U.S. private company deals typically have some sort of post-closing purchase price adjustment mechanism. In the U.K. and Asia, a “locked-box” approach is more common. This Cooley blog discusses how locked-box provisions work and some of the issues associated with them. This excerpt provides an overview:
The parties agree on a fixed price by referencing a set of agreed historical accounts – this is typically the last set of audited financial statements, but sometimes they’re unaudited management accounts or a set of accounts prepared specifically for these purposes –referred to as “locked-box accounts.” The locked-box accounts fix the equity price in respect of the cash, debt and working capital actually present in the target business at the date of the locked-box accounts, and determine the equity price that is written into the sale and purchase agreement (SPA).
From the date of the locked-box accounts, known as the “locked-box date,” the target company is essentially considered to be run for the benefit of the buyer – at least from a financial risk point of view – and no value, or “leakage,” is allowed to leave the business for the benefit of the seller. The box is therefore “locked.” Provided the box stays locked (more on this below), the SPA would not include any adjustment to the purchase price, and there would be no post-closing true-up. This is a key feature of the “locked-box” mechanism: The financial risk and benefit in the target pass to the buyer at the locked-box date.
The blog goes on to discuss the indemnity arrangements typically used to address any impermissible leakage that does occur and some of the arrangements that may be established to compensate the seller for running the business between signing and closing. The blog also addresses when a locked-box arrangement might make sense, as well as its advantages and disadvantages.
– John Jenkins
On July 27, 2022, Delaware Gov. John Carney signed into law this year’s amendments to the DGCL, which became effective yesterday. This Saul Ewing memo highlights the most notable aspect of the 2022 amendments:
The most significant change to the DGCL is the extension of Section 102(b)(7)’s exculpation of personal liability to corporate officers. Previously, Section 102(b)(7) authorized the exculpation of personal liability for corporate directors only. This discrepancy between director and officer liability often created issues in litigation involving individuals serving as both corporate directors and officers. In such instances, an individual could be exempt from liability in his or her director capacity yet still liable in his or her capacity as an officer.
The newly revised Section 102(b)(7) remedies this discrepancy by authorizing corporations to adopt exculpatory provisions in their certificates of incorporation that limit or eliminate the personal liability of officers, as well as directors. As with director liability, corporations may only limit an officer’s liability for breaches of the duty of care. Specifically, officers may only be exempted from claims for breach of duty of care brought directly by stockholders. Officers remain liable for breach of fiduciary duty claims brought directly by the corporation or derivatively by stockholders, as well as for breaches of the duty of loyalty and for intentional acts or omissions.
Exculpation of liability under Section 102(b)(7) is available only for senior officers authorized to receive service of process under Delaware law. These officers include the president, CEO, CFO, COO, chief legal officer, controller, treasurer, chief accounting officer, and others named as executives in SEC filings.
Officer liability is a topic we’ve addressed quite frequently over the past few years, and the ability of companies to include exculpatory language in their charter documents akin to the language that protects directors provides an opportunity to help even the playing field – at least hypothetically. The idea of exculpating senior corporate officers from liability to stockholders is controversial, so it remains to be seen how many companies will opt to ask stockholders to approve these exculpatory charter amendments.
– John Jenkins
Last week, in City Pension Fund for Firefighters & Police Officers v. The Trade Desk, (Del. Ch.; 7/22), held that the controlling stockholder of The Trade Desk, founder & CEO Jeff Green, and the company’s board of directors satisfied the MFW standard in connection with the adoption of a charter amendment. That amendment repealed a “dilution trigger” that would have eliminated the company’s dual class capital structure if the high-vote shares – most of which were owned by Green – dipped below 10% of the shares of common stock outstanding.
After rejecting allegations that the Special Committee appointed to negotiate the terms of the amendment with the controlling stockholder lacked independence, Vice Chancellor Fioravanti addressed claims that stockholder approval of the amendment wasn’t fully informed. In making these allegations, the plaintiff pointed to a variety of alleged disclosure shortcomings in the proxy statement.
Most of these allegations weren’t all that interesting and were disposed of pretty quickly by the Vice Chancellor. However, one of the allegations was a little more intriguing. It related to the company’s failure to disclose Compensation Committee discussions about a possible “mega equity award” to Jeff Green that were held while proxies for the charter amendment were being solicited. That award – which amounted to 5% of the company’s outstanding equity (!) – was subsequently made 10 months later.
The plaintiff claimed that stockholders known that the board was “strongly considering the near-term bestowal of a windfall on Green, stockholders may have decided to vote against the perpetuation of control.” Vice Chancellor Fioravanti rejected the plaintiff’s claim that information about this potential award should have been disclosed.
The Contemplated Green Award was not one of the proposals presented to the stockholders for their vote in December 2020. In fact, the Contemplated Green Award was entirely speculative at the time the adjourned and reconvened stockholder meetings were held. “Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders.” Arnold, 650 A.2d at 1280; accord Crane, 2017 WL 7053964, at *13; see also In re Columbia Pipeline Gp., Inc., 2017 WL 898382, at *5 (Del. Ch. Mar. 7, 2017) (“As a matter of Delaware law, a board does not have a fiduciary obligation to disclose preliminary discussions, much less an analysis of preliminary discussions.”). Plaintiff’s argument that disclosure of a potential large equity grant was required because it was being considered as an “alternative to the then-uncertain Dilution Trigger Amendment” is equally unpersuasive.
The Vice Chancellor said that the plaintiff failed to explain how the Compensation Committee’s preliminary consideration of the option award would have been “important in deciding how to vote” on the charter amendment. Accordingly, he applied the business judgment rule to the board’s decision to endorse the charter amendment.
– John Jenkins