Last Friday, the Chancery Court issued a post-trial memorandum opinion in Verisk Analytics v. ExactLogix (Del. Ch.; 8/26) finding that a buyer was not entitled to terminate a merger agreement at the outside termination date because its actions were the “primary cause” of the FTC issuing a second request, preventing the expiration of the HSR waiting period from occurring by that date. Here are snippets of Vice Chancellor David’s summary of the facts:
AccuLynx and Verisk believed when they signed the merger agreement that the merger presented only minimal antitrust risk, as the companies did not compete horizontally or have a vertical supplier-customer relationship. Verisk’s business includes “integrating” software with customers to support insurance claims estimation, but Verisk had integration agreements with only a small number of AccuLynx competitors.
Prior to the merger, Verisk was engaged in discussions with one such AccuLynx competitor, ServiceTitan, Inc., about developing an “enhanced” integration that would offer better pricing features than Verisk’s standard integration. When Verisk agreed to the merger, it decided to end those discussions and negotiate a standard integration with ServiceTitan instead.
Soon after the FTC opened its preliminary investigation into the merger, ServiceTitan told the FTC about Verisk’s decision to abandon the enhanced integration. That unusual decision prompted the FTC to develop a novel “market reset” theory of competitive harm centered on Verisk’s plans to integrate with AccuLynx competitors [. . .]
Over the following weeks, the FTC repeatedly asked Verisk in different ways whether it had ever terminated integration discussions with an AccuLynx competitor or rejected a request for an enhanced integration. Verisk did not realize that the FTC was specifically referring to ServiceTitan and repeatedly told the FTC that the answer was “no” when the FTC knew from ServiceTitan that the answer was “yes.” Verisk’s outside counsel eventually learned of Verisk’s discussions with ServiceTitan and disclosed them to the FTC. Thereafter, the FTC issued a “second request” focused on Verisk’s integrations [. . .] Verisk purported to terminate the merger agreement on the extended termination date.
But Vice Chancellor David’s conclusion is notable because, as the decision indicates, “The facts of this case stand apart from other broken deal cases in which a buyer tried to avoid its obligation to close.”
The trial record here revealed virtually no evidence suggesting that Verisk intended to scuttle the deal. Verisk witnesses credibly testified that but for the uncertainty and cost presented by a lengthy Second Request process, AccuLynx remained an attractive acquisition target for Verisk, and no contemporaneous evidence suggests otherwise.
Verisk tried in earnest to convince the FTC that its “market reset” theory was unfounded and that it should not issue the Second Request, and once issued, that the FTC should find the Second Request satisfied based on information produced under the quick look agreement. Verisk met with the FTC nearly 30 times; hired experienced legal advisors, expert economists, and a government affairs firm to advocate for FTC clearance; and spent nearly $8 million in legal fees to review roughly four million documents from 16 custodians under the quick look agreement. Moreover, although Verisk misrepresented and omitted information in response to FTC questions by failing to disclose Verisk’s discussions with ServiceTitan about an Enhanced Integration, its missteps were not intentional.
But the merger agreement foreclosed termination by a party whose “willful conduct” was the “primary cause” of “the failure to satisfy any condition to the obligations of the Parties.” VC David distinguished the term “willful conduct” from “willful breach,” finding that the former encompasses “any voluntary and intentional conduct that caused a condition to fail.” VC David also found that AccuLynx proved at trial that the FTC would not have required full compliance with the Second Request but for Verisk’s decision to switch to standard integration with ServiceTitan. She ordered specific performance and found that AccuLynx was entitled to damages for direct costs and prejudgment interest.
A recent Fried Frank alert discusses the Chancery Court’s July decision in Berger v. Fox (Del. Ch.; 7/26) involving claims that a PE take-private was steered to a preferred, lower bidder due to financial advisor conflicts. Plaintiffs argued that the target’s failure to run a full company auction or solicit alternative bidders reflected the board’s bad faith and that the financial advisor’s relationship with the buyer caused it to improperly favor the buyer. As the alert discusses, Vice Chancellor David rejected these arguments.
The court rejected the Plaintiffs’ contention that the sale process—which included neither an auction nor any solicitation of alternative bidders—reflected bad faith. The court noted that the news media publicly reported that the Company was considering strategic alternatives; that the Company separately ran a process to sell the D&A Business, in which it contacted 80 potential bidders; and that the Board had received two unsolicited bids to acquire the Company. Further, the Board had considered conducting a pre-signing market check, but rejected doing so, deciding instead to negotiate a low break fee, after considering the widespread news of its process, the risk of additional delay, and the fact that the two unsolicited bidders both had rejected a go-shop provision. These decisions were not outside the bounds of reason or otherwise indicative of bad faith, the court stated.
The court rejected the Plaintiffs’ contention that the Financial Advisor’s relationship with the Buyer caused it to steer the deal to the Buyer. The court noted that, although the Financial Advisor disclosed to the Board that it expected to receive significantly more compensation from the Buyer than from the Company relating to the Merger, the contingent fee arrangement with the Company incentivized the Financial Advisor to maximize price. Also, the Financial Advisor had “similar relationships” with both competing bidders as it had with the Company. Further, the court stated, even if the Financial Advisor had an incentive to favor the Buyer over its other clients, the Complaint “still fail[ed] to allege” that the Financial Advisor acted improperly—i.e., it acted as directed by the Board and did not mislead the Board.
VC David also rejected claims that the financial advisor aided and abetted the directors’ alleged breaches and that the disclosures regarding the financial advisor’s conflicts were inadequate.
The alert shares key takeaways from the decision. Here are a few:
It is extremely difficult for plaintiffs to succeed on claims that independent and disinterested directors acted in bad faith. As the Company’s directors were independent and not self-interested in the transaction, and were exculpated for duty of care violations, they could have liability only if they had acted in bad faith. It is a “daunting task,” the court stated, to show that independent and disinterested directors intentionally failed to run a reasonable sales process or intentionally caused a merger proxy statement to omit material information—as they would have “no motive” for doing so. Moreover, the court stressed, in this case, it appeared that the “fully independent Board retain[ed] experienced advisors, inform[ed] itself of potential conflicts, engag[ed] with multiple bidders, and me[t] over a dozen times before reaching a deal”—none of which indicated bad faith.
The Financial Advisor’s relationship with the Buyer did not create an incentive for it to favor the Buyer. The court emphasized that the Financial Advisor had fully disclosed to the Board its relationship with the Buyer, and the Board fully disclosed the conflict to the stockholders. Also, the Financial Advisor had “similar relationships” with the competing bidders. And, in any event, there were no allegations that the Financial Advisor had taken “any action without Board direction or approval or concealed information from or otherwise misled the Board.”
The Company’s disclosure to stockholders relating to the Financial Advisor was adequate. Although the amount of the fees the Financial Advisor expected to receive for concurrent engagements with the Buyer was not disclosed to the stockholders, the court concluded that “the scale” of the engagements was sufficiently disclosed as the proxy stated that that compensation was expected to be “significantly more” than the fees the Financial Advisor would receive from the Company in connection with the Merger. Also, the court concluded that it was not necessary that the Company have disclosed in the proxy that the Financial Advisor, a month before being engaged by the Company, had in the ordinary course provided an “Illustrative LBO Analysis” of the Company with the Buyer, which it had shared with the Buyer.
With respect to the aiding and abetting claim against the Financial Advisor, the court applied the heightened Mindbody standard for “knowing participation.” Notably, the court did not mention recent decisions in which Vice Chancellor J. Travis Laster has suggested that the Mindbody standard should apply only when aiding and abetting claims are asserted against third-party buyers, and not when asserted against financial advisors.
Last month, I blogged about the Delaware Supreme Court’s decision in the Paragon Metals case, in which the Court held that buyers reasonably relied on the seller’s reps & warranties for purposes of asserting a fraud claim despite shortcomings in the buyer’s due diligence process. Last week, in In Re Swervepay Acquisition, LLC, (Del. Ch.; 7/26), the Chancery Court reached a similar conclusion with respect to a seller’s fraud claims.
The litigation arose out of the acquisition of SwervePay, a payments facilitator (PayFac), by a portfolio company owned by private equity sponsors. The sponsors had previously acquired the portfolio company based on their belief that its software platform provided access to at least $34 billion of payment volume that could be monetized through a PayFac business. Those figures were repeatedly cited during the negotiations with the target, and it ultimately agreed to a deal structure that included substantial earnout payments tied to achieving that payment volume.
However, prior to the signing, the sponsors and their advisors learned that the actual potential payment volume was significantly lower than what was represented but did not disclose that fact to the target. After closing, it became clear that the earnouts were effectively unattainable, and the target’s former owners sued for fraudulent inducement.
In challenging the plaintiffs’ argument that their reliance on the buyers’ extracontractual representations about payment volumes was reasonable, the defendants pointed to alleged shortcomings in the target’s due diligence investigation and its failure to bargain for a contractual representation concerning payment volumes. Chancellor McCormick’s opinion first addressed the argument relating to the target’s due diligence:
Buyers quibble with Sellers’ diligence efforts. They raise arguments describing steps that Sellers could have taken instead of relying on the February 8 Email, including speaking to management, retaining advisors, or speaking with Durrett. But the court’s inquiry is not whether Sellers could have eventually discovered the truth had they continued to dig. The inquiry is whether Sellers’ reliance on the false representation was reasonable.
It was. Sellers inquired about Ontario’s monetizable payments volume several times. Sellers then asked to see data allowing them to verify Buyers’ statements. . .
Here, Sellers did not seek diligence regarding the payments market generally. Rather, they sought information specific to [the portfolio company]—the payments volume within [the portfolio company’s] system. Buyers were the most reliable source for that information and Sellers acted reasonably in relying on Buyers’ representations.
The Chancellor also rejected the defendants’ argument concerning the impact lack of a rep in the purchase agreement on the plaintiffs’ ability to rely on its extracontractual representations concerning payment volumes. In doing so, she pointed to the agreement’s absence of an anti-reliance clause:
Buyers also argue that Sellers’ failure to secure a contractual representation regarding Ontario’s payments volume weighs against a finding of reasonable reliance. This argument also fails. Parties to merger transactions can contractually circumscribe exposure to post-closing claims of fraudulent inducement. But Delaware law requires that they do so explicitly through unambiguous antireliance language. Buyers do not dispute that the Purchase Agreement contains no anti-reliance language.
Chancellor McCormick ultimately concluded that the plaintiffs established all the elements of their fraud claim, and awarded them the full amount of the earnout payments set forth in the agreement as damages.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, Cleary’s J.T. Ho and I were joined by Christine O’Brien, Interim Head of Special Situations & IR at Edelman Smithfield, and Lex Suvanto, Edelman Smithfield’s CEO. Topics covered during this 47-minute podcast include:
– The biggest mistake boards make in the first 48 hours after an activist shows up.
– The problem with “listen-only” and better strategies for the first engagement.
– The downside of delay tactics.
– The line between managing the narrative and damaging trust.
– Activist expectations around early board-level engagement.
– How public comments during activist engagements can shift the balance of power.
– Is there ever a place for “bedbug letters”?
– How defensive moves like poison pills or bylaw changes are perceived by long-term investors.
– The risk of preemptively appointing directors in response to activist pressure.
– How overly aggressive standstill terms derail settlements.
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!
With traditional exit opportunities increasingly difficult to come by, private equity continuation funds have attracted a lot of interest in recent years, but this Proskauer memo says that there are questions that GP’s need to answer prior to launching a continuation vehicle (CV) if they want to maximize their chances of success. This excerpt discusses the key terms that should be considered at the outset of the process:
The lead investor will negotiate the terms of the transaction on behalf of the CV and the wider investor group. Sponsors should still give thought to key terms early in process.
One key term is whether to offer reinvesting selling fund investors a status quo option with respect to economics. While investors are generally expected to participate on new terms, sponsors have increasingly offered status quo management fees to reinvesting investors. This aligns with the ILPA guidance and is therefore receiving greater scrutiny from selling fund LPACs.
For carried interest, all investors typically participate in the same arrangements, often through tiered profit structure with a number of return multiple and/or preferred return tests. This promotes alignment between sponsors and buyers and demonstrates sponsor conviction in the underlying asset.
On the transaction side, the allocation of costs and expenses among the sellside and the buyside is often a key negotiated point. Some costs clearly belong on one side or the other: CV establishment and lead investor costs are borne on the buyside by the CV, and election-process and other sellside process costs borne by the selling fund. Some costs however, are not so clearly apportioned, and the precise apportionment of those can become heavily negotiated. Having a clear idea of the broader transaction budget and the apportionment of costs is therefore an important consideration, particularly to the extent allocated to the sellside where those costs will usually impact the net proceeds available for reinvesting selling fund LPs.
The memo says that other questions that should be addressed include whether the asset & business plan is a good fit for a CV transaction, the sponsor’s ability to demonstrate alignment and transparency on valuation and conflicts, how to manage LP communications and timing, and how to convincingly demonstrate sponsor alignement.
The Delaware Chancery Court recently provided a reminder to those drafting acquisition agreements that if you want to create a contractually binding obligation, the recitals section of the agreement isn’t generally the place to do it. In Feeney Brothers Excavation Trust v. Artera Services, (Del. Ch.; 7/26), the Court rejected claims that a buyer breached the terms of an Equity Purchase Agreement by failing to provide what they alleged was an agreed upon dollar amount of rollover equity.
In support of its claim that the buyer had agreed that the rollover equity would have a specific dollar value, the plaintiffs’ pointed to the following definition contained in the recitals section of the Agreement:
“Rollover Amount” references “an aggregate value of $30,000,000,” used in the context of describing the value of the Contributed Units.
However, the recitals were the only section of the Agreement in which a specific dollar amount was referenced, and Judge Patricia Winston, sitting in Chancery by designation, concluded that wasn’t sufficient:
Plaintiffs’ theory fails because it seeks to impose obligations via the recitals. “Generally, recitals are not a necessary part of a contract and can only be used to explain some apparent doubt with respect to the intended meaning of the operative or granting part of the instrument.” Recitals may identify the meaning of terms via definitions or “provide background and . . . offer insight into the intent of the parties.”But a recital may “not establish a substantive obligation.” And “[i]f the recitals are inconsistent with the operative or granting part, the latter controls.”
While Judge Winston agreed with the plaintiffs that reference to the recitals was necessary to identify which units were transferred or issued in the rollover transaction, and that Section 1.1 of the agreement uses the terms defined in the recitals, she characterized the plaintiffs claims as an attempt “to transform the recital definitions into a guaranty or representation and warranty regarding the units’ ‘actual value.’”
She concluded that using the recitals in this way conflicted with the operative sections of the contract. Specifically, Judge Winston pointed to a representation from sellers acknowledging that there was “no representation or warranty. . . as to the . . .desirability or value of an investment in [the post-closing entity],” except for the representations set forth in Section 2 of the Agreement. This language, she said, precluded the plaintiffs from asserting that the language of the recitals constituted a representation concerning the value of their investment.
In the latest edition of our Deal Lawyers Download podcast, Datasite’s Chief Marketing Officer Merlin Piscitelli joined me to discuss AI’s growing role in the M&A process. Topics in this 16-minute podcast include:
– AI’s role as a force multiplier
– The strengths and limits of AI tools
– Balancing AI insights with professional judgment
– Managing the legal risks of AI adoption
– Building an effective “human-in-the-loop” model
– Where AI delivers the greatest value in M&A practice
– AI’s impact on due diligence and risk assessment
– How AI will reshape the M&A lawyer’s role
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.