April 4, 2022

Deal Hacking: Del. Chancery Address Claims Arising Out of Hacker’s Theft of Merger Consideration

Last year, I blogged about a situation in which a hacker apparently changed the payment instructions that a target shareholder provided to a paying agent in connection with a merger, and successfully diverted the shareholder’s consideration to the hacker’s account. That hot mess ended up in the Chancery Court’s lap, and last week, in Sorenson Impact Foundation v. Continental Stock Transfer & Trust Co., (Del. Ch.; 4/22), the Court addressed a motion to dismiss the case.

Vice Chancellor Glasscock dismissed the plaintiff’s claims against the paying agent on jurisdictional grounds, and also dismissed claims alleging that the buyer was responsible for its agents’ breach of the letter of transmittal & paying agent agreement.  As to these latter claims, the Vice Chancellor cited Wenske v. Blue Bell Creameries, Inc., (Del. Ch.; 7/18), for the proposition that “Delaware law recognizes no theory under which a principal can be vicariously liable for its agent’s non-tortious breach of contract.” However, Vice Chancellor Glasscock declined to dismiss claims that the buyer breached its obligations under the merger agreement concerning the payment of the merger consideration:

The Merger Agreement imposes duties on Parent, and it is reasonably conceivable that it also provides rights to the Plaintiffs (as third-party beneficiaries) here. The Plaintiffs’ “First Cause of Action (Breach of Contact—against Tassel Parent)” recites generally that the Merger Agreement entitles Parent to receive the Plaintiffs’ stock (and note) “in exchange for payment as set forth in the Merger Agreement,” and further that the Plaintiffs had complied with the conditions precedent in order to receive Merger consideration, and became “automatically entitled to receive their pro rata portion of the Merger consideration . . . pursuant to Section 3.3(i) of the Merger Agreement . . . .”

That Section of the Merger Agreement includes a provision explaining the conditions precedent for consideration to be paid, to which the Plaintiffs cite in averring that they have met those conditions precedent. Once that happens, under Section 3.3(i), the stockholder is “entitled” to receive the Merger consideration. The Section goes on to explain the duties of Parent thereafter: to pay the sum due to each such compliant stockholder to the Paying Agent.

The Vice Chancellor noted that the complaint alleges that both the Plaintiffs’ conditions precedent to payment and the buyer’s payment obligation were satisfied, and that “read holistically” it was reasonably conceivable that the merger agreement imposed an obligation on the buyer to ensure that payment was made to the recipients entitled to receive it.

John Jenkins