While the parties give a lot of attention to deciding which jurisdiction’s law will govern disputes arising out of an acquisition agreement, in many cases they treat the language of the choice of law clause itself as “boilerplate.” This Weil blog says that’s a big mistake. Here’s the intro:

Choice-of-law clauses are part of the much-maligned miscellany that are consigned to the back of a merger or acquisition agreement. As long as the clause purports to select the law of the state chosen by the parties, why worry about the details of the exact words used to select that chosen law? Indeed, with all of the complex issues requiring attention at the front of the agreement, many consider it the M&A equivalent of “bikeshedding” to spend any time on such trivial issues as the specific wording of a choice-of-law clause. But when disputes arise regarding the front part of that complex merger or acquisition agreement, the exact wording of that otherwise trivial choice-of-law clause can actually be outcome determinative.

And many deal professionals and their counsel remain blissfully unaware of the impact slight changes in the wording of a choice-of-law clause can have—i.e., does the chosen state’s law apply to only contract-based claims, or to all claims arising out of the parties dealings related to the agreement (whether based in contract or tort), and does the chosen state’s statute of limitations apply to the substantive cause of action (whether in contract or tort), or does the statute of limitations of the forum state (when different from the chosen state) apply, even when the forum court is otherwise applying the substantive law of the chosen state?

The blog reviews recent case law on these and other choice of law issues from Delaware and other jurisdictions, and offers suggested language for an updated version of a choice of law clause that addresses them.

– John Jenkins

The July-August issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer. It takes a deep dive into the growing business of M&A-related fiduciary duty claims against corporate officers. Topics include:

– What Claims are Being Brought Against Officers?
– Officer Liability: Beyond Motions to Dismiss
– Claims Against Persons Serving as Directors and Officers
– Pattern Energy: Officer Liability Leads to Unexculpated Director Liability

Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

– John Jenkins

Keith Bishop recently flagged an interesting Nevada Supreme Court decision in which the Court held that a minute book isn’t the only place you might find a board resolution. In Pope Investments v. China Yida Holdings, (Nev.; 7/21), the Court found that the board’s statement approving a merger set forth in the merger agreement itself was a “resolution” sufficient to confer appraisal rights on shareholders under Nevada law.  This excerpt from Keith’s blog explains:

Nevada’s market-out exception provides that there is no right to dissent in favor of any class of securities that is a “covered security” as defined in Section 18(b)(1)(A) or (B) of the Securities Act of 1933, 15 U.S.C. § 77r(b)(1)(A) or (B), as amended., unless the articles of incorporation of the corporation issuing the class or series or the resolution of the board of directors approving the plan of merger, conversion or exchange expressly provide otherwise.  CY’s articles did not provide otherwise.  Thus, the only question was whether a board resolution expressly provided otherwise.  The Nevada Supreme Court found such a resolution not in the minutes of a board meeting but in the introduction to the merger agreement:

What constitutes the board’s resolution is not limited by any particular formal requirements, and here,  the statement of the board’s approving the merger agreement in the introduction to the merger agreement constitutes the relevant board resolution.  The resolution here provided the shareholders with a right to dissent because the merger agreement envisioned that there was authority to dissent that could be validly exercised. In so doing, the resolution provided a right to dissent.  This reading is supported by contemporaneous representations to shareholders that they had rights to dissent and by all of the directors that the transaction was fair because objecting shareholders had a right to dissent.

Oh yeah, about those “contemporaneous representations” – despite the company’s decision to object ot the dissenters’ assertion of appraisal rights, the proxy statement was apparently full of disclosure to the effect that appraisal rights would be available in connection with the merger.

– John Jenkins

On Friday, President Biden signed an “Executive Order on Promoting Competition in the American Economy.” The order represents a sweeping, “all government” effort to promote competition. It seeks to accomplish that objective by making it easier for workers to change jobs by banning or limiting the use of non-competes and unnecessary licensing requirements, by limiting the ability of employers to share information that might help suppress wages, and by reducing consolidation in multiple industries.

When it comes to reducing consolidation, the executive order & accompanying fact sheet make it clear that the President wants antitrust regulators to turn up the heat on enforcement & on merger reviews across a variety of industries. The executive order calls on the DOJ & FTC “to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines” in order to address concerns about consolidation, but that’s not the only aspect of the order that could impact M&A. According to these excerpts from the fact sheet, the order:

– Calls on the leading antitrust agencies, the Department of Justice (DOJ) and Federal Trade Commission (FTC), to enforce the antitrust laws vigorously and recognizes that the law allows them to challenge prior bad mergers that past Administrations did not previously challenge.

– Underscores that hospital mergers can be harmful to patients and encourages the Justice Department and FTC to review and revise their merger guidelines to ensure patients are not harmed by such mergers.

– Announces an Administration policy of greater scrutiny of [technology] mergers, especially by dominant internet platforms, with particular attention to the acquisition of nascent competitors, serial mergers, the accumulation of data, competition by “free” products, and the effect on user privacy.

– Encourages DOJ and the agencies responsible for banking (the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) to update guidelines on banking mergers to provide more robust scrutiny of mergers.

Wow. The President not only wants antitrust regulators to crack down on three giant sectors of deal economy – healthcare, tech & bank mergers – but he’s giving them a forceful reminder that they have the ability to challenge “bad” mergers that past Administrations let through.  Like Bette Davis said in “All About Eve,” “fasten your seatbelts, it’s gonna be a bumpy night.”  We’re posting memos in our “Antitrust” Practice Area.

FTC Chair Lina Khan isn’t wasting any time responding to the executive order’s directives. On Friday, she issued a joint statement with the head of the DOJ’s Antitrust Division in which the two pledged to “jointly launch a review of our merger guidelines with the goal of updating them to reflect a rigorous analytical approach consistent with applicable law.” She followed that up on Monday with an announcement that the agency will vote next week on whether to rescind its 1995 policy statement on pre-approval & prior notice remedies in merger cases.

– John Jenkins

If you saw Mike Tyson in his prime, you know just how devastating an uppercut from him could be.  Yet in Bardy Diagnostics v. Hill-Rom, (Del. Ch.; 7/21), Vice Chancellor Slights declined to find that a contractual MAE had occurred despite characterizing an adverse development in a seller’s business as the equivalent of a “Tyson right uppercut.”

Just how adverse was the development in question? Try an 86% reduction in the price that the seller’s largest customer (Medicare) would pay for the only product the seller made. To make matters worse, when the parties entered into the merger agreement, both anticipated that Medicare would substantially increase the reimbursement rates for the seller’s ambulatory electrocardiogram device, known as a “long-term Holter” or LTH device.

In his opinion, Vice Chancellor Slights that this case didn’t involve the classic “buyer’s remorse” situation commonly found in MAE litigation.  Instead, he acknowledged that the buyer acted in good faith throughout the process, and supported the seller’s efforts to reverse the decision on the price reduction. However, when no change in the pricing had been made, the buyer advised the seller that it believed a MAE had occurred and attempted to terminate the agreement. The seller promptly sued for specific performance, and the buyer counterclaimed, alleging that a MAE had occurred.

Despite the devastating short-term impact of Medicare’s decision on the seller’s business, the Vice Chancellor concluded that it didn’t rise to the level of a MAE under the contract.  He found that the buyer hadn’t established that the impact was durationally significant. Moreover, he noted that an MAE resulting from a change in a “Healthcare Law,” was carved out of the MAE definition unless the change disproportionately impacted the seller’s business compared to “similarly situated” companies.

The agreement didn’t define the term “similarly situated,” and the buyer argued that it should encompass not only developmental stage, single product companies in the industry, but also more established businesses that competed in the cardiac ambulatory care market that were less reliant on LTH devices like the one marketed by the seller. In that regard, the buyer pointed out board documents demonstrating that it considered these companies to be competitive with the seller.

The Vice Chancellor disagreed. He concluded that where the “matter” or “event” that’s alleged to have triggered an MAE is a specific product’s Medicare reimbursement rate, the product mix is “patently the most important factor” in determining whether a company is in a similarly situated position with the seller:

Hillrom’s arguments show merely that each of these companies compete for customers and have a shared interest in getting paid as much as the market will bear for their products and services. The Agreement’s MAE clause, however, did not delimit the reach of its “disproportionate impact” exception to companies operating in the same “market.” Rather, it required an assessment of whether the impact caused by “such matter” was “materially disproportionate” relative to “similarly situated companies operating in the same industries.” In my view, that language calls for a more granular parsing of a company’s situation than mere participation in the LTH market.

VC Slights concluded that only one company – which also was a single LTH product business – was “similarly situated” with the seller. After analyzing the impact of the reimbursement change, the Vice Chancellor concluded that the buyer had failed to carry its burden to prove that the disproportionate-effect exception applies to the applicable MAE carve-out. As a result, the buyer’s refusal to close was a breach of the Agreement. While he rejected the seller’s claim for damages, VC Slights ordered the buyer to specifically perform its obligations under the agreement and awarded the seller prejudgment interest.

I’ve already entered tl;dr territory with this blog, but there are a couple of points I want to make before signing off. First, although I didn’t have room to address it here, be sure to check out the section of the Vice Chancellor’s opinion in which he marches through the disproportionate impact analysis. Second, I’m pretty sure that Marvis Frazier wishes that Vice Chancellor Slights was a ringside judge instead of just a Chancery Court judge.

– John Jenkins

Section 8 of the Clayton Act prohibits competitors from having overlapping directors or managers, regardless of whether any anticompetitive conduct actually occurs. This Sidley memo provides a refresher on antitrust issues regarding the suitability of potential director appointments. This excerpt addresses highlights the application of Section 8 in proxy contests and M&A:

Interlocking directorate issues may arise when a person serves as an officer or director of two competing companies. In a proxy contest, activist investors should ensure that their candidates do not have any interlocking directorate issues, like in the recent proxy contest launched by activist investor Ancora Holdings, Inc. against Blucora, Inc. Press Release, Blucora, Inc., “Acclaimed Antitrust Expert Believes Ancora CEO Fred DiSanto Cannot Serve on Blucora’s Board of Directors” (Apr. 12, 2021).

The issue can also arise in connection with deals cleared by the U.S. antitrust agencies. Press Release, Dep’t of Justice, “Tullett Prebon and ICAP Restructure Transaction after Justice Department Expresses Concerns about Interlocking Directorates” (July 14, 2016) (allowing partial investment between parties under Section 7 of the Clayton Antitrust Act, but requiring the parties to remove director interlock). Most recently, two executives stepped down from a board after the Department of Justice (DOJ) expressed concerns that the appointments created an illegal director interlock between two companies that compete in ticket sales in sports and entertainment markets. Press Release, Dep’t of Justice, “Endeavor Executives Resign from Live Nation Board of Directors after Justice Department Expresses Antitrust Concerns” (June 21, 2021.

The memo also points out that even if a particular situation doesn’t involve an interlock prohibited by Section 8 of the Clayton Act, other provisions of the antitrust laws, including Section 5 of the FTC Act and Section 1 of the Sherman Act, may be implicated. Compliance with these provisions may require an officer or director to take steps to recuse himself or herself from participation in certain decisions and not access certain information provided to the board that is directly relevant to the competitive overlap.

– John Jenkins

Delaware’s takeover statute (Section 203 of the DGCL) has been on the books for more than a generation, but in recent years it hasn’t come up all that often in litigation. So, it’s news when the Chancery Court decides a case where the statute is front and center – even if it’s just a letter opinion.  That happened last week when Chancellor McCormick issued a letter opinion denying motions to enjoin the stockholder vote on Madison Square Garden Entertainment’s (MSGE) proposed acquisition of MSG Networks on the basis of alleged violations of Section 203 of the DGCL.

Section 203 prohibits certain transactions between a Delaware corporation and an “interested stockholder,” which is defined generally to mean a beneficial owner of shares representing 15% or more of the company’s voting power. The statute prohibits business combinations with an interested stockholder for a period of three years, subject to certain exceptions.  In the case of this deal, the relevant exception is the one that applies to a business combination with a person who became an interested stockholder in a transaction that received the prior approval of the board.

At one time or another, most deal lawyers have been involved in transactions in which rights offerings were used to help cleanse issuances of securities to a big investor. The theory is that since every stockholder is being offered the opportunity to buy on the same terms as the investor, the pricing of the share issuance will be insulated from challenge. There’s also some evidence that a properly structured rights offering may help protect insiders from liability for share issuances to controlling stockholders as well.

Well, if Harvard Law prof. Jesse Fried is correct, we may we may need to rethink the benefits of rights offerings. That’s because he just tossed the proverbial “turd in the punchbowl” in the form of this article, in which he contends that rights offers provide insiders with an opportunity to issue themselves stock at bargain prices & at the expense of outside stockholders.  Here’s an excerpt from Fried’s recent blog on his article:

Information asymmetry in both unlisted and listed firms leads to what I call a “zone of uncertainty”—a range of prices in which outsiders cannot tell whether securities offered by a firm are cheap or overpriced. As asymmetry increases, this range widens. Prices far enough beyond the boundaries of the zone will be sufficiently high or low that outsiders can easily figure out whether the offered securities are overpriced or cheap. But within the zone, outsider will be uncertain. Suppose, for example, that outsiders in an unlisted firm believe that the firm’s shares are worth between $5 and $15 each. If insiders have the firm offer additional shares for $10 each, outsiders will not know whether the offered shares are cheap or overpriced.

An offer price within the zone of uncertainty enables insiders to put outsiders between a rock and a hard place, as it forces outsiders to choose between two options, each of which (in expectation) leads to expropriation: (1) exercise rights to buy, risking overpriced-issuance expropriation or (2) refrain, risking cheap-issuance expropriation.

Fried argues that the informational asymmetry problem is greater in private companies that aren’t subject to the SEC’s disclosure rules and in companies with complex capital structures.  He argues that courts need to more closely scrutinize the fairness of rights offerings to outsiders in light of these concerns.

– John Jenkins

Latham & Watkins just published this guide to take-private transactions. The guide an overview of various legal and financing issues associated with taking a public company private.  Here’s an excerpt from the guide’s discussion of deal structures:

A take-private typically is structured in one of two ways: (1) a statutory merger governed by the law of the state in which the target company is organized; or (2) a tender or exchange offer followed by a “back end” statutory merger. Transactions involving only a statutory merger often are referred to as “one-step” transactions, while transactions involving a tender or exchange offer followed by a back-end merger often are referred to as “two-step” transactions.

The principal difference between the two structures is the ability, in certain circumstances, to complete a two-step transaction more quickly than a one-step transaction. However, as discussed below, there are a number of factors relevant to determining the appropriate structure in any given situation.

Regardless of whether an acquirer uses a one‑step or two‑step transaction structure, the acquirer in an acquisition of a US public company may pay in cash, stock of the acquirer, or other forms of consideration, or a combination of the foregoing.

In addition to issues relating to deal structure, topics covered by the guide include considerations for sponsor take-privates, target fiduciary duties & standards of review, friendly & hostile approaches, disclosure considerations and shareholder litigation.

– John Jenkins

We’ve posted the transcript for our recent webcast: “The Leveraged ESOP as an Exit Alternative.” This program covered a lot of ground about an attractive alternative to a sale for many privately held companies. Shawn Ely of Lazear Capital Partners,  Steve Goodman of Lynch, Cox, Gilman & Goodman, PSC &  Steve Karzmer of Calfee, Halter & Griswold LLP addressed a number of topics, including

– Overview of a Leveraged ESOP
– Tax Aspects of Leveraged ESOPs for Sellers & the Company
– Structuring and Financing an ESOP Deal
– Corporate and ERISA Fiduciary Considerations
– Restrictions and Post-Closing Obligations

– John Jenkins