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Our new Deal Lawyers Download podcast features my interview with Bloomberg Law’s Grace Maral Burnett about her analysis of references to cryptocurrencies & other digital assets in 2021 acquisition agreements. Topics addressed in this 18-minute podcast include:
– Researching references to cryptocurrencies & crypto assets in public acquisition agreements
– Emerging drafting trends did you discover when it comes to crypto references?
– The kind of deals that are referencing crypto
– Interesting or unusual crypto-related provisions
– Future trends do you see emerging when it comes to crypto in M&A deal documents?
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. 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.
Last month, I blogged about the Delaware Chancery Court’s decision in BCIM Strategic Value Master Fund v. HFF, (Del. Ch.; 2/22), in which Vice Chancellor Laster determined to apply an upward adjustment to the merger consideration in determining the fair value of a share. While he did not find fault with the deal process, the Vice Chancellor did conclude that an increase in the target’s value between signing and closing should be reflected in the fair value determination.
This Cooley blog reviews the decision and offers up some key takeaways – one of which is the potential that it creates for appraisal arbitrage in some mixed consideration deals. The blog notes that this deal involved a combination of cash & stock, with each share of the target’s common stock being converted into the right to receive $24.63 in cash and 0.1505 shares of buyer’s common stock. At signing, the value of buyer’s stock implied a deal price of $49.16 per share (based on the buyer’s trading price on the date of signing). This excerpt says that it’s the use of a fixed conversion rate for buyer’s stock that creates the potential for appraisal arbitrage:
It is the use of spot trading prices to measure the value of buyer’s stock in a mixed consideration transaction that may create an opportunity for appraisal arbitrage. Had the deal consideration been comprised entirely of cash or had the exchange rate for the stock portion of the consideration been floating, rather than fixed, no upward adjustment would have been warranted because the determined fair value at closing ($46.59/share) was less than the implied deal price at signing of $49.16/share.
Additionally, an appraisal proceeding could have been wholly avoided had the transaction been structured as an all-stock deal or had target’s stockholders had the right to elect between cash and stock consideration and there was no cap on the amount of stock consideration a stockholder could elect (i.e., each stockholder could elect to receive 100% stock consideration).
The blog says that the case may create appraisal arbitrage opportunities for cash & stock deals even absent a change in target value between signing and closing. That’s because it creates an incentive for stockholders to argue that the value of consideration delivered at closing was less than fair value based solely on a decline in the buyer’s stock price between signing and closing.
As most readers know, “sandbagging” in the M&A context refers to the ability to rely on the other side’s representations even you know that the rep is inaccurate when made. Delaware has long been viewed as a “pro-sandbagging” state, but language in the Delaware Supreme Court’s decision in Eagle Force Holdings v. Campbell, (Del.; 5/18), called that conclusion into question.
The Chancery Court’s recent decision in Arwood v. AW Site Services, (Del. Ch.; 3/22), may help lessen that uncertainty, because it provides a strong statement in support of the view that Delaware remains pro-sandbagging even after Eagle Force Holdings. As this excerpt from Goodwin’s memo on the decision notes, the Eagle Force Holdings decision was front & center in Vice Chancellor Slights’ analysis:
Given the vice chancellor’s finding that the buyer knew or should have known the seller’s representations were false, he asked the parties to submit post-trial briefs on the state of Delaware’s law regarding “sandbagging”. The vice chancellor was particularly interested in the impact, if any, that the Delaware Supreme Court’s 2018 opinion in Eagle Force Holdings, LLC v. Campbell had on the question.
Prior to Eagle Force, it was commonly understood that Delaware was “a pro-sandbagging state” — a state that allowed a buyer to sandbag a seller, even when their agreement was silent on the issue. However, Eagle Force was seen by many commentators as casting a measure of “doubt” on the idea that a buyer can “turn around and sue because of what he knew to be false remained so,” and drew questions about the extent to which parties could recover on a breach of warranty claim in Delaware when it knew at signing certain warranties were not true.
After considering the parties’ briefing, Vice Chancellor Slights concluded that sandbagging is and should be allowed under Delaware law because it is consistent with Delaware’s “profoundly contractarian predisposition,” including its public policy favoring private ordering, history of enforcing good and bad agreements, and exclusion of reliance as an element required to establish a breach of contract claim. The court also considered that a pro-sandbagging rule supports the notion that representations and warranties serve an important risk allocation function in transactions.
The memo says that post-Arwood, it is even more important that a seller wishing to avoid being sandbagged in a deal governed by Delaware law obtain an explicit anti-sandbagging provision in the parties’ contract. Based on the available evidence, that remains a tough ask – according to the ABA’s 2019 Private Targets Deal Points Study, only 4% of purchase agreements included an anti-sandbag clause.
The folks at Sidley recently came up with this list of seven Delaware books & records cases that every practitioner should know. Reflecting the increasing importance of Section 220 litigation, every case but one on the list was decided within the past five years. Here’s an excerpt on last year’s Amerisource Bergen decision:
AmerisourceBergen Corp. v. Lebanon Cnty. Emps. Ret. Fund, 243 A.3d 417 (Del. 2020): It is well established that under Section 220, a stockholder seeking to inspect the books and records of a corporation must demonstrate a “proper purpose” for inspection. In this seminal opinion from 2020, the Delaware Supreme Court affirmed a Chancery Court decision that found a sufficient proper purpose and required the company to produce corporate books and records in response to stockholders’ demand to “investigate possible breaches of fiduciary duty, mismanagement, and other violations of law,” regarding the corporation’s distribution of opioids and related ongoing governmental investigations.
While recognizing that a stockholder must demonstrate a “credible basis” from which wrongdoing may be inferred, the Supreme Court affirmed that “where a stockholder meets this low burden of proof . . . [the] stockholder’s purpose will be deemed proper under Delaware Law” and that the stockholder “is not required to specify the ends to which it might use the books and records.” Moreover, the Supreme Court affirmed that a demanding stockholder need not demonstrate the suspected wrongdoing it seeks to investigate is “actionable” under Delaware law.
We’ve posted the transcript from our recent webcast – “Activist Profiles & Playbooks.” Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Dan Scorpio shared their insights on the lessons learned from 2021 activism and what we might see this year. Here’s an excerpt of some of Dan Scorpio’s comments on what companies can expect this year:
As we look back on last year, nearly half of all activist campaigns involved M&A as a core thesis. That could be pushing for a breakup, a spin-off, or opposing a previously announced or agreed upon transaction. We expect that this will likely continue until the M&A market turns. You’re starting to see activists more and more taking pages out of the private equity playbook. Some are even proposing to acquire the target companies outright, and if you think of how this happens, you’ll see a soft behind the scenes approach – an escalation to a proposal or a bear hug letter, and even some well-orchestrated leaks to media. This is something that we’re watching. It will be interesting to see if this picks up over this year as well.
In Level 4 Yoga v. CorePower Yoga, (Del. Ch.; 3/22), Vice Chancellor Slights was called upon to address a question of contract interpretation that I don’t recall seeing a Delaware court confront before – how should the Court analyze a buyer’s claim that it can refuse to close a deal based on an alleged breach of a seller’s MAE rep that was not accompanied by a closing condition premised on the absence of an MAE?
The case arose out of a franchisor’s efforts to back out of an asset purchase agreement to acquire a franchisee’s business. The seller responded by suing for specific performance. Like many of these cases over the past couple of years, the buyer responded by alleging, among other things, that the seller’s response to the pandemic resulted in its “material breach” of several of its contractual obligations, thus entitling the buyer not to close. One of the alleged breaches involved the seller’s MAE rep, but as I’ve previously noted, the asset purchase agreement didn’t expressly condition the buyer’s obligation on the absence of an MAE.
Vice Chancellor Slights noted that “Delaware law firmly supports the principle that a party to a contract is excused from performance if the other party is in material breach of his contractual obligations,” but that breaches that don’t rise to this level may only give rise to claims for damages. In order to rise to the level of a material breach at common law, the breach must go “to the root or essence of the agreement between the parties, or [touch] the fundamental purpose of the contract and defeats the object of the parties in entering into the contract.”
Since the buyer didn’t bargain for a closing condition tied to the absence of an MAE, VC Slights had to determine whether any “Material Adverse Effect” would be sufficient to excuse the buyer from the contract. He concluded that it would not be sufficient:
If it were the case that the occurrence of any MAE would justify a refusal to close, buy-side transactional planners might well wonder why they have bargained so hard to include express language in their acquisition agreements that makes clear the non-occurrence of an MAE is a condition to closing. In my view, they need not wonder or question whether they’ve been wasting their time. To justify a refusal to close based on a purported breach of an MAE representation (or covenant) in the absence of an express corresponding condition to close, the buyer must demonstrate that the breach of that representation (or covenant) was material.
This is not redundant. Parties may define an MAE to mean whatever they want it to mean. And one can certainly envision an MAE definition that is triggered in circumstances that do not “go[] to the root or essence of the agreement between the parties, or touch[] the fundamental purpose of the contract and defeat[] the object of the parties in entering into the contract.” In such instances, while there might be an MAE, there would not be a material breach of the MAE representation or covenant.
I guess the lesson of Vice Chancellor Slights’ decision is that if a buyer is armed with an MAE closing condition and a rep, then it just has to establish that the seller has experienced an MAE within the agreement’s definition in order to justify a refusal to close. If a buyer’s only relying on a seller’s rep, then it must establish that the breach of that rep is itself a material breach, and the circumstances that might result in breach of an MAE rep wouldn’t allow the buyer to walk unless it also satisfied the standards for a material breach under common law.
It’s fitting that the companies involved in this dispute were in the yoga business, because it’s pretty clear from the immediately preceding paragraph that I’ve tied myself in knots trying to understand the Chancery Court’s decision. For a more detailed review of the decision in this case, check out this Shearman blog.
Ropes & Gray recently did a podcast on the use of MAC clauses and ordinary course covenants in private equity secondaries transactions. While MAC clauses are relatively uncommon in these deals, in this excerpt from the transcript partner Isabel Dische discusses where those provisions typically appear and how their use has been on the rise due to recent events in Ukraine:
Very briefly, material adverse change (or MAC) clauses arise in secondaries transaction agreements in two typical ways. First, and more common, would be to include a MAC qualifier on certain of the representations within the agreement. For example, a representation about an underlying portfolio company might be read so that the portfolio company is not in default under any of its contractual arrangements, except for such defaults as would not individually, or in the aggregate, cause a MAC.
Less common would be to include a MAC closing condition for a deal, expressly saying that the buyer’s performance obligations are conditioned upon no material adverse change having occurred. The usage of MAC clauses in this context has been fairly uncommon in recent years, but in the past two months, we have seen these clauses creep into a number of letters of intent and term sheets for deals, as buyers try to protect themselves against market uncertainty. And in the past couple of weeks, we’ve seen increasing questions around this. It is worth stressing that we are still seeing MAC clauses in only a small minority of deals, but it is a trend that seems to have been accelerating along with events in Ukraine.
This WilmerHale memo (p. 6) reviews commonly used antitakeover provisions & their prevalence among IPO companies, the S&P 500, and the Russell 3000. In addition to demonstrating my lack of proficiency in creating tables in WordPress, this excerpt from the memo reveals significant differences between the groups when it comes to their use of certain antitakeover devices:
Antitakeover Provision
IPO Companies
S&P 500
Russell 3000
Staggered Board
83%
13%
43%
Limit Right to Call Meeting
95%
33%
53%
No Written Consent
88%
68%
74%
Some antitakeover defenses appear to be relatively ubiquitous across all groups of companies. These include advance notice bylaws and charter provisions authorizing blank check preferred stock, which are in place at more than 95% of companies within each group. The memo also reviews each of the takeover defenses addressed in the survey and points out some of the questions to be considered by a board in evaluating them.
This is pretty far down the list of priorities when it comes to the sickening events of the last couple weeks in Ukraine, but the new sanctions imposed on Russia for its aggression need to be considered by both buyers and RWI insurers when they evaluate a proposed deal with a company that has business in Russia. This Norton Rose Fulbright memo addresses this issue from both perspectives. This excerpt reviews some of the things that buyers planning to purchase RWI need to keep in mind:
Buyers that are seeking RWI coverage on an ongoing transaction should be prepared to supply detailed information regarding touchpoints in Russia or Ukraine, especially if those touchpoints are direct commercial relationships with Russian firms or Russian nationals. Insurers will expect that businesses in key industries like energy extraction and transportation, high-tech devices and components and transportation, to the extent they have any exposure to the impacted region, present heightened compliance risks in underwriting RWI policies. In order to minimize the breadth of any coverage exclusions, buyers should be proactive in undertaking specific due diligence to address the impact of new sanctions and restrictions on the target business.
Once in underwriting, buyers should assume that significant insurer time and attention will be devoted to assessing this area of risk, so buyers should consider taking a proactive approach in diligence to understand how effectively the target business has established trade compliance policies and procedures, whether the target business has sufficient recordkeeping in order to quantify the impact of new sanctions and restrictions and whether the target business has already begun the process of disentangling itself from any impacted relationships.
Additionally, buyers should expect that this will be a broader diligence exercise than simply addressing trade compliance. Insurers will also focus on labor impacts, to the extent employees or contractors sit in Russia or Ukraine, cybersecurity impacts and supply chain impacts, so members of the buyer’s diligence team specializing in those areas should conduct their review with an eye towards answering conflict-specific questions in their area.