In transactions involving a number of shareholders, it is fairly common to see a shareholder representative appointed to act on behalf of those holders with respect to various matters under the purchase agreement, including post-closing disputes. In Fortis Advisors v. Allergan W.C. Holding, (Del. Ch.; 5/20), the Delaware Chancery Court held that the appointment of a shareholder representative precluded the buyer from obtaining discovery from individual selling shareholders in a post-closing dispute over an earnout.
After Fortis, as the shareholders rep appointed in the agreement, filed the lawsuit against Allergan. Allergan sought discovery from each of the more than 50 “sellers” named in Schedule I to the merger agreement. Fortis objected to the requests on the basis that they were directed to “sellers” who were not parties to the litigation. In her letter opinion, Vice Chancellor Zurn held that the terms of the agreement appointing Fortis made it a real party in interest in the contract, and precluded disclosure from the other sellers. This Stinson memo on the case summarizes the Vice Chancellor’s ruling:
The merger agreement appointed Fortis as the stockholders’ “sole, exclusive, true and lawful agent, representative and attorney-in-fact of all sellers…with respect to any and all matters relating to, arising out of, or in connection with, this agreement.” In particular, Allergan agreed that Fortis would “act for the sellers with regard to all matters pertaining to the…Contingent Payments” (which included the Enhanced Product Labeling Milestone). The merger agreement did not empower Fortis to compel stockholder participation in litigation; rather, it appointed Fortis to litigate in the stockholders’ stead.
According to the court, the contractual appointment of a shareholder representative to bring certain actions makes that representative the real party in interest in those actions. This structure is helpful to both buyers and sellers, as it “enables each side to resolve post-closing disputes efficiently.” Buyers also benefit from the fact that the structure makes a judgment against the representative binding on all the stockholders, eliminating the risk of inconsistent judgments. The opinion states the court has been reluctant to disregard the clear contractual authority of a stockholders’ representative at the behest of a party.
The court held the merger agreement specified Fortis was to act for the sellers with regard to all matters pertaining to the contingent payments. Allergan consented to the shareholder representative structure as formulated in the merger agreement, which did not include the discovery rights it sought to enforce, and which limited itself to the enumerated rights. The fact that the merger agreement did not give Fortis control over the stockholders and their discovery was not Fortis’s “fault” or “problem”—it was a result that Allergan bargained for.
As Vice Chancellor Zurn’s opinion notes, there a many benefits to buyers and sellers associated with giving a shareholders’ rep broad authority under the terms of its appointment. However, the Fortis decision suggests that buyers should take a hard look at the wording of the language appointing the shareholder rep and negotiate for language providing them with appropriate discovery rights if they want the ability to obtain discovery from individual sellers in the event of a lawsuit.
– John Jenkins