The Chancery Court’s 2013 Great Hill Equity Partners decision made it clear that Delaware’s default rule is that all privileges, including the attorney-client privilege, pass to the acquirer following the closing of an acquisition. However, the Great Hill decision also said that parties may contract out of the default rule, and, to a greater or lesser extent, many have done that.
The parties in RSI Holdco included a privilege “claw back” in their merger agreement that prohibited the buyer from using or relying on privileged communications in any post-closing dispute. Despite that, the buyer sought to use 1,200 of the seller’s pre-closing emails in litigation against the seller. Those emails had not been segregated in any fashion prior to closing, and the buyer argued that any privilege had been waived. The Vice Chancellor rejected those contentions, and this excerpt from the memo summarizes part of her reasoning:
The Court stated that “[p]ermitting [the Buyer] to both ‘use and rely on’ the [e]mails would further render the express language of [the privilege claw-back provision] meaningless.” The Court further explained that the Buyer’s arguments in support of a waiver of the privilege failed because the merger agreement required the parties to “take the steps necessary to ensure that any privilege attaching as a result of [Radixx’s counsel] representing [Radixx] . . . in connection with the transactions contemplated by this Agreement shall survive the Closing, remain in effect and be assigned to and controlled by the [Representative].”
Thus, for the privilege to be waived, the Court found that it would necessarily be due in part to the Buyer’s own failure to “take the steps necessary” to preserve the privilege. The Court found that the Buyer could not argue that its own failure to preserve the privilege should now inure to its benefit.
The RSI Holdco decision is the first post-Great Hill case squarely addressing a contractual provision intended to preserve the seller’s attorney-client privilege, and the memo says that it provides sellers with some important takeaways when it comes to the key terms to include in such a provision:
Following the guidance in RSI, target companies and their counsel are encouraged to ensure that privilege claw-back provisions not only provide for the preservation of pre-closing privileged communications, but that they also (i) provide for the express assignment of control over the privilege to the stockholders’ representative, (ii) require all parties to take steps to ensure that the privileged communications are preserved and vested in the stockholders’ representative, (iii) prohibit the buyer from making use of any such privileged communications, and (iv) define the scope of materials subject to these protections as those privileged as of the closing date.
The memo also points out that if a seller includes a provision as comprehensive as this, it will provide the seller with another important benefit – the ability to avoid engaging in “a pre-closing document review and segregation exercise” in order to protect the privilege.
I used to play golf, or at least I used to try to play golf. About the only thing I had going for me was that I could drive the ball a long way. Unfortunately nobody could ever predict in which direction my drive would head. For that reason, I came to both appreciate & depend on one of golf’s grand traditions – the “Beer Cart” the “Mulligan.”
Recently, a Delaware corporation that didn’t provide the notice of appraisal rights required under Section 262 of the DGCL argued that it deserved a Mulligan too – but in Mehta v. Mobile Posse,(Del. Ch.; 5/19), the Chancery Court shot that argument down. The gist of the defendants’ argument was that a supplemental notice provided subsequent to the filing of the lawsuit was enough to satisfy the notice requirement. What’s more, they had the chutzpah to attach the supplemental notice to the pleadings, and file a motion for judgment on the pleadings!
While a chutzpah strategy has won the day in the Chancery Court in the past, this recent blog from Francis Pileggi says it didn’t fly with Vice Chancellor McCormick:
The company sought a “do-over” or a mulligan for its statutory errors, because it purported to send proper notices required by DGCL Section 262–only after suit was filed. Three problems with that approach are that: (i) Such a “replicated remedy proposal” had never before been blessed by a Delaware court; (ii) Even the supplemental notice proposed was itself wrong (in part because it quoted the statute of another statute); and (iii) trying to make a “supplemental notice” sent after the lawsuit was filed does not always make it part of the pleadings.
If that wasn’t enough, the Vice Chancellor also refused to dismiss allegations that the defendants also failed to comply with various requirements under Section 228 & Section 251 of the DGCL, and found that stockholder consents approving the deal failed to achieve a ratifying effect under Section 144. In fact, the transaction appears to have been such a festival of statutory non-compliance that VC McCormick led off her opinion with the following statement:
The complaint in this case reads like a law school exam designed to test a student’s knowledge of these and other basic legal requirements for consummating the merger. The defendants, Mobile Posse and its board, would not have done well on that exam.
To stick with the golf analogies, if you see language like this at the beginning of an opinion, you’d be well advised to yell “FORE!” to the parties at whom it’s directed – because the judge’s drive has drawn a bead on them.
Activists getting personal with corporate CEOs is as American as uh, maybe not apple pie – but how about Campbell’s Soup? Over the years, many of the nation’s CEOs have exited altercations with activists like Carl Icahn, Dan Loeb & Paul Singer with at least one more orifice than they entered them with – and many activists seem certain that cultivating a Darth Vader image is good for business.
This Activist Insight newsletter reports that activists have toned things down in recent years, but says that Voce Management’s ongoing battle with Argo International is a notable exception. It also suggests that Voce’s hardball strategy may have backfired on it:
Voce opened with a 10-page letter cataloging CEO Mark Watson’s perks, including sponsorships for sailing races he liked to patronize, a family trip to India at Christmas in 2017 on a jet the activist said was owned by the company – Argo later said the aircraft “was neither owned by Argo, nor exclusively used by Argo,” and that personal trips were at executives’ expense – and luxurious accommodation in New York. The point was not only that the executive had been benefiting egregiously from his position, but that Argo had a cost management problem. Expensive office space hung with fancy artwork also featured heavily.
That strategy was thrown into doubt with the publication of Institutional Shareholder Services’ (ISS) recommendation, which was a vote on the management card for all incumbent directors. “Of note, the dissident’s decision to kick off its campaign with a flashy diatribe against the Argo CEO may have been a strategic misstep,” ISS wrote, “as the materiality of the dissident critique did not ultimately substantiate the degree of impropriety implied by its opening salvo.”
The article notes that ISS’s recommendation for management’s slate came despite its general agreement with Voce’s substantive criticism of the company’s business strategy & incentive comp arrangements. That being said, Agro outperformed both the S&P 500 and its peers, so this was a fight that was going to be difficult to win in any event – but Voce’s decision to get personal from the get-go doesn’t appear to have helped.
Although venture capital really isn’t my “thing,” Mark Suster is one of my favorite bloggers. Unfortunately, he rarely blogs anymore. But when he does, it still is really good. Check out his latest about how VC has changed in recent years…
Vice Chancellor Laster’s 2015 decision to tag Dole Food’s CEO & another executive with a $148 million judgment for breaching their fiduciary duties in connection with its going private transaction was one of that year’s most noteworthy Chancery Court rulings. While Dole’s CEO & 40% shareholder David Murdock ultimately agreed to a settlement calling for him to pay the entire amount of the judgment, he sought to recover under the company’s D&O policy. After all, you don’t get rich enough to write a check this big by writing checks this big. . .
As you might imagine, the insurers weren’t too excited about being asked to pick up the tab for this settlement & one in a related federal case – which brought the grand total to $222 million – and filed a lawsuit claiming that they weren’t liable for them. Earlier this month, the Delaware Superior Court ruled on competing motions for summary judgment by each of the parties. Here’s an excerpt from a recent Morris James blog summarizing each party’s position:
The defendants then were sued by six of their excess insurance carriers, seeking a declaratory judgment that they did not have to fund the settlement. Among other reasons, the insurers asserted that the settlement payment representing the actual fair value of the merger consideration did not constitute a “Loss” under the policy.
Defendants counterclaimed seeking declaratory judgment that the insurers breached the policies by refusing to pay for the Court of Chancery settlement as well as the settlement in San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-01140 (D. Del.).
The Court granted in part and denied in part the summary judgment motions. The Court applied the rules of interpretation applicable to insurance policies, and determined that the settlement payments constituted a “Loss” covered under the policy. But it also held that genuine issues of material fact remained as to whether the insureds breached their own obligations under the contract. For more details on the case, see this Hunton Andrews Kurth blog.
Last week, President Trump issued an Executive Order declaring that threats to IT & telecom supply chain posed by “foreign adversaries” are a national emergency & granting broad authority to the Secretary of Commerce to prohibit a wide variety of transactions that might pose risks to U.S. national security.
In general, the Order prohibits companies from acquiring, importing, or otherwise using any “information and communications technology or services” in which a foreign adversary has any interest. That prohibition only kicks in if the Secretary of Commerce (after consulting with other agencies) determines both that the deal involves persons who are controlled by or under the jurisdiction of the bad guys, & that it presents risks to critical infrastructure or raises other national security concerns.
This recent blog from Steve Quinlivan notes that given how sweeping the prohibition is, people involved in M&A transactions need to take it into account in due diligence, but also points out that – at least for now – answers about its implications for a potential deal may be hard to come by:
The broad prohibition on acquisitions indicates the Executive Order merits consideration in pending or newly initiated M&A transactions involving information and communications technology and related services from foreign governments and persons. Unfortunately, the Executive Order does not appear to include a mechanism where questions of the applicability of the Executive Order can be speedily resolved at this time.
Further to Steve’s point, this Winston & Strawn memo says that the Order doesn’t impose immediate restrictions, but instead represents the “beginning of a new regulatory framework to address these concerns.” In terms of guidance, the memo says that we’re likely going to have to wait to see the regulations issued under the Order. This excerpt suggests those aren’t likely to be rolled out for several months:
The key developments to watch following issuance of this Executive Order are the procedures developed by the Commerce Department (in consultation with other agencies and departments) to make these critical determinations. The Order directs the Secretary of Commerce, within 150 days, to issue implementing regulations that may, but need not, include:
– determining that particular countries or persons are foreign adversaries for the purposes of this order;
– identifying persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries for the purposes of this order;
– identifying particular technologies or countries with respect to which transactions involving information and communications technology or services warrant particular scrutiny under the provisions of this order;
– establishing procedures to license transactions otherwise prohibited pursuant to this order;
– establishing criteria by which particular technologies or particular participants in the market for information and communications technology or services may be recognized as categorically included in or as categorically excluded from the prohibitions established by this order; and
– identifying a mechanism and relevant factors for the negotiation of agreements to mitigate concerns raised in connection with the Order.
The memo also says it’s likely that a multi-agency review panel of some form will take on a role in reviewing IT & telecom transactions that may present concerns, and that this panel’s jurisdiction may overlap with that of the CFIUS. But then again, until we see something from Commerce, who knows what we’re dealing with? In any event, we’re posting memos in our “National Security” Practice Area.
– The Culture of Counterparties
– Cross-Border Carve-Out Transactions: Conditions & Staggered Closings
– California Consumer Privacy Act and Its Impact on M&A Transactions
– The Millenials Strike Back: 29 Tips for Older Deal Lawyers
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State and local tax (SALT) issues are sometimes below dealmakers’ radar screens – but they can pack quite a wallop if they aren’t properly taken into account. This Morrison & Foerster memo provides an overview of how state & local tax laws can impact a transaction.
One of the things that the memo points out is that when it comes to taxes, the feds & the states don’t always see eye-to-eye. For instance, this excerpt highlights the fact that state & local authorities take a different point of view than does the IRS when it comes to successor tax liability in an asset deal:
For asset deals, states do not typically follow the federal income tax rule that there is no successor liability for a buyer unless the transfer constituted a fraudulent conveyance under state law. State successor liability statutes typically apply more broadly, do not require a fraudulent conveyance in order for successor liability to apply and may apply to more taxes than just sales and use taxes. State liabilities can be for all taxes. Just because you found the sales and use tax bulk sale law does not mean that you found all the tax bulk sale laws in the state. The laws can be contained in other tax statutes.
The memo also addresses how state & local income tax, sales & use taxes, real estate transfer taxes and unclaimed property laws can create problems for dealmakers – and highlights the need to include lawyers with SALT expertise on deal teams early on in a transaction.
I remember my law school Property prof’s discussion of the dreaded “rule against perpetuities.” I didn’t get it, and neither did my classmates. Finally, the prof threw in the towel, and said something along the lines of “I’m going to give you the same advice I got – there’s a definitive 1938 Harvard Law Review article on the rule against perpetuities. If you read it carefully, you will know enough about the rule to give the wrong answer to the question they’ll ask about it on the bar exam.”
Anyway, I sort of think that the whole issue of what constitutes a sale of “all” or “substantially all” of a company’s assets is corporate law’s version of the Rule Against Perpetutities. When I taught law school, I used to tell my students that if they did this stuff for a living, they’d eventually be asked to write the same 20-page memo on whether a particular deal involves the sale of substantially all of the assets of a company that the lawyer assigning it to them wrote 25 years ago. And the answer will also be the same – some variation of “maybe, but then again, maybe not.
If you’ve already drafted this memo, I can’t be of much help to you. But if you haven’t, I can at least point you in the direction of this Greenberg Traurig memo that introduces the Nevada sale of assets statute, discusses its plain meaning, and reviews case law interpreting “all” and “substantially all” in the sale of assets statutes in various other jurisdictions including Delaware, California, Connecticut, and Illinois. If you read it carefully, you’ll know enough to give a more definitive tone to the “maybe, but then again, maybe not” answer you give in your memo.
This Fox Rothschild blog reviews the Delaware Supreme Court’s recent decision in Leaf Invenergy Co. v. Invenergy Renewables, LLC, in which it reversed the Chancery Court’s decision to award only nominal damages in connection with a company’s breach of an investor’s consent right. Instead, the Court determined that the plaintiff was entitled to $126 million in damages! This excerpt summarizes the Court’s reasoning:
The High Court found that Leaf had previously negotiated consent rights when investing $30 million into Invenergy, which required the investor’s permission in advance of any material sale. Per the opinion, the relevant contract provision reflected each side’s intention to either move forward with a such a sale only with Leaf’s consent, or to require Invenergy to buy out Leaf if it did not consent to the transaction. When the Court of Chancery determined that those rights had been breached, it should have upheld contractual provisions calling for a damages multiplier, per the Supreme Court.
Instead, Vice Chancellor Laster held that an “efficient breach” had occurred, because even though Invenergy did not seek Leaf’s consent prior to the sale, the trial court found that Leaf received more in the sale than it would have under the contract terms. Vice Chancellor Laster thus decided on the $1 nominal damages award because he determined that Leaf was left no worse off despite the breaches, in light of the efficient breach doctrine.
When assessing damages, the High Court found that the Court of Chancery erred by limiting its focus on the harm to Leaf in the context of the results of the sale, rather than considering the full effect of Invenergy’s contractual breach in failing to seek Leaf’s consent and then failing to pay the target multiple. The Supreme Court stated held the trial court should have taken a broader approach that “considered the combination of [all aspects of the contractual breaches] when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages would return Leaf to the position it would have been in had Invenergy not breached [the contract]”.
This decision may turn out to be good news for holders of preferred stock generally. That’s because recent Delaware precedent suggested that directors’ fiduciary duties to common holders might require them to use the “efficient breach” concept in order to avoid complying with preferred stock’s contract rights.
For example, in Hsu Living Trust v. ODN Holding, (Del. Ch.; 5/17), Vice Chancellor Laster held that a board’s fiduciary duty to common shareholders may obligate it to breach contractual obligations to preferred shareholders if it could do so through an “efficient breach.” The Supreme Court’s approach in Invenergy complicates the efficient breach analysis, and may increase the leverage of preferred holders when attempting to exercise or enforce those rights.