If you’re interested in the ongoing debate over the proposed 2024 amendments to the DGCL, there’s one voice I think you’ll want to be sure not to miss – Vice Chancellor Travis Laster. Over on his LinkedIn page, the Vice Chancellor has authored posts raising important questions about the language of the proposed amendments. Below are links to his posts:
Hello Contractual Voidness; Bye-Bye Brazen – The language of proposed Section 261(a)(1)(i) authorizes merger agreements to provide for “penalties and consequences” – and that may create a trap for the unwary.
After Section 122(18), What Happens To The Merger Recommendation – Under the proposed language of Section 122(18) of the DGCL, could a buyer obtain a provision in the merger agreement stating that the board would not change or withdraw its recommendation in favor of the deal?
The Unintended Beneficiaries Of Section 122(18) – Activist hedge funds, the Big Three asset managers & the plaintiffs’ bar may be unintended beneficiaries of the Moelis fix contained in proposed Section 122(18) of the DGCL.
The Vice Chancellor also recently wrote a response to claims that the Moelis decision “put thousands of financings at risk” in which he argued that “[t]he only financings potentially at risk involve small dollar controllers, where the policy case for perpetuating control is contestable. But that doesn’t make for a good quote. Hyperbole does.”
Stop me if you’ve heard this one before – a founding stockholder enters into a stockholders agreement containing governance provisions that allow him to veto a laundry list of corporate actions that the board could otherwise take. A stockholder plaintiff objects to those provisions and files a lawsuit in Chancery Court seeking to invalidate them. Sounds familiar, doesn’t it? In any event, that’s the situation Vice Chancellor Laster addressed earlier this week in Wagner v. BRP Group, (Del. Ch.; 5/24).
Not surprisingly, the Vice Chancellor’s decision in this case was very similar to his earlier decision in Moelis. This excerpt from his opinion summarizes VC Laster’s conclusions:
On the merits, the plaintiff’s attacks on the Challenged Provisions succeed— at least for purposes of those provisions as they existed when the plaintiff filed this lawsuit. First, the plaintiff objects to the requirement that the corporation obtain the founder’s prior written approval before permitting the occurrence of, agreeing to, or committing to any significant decision regarding any senior officer (the “Officer Pre-Approval Requirement”). That provision is invalid because it contravenes Section 141(a) of the Delaware General Corporation Law (the “DGCL”). It is also invalid because it contravenes Sections 142(a) and (e).
Next, the plaintiff challenges a requirement that the corporation obtain the founders’ prior written approval before permitting the occurrence of, agreeing to, or committing to any charter amendment (the “Charter Pre-Approval Requirement”). That provision likewise contravenes Section 141(a) of the DGCL. It also contravenes Section 242 of the DGCL.
Last, the plaintiff challenges a requirement that the corporation obtain the founders’ prior written approval before permitting the occurrence of, agreeing to, or committing to an array of significant transactions (the “Transaction Pre-Approval Requirement”). While that provision or versions of it could well be valid in a commercial agreement, as a feature in a governance agreement, it violates Section 141(a).
In addition to detailing the reasons why he concluded that the challenged provisions violated the various statutory sections noted above, the Vice Chancellor rejected a litany of equitable and legal arguments raised by the defendants in support of their validity. He also addressed the governance agreement v. commercial agreement distinction that, as in Moelis, played an important role in the outcome of the case.
– Trends in private deal buyers and size & type of consideration
– Valuations and financial terms of 2023 transactions
– The rise in earnouts
– RWI usage trends
– Post closing purchase price adjustment terms
– Big picture conclusions and thoughts on 2024 M&A environment
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re 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.
One of the most challenging aspects of Delaware’s corporate law jurisprudence over the past 40 years has involved efforts to reconcile the contractual obligations that a target board may commit itself to in connection with a sale transaction and its fiduciary duties to target company stockholders. In his latest decision in In re Columbia Pipeline Merger Litigation, (Del. Ch.; 5/24), Vice Chancellor Laster devotes considerable attention to this tension between contractual and fiduciary obligations. In his blog on the case, Francis Pileggi offers some key takeaways from the Vice Chancellor’s decision. Here’s an excerpt from the blog:
– The court describes why, under Delaware law, fiduciary duties do not trump contracts—but rather, the opposite is true. The court discussed the rationale of the key Delaware cases on this topic over nearly 40 years: Van Gorkom; QVC; Omnicare; post-Omincare cases such as, e.g., C&J Energy Servs., Inc. v. Miami Gen. Empls.’, 107 A.3d 1049, 1072 (Del. 2014). Slip op. at 39 to 64.
– The court emphasized that Delaware law does not regard the fiduciary duties imposed by equity as more important than voluntarily assumed contractual commitments. Slip Op. at 61. Rather, the court instructed that:
“The cases overwhelmingly demonstrate that a court cannot invoke the fiduciary duties of directors to override a counterparty’s contract rights. That is true even when a heightened standard of review applies. To argue that case law empowers a court to set aside a contract when reviewing director actions under an enhanced form of judicial scrutiny, embraces the much-ridiculed position that the Omnicare majority was perceived to take. As consistently interpreted by courts and commentators, QVC does not support that assertion, and post-Omnicare case law soundly rejects it.”
The blog also notes that as part of his explanation of the fact that directors’ fiduciary duties don’t permit the corporation to avoid contractual obligations, the Vice Chancellor recognized the concept of “efficient breach,” and observed that a corporation can engage in efficient breach just like any other contracting party.
Maybe it’s because I hated doing them so much as a junior associate, but whatever the reason, I am always drawn to Chancery Court decisions addressing disclosure schedules. That’s why I thought the Chancery Court’s recent letter decision in Aldrich Capital Partners Fund, LP v. Bray, (Del. Ch.; 5/24), was worth blogging about. It’s just a letter ruling, so the case isn’t going down in the annals of Delaware corporate law, but it’s still interesting for the way the Court analyzed the language of the agreement relating to the disclosure schedules and the language contained in the schedules themselves.
The case arose out of alleged breaches of IP ownership and non-infringement reps contained Section 4.16 of a stock purchase agreement with outside investors in Rhythm Management Group, and a no breaches of material contracts rep contained in Section 4.25 of that agreement. The reps in question were qualified by general disclaimer language stating that they were accurate “except as qualified by the Disclosure Schedules.” Section 8.18 of the stock purchase agreement also included the following language addressing the scope of the disclosure schedules:
The disclosures in the Disclosure Schedules are to be taken as relating to the representations and warranties of the Company and the Seller set forth in the corresponding section of this Agreement and in each other section of this Agreement (to the extent the applicability of such disclosure is readily apparent on its face . . .), notwithstanding the fact that the Disclosure Schedules are arranged by sections corresponding to the sections in this Agreement or that a particular section of this Agreement makes reference to a specific section of the Disclosure Schedules.
The language used in the disclosure schedule themselves wasn’t entirely consistent with this familiar seller-friendly language, and said that “any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement if specified under such other section number.”
The plaintiff sued the defendant for fraud and cited alleged inaccuracies in the foregoing reps relating to a license with Murj, Inc. and litigation surrounding that license in support of its claims. In moving to dismiss those claims, the defendant cited the agreement’s language concerning the scope of the disclosure schedules and argued that the relevant reps were appropriately qualified by the schedules. In refusing to dismiss the investors’ fraud claims, the Court noted the inconsistency in the disclaimer language contained in the body of the agreement and in the schedules, but said that even looking solely to the agreement language, the plaintiffs’ claims against the defendant should not be dismissed:
The Court doesn’t need to decide between those competing approaches at this stage. Even applying SPA § 8.18—which is Bray’s preferred route—it is reasonable to construe DS § 4.16(b) as not modifying all of the challenged representations. For starters, the contents of DS §§ 4.16(a) and 4.25 undercut the notion that it is “readily apparent” that DS § 4.16(b) should apply to those representation. DS § 4.16(a) is not merely blank or omitted; instead, it explicitly states, “none.”
In the Court’s view, it is reasonable to interpret “none” to mean that no disclosures apply, implicitly or otherwise. DS § 4.25 leads to a similar conclusion for a dissimilar reason. DS 4.25 discloses many material contracts, including by cross-referencing other sections of the Disclosure Schedule, but it makes no mention of Murj, the Murj Litigation, or DS § 4.16(b). Under Delaware’s contract principles, DS § 4.25’s inclusion of explicit cross-references weighs against finding implicit cross-references.
Moreover, notwithstanding DS §§ 4.16(a) and 4.25’s silence, the Disclosure Schedule explicitly mentions the Murj Litigation outside of DS § 4.16(b). Specifically, DS § 4.18 discloses pending and threatened litigation against Rhythm. Right at the top, it says, “[t]he Murj Litigation.” Either that separate disclosure is superfluous, or DS § 4.16(b)’s scope isn’t quite as broad as Bray contends. The Court declines to hold that an interpretation that defies this state’s presumption against meaningless contractual language is unambiguously correct.
The Court also observed that Disclosure Schedule § 4.16(b) mentions the Murj Litigation only where the corresponding representation says there is no pending litigation against Rhythm—i.e., representations that are directly refuted by the Murj Litigation’s mere existence. To the Court, this suggested that the “readily apparent on its face” language in Section 8.18 of the agreement applies “to each representation that directly conflicts with the disclosure” and that, under this construction, the challenged representations wouldn’t be modified by DS § 4.16(b). Ultimately, the Court concluded that the plaintiffs’ position that the challenged representations were unmodified by the disclosure schedules was not unreasonable, and denied the motion to dismiss.
The United States in particular is moving ahead with establishing an outbound investment review mechanism, even if in its initial form it will apply only to certain sectors of the economy and only to certain destination countries. As currently envisioned, the U.S. outbound review mechanism will review and potentially prohibit certain outbound investments by U.S. investors to protect U.S. national security and safeguard U.S. supply chains from certain countries such as Russia and China. Although China, Taiwan and South Korea have forms of outbound investment review mechanisms, once established in the United States, the U.S. outbound investment review mechanism will be the first of its kind to be adopted by a major Western economy and could have potential ripple effects with other governments considering similar mechanisms (such as the EU).
The report says that these and other foreign direct investment screening developments may meaningfully impact dealmakers’ ability to deploy capital and close deals, and that it is more important than ever to evaluate FDI screening risks early in the deal process and to deploy strategies to manage potential risks.
In our latest Deal Lawyers Download Podcast, Mintz’s Stephen Callegari and Stefan Jović joined me to discuss preparing a VC-backed company for an exit event. We addressed the following topics in this 10-minute podcast:
– Key issues to consider in deciding to pursue a sale of the VC-backed company
– Impact of sale timing on financing decisions and capital resources
– Legal housekeeping issues to address as companies prepare for a sale
– Sale process alternatives and key pros and cons
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re 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.
A recent memo from Gibson Dunn addresses updated guidelines for obtaining private letter rulings from the IRS addressing spin-offs and related debt exchanges. Here’s the intro:
The Internal Revenue Service (the “IRS”) and the Treasury Department (“Treasury”) have released Rev. Proc. 2024-24 (the “Rev. Proc.”) providing updated guidelines for requesting private letter rulings regarding transactions intended to qualify under section 355, with significant focus on “Divisive Reorganizations” and related debt exchanges. The Rev. Proc. modifies Rev. Proc. 2017-52 and supersedes Rev. Proc. 2018-53.
The IRS and Treasury also released Notice 2024-38 (the “Notice”) requesting public comment on select issues addressed by the Rev. Proc. and outlining the IRS and Treasury’s current perspectives and concerns related to those issues.
The Rev. Proc. was highly anticipated and is of critical importance for taxpayers considering a spin-off, particularly for spin-offs that involve debt exchanges. It applies to all ruling requests postmarked or, if not mailed, received by the IRS after May 31, 2024.
The rest of the memo provides details on the new guidelines, but I’m not going to excerpt any of it here because it is written in tax lawyers’ native tongue, and my fluency in that language is very limited.
Major investors in VC-backed financings customarily obtain contractual rights to receive access to financial and certain other information from the company. In some cases, these rights include the ability to appoint an observer to attend board meetings. This Morrison & Foerster memo provides an overview of these contractual provisions and discusses the specific information rights that companies typically provide. This excerpt describes some of the financial information with which major investors are customarily provided:
– Annual financial statements. Investors often negotiate for the right to receive annual financial statements (i.e., balance sheet, statements and income and cash flows, and a statement of stockholders’ equity) as of the end of the fiscal year. These financial statements are typically delivered to investors within 90-180 days after the end of the company’s fiscal year. Investors may negotiate to receive audited financial statements, certified by independent public accountants of a nationally recognized firm.
However, providing audited financials can be expensive for early stage companies, especially during the first few months of the year when public companies are demanding much of the attention of the accounting firms, and so it is not unusual for early stage companies to provide unaudited financials until later rounds of financing. Investors can also require that the financial statements must be certified by an officer of the company. The certification statement will show that the financial statements were prepared in a way that is consistent with generally accepted accounting principles (GAAP) and fairly present the company’s financial condition.
– Quarterly financial statements. Investors will also often negotiate for the right to receive unaudited quarterly financial statements for the first three quarters of the company’s fiscal year. These statements are typically delivered to investors within 45 days after the end of the fiscal quarter.
Other specific items of information that may be provided to investors under the terms of these contractual rights include a quarterly update on the cap table, monthly p&l information, and a board-approved annual budget and business plan. Investors may also negotiate for the right to receive other business and financial information that they may reasonably request.
Last month, the FTC filed an administrative complaint seeking to block Tapestry Inc.’s $8.5 billion proposed acquisition of Capri Holdings. This fight is all about purses, folks, because the FTC says that the deal would eliminate competition between Capri’s Coach & Kate Spade brands and Tapestry’s Michael Kors. The FTC alleges that the deal would significantly increase concentration in the “accessible luxury” handbag market and permit Tapestry to dominate that market.
These sound like pretty conventional antitrust concerns, but this excerpt from a recent Freshfields’ blog points out that the FTC has managed to work in some of the more novel concerns laid out in the 2023 Merger Guidelines into its complaint:
In addition to the horizontal overlap between Tapestry and Capri, the FTC alleges other theories of harm advanced by the 2023 Guidelines:
Labor Market Harms: The FTC alleges that the transaction would not only lead to a reduction of competition between the parties for sales of handbags, but also in the purchase of labor. The Guidelines specifically acknowledge that when a merger combines competing buyers of labor, it can result in a lessening of competition that may slow wage growth and worsen conditions for workers. This is particularly the case in labor markets that are highly specialized and have high switching costs.
The FTC has similarly brought labor market harms as an additional theory of harm in prior merger challenges—for example, in Kroger / Albertsons, the FTC alleged potential harm to a subset of employees, particularly by weakening union leverage. However, in its challenge to Tapestry/Capri, the FTC does not focus on any particular category of labor (e.g., sales) or highly specialized labor. Instead, the complaint alleges that the combination of the parties could harm competition in light of their combined “more than 33,000 employees worldwide . . . in a variety of locations and functions.”
Serial Acquisitions: The FTC harkens to another part of the Merger Guidelines scrutinizing serial acquisitions, arguing that the deal “builds on a deliberative, decade-long M&A strategy by Tapestry. . .to achieve its goal to become the major American fashion conglomerate” through successive acquisitions of fashion brands. Citing to its documents, the FTC noted that it has no plans to slow its acquisition strategy.
The blog highlights the fact that this is the latest in a series of cases in which the FTC has trotted out some of novel theories of harm in its 2023 Merger Guidelines. It says it is unclear if the FTC would’ve been willing to bring these claims on a standalone basis to block the deal, but the case is another signal that companies should anticipate that the FTC will throw new theories of harm into the mix, particularly when it challenges deals between competitors.
By the way, I was thinking that if Kors, Kate Spade & Coach handbags form the “accessible luxury” market, maybe the knockoffs those guys camped out on Broadway around Times Square peddle should be classified as the “accessible larceny” market.