In Strategic Investment Opportunities v. Lee Enterprises, (Del. Ch.; 2/22), the Delaware Chancery Court rejected a hostile bidder’s allegations its nominees for election to the board were valid under the company’s advance notice bylaw or that the board acted inequitably in rejecting those nominations. In doing so, it enforced provisions of the bylaw dealing with the persons entitled to submit nominations and the specific materials required to accompany a nomination.
The case arose out of Alden Global Capital’s hostile bid for Lee Enterprises. An Alden affiliate submitted a slate of nominees for election as directors of Lee. The company rejected those nominations on the grounds that Alden failed to comply with applicable provisions of Lee’s advance notice bylaw, which required notice of the nominations to be submitted by a stockholder of record and accompanied by a D&O questionnaire prepared by the company.
The plaintiff had attempted to become a record holder a few days before the nomination deadline set forth in the bylaw, but since the transfer was not completed in time it asked the record holder, Cede & Co. to provide a cover letter for its nomination in an alternative attempt to meet the requirement. The plaintiff also requested the company to provide it with a form of nominee questionnaire, but the company refused to do that, since the plaintiff was not a record holder.
Vice Chancellor Will rejected the plaintiff’s contentions that the Cede & Co. letter amounted to compliance with the bylaw and that the company acted inequitably in refusing to accept an alternative form of questionnaire. This excerpt from Hunton Andrews Kurth’s memo on the case provides an overview of the Vice Chancellor’s reasoning:
The Court of Chancery held that the record ownership requirement was unambiguous and it was undisputed that the nominating stockholder was not a record owner. It explained that the Cede & Co. letter did not cure this deficiency. Although the plaintiff argued that Cede & Co.’s role was purely ministerial, the court focused on the fact that Cede & Co. was not making the nomination. The court characterized Cede & Co.’s letter as “non-committal and “distanc[ing] itself from having any role in the nomination.” The court also found that the stockholder failed to comply with the bylaw requirement that it use the corporation’s form of questionnaire.
Having concluded that the stockholder did not comply with the bylaws, the court turned to whether the board acted inequitably by refusing to waive the non-compliance or provide Alden an opportunity to cure the deficiencies. The court observed that requiring a nomination to come from a record holder was not unreasonable because it “ensures order and gives the corporation certainty that the party attempting to take action based on a right incidental to share ownership is, in fact, a stockholder.” In response to the stockholder’s argument that the corporation had refused to provide its form of questionnaire when requested, the court said that “if only record holders could make nominations, it seems justifiable that [the corporation] would not undertake the process of providing a questionnaire unless a record holder inquired.”
The memo also provides several key takeaways from the decision, including the fact that while courts can still review a board’s response to a stockholder’s failure to comply with an advance notice bylaw under equitable principles, they are typically unwilling to set those requirements aside when the stockholder was responsible for the problem.
I think I may be the last person in America – or at least the last one on social media – who hasn’t succumbed to the Wordle craze. That’s not unusual – as my kids are fond of telling me, my pop culture references are generally about 20 years behind the times. Anyway, since the NY Times’ acquisition of Wordle received an outsized amount of attention for such a small deal, I’ve been looking for a chance to blog about it. But the problem is, because it’s a rounding error as far as the NY Times is concerned, there’s nothing publicly filed that I could sink my teeth into.
Fortunately, Andy Abramowitz put together a nice blog on the deal, and he pointed out one of the important issues that eager sellers & their advisors should keep in mind when presented with a sale opportunity for a business that’s captured lightning in a bottle – the risk of leaving money on the table:
On one hand, I can see why he would take that deal: it’s a nice chunk of change for a few months of work, and maybe three weeks from now, game players will move on to another obsession, so he wanted to strike while the iron was hot.
However, let’s consider the other possibility, that it becomes an institution for years to come, even after the initial craze passes (something like Sudoku). In that case, letting it go for what seems like a nice cash payment won’t look so wise in retrospect, while the Times reaps many millions from it over the years.
If I was advising Mr. Wardle, I would have advised him to incorporate provisions in the agreement to enable him to benefit from the blowout success scenario. (Again, I want to stress that the agreement isn’t public, so I can’t say for sure that this didn’t happen.) The agreement could incorporate milestone payments, i.e., the initial seven-figure payment up front, but then additional payments if and only if the game is a big success for the Times, and the Times would be obligated to use reasonable efforts to make that happen. Or there could be some form of royalty-type payment, where he’d share in a small percentage of the Times’ earnings from the game.
It’s really hard to appropriately address future value through earnouts or other mechanisms, but it’s sometimes even harder for sellers to have to deal with the knowledge of just how much they may have left on the table.
I’ve blogged a few times in recent years about mootness fees, which have become a popular alternative for plaintiffs asserting M&A disclosure claims post-Trulia. In order to avoid Delaware’s limits on disclosure-only settlements, plaintiffs bring their claims in federal court. Once “corrective” proxy disclosure is made, they settle their claims in exchange for a mootness fee. Since the idea is to avoid Trulia-like scrutiny of these settlements, the objective is to slide the mootness fee through without attracting a lot of attention from the judge – and plaintiffs have enjoyed some success with that approach.
However, federal judges don’t typically like to get played. In recent years, some of them have caught on to the game and have imposed Trulia-like conditions on attempted mootness fee settlements. The latest example of that comes from the SDNY. In Serion v. Nuance Communications, (SDNY; 2/22), the Court refused to approve a mootness fee settlement where it concluded that additional disclosures did not provide a significant benefit to shareholders. Here’s an excerpt from this Shearman blog on the decision:
The case arose in connection with defendant’s agreement to be acquired by Microsoft Corporation. After the company filed its proxy statement in connection with the merger, plaintiff—a Nuance shareholder—filed suit claiming violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Specifically, plaintiff alleged that the proxy omitted material information. Several similar complaints were also filed by other shareholders. Thereafter, defendant filed a supplement to the proxy, which disclosed the allegedly omitted information and “mooted” plaintiff’s claims. Plaintiff’s counsel sought payment of attorneys’ fees from defendant on the basis of the “common benefit” doctrine.
The Court explained that there is no entitlement to such fees unless (i) there is “a causal connection between the lawsuit and the defendant’s action mooting the suit,” and (ii) a “substantial benefit was conferred.” The Court added that to satisfy the “substantial benefit” requirement, a supplemental disclosure “must provide something more than technical in consequence and . . . accomplish a result which corrects or prevents an abuse. . . .”
The supplemental disclosure consisted of some additional data points for the comparable companies trading analysis conducted by target’s banker in rendering its fairness opinion. The Court believed that the existing proxy statement already included the required “fair summary” of the opinion, and that other disclosures added in response to the lawsuit didn’t move the needle either. Accordingly, it concluded that the additional disclosures didn’t confer a substantial benefit.
There’s an interesting detail in the press release announcing Standard General’s $5.4 billion acquisition of TEGNA – it turns out that the buyer has agreed to pay a “ticking fee” if the closing is delayed:
Under the terms of the definitive merger agreement, in addition to receiving $24.00 per share, TEGNA shareholders will receive additional cash consideration in the form of a “ticking fee” of $0.00167 per share per day (or $0.05 per month) if the closing occurs between the 9- and 12-month anniversary of signing, increasing to $0.0025 per share per day (or $0.075 per month) if the closing occurs between the 12- and 13-month anniversary of signing, $0.00333 per share per day (or $0.10 per month) if the closing occurs between the 13- and 14-month anniversary of signing, and $0.00417 per share per day (or $0.125 per month) if the closing occurs between the 14- and 15-month anniversary of signing.
Ticking fees are by no means unheard of as a way to allocate the risks associated with antitrust regulatory approvals, but they haven’t been a popular option in the past. However, as antitrust regulators increase their scrutiny of potential deals, it’s possible that other dealmakers might consider ticking fees as part of their efforts to allocate regulatory risk.
But if you’re considering the possibility of a ticking fee, keep in mind that there are reasons why this mechanism has only rarely been used. You should take a look at this Paul Hastings memo, which provides an overview of the positives and negatives of ticking fees. This excerpt highlights one potentially big negative from a buyer’s perspective:
Once a transaction is announced, a potential interloper with perceived low regulatory risk may view a ticking fee as a signal that the parties have serious regulatory concerns. The existence of the ticking fee could therefore potentially act as inducement for an interloper to try to disrupt the transaction.
Bloomberg Law’s Grace Maral Burnett has a new article that looks at references to cryptocurrencies & crypto assets in publicly filed acquisition agreements. References to crypto appeared in 24 public deal docs last year. That may not sound like a lot, but it’s an all-time record & enough to see some drafting trends begin to emerge – including where in acquisition agreements crypto references are likely to appear.
In addition to cataloging that information, the article excerpts some specific crypto language in MAE clauses, reps & warranties, and even in a post-closing covenant addressing employee compensation. The article also flags an interesting termination provision allowing a buyer to walk in the event of a decline in the price of bitcoin. Here’s that provision:
Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 8.01(b) through 8.01(k), by written notice by the terminating party to the other party), whether before or, subject to the terms hereof, after approval of the Merger Partner Voting Proposal by the Shareholders of Merger Partner or approval of the Public Company Voting Proposals by the Shareholders of Public Company:
by Public Company, at any time prior to the Effective Time, if the seven day moving average price of Bitcoin, as reported on Binance as “MA(7)”, falls below $15,000. (Gryphon Digital Mining Inc.–Sphere 3D Corp. Agreement and Plan of Merger dated June 3, 2021 (governing law: Delaware))
It’s interesting to note that the agreement was subsequently amended to eliminate that termination right as part of an overhaul of the deal’s termination provisions. If you’re interested, you can check out the discussion of that amendment & related changes to the deal that appears on p. 138 of Sphere 3D’s proxy statement/prospectus for the transaction.
Check out our new Deal Lawyers Download podcast, featuring my interview with Faegre Drinker’s Oderah Nwaeze about his recent article on protecting emails from production in books & records litigation. Topics addressed in this 15-minute podcast include:
– Background on Section 220 demands and books & records litigation.
– What “books and records” are stockholders entitled to review?
– How do director emails & texts become subject to production as books & records?
– Is it only email accounts at the corporation that may need to be produced?
– What can be done to avoid having to produce emails & texts in response to a Section 220 demand?
If you have something you’d like to talk about, please feel free to reach out to me via email at firstname.lastname@example.org. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Enjoy the holiday weekend & thanks for reading. We’ll see you back here on Tuesday of next week.
It looks like one of the emerging trends in recent Delaware case law is an increased willingness to allow claims against buyers premised on allegations that they aided & abetted the seller’s directors and officers in breaching their fiduciary duties. This Milbank blog takes a look at these cases and offers some advice to buyers about how to protect themselves against aiding & abetting claims.
One of the ways that recent cases have tagged buyers is by citing contractual provisions that give the buyer the right to review the seller’s proxy disclosures. Plaintiffs have successfully alleged that a buyer’s failure to object to omissions in the seller’s disclosure about potentially problematic contacts may serve as evidence of knowing conduct. This excerpt from the blog provides some advice to buyers about how to help avoid having a contract right intended to protect them used to support a plaintiff’s aiding and abetting claims:
Finally, to eliminate the “contractual hook” relied on by the courts in both Mindbody and In re Columbia Pipeline Group, Inc., the merger agreement’s covenant to correct target’s disclosure could be written to limit buyer’s obligation to participate in target’s proxy disclosure to providing target with information only about buyer itself – such that any disclosure required to be made regarding meetings held with target management, the terms of preliminary offers made to target and judgments regarding the materiality of any other information in the possession of target (such as projections) would be the sole responsibility of target. This should have the effect of requiring some showing that buyer actually knew of the fiduciary’s breach, as plaintiffs will not be allowed to rely on the breach of the information covenant to demonstrate “knowing participation” in the fiduciary breach.
The blog also makes a compelling argument that it is inappropriate to use these contractual provisions as a basis for aiding & abetting claims, noting that “buyers are not typically privy to communications between a CEO and board regarding process matters, so that much evidence of a poorly run process may be hidden from buyer’s view.”
We’ve posted the transcript for our recent webcast: “Universal Proxy: Preparing for the New Regime.” Our panelists provided insights into a number of aspects of the changing antitrust regulatory environment. Topics addressed by the panel included:
– An Overview of the Universal Proxy Requirement
– Proxy Contests Under the New Regime
– Universal Proxy’s Influence on Activist Strategies & Tactics
– Bylaw Issues
– Other Rule Changes & Implications for Disclosure Controls and Procedures
– Advice for Companies in Advance of the Compliance Date
In Wei v. Zoox(Del. Ch.; 1/22), the Chancery Court granted a protective order limiting the discovery that a company would be otherwise be required to provide to petitioners in an appraisal proceeding. The case arose out of Amazon’s 2020 acquisition of Zoox, a private company. The petitioners followed their appraisal demand with a Section 2020 inspection demand, but the company refused to comply with it because the merger had already closed.
Subsequently, the petitioners withdrew their appraisal demand for 95% of the shares that they owned, and filed an appraisal action in the Chancery Court. They subsequently submitted a detailed document request to Zoox, which the company partially complied with. In arguing that it should not be required to comply fully with the petitioners’ discovery demands, Zoox argued that the petitioners were improperly using the appraisal proceeding as a means to investigate a potential breach of fiduciary duty claim. Chancellor McCormick agreed, and this Potter Anderson blog summarizes her reasoning:
While acknowledging that Delaware courts have allowed appraisal petitioners to use discovery adduced in appraisal proceedings in parallel or later-filed actions, the Court evaluated the policy considerations underlying Sections 220 and 262 and concluded that appraisal petitioners should not be permitted to obtain full discovery in an appraisal proceeding initiated solely for the purpose of conducting a pre-suit investigation. Doing so would allow stockholders seeking to conduct a pre-suit investigation to do so under the Rule 26 standard for obtaining discovery in appraisal proceedings rather than the narrower standard for obtaining books and records under Section 220.
That would make appraisal proceedings more attractive than Section 220, contrary to the Court’s guidance that stockholders employ Section 220 for such pre-suit investigations. The Court reasoned, however, that where, as here, an appraisal proceeding is pursued because the Section 220 path is blocked, a trial court has discretion to limit discovery to the scope of what the petitioner could have obtained under Section 220.
The Court concluded the petitioners filed the appraisal action as a substitute for Section 220 on the grounds that “objectively discernable facts reflect” that seeking appraisal was “an economically irrational investment” given the small dollar amounts at stake, and the petitioners did not deny that such an investigation was one of their aims. The Court thus granted Zoox’s protective order in part, limiting petitioners to the discovery that they would have obtained in a Section 220 proceeding.
The blog also points out that Zoox’s status as a private company is central to the case, and the issues presented here are unlikely to arise in public company transactions. There are two reasons for that conclusion. First, the federal securities laws ensure that public company stockholders have enough advance notice of a merger to pursue books and records actions prior to closing, which means they wouldn’t have to use the appraisal mechanism as a substitute. Second, Section 262(g) of the DGCL requires appraisal petitioners in most public company deals to obtain at least 1% of the outstanding eligible shares or shares worth $1 million. That relatively high filing bar “would most likely prevent petitioners from using ‘economically irrational’ appraisal petitions to pursue books and records concerning most mergers involving publicly traded companies.”
KPMG has put together this whopping 615-page handbook on accounting for business combinations. To my knowledge, this is the first comprehensive resource from one of the Big 4 that addresses accounting for de-SPAC transactions. Check out this excerpt from the discussion of how to determine the accounting acquirer in a deal involving a SPAC:
The accounting acquirer determination in a SPAC merger is critical because it dictates the accounting basis of the merged entity. Additionally, determining the predecessor is often correlated with this determination, which affects the form and content of financial statements required in SEC filings. While the SPAC is typically the legal acquirer, the accounting does not always follow the legal form. In many cases, the target company (the legal acquiree) will be considered the accounting acquirer in what is referred to as a reverse recapitalization. When the SPAC is both the legal and accounting acquirer the transaction is commonly referred to as a forward merger.
Similar to a reverse acquisition involving a shell company (see Paragraphs 9.014 through 9.015), a reverse recapitalization is in substance the issuance of shares by the target company for the net monetary assets of the SPAC, accompanied by a recapitalization. This is because, in most cases, the SPAC will not meet the definition of a business and its only assets are cash and cash equivalents (e.g., nonmonetary assets are nominal).
Conversely, in a forward merger, the transaction is accounted for as a business combination or asset acquisition, depending on whether the target company meets the definition of a business (see Section 2). Because of the significance of the target company’s operations relative to those of the SPAC, the target company is usually considered the predecessor entity for SEC reporting purposes.
The handbook also addresses changes to the standards governing the treatment of deferred revenue in a business combination made by ASU 2021-08, which FASB adopted late last year.