This recent Weil blog is titled “Stuff You Might Need to Know: What Assignments Do Broad Anti-Assignment Clauses Not Prohibit?” I would say a better title might be “Stuff You Definitely Need to Know. . .” Here’s the intro:
A recent federal court decision applying Delaware law, Partner Reinsurance Co. Ltd. v. RPM Mortgage, Inc., 2021 WL 2716307 (S.D.N.Y. July 1, 2021), explores some rare contractual territory—i.e., the question whether, in the absence of consent, a valid assignment may be made by a party of its rights to pursue a claim for damages for breach of a merger agreement, notwithstanding an anti-assignment clause that declared “void” any assignment of “any or all of” such party’s “rights under” that merger agreement.
Surely, some might say, the right to claim damages for a breach of a contact is a “right[] under” that contract and would accordingly be prohibited by such a broad anti-assignment clause. Not so says the United States District Court for the Southern District of New York; and, in case you were wondering, this holding is consistent with long standing law concerning the scope of even the broadest anti-assignment provisions.
The blog goes on to discuss the applicable provisions of the Restatement of Contracts that Delaware courts and the SDNY applied in reaching this conclusion, and points out that that bottom line is that if parties want to restrict assignment of damage claims, the anti-assignment clause needs to include language specifically addressing those claims, and just restricting the assignment of “any or all rights under the contract” won’t cut it.
I’ve always been a fan of “Butch Cassidy & the Sundance Kid,” and I give Vice Chancellor Slights 5 stars for the way he worked the film into his opinion in Online HealthNow v. CIP OCL Investments. (Del. Ch. 8/21). The case involved the enforceability of contractual limitations on post-closing claims that effectively eviscerate all claims, including those that allege the contract itself is an instrument of fraud. Vice Chancellor Slights began his opinion by invoking this famous scene, and concluded that the stock purchase agreement’s liability limitations simply contained “too much dynamite” to be enforceable:
Defendants’ motion to dismiss must be denied. Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud. Stated more vividly, while contractual limitations on liability are effective when used in measured doses, the Court cannot sit idly by at the pleading stage while a party alleged to have lied in a contract uses that same contract to detonate the counter-party’s contractual fraud claim. That’s too much dynamite.
The Chancery Court’s 2006 decision in ABRY Partners v. F&W Acquisition, (Del. Ch. 2/06) played a central role in Vice Chancellor Slights’ opinion. In ABRY Partners, then Vice Chancellor Strine held that Delaware law permits “sophisticated commercial parties to craft contracts that insulate a seller from a rescission claim for a contractual false statement of fact that was not intentionally made.” However, he went on to say that the contractual freedom to immunize a seller from liability for a false contractual statement of fact ends there. When a seller intentionally lies, a contractual provision limiting the remedy of the buyer to a capped damage claim would not be enforceable.
In arguing that contractual fraud claims against the target & its owner should be dismissed, the Online HealthNow defendants in pointed to the stock purchase agreement’s survival clause, which stated that the reps and warranties of the target and its private equity owner “shall not survive the Closing for any purpose.” The defendants contended that, unlike the situation in ABRY Partners, this survival clause didn’t limit the buyer’s claim to a remedy, but simply limited the time during which it could pursue that remedy.
The defendants cited the Delaware Superior Court’s decision in Sterling Network Exchange v. Digital Phoenix Van Buren, (Del. Super. 3/08), which held that a survival clause limiting the time during which claims could be asserted did not run afoul of ABRY Partners. However, the Vice Chancellor rejected that argument, noting that the Court’s conclusion was contingent upon the existence of “a reasonable period of opportunity to unearth possible misrepresentations.” He was somewhat skeptical of the decision in that case, but decided that in any event the reasonableness of the discovery period was not something that was suited for resolution on a motion to dismiss.
In arguing that fraud claims could not be asserted against the target’s owner, the defendants also pointed to the stock purchase agreement’s non-recourse provision. That said, among other things, that claims arising out of the SPA may only be asserted against “the Persons that are expressly identified as Parties and their respective successors and permitted assigns”; that “no officer, director, partner, manager, equityholder, employee or Affiliate of any Party . . . will have any liability or obligation with respect to [the SPA] or with respect to any claim or cause of action (whether in contract, tort or otherwise)” arising out of it.
The defendants cited language in ABRY Partners to the effect that “it [is] difficult to fathom how it would be immoral for the Seller and Buyer to allocate the risk of intentional lies by the Company’s managers to the Buyer” in support of their position that the non-recourse clause was enforceable. But Vice Chancellor Slights summarily dismissed that argument, noting that the quoted language arose during the Court’s discussion of a situation where the seller did not have actual knowledge of the fraud. He concluded that the language cited by the defendants didn’t abridge ABRY Partners’ central holding – that public policy won’t permit a seller to avoid liability for contractual representations and warranties that it knew were false.
This Mayer Brown blog summarizes the results of a survey of global venture financing trends during the second quarter of 2021. Here’s an excerpt:
According to CB Insights’ latest State of Venture Report, global startup financing in Q2’21 reached $156.2 billion, a 157% year-over-year increase and a record quarter high. U.S. startup funding accounted for the largest portion of the global quarter total, raising $70.4 billion, followed by Asia raising $42.2 billion. Meanwhile, funding to China-based companies continued to decline with an 18% drop from its peak in Q4’20.
As a result of increased funding, global unicorn births saw a record quarter high with 136 new unicorns, an increase of 491% year-over-year. In the first half of 2021, the average unicorn valuation rose to $1.6 billion, up from the 2016 average of $1.2 billion. Mega-round deals (capital raises over $100 million) almost tripled compared to Q2’20, totaling 390 deals. Global M&A exits rebounded from pandemic lows to reach new records with 2,613 M&A exits and 280 IPOs.
The blog says that halfway through 2021, U.S. venture funding is approaching 2020’s yearly total despite fewer deals. The U.S. also reached a record quarter high of 76 unicorn births, including (Stripe valued at $95 billion), SpaceX ($74 billion), and Instacart ($39 billion).
In Houseman v. Sagerman, (Del. Ch. 7/21), the Delaware Chancery Court held that a merger agreement’s indemnification provisions were binding on the seller’s non-signatory stockholders. Unlike the situation addressed in Cigna v. Audax, (Del. Ch. 11/14), the indemnification provisions here were capped at the amount of the escrow account. While that avoided Audax’s Section 251(b) issue, Steve Quinlivan’s blog on the case discusses how the Court dealt with the issue of binding non-signatories. As this excerpt explains, that turned on the Court’s interpretation of the authority of the Shareholders’ Representative:
The Court found that even though the Shareholders’ Representative was appointed by the Owners, and not all shareholders, that did not limit the ability of the Shareholder Representative to act on behalf of the other shareholders. The Merger Agreement provided that “[t]he Owners hereby appoint Thomas D. Whittington (the “Shareholders’ Representative”) as their attorney-in-fact with full power . . . to perform any and all acts necessary or appropriate in connection with the Agreement.” The Merger Agreement further provided that the actions of the Shareholders’ Representative “shall be binding upon all of the Owners and Shareholders.”
In the view of the Court, the actions of a stockholders’ representative are generally binding on all stockholders. Looking to prior precedent, the Court noted that all Section 251 of the DGCL required was for the representative to be designated as the individual who would follow the procedures and make or participate in the determinations called for by the Merger Agreement. In this case the Merger Agreement designated the Shareholders’ Representative to carry out the actions contemplated by that Agreement. Therefore, the Shareholders, whether signatories or not, were bound by the actions and determinations of the Shareholders’ Representative to the extent they are in accordance with the Merger Agreement’s terms.
According to a recent CFO Dive article, the high volume of M&A activity has made it increasingly difficult for deals that don’t fit easily within carriers’ comfort zones to find RWI coverage. Here’s an excerpt:
CFOs whose companies are considering an acquisition could struggle to get representations and warranties insurance unless the deal falls neatly into carriers’ comfort zones, insurance specialists said in a Dechert LLP webcast.
Since the end of last year, mergers and acquisitions have been exploding, creating a bandwidth problem at insurance carriers as they try to keep up. As a result, insurers aren’t hesitating to turn down deals.
“Carriers across the board right now are inundated with deals and requests to quote deals and as a result they can be, and are being, highly particular with the deals they choose to actually underwrite,” said Emily Standen, senior vice president of insurance broker Marsh JLT Specialty.
The article says that small deals, complex deals, deals with tight timetables and those involving unfavored industry sectors are facing challenges in finding coverage. What’s more, if you do find coverage, you’re likely to find that premiums are higher & coverage terms tighter than they’ve been in the past.
This recent memo from Hunton Andrews Kurth’s Steve Haas discusses the lessons learned from the last year’s worth of pandemic-related M&A litigation. Steve says there are two broad categories of lessons to be learned from these lawsuits. The first category deals with the specific allocation of pandemic-related risks in purchase agreements, such as whether the effects of pandemics are excluded from the MAE definition and the extent to which the target can take actions between signing & closing without violating interim operating covenants.
Steve suggests that these lessons will become less important as the pandemic fades, but that a second category of lessons – those that arise from pandemic-era judicial interpretations of deal terms in use prior to the pandemic – will have a more lasting impact. This excerpt says that these lessons include:
– reaffirming the high threshold necessary to show an MAE has occurred under Delaware law;
– whether parties want to be more specific in referencing the peer group for determining whether a target has been disproportionately impacted by external changes or events relative to its peers;
– negotiating ordinary course covenants, including whether the obligation to operate in the ordinary course is absolute, qualified by an “efforts” standard, or subject to other exceptions; whether “ordinary course” is based only on the target’s prior performance or can also be based on what similarly situated companies do; and the extent to which a buyer is entitled to withhold its consent from the target’s request to deviate from its covenants; and
– the possibility that sellers may be able to obtain specific performance against private equity buyers even when the parties have used the typical financial sponsor construct in which specific performance is conditioned on the funding of the debt financing.
It’s fairly standard for shareholders agreements to include a “lockup” provision obligating a shareholder to refrain from selling shares for a period of time following an initial public offering of the company’s shares. Other rights and obligations under these contracts are sometimes triggered by an initial public offering as well. But what happens when the initial public offering isn’t a traditional IPO, but a de-SPAC merger?
There are a couple of interesting pieces of litigation rattling around in Delaware that address interpretive issues about whether contractual provisions designed to address a traditional IPO also cover a de-SPAC. This excerpt from a recent blog by Ann Lipton explains what’s at issue in the two cases:
In two cases pending in Delaware Chancery, investors in private companies slated for a SPAC merger are arguing that their shareholder agreements impose certain obligations on them in the event of a traditional IPO, but impose no obligations in the event that a company goes public via SPAC.
In the first, Brown v. Matterportet al., 2021-0595, the plaintiff is the former CEO. He claims that he agreed to a lockup for his shares in the event of an underwritten IPO, but that no such restriction attaches for a de-SPAC transaction – and that Matterport is improperly trying to bind him to a lockup via the merged company’s bylaws.
In the second, Pine Brook Capital Partners v. Better Holdco et al., 2021-0649, a venture capital firm claims that its shareholder agreement only gives the company redemption rights for some of its shares in the event of an underwritten IPO – not a de-SPAC transaction. (The firm also claims that the company is improperly requiring that larger shareholders – including itself – agree to a lockup as a condition to receiving merger consideration; the complaint does not specify whether its shareholder agreement provides for a lockup in the event of an IPO.)
Ann’s blog points out that the shareholders agreements at issue were entered into before the SPAC market exploded, and their language didn’t specifically address the possibility of going public via a de-SPAC deal. That means it’s time for the Chancery Court to put on its thinking cap.
This Debevoise publication provides an overview of the various EU & US regulatory factors and other considerations that are helping to make ESG issues front and center in many M&A transactions. This excerpt focuses on ESG metrics and their use in the due diligence process:
When conducting ESG due diligence in an M&A context, it is important to understand how the buyer intends to account for and potentially disclose ESG information. For example, diligence conducted for an impact-focused fund will likely serve as the baseline from which the fund will measure and report ESG changes during its period of ownership. Similarly, a social impact fund aimed at improving financial inclusion will want to know the number of “unbanked” people currently served by a target company so that it can measure the shift in access to financial services during the life of its investment.
As another example, a large public company that reports on ESG matters under the Sustainability Accounts Standards Board (the “SASB”) standard will want to understand the pro forma effect of a potential acquisition on its ESG reporting. This is no different in concept to understanding the accounting framework used by the buyer when conducting accounting and financial due diligence.
As discussed above, some regulators have mandated ESG-related reporting on specific matters, such as supply chain or climate risks. Beyond those legally mandated, various systems of ESG reporting standards have arisen over the last few years. Notable examples are the SASB and the Global Reporting Initiative (the “GRI”). SASB’s set of 77 Industry Standards identifies “the minimal set of financially material sustainability topics and their associated metrics for the typical company by an industry”. The GRI Standards are divided by topic: the three universal Standards are used by every organisation that prepares a sustainability report; and the remainder are chosen by an organisation from topic-specific Standards.
The publication also addresses new ESG diligence requirements in selected EU markets & in the U.S., highlights certain risk management concerns, and addresses the potential benefits for businesses of robust ESG diligence.
Most acquisition agreements contain an “effect of termination” provision that limits the parties liability for pre-termination breaches. However, it is also common to include carve-outs from that limitation on liability permitting each party to hold the other responsible, post-termination, for any damages associated with certain pre-termination breaches of the agreement. This Gibson Dunn memo discusses factors that should be taken into account when negotiating effect of termination provisions and the related carve-outs in an evolving M&A market. Here’s an excerpt :
The scope of the pre-termination breaches subject to the carve-out typically is, and should be, scrutinized in transactions in which there is significant risk of the deal being terminated, such as due to a failure to receive regulatory approval or a debt financing failure. For example, in transactions in which the buyer is a financial sponsor and is relying on the availability of debt financing to pay the purchase price, the seller typically wants to ensure that, if the buyer fails to close the acquisition when required by the agreement, it has the ability to (i) keep the agreement in place and seek specific performance of the agreement to force the buyer to close, which may be limited to circumstances in which the buyer’s debt financing is available (i.e., a synthetic debt financing condition), or (ii) terminate the agreement and recover damages, often in the form of a reverse termination fee, from the buyer.
The effect of termination provision should not purport to foreclose recovery of the reverse termination fee, which in some transactions serves as liquidated damages and a cap on the buyer’s liability for pre-termination breaches. In other transactions, the effect of termination provision may also permit the seller to recover damages beyond or irrespective of a reverse termination fee, frequently limited to circumstances in which there was an “intentional” or “willful” pre-termination breach by the buyer of its obligations.
The memo goes on to note that in a very competitive M&A market, buyers have become more willing to agree to bear regulatory approval risk and for private equity buyers to backstop the entire purchase price with equity in lieu of a synthetic debt financing condition or reverse termination fee. These additional commitments make it even more important to closely scrutinize effect of termination language.
When it comes to sellers, the memo points out that the scope of liability for pre-termination breaches needs to be considered in light of the availability of R&W insurance. In these situations, sellers frequently expect that they won’t face any liability for pre-termination breaches of reps & warranties aside from fraud claims.
The HSR Act generally provides a 30-day period for review of a pending merger transaction by the FTC & DOJ. While post-closing challenges do occur from time to time, the expiration of the HSR waiting period without receipt of a second request is usually taken as a sign that the deal doesn’t raise antitrust concerns. However, the FTC’s Bureau of Competition blogged yesterday that the agency is so swamped with HSR filings that it isn’t able to complete its review of many transactions within that 30-day period. If the agency hasn’t completed its review, then this excerpt says that you move forward with your deal at your own risk:
This year, the FTC has been hit by a tidal wave of merger filings that is straining the agency’s capacity to rigorously investigate deals ahead of the statutory deadlines. (We now post our monthly HSR figures on the website and they are astounding.) We believe it is important to be upfront about these capacity constraints. For deals that we cannot fully investigate within the requisite timelines, we have begun to send standard form letters alerting companies that the FTC’s investigation remains open and reminding companies that the agency may subsequently determine that the deal was unlawful.
Companies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk. Of course, this action should not be construed as a determination that the deal is unlawful, just as the fact that we have not issued such a letter with respect to an HSR filing should not be construed as a determination that a deal is lawful.
If your deal is one as to which the FTC’s investigation remains open when the waiting period expires, here’s the form letter you can expect to receive from the agency.