Earlier this week, in Frank v. Mullen and B. Riley Financial, (Del. Ch.; 5/25), the Chancery Court rejected allegations that B. Riley, a minority stockholder of National Holdings Corporation, was a controlling stockholder and that its acquisition of the company should be evaluated under the entire fairness standard. The plaintiff cited several factors that it claimed supported his allegations of control, including B. Riley’s 46% ownership interest and support from other large stockholders, its alleged outsized influence over the board and control over the merger process, and the target board’s perceptions that the stockholder had control.
All of this didn’t get the plaintiff much traction with the Court. Vice Chancellor Zurn concluded that none of the factors cited by the plaintiff provided the kind of clout over the target’s board that the plaintiff claimed, and that in combination, they did not represent actual control. Instead, she concluded that what those factors provided the buyer with was leverage, which it was permitted to use:
Here, Plaintiff argues BRF exerted control over National for purposes of the merger, assumed fiduciary duties to National and its stockholders, and forced National into a conflicted transaction that warrants, and fails, entire fairness review. Plaintiff pleads that BRF had a great deal of leverage in the negotiations. But leverage in an arm’s-length negotiation is not tantamount to control over the special committee or board. The question is not what cards BRF held; the question is whether BRF controlled how the special committee played its cards. Plaintiff fails to plead facts that show BRF controlled the special committee or National’s board in the merger process.
VC Zurn observed that B. Riley had no board representation, committed to follow the MFW framework on multiple occasions during the negotiation process, was subject to a standstill, and that the plaintiff did not plead that B. Riley controlled the target’s board or the special committee. While B. Riley did advise the target that it was not interested in selling to a third party and that it would pursue a change in control transaction after its standstill expired, the Vice Chancellor did not view either of those statements as interfering with the special committee’s control of the process.
The Vice Chancellor acknowledged that a take-private deal by a large stockholder involves the potential for a conflicted controller transaction, but said that where that stockholder doesn’t exercise actual control over the company’s business and affairs, independent directors can keep that stockholder out of the boardroom by engaging in an arm’s-length negotiation process. By so doing, they can keep the presumptions of the business judgment rule. Ultimately, she concluded that “[w]hen there is an independent special committee, an independent board, and a clean process, a plaintiff cannot plead actual control over the transaction simply by pointing to a large blockholder’s negotiating leverage.”
If there’s anything more likely to result in busted deal litigation than a binding letter of intent with a distressed seller, I haven’t encountered it. The Delaware Superior Court’s recent decision in Cercacor Labs v. Metronom Health, (Del. Super.; 4/25), in which the Court was called upon to address competing allegations of a breach of an LOI, is a case in point.
The defendant Metronom was a pre-revenue medical device company that had exhausted its funding and was winding down its operations when it began discussing a potential sale to Cercacor, a health and fitness technology company. Discussions moved quickly due to the target’s dire financial straits, and after a full day of negotiations, the parties entered into an LOI for a potential acquisition on the eve of Metronom shutting its doors.
The LOI contemplated that the buyer would acquire the target or its assets on a “cash free, debt free” basis in exchange for 100,000 shares of the buyer’s stock. The LOI conditioned Cercacor’s acquisition proposal on satisfactory completion of due diligence and the negotiation and execution of a definitive acquisition agreement. It also contained a binding exclusivity provision as well as language obligating the parties to use good faith efforts to negotiate a definitive agreement as promptly as practicable. During that period, Metronom agreed to “operate its business in the ordinary course consistent with past practice.” Cercacor also agreed to pay the target’s operating expenses during the negotiating period (which it did).
As often happens when a buyer tries to catch a falling knife, things began to go south between the parties shortly after the LOI was signed. Cercacor alleged that Metronom was dragging its feet on responding to due diligence requests and in obtaining debtholder releases. In turn, Metronom complained that it took Cercacor nearly a month to deliver a draft asset purchase agreement, which it also contended inaccurately described the business being acquired. Ultimately, things deteriorated to a point where the parties ended up in court.
The buyer’s complaint threw the kitchen sink at Metronom, alleging breach of the LOI, breach of the implied covenant of good faith and fair dealing, conversion, unjust enrichment, and fraudulent inducement. The target counterclaimed, alleging that Cercacor breached its obligations under the LOI and the implied covenant.
While the Court cleared some of the underbrush and dismissed a portion of each parties’ claims, it let stand each party’s claims that the other breached the LOI. In refusing to grant Cercacor’s motion for summary judgment, the Court concluded that a material issue of fact existed as to whether the LOI required the target to deliver debtholder releases:
The parties first breach-of-contract dispute is one of interpretation—they disagree regarding whether the term “cash free, debt free” obligated Defendants to secure releases from Metronom’s debtholders. When “the issue before the Court concerns contract interpretation, `summary judgment is appropriate only if the contract in question is unambiguous.'” A term is ambiguous when it is “reasonably. . . susceptible of different interpretations.”
Under that standard, the phrase “cash free, debt free” in the LOI is ambiguous. Both parties invoke expert testimony, fact witness depositions, and extrinsic evidence, to support their interpretation of “cash free, debt free.” While the weight of this evidence suggests the parties intended the LOI to require Metronom to secure debtholder release, the Court doesn’t weigh evidence on a summary judgment motion. Because “cash free, debt free” is reasonably susceptible to more than one interpretation, the LOI is ambiguous regarding whether Metronom had to secure debtholder releases. And that precludes summary judgment on that issue.
Cercacor’s motion for summary judgment on its claims that Metronom dragged its feet in due diligence met the same fate, with the Court noting that these allegations involved factual issues that were inappropriate to resolve via summary judgment. For similar reasons, the Court also declined to grant summary judgment on Metronom’s counterclaim alleging that Cercacor breached the LOI by “delaying and stalling” the closing.
In addition to these issues, a sideshow involving the target CEO’s alleged efforts to renegotiate the deal in order to sweeten the pot for himself resulted in Cercacor’s assertion of tortious interference claims which the Court declined to dismiss.
As I’ve said before, I’ve never been a fan of letters of intent, and the hot mess created by this one isn’t likely to make me rethink that position.
In our latest “Deal Lawyers Download” Podcast, Gibson Dunn’s Branden Berns, Ryan Murr and James Moloney joined me to discuss how recent actions by the SEC have influenced the way that reverse mergers are structured and the implications of those actions for companies considering such a transaction. We addressed the following topics in this 35-minute podcast:
– Overview of reverse mergers and their rationale
– Evolution of the Corp Fin Staff’s position on shell company status
– Implications of SPAC rules for reverse mergers generally
– How changes in rules and interpretations have influenced structure of revers mergers
– The new limitations on the “sign & close” structure and remaining uncertainties
– Key considerations for parties considering a reverse merger
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.
This Mayer Brown alert outlines a three-step process for evaluating conflict transactions following the DGCL amendments that took effect in March. Below, I’ve streamlined the outline. It also contains details on and analyses of each of these steps and sets forth procedural safeguards to invoke the safe harbors.
Step One: Does the act or transaction involve a controlling stockholder or a control group?
Is there a controlling stockholder or a control group?
If the corporation has a controlling stockholder or a control group, are they involved in the act or transaction?
Is the act or transaction a going private transaction?
Step Two: If the act or transaction does not involve controlling stockholders or a control group, are directors or officers of the corporation involved?
Step Three: Are the safe harbor requirements met?
Determine which directors and stockholders are disinterested.
Will the corporation rely on the fairness safe harbor?
The alert concludes with this reminder:
What if a conflicted transaction fails to qualify for a safe harbor? If a conflicted transaction fails to satisfy any of the safe harbor criteria, including the fairness fallback, the relevant directors, officers, controlling stockholders, and control group members may be exposed to liability, including monetary damages, for breaches of their fiduciary duties. Delaware courts will assess whether to impose liability based on the individual conduct of such corporate actors:
– For breaches of the duty of care, controlling stockholders benefit from §144(d)(5) exculpation, and directors and officers may benefit from similar exculpation under the certificate of incorporation, subject to limitations relating to bad faith, intentional misconduct, knowing violations of law, and receipt of an improper personal benefit.
– Breaches of the duty of loyalty cannot be exculpated and will result in liability if proven that the director, officer, or controlling stockholder acted in a self-interested manner adverse to stockholder interests, lacked independence, or acted in bad faith.
The §144 safe harbors are not exclusive protections and do not preclude other Delaware common law protections, including circumstances under which the business judgment rule is presumed to apply.
Michael Levin at The Activist Investor has been closely tracking US proxy contests since the universal proxy rules. He recently released these stats on the 2025 proxy season so far and committed to distributing weekly updates to his listserv through July. Here’s the data as of April 24:
Pending proxy contests: 29
Activist seeking:
– all available BoD seats: 14 companies
– majority of available BoD seats: 9 companies
– less than majority of available BoD seats: 4 companies
– single BoD seat: 2 companies
Completed proxy contests: 7
Activist gains:
– all available BoD seats: 2 companies – more than 1 BoD seats: 1 company – only 1 BoD seat: 1 company – no BoD seats: 3 companies
He also lists out all the new proxy contests added since his last update in March and the ones that have since been settled and abandoned.
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.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
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.