Earlier this week, in Wong Leung Revocable Trust v. Amazon.com, (Del. 7/25), the Delaware Supreme Court overruled a prior Chancery Court decision dismissing a stockholder’s Section 220 action against Amazon. This excerpt from a recent Business Law Prof Blog post on the case summarizes the Court’s decision:
A stockholder sent a letter to Amazon, demanding to inspect books and records under Delaware’s Section 220. The stockholder’s stated purpose was to investigate Amazon’s possible wrongdoing and mismanagement by engaging in anticompetitive activities.
The request kicked of an extended legal battle. A Magistrate conducted a one-day trial that led to a report siding with Amazon that the the stockholder had not alleged a “credible basis” to infer possible wrongdoing by Amazon. The stockholder took exception. A Vice Chancellor also sided with Amazon, but on a different basis–finding that the stockholder’s purposes was overbroad, “facially improper,” and not lucid. The stockholder appealed and the Delaware Supreme Court reversed.
Under Delaware law, investigating corporate wrongdoing is a legitimate purpose, but stockholders must present “some evidence to suggest a credible basis from which a court can infer that mismanagement, waste or wrongdoing may have occurred.” The Supreme Court found that the Vice Chancellor had erred in its interpretation of the scope of the stockholder’s purpose and should have engaged “with the evidence presented by the [stockholder].”
On the evidentiary front, the stockholder pointed to a history of investigations, lawsuits, fines, and one Federal Trade Commission action against Amazon that survived a motion to dismiss. The Delaware Supreme Court stressed that the credible basis standard is the “lowest possible burden of proof under Delaware law.” It requires more than a “mere untested allegation of wrongdoing but does not require that the underlying litigation result in a full victory on the merits against the company.” Collectively, these predicates sufficed to “establish a credible basis from which a court can infer that Amazon has engaged in possible wrongdoing through its purported anticompetitive activities.” Now the matter heads back to Chancery to “determine the scope and conditions of production.”
The blog points out that if Amazon was incorporated in Nevada, this case would’ve turned out differently. In fact, my guess is that the lawsuit never would’ve been filed in the first place. That’s because under Nevada’s statute (which I think we all may need to start getting more familiar with), stockholders in a public company don’t have inspection rights.
With the IPO market’s extended slump, private market liquidity alternatives have continued to grow in importance. Gunderson Dettmer recently published a report on market trends in one of the most prominent of those liquidity alternatives, private company tender offers. The report was based on data garnered from over 250 private tenders in which the firm was involved. Topics addressed include company valuation, deal size, pricing, the nature of the buyers, the securities invovled, and the sellers eligible to participate in the offer.
Eligible sellers in a tender offer might include founders, insiders, current service providers, former service providers, and investors. This excerpt discusses how frequently each of these groups was eligible to participate in a tender offer:
The data on eligible sellers shows the percentage of deals over the past 18 months in which each of the named groups was allowed to participate and sell shares. The group most often included is current service providers, who were eligible to sell shares in 87% of the deals. Note however that, for each of the named groups, companies will often limit participation to only a defined portion of the group.
For example, investors could be limited to holders of a certain series of preferred stock, or former service providers could be limited to individuals whose employment was terminated in a reduction in force. For service providers, companies often limit participation based on years of employment. In 39% of deals in the past 18 months, current and/ or former service providers had to meet a years-of-service requirement (typically between 1 and 3 years) to be eligible to participate in the offer.
The figure showing that founders were eligible to participate in 78% of deals reflects both deals in which founders could tender shares in the tender offer, and deals in which the parties negotiated to allow insiders to sell shares prior to or following the tender offer. Founders sold shares in these “outside” transactions in 27% of tender offer deals over the past 18 months, while founders were eligible to participate in the defined tender offers in 51% of the deals.
The report also addressed the percentage of their holdings that each group was allowed to sell in the tender offers in which they were eligible to participate. It concluded that founders, insiders and current service providers were limited to tendering 20% of their holdings, former service providers were limited to tendering 28% of their holdings, and investors were not subject to a limit on tenders.
A recent FTI Consulting article provides advice to sellers on strategies to ensure that the TSA they enter into in connection with a divestiture facilitates seamless transaction and protects their financial and operational interests. This excerpt discusses how sellers can manage financial exposure and limit operational burdens in the process of determining the services buyers may require and the ones sellers are willing to provide:
– Assess Contractual and Operational Feasibility: Review vendor contracts to confirm which services can be legally provided under the TSA. For example, payroll providers, real estate subleases and systems like enterprise resource planning (“ERP”) often require third-party consents, which may incur fees. Identify operationally complex or costly services, such as benefits administration or treasury, and consider excluding them to streamline delivery.
– Exclude Strategic or Sensitive Functions: Avoid providing services related to post-closing strategy, such as financial planning, sales forecasting or marketing. These functions can expose proprietary knowledge and entangle sellers in long-term decisions. Maintain a focus on operational support to reinforce boundaries and avoid exposure to strategic or commercial risk.
– Understand the Buyer Type: Tailor the TSA based on whether the buyer is strategic (likely to integrate the target) or financial (likely to operate it independently). Strategic buyers may require a narrower scope and shorter duration. Financial buyers, such as private equity sponsors, often require broader services and longer timelines to support the stand-up of a new platform.
– Mitigate Stranded Costs Proactively: Stranded costs, such as underutilized staff, systems or facilities, can erode margins following a divestiture. Enable buyers to exit specific functions in a phased manner to reduce delivery complexity and protect the seller’s cost base. Evaluate changes to scope and duration through a lens of cost recovery.
Other topics addressed in the article include pricing provisions, transparency and governance arrangements, IP and data security, the need for robust exit mechanisms, the need for clearly defined performance metrics and accountability, and the need to build in mechanisms for managing change and fairly allocating risks.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Evercore’s Gloria Lin. We spoke with Gloria on a range of topics relating to the current activism environment. Topics covered during this 34-minute podcast include:
– Current activism environment and key campaign themes
– Evolving activist tactics
– Timing and number of activist settlements
– Director characteristics being targeted by activists
– Key lessons that you have learned from recent proxy fights
– Influence of macroeconomic conditions on recent activist campaigns
– Potential impact of recent events in the Middle East on activism trends
– Tips for vulnerable companies on how to prepare for activism today
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
Last February, on TheCorporateCounsel.net, I blogged about the decision by California’s Fourth District Court of Appeal in EPICENTERx, Inc. v. Superior Court (Cal. Ct. Appeal, 9/23), which refused to enforce a forum selection clause “in a Delaware corporation’s corporate documents” since it “would operate as an implied waiver of the plaintiff’s right to a jury trial—a constitutionally-protected right that cannot be waived by contract prior to the commencement of a dispute.” California was an outlier — with Georgia; while most state constitutions recognize the right to a jury trial, California and Georgia courts had expressly prohibited pre-dispute jury waivers.
This decision effectively overrules Handoush v. Lease Financing Group, LLC, 41 Cal.App.5th 729 (2019), in which the California Court of Appeal (First District) restricted courts from enforcing such clauses where the plaintiff would not be entitled to a jury trial in the selected forum. The Supreme Court’s decision thus clarifies the law in California, providing practitioners and litigants with greater certainty that forum selection clauses will be enforced . . .
The Supreme Court explained that although California does recognize a fundamental public policy interest in preserving the right to a civil jury trial and pre-dispute jury waivers are invalid, this policy is tethered to jury trials in California courts. The policy does not conclusively forbid waivers outside California courts. Nor does it preclude contracting parties from agreeing to resolve disputes in fora outside California, even when those fora recognize much more limited (or no) jury trial rights. The Court recognized the importance of enforcing forum selection clauses, citing federal authority from United States Supreme Court and the United States Court of Appeals for the Ninth Circuit.
The California Supreme Court reversed with instructions for the Superior Court to consider the plaintiff’s other arguments for non-enforcement of the forum selection clause, namely that they were improperly adopted and not “freely and voluntarily negotiated at arm’s length.” The Court declined to address the merits of these other theories because they were not considered or decided by the Court of Appeal. Although the Court held that the loss of jury trial rights could not alone justify non-enforcement of a forum selection clause, it left open the possibility that jury trial rights might be relevant to related public policy arguments for non-enforcement.
EpicentRx is an important decision for practitioners in California. It dispels the confusion created by Handoush, and thus provides much greater certainty to California-based corporations that California courts will enforce forum selection clauses — often selecting the Delaware Court of Chancery, but also increasingly selecting business courts being established in Texas, Nevada and other jurisdictions — for resolution of complex corporate and business disputes.
In Hartfield, Titus & Donnelley, LLC v. MarketAxess Holdings, Inc., (Del. Ch.; 7/25), seller sought to reform a membership interest purchase agreement to reduce the minimum threshold that would allow it to pay cash to “top-up” to the maximum earnout target. It argued that re-writing the contract was appropriate under the doctrine of mutual or unilateral mistake because the parties had previously agreed to prorate the earnout target itself to reflect the transaction’s mid-month closing date. Yesterday, the Chancery Court denied the seller’s request because it failed to show a meeting of the minds that the cash top-up threshold would be similarly prorated. Here’s more background:
In September 2020, MarketAxess Holdings entered into a membership interest purchase agreement to acquire HTD’s municipal bonds trading platform. The purchase price included an up-front cash payment and multiple potential earnout payments. HTD could receive an earnout by achieving targets measured by the amount of annual system license fees HTD paid MKTX to use the acquired platform during the earnout period, with a maximum earnout target of $3,250,000 in system license fees. But, if the system license fees paid by HTD were between $2,750,000 and $3,250,000, it could pay an amount in cash to “top-up” to the maximum $3,250,000 earnout target.
When the closing date was set for April 9, the parties sought a way to address a mid-month closing in the earnout calculation and settled on adjusting the earnout table to prorate the target figures (356/365ths of what was negotiated). “The parties did not think to similarly prorate the minimum threshold triggering HTD’s ability to pay cash to “top up” to the maximum prorated earnout target.” When the actual license fees at the end of the first earnout period were short of the agreed-upon cash top-up threshold but above a prorated amount — and the parties failed to reach an agreement on a new earnout structure — litigation ensued over whether the failure to adjust the “top up” minimum was a “mistake.”
In a memorandum opinion issued after a four-day trial, Vice Chancellor David found that HTD failed to prove either mutual or unilateral mistake.
‘Regardless of which doctrine is used, the plaintiff must show by clear and convincing evidence that the parties came to a specific prior understanding that differed materially from the written agreement’ . . . In this action, HTD has failed to meet its burden to prove by clear and convincing evidence that the parties reached a prior understanding to prorate the Cash Top-Up Threshold . . .
HTD argues that when the parties negotiated the Amendment, they “reached a specific prior understanding to ministerially prorate all targets to account for a shortened initial earnout calculation period[,]” which, according to HTD, included the Cash Top-Up Threshold.
But the record evidence shows that the parties never discussed whether, let alone agreed that, the Amendment would prorate the Cash Top-Up Threshold. Both parties point to a March 29, 2021 email . . . proposing three alternatives to address the effect of a mid-month closing on the earnout calculation. HTD accepted MKTX’s proposal to “adjust the table so that the system license fee target figures are 356/365ths of the figures expressed in the table” but did not mention prorating the Cash Top-Up Threshold . . .
There could be “no meeting of the minds about how the [Cash Top-Up Threshold] would operate” with the prorated system license fee targets because the parties never discussed the issue. Only after the First Earnout Calculation Period was nearly over did HTD assert that the Cash Top-Up Threshold should have been prorated, but HTD reached that view months after the parties executed the Amendment, and it therefore does not support a specific prior understanding at the time the Amendment was signed.
This HLS Blog post from Wachtell succinctly summarizes some of the key provisions of the One Big Beautiful Bill Act that will impact domestic and cross-border M&A.
On the domestic front, the OBBBA makes permanent several taxpayer-favorable TCJA provisions.
– Taxpayers will again be entitled to deduct immediately 100% of the cost of depreciable tangible assets, likely increasing the appeal of acquiring assets as compared to stock.
– The deduction for up to 20% of the business income of certain noncorporate investors in certain pass-through entities is made permanent, preserving the tax efficiency of partnership, rather than corporate, joint venture structures for those investors.
– The OBBBA permanently restores the pre-2022 TCJA limitation on interest expense deductions by applying the 30% limit to an amount that approximates EBITDA, rather than EBIT. But it imposes new limits by excluding from the EBITDA calculation certain foreign-source items of income. The net impact of these changes on particular leveraged transactions will need to be assessed.
For U.S. multinationals, the OBBBA is a mixed blessing.
– It widens the scope of income of U.S.-parented “controlled foreign corporations” (“CFCs”) that is subject to current federal income taxation, but generally improves the U.S. parent company’s ability to credit foreign income taxes. Specifically, GILTI (the TCJA’s tax on CFC earnings in excess of a deemed 10% return on tangible assets) is replaced with a more costly tax on “net CFC tested income,” a concept that does not reflect a deduction for the return on tangible assets.
– However, the OBBBA liberalizes the foreign tax credit regime by increasing the amount of foreign taxes that may be credited against net CFC tested income and by no longer requiring interest expense and research and experimental expenditures to be allocated against such income.
– The OBBBA also revises the treatment of mid-year sales of CFCs, requiring a pro rata income allocation based on the period of stock ownership.
It urges M&A participants to understand the new law (many provisions of which are effective for tax years beginning after December 31, 2025) and take it into account when negotiating pricing, transaction structure and deal terms.
On Friday, Chancellor McCormick dismissed all claims against Elon Musk and X Corp. in Khalid v. Musk (Del. Ch.; 7/25). Plaintiff, a retail investor, first purchased Twitter stock after Musk said he entered an agreement to acquire the company at $54.20 per share and then sold those shares after Musk said he was terminating the merger agreement. He incurred losses to the tune of $1.88 million and sued, asserting eleven tort, fiduciary, and contractual claims. Defendants moved to dismiss based on lack of personal jurisdiction (Musk) and failure to state a claim (X defendants).
With respect to Musk’s motion to dismiss, the opinion addresses the plaintiff’s argument that Musk transacted business in Delaware by entering into the merger agreement and consented to jurisdiction under its forum selection clause. It notes that “an express consent to jurisdiction satisfies the requirements of due process and typically resolves the statutory analysis,” but a consent to jurisdiction only applies to claims under that agreement, and, with respect to those claims, plaintiff must show he was an intended third-party beneficiary — since he was not a party to the merger agreement. The court dismissed all the contractual claims, applying the reasoning of the Crispo decisions.
With respect to the plaintiff’s common law fraud claims — asserting that he was defrauded by defendants saying they would, then wouldn’t, buy Twitter — Chancellor McCormick says:
Defendants advance many arguments for dismissal. Once again, one suffices. Plaintiff has failed to adequately allege that Musk intended to induce him to buy or sell Twitter stock. There are no allegations that Musk lied when he first announced that he entered into the Merger Agreement, which led Plaintiff to buy Twitter stock. And Plaintiff does not allege that Musk lied when he sent the Termination Letter to induce Plaintiff to sell stock. Under Plaintiff’s theory, Musk sent the Termination Letter to gain leverage to renegotiate the deal price and not with intent to cause Plaintiff to act. This allegation does not support Plaintiff’s fraud claim.
“This too shall pass” doesn’t apply to CFIUS risk. Despite five years having passed since the acquisition of Jupiter Systems by Hong Kong-based acquirer, Suirui International, a July 8 Executive Order mandates that Suirui divest the interest it acquired in Jupiter Systems following a review by CFIUS, which found that the ownership posed a threat to U.S. national security. Here’s background from this Freshfields blog:
Jupiter deals in video wall display technology and visualization systems—in other words, large-scale, multi-monitor displays one might see in NASA’s Mission Control or in a military command center. Jupiter has operated for over 40 years and offers its solutions to corporate customers as well as U.S. government entities. Jupiter reports its U.S. government customers include the CIA, the NSA, and NASA. These agencies likely rely on Jupiter’s systems to display and process sensitive or classified data.
Suirui and its Chinese parent company are cloud communication service carriers similarly specializing in video conferencing solutions . . . After buying Jupiter for an undisclosed sum, Suirui installed its co-Chairman as Chairman of Jupiter and its co-CPO as CEO. Beyond announcing these overlapping executive appointments, Jupiter’s website currently contains no disclosure of the acquisition itself[.]
The blog summarizes what the order requires, as follows:
Immediate Access Prohibitions: Suirui and its affiliates are immediately barred from accessing Jupiter’s non-public source code, technical information, IT systems, and U.S. facilities.
Complete Divestment: Within 120 days, Suirui must divest all interests in Jupiter, including transferring or destroying assets such as intellectual property, source code, and customer contracts.
Jupiter’s Divestment of the Jupiter Asia Companies: A unique requirement for this presidential order is that Jupiter is required to divest all interests or rights in any assets or operations of the Jupiter Asia Companies—three entities organized in Hong Kong and China—created after the completion of the Transaction.
Buyer Pre-Approval: The divestment is subject to CFIUS non-objection; CFIUS has 30 days to object to potential buyers once proposed. The order specifically mentions factors on which an objection might be based, such as whether the buyer is a U.S. citizen and whether they have ties to the Chinese sellers.
Compliance Monitoring: Until divestment is complete, the parties must provide weekly compliance certifications to CFIUS and are subject to audit requirements.
It also provides a list of key factors in CFIUS’s review, and these key takeaways:
Non-passive Chinese investments in U.S. businesses that pose any colorable national security risk are almost certain to be prohibited.
Even without public reporting, CFIUS has means to identify non-filed transactions.
CFIUS’s reach extends well beyond the pre-closing transaction review process. Companies that fail to engage with CFIUS appropriately may find themselves subject to retroactive scrutiny that could ultimately result in forced divestment.
A forced divestment can result in destruction of value of the company. In structuring its divestment requirement, CFIUS is less likely to be sympathetic to value destruction concerns if the national security considerations should have been obvious and it appears that the parties sought to avoid detection of the transaction by customers or CFIUS.
I *think* (please reach out if I am wrong) that this marks only the 10th time this power has been used to formally block or unwind a transaction since the first in 1990.
The updates to the Schedule 13D/G CDIs for the 2023 rule amendments I blogged about earlier this week aren’t the only recent development coming out of Corp Fin that’s relevant to M&A practitioners.
– Back in March, I noted that the discussion on acquired company financial statements in the SEC’s Division of Corporation Finance’s Financial Reporting Manual hadn’t been updated since before the 2020 overhaul of the S-X acquired company financial statement rules. That’s no longer the case!
– And for folks who regularly reference the SEC’s Compliance & Disclosure Interpretations, check out this new page on the SEC’s website where Corp Fin has consolidated all of its CDIs in one place so, per this LinkedIn post, everyone now has the ability to search for potentially relevant guidance simply by clicking Ctrl + F.