Last week, Meredith blogged about the Chancery Court’s decision to grant motions to certify certain constitutional questions relating to SB 21 to the Delaware Supreme Court. A recent AO Shearman blog reports that the Court has accepted both questions certified to it. This excerpt specifies the questions that the Supreme Court will review and where things go from here in these proceedings:
Plaintiffs moved for certification of two constitutional questions concerning the amendments to Section 144 of the DGCL by SB21, specifically: (i) whether the elimination of the Court of Chancery’s ability to award “equitable relief” or “damages” in circumstances where the safe harbor is met violates the Delaware constitution by purporting to divest the court of its equitable jurisdiction, and (ii) whether the retroactive application of SB21 “violate[s] the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested.”
A briefing schedule will be set this week, indicating that the Delaware Supreme Court is moving quickly to resolve questions around SB21. Perhaps indicating the judiciary’s desire for clarity, stays have been issued in several cases currently pending before the Court of Chancery where similar constitutional questions are implicated.
A recent Paul Hastings memo discusses spin-offs as a potential alternative for biotech companies to unlock value. While the memo focuses on that industry, much of its discussion of the key legal and business considerations associated with a spin-off applies to companies in any industry considering such a transaction. This excerpt addresses some of the issues that need to be addressed when considering how to separate the businesses and employees involved in the transaction:
Planning for a spin-off involves identifying assets and liabilities to be separated, allocation of employees, identifying and addressing shared assets and contracts, consents, waivers, notices and possibly transition services agreements.
If the businesses to be separated are tightly integrated or are expected to have significant business relationships following the spin-off, it could take more time and effort to allocate assets and liabilities, identify personnel that will be transferred, separate employee benefits plans, obtain consents relating to contracts and other rights, and document ongoing arrangements for shared services (e.g., legal, finance, human resources and information technology) and continuing supply, intellectual property sharing and other commercial or operating agreements.
Other topics addressed include tax matters, intellectual property and licensing, legal and contractual considerations and public company considerations.
For an M&A blogger, the earnout litigation following Alexion Pharmaceuticals’ 2018 acquisition of Syntimmune is one of those gifts that keep on giving. We’ve already blogged about Vice Chancellor Zurn’s 2021 decision to deny Alexion’s motion to dismiss the case and her 2024 post-trial opinion finding that Alexion had breached its obligations under the earnout provisions of the merger agreement. Last week, in Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch.; 6/25), the Vice Chancellor turned her attention to the issue of damages.
If you decide to tackle this opinion, bring your calculator, because it’s as math-heavy a piece of work product as I’ve seen this side of NASA. A lot of that math was necessary to lay out and assess both sides’ arguments concerning the probability that specific earnout payment milestones would be achieved. Vice Chancellor Zurn concluded that the strongest probability evidence was derived from Alexion’s own estimates of the probability of technical and regulatory success of Syntimmune’s experimental drug made shortly before the breach.
Vice Chancellor Zurn then calculated each earnout milestone’s expected payment by weighting the amount of the milestone payment by its probability of achievement. Regrettably, more math ensued. When it was finally “pens down,” the Vice Chancellor determined the present value of expected milestone payments based on their expected payment dates and then applied an annual discount rate to certain milestone payments. Adding it all up, she concluded that Syntimmune’s stockholders were entitled to pre-interest damages in the amount of $180,944,915.32.
Yeah, I’m sorry that the preceding paragraph isn’t exactly a model of clarity. I’m doing the best I can here, but complex mathematical calculations aren’t exactly in my wheelhouse – the “C” I got in Calculus my freshman year in college remains my proudest academic achievement! So maybe the best way for me to exit from this blog is to say that I think the most important takeaway from Vice Chancellor Zurn’s opinion is her view of how the customary “expectation damages” measure for breach of contract claims should be approached when dealing with earnout milestones.
Citing the Chancery Court’s recent decision in Fortis Advisors v. Johnson & Johnson, (Del. Ch.; 9/24), the Vice Chancellor concluded that when a buyer’s breach of its efforts obligation made earnout milestones impossible to achieve, the expected value of those milestone payments at the time of the breach should be calculated by weighting each milestone by the proven likelihood it would be achieved:
SRS’s injury is best understood as the lost expected value of each milestone as compared before and after Alexion’s breach of its CRE Obligation. As in Fortis, an expected value approach reflects the theory behind expectation damages, which aim to put “the nonbreaching party in as good a position as he would have been in had the contract been performed, and no better.”
Compensating for lost expected value, rather than with full value whenever earnout payments are likely and zero value whenever earnout payments are unlikely, strives to hit the mark on the parties’ reasonable expectations, rather than award windfalls for some promisees and goose eggs for others.
In a speech on June 4 at the George Washington University Competition and Innovation Lab Conference, Deputy Assistant AG Bill Rinner addressed how the Antitrust Division of the DOJ will approach merger review. While he stressed a commitment to robust enforcement, he also emphasized that the Division does not view dealmaking with inherent suspicion.
This Troutman Pepper Locke Regulatory Oversight blog lists these key takeaways for how the Division plans to handle merger reviews:
– The Antitrust Division has a strong preference for structural remedies or divestitures, not behavioral remedies, and it will “welcome” parties’ proposals to divest to third-party buyers – fix-it-first proposals.
Where structural remedies are more complicated and involve ongoing commercial entanglements inherent to the industry, the agency would consider use of strong monitoring and enforcement mechanisms.
Divestiture buyers will be rigorously reviewed to ensure that they have the incentive and ability to replace lost competition in every way, including product or service quality.
– It will not use its merger enforcement authority as leverage to get relief from the parties not related to the harm to competition that allegedly flows from the transaction itself.
– Second requests will only be issued where the Antitrust Division has merger-related concerns, not to build a civil or criminal conduct investigation.
– The agency will be transparent with parties about where it has concerns so that the parties can focus their advocacy on addressing those concerns.
– The Antitrust Division will not send letters to parties suggesting that an investigation is ongoing and if the parties proceed with the transaction, they will “close at their own risk.”
– The agency will seek judicial sanctions where parties systematically abuse legal privilege or withhold or alter documents required by the HSR Act.
In two decisions last spring, the Supreme Court overruled Chancery Court decisions that had dismissed challenges to transactions on the basis that MFW‘s conditions were met. In both cases, the Supreme Court found that certain undisclosed conflicts of interest involving financial advisors were material and held that the stockholder vote approving the deal was not fully informed, so defendants’ motion to dismiss fiduciary duty claims should be denied. The second of those decisions was in City of Sarasota Firefighters Pension Fund v. Inovalon Holdings (Del.; 4/24). Just this week, Chancellor McCormick addressed the defendants’ supplemental motions to dismiss raised on remand — including that the claims should be dismissed because defendants are entitled to exculpation — in City of Sarasota Firefighters Pension Fund v. Inovalon Holdings (Del. Ch.; 6/25).
In denying the motion to dismiss on this basis, Chancellor McCormick found that it was reasonably conceivable that defendants failed to disclose the advisor conflicts and exaggerated another advisor’s role in market outreach knowingly and in bad faith. In so finding, she points to the significance of this information in the eyes of the Supreme Court to support an inference that it is reasonably conceivable the defendants withheld information from the proxy statement to make the process look better.
The defendants argued that it was unreasonable to infer bad faith because “’it took a review by the Supreme Court . . . to clarify that such facts were material.’ If the trial court did not view this information as material, how can one fault the Committee Defendants?” The Chancellor acknowledged that this was a fair question but said it ignores the law in the case. The Supreme Court determined the information was material, and it is reasonably conceivable that the defendants withheld it knowingly, which is enough to state a non-exculpated claim.
Jasper Street’s latest newsletter highlights notable activist campaigns that went to a vote in May, including those at Phillips 66, WEX, Harley-Davidson, US Steel, and NHI. It shares the following key takeaways from these campaigns:
Governance Still Drives Outcomes: ISS’s support for Elliott at Phillips 66 was heavily governance-focused. Boards must address entrenchment, refreshment, and independent leadership proactively and with an objective lens.
Passive vs. Active Dynamics Matter: The Phillips 66 vote was a clear example—passive investors backed management, while actives backed Elliott. Companies must recognize that governance concerns flagged by ISS and Glass Lewis can resonate with actives, but passive investors often hesitate to back a full dissident slate.
Withhold Campaigns Can Be Equally Dangerous: The WEX and Harley-Davidson outcomes show that withhold campaigns are powerful tools that can force change at companies targeted by activists. Shareholders can voice their frustration en masse, sometimes leading to immediate change or these campaigns build momentum for future contests—even without immediate director turnover, they send a clear message.
It’ll be interesting to see if there is a corresponding increase in proxy contests next year, with “vote-no” campaigns — possibly to, as Andrew Freedman of Olshan said, “test the waters and perhaps consider a contest next year” — on the rise.
Late last month, John blogged about the Delaware Chancery Court’s decision in Vejseli v. Duffy, (Del. Ch.; 5/25) in which Vice Chancellor David upheld a board’s rejection of dissidents’ nominees but allowed the dissidents to resubmit their nominations after concluding the board breached its fiduciary duties when it reduced the number of directors up for election. This Fried Frank alert discussing the decision provides some related practice points for boards considering nomination notices. Here are some of the suggestions:
– A board should understand and be able to articulate the specific corporate purpose for which it rejects a nomination notice. Even if rejection of a nomination notice may be legally permissible on the basis that it does not comply with the company’s advance notice bylaw requirements, the rejection also must be equitable—that is, done for the purpose of advancing a legitimate corporate purpose, and not for pretextual, selfish, or disloyal reasons.
– When considering a nomination notice, a board should consider whether the notice complies with the requirement that all agreements relating to the nomination must be disclosed. Given the court’s focus in Ionic on the validity and importance of this requirement for an informed stockholder vote, a board evaluating a nomination notice should carefully consider what its advance notice bylaw requires with respect to disclosure of agreements and whether the requirement has been met.
– Boards should consider specifying in an advance notice bylaw that recently terminated agreements and surviving provisions of terminated agreements must be disclosed. Even if (as in Ionic) the bylaw does not so provide expressly, the board should consider whether non-disclosure of such agreements or provisions renders the nomination notice at issue non-compliant.
– A board should make governance changes on a “clear day” when possible. Such actions, even if defensive in nature, will be reviewed under the business judgment rule. If such actions are defensive, affect the stockholder franchise, and are not adopted on a clear day, then enhanced scrutiny under the Coster standard will apply instead.
– There remains an open issue as to how broadly the Coster standard applies. It has not been clear whether the Coster standard applies only to board responses taken on a “rainy day” when they relate to the election of directors or issues touching on control—or, instead, as may be suggested by certain language in Coster, it applies to all stockholder votes. As Coster and Kellner, and now Ionic, all have involved elections of directors, the question remains unanswered.
Shortly after SB 21 was signed into law, John blogged about the possibility of constitutional challenges to the legislation — which soon thereafter became reality. Shortly after that challenge was filed, on May 6, a shareholder plaintiff filed a derivative claim challenging the fairness of an asset purchase transaction that closed in April 2024 between Clearway Energy and its majority stockholder. The transaction was approved by a committee of directors determined to be independent by the company’s board under NYSE listing standards, but not by vote of the shareholders.
In that case, before defendants answered or filed a motion to dismiss, plaintiff moved to certify certain questions of constitutional law to the Delaware Supreme Court, which Vice Chancellor Will granted late last week. The motion was unopposed and stated:
– The Constitutional Questions are of first instance in this State and relate to the constitutionality, construction or application of a statute of this State which has not been, but should be, settled by the Supreme Court . . .
– Answering the Constitutional Questions now will minimize uncertainty for transaction planners seeking to design transactions to take advantage of Senate Bill 21’s revisions to [Section] 144 (the “Safe Harbor Provisions”) and provide clarity for stockholders with potential fiduciary claims affected by Senate Bill 21.
Here are the questions to be addressed by the Delaware Supreme Court if cert is accepted:
– Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?
– Does Section 3 of Senate Bill 21— applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?
I think (please reach out if you know otherwise!) that this is the first case where cert was granted to address constitutional challenges to SB 21. For those interested, Anthony Rickey of Margrave Law is posting on LinkedIn regularly about SB 21 — and tracking cases involving challenges to the legislation.
A pair of settlements entered into by the FTC and DOJ over the past week indicate that antitrust regulators are more willing to accept structural remedies to resolve merger challenges than they were during the Biden administration.
On Monday, the DOJ announced that it had reached a settlement that would allow Keysight Technologies to move forward with its proposed acquisition of Spirent Communications. The excerpt from the DOJ’s press release provides an overview of the reasons the government moved to block the deal and the terms of the settlement:
According to the complaint, Keysight and Spirent dominate the markets in the United States for high-speed ethernet testing, network security testing, and RF channel emulators. High-tech companies – including chipset manufacturers, cloud computing providers, mobile network operators, government labs, and large enterprises – rely on the Defendants’ products to validate that their networks and network equipment are functional, secure, and integrating the latest technology.
The parties together account for 85% of the market for high-speed ethernet testing, more than 60% of the market for network security testing, and more than 50% of the market for RF channel emulators. Keysight and Spirent are each other’s closest competitors in these markets and compete head-to-head to develop and sell this crucial test equipment. Without the proposed divestiture, Keysight’s acquisition of Spirent would likely result in higher prices, lower quality, and reduced innovation to the detriment of customers and American consumers.
The proposed settlement requires Keysight to divest Spirent’s high-speed ethernet testing, network security testing, and RF channel emulation businesses to Viavi, including all tangible and intangible assets necessary to produce and sell these products. Together, these three business lines account for about 40% of Spirent’s total revenues. Viavi is expected to hire certain key Spirent employees that today support the divested business lines.
This settlement came on the heels of the FTC’s decision last week to allow Synopsys to move forward with its acquisition of ANSYS under the terms of a proposed consent order requiring it to divest certain product lines. That settlement was accompanied by a statement from FTC Chair Andrew Ferguson. This excerpt from a Simpson Thacher memo summarizes Chair Ferguson’s comments about the agency’s willingness to settle and the kind of structural remedies it expects to require companies to commit to:
– Settlements Are Back. In Chairman Ferguson’s Statement, he emphasizes that part of the settlement decision-making process under the new administration will involve declining to bring lawsuits to conserve agency resources if a settlement can preserve competition. “[S]ettlement maximizes the Commission’s finite enforcement resources. Antitrust litigation is expensive.”
– Robust Structural Remedies Remain Preferred. Chairman Ferguson also cautioned that behavioral remedies are disfavored and should be treated with “substantial caution.” The Statement explains that structural remedies should typically involve “the sale of a standalone or discrete business, or something very close to it, along with all tangible and intangible assets necessary (1) to make that line of business viable, (2) to give the divestiture buyer the incentive and ability to compete vigorously against the merged firm, and (3) to eliminate to the extent possible any ongoing entanglements between the divested business and the merged firm.” Further, the FTC must be confident that the divestiture buyer has the “resources and experience necessary to make that standalone business competitive in the market.” Chairman Ferguson’s Statement explains that unless these conditions are met, the Commission should proceed to litigation.
The willingness of antitrust regulators to accept structural settlements should come as good news to dealmakers, since it represents a departure from the hard-line approach taken by them during the Biden administration. However, regulators have made it clear that any structural remedies are going have to be quite robust before the DOJ or FTC will sign off on them. Chairman Ferguson’s comments laid out the FTC’s position, while the DOJ’s Antitrust Chief Gail Slater offered a more colorful summary of the Justice Dept’s bottom line when she commented that the DOJ isn’t interested in “accepting . . . bull**** consent decrees.”
Deals where preferred stockholders come out whole while common stockholders end up with peanuts often end up with the common stockholders crying foul. Wei v. Levinson, (Del. Ch.; 6/25), is the latest example of that kind of case to make its way to the Chancery Court. The case arose out of Amazon’s $1.3 billion acquisition of Zoox. Under the terms of that transaction’s merger agreement, most of the merger consideration went to the target’s noteholders and preferred stockholders, without much leftover for its common stockholders.
The plaintiffs asserted breach of fiduciary duty claims against the target’s directors and certain of its officers, as well as aiding and abetting claims against Amazon. The defendants responded by filing a motion to dismiss those claims. In her opinion, Chancellor McCormick refused to dismiss claims against the management directors and directors affiliated with the preferred stockholders, but she dismissed claims against the other members of the board and the aiding and abetting claims against Amazon.
The plaintiffs’ fiduciary duty claims were premised on alleged conflicts of interest on the part of the director and officer defendants. With respect to the directors who were appointed as representatives of the preferred stockholders, the plaintiffs pointed to the economics of the two series of preferred stock laid out in the target’s charter documents. In effect, the terms of the preferred created a “dead zone” above around $1.07 billion in merger consideration where no preferred stockholder received additional consideration unless the deal price exceeded $2 billion. The plaintiffs argued that within that zone, the preferred directors had no incentive to risk losing the value the preferred stockholders would receive in a deal by pushing to increase the value of the deal for the common.
Chancellor McCormick agreed. She cited Vice Chancellor Laster’s comments in Trados to the effect that it was “intermediate cases” – transactions in which preferred holders get paid out while common stockholders lose most of their investment & and future upside – that give rise to conflicts. The Chancellor said this was a “classic intermediate case,” and that the establishment of a bonus plan for members of management paid for in part by the common stockholders added fuel to the conflict of interest fire:
Atop the typical distortive effects that the economic rights of preferred stockholders offer in the intermediate case, the Bonus Plan supplied an additional conflict. At first, the Board contemplated that the preferred stockholders and noteholders would absorb the full cost of the Bonus Plan for the first $1 billion of consideration. But the preferred stockholders and noteholders never approved that deal and ultimately sought to re-trade, placing the preferred and common stockholders at odds on the question of allocation. In the end, the Board approved a deal that imposed 25% of the costs of the Bonus Plan on the common stockholders.
She concluded that it was reasonably conceivable that the plaintiff’s claims would be evaluated under the entire fairness standard, and that the plaintiffs were required to plead that the merger was “not the product of both fair dealing and fair price.” Chancellor McCormick concluded that the plaintiffs adequately alleged unfair dealing by the preferred directors, management directors and a noteholder director, but failed to plead that the other directors were conflicted. As a result, the process-based claims against those directors only supported a claim that they breached their duty of care, as to which they were entitled to exculpation under the Chancery Court’s 2015 decision in Cornerstone Therapeutics. She therefore dismissed those claims.
Chancellor McCormick declined to dismiss the plaintiffs’ claims against the management directors. She concluded that the plaintiffs’ adequately pled conflicts of interest due to non-ratable benefits that they would receive from the Amazon transaction and statements made after the deal indicating that they did not attempt to maximize the target’s value in negotiating a potential sale. However, she dismissed the aiding and abetting claim against Amazon, holding that the plaintiffs failed to adequately plead that, even if Amazon was aware of the conflicts of interest among the target’s fiduciaries, it took any action to exploit them.