRS (Del. Ch. Aug. 30, 2021)
Agreements frequently specify how the termination of the agreement affects the parties’ rights and obligations. This case illustrates that Delaware courts generally enforce “effect of termination” provisions in merger agreements as readily as any other contract provision. More ›
Chancery Denies Motion to Dismiss in Part Because Certain Discussions Between CEO and Acquirer Were not Disclosed in Proxy When Other Similar Communications Were
Teamsters Local 237 Additional Security Benefit Fund v. Caruso, C.A. No. 2020-0620-PAF (Del. Ch. Aug. 31, 2021)
Under Revlon, a director must focus on obtaining a transaction that provides the maximum value for stockholders in a sale of control. In addition, when directors solicit stockholder approval, they must disclose fairly and fully all material information. More ›
