DealLawyers.com Blog

Books & records demands under Section 220 of the DGCL are becoming more frequent, and Delaware courts have proven willing to expand the boundaries of the inspection rights provided to stockholders under that statute. This Cleary Gottlieb blog says that the Chancery Court’s decision in Pettry v. Gilead Sciences, (Del. Ch.; 11/20), continues this trend, and introduces a new element of risk that companies need to consider when considering their response to these requests – the possibility of an award of attorneys’ fees to the plaintiff. Here’s an excerpt:

In reaching her decision, Vice Chancellor McCormick decried what she viewed as the “massive resistance” by defendant corporations generally to Section 220 demands and criticized what the court viewed as the company’s “overly aggressive defense strategy” in this case as “epitomiz[ing] a trend” of defendants “increasingly treating Section 220 actions as surrogate proceeding[s] to litigate the possible merits of the suit and plac[ing] obstacles in the plaintiffs’ way to obstruct them for employing it as a quick and easy pre-filing discovery tool.”  In light of these concerns, Vice Chancellor McCormick sua sponte granted leave for plaintiffs to seek an order compelling the company to pay their attorneys’ fees in pursuing the Section 220 case.

The memo goes on to say that it is uncertain whether the threat of fee-shifting will be raised in other cases, and that while the Vice Chancellor suggested that fee-shifting might be applied in other cases, her reasoning suggests that the remedy should be limited to fee shifting should be limited to extreme cases where the company assumed an overly aggressive litigation posture – “such as “taking positions for no apparent purpose other than obstructing the exercise of Plaintiffs’ statutory rights.”

– John Jenkins

We’ve all been waiting for the courts to provide some guidance on pandemic-related deal terminations. Last week, the Delaware Chancery Court became the first court to weigh-in with a decision on a fully litigated case.  In his 242-page opinion in AB Stable VIII v. Maps Hotels, (Del. Ch.; 11/20), Vice Chancellor Laster addressed some of the most pressing issues raised by these busted deals. His opinion will likely influence the way other courts analyze how the pandemic’s impact on a seller – and the seller’s response to it – implicates contractual MAE clauses and ordinary course covenants in acquisition agreements.

The case arose out of a September 2019 deal between the buyer, a subsidiary of Mirae Asset Financial Group, a Korean conglomerate, and the seller, a subsidiary of Anbang Insurance, under the terms of which the buyer was to acquire Strategic Hotels & Resorts, an Anbang subsidiary that owns a portfolio of luxury hotels.  The buyer sought to terminate the transaction based on allegations that the seller had experienced a “Material Adverse Effect” due to the pandemic, and that the dramatic actions the seller took in response to the pandemic violated its obligation to conduct its business only in the ordinary course, consistent with past practice.

Ultimately, the Vice Chancellor held that the seller did not suffer an MAE due to an applicable pandemic-related carve-out, but that its breaches of the ordinary course covenant & other contractual obligations gave the buyer the right to walk away from the deal. As this Fried Frank memo notes, there’s a lot more to take away from the decision than just the bottom line result. Here’s an excerpt with some of the highlights:

Based on the decision, it appears that the court may, more readily than had been expected, find that a target company’s responses to the pandemic constituted a breach of an ordinary course covenant. The decision highlights that sellers and target companies should seek to ensure that an ordinary course covenant is specifically drafted to provide sufficient flexibility for the target company to respond to extraordinary events so that such responses do not breach the covenant and trigger a right by the buyer to terminate the deal.

Based on the language of the ordinary course covenant in this case–which required that the business be operated “only in the ordinary course consistent with past practices in all material respects” – the court held that the only relevant issue was whether Strategic, after entering into the agreement, “substantially deviated” from its “customary and normal routine of managing [its] business.” It was irrelevant, the court stated, whether Strategic’s responses to the pandemic were reasonable or were similar to other companies’ responses. The court specifically rejected the Seller’s arguments that an ordinary course covenant permits a target company to engage in “ordinary responses to extraordinary events” and that Strategic had “operated in the ordinary course of business based on what is ordinary during a pandemic.”

The decision confirms that the court continues to interpret MAE clauses narrowly as a general matter. Although the MAE definition did not specify an exception for effects arising from “pandemics” (or “epidemics”), the court concluded that the specified exception for “calamities” encompassed the COVID-19 pandemic. The decision is thus in line with the court’s long tradition of not finding the occurrence of an MAE (with Akorn, decided in 2018, being the only case we know of in which the court has ever found that an MAE occurred).

The panelists in our “M&A Litigation in the Covid-19 Era” webcast suggested that sellers dealing with the pandemic’s impact were more likely to face issues under an ordinary course covenant than an MAE clause, and Vice Chancellor Laster’s decision is consistent with that view. The Vice Chancellor made it clear that “ordinary course” covenant is viewed independently from the MAE clause unless the two are explicitly linked.  As this excerpt from Fried Frank’s memo points out, that means that some actions that don’t give rise to an MAE may still result in a violation of the ordinary course covenant:

Thus, we would note, the anomalous result that can obtain (as it did in this case) that a buyer that has agreed (in the MAE clause) that certain specified extraordinary events will not provide a basis for an MAE nonetheless may be excused from closing based on the target company’s responses to the event constituting a breach of the ordinary course covenant (even though those responses may be dictated by the circumstances and thus largely non-volitional).

In considering this point, it’s useful to keep in mind that the Vice Chancellor was interpreting an “ordinary course” covenant drafted prior to the onset of the pandemic. As I blogged earlier this year, dealmakers are already revising the standard language of that covenant in order to address the realities of business life during the pandemic.

If you’re interested in learning more about this decision, then be sure to tune-in for our December 16th webcast – “Covid-19 Busted Deal Litigation: The Delaware Chancery Court Speaks!”  Our panel is comprised of some of the litigators who argued & won the AB Stable Value case, and they’ll provide first hand insights on the decision along with key takeaways for deal lawyers.

–  John Jenkins

Activist Insights’ recent publication, “Proxy Fights 2020,” provides a variety of perspectives on avoiding, preparing for, contesting & winning proxy fights in the age of activism. Contributors include law firms, proxy solicitors, investor communications firms and other advisors. Here’s an excerpt with some thoughts from Vinson & Elkins about whether companies should always take the high road when dealing with activist proxy contests:

Should companies take the high road, whatever an activist does?

No. While companies are generally expected to take the high road and to refrain from ad hominem attacks, there are certainly times where it behooves boards to respond aggressively or even to instigate proactive communication to shareholders. For example, companies must develop a plan to respond directly to each of an activist’s criticisms about business performance and the bona fides of board members and management. Oftentimes, such criticisms are meritless and companies should make this clear in a swift, direct, and deliberate fashion.

As another example, certain activists have a tendency to spin false narratives about a board’s willingness to engage with shareholders. Indeed, if there’s a good story for the board to tell about constructive engagement, it is critical for companies to expeditiously and decisively correct groundless activist timelines by pointing to facts to discredit activists and calling them out for being untruthful. If companies do not respond with strength and conviction in such  circumstances, they could appear weak in the eyes of shareholders, as well as Institutional Shareholder Services (ISS) and Glass Lewis, whose support will be critical to achieve a successful outcome.

– John Jenkins

This SRS Acquiom memo addresses some of the more novel post-closing scenarios that have arisen in M&A transactions as a result of the Covid-19 pandemic.  Here’s an excerpt on some of the issues associated with the NOL carryback provisions of the CARES Act:

One of the many ways the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) helps businesses is by allowing taxpayers to carryback net operating losses (or “NOLs”) up to five years from taxable years 2018, 2019 and 2020. This is potentially a great benefit for companies that want to spread the losses from COVID-19 to prior tax years and hemorrhage a bit less cash in 2020. One of the unexpected outcomes, though, is a surge in tax return amendments regarding target companies which were recently acquired

Most merger agreements are silent on who should reap the benefits of pre-closing tax benefits that are received post-closing. Of those which are not silent, most deal specifically with the straddle-year return, and not potential amendment of prior tax years. As a result, it is unclear and to what extent the sellers should benefit from a tax amendment regarding the preclosing period.

Outcomes vary. In deals where the agreement is silent on pre-closing tax benefits, we have reached deals with buyers regarding a potential split of the benefit. We have also allowed buyers to reap the benefit in exchange for other benefits for the sellers, such as an early escrow release.

The memo notes that buyers are not incentivized to go through the expense of amending returns in deals where the sellers are entitled to all pre-closing tax benefits, and that this has led to SRS Acquiom reaching out to start a discussion and offer to pay for the work directly.  Other pandemic-related post-closing issues addressed in the memo include earnouts, deal litigation and stock settlements.

– John Jenkins

Today’s blog comes from Prof. Samuel Thompson, Director of Penn State Law School’s Center for the Study of M&A. Prof. Thompson has written a new book titled, “The Deal Lawyer’s Weapons in the War on COVID-19.”  and his blog provides an introduction to that work:

This article first introduces my recently published PLI book, The Deal Lawyer’s Weapons in the War on COVID-19 (Weapons), which is a supplement to my five-volume PLI treatise: Mergers, Acquisitions and Tender Offers (MATO).  The article then briefly discusses and elaborates upon valuation issues addressed in Weapons.

After the introductory chapter, Weapons proceeds as follows.  Chapter 2, Congress’s Fiscal Policy COVID-19 Initiatives: The PPP and Treasury Financial Assistance, introduces the CARES Act with a focus on the Paycheck Protection Program (PPP) and Treasury Financial Assistance provisions.

Chapter 3, The Fed’s Monetary Policy and Bank Regulatory COVID-19 Initiatives, looks at both conventional and non-conventional monetary policy responses to this crisis by the Federal Reserve Board (Fed). Many of the Fed’s non-conventional responses are similar to measures it took in the Financial Crisis of 2007-2008.

Chapter 4, Corporate, Securities and Stock Exchange COVID-19 Initiatives, addresses several state corporate law issues and SEC rules and regulations, including (1) state law fiduciary duties applicable to directors in a crisis, (2) corporate and SEC rules governing shareholder virtual meetings, (3) SEC disclosures, and (4) modifications in the NYSE’s shareholder voting rules.

Corporate and stock exchange issues are addressed in chapters 2 through 5 of MATO, and securities issues are addressed in chapters 6 through 8 of MATO.

Chapter 5, The DOJ’s and FTC’s Antitrust COVID-19 Initiatives, starts with a quick review of the applicable antitrust and pre-merger notification laws, and then addresses both procedural and substantive antitrust issues arising from this crisis.  The substantive issues include merger enforcement, competitor collaborations, and the legality of price gouging.

Substantive antitrust merger enforcement is addressed in chapter 12 of MATO, and Hart-Scott-Rodino pre-merger notification is addressed in chapter 13 of MATO.

Chapter 6, Congress’s and Treasury’s Federal Income Tax COVID-19 Initiatives, discusses several tax related provisions of the CARES Act, including (1) the modification to the net operating loss (NOL) carryback and carryover rules, (2) the Employee Retention Credit for Employers, and (3) the delay in the payment of the Employer Payroll Tax.

For more general detail, chapter 9 of MATO addresses domestic federal income tax issues in M&A; chapter 21 deals with such issues in inbound cross-border M&A; and chapter 22 addresses such issues in outbound M&A.  Chapter 23 of MATO addresses state tax issues in M&A.  My two volume PLI treatise, The Business Taxation Deskbook, contains chapters dealing with all aspects of the federal income taxation of business transactions.

Chapter 7, Cross Border Inbound and Outbound COVID-19 Initiatives, looks at both (1) COVID-19 related issues facing foreign firms when investing in the U.S. and (2) COVID-19 issues facing U.S. firms when investing or operating abroad.  The focus from an inbound perspective is on activities of the Committee on Foreign Investment in the U.S. (CFIUS), which, in certain cases, has the power to block an acquisition by a foreign firm of a U.S. target.

From an outbound perspective, the focus is principally on the European Union’s (EU’s) (1) investment restrictions, (2) State Aid rules, and (3) antitrust enforcement.  While the focus is on the EU, the principles the EU employs in responding to COVID-19 could be similar to principles followed by non-EU countries.

Chapter 19 of MATO addresses corporate, securities and other issues relating to inbound M&A, and chapter 20 addresses such issues from an outbound perspective.

Chapter 8, Investment Banker’s Valuation COVID-19 Initiatives, starts with a brief review of the discounted cash flow (DCF), comparable companies, and comparable transactions valuation techniques.  The chapter then illustrates how these concepts are applied by investment banking firms in valuing targets in M&A transactions.  The chapter also briefly addresses issues involved in valuing companies in financial distress, such as bankruptcy.

Valuation issues are addressed generally in chapter 11 of MATO, and I am currently working on a new PLI book dealing with valuation in M&A transactions that will build on that chapter.

Immediately after this introduction to Weapons in this Section II, I turn in Section III to a brief discussion of some post-publication valuation issues presented by the COVID-19 crisis.

Chapter 9, The Deal Lawyer’s Contract Drafting COVID-19 Initiatives, focuses on one of the principal responsibilities of a deal lawyer: preparing an agreement to address the client’s needs.  The focus is on the drafting of acquisition agreements in the context of the COVID-19 crisis, including issues involving the material adverse change or effect clause.  This topic is generally addressed in chapter 2 of MATO.

Finally, Chapter 10, The Deal Lawyer’s Bankruptcy Law COVID-19 Initiatives, provides a brief introduction to some of the bankruptcy law concepts that are likely to be of significance in addressing the increasing number of COVID-19 generated bankruptcies, such as the bankruptcy of Hertz.  Bankruptcy issues are addressed generally in chapter 16 of MATO.[1]

Periodic updates to Weapons will be posted on the Penn State Law website beginning in January 2020.

As discussed above, Chapter 8 of Weapons addresses valuation issues presented by the COVID-19 crisis.  When addressing valuation issues in M&A and related transactions, deal lawyers, investment bankers, and other professionals should be aware of the writings of Professor Aswath Damodaran, a professor of finance at the NYU Stern School of Business.  I have been fortunate to use Professor Damodaran’s book entitled Investment Valuation in my Merger Finance and Economics MBA course at Penn State’s Smeal School of Business.  I have also looked at several of his many other books on corporate finance and valuation, including Narrative and Numbers: The Value of Stories in Business.

Interestingly and uniquely, Professor Damodaran makes the recordings and materials for his NYU classes available on his NYU webpage: Damodaran Online at http://pages.stern.nyu.edu/~adamodar/.  In addition, Professor Damodaran has a blog entitled Musings on Markets, which is available at http://aswathdamodaran.blogspot.com/2020/.

As indicated in Chapter 8 of Weapons, Professor Damodaran has published several insightful posts on his Musings and Markets blog addressing various valuation issues arising out of the COVID-19 crisis.

As of November 16, 2020, there are 14 posts, each with the introductory words A Viral Market Meltdown, and the posts were made between February 26, 2020 and November 5, 2020.  The November 5 posting, which is entitled A Viral Market Update: A Wrap on the COVID Market, Premature or Not! (COVID Wrap Post)[2] explains: “In this post, I intend to wrap up this series with a final post, reviewing how value has been reallocated across companies during the months, and providing an updated valuation of the S&P 500.”  Since the COVID-19 crisis is not yet over, I hope that this is not Professor Damodaran’s last Viral Market Meltdown post.

In chapter 8 of Weapons, I discuss various aspects of Part I, February 26, 2020, through Part VII, May 13, 2020, of the Viral Market Meltdown posts.  In the balance of this post, I address some of the highpoints of the Part XIV, November 5 COVID Wrap Post, as they relate to the valuation of the market generally.

This COVID Wrap Post gives the following succinct description of the way in which the stock market has moved from before the crisis in February 2020 and through early November 5, 2020:

The year began auspiciously for US equities, as stocks built on positive performance in 2019 (when it was up more than 30%) and continued to rise. In fact, on February 14, US equities were are at all-time highs, when news of the virus encroaching into Europe and then rapidly expanding across the world caused stocks to go into a tailspin that lasted just over five weeks. On March 23, 2020, amidst talk of doomsday for stocks, momentum shifted, with some credit to the Fed, and stocks went on a run that extended through the end of August, recovering almost all of the ground lost during the meltdown. In September and October, stocks were choppy with more bad days than good, as investors recalibrated.[3]

Can you see the V-shape in these market moves: High; Dramatically Down; and Dramatically Up?  Economists debate whether the recovery will be V-shaped.

In his COVID Wrap Post, Professor Damodaran has an interesting observation on the performance during the COVID-19 crisis of the FANGAM stocks (i.e., F Facebook, A Amazon, N Netflix, G Alphabet—Google, A Apple, and M Microsoft).  He reports:

Updating the numbers through November 1, here is how these six companies have performed over the crisis, relative to the rest of the market: [T]he FANGAM stocks have added $1.25 trillion in aggregate market cap since February 14, while all other US equities have shed $1.32 trillion over that period. If the market has almost fully recovered from its early swoon, the credit has to go almost entirely to these six companies.[4]

After this post, on November 5, both (1) Pfizer and its partner BioNTech, and (2) Moderna announced that they had produced coronavirus vaccines that were 90% and 94.5% effective, respectively.  As explained in an article in the Wall Street Journal, as this post was written on November 16, 2020, the market had the following reaction to this vaccine news:

The Dow Jones Industrial Average hit a new all-time high on Monday after a second set of upbeat test results from a potential Covid-19 vaccine lifted shares of companies that have been walloped by the pandemic.

The index of blue-chip companies rose about 315 points, or 1.1%, to 29795 in recent trading, after touching an intraday record of 29,942.88. The climb put the Dow within striking distance of the 30000 mark—a milestone that the index has neared but never reached.

Gains were wide-ranging. Shares of several tech stocks rallied alongside banks, retailers, oil companies and travel stocks. The S&P 500 rose 0.6% after settling Friday at a new record high. The Nasdaq Composite rose 0.3%.[5]

Professor Damodaran provides the following three “Lessons Learned, Unlearned, and Relearned” during the COVID-19 crisis:

• Respect markets, even if you disagree with them: Markets are not all knowing and they are definitely not efficient, but they are extraordinary platforms for conveying a consensus view of the future. While you and I may disagree with the market view, and markets can be wrong, it behooves us all to at least try and understand the message that it delivers.
• Time to move on: For many managers and investors, the COVID crisis is a reminder, sometimes in painful terms, that we are now well into the 21st century and continuing to use tools, techniques and metrics that were developed and tested on 20th century data is a recipe for disaster. That was the underlying message in my posts on value investing from last month.
• Importance of Flexibility: If you look across what companies that have done well during this crisis share in common, it is flexibility, with companies that can adapt quickly to new circumstances improving their odds of winning. In the same vein, it seems self-defeating for companies to borrow too much or lock themselves into paying large dividends, since both reduce their capacity to respond quickly to changed circumstances.[6]

Let’s hope that Professor Damodaran keeps the COVID-19 Lessons coming!

[1] Ngu Huu Truong, a May 2020 LLM graduate and current SJD candidate at Penn State Law, is my co-author of chapters 9 and 10.

[2] Aswath Damodaran, A Viral Market Update: A Wrap on the COVID Market, Premature or Not! [hereinafter COVID Wrap Post].

[3] Id.

[4] Id.

[5] Caitlin McCabe, Mischa Frankl-Duval, and Frances Yoon, Dow Hits New High After Positive Moderna Vaccine Results, Wall St. J. (Nov. 16, 2020).

[6] COVID Wrap Post, supra.

An excerpt from Prof. Thompson’s new book will appear in the next issue of our Deal Lawyers print newsletter.

– John Jenkins

We’ve seen quite a few high profile Covid-19 busted deal cases  that started out in litigation end up with a negotiated resolution. That’s not unusual; after all, many buyers use the threat of an MAE out as leverage to reopen valuation discussions. But in a recent blog, Alison Frankel raises an interesting question: “If both parties know the endgame is revised deal terms or a negotiated breakup fee why go through the expensive rituals of litigation? Wouldn’t it be more efficient to skip the whole litigation detour and go straight to settlement talks?”

Alison acknowledges that many deals do get renegotiated without litigation, but she asked a number of experts about why companies resort to litigation. These include former Delaware Chief Justice Leo Strine, Tulane Prof. Ann Lipton, and Widener Prof. Larry Hamermesh. Here’s an excerpt with their responses:

For buyers, the threat of MAE litigation is leverage, especially after Delaware Chancery Court ruled for the first time, in 2018’s Akorn v. Fresenius, that an acquiring company was entitled to walk away from a deal because the target had experienced an MAE. “It’s a way to force the target to the bargaining table,” said Lipton, the Tulane prof, by email. “The target may not want to roll the dice or live with prolonged uncertainty even if the odds are in its favor.”

Delaware law professor Hamermesh said that just bringing an MAE case can be a boon to buyers if the target’s business continues to decline. Litigation, he said, extends uncertainty for the company being acquired. That can mean extra pressure on the operating business, which might work to the buyer’s benefit in renegotiations of the deal price. “Time is on the buyer’s side,” he said.

Judges might not be thrilled about buyers using their courts more for leverage than to obtain actual decisions on their claims, Hamermesh said. Interestingly, though, longtime Delaware jurist Strine suggested in an email that court deadlines in MAE proceedings can force buyers to “face reality.” Strine noted that MAE provisions – which he calls “renegotiation clauses” – often lead to peaceable re-pricing agreements. But when the buyer and seller end up in court, Strine said, “the guarantee of a prompt trial and, as important, swift resolution to appeals limits the time for games playing.”

Shareholder pressure also factors into the mix. If a buyer’s shareholders feel the price is too rich, it may feel compelled to press an MAE claim in court. On the other hand, a seller’s board may fear shareholder suits if it agrees to price concessions without compelling the buyer to bring a lawsuit seeking to terminate the deal.

Of course, not every lawsuit ends up in a renegotiated deal. Earlier this week, Vice Chancellor Laster issued his opinion in AB Stable VIII v. Maps Hotels, (Del. Ch.; 11/20), in which he held that, although a seller did not suffer an MAE due to an applicable pandemic-related carve-out, its breaches of the ordinary course covenant & other contractual obligations gave the buyer the right to walk away from the deal. I’ll blog more about the case later, but it’s one of the Vice Chancellor’s 200+ page specials, so I’m still digesting it.

– John Jenkins

We have posted the transcript for our recent webcast – “Doing Deals Remotely.”

– John Jenkins

In In re TerraForm Power, Inc. Stockholder Litigation, (Del. Ch.; 10/20), the Chancery Court refused to dismiss claims alleging that a company’s board & controlling shareholder breached their fiduciary duties by engaging in a private placement of stock to the controller at an inadequate price.

The plaintiffs’ allegations arose out of the company’s issuance of stock to the controlling stockholder in a private placement. The offering was conducted in order to finance an acquisition proposed by the controller, and was allegedly underpriced. The controller’s ownership interest in the company increased from 51% to just over 65% as a result of the transaction. The plaintiffs were minority shareholders and  originally asserted both direct & derivative claims, but the derivative claims were dismissed after the controlling shareholder acquired the company’s remaining shares in a merger. 

Vice Chancellor Glasscock’s decision in this case addressed the direct claims. This excerpt from a recent Shearman blog on the case discusses his reasoning:

The Delaware Supreme Court’s decision in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), generally sets the framework for distinguishing between “derivative” and “direct” claims. That decision held that the determination “must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” In order to plead a “direct” claim under Tooley, a “stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”

Thus, as Vice Chancellor Glasscock explained, claims that the corporation improperly transferred value to a third party are “not regarded as direct” because the dilution of value of the corporation’s stock “merely” reflects the “reduction in the value” of the entire corporation itself.

According to the Vice Chancellor, “[t]his rationale extends even where a controlling stockholder allegedly causes a corporate overpayment [to itself] in stock and consequent dilution of the minority interest.” This is because “the worth of the stockholder’s interest is reduced to the extent the entity was harmed.” In other words, “[t]he harm is suffered by the entity, and restoring value to the entity would make both it and, derivatively, its stockholders, whole.” Therefore, under the “classic” Tooley framework, the claims alleged by plaintiffs in this case would be “derivative”—rather than “direct”—and thus subject to dismissal for lack of standing.

Nevertheless, the Vice Chancellor denied the motion to dismiss because the Delaware Supreme Court upheld nearly identical claims in Gentile, which was decided two years after Tooley. Specifically, in Gentile, the Delaware Supreme Court found that breach of fiduciary duty claims for the alleged issuance of stock to a controlling stockholder for inadequate value could be maintained by former stockholders as “direct” claims even though they no longer had standing to assert “derivative” claims.

The Vice Chancellor Glasscock noted that Gentile v. Rossette has been subject to a great deal of criticism, but said that as a trial court judge, he was bound by the Delaware Supreme Court’s precedent & that, as such, Gentile required him to conclude that the direct claims in this case must survive the motion to dismiss.

But that may not be the end of the standing issue in this case. That’s because the Vice Chancellor followed up his opinion with a letter opinion granting a motion for an interlocutory appeal to the Delaware Supreme Court. As this excerpt notes, the issue to be addressed in the appeal is whether Gentile continues to be good law:

Again, in light of case law questioning the continued vitality of Gentile at the trial court level, and in light of criticism at the Supreme Court level, I find it in the interest of justice that the matter be available for review by the Supreme Court at this Motion to Dismiss stage.

– John Jenkins

Part of the fallout from the pandemic has been an acceleration of a global trend toward tighter regulation of foreign direct investments.  This Simpson Thacher memo highlights the latest example of this trend – pending legislation in the U.K. that would ratchet up that nation’s regulatory scrutiny of FDI. Here’s the intro:

On November 11, 2020, the Parliament of the United Kingdom (“U.K.”) introduced the National Security and Investment Bill of 2020 (the “NSI Bill”) to modernize the U.K.’s foreign direct investment (“FDI”) screening process and strengthen its ability to investigate and intervene in transactions targeting U.K. businesses. The NSI Bill imposes mandatory notification requirements to the U.K. Department of Business, Energy and Industrial Strategy (“BEIS”) for transactions involving investments in U.K. businesses operating in certain strategic sectors, a regime that will apply to investors from any foreign country.

In the broader context, the NSI Bill is reflective of a global trend of tightening FDI screening in many major economies, including the United States, European Union member states, and Australia, among others. Particularly in the era of COVID-19, numerous countries around the world have implemented or expanded national security-focused FDI regimes designed to protect domestic businesses involved in sectors affecting national security and public order. International investors, including private equity sponsors and multi-national corporations engaged in cross-border transactions, should consider and analyze as part of their routine transaction diligence the plethora of new obligations arising pursuant to these changes, and in particular, the forthcoming rules in the United Kingdom.

– John Jenkins

Chancellor Bouchard’s recent decision in In re Baker Hughes Inc. Merger Litigation, (Del. Ch.; 10/20), illustrates the potential hazards faced by corporate officers due to the fact that, under Delaware law, exculpatory charter provisions apply to directors only.  In this case, that resulted in the target’s CEO being the sole remaining defendant in a lawsuit in which fiduciary duty and aiding & abetting claims against the target’s board and the buyer were dismissed.

The case arose out of the 2017 merger of Baker Hughes and General Electric’s oil & gas business. The plaintiffs alleged that Baker Hughes’ directors and officers breached their fiduciary duties and that GE aided and abetted that breach.  The plaintiffs also alleged that the Corwin doctrine should not apply to the lawsuit due to the target’s failure to disclose in its proxy statement the unaudited financial information about GE’s oil & gas business that the board relied upon in authorizing the transaction.

Chancellor Bouchard agreed with the plaintiffs’ contention that the unaudited financials should have been disclosed in the proxy statement, and that Corwin therefore did not apply.  However, he nevertheless dismissed fiduciary duty claims against the Baker Hughes’ board premised on allegations that they failed to satisfy their obligations under Revlon, as well as aiding and abetting claims against GE.

The claim against the target’s CEO, however, was a different story.  The Chancellor noted that the plaintiffs’ alleged that the CEO breached his duty of care in preparing the proxy statement, noting that the CEO signed both the proxy statement & the buyer’s Form S-4 registration statement.  He concluded that this allegation was sufficient to permit the plaintiffs’ claim to survive a motion to dismiss:

Although not overwhelming, this allegation is sufficient to support a reasonably conceivable claim that Craighead breached his duty of care with respect to the preparation of the Proxy he signed as Baker Hughes’ CEO. This is so, in my view, given the importance of the Unaudited Financials—the only source of GE O&G historical financial information available to Baker Hughes before it signed the Merger Agreement—and given the categorical obligation in Section 5.04(c) of the Merger Agreement to attach the Unaudited Financials to the Merger Agreement.

Chancellor Bouchard observed that further discovery might demonstrate that the failure to attach the unaudited financials to the proxy statement was inadvertent or handled by advisors upon whom the CEO reasonably relied, but that these factual questions could not be resolved on the pleadings.

This isn’t the first case in which directors were able to avoid fiduciary duty claims – despite the inapplicability of Corwin – due to charter provisions eliminating their liability for breaches of the duty of care.

– John Jenkins