About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 160 posts in M&A.
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.
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 ›
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 Addresses Earn-Out Dispute Involving Alleged Breaches of Fiduciary Duty and the Implied Covenant
Contingent payments based on an acquired business’s future performance are a frequent feature in M&A transactions. In this case, after selling control, the seller remained a minority member for a time period. Two holdings are noteworthy. More ›
Chancery Declines to Dismiss Claim that Acquirer Failed to Use “Commercially Reasonable Efforts” to Reach Earn-out Milestones
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 ›
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.
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 ›
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 ›
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 ›
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.
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.
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.
Briefly, under Corwin, the informed vote of a majority of the disinterested stockholders subjects a transaction to the business judgment rule when the deal does not involve a conflicted controlling stockholder. Additionally, a “controller” may be a group of stockholders when that group acts together in a way that is not just a concurrence of the members’ self-interest. This decision examines both issues. Further, as this decision explains, pleading around Corwin by adequately alleging a disclosure violation is not enough to sustain a complaint—the stockholder still needs to state a non-exculpated claim in order to pursue a damages action.
As this decision explains, to state a claim attacking a merger on the basis that the Board acted in bad faith you need more than accusations that directors were motivated to avoid a proxy fight involving an activist investor. Informed stockholder approval, disinterested directors, careful consideration, a premium price, reasonable deal protection devices, and prominent advisors all work to negate inferences of bad faith.
This decision begins with a conventional analysis of a claim that disclosure violations and director self-interest have tainted a merger vote. That claim was rejected for want of factual support. More unusual, the decision also rejects the plaintiff’s argument of an alleged independent right to appraisal that, when infringed by disclosure violations, is outside the usual charter exculpation provision for duty of care breaches. As this decision explains, quasi-appraisal is simply a form of remedy, typically sought to address disclosure deficiencies that are the product of a breach of fiduciary duty. Where there is no failure to identify any material misrepresentation or omission, or any other viable claim for breach of fiduciary duty, there is no basis to impose a quasi-appraisal remedy.