Earlier this week, in Thompson Street Capital Partners, IV v. Sonova (Del. Sup.; 4/25), the Delaware Supreme Court reversed the Chancery Court’s March 2024 dismissal of a complaint alleging an indemnification claim notice was insufficient under the terms of a merger agreement and that escrowed funds should not be held in a claim reserve beyond the indemnity escrow expiration date. Both the merger agreement and related escrow agreement set forth procedures governing the submission of a claim notice, and the Chancery Court’s order had distinguished the analysis governing release of the indemnity escrow fund (governed by the escrow agreement) from the analysis of whether the buyer waived its right to pursue indemnification (governed by the merger agreement) and focused on the buyer’s compliance with the less onerous terms in the escrow agreement.
On appeal, the plaintiff argued that the Chancery Court erred in finding that the escrow agreement’s internal notice clause governed the case “to the exclusion” of the notice provision in the merger agreement, which required that notice include an estimated amount and copies of written evidence. They also pointed to this sentence in the merger agreement provision governing claim procedures:
The Purchaser Indemnified Parties shall have no right to recover any amounts pursuant to Section 9.2 unless the Purchaser notifies the Members’ Representative in writing of such Claim pursuant to Section 9.3 on or before the Survival Date.
Pointing to the integration clause, the Supreme Court read the merger and escrow agreements as a unitary contractual scheme and sought to give effect to the notice provisions in both agreements – meaning the buyer also had to comply with the specificity requirements in the merger agreement. And, unfortunately for buyer, the sentence above “clearly and unambiguously conditioned [buyer’s] right to recover any amounts” on its compliance with the merger agreement notice requirements so that failure to provide sufficient notice meant a potential forfeiture of buyer’s indemnification rights. The merger agreement’s “no waiver” provision didn’t change that outcome since “where specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one.”
Since it was “reasonably conceivable” on the record that buyer failed to comply with the merger agreement’s notice requirements, the final analysis was whether noncompliance may be excused because, in Delaware, “common law abhors a forfeiture.” On that issue, the Supreme Court remanded the decision to the Chancery Court for additional fact-finding since the record was insufficient to settle the materiality and disproportionate forfeiture issues that factor into the excusal analysis.
In January, Vice Chancellor Laster issued a post-trial opinion in In Re Dura Medic Holdings, Inc. (Del. Ch.; 1/25) addressing fiduciary duty claims by a target company’s co-founder related to post-acquisition financing from its controlling stockholder. The court found that the financings were not entirely fair. Notably, as a remedy, it applied equitable subordination — treating the parent-level, unsecured subordinated promissory note issued as part of the merger consideration as if the target company had issued it, giving it priority over the challenged financings. Here are the facts involved, from this Sidley Enhanced Scrutiny blog:
In May 2018, Comvest took a controlling stake in Dura Medic, a durable medical equipment supplier. Under the agreement, the selling stockholders, including the co-founder, received $18 million in cash consideration, and a $12 million Seller Note . . . Dura Medic needed cash while new management sought to right the ship, so Comvest, which was then the controlling stockholder of the Company, injected additional funds over four financings. Two of the financings were structured as debt, and two were structured as preferred equity.
The financings provided for a 15% interest rate and, notably, were structurally senior in priority to the co-founder’s Seller Note: the financings were at the operating company level whereas the Seller Note was a debt of the operating company’s parent entity. The Court observed that no outreach to third party sources of financing was conducted, and no market analysis of the terms of the financings was performed before the financings closed. The co-founder challenged the Comvest financings as a breach of Comvest’s fiduciary duty to the Company. The Court of Chancery applied the exacting entire fairness standard of review because Comvest was the controlling shareholder, and Dura Medic’s board lacked an independent and disinterested majority.
VC Laster found that no indicia of fair process or substance were present and rejected the argument that the participation offer to minority stockholders evidenced fairness. Consequently:
To remedy the breach, the Court of Chancery equitably subordinated the challenged financings to be junior to the Seller Note. Equitable subordination, while not a common remedy, may be ordered where a creditor’s inequitable conduct has a detrimental effect on other creditors. It can be a powerful remedy in a distressed entity where subordinated claims may have a greater risk of going unpaid.
In re Dura Medic Holdings, Inc. is a reminder that both publicly traded and privately held companies are best served to consider best practices—substantive and procedural—in related-party transactions. When parties fail to do so, unique equitable remedies may result.
The debate over the 2025 amendments to the Delaware General Corporation Law was the most heated in memory, and culminated in the adoption of broad safe harbors for transactions with controlling stockholders and other insiders, as well as language narrowing the information available pursuant to a stockholder books and records demand. While the amendments are now law, it’s unlikely that the fight over them and what they mean for Delaware corporations is going to end anytime soon.
Tune in tomorrow at 2 pm eastern for our “2025 DGCL Amendments: Implications & Unanswered Questions” webcast to hear Johnathon Schronce of Hunton Andrews Kurth, Julia Lapitskaya of Gibson Dunn, and Eric Klinger-Wilensky of Morris Nichols discuss the 2025 DGCL amendments and what the changes mean for corporate governance and dealmaking practices. Topics include:
– Overview of the DGCL amendments
– Implications for governance agreements
– Implications for acquisition agreements
– Fiduciary duties v. contractual obligations
– Unanswered questions
Members of DealLawyers.com are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
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This program will also be eligible for on-demand CLE credit when the archive is posted, typically within 48 hours of the original air date. Instructions on how to qualify for on-demand CLE credit will be posted on the archive page.
The March-April issue of the Deal Lawyers newsletter was just sent to the printer. It is also available online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– Delaware Court of Chancery Rejects Challenges to Sale of Company by Private Equity Controller
– Thinking Outside the Buyout: Four Factors Management Teams Need to Get Right
– Acquiring AI: Considerations for Representations and Warranties in Transaction Documents
– Don’t Gamble on Governance – Chart Your Winning Strategy at Our 2025 Conferences
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
SRS Acquiom recently released the 2025 edition of its M&A Deal Terms Study. The study analyzes 2,200+ private-target acquisitions that closed between 2019 and 2024 where SRS Acquiom provided services, valued at $505 billion. Here are some of the key findings from this year’s study:
– 2024 saw a 3x increase in “jumbo” transaction values ($750 million or more in upfront value) year over year, with about 20% fewer deals that had $100 million or less in upfront value.
– The median return on investment for 2024 deals remained the same as 2023 at 2.5x, albeit with a lower average year over year, and down from a median of 4x in 2022.
– The percentage of deals with a management carveout went down slightly to about 5%, but the sizes increased, indicating distressed deals remain a small part of the mix.
– 2024, like 2022, saw increased activity from financial buyers, including Private Equity, with strategic buyers remaining about as active as they were in 2023.
– 2024 saw a modest yet steady increase in all-cash deals (including deals with management rollovers), especially in the second and third quarters.
More generally, the study found notable seller-favorable shifts in deal terms such as earnout and indemnification provisions. Buyers did, however, hold their ground certain important areas, including “No Undisclosed Liabilities” reps.
In our latest “Deal Lawyers Download” Podcast, H/Advisors Abernathy’s Dan Scorpio joined me to discuss the evergreen topic of deal leaks. We addressed the following topics in this 16-minute podcast:
– Overview of H/Advisors Abernathy deal leaks report
– Reasons deals leak
– Characteristics that make a deal more or less likely to spring a leak
– Particular industries whose deals seem more prone to leaks
– The stages in the deal process where leaks most commonly occur
– Advance planning for deal leaks
– Factors to consider when thinking about how to respond to a leak
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 Goodwin memo says that the amount of time required to complete major M&A transactions has risen across the globe, with the average time between signing and closing for $10+ billion mega deals rising by 66% in the US, 19% in Europe, and a staggering 125% in the Asia-Pacific region. timeframe. Not surprisingly, the primary culprit here is the regulatory review process, and the firm has some thoughts on how parties can navigate the delays associated with these longer time frames. This excerpt discusses the implications of potential delays that buyers and sellers should consider when negotiating closing conditions:
Plan for Regulatory Approvals. Buyers and sellers must identify which specific approvals are required from regulatory authorities (e.g., antitrust regulators, foreign investments regulators or industry-specific agencies) to legally complete the transaction but also to measure the expected length of the interim period, set the long stop date (which is the deadline for transaction completion, beyond which it will be abandoned unless both parties agree to extend) and negotiate the availability of the financing commitments (see below).
Carefully Negotiate the Material Adverse Change (MAC) Clause. A MAC clause allows buyers to exit a deal if significant negative events occur that affect the value or operation of the target company between signing and closing. This clause is particularly important during prolonged interim periods, as extended timelines increase the likelihood of unforeseen events.
When defining a MAC, buyers should aim for the broadest (e.g., events affecting the industry) and most subjective terms. Conversely, sellers should strive for narrow criteria, focusing on events with significant and lasting impacts on the target while excluding external events such as health crises, wars, terrorism, natural disasters, or market fluctuations. Sellers may also define a materiality threshold based on revenue, net assets, EBITDA, a percentage of the transaction consideration, or another criterion.
Buyers Must Secure Financing. Buyers can stipulate that the deal will close only if the required financing is available at the closing date. In any event, for deals with prolonged timelines, buyers must negotiate financing commitments that remain valid for the entire duration of the interim period, up to the long stop date (and any extension). They should also be prepared for the lenders to charge ticking fees given the extended timeline.
Make Deal Completion Contingent on Covenant Compliance. Longer deal timelines increase the likelihood of covenant breaches in which one party fails to fulfill its agreed-upon obligations. Buyers may require that the deal’s completion be contingent on the absence of any breaches in business conduct or other material covenants between signing and closing, rather than seeking indemnification.
Other topics addressed in the memo include the possibility of negotiating “hell or high water” divestiture obligations and reverse termination fees, the need to address potential valuation changes during the period between signing and closing, and the need to manage the disclosures against reps & warranties.
With the uncertainties surrounding US tariff policies likely to continue for some time, parties to acquisition agreements need to determine how to allocate the risks associated with tariffs in those agreements. This recent BakerHostetler memo identifies possible approaches to that process. Here’s an excerpt from the memo’s discussion of how reps and warranties can be used to allocate tariff risks:
A buyer may seek either to add specific, tariff-related representations and warranties or alternatively to supplement other more traditional representations and warranties with language addressing tariffs. For example, a buyer may desire to include tariff-related language in connection with a seller’s representations about its customers and suppliers, and its and their respective supply chains, including (a) whether any such relationships have been terminated or modified due to new tariffs, (b) if applicable, whether a seller’s inventory has become more difficult to obtain or turn over in a timely fashion, (c) country-of-origin information, (d) current tariff rate, and (e) volume of supply broken down by supplier.
A buyer may also seek to expand more traditional tax representations to include language addressing the impact of tariffs on the business. Another possibility would be to expressly include tariff-related language in the common representation concerning the absence of changes to prompt more specific disclosure from the seller about announced, recently effective, or proposed tariffs on various products, goods, and services.
In contrast, a seller should take care when preparing its disclosure schedules to consider the impact of tariffs on traditional representations regarding (i) the absence of undisclosed liabilities and (ii) whether the financial statements fairly present the financial condition of the seller’s business in light of any recently enacted tariffs. If a seller takes steps to reduce a target company’s imports, additional disclosures about acting outside of the ordinary course of business may be warranted.
The memo also addresses ways that indemnification provisions, interim operating covenants, closing conditions, MAC clauses, and earnouts, holdbacks and purchase price adjustments may be used to allocate tariff-related risks.
This Sidley Enhanced Scrutiny blog discusses the Delaware Chancery’s recent “rare pre-discovery dismissal of an entire fairness claim” in In re Skillsoft Stockholders Litigation (Del. Ch.; 2.25). The claim involved the acquisition of Codecademy by Skillsoft in November 2021, shortly after Skillsoft went public via de-SPAC. In the de-SPAC, Prosus acquired a 38.4% stake in Skillsoft. It also held a 24% interest in Codecademy. Skillsoft’s stock price decreased after the Codecademy acquisition was announced, and stockholders brought derivative claims, saying Prosus was a conflicted controller.
Despite finding that plaintiffs were excused from making a demand on the board and applying entire fairness with controller Prosus standing on both sides of the transaction, VC Laster still granted the defendants’ motion to dismiss.
Although entire fairness review applied, the court held, the complaint should still be dismissed entirely. The dispositive fact was that Prosus owned a bigger interest on the buy side of the transaction—37.5%, as opposed to 24% on the sell side. Prosus’s interests were aligned not with Codecademy but with Skillsoft. That was enough to conclude that economic fairness, or fair price, was satisfied. “In that setting, overpaying is not a way to transfer value. It’s a way to deplete value,” the court said. That was “enough to negate the inference of pricing unfairness, at least absent some other explanation.”
That fact eclipsed the court’s concerns about procedural fairness, including the contrary fact that there was “relatively little board involvement.” Because Prosus’s interest was aligned with Skillsoft, and the directors’ interests were aligned with Prosus, entire fairness was satisfied.
The blog notes that this is an uncommon outcome but not unheard of:
This was the “rare case,” Vice Chancellor Laster concluded, when “at the pleading stage, in the face of the application of the entire fairness test, [one] cannot reasonably infer [un]fairness.” Rare, but not unprecedented: as this blog previously reported, the Delaware Court of Chancery recently dismissed an entire fairness claim in White v. Hennessy, where Sidley represented the defendants.
Earlier this week in Siegel v. Morse (Del. Ch.; 4/25), the Chancery Court dismissed a stockholder challenge to a company’s recently amended advance notice bylaws as unripe — confirming that Delaware courts must be presented with a genuine dispute before undertaking an equitable review of a company’s bylaws. This Richards Layton alert describes the facts as follows:
In August 2023, the board of directors of The AES Corporation amended AES’s advance notice bylaws following the SEC’s adoption of the universal proxy rule. [An AES stockholder] sued AES and its board to challenge the amendments. Plaintiff originally claimed that the amended bylaws were facially invalid and that the board breached its fiduciary duties by amending the bylaws . . .
Plaintiff then amended his complaint in light of Kellner, removing his facial invalidity challenge and resting on his fiduciary claim. Plaintiff’s claim focused on two purported issues with the amended advance notice bylaws: the “acting in concert” definition and an ownership provision that required nominating stockholders to disclose any equity interest in AES (including synthetic and derivative ownership interests, short interests, and hedging arrangements), along with their history of ownership of stock or derivative interest in AES (the “Ownership Provision”). The Ownership Provision also required a nominating stockholder and any person “acting in concert” with such stockholder to disclose any performance-related fees they would receive if AES’s stock appreciated or depreciated.
The court took issue with the fact that the plaintiff wasn’t asking for himself or even asking for a friend. There was no pending or imminent proxy contest, plaintiff did not intend to nominate a director and could not identify any stockholder who “intends to run a proxy contest, is considering running one, or, for that matter, says he, she or it is ‘chilled’ . . . it appears Plaintiff seeks a declaration that the bylaw is ‘unenforceable’ as to all stockholders.”
Plaintiff tried to point to excerpts from slides prepared by the company’s counsel to suggest a selfish, disloyal or defensive motive, but VC Cook disagreed, saying the the board — like many boards — revisited the bylaws after the adoption of the universal proxy rules and the slides contained only “generic references to stockholder activism.” Such references do not “demonstrate that a genuine, extant controversy exists.” Accordingly, VC Cook found the challenge to be hypothetical and “precisely the sort of case” where the court should postpone review until a concrete dispute exists.