Earlier this week, the Delaware Supreme Court issued its decision in Coster v. UIP Companies, (Del. Sup.; 6/21), which involved a disputed share issuance used by an incumbent board to resolve a stockholder deadlock at a private company. The Court overturned a prior Chancery Court decision upholding the share issuance – even though the Chancery Court determined that the transaction satisfied the entire fairness standard.
The Supreme Court didn’t reject the Chancery Court’s conclusion as to the fairness of the share issuance, but held that in light of the circumstances, that was only the first step in the required analysis. As this excerpt indicates, the Court reached that conclusion because it thought the transaction raised concerns about stockholder disenfranchisement.
In our view, the court bypassed a different and necessary judicial review where, as here, an interested board issues stock to interfere with corporate democracy and that stock issuance entrenches the existing board. As explained below, the court should have considered Coster’s alternative arguments that the board approved the Stock Sale for inequitable reasons, or in good faith but for the primary purpose of interfering with Coster’s voting rights and leverage as an equal stockholder without a compelling reason to do so.
Two precedents featured prominently in the Court’s decision. The first, Schnell v. Chris-Craft Industries, stands for the proposition that actions taken by an interested board with the intent of interfering with a stockholder’s voting rights are a breach of the directors’ fiduciary duty. The second, Blasius v. Atlas Industries, holds that even good faith actions by the board that have the effect of interfering with voting rights require a “compelling justification.”
Ann Lipton has a Twitter thread on this decision that I highly recommend. She has some interesting thoughts on how to reconcile the apparent incongruity of using Blasius, which the Delaware courts have demoted over the years to merely being a particularized application of the intermediate scrutiny called for under the Unocal standard, to knock out a transaction that’s withstood the supposedly more demanding review called for by the entire fairness standard.
According to Collier Capital’s “Global Private Equity Barometer” survey of LPs, private equity investors are all about ESG these days. Here’s an excerpt from the company’s press release announcing the survey’s results:
Two major issues will drive change in LPs’ private equity portfolios in the next few years, according to Coller Capital’s latest Global Private Equity Barometer. Three quarters of all LPs will invest differently in response to issues connected with sustainability and climate change, and a similar proportion will focus on new opportunities in healthcare and biotech.
“The fact that key ESG issues – climate, sustainability and health – are at the top of investor agendas should surprise no one,” said Jeremy Coller, Chief Investment Officer of Coller Capital, “but the fact that half of all private equity investors think ESG investing will in itself boost their portfolio returns should be a wake-up call to anyone who still thinks ESG is a ‘nice to have’ or a PR tool.”
Maybe. However, if you read the survey, you’ll discover that there’s reason to believe that – among U.S. investors at least – lip service to ESG is the order of the day. Why do I say that? Because the survey says less than one-third of LPs are willing to have any of their remuneration tied to performance with respect to ESG goals. Even among the supposedly more “tuned-in” investors in Europe & Asia, only a little more than half are willing to connect ESG performance with their payouts.
This recent ClearBridge article on compensation issues in M&A is a useful reference tool for identifying and addressing those issues. The article covers both pre and post-closing compensation concerns for the buyer & seller, and provides commentary on market practice. Here’s an excerpt on the treatment of outstanding incentive plans:
Bonus Plans:
– Target Company: Determine treatment of payouts for inflight bonus (i.e., bonus during year of acquisition), including whether to pay bonuses based on target performance or actual performance (if calculable), as well as whether to apply any proration to account for shortened performance period (if applicable)
– Acquiring Company: Determine if impact of newly acquired business should be reflected in performance results for bonus payouts for year of transaction (if applicable), or adjusted out from actual performance results for either all or a portion of the year
Unvested Equity:
– Target Company: Determine treatment of unvested equity per equity incentive plans, award agreements or employee contracts (e.g., single vs. double trigger vesting), as well as treatment of performance awards upon the acquisition (i.e., settle at target vs. actual performance)
– Acquiring Company: Assess dilutive impact of assuming any target company equity, as well as impact of target company performance on any unvested performance-based equity (e.g., excluding performance results for all or a portion of outstanding performance periods)
Market Commentary:
For Target companies, unvested stock price / total-shareholder return-based performance awards are more likely to be earned based on actual performance at time of close than based on target performance. Practice is more mixed for financial / strategic goals given the complexity of calculating performance results / outcomes for inflight plans.
A few weeks ago, I blogged about the Chancery Court’s decision in In Re GGP, Inc. Stockholder Litigation, (Del. Ch.; 5/21). My blog focused on claims relating to an extraordinary dividend paid as part of a sale transaction, but the case also involved allegations that a 35% stockholder, Brookfield Capital Partners, was a controlling stockholder owing fiduciary duties to the corporation. This Sullivan & Cromwell memo addresses that aspect of the case, and this excerpt reviews the reasoning behind the Court’s decision to reject those allegations:
The court reiterated that since Brookfield owned less than 50% of GGP’s outstanding stock, it owed fiduciary duties as a controller only if it exercised actual control over GGP either by dominating GGP during the negotiation of the Merger or exercising general control over GGP’s business.
With respect to Brookfield’s degree of control over the Merger, the court held that Plaintiffs were required to plead that Brookfield dominated the Special Committee. In particular, the court held that Plaintiffs failed to show that a majority of Special Committee members were beholden to Brookfield.
With respect to Brookfield’s overall control over GGP’s business, the court held that “there [was] no pled basis to infer that Brookfield exerted any influence over GGP fiduciaries such that they would ‘defer to [Brookfield] because of its position as a significant stockholder.’” The court also credited Brookfield’s
contractual standstill arrangements with GGP, which blunted the amount of influence that Brookfield could bring to bear.
Since Brookfield was not a controlling stockholder, the plaintiffs needed to plead that the vote approving the deal was either coerced or uninformed. The Court ultimately concluded that the plaintiffs’ pleadings were insufficient to support claims that the vote approving the deal was defective, so it dismissed their claims.
According to this Winston & Strawn memo, the Treasury Department is building a team of sleuths dedicated to seeking out “non-notified” transactions that might be of interest to CFIUS. Companies involved in transactions that the team identifies may find themselves on the receiving end of a request from CFIUS to make a filing so that it can review the potential national security implications. Here’s an excerpt discussing how the team identifies non-notified transactions:
Treasury’s non-notified team identifies non-notified transactions in three ways. First, the team conducts market monitoring. Every business day, Treasury case officers scour press releases, bankruptcy filings, and multiple commercial databases, searching for transactions that were not filed with the Committee and may have national security consequences.
CFIUS has jurisdiction over all types of corporate transactions, including mergers and acquisitions involving public and private companies, joint ventures, corporate restructurings, bankruptcies, real estate deals, and early-stage investments in startup companies. The non-notified team has access to information and databases covering all of these types of corporate transactions, and the team conducts near-constant surveillance of the market for transactions that may fall within CFIUS’s jurisdiction.
Second, the non-notified team receives referrals from other government agencies and offices. The national security agencies—DOJ, DOE, DHS, and DOD—are probably most active in looking for non-notified transactions, but Treasury also accepts referrals from other government agencies and offices.
Third, the non-notified team reviews public tips. Members of the public are encouraged to provide tips, referrals, or other relevant information by emailing the non-notified team at CFIUS.tips@treasury.gov.
Given the resources being devoted to identifying non-notified transactions, the memo says that for parties engaging in a covered transaction that may raise national security concerns, the smart play is to make a filing. Treasury’s efforts virtually guarantee that you’ll be found and it’s much better to go through the CFIUS review process before rather than after you close.
The Delaware Chancery Court is renowned for its ability to handle complex corporate cases in an expeditious manner, but every now and again, a lawsuit comes along that manages to throw sand in the Court’s gears. That’s clearly the case with the litigation involving Oracle’s 2016 acquisition of NetSuite. As Vice Chancellor Glasscock observed in his recent decision in In re Oracle Corp. Derivative Litig., (Del. Ch.; 6/21), that litigation has now generated five memorandum opinions from the Chancery Court without moving beyond the motion to dismiss stage.
The latest go-round involved motions to dismiss fiduciary duty claims against certain officers and directors of Oracle. Two of the defendants were directors and executive officers of the company, while the third was an outside director who chaired Oracle’s special committee. In earlier proceedings, all three had been found to be not independent of Oracle’s CEO, Larry Ellison, who in addition to his significant ownership stake in Oracle, owned or controlled nearly 45% of NetSuite.
The Vice Chancellor dismissed the claims against the two officer-director defendants,. As to the first, the company’s late CEO Mark Hurd, VC Glasscock found that his challenged actions were undertaken solely in his capacity as an officer, and that the plaintiffs failed to adequately pled that he acted in a grossly negligent manner. As to the second, the company’s Vice Chair Jeffrey Henley, the Vice Chancellor found that his actions were undertaken solely in his capacity as a director, and that the plaintiffs complaint did not adequately allege any non-exculpated breaches of fiduciary duty. Accordingly, the Vice Chancellor dismissed the fiduciary duty claims against these defendants.
The Vice Chancellor reached a different conclusion when it came to the fiduciary duty allegations against the chair of Oracle’s special committee, Renee James. Since James served only as a director, the Vice Chancellor applied the two-prong test for allegations of disloyalty established by the Delaware Supreme Court in its 2015 Cornerstone Therapeutics decision. The Cornerstone test requires the complaint to state facts establishing a rational inference that the director both: (a) lacked independence from an interested party, and (b) “acted to advance” the self-interest of the same interested party.
Since the Court had previously determined that James lacked independence, the Vice Chancellor focused on the second part of the test, and found that the plaintiffs’ allegations made the cut:
James was the chairperson of the Special Committee and, as demonstrated by her attendance at a diligence meeting with NetSuite without the other two directors of the Special Committee, took an active role in the negotiations. It is reasonably conceivable that James, who both is not independent of Ellison and who actively participated in the formulation of the NetSuite acquisition, acted to advance Ellison’s self-interest in securing the deal.
Earlier this month, I blogged about the Albertsons case, in which Vice Chancellor Slights held that allegations that the buyer had breached contractual obligations not to take actions intended to avoid payment of an earnout were sufficient to withstand a motion to dismiss. The plaintiff also brought a fraud claim premised on the buyer’s alleged assurances that it intended to grow the seller’s business, but that claim didn’t make the cut.
One of the interesting aspects of the Vice Chancellor’s decision to dismiss the fraud claim was the fact that the agreement did not include a reliance disclaimer, but only a standard integration clause. That kind of clause is generally insufficient to bar fraud claims based on oral misrepresentations made during the negotiation process, but as this Weil blog points out, the problem for the plaintiff here was that it didn’t allege any misrepresentations of fact. This excerpt explains:
The selling shareholders were not alleging that the buyer made any misrepresentations of fact, however, but instead alleged that the buyer had “lied” about the buyer’s future intent respecting the operation of the target post-closing. According to the Court of Chancery, “[w]hile anti-reliance language is needed to stand as a contractual bar to an extra-contractual fraud claim based on factual misrepresentations, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises.”
Indeed, “[a]s distinguished from a claim of extra-contractual fraud based on a statement of fact, the fraud claim based on a ‘future promise’ amounts to an improper attempt to introduce ‘parol evidence that would vary the extant terms in the subsequent integrated writing.’” As a result, the selling shareholders are free to attempt to prove a breach of the specific contractual commitment made by the buyer not to intentionally take action to avoid the payment of the earnout, “but [they] cannot claim fraud based on future promises [to continue to operate the target as an ecommerce business] not memorialized in the Merger Agreement.”
The blog notes that this position applies to claims made by both buyers and sellers, and is also consistent with cases holding that reliance on statements outside of the contract is not justifiable when they are directly contradicted by the language of the contract itself.
This Morris James blog reviews UBOE Holdings v. Drakulic, (Del. Ch.; 4/21), a recent Delaware Chancery case in which a buyer attempted to enforce a merger agreement’s forum selection clause against a former shareholder who allegedly violated non-compete obligations imposed under the agreement. The only problem was that the deal team apparently actively hid certain terms of the deal – including the forum selection clause – from the seller. This excerpt from the blog says that wasn’t a very good idea:
The Court recognized that, normally, a party in the defendant’s position would be held to an agreement he signed, whether he read it or not. But here, the party purportedly negotiating on the defendant’s behalf actively kept him in the dark. The defendant never saw, or had the opportunity to see, the forum selection provision prior to signing.
When he later requested a copy of the merger agreement, the deal team provided only an excerpted copy that did not include the forum selection provision. Because there was an active attempt to keep the defendant ignorant of the forum selection provision, there was no meeting of the minds on that term and thus, he could not have consented to jurisdiction in Delaware.
As a result, then Vice Chancellor McCormick concluded that “it would simply be unjust to assert personal jurisdiction over [Defendant] under a consent-based theory where consent was a total fiction,” and dismissed the lawsuit.
According to a recent NVCA newsletter, the venture capital industry is pretty worried about the prospect that the antitrust legislation currently floating around the nation’s capital might actually become law. Here’s an excerpt:
Several recently proposed antitrust bills in the U.S. would restrict the ability of large technology companies to make acquisitions. That, in turn, would discourage venture investors from making deals, hurt their returns and decrease the number of new venture funds, says a new report funded by the National Venture Capital Association. A venture-backed company is about ten times more likely to be acquired than to go public, according to the NVCA.
“We are very concerned that these restrictions on acquisitions will at least partially, if not completely, shut off that avenue of exit,” said Jeff Farrah, general counsel at the NVCA, in a call with media on Monday.
The NVCA took aim at the Competition and Antitrust Law Enforcement Reform Act, sponsored by Sen. Amy Klobuchar (D. Minn.); the Trust-Busting for the Twenty First Century Act, sponsored by Sen. Josh Hawley (R. Mo.); and the Platform Competition and Opportunity Act, sponsored by Rep. Hakeem Jeffries (D., N.Y.) and introduced Friday.
Speaking of antitrust legislation that dealmakers are guaranteed to hate, remember that New York “mini-HSR” legislation that I blogged about a few months ago? This White & Case memo says it’s still bouncing around the state legislature, and that it has a chance to become law.
In In re Tilray, Inc. ReorganizationLitig., (Del. Ch.; 6/21), the Delaware Chancery Court held that the founding shareholders of Tilray constituted a “control group,” and that they received non-ratable benefits in a tax-driven reorganization transaction. As a result, Chancellor McCormick held that the transaction was subject to review under the entire fairness standard. Here’s an excerpt from this Shearman blog discusses the Chancellor’s reasoning:
The Court held that plaintiffs adequately pleaded that the founders comprised a control group as the complaint alleged a “concurrence of interests” among the founders along with several “plus factors.” Specifically, the Court found that plaintiffs sufficiently alleged that the founders collectively shared a “desire to avoid massive tax liability associated with the substantial increase on [their] initial investment,” which was “not shared by other . . . stockholders.”
The Court also found that plaintiffs adequately alleged “historically and currently significant ties and transaction-specific ties among the [f]ounders,” including that they (i) were “long-time friends”; (ii) founded the parent and jointly managed the Company and other portfolio companies; (iii) “held each other out as ‘partners’” and defined themselves in organizational documents as the “Founders”; and (iv) negotiated the reorganization collectively.
The Court also rejected defendants’ contention that entire fairness review did not apply because the tax benefits “were not extracted from and were never available to [the Company’s] minority stockholders” and the reorganization “caused no detriment to the minority.” The Court instead found that multiple decisions have held that “entire fairness presumptively applies whenever a controller extracts a non-ratable or unique benefit.”
Even if some detriment to the minority shareholders is required in order to invoke entire fairness, the Chancellor held that the complaint’s allegations that the board failed to exert its leverage over the founders to the detriment of the minority were sufficient to establish it.