Shareholders’ representatives play an important role in many transactions where the target has a relatively large number of shareholders, but I haven’t seen their obligations addressed in judicial decisions. Okay, I admit I haven’t exactly been on the prowl for these decisions, but having stumbled across this Morris James blog describing the Chancery Court’s decision in Houseman v. Sagerman,(Del. Ch.; 7/21), I thought it was worth sharing.
The plaintiffs challenged a number of decisions made by the shareholders’ representative in the administering the proceeds of a merger, and argued that entire fairness was the appropriate standard of review. The matter was referred to a Special Master, who determined that the representative’s conduct should be evaluated under an an abuse of discretion standard. This excerpt from the blog summarizes the Chancery Court’s decision:
The Court of Chancery, upon de novo review of the Special Master’s report, noted that a Shareholders’ Representative, as attorney-in-fact for other shareholders, “generally assumes the obligations of a fiduciary.” However, the powers and duties of such a representative can be modified and circumscribed by contract. Here, the merger agreement indicated that “[t]he Shareholders’ Representative shall not have any duties or responsibilities except those expressly set forth in this Agreement.”
Under the merger agreement, the Shareholders’ Representative was empowered to “do[] any and all things and tak[e] any and all action that the Shareholders’ Representative, in such Person’s sole and absolute discretion, may consider necessary, proper, or convenient in connection with or to carry out … the transactions contemplated by this Agreement.” The Court interpreted that language as requiring that conduct be measured by the subjective good faith of Shareholders’ Representative.
So long as the Shareholders’ Representative actually concluded in good faith that specific acts were “necessary, proper or convenient” to protect the interests of all shareholders, the Shareholders’ Representative was empowered to take such acts, and all shareholders, even those who did not sign the merger agreement, were bound to such determinations.
That last part – the ability to bind non-signatories – is another interesting aspect of the decision. In support of that conclusion, the Chancery Court cited its prior decision in Aveta v. Cavallieri, (Del. Ch.; 9/10), which held that certain post-closing price adjustments determined through a stockholders’ representative were permissible under Section 251(b) of the DGCL:
The [Aveta] Court concluded that, because post-closing adjustments are generally permissible as a matter of corporate law, the scope of the contractual grant of authority to an agent to administer those adjustments is irrelevant. Accordingly, “it does not matter whether . . . the Purchase Agreement
gave [the representative] authority to act on behalf of some, all, or none of [the] stockholders. All that [Section 251] required was for [the representative] to be designated as the individual who would follow the procedures and make or participate in the determinations called for by the Purchase Agreement.”
Since the merger agreement designated the shareholders’ representative to carry out the actions contemplated by that agreement, the shareholders were bound by the representative’s actions taken in conformity with the agreement, regardless of whether they were signatories to it.
The September-October issue of the Deal Lawyers newsletter was just posted – & also sent to the printer. Articles include:
– Recasting a Boilerplate Provision: Exclusive Forum Provisions for Private Delaware LLCs After a Decade of Public Corporate Developments
– Buyer Loses an MAE Claim (Again) in Delaware
– Discounted Cash Flow: “I’m Not Dead Yet!”
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Well, it was fun while it lasted – a little more than a year after adopting the first overhaul of its Vertical Merger Guidelines in 40 years, the FTC voted to rescind them. Here’s an excerpt from this Cadwalader memo:
On September 16, 2021, the FTC voted 3-2 to withdraw its support for the Vertical Merger Guidelines, which were jointly adopted by the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”), and the Commission’s commentary on vertical merger enforcement. The FTC’s rescinding of policies without issuing new guidance, coupled with the destabilizing blows to the premerger notification filing program under the Hart-Scott-Rodino Act that we discussed recently, leaves merging parties in the lurch, forcing them to navigate the merger review process in the dark.
To add to the confusion, the FTC and DOJ may be applying different policies with regard to vertical mergers, as the DOJ Acting Assistant Attorney General Richard A. Powers issued a statement hours after the FTC’s vote that, although the Department is reviewing the Vertical Merger Guidelines, they currently remain in place at the DOJ.
The memo notes that the DOJ is currentlyreviewing both the Horizontal Merger Guidelines and the Vertical Merger Guidelines “to ensure they are appropriately skeptical of harmful mergers,” and says that while significant policy changes may be deferred until after Jonathan Kanter is confirmed to head the Antitrust Division of the DOJ, it already has identified several aspects of the Vertical Merger Guidelines that “deserve close scrutiny” and has pledged to work closely with the FTC to revise them as appropriate.
The boom in SPAC IPOs has left hundreds of newly-public buyers flush with cash and chasing De-SPAC mergers before the clock strikes midnight – but competition for deals is fierce and regulators are ramping up their scrutiny of SPAC deals. Tune in tomorrow for the webcast – “Navigating De-SPACs in Heavy Seas” – to hear Erin Cahill of PwC, Bill Demers of POINT BioPharma, Reid Hooper of Cooley and Jay Knight of Bass Berry discuss the key issues facing SPACs as they seek to complete their de-SPAC transactions in this challenging environment.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit your state and license number and complete the prompts during the program.
A recent FTI Consulting study looked at the factors driving skyrocketing SPAC valuations, and what they found provides some reason for concern. Here’s an excerpt from the intro summarizing the findings:
What follows is a look at FTI Consulting’s findings, which show three significant trends: 1) SPACs and the resulting newly public companies are increasingly being traded based on multiples of forward revenue (not the more traditional multiples of historical revenue and earnings); 2) projection periods are growing longer; and 3) those forward revenues are projected to grow at much higher rates.
FTI looked at 216 out of 250 SPAC investor presentations that included projections, and found that almost two-thirds of announced de-SPAC mergers in the past year have been for pre-revenue, pre-EBITDA companies. That’s up from just one-quarter of such companies in the period between 2016 and early 2020. These developmental stage companies assumed very high growth rates in their projections extended those projections out over a longer projection period than more mature companies.
How aggressive are the growth rates for these projections? The median CAGR of projected revenues for SPACs over the last year was between 40- 50%, compared to 21% during prior periods – and the latest batch of projections covered four years, as compared to two and a half years in 2016.
For the first 20 years of my career, I was the principal lawyer for the M&A group of a regional investment banking firm, which means that whatever else I had going on during a given day, I could usually count on being asked to draft or negotiate an investment banker’s engagement letter. I don’t mind telling you that I absolutely despised that part of my job.
Negotiating bankers’ engagement letters is a completely miserable experience, but it’s something that everyone involved in M&A needs to know a little about. That’s why I recommend this Venable memo to you if you haven’t had a lot of experience with engagement letters. It provides a nice overview of their terms. For example, here’s an excerpt on “tail” coverage:
Once the engagement is terminated, the “tail” period starts running. The tail provision entitles the advisor to receive its fees if the transaction identified in the engagement letter occurs during some specified period after its termination. The tail provision ensures that the advisor receives its compensation if it has performed its services and introduced the client to the buyer (or other party to the transaction, as determined by the engagement letter), even though the parties closed the deal after the term ended. It also functions as a bad-faith protection, as it prevents clients from terminating the engagement and entering into a transaction immediately after to avoid paying the fee. The tail period generally may last up to 2 years, and frequently it is applicable only to specified potential buyers or other parties to the transaction.
On this last point, in my experience, bankers frequently push to have tail coverage extend to a transaction with any party, not just those contacted during the sale process. The argument is usually some variation of “word gets around” as a result of the banker’s marketing efforts and the bankers don’t want to create an incentive for the seller or a potential buyer to engage in strategic behavior in order to avoid paying a fee.
All sorts of contractual provisions impose obligations on the parties and their respective affiliates. But if you sign up for an obligation that covers your affiliates, is it limited to those who were affiliates at the time of the contract, or are persons and entities that subsequently become affiliates covered as well? This Weil blog reports on a recent Chancery Court decision that addressed that issue. Here’s the intro:
When is a person’s status as an “affiliate” determined—when the contract restricting an affiliate’s activities is entered into, or at the time an alleged violation of the contractual restriction occurs? Stated differently, can a contracting party become responsible for an alleged violation of a contract restricting a party and “its affiliates” by the actions of a person after it becomes an affiliate, even though it was not an affiliate when the contract was entered into? According to a recent Delaware Court of Chancery decision, Symbiont.IO, Inc. v. Ipreo Holdings, LLC, 2021 WL 3575709 (Del. Ch. Aug. 13, 2021), the answer, at least in the context of a non-competition provision contained in a joint venture agreement, is that a person’s status as an affiliate is generally measured at the time of the alleged breach.
The blog goes on to explain that this means that if a party agrees to restrictions that will apply to its affiliates actions, it becomes responsible for an affiliate’s violation of those restrictions, even if the contracting party has no control over that affiliate but is instead controlled by it. In the case of a non-compete, it also doesn’t matter if the affiliate is just conducting its business as usual and was not itself bound by the non-competition agreement.
Yesterday, the Delaware Supreme Court issued its long-awaited decision in Manti Holdings v. Authentix Acquisition, (Del. 9/21). The Court upheld the Chancery Court’s prior decision, in which Vice Chancellor Glasscock held that, subject to certain conditions, sophisticated stockholders could agree to waive statutory appraisal rights granted to them under the DGCL.
The Supreme Court rejected the petitioners’ contention that appraisal rights represented a mandatory provision of the DGCL that cannot be varied by contract. Instead, the Court held that, at least in limited circumstances involving sophisticated parties, such a waiver was permissible. Here’s an excerpt from Justice Montgomery-Reeves’ majority opinion:
We acknowledge that the availability of appraisal rights might theoretically discourage attempts to pay minority stockholders less than fair value for their cancelled stock. Nonetheless, the focus of an appraisal proceeding is paying fair value for the petitioner’s stock, not policing misconduct or preserving the ability of stockholders to participate in corporate governance. Granting stockholders the individual right to demand fair value does not prohibit stockholders from bargaining away that individual right in exchange for valuable consideration.
And while the availability of appraisal rights may deter some unfair transactions at the margins, we are unconvinced that appraisal claims play a sufficiently important role in regulating the balance of power between corporate constituencies to forbid sophisticated and informed stockholders from freely agreeing to an ex ante waiver of their appraisal rights under a stockholders agreement in exchange for consideration.
The Court also affirmed the other aspects of the Chancery Court’s decision, including its conclusion that the petitioners agreed to a clear waiver of their appraisal rights with respect to the transaction in question, that the waiver was not a stock restriction that had to be included in the corporation’s charter, and Delaware corporations may enforce stockholders agreements.
Justice Valihura dissented. She concluded that the waiver was not sufficiently clear and unambiguous, that statutory appraisal rights were not waivable under the DGCL, and that even if they were, a stockholders agreement was the wrong place for them. Here’s an excerpt from her dissent:
Stockholder agreements may offer venture capital funded start-ups flexibility versus complying with the formalities of charters and bylaws. And unlike charters, they are not public documents filed with the Secretary of State. But restriction or elimination of important stockholder rights such as inspection, appraisal, election rights and fiduciary duties may minimize accountability of the Board and upset the delicate balance of power that the General Assembly and courts have attempted to maintain among a Delaware corporation’s constituencies.
The ordinary place for private ordering provisions that alter this balance is in the charter or bylaws. Principles of corporate democracy support this preference. If private contract by and between all stockholders could override the charter and bylaws, that agreement would transform the corporate governance documents into gap-filling defaults and collapse the distinction between a corporation and alternative entities. Thus, assuming arguendo the validity of ex ante waivers of important statutory governance rights like appraisal rights (the question next addressed), they should be in a corporation’s charter and not in a stockholders agreement.
As always, Ann Lipton’s Twitter feed is an indispensable resource for getting a quick and insightful read on any major Delaware decision, and we’ll be posting memos in our “Appraisal Rights” Practice Area.
Activists are nothing if not opportunistic, and this Sidley memo says that the huge piles of cash currently sloshing around in SPACs are likely to serve as “chum in the water” for activists. This excerpt says that activists may not even wait for the de-SPAC before targeting a SPAC:
Activism is present at all stages of the SPAC life cycle, but the risk and nature of activism varies depending on the stage. The potential for activism increases immediately after the SPAC’s IPO. Before the time a target is found, an activist may attempt to influence the choice of the target. It is also possible that an activist may at the same time have a stake in a potential target company that they wish to be targeted by the SPAC.
The risk of this activism increases as the SPAC approaches its expiration, which has a punitive impact on the sponsor. As a result, the SPAC sponsor is likely to become more desperate and perhaps less discerning in evaluating acquisitions. Activism risk continues after a target is selected during the de-SPAC process. Any time there is a shareholder vote on a substantial economic transaction, there is the potential for an investor to agitate against the deal.
In the late 2000s, there was a wave of activism against SPACs prior to a de-SPAC where activists would purchase shares of a SPAC at a discount with the intent of voting down any proposed merger and redeeming their shares for par value. While current SPAC structures have been modified to deter this specific type of activism, the risk of activism prior to a de-SPAC remains.
The memo also addresses the risks of “SPACtivism” following a de-SPAC transaction, and offers tips on how to prepare for activism both before and after the de-SPAC.
In recent years, several Delaware cases have addressed the “fraud on the board” concept. This Richards Layton memo attempts to get its arms around exactly what courts mean when they talk about fraud on the board as a theory of liability. Here’s the intro:
In a footnote in a two-page order issued in 2018, the Delaware Supreme Court quietly reminded corporate law practitioners that, per the 1989 case of Mills Acquisition v. Macmillan, a complaint seeking post-closing Revlon damages can survive a motion to dismiss without pleading nonexculpated breaches of fiduciary duty by a majority of directors so long as a single conflicted fiduciary deceived the entire board. See Kahn v. Stern, 183 A.3d 715 (Del. 2018).
In the three years that followed, this “fraud-on-the-board” theory of liability has received long-form discussion in at least eight published Delaware opinions and evolved into a Swiss Army knife for stockholder-plaintiffs—indeed, Delaware courts have recently applied the once-obscure theory to serve at least three distinct doctrinal ends. This article describes, at a high level, what fraud on the board is by pinpointing the various doctrinal roles it has played in three recent opinions issued by the Delaware Court of Chancery.
For more on “fraud on the board” and its use in recent officer liability cases, see the most recent issue of our Deal Lawyers newsletter.