This may sound strange to most of you, but when I took Corporations in the fall of 1984, corporate law was kind of a sleepy backwater. Of course, the area awoke with a vengeance in 1985, but when I took the class, Van Gorkom, Moran, Unocal, Revlon, etc. weren’t even on the radar screen. In fact, one of the few things I do remember from that class was spending an inordinate amount of time on Zapata v. Maldanodo, a 1981 Delaware Supreme Court decision about the standards that would apply to a special litigation committee’s decision not to pursue a derivative action.
I’ve come across Zapata many times in reading Delaware cases, but it never seemed to be worth the time my professor invested in it – at least until now. That’s because Zapata v. Maldanodo featured prominently in the Chancery Court’s recent decision in In Re WeWork Litigation, (Del. Ch.; 12/20). Like almost everything associated with The We Company, the case is pretty convoluted. It arose out of breach of contract claims against the company’s new controlling shareholder that were brought by a special committee that was established to negotiate the deal in which that shareholder acquired its controlling stake.
After the new controller acquired control, the company’s board established a new special committee, which determined that the other special committee lacked authority to continue the suit and moved to dismiss the case. Noting that this was a case of first impression, Chancellor Bouchard decided to look to Zapata for guidance, and ultimately denied the motion to dismiss. This excerpt from a recent Shearman blog on the case explains his approach:
The Court determined to engage in an analysis akin to that developed for assessing special committee motions to dismiss derivative claims under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). Zapata entails a two-part assessment (i) testing the independence, good faith and reasonableness of the investigation, and (ii) applying the court’s own independent business judgment as to whether the motion should be granted.
The Court denied the motion because it found (i) the new committee did not establish the reasonableness of its investigation and conclusions, and (ii) the special committee was authorized to pursue the litigation and it would be “fundamentally unfair” to dismiss the claims.
In applying the the Zapata test, The Chancellor found “significant shortcomings and errors” in the new special committee’s investigation and concluded that that it was clear that the previously established committee had the authority to file the lawsuit.
Now, just to make things more convoluted, Chancellor Chandler issued another decision in the WeWork litigation on the same day. In that decision, the Chancellor dismissed fiduciary duty claims that were duplicative of the contract claims addressed in the other opinion. This blog from Francis Pileggi has the skinny on that part of the case.
Shortly after issuing these two opinions and a third letter opinion addressing a discovery dispute in this litigation, Chancellor Bouchard announced that he planned to retire from the bench in April. There’s no indication that this lawsuit played a role in that decision, but as somebody who had to read this company’s goofy IPO S-1 filing, I wouldn’t be shocked if it did.
Last year’s dispute between LVMH and Tiffany raised all sorts of intriguing legal issues, but the parties ultimately settled their case before the Chancery Court could weigh-in. But what if that case had gone to trial?
That’s the hypothetical situation that UCLA’s Stephen Bainbridge recently addressed on his blog. After concluding that Tiffany should not have been regarded as having experienced a MAC as a result of the pandemic, the blog addresses the potential implications of the Chancery’s AB Stable decision on the MAC analysis. Here’s an excerpt:
I think Tiffany had a strong argument that there had been no MAC. As a cautionary matter, however, I note that in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, the Delaware Chancery Court (per VC Travis Laster) assumed that the Seller had “suffered an effect due to the COVID-19 pandemic that was sufficiently material and adverse to satisfy the requirements of Delaware case law. Based on that assumption, the burden rested with Seller to prove that the effect fell within at least one [carveout] exception.”
As was typical of merger agreements entered into before (or in the early days of) the pandemic, the LVMH-Tiffany deal lacked an express carveout for pandemics. As was often the case with disputes over MACs in the wake of the pandemic’s outbreak, Tiffany would have pointed to carveout number viii’s exception for adverse changes arising out of “natural disasters.”
In AB Stable VIII LLC, the MAC contained an exception for adverse changes arising out of “natural disasters or calamities.” VC Laster had little difficulty concluding that the pandemic was a calamity.
The COVID-19 pandemic fits within the plain meaning of the term “calamity.” Millions have endured economic disruptions, become sick, or died from the pandemic. COVID-19 has caused human suffering and loss on a global scale, in the hospitality industry, and for [Seller’s] business. The COVID-19 outbreak has caused lasting suffering and loss throughout the world.
The court further concluded that the pandemic “arguably” fell within the definition of a natural disaster.
The blog goes on to review VC Laster’s analysis of the MAC exclusion for natural disasters, and concludes that “in the unlikely event that the pandemic would have been regarded as a material adverse change in Tiffany’s business, it would have fallen within the exemption for natural disasters.”
By the way, we may not have to wait too much longer for more guidance from Delaware on Covid-19 busted deal issues. Trial began last week in the $550 million dispute over KKR’s termination of a deal to buy Snow Phipps’ portfolio company DecoPac last April. The trial is expected to be completed by the end of January, and this “On the Case” column by Alison Frankel provides some play-by-play of last week’s proceedings.
Over the past few months, I’ve blogged about several decisions involving potential liability on the part of corporate officers. Frequently, these cases involve situations in which corporate directors have managed to avoid liability due to exculpatory charter provisions that don’t extend to corporate officers. This Skadden memo reviews recent trends in officer liability, and highlights the role that the lower level of protection provided to officers has played in making them increasingly attractive targets for plaintiffs. Here’s the intro:
More than a decade ago in the seminal case Gantler v. Stephens, the Delaware Supreme Court clarified that officers of Delaware corporations owe the same fiduciary duties of care and loyalty that directors owe to the corporation and its stockholders.
While directors and officers owe the same fiduciary duties, they are not entitled to the same defenses. Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permits a corporation to adopt a provision in its certificate of incorporation exculpating directors from money damages for breaches of the duty of care. Those provisions, which are routinely adopted by Delaware corporations, do not apply to corporate officers. To adequately plead a breach of the duty of loyalty, a plaintiff must show that fiduciaries acted in a self-interested manner or in bad faith, which is a high bar to meet. By contrast, to plead a breach of the duty of care, a plaintiff must allege only that the fiduciaries acted in a grossly negligent manner, a far lower bar that makes care claims a prime target for stockholder plaintiffs.
Even so, until recently, officer liability cases were still few and far between. The rare officer liability claim was typically brought in derivative litigation and involved either allegations of disloyal conduct for which neither a director nor an officer could be exculpated or conduct by an individual serving in both an officer and director role. Claims against an officer for breach of the duty of care — particularly in class action merger litigation — were exceedingly rare.
Over the past year, however, stockholder plaintiffs have increasingly pursued claims against officers for breaches of the duty of care. Moreover, such claims have been raised not only in the derivative context but in class action merger litigation as well, with mixed results.
The news isn’t all bad for corporate officers – the memo says that while they aren’t afforded the same protections as directors under Section 102(b)(7), the Chancery Court hasn’t given plaintiffs a free pass. In order to state a claim, plaintiffs must allege not only a breach of the duty of care, but also that the individual in question was acting in their capacity as an officer and not a director. It notes that the Chancery Court has issued three recent decisions dismissing plaintiffs’ claims against officers due to the failure to adequately pled these allegations.
This recent Morris James blog discusses the Delaware Superior Court’s decision in Ashland LLC v. Heyman Trust, (Del. Super. 11/20), in which the Court held that the plaintiff was not entitled to be indemnified for its attorneys fees for first party claims under the terms of a stock purchase agreement. This excerpt from the blog summarizes the Court’s decision:
In this case, the parties’ Stock Purchase Agreement (“SPA”) required defendants to indemnify against “Losses” – which was defined to include reasonable attorneys’ fees and expenses. The Court previously had found that the defendants breached a section of the SPA. Plaintiff then sought to recover as “Losses” its attorneys’ fees and expenses in proving the breach.
The Court reasoned that indemnification provisions are presumed not to provide for fee-shifting in claims between the parties (first-party claims) absent a clear and unequivocal articulation of that intent. While there is no specific language that must be used, the SPA here contained a separate, relatively straightforward and narrower prevailing party fee-shifting provision, which did not apply to the claims at issue.
The Court reached this conclusion despite the fact that Article I of the SPA defined “Losses” to include reasonable attorneys’ fees, “whether or not involving a Third Party Claim.” It noted that under the terms of the SPA, “Third Party Claim” was a defined term, not a generic term for third party claims, and that its use in the Losses definition did not imply “clearly and unequivocally” that first party claims were included.
The Court ultimately held that the SPA’s indemnification language did not clearly provide for fee-shifting for first-party claims, and granted defendants’ motion for summary judgment that the language of the contract did not entitled the plaintiff to recover its attorneys’ fees and expenses.
Shortly before the Christmas holiday, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance Topic: No. 11, which provides Corp Fin’s views regarding disclosure considerations for SPACs in connection with both their IPOs & subsequent de-SPAC transactions. Here’s an excerpt from this Skadden memo summarizing the guidance on disclosure considerations for de-SPAC deals:
Many of the disclosure considerations relevant at the IPO stage remain important through the business combination stage, such as disclosure involving the terms of any additional financing sought or obtained to facilitate the business combination and how that funding affects the interests of existing shareholders.
As during the IPO stage (when SPACs disclose the disproportionate interest and control sponsors and other insiders would stand to gain in a business combination generally) once a specific acquisition is proposed and the valuation is known, the SPAC should disclose the expected total percentage ownership of the insiders in the combined entity and the total expected return on the insiders’ initial investment, giving effect to the exercise of warrants and the conversion of convertible debt. The SPAC also should update investors with respect to the services provided by the underwriter in the business combination, the compensation due for such services and the terms of the compensation, including whether any of it is delayed or contingent.
Additionally, the SPAC also should provide clarity with regard to the acquisition selection process and inform investors about how the target was selected. Details should include the circumstances involving first contact; explaining why a particular target was selected over others; what factors the board determined were material in its selection process; whether the interests and potential conflicts of individual insiders were considered; and the process for negotiating the value of the acquisition. To the extent any conflicts of interest were identified, the SPAC should disclose them and how they were handled, including whether any waivers to a policy that addressed conflicts of interest were granted.
This Wilson Sonsini memo reviews the Delaware Supreme Court’s recent decision in Amerisource Bergen v. Lebanon County Employees Retirement Fund, (Del. 12/20). In that case, the Court held that a Section 220 inspection demand need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing. Here’s an excerpt:
Last week, the Delaware Supreme Court issued a key decision addressing stockholders’ rights to access books and records under Section 220 of the Delaware General Corporation Law. Because the Supreme Court rarely weighs in on the scope of Section 220, the decision is an important guide for corporations and practitioners navigating stockholder demands for books and records under Delaware law.
In the 43-page opinion, the Delaware Supreme Court reiterated that a stockholder need only show a proper purpose for demanding corporate records, such as investigating potential wrongdoing, but need not, at least in many circumstances, show that the wrongdoing is “actionable” or identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicions.
The memo notes that the decision follows on the Chancery Court’s recent Gilead Sciences decision, which reiterated that merits-based defenses to potential claims are not appropriate at the Section 220 stage.
In the wake of the pandemic, some cash-rich foreign acquirers are likely to take a heightened interest in U.S. targets. This Locke Lord memo says that one of the implications of this is that many U.S. in-house lawyers who have focused on purely domestic transactions will need to prepare to address the “international” aspects of the sale of a business that has always been purely domestic.
The memo addresses topics ranging from OFAC’s prohibited persons lists to the CFIUS process and the requirements applicable to defense companies under the International Traffic in Arms (ITAR) regulations. This excerpt addresses the issues associated with “deemed exports”:
Even if your company has never exported a single product or has no intention of doing so, you need to be aware of the deemed export rules if you plan on selling assets or a company to a non-US buyer. Under the Export Administration Regulations (and similar rules under the ITAR), a “deemed export” occurs whenever certain controlled technology and information is disclosed or made accessible to a non-US person – and a sale of an entity or assets that includes that technology or information, regardless of whether the buyer takes the assets outside the US, could qualify. If it does qualify, then the seller needs to obtain a license to consummate the transaction (assuming it would not be barred, which is also a possibility).
The memo notes that some potential issues under these various regulatory regimes require a simple check, but others require more substantial analysis. In either case, appropriate upfront diligence on all of them can prevent a significant amount of problems later in the transaction process.
The results of this Lincoln International survey of more than 150 global private equity investors indicate that they have plenty of dry powder & their top priority in 2021 is deploying it. Here are some of the survey’s key findings:
– 88% of respondents said that their top priority in 2021 was deploying capital. Last year, 79% of respondents identified this as their top priority.
– 5% of 2021 respondents identified completing portfolio company exits as their top priority, while 2% said that helping portfolio companies navigate the economic downturn and pandemic implications topped their list.
– 89% of respondents expect to be more active in buying rather than selling portfolio companies in 2021, compared to 82% last year.
– Reflecting the continued economic uncertainty, 68% of respondents plan to heighten their focus on the quality of portfolio company management teams, 59% plan to hold portfolio companies for longer periods, and 43% expect to continue to focus on the liquidity of portfolio companies.
Despite last year’s challenges, the survey says that PE investors deal volume to increase in 2021, with 50% expecting volume to increase slightly & 27% expecting it to increase meaningfully. When it comes to valuations, 58% expect them to remain relatively stable, while 32% expect them to increase slightly.
The survey concludes on an optimistic note, observing that, for the last several years, investor dread of a cyclical market contraction has cast a shadow. But now that this dreaded contraction has occurred, deal making has snapped back “at a rate that no one could have anticipated.”