June 24, 2024

Antitrust: The DOJ & FTC Invite the Public to “Drop a Dime” on Roll-Ups

The DOJ and FTC are extending a cordial invitation to the public to drop a dime on “serial acquirers” whose deals may have harmed competition.  This Morrison & Foerster memo explains the initiative:

On May 23, 2024, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) Antitrust Division announced a Request for Information (“RFI”) seeking information from the public to “identify serial acquisitions and roll-up strategies throughout the economy that have led to consolidation that has harmed competition.”

This is the latest action by the Biden administration to enforce against corporate consolidation more aggressively. The FTC and DOJ claim that serial acquisitions are particularly troublesome because a company can become “larger” and “potentially dominant” through a series of smaller acquisitions that fall below the Hart-Scott-Rodino (“HSR”) thresholds and therefore are not subject to pre-closing agency review or oversight. According to the FTC, through these smaller deals, firms can “amass significant control over key products, key services, and/or labor.”

The memo notes that the agencies’ focus on serial acquisitions is not new, and that, among other things, the new Merger Guidelines and changes to the HSR filing process illustrate their concern with roll-up strategies. The memo discusses several recent enforcement actions targeting private equity roll-ups and notes that the results of this initiative could lead to a variety of new actions by the antitrust agencies.  It advises serial acquirers to keep tabs on the public responses to this RFI, which will be available on the website.

John Jenkins

June 21, 2024

Delaware Legislature Passes Moelis Fix

Last night, the Delaware Legislature passed the controversial 2024 amendments to the DGCL and sent the legislation to Gov. John Carney for signature. Whatever the legislation’s merits may be, it would make sweeping changes to Delaware’s statutory corporate governance structure and create a number of thorny issues for the Chancery Court to work through. One respected commenter warned that the legislation could also backfire on the state. Here’s an excerpt from a Delaware Business Times article on the Legislature’s action:

Charles Elson, who founded the University of Delaware’s Weinberg Center for Corporate Governance and has served on several board of directors and advised many others, testified a third time before legislators that he thought SB 313 would threaten Delaware’s dominance in corporate litigation matters.

“This kind of revision hasn’t taken place since the 1980s, and that took two years of back and forth and compromise. This has taken two months, and I don’t believe there’s significant enough debate or attempts to compromise,” he said. “Decisions on corporate law should not be a ballgame, because it’s our bread and butter … It constitutes 67% of our revenues, and it’s the reason we don’t have a sales tax.”

Supporters of the legislation include former Chancellor William Chandler, who expressed his faith in the Delaware Corporate Law Council, which drafted the legislation.  According to the Business Times article, he warned legislators that if the amendments didn’t pass, “[t]he headlines will read that two judges and a lot of law professors succeeded in convincing [legislators] to vote down changes to corporate law that would have preserved the continuity and stability that we have known.” 

Former Chancellor Chandler also called out Chancellor McCormick and Vice Chancellor Laster for their public participation in the debate over the legislation.  Here’s another excerpt from the Business Times article:

“As chancellor, I was taught that judges need to stay in their lane and need to be applying the law [legislators] give them,” Chandler said. “Judges don’t need to intrude upon the process of law, because if they do they become the makers as well as the appliers.”

As plaintiffs’ lawyer Joel Fleming pointed out on Twitter, that’s a lesson that the former Chancellor apparently neglected to pass on to his immediate successor. It’s also a message that many other members of the Delaware judiciary who, over the years, have written articles, given speeches and provided other extra-judicial commentary to influence the course of Delaware law, apparently never received.

John Jenkins

June 20, 2024

May-June Issue of Deal Lawyers Newsletter

The May-June Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:

– Delaware Supreme Court Expands MFW Requirements in Conflicted Controller Transactions
– Delaware Court of Chancery Opines on Meaning of “Commercially Reasonable Efforts” in Pharmaceutical Earn-Out Provision
– Bridging the Value Gap: Making Your Reverse Morris Trust Work
– In-Person Conferences Return This Fall – Don’t Miss the Early Bird Rate!

The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at or call us at 800-737-1271.

John Jenkins

June 18, 2024

EU Foreign Subsidies Rule: EC Announces First In-Depth Investigation of Proposed Deal

Last year, Meredith blogged about the EU’s implementation of its Foreign Subsidies Regulation and its potential impact on M&A transactions.  That impact ceased being purely potential earlier this month, when the European Commission announced that it had commenced the first in-depth investigation of a proposed acquisition under the FSR. Here’s an excerpt from Reed Smith’s memo on the announcement:

On 10 June 2024, the EC opened its very first in-depth investigation of an M&A deal under the FSR concerning the proposed acquisition by the state-controlled Emirates Telecommunications Group Company PJSC (e&) of sole control of the non-Czech businesses of PPF Telecom Group.

The EC has “sufficient indications” that e& has received foreign subsidies distorting the internal market, namely in the form of an unlimited guarantee from the UAE and a loan from UAE-controlled banks directly facilitating the transactions. The EC is concerned that these subsidies may have improved e&’s capacity to perform the acquisition as well as the competitive position of the merged business in the EU going forward by improving its capacity to finance its EU activities at preferential terms.

The focus of the investigation will be for the EC to assess whether the alleged subsidies had actual or potential negative effects on the acquisition process – in particular, by allowing e& to deter or outbid other parties or to perform the acquisition in the first place – and the internal market more broadly going forward.

The memo says that the EC now has 90 working days to decide whether to issue a no-objection decision, prohibit the deal or accept commitments from the buyer to remedy any alleged distortion to the EU internal market.

John Jenkins

June 17, 2024

Private Equity: General Partner Liability Insurance

Woodruff Sawyer recently issued its “Guide to Insuring Fund Liability Risks for Venture Capital and Private Equity Firms.” The publication provides an overview of the key coverages and claims scenarios. Here’s an excerpt from the discussion of the evolution of general partner liability coverage:

General Partnership Liability Insurance (GPL) is a longstanding insurance product tailored for executives acting in a different fiduciary capacity than a traditional corporation or LLC, such as on behalf of a general partner or limited partnership. Traditionally structured private or public D&O policies often exclude or limit coverage available to partnership entities, so a tailored solution was needed in the form of either a partnership endorsement to an existing D&O policy or a dedicated blended D&O/ General Partnership Liability policy. While the language is a bit more nuanced for partnership exposures, the exposures and types of claims covered were fairly uniform in the context of what a D&O insurance policy covers.

Over the last quarter century, the meaning of a GPL policy has evolved to be synonymous with a blended D&O/E&O/Fund Liability coverage suitable for asset management firms with private fund structures, usually with a GP/LP type structure. Therefore, we now have the “GPL” monicker.

GPL policies structured for these entities and structures are intentionally broadened to provide comprehensive coverage for everyday business management activities, such as oversight of limited partnerships, portfolio company investment, and overall investment management. In the following pages, we dive into specific elements of GPL policy structure and why it is imperative for venture capital and private equity firms to not only purchase a GPL policy, but to ensure they work with an insurance expert who understands the unique exposures of the firm.

The guide also discusses additional coverages available in the GPL market, including employment practices liability coverage, ERISA fiduciary coverage, financial institution fidelity bonds, and cybersecurity coverage, and addresses emerging SEC regulatory risks.

John Jenkins

June 14, 2024

Private Equity: Sponsor Guarantees

For portfolio companies experiencing financial difficulties, credit support from PE sponsors may be essential in order for lenders to provide covenant relief or other accommodations to portfolio company borrowers.  This Dechert memo discusses the use of sponsor guarantees and the issues that sponsors should keep in mind when considering them. This excerpt discusses which entity might serve as the source of a sponsor guaranty:

The entity providing the Sponsor Guaranty is typically the fund or funds that are the existing investors in the portfolio company, rather than the Sponsor (i.e., the advisor to the funds), but consideration should be given whether the Sponsor Guaranty can be given from the equity aggregator vehicle in the structure (particularly where there are co-investors alongside the Sponsor investment in the underlying portfolio company).

Of course, lenders will require that the Sponsor Guaranty be provided by a creditworthy entity and will need confirmation that the entities providing the Sponsor Guaranty have, and maintain during the term of the guarantee, the resources to fund the Sponsor Guaranty, whether by calling on limited partner capital commitments or accessing available fund level leverage facilities.

Though not common anymore, fund entities’ constitutive documents may prohibit or limit the provision of guarantees. In certain limited circumstances, most often related to availability of sufficient capital and/or concentration limitations, the sponsor guarantor may need a back-to-back guarantee or other financial support from a different sponsor entity in order to comply with fund governance or other limitations.

The memo also addresses issues relating to, among other things, the amount of the guaranty, payment triggers, the timing and amount of payments following a triggering event, the interplay between sponsor contributions and equity cure provisions in underlying loan documents, and events which will trigger a reduction or termination of the sponsor guaranty.

John Jenkins

June 13, 2024

Post-Closing Adjustments: Del. Chancery Interprets Working Capital True-Up Language

In CURO Intermediate Hldgs. v. Sparrow Purchaser, LLC, (Del. Ch.; 6/24), the Chancery Court was recently called upon to interpret an asset purchase agreement’s working capital adjustment provision. Vice Chancellor Cook’s opinion addresses two contract interpretation issues that the purchaser claimed needed to be resolved by the Court before the parties’ disputes concerning the adjustment could be submitted to the independent accountant designated in the agreement for resolution.

The asset purchase agreement in this case involved a fairly standard true-up mechanism under which the purchaser was required to provide the seller with an initial closing statement including a good faith, GAAP-compliant calculation of working capital no later than 60 days after closing. In turn, the seller had 60 days after receipt of the closing statement to provide notice of any objections to it, and the agreement then called for a 30-day period during which the purchaser and seller could attempt to resolve their dispute.  If the parties were unable to reach agreement, the dispute would be submitted to an independent accountant for resolution.

The seller disagreed with three aspects of the initial closing statement’s working capital calculation. The parties were able to reach agreement on one issue, but two others, a dispute over accrued vacation liability and accrued bonuses reflected in the working capital calculation remained unresolved.  The purchaser contended that the Court needed to resolve contract interpretation issues under the provisions of the agreement specifically addressing accrued vacations and accrued bonuses before the dispute could be submitted to the independent accountant for resolution.

With respect to the accrued vacation liability, the purchaser argued that the dispute was whether, under the terms of the agreement, that liability should be included in the working capital calculation. It contended that this issue needed to be resolved before the matter could be submitted to the independent accountant for resolution.  Vice Chancellor Cook disagreed, noting that the seller didn’t dispute that accrued vacation should be part of the working capital calculation, but the amount of that liability that should be included:

Put another way, as it relates to vacation liability, the parties only disagree on the amount of the liability included in the Working Capital calculation. This disagreement is based on differing views of how to calculate that figure. That is a GAAP question. Thus, under Section 2.06(c), the remaining dispute arising from the vacation liabilities is proper for presentation to an Independent Accountant.

The Vice Chancellor reached a different conclusion with respect to the language of the agreement relating to accrued bonuses. Specifically, he pointed to a proviso in the relevant section that said ““for the avoidance of doubt, certain amounts related to anticipated Cash Incentive Compensation will be reflected as a Liability in the calculation of Working Capital.” The purchaser contended that the language of the clause, including the proviso, permitted it to include as a liability in the working capital calculation the pro rata portion of anticipated bonuses payable with respect to the pre-closing period, including discretionary bonuses. The seller took the position that the proviso should be read to exclude discretionary bonuses that may not be paid, and that the only issues to be resolved related to what was appropriate under GAAP.

VC Cook concluded that the use of the term “certain amounts” in this proviso created ambiguity concerning whether that term was intended to mean amounts that are certain as of the time of the closing (“definite amounts”) or amounts that are of “a specific but unspecified character (i.e., “some amounts”).” This excerpt explains the implications of that conclusion:

If read as meaning “definite amounts,” it is reasonable, as Seller argues, to read the Proviso to exclude unpaid, discretionary bonuses from the Working Capital calculation. But if read as meaning “some amounts” it is also reasonable to believe the parties may have intended, as Purchaser argues, for all bonuses paid in respect of the pre-Closing part of 2022 to be included in the Working Capital calculation. The reasonableness of this point seems especially salient as it relates to anticipated but discretionary bonuses since, if reading “certain amounts” as “some amounts,” Section 6.04 does not appear to require discretionary bonuses to be treated differently from any other bonuses.

The Vice Chancellor noted that the parties ascribed different but reasonable meanings to the proviso’s use of the term “certain amounts,” which precluded him from dismissing the case and compelling the parties to submit the dispute concerning this aspect of the working capital calculation to the independent accountant.

John Jenkins

June 12, 2024

Fraud: Integration Clause Doesn’t Bar Claims Based on Future Promises

Earlier this week, in Trifecta Multimedia Holdings, Inc., et al. v. WCG Clinical Services LLC(Del. Ch.; 6/24), the Chancery Court held that a standard integration clause was insufficient to bar claims against a buyer premised on its alleged assurances to assist in growing the target’s business post-closing. Vice Chancellor Laster’s decision represents a departure from prior Chancery Court decisions to the contrary.

The case arose as these cases usually do – a buyer allegedly made all sorts of promises about the great things it would do for the target post-closing in order to achieve earnout milestones. When that didn’t happen, the sellers sued and asserted fraud claims.  In response, the defendants pointed to the purchase agreement’s integration clause and, citing the Chancery Court’s decisions in Shareholders Representative Services v. Albertsons, (Del. Ch.; 6/21) and Black Horse Capital v. Xstelos Holdings, (Del. Ch.; 9/14), argued that the clause precluded claims based on extra-contractual future promises.  Vice Chancellor Laster disagreed:

Both decisions relied on Abry Partners. There, the parties to an acquisition agreement disclaimed reliance on any extra-contractual representations or warranties. When the buyer sued for fraud and sought to rescind the agreement, then-Vice Chancellor Strine enforced the anti-reliance provision. At the same time, he observed that Delaware law has “not given effect to so-called merger or integration clauses that do not clearly state that the parties disclaim reliance upon extra-contractual statements.” He later stated that “[i]f parties fail to include unambiguous anti-reliance language, they will not be able to escape responsibility for their own fraudulent representations made outside of the agreement’s four corners.”

The Albertsons and Black Horse decisions thus relied on Abry Partners for a proposition that Abry Partners rejects. The assertion that an integration clause standing alone bars a fraud claim is also contrary to the Kronenberg decision, also written by then-Vice Chancellor Strine, where he observed that “many learned authorities state that typical integration clauses do not operate to bar fraud claims based on factual statements not made in the written agreement.

The Vice Chancellor went on to say that the majority rule, which Abry Partners embraced, does not distinguish between misrepresentations of fact and other types of misrepresentation. Accordingly, he concluded that the integration clause was insufficient to preclude claims based on expressions of future intent or future promises.

John Jenkins

June 11, 2024

Proposed DGCL Amendments: Law Profs Give “Thumbs Down” to Moelis Fix

In the latest addition to the ongoing debate over proposed 2024 amendments to the DGCL, a group of prominent law professors recently submitted a letter to the Delaware Legislature opposing the proposed changes to Section 122(18) of the DGCL intended to address the Chancery Court’s decision in the Moelis litigation invalidating certain governance provisions contained in a stockholders agreement. This excerpt provides the gist of their concerns:

The Proposal would do more than simply overturn Moelis. It would allow corporate boards to unilaterally contract away their powers without any shareholder input. It would also exempt such contracts from Section 115, thereby creating a separate class of internal corporate claims—including claims of breach of fiduciary duty—that could be arbitrated and decided under non-Delaware law. These would be the most consequential changes to Delaware corporate law of the 21st century, and they should not be made hastily—if at all.

Proponents of the Proposal argue that the Moelis decision struck down a common practice of Delaware corporations and that the Proposal merely restores the status quo ante. Not so. The contract in Moelis was far from typical, especially for public corporations, and the Moelis decision only held that certain of its provisions contravened the board-centric model of governance codified in Section 141(a). Those provisions could only be adopted in the corporate charter, and thus only after a majority of shareholders—who invested in reliance on Section 141(a)—gave their approval.

The professors argue that instead of “hastily rewriting the rules,” the better path would be to wait for the Delaware Supreme Court to weigh-in on the issues raised by the Moelis decision.

John Jenkins

June 10, 2024

SPAC Litigation: Del. Chancery Hands DeSPAC Defendants a Win

Armed with favorable precedent generated the MultiPlan and GigAcquisition3 lawsuits and supported by a boatload of negative publicity about SPAC insiders leaving the public holding the bag, plaintiffs in deSPAC lawsuits have had the benefit of a prevailing wind in recent years.  However, the Chancery Court’s recent decision in In re Hennessy Capital Acquisition Corp. IV Stockholder Litigation, (Del. Ch.; 5/24), dismissing fiduciary duty claims arising out of a deSPAC may have taken a little bit of that wind out of their sails.

The case arose out of a deSPAC merger in which Hennessey Capital merged with Canoo Holdings, a electronic vehicle startup.  Approximately three months following the closing of the merger, the company’s board determined to make significant changes to its business model based on input received from management and McKinsey.  Those changes were announced during a quarterly earnings call and went over like a lead balloon, with the company’s stock price declining by more than 20% following the announcement.  The plaintiff, a public stockholder who elected not to have shares redeemed in the deSPAC, alleged that the SPAC’s board and its sponsor breached their fiduciary duties by failing to disclose that McKinsey had been engaged and the ensuing changes to Canoo’s business model.

In dismissing those claims, Vice Chancellor Will first noted that following the MultiPlan decision, deSPAC litigation has become “ubiquitous” in Delaware.  She observed that these cases shared “remarkably similiar complaints” alleging breaches of fiduciary duty “based on flaws in years-old proxy statements that became problematic only when the combined company underperformed.” The Vice Chancellor went on to say that the plaintiff had lost sight of some fundamental principles – namely that “[p]oor performance is not. . . indicative of a breach of fiduciary duty. Conflicts are not a cause of action. And pleading requirements exist even where entire fairness applies.”  This excerpt from a King & Spalding memo on the case summarizes the reasoning behind VC Will’s decision to dismiss the complaint:

Examining the complaint’s allegations, the Chancery Court found them wanting, as the disclosure claims relied entirely on “post-closing developments”—namely, the presentations at the post-merger Canoo board meeting and ensuing changes to the company’s business model. The Court contrasted plaintiff’s allegations with those in MultiPlan and other SPAC cases denying motions to dismiss, noting that the complaints in those cases pled “concrete facts about the merger target’s prospects” that were “known or knowable” by the defendants prior to stockholders’ approval of the challenged mergers. The Court found that “[n]o such material facts that were known or knowable by the defendants” were pled in the Hennessy complaint, which “instead addresses actions by Canoo’s post-closing board.” In so finding, the Chancery Court rejected plaintiff’s arguments that “use of the past tense” in some portions of the cited board presentations supported an inference that the decision to revamp Canoo’s business model preceded the merger.

The Court cited the Executive Chairman’s statement on the post-merger earnings call that the decision to “deemphasize the originally stated contract engineering services lines” was made with the input of Canoo’s board, which input presumably was supplied at or following the post-merger board meeting. While plaintiff’s allegations, taken as true, supported an inference that “McKinsey may have reached early recommendations about aspects of the company’s business” prior to the stockholder meeting, the Court noted that “Delaware law does not . . . require the disclosure of preliminary analyses and discussions” and that “[t]o require an unadopted, interim analysis to be disclosed would invite speculation about matters that may never solidify.” The Court also held that plaintiff’s claim that Hennessy’s engagement of McKinsey was material information that defendants were required to disclose lacked support in Delaware law.

The memo goes on to say that since the case represents the first complete pleading stage win for defendants in SPAC litigation subject to the entire fairness standard, it’s a big deal. The memo also notes that the Vice Chancellor’s clear message to plaintiffs that they must plead material facts that were “known or knowable” by the defendants prior to the deSPAC provides the targets of these lawsuits with a potential arrow in their quiver.

John Jenkins