The way that Delaware courts have approached controlling stockholder transactions in recent years has given impetus to the DExit movement. Our readers are well aware of how the Delaware legislature has responded to this challenge, and we’ve also blogged about Nevada’s recent statutory changes designed to enhance controlling stockholders’ protection from liability – but what about Texas?  How does The Lone Star State evaluate the obligations owed by controlling stockholders and what standard applies to judicial review of transactions with them?  This excerpt from a recent Cooley blog provides some insight into these questions:

In the context of a controller transaction, Texas courts apply somewhat of an intermediate approach, focusing on the duty of loyalty in analyzing the propriety of director conduct. To prove a breach of a duty of loyalty, it must be shown that the director was interested in the transaction. Once it is shown that a transaction involves an interested director, the burden is then shifted to the directors to prove the fairness of their actions to the corporation – a heightened review regime more akin to entire fairness than the BJR.

A challenged transaction found to be unfair may nonetheless be upheld if ratified by a majority of disinterested directors or the majority of stockholders. With the recent TBOC amendments codifying the BJR, this heightened legal regime would not apply to a controller transaction in the case of a public company or company that opted into the BJR codification regime and complied with Texas law.

The blog points out that recent amendments to the TBOC also give the board of a public company the right to petition the Texas Business Court to determine the independence and disinterest of directors comprising special committees formed to review transactions with controlling stockholders, directors or officers.

– John Jenkins

Of all the challenges involved in a successful M&A transaction, post-deal integration is probably the hardest to get right – and effectively integrating key employees into the combined enterprise is often the hardest part of the integration process. This Foley blog provides some thoughts on how to get the “human factor” right. This excerpt discusses how to identify and manage talent:

Every business has mission-critical employees. Identifying and offering incentives to these employees can improve engagement in a transaction process and prevent an exodus of the most important talent. These types of incentives can take many forms, including retention bonuses, post-closing equity compensation, pre-negotiated employment and severance agreements, leadership opportunities, or clear paths for growth within the post-closing entity, and they can be offered to employees on both sides of the transaction. If certain employees will not be retained in the transaction, then handling their transition out of the business thoughtfully will also have a positive impact on overall morale.

The blog also emphasizes the importance of cultural due diligence during the M&A process in order to ensure that the cultures of the two parties align and recommends the use of individuals or teams of “cultural stewards” to identify issues that arise during the post-closing integration phase and keep employees aligned on shared values and goals.

– John Jenkins

Purchase price adjustment disputes often involve intricate interpretive issues in which the meaning of terms that the parties thought they had agreed upon during the negotiation process becomes hotly disputed. Not infrequently, the parties call upon the Chancery Court to sort things out.  Vice Chancellor Will’s decision in Northern Data AG v. Riot Platforms, (Del. Ch.; 6/25) is the latest example of that.

The case arose following an accounting expert’s resolution of various purchase price adjustment issues in the buyer’s favor. The seller sought to have the Court overturn the expert’s decisions, contending that with respect to two items, the accounting expert applied a GAAP standard, instead of also considering the seller’s historical accounting practices reflected on the closing statement it submitted in accordance with the agreement. The seller challenged other determinations on the basis that they exceeded the expert’s authority because they should have been governed by the indemnification provisions of the agreement instead of addressed through the purchase price adjustment mechanism.

Vice Chancellor Will rejected the seller’s argument concerning the expert’s application of a GAAP standard to the purchase price adjustment.  This excerpt from Gibson Dunn’s memo on the decision summarizes her reasoning:

The Court found that the SPA created a hierarchy whereby the Accounting Expert was obligated to apply GAAP as the primary standard. If GAAP allowed for multiple approaches, the Accounting Expert was required to determine the GAAP-compliant approach most consistent with the Illustrative Closing Statement. However, if GAAP allowed for only one approach and the Illustrative Closing Statement was noncompliant with the permitted methodology, the Accounting Expert had to apply the approach that complied with GAAP for PPA purposes.

The Court agreed with the Accounting Expert that GAAP only allowed for a single approach with respect to the accounting items at issue, which approach was not compatible with the Illustrative Closing Statement. The Court upheld the Accounting Expert’s determination, as the SPA provided that his resolution would be final and binding absent manifest error, and he had not committed such error in his assessment under GAAP.

Vice Chancellor Will agreed with the seller that the accounting expert exceeded his authority in attempting to resolve the validity of an account receivable and an account payable reflected in the seller’s net working capital through the purchase price adjustment process. Here’s how the memo summarizes that aspect of her decision:

In both cases, there were factual questions about whether the receivable and payable had already been paid, and the Court addressed how the validity of such items interacted with Seller’s representations regarding the target’s accounts receivable and indebtedness. The Court emphasized that the PPA true-up process had a “limited” role that was intended only to account for changes in the target’s business between signing and closing.

The goal of the PPA was to keep all measures other than such changes consistent, “to prevent parties from extracting value for which they did not bargain.” The Court determined that the validity of the two payments, however, turned on events that occurred prior to the relevant period and did not reflect changes in the target’s business during such period.

Instead, the Vice Chancellor concluded that although accounting matters may be implicated in determining the validity of the payments, the timing of the events in question meant that they implicated the accuracy of the seller’s reps & warranties.  Accordingly, those claims should be pursued under the stock purchase agreement’s indemnification terms and not through the purchase price adjustment process.

– John Jenkins