Posts tagged M&A

Court Of Chancery Explains Limits Of Revlon

In re Morton's Restaurant Group Inc. Shareholder Litigation, C.A. 7122-CS (July 23, 2013)

This decision is another example of the increasing scrutiny of complaints attacking mergers without an adequate factual basis.  At the outset of the decision, the Court gives an extensive justification for going beyond the mere confines of the allegations of the complaint to review SEC filings and other materials touched on in the complaint.  From those documents, the court is able to conclude the Revlon claim has no merit.

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Court Of Chancery Applies BJR To Controller Merger

In Re MFW Shareholders Litigation, C.A. 6566-CS (May 29, 2013)

In this important decision the Court of Chancery for the first time has applied a business judgment rule analysis to a review of a merger where a controller is on both sides of the deal. This result limits the old Lynch doctrine that mergers involving a controller on both sides is subject to the intrinsic fairness standard that almost always requires a trial to resolve.  While this short blog cannot do justice to the Court's analysis, it held that the BJR will apply when: (1) the deal is subject to the approval of a SNC and the majority of the minority stockholders, (2) the SNC is independent, (3) the SNC has its own advisors and can say "no", (4) the SNC meets its duty of care, (5) the stockholder vote in fully informed and (6) the  vote is not subject to coercion.

 

 

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Court Of Chancery Upholds Concealment Claim

Transdigm Inc. v. Alcoa Global Fasteners Inc., C.A. 7135-VCP (May 29, 2013)

This is another in the continuing series of cases involving buyers of companies who claim to have been misled by the sellers and where the sellers rely on exculpation clauses to defeat the buyers' claims.  What is interesting about this decision is that it upholds the novel argument that a concealment claim is not barred by such exculpation language. The decision has an excellent review of prior Delaware law interpreting such clauses.

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Court Of Chancery Explains When A Derivative Suit Survives A Merger

In Re Primedia Inc. Shareholders Litigation, C.A. No. 6511-VCL (May 10, 2013)

This is a major decision.  Generally, a merger ends the standing of a plaintiff to pursue derivative litigation.  To get around this problem, derivative plaintiffs have alleged that the merger itself was invalid because the consideration paid to the stockholders eliminated in the merger did not include anything for the value of a pending derivative claim.  Until this decision, that claim did not go very far because the courts found that the derivative claim was worth very little.  But what if the claim is worth a lot?

This decision explains how to deal with that situation to effectively assert what is known as a "Parnes" claim.  As a result, we may see more such claims at least when the derivative litigation asserts big damages.

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Court Of Chancery Upholds Acceptance Of One Offer Without Market Check

In re Plains Exploration & Production Company Stockholder Litigation, C.A. 8090-VCN (May 9, 2013)

 As this decision points out again, when a board of directors is disinterested in the transaction, its decision to accept the first offer for its company does not run afoul of the Revlon doctrine just because there was no pre-agreement market check.  Instead, their decision is subject to the business judgment rule.

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Court Of Chancery Explains Deal Protection Limits

In re Bioclinica Inc. Shareholder Litigation, C.A. 8272-VCG (February 25, 2013)

This is yet another example of the Court of Chancery explaining that the deal protection rules set by Omnicare have long since been modified by the Court.  The correct analysis is not to just adopt some rigid formula but to instead carefully test the actual impact of the deal protection measures on the possibility some other bidder may appear. This decision tells you how to do just that test.

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Court Of Chancery Explains Bad Faith Claim

In re Novell Inc. Shareholder Litigation, C.A. 6032-VCN (January 3, 2013)

This decision well explains what may constitute a claim that a merger was entered into in bad faith. Such a claim is necessary to sustain a complaint when the majority of the directors are independent and disinterested.  Deal protection devices such as termination fees are not enough to show bad faith, at least when their terms are typical of such provisions.

Here the complaint adequately pled bad faith by alleging that the board favored 1 of 2 bidders for no good reason. For example, if the losing bidder made the highest offer, there must be some reason to not take its bid.  If not, the the board may be said to have acted in bad faith because that would knowingly violate its duty to get the best deal.

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Court Of Chancery Examines "Don't Ask, Don't Waive" Clause

In re Complete Genomics Inc. Shareholder Litigation,  C.A. 7888-VCL (November 27, 2012)

This transcript has an excellent review of the case law on deal protection clauses that limit what a Board can do upon receiving a possible better offer.  The Court enjoined compliance with a "don't ask, don't waive" clause in such circumstances.

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Court Of Chancery Explains Post-Closing Notice Requirements

Impact Investments Colorado II LLC v. Impact Holding Inc., C.A. 4323-VCP (August 31, 2012)

Acquisition agreements often have provisions for post-closing adjustments to the purchase price. How to invoke the right to such an adjustment is set out in the agreement.  This decision deals with such a notice provision requiring "reasonable particularity" for the claimed adjustment.  While the Court reserved for trial the decision on whether that standard was met, the discussion of the notice provision is an excellent guideline on how to draft and interpret notice provisions.

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Court Of Chancery Explains Disclosure Rules For Management Contracts

In re Micronetics Inc. Shareholder Litigation, C.A. 7626-VCP (July 24, 2012)

While each disclosure case will turn on its own facts, this decision gives an excellent overview of when employment contracts with management must be disclosed when notifying stockholders of a proposed merger with an acquiring company.  When management has been involved in the merger negotiations, any employment agreements and the surrounding circumstances must be disclosed.

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Court Of Chancery Explains Reformation Remedy

Brinckerhoff v. Enbridge Energy Company Inc., C.A. 5526-VCN (May 25, 2012)

This is an interesting decision because it suggests a remedy other than damages in an unfair price case.  Once a deal has closed, the plaintiff may find that his remedies in a pure unfair price claim are limited.  Frequently, damages against directors are foreclosed by an exculpation clause. Here the Court suggests that, at least when the merger consideration is not just cash, reformation may be an available remedy.  Given that has happened just once, it may be a long shot at best.

This decsiion was upheld by the Supreme Court on MAy 28, 2013. 67 A3d 369.

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Supreme Court Clarifies Fraud Disclaimers

RAA Management LLC v. Savage Sports Holdings Inc., C.A. 577, 2011 (May 18, 2012)

It is common in sales of a company to have a non disclosure agreement containing a waiver of any claim, including a fraud claim, by the buyer that is based on any representation not specifically included in the final agreement of sale.  In other words, there may be no reliance on any oral representation or even any written materials unless the final agreement says the buyer is entitled to rely on that representation.  This Delaware Supreme Court decision squarely upholds such provisions.

After all, the result could hardly have been otherwise in this case.  For here, the would be buyer never actually agreed to buy, but only to take a look.  When it found out the facts, it walked away except to demand payment for its expenses.  To let a possible buyer recover expenses based on claims it had disclaimed going into the due diligence room seems unwise.

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Court Of Chancery Enjoins Proxy Contest For Violation Of NDA

Martin Marietta Materials Inc. v. Vulcan Materials Company, C.A. 7102-CS (May 4, 2012)

Non-disclosure agreements are often used and frequently ignored.  Well not any more.  This decision enjoins a proxy contest for 4 months because the bidder violated a NDA in its proxy materials.  This unique remedy will make it much more important to carefully draft and to honor NDAs.

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Court Of Chancery Explains When Director May Be "Interested"

In re Answers Corporation Shareholders Litigation, C.A. 6170-VCN (April 11, 2012)

Directors who are also officers have an interest in a merger when they are to retain their jobs in the merged company.  Delaware has recognized that this interest is inevitable in many cases and is usually not enough to make that director's vote for the merger considered an interested transaction. Of course, if future employment is negotiated improperly, the director may well be "interested," particularly if he both negotiates the merger and his future employment at the same time.

But what happens if he does not do so? Here the director/officer was deemed to be an interested director who had to prove the entire fairness of the deal because he knew he was about to be fired unless the deal was done soon.  This illustrates the importance of context.

Finally, the opinion is also interesting for its review of when circumstantial evidence is enough to show the acquiror had knowledge of possible fiduciary duty breaches so as to be an aider and abettor.

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Court Of Chancery Explains Special Benefit Rule

Frank v Elgamal, C.A. 6120-VCN (March 30, 2012)

It is well understood that when a controlling stockholder stands on both sides of a transaction with his controlled entity that he will need to show the transaction is entirely fair to the other owners.  But when he receives such a special benefit so as to be on both sides of the deal is not always so easy to decide.  After all, it is common such acquirors to want to retain management.  If the insiders get an employment contract, do they stand on both sides of the negotiations?  This decision helps to answer that question.  In general, if the controllers get an equity interest in the surviving entity to a merger that is not shared with the other owners, then they are on both sides of the transaction and must show it is entirely fair.

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