The Chancery Court recently dismissed breach of fiduciary duty claims arising out of a $400 million reduction in the purchase price to be paid to target stockholders as a result of post-signing equity awards to insiders that allegedly violated the terms of the merger agreement. In In re Anaplan, Inc. Stockholders Litigation, (Del. Ch.; 6/24), Vice Chancellor Cook held that because the transaction was approved by a fully informed and uncoerced vote of the target’s stockholders, it was subject to business judgement review under Corwin.
The key takeaway from this decision may just be that if you want to make a quick exit from a lawsuit based on Corwin cleansing, your best bet is to lay the whole situation out in your proxy disclosure without sugar coating it. This excerpt from Vice Chancellor Cook’s opinion suggests that’s exactly what the target did here:
Immediately up front in the Supplemental Proxy, the Board set forth its position, which was readily understandable to any stockholder reading it—that the Board believed the Company and its directors and officers had acted in good faith and in compliance with the Original Merger Agreement, but that a bona fide dispute had arisen with Thoma Bravo on that issue.
Stockholders would further understand that, rather than continue to dispute the issue and risk losing the deal, the Board made the business judgment that it was in the best interests of Anaplan and its stockholders to agree to a price reduction in return for securing the still premium transaction and enhanced closing certainty. This explanation was followed by an additional eight pages laying out in substantial detail the Board’s position, Thoma Bravo’s position, the dispute between the counterparties, and the negotiations over an amended merger agreement over a roughly two-week period.
In order to satisfy Corwin, it’s not enough that the stockholder vote is fully informed – it must also be uncoerced. The plaintiffs argued that the circumstances of the transaction involved “situational coercion,” because the status quo was so unpalatable that stockholders had no alternative but to vote for the deal at the reduced price. Specifically, they argued that if the stockholders didn’t approve the deal, the stock price would plummet. Vice Chancellor Cook rejected that argument as well:
To be sure, a stockholder would prefer more money for her shares to less, all things being equal. This would seem to hold true in all transactions involving rational economic actors. But it does not follow that a merger, or the vote thereon, is situationally coercive under our law simply because the merger offers a premium relative to the expected trading price for shares if stockholders do not approve the deal.
Anaplan stockholders had a choice to accept the revised merger or to vote it down and thereby retain their shares in the standalone company. Plaintiff does not allege the Company, or its shares, would be worthless or even materially impaired in terms of their intrinsic value. Anaplan stockholders had the opportunity to retain an interest in a multibillion-dollar company with significant revenue. The difference between good, better, and best here is not grounds for situational coercion.
The Vice Chancellor also rejected arguments that the transaction was “structurally coercive,” holding that those arguments boiled down to “a beef with Corwin itself.” He concluded that the plaintiffs were essentially arguing that the stockholders’ overwhelming vote to approve the deal shouldn’t be accorded any weight because it was bound up in their desire to receive a premium. VC Cook concluded that this ain’t the way it works:
Plaintiff’s argument seems to suggest that corporations, and our courts, have been missing structural coercion inherent in merger votes for nearly a decade. Corwin, however, establishes a framework in which our law respects equity owners’ fully informed decision to cash out their shares for a premium via a merger and accords that decision cleansing effect rather than labeling it coercion. That is a very deliberate feature, not a bug, of the system.
According to a recent Institutional Investor article, private equity funds are sitting on a mountain of dry powder – or at least some of them are. The article says that PE & VC funds have added nearly $50 billion to their cash reserves since December 2023. That’s double the amount they added during the previous 12-month period and brings the amount of dry powder to more than $2.6 trillion. But this excerpt says that the wealth hasn’t been shared equally – and that the big boys have raked in a disproportionate amount of the spoils:
Record dry powder is not a proxy for the health of the private equity and VC industries. A short list of the largest managers accounts for a disproportionate share of the cash. The 25 firms with the largest war chests collectively have $556.19 billion of uncommitted capital, more than 21 percent of all dry powder globally, according to S&P Global Market Intelligence. Topping the list of managers are KKR (which has had a celebratory five-years stretch) and Apollo Global Management, which each have more than $40 billion in dry powder. Ten others have at least $20 billion and the rest have at least $12 billion.
Overall, the rise in the amount of funds available for investment is a sign of renewed optimism about the deal market, but the article notes that fund managers aren’t out of the woods yet – capital is still a lot more expensive than it was a few years ago and the divide between buyers and sellers on valuation is still pretty wide.
Many D&O policies include “bump-up” exclusions that can come into play when a buyer increases the price to be paid in an acquisition in response to litigation challenging the deal. Earlier this year, Meredith blogged about a federal court’s decision holding that a “bump-up” exclusion in a D&O insurance policy resulted in the loss of coverage for the target company’s directors.
A recent Cooley blog reviews case law from various jurisdictions addressing the applicability of the bump-up exclusion. It concludes that determining whether the exclusion applies to a particular settlement depends on the wording of the exclusion, the structure of the underlying deal, and the law of the jurisdiction governing the policy. This excerpt addressing the Delaware Superior Court’s decision in litigation between Viacom and its insurer illustrates the importance of both policy terms and deal structure in determining whether the exclusion applies:
In 2023, in Viacom Inc. v. U.S. Specialty Insurance Company, the Delaware Superior Court again applied Delaware law and held that the bump-up exclusion did not apply to the settlement of a post-close lawsuit because the underlying deal did not qualify as an “acquisition” under the terms of the exclusion. The bump-up exclusion at issue stated that covered “Loss” did not include:
any amount representing the amount by which the price of or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all of the ownership interest in, or assets of, an entity, including [Viacom], was inadequate or effectively increased.
The court noted that the underlying transaction was an all-stock merger between Viacom and CBS, at the close of which CBS owned all of Viacom’s assets, and Viacom shares were automatically converted into CBS common stock, with former Viacom shareholders owning approximately 39% of CBS outstanding common stock.
After examining the bump-up exclusion, the court determined that it was ambiguous. While the merger qualified as an acquisition of Viacom by CBS under the ordinary dictionary definition of “acquisition,” other provisions in the D&O policy distinguished between a “merger” and an “acquisition” and treated them as distinct types of transactions. Because the exclusion was ambiguous – and Delaware law required ambiguity to be resolved in favor of the insured – the court held that the bump-up provision did not apply to the settlement of the post-close litigation commenced by former Viacom shareholders.
The blog warns that in light of this developing case law, carriers are expected to include broad bump-up exclusion provisions that will limit coverage in a wide range of M&A transactions, and recommends that M&A practitioners carefully review their clients’ D&O policies to appropriately counsel them on the likelihood that a claim will not be covered.
This recent Sheppard Mullin blog addresses a topic that’s becoming increasingly important in M&A transactions – how to draft reps & warranties that cover AI issues for deals that don’t involve AI-related businesses. The blog points out that even non-AI companies frequently incorporate a lot of AI tools into their business, and that the AI-related issues that need to be addressed in the diligence and drafting process include infringement, confidentiality, IP ownership and protection, regulatory compliance, and other risks such as indemnity obligations or managing the use of AI by contractors.
That sure sounds like a lot, but the blog says the good news is that in many cases, drafting appropriate AI-related reps in these deals may simply involve some tweaks to the IP reps:
In some cases, existing IP representations and warranties can be expanded to address the definition of AI technology either as its own defined term or to be incorporated into other IP related definitions like “software” or “technology”, as needed. AI technology may include generative AI tools such as ChatGPT or tools which include AI like MSWord which has Co-Pilot integrated and the definitions should take the specific uses by the target into account. These types of tools use machine learning algorithms and large volumes of training data to develop models that can generate outputs in the form of high quality text, images and other content based upon user inputs.
If these tools are used by the target, it may also be necessary to include a concept of “Training Data” to flush out AI risks in the target business. Training Data is usually described as data, fine tuning and RAGS consent used to train, pretrain, validate, or otherwise evaluate, improve, modify or supplement a software algorithm or model. In general, the actual scope of the definitions will vary depending on the results of the target company diligence. For example, diligence may also reveal whether the target has an established policy for its employees on the use of AI in its business. Reviewing these policies can also influence these definitions as well as if the target uses contractors who create work product using AI.
The blog goes on to observe that buyers need to confirm rights to the use and ownership of the output of AI tools, and that reps covering infringement of and rights to Training Data, ownership of AI technology tools, ownership & protectability of outputs from those tools, licenses to inputs from AI technology and separate copyright & patent reps should be considered.
Tune in tomorrow at 2 pm eastern for our “2024 DGCL Amendments: Implications & Unanswered Questions” webcast to hear Steven Haas of Hunton Andrews Kurth, Julia Lapitskaya of Gibson Dunn, and Eric Klinger-Wilensky of Morris Nichols discuss the landmark changes made by the 2024 DGCL amendments. Topics include:
– Overview of the DGCL amendments
– Implications for governance agreements
– Implications for acquisition agreements
– Fiduciary duties v. contractual obligations
– Unanswered questions
Members of DealLawyers.com are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
Earlier this week, I blogged about a Richards Layton article addressing how the MFW defense has fared in the Delaware courts in the decade since the Delaware Supreme Court established the MFW framework. The article observed that the success of the defense has declined markedly in recent years. In a Linkedin post commenting on that blog, Vice Chancellor Laster offered his thoughts on why that might be the case:
I personally suspect that this is due to plaintiffs’ lawyers doing a better job triaging cases and only filing relatively strong complaints. When we started the MFW decade, we were still in an era that saw frequent filers challenging virtually any controller deal. That, at least, has changed.
It suggests to me that MFW has done its work. But its main effect has been to deter weak cases from being filed.
On X, Prof. Ann Lipton also observed that, when it comes to a decision as to whether or not to follow MFW, “apparently the price of noncompliance is not particularly high.” She cited a recent Reuters article on Endeavor Group’s decision not to require a majority-of-the minority vote on its $13 billion take private deal. Here’s the money quote from that article:
Nearly a dozen lawyers and bankers told Reuters there is a growing realization among the controlling investors of companies that the financial benefit of depriving minority shareholders of a deal veto outweighs the legal risks.
“(The shareholder vote) opens the door to an activist who can say, ‘I know you’re negotiating with the special committee, but now you’re going to negotiate with me, and I’m going to squeeze a second bite’,” said Phillip Mills, an M&A partner at law firm Davis Polk.
Yesterday, Delaware Governor John Carney signed into law SB 313, the controversial 2024 DGCL amendments. The most hotly contested change put in place by the legislation is new Section 122(18) of the DGCL, which is intended to address the Chancery Court’s decision in West Palm Beach Firefighters v. Moelis, (Del. Ch.; 2/24), but the amendments also respond to issues raised by several other recent Chancery Court decisions.
Advocates of the legislation contend that it is necessary to address “rogue” decisions by the Chancery Court that were inconsistent with market practice, while critics argue that it makes seismic changes to the DGCL without sufficient deliberation, raises a number of unanswered questions and reopens many governance issues that were long thought to be settled.
With all of the controversy surrounding the 2024 DGCL amendments and their potentially profound impact on Delaware corporations, you won’t want miss next week’s webcast – “2024 DGCL Amendments: Implications & Unanswered Questions”. Our panel of experts will review the changes made by SB313 and their implications for governance and acquisition agreements. They’ll also address the interplay between fiduciary duties and contractual obligations that is at the heart of much of the uncertainty resulting from this legislation, and discuss some of the unanswered questions that will likely fall into the Chancery Court’s lap over the next several years.
My colleague Lawrence Heim shared with me a new KPMG study on global ESG due diligence practices in M&A transactions. The study finds that despite a challenging deal environment and ‘ESG backlash’ in the US, ESG issues are increasingly important in M&A transactions. Here are some of the key findings:
– Four out of five dealmakers globally indicate that ESG considerations are on their M&A agenda, with little regional variation. Even more explicitly, 71% of respondents report an increase in importance of ESG in transactions in the last 12 to 18 months.
– Investors expect the frequency of ESG due diligence on transactions to increase evenfurther. Globally, 57% of respondents say they expect to perform ESG due diligence on most of their transactions over the next two years (up from 44% historically). On the opposite side of the scale, only 6% say they will continue not toconduct any ESG due diligence over the same time period (down from 19% historically).
– 58% of global respondents report conducting ESG due diligence primarily because they believe in the monetary value of identifying sustainability-related risks and opportunities early in the deal process.
– Almost three in four respondents across the regions confirm they perceive ESG due diligence as more important because of changing stakeholder requirements. What this means, however, can vary from business to business. For example, for general partners of private equity funds, the requirements of their limited partners (LPs) play an important role.
The study also addresses ESG due diligence best practices and identifies ESG “value creation levers” and the challenges dealmakers face in conducting due diligence investigations into ESG-related topics.
A recent Richards Layton article notes that 2024 marks the 10th anniversary of the Delaware Supreme Court’s decision in Kahn v. MF&W Worldwide, which gave boards and controlling stockholders a path to business judgment review of transactions with a controlling stockholder. The article reviews the experience that companies asserting compliance with the MFW framework as a defense have had in the Delaware courts over the past decade.
Under the MFW framework, transactions between a company and its controlling stockholder will be entitled to review under the deferential business judgment standard if the controller conditions the transaction ab initio on the approval of both a special committee and a majority of the minority stockholders, the special committee is independent, empowered to freely select its own advisors and to say no to the proposed transaction and satisfies its duty of care in negotiating a fair price. In addition, the vote of the minority shareholders must be fully informed and uncoerced. This excerpt from Richards Layton’s article summarizes how company’s have fared in MFW litigation over the past decade, and notes where the Delaware courts have most frequently found shortcomings in the process:
Overall, during MFW’s 10-year history, MFW defenses succeeded in 10 of 26 cases for an aggregate success rate of 38.5%. In the first nine and a half years after MFW, the Delaware Supreme Court reversed a lower court dismissal under MFW only once, but it has done so three times in the last three months. Causes of MFW defenses’ failure, listed in decreasing order of frequency, were the ab initio requirement (eight cases), the majority-of-the-minority requirement (seven cases), and the committee requirement (four cases) (again, these amounts do not sum to sixteen because multiple MFW factors failed in some cases).
Thus, whereas plaintiffs successfully challenged the first two factors with roughly comparable success rates, corporate defendants generally had the most success satisfying the committee requirement, as that component was either not challenged or held satisfied in 84.6% of litigated cases. With that said, plaintiffs have successfully challenged every factor and almost every sub-factor of the MFW test. Comparatively obscure grounds for the MFW defenses’ failure include that the special committee was not fully empowered or fully functioning (two cases), coercion of the special committee or disinterested stockholders (three cases), and wrongful inclusion of certain stockholders in the majority-of-the-minority stockholder vote tabulation (two cases).
The article says that defendants have been less successful in asserting MFW as a defense in more recent cases. From mid-2019 to the present, the defense succeeded in only four of 15 cases (27%). Of those 11 cases in which the defense failed, the majority-of-the minority vote failed in six, the special committee requirement in four, and the ab initio requirement in two. In these more recent cases, plaintiffs have typically challenged compliance with the majority-of-the minority vote requirement on the basis of allegedly defective disclosures.
The article goes on to point out that recent Delaware Supreme Court decisions are likely to increase the focus on whether the independence of any single member of the committee can be called into question and on disclosure of potential conflicts of the committee’s legal and financial advisers.
We previously blogged about the Chancery Court’s decision in Kellner v. AIM Immunotech, (Del. Ch.; 12/23), in which Vice Chancellor Will invalidated certain amendments to a company’s advance notice bylaw adopted during a proxy contest, but ultimately concluded that the board acted reasonably in rejecting the investors’ notice of nominations for noncompliance with the advance notice bylaw. Last week, the Delaware Supreme Court issued an opinion affirming that decision in part and reversing it in part.
The plaintiffs challenged six bylaw provisions, which are detailed in our earlier blog on the case. The Chancery Court invalidated four of the challenged bylaw provisions but upheld two others. The Supreme Court held that, under the circumstances of this case, all of the bylaws had to go. This excerpt from a recent blog by Prof. Ann Lipton summarizes the Court’s reasoning:
First, the Delaware Supreme Court held (and we should all take note of this for future cases) that advance notice bylaws may be evaluated for invalidity, and separately for inequity. A validity challenge is a facial challenge, and relatively narrow: quoting ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), the Court held “A facially valid bylaw is one that is authorized by the Delaware General Corporation Law (DGCL), consistent with the corporation’s certificate of incorporation, and not otherwise prohibited.” The fact that it might operate inequitably or unlawfully in some circumstances is not sufficient to render the bylaw invalid.
On that analysis, the Court found that one amended AIM bylaw was invalid, because it was unintelligible: “The bylaw, with its thirteen discrete parts, is excessively long, contains vague terms, and imposes virtually endless requirements on a stockholder seeking to nominate directors….An unintelligible bylaw is invalid under ‘any circumstances.'”
The other bylaws, however, were found to be facially valid. But, they still had to be “twice-tested” in equity. And that test is the enhanced scrutiny test, as articulated in Coster v. UIP Companies, 300 A.3d 656 (Del. 2023). First, the board must identify a threat and act in good faith; second, the board’s response must be proportional.
In this case, the Court found that the totality of the amended bylaws – which were exceptionally broad, required information potentially unknown to the nominee, were ambiguous, unreasonable, and ultimately at odds with the board’s stated purpose of information-collection – suggested that the board did not, in fact, act with a proper purpose when amending them. Instead, the purpose was to block the dissident entirely. When it comes to proxy contests, boards may try to inform stockholders, but they can’t substitute their own judgment for the stockholder vote; therefore, all of the bylaws (including the two that Will did not find to be unreasonable) had to be stricken.
I think the Court’s reminder that “when corporate action is challenged, it must be twice-tested – first for legal authorization, and second by equity” is important to keep in mind, and not just for advance notice bylaw challenges. My guess is that the “twice-tested in equity” concept will feature prominently in the parade of case law that’s likely to result from the adoption of new Section 122(18) of the DGCL.