I’ve previously blogged about the Delaware Supreme Court’s decision in Fort Myers Gen. Empl. Pension Fund v. Haley, (Del. 7/20), and the Chancery Court’s decision in In re Dell Technologies Class V Stockholders Litigation, (Del. Ch. 5/20). While the issues raised in those cases were different, they shared one important thing in common – the plaintiffs’ allegations focused on actions taken after the initial announcement of the proposed transactions.
That’s the aspect of the cases that this Cooley blog addresses, and it says that both cases provide important lessons about the need for fiduciaries to exercise their duties throughout the deal process. Here’s an excerpt:
Section 141(a) of the Delaware General Corporation Law imbues boards with the unique authority to manage or direct the affairs of a corporation. An important corollary to that statutory authority is the bedrock principle under Delaware law that directors are fiduciaries to the corporation and its stockholders.
Two recent Delaware cases serve as reminders that fiduciaries must continue to exercise care in discharging their duties throughout the life of a deal — that is, as it is often put, directors’ and officers’ fiduciary duties are unremitting. In the M&A context, most breach of fiduciary duty cases assert claims that arise at the time the board approves the entry into the definitive transaction document.
In that setting, it is well understood that such decisions require the directors to act with the utmost care, on an informed basis and in the best interests of the corporation and its stockholders. However, the decisions in Fort Myers v. Haley and the Dell Stockholders Litigation involved breach of fiduciary duty claims stemming from actions taken after the initial announcement of the proposed transactions. These opinions show that, in situations where parties renegotiate deal terms in response to stockholder opposition of the original terms, plaintiffs (and thereby the court) will scrutinize the process that led to the board’s decision to approve the revised deal terms.
The blog reviews both decisions and identifies key takeaways from each. It notes that the cases underscore the importance of officers and directors keeping the full board or special committee informed of material developments, engaged in the process of renegotiating any material terms post-signing, and ensuring that the board or committee is ultimately in control of the process throughout the transaction.
This WilmerHale memo discusses a recent federal court decision that addresses a variety of attorney-client privilege issues arising out of the antitrust merger review process. Here’s the intro:
Few lawyers would question the need to keep their clients apprised of negotiations with enforcers, particularly where merger approval hinges in the balance. A recent federal district court ruling, however, serves as a reminder that privilege protection is not a given for a lawyer’s factual updates to her client.
The ruling also addresses other frequent privilege issues in merger reviews, including the scope of the common interest exception to privilege waiver and antitrust lawyer involvement in public communications. The opinion helpfully acknowledges a common legal interest among parties to an agreed merger but takes a more conservative— and arguably draconian—approach to other privilege questions that can arise in merger review.
The case is Chabot v. Walgreens Boots Alliance, Inc., 2020 U.S. Dist. LEXIS 107547 (M.D. Pa. Jun. 11, 2020). Unfortunately, there is no free version of the decision available online. So, it looks you’ll have to head to a database to find it – or you can just read the memo, which is pretty comprehensive.
Unless you’ve been living under a rock for the last several weeks, you’re well aware of President Trump’s efforts to first ban, and then compel the sale of, the popular TikTok app. This Crowell & Moring memo looks at one aspect of this situation – the Executive Order issued last Friday that compels ByteDance to unwind the 2017 deal in which it acquired TikTok:
Citing the existence of credible evidence that ByteDance, Ltd.’s (ByteDance) 2017 acquisition of Musical.ly “threatens to impair the national security of the United States”, the President issued an Executive Order on August 14, 2020, ordering ByteDance to divest all of its interests in the mobile application TikTok within 90 days.
Specifically, the order prohibits the 2017 acquisition along with any ownership interests in Musical.ly by ByteDance. Further, it directs ByteDance to divest all interests in “any tangible or intangible assets or property, wherever located, used to enable or support ByteDance’s operation of the TikTok application in the United States” and “any data obtained or derived from TikTok application or Musical.ly application users in the United States.”
Following divestiture, ByteDance must certify in writing to the Committee on Foreign Investment in the United States (CFIUS) that it has destroyed that data as well as any copies of that data wherever located. CFIUS may require an audit to ensure destruction of the data.
The memo says that the President’s action highlights the risk that CFIUS may determine to investigate a transaction post-closing. That’s a rare event, but CFIUS can initiate a review of a “non-notified” transaction at any time, and that post-closing review may result in divestiture. In contrast, deals that are filed with and cleared by CFIUS enjoy a safe harbor from subsequent CFIUS review. There’s a lesson in there somewhere. . .
In 2015, the DGCL was amended to expressly prohibit the use of fee-shifting bylaw provisions in connection with internal corporate claims, but are contractual fee-shifting arrangements also prohibited? That’s the issue the Chancery Court recently confronted In Manti Holdings, LLC, et al. v. Authentix Acquisition (Del. Ch.; 8/20).
If the name of this case sounds familiar, it may be because the Chancery Court has already issued a notable decision in this litigation. Vice Chancellor Glasscock previously held that a contractual “drag” right that effectively waived appraisal rights was enforceable under Delaware law. In this go-round, the issue was whether, having prevailed in that litigation, the company could enforce the stockholder agreement’s “loser pays” provision. As Steve Quinlivan’s recent blog on the case explains, Vice Chancellor Glasscock rejected the argument that the fee-shifting arrangement violated Delaware law:
The Petitioners noted that our law observes a hierarchy of authority for documents concerning shareholder rights: the DGCL comes first, then the charter, then the bylaws, then contracts. Provisions in lower-order documents cannot trump those in higher-order documents. The Petitioners pointed to the fee-shifting prohibitions of §§ 102(f) and 109(b), and argued based on these sections that enforcing a “loser pays” provision in a contract between a corporation and stockholders violates the hierarchy described above and is thus unenforceable.
The Court rejected this argument noting nothing in the plain language of §§ 102(f) or 109(b) prohibited the fee-shifting Respondent sought to enforce. The plain terms of these sections referred only to certificates of incorporation and bylaws and not to contracts.
In addition, the Court noted the expressed legislative intent shows that stockholder agreements were specifically carved out from these statutory prohibitions. The Bill synopsis provided for § 102(f) and § 109(b) of the DGCL states that those statutes are “not intended, however, to prevent the application of such [fee-shifting] provisions pursuant to a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.”
The fact that the fee-shifting provision applied to an appraisal rights waiver was also important. The Vice Chancellor noted that the case didn’t involve an underlying allegation of breach of fiduciary duty, which was the legislature’s apparent focus in prohibiting fee-shifting in charters and bylaws.
Contractual reliance disclaimers can be helpful in precluding fraud claims based on non-contractual statements, but as the Delaware Chancery Court’s decision in Agspring Holdco v. NGP X US Holdings, (Del. Ch. 7/20), illustrates, the language of the contractual reps & warranties themselves can give rise to fraud claims. Here’s the intro from this Fried Frank memo:
At the pleading stage of litigation, the court found it reasonably conceivable that: (i) the portfolio company officers deliberately concealed from the buyer a steep decline in Agspring’s earnings before and after the signing and closing in December 2015; (ii) as a result of the earnings decline, certain of Agspring’s representations and warranties in the sale agreement and a related financing agreement were false when made; and (iii) not only the portfolio company officers, but also the PE-seller, knew or were in a position to know that the representations were false.
In denying the defendants motion to dismiss, the Chancery Court found that the defendants alleged conduct implicated the portfolio company’s representations concerning material contracts & the absence of a MAE. The memo notes that Chancellor Bouchard’s decision is also a reminder that a PE-seller can be liable for fraudulent representations made by its portfolio company in an agreement even if it is not a party to the agreement.
This is a case that seems to have very bad facts – the target’s earnings didn’t just decline, they fell off a cliff (less than $1 million v. $33 million projected). What’s more, the decline allegedly was deliberately concealed by the target’s officers and the buyer was provided repeatedly with reassurances about the target’s performance. Still, the Court appears to have taken a pretty liberal approach to the allegations that the conduct in question made the reps false when they were made.
For example, the Chancellor found allegations that the downward earnings spiral was sufficient to make a representation that “to the knowledge of Agspring, no event has occurred or circumstance exists…[that may] result in a breach of or default under any Material Contract” potentially fraudulent. But the default in question occured nearly three years after the closing, when Agspring started missing payments on a debt obligation that was a material contract under the terms of the agreement.
The memo lays out a number of practice points arising out of the decision, including suggesting that sellers consider seeking some novel protections – such as contractually limiting “the parties against which fraud claims could be made, the timeframes for making them, the subject matters to which they could relate, and/or the responsibility for payment of the fees and expenses incurred in defending them unless the buyer prevails in the litigation.”
I’ve blogged a lot about R&W Insurance, and with good reason – it’s become a central part of the deal process for private company M&A. But until now, I haven’t seen a resource that provides a solid answer to the most fundamental question about these policies: do the insurers pay the claims that are made under them?
Lowenstein Sandler surveyed nearly 150 representatives of buyers & sellers of R&W insurance in an effort to gain an answer to that question – and its recent report on that survey’s results says the answer is a qualified “yes”:
While R&W policies have proliferated, a key question remains unanswered: Do insurers actually pay the claims? The answer is “yes”–with some caveats. A common hurdle to clear is incurring a loss that exceeds the SIR. Our survey revealed that more than two-thirds of all respondents said that all the claims fall within the retention and therefore do not result in payment by insurers.
For claims that do exceed the retention, our survey confirmed that R&W policies provide value to buyers. Indeed, the data shows buyers are able to negotiate with insurers to secure at least partial payment for the vast majority of claims that exceed the SIR.
According to the report, 87% of respondents said at least a partial payment was negotiated for all R&W claims that exceeded the self-insured retention. The report also offers buyers practical guidance to consider when presenting a claim under an R&W policy. If you’ve ever dealt with an insurance company, you probably won’t be surprised to find that one of the key pieces of advice is don’t take “no” for an answer:
Our survey reveals that R&W insurers routinely issue knee-jerk claim denials, but those denials are the beginning, not the end, of the conversation. Ultimately, by challenging an early disclaimer of coverage, most buyers are able to turn the denial into a claim payment.
Over on “M&A Law Prof Blog,” Boston College’s Brian Quinn has linked to a collection of animated M&A training materials put together by Rick Climan & Keith Flaum. As a fan of shows like Rick & Morty, Archer & Bojack (and someone who’s even known to still tune in to The Flintstones from time-to-time), I’ve always thought these were terrific training tools, and Prof. Quinn agrees. Check them out – you may learn something.
By the way, I think the animated likenesses of Rick & Keith are well done, but in case we ever opt for cartoons here on DealLawyers.com, I won’t need anyone to draw one of me. If you’ve seen my Twitter avatar, you already know I’m a dead ringer for Sir Topham Hat from “Thomas the Tank Engine.”
The FTC & DOJ published their HSR Act Annual Report last month, and it discloses that while HSR second requests rose during 2019, the percentage of deals challenged declined significantly. Here’s an excerpt from this Perkins Coie memo on the report with some of the highlights:
In fiscal 2019, a total of 2,089 transactions were reported under the HSR Act, which is just a 1% decrease from the 2,111 transactions reported in fiscal 2018. In 2019, the FTC and the DOJ investigated about 12% of reported transactions in which a Second Request could be issued, a slight decrease from the number investigated in fiscal 2018.
Of the transactions investigated, about 26% resulted in the issuance of Second Requests, a 63.6% increase over the 16% reported in fiscal 2018. Where Second Requests were issued, there was a decrease in the number of transactions which resulted in an abandoned or restructured deal, a consent decree requiring the parties to divest assets, or litigation in federal district court, 62.3% compared to 87% in fiscal 2018.
The memo advises companies considering a deal that’s likely to raise agency concerns to address potential anti-competitive concerns with counsel during the preparation of their HSR filings & engage with regulators as soon as possible during the waiting period.
This Debevoise memo takes a look at the SPAC recently launched by Bill Ackman’s Pershing Square Capital, and notes that in addition to being the largest SPAC IPO of all time ($4 billion), the terms of the deal differ from those found in the typical SPAC template. Here’s an excerpt addressing some of those deviations:
– No Founder Shares. In a striking deviation from customary terms, Pershing Square is foregoing the typical 20% “promote”, consisting of founder shares provided to the sponsor for nominal consideration. Instead, Pershing Square will purchase warrants, at their fair market value, that are not transferrable or exercisable until three years after the closing of the initial business combination. Typically, sponsor warrants are exercisable 30 days after closing of the initial business combination. The Pershing Square Tontine warrants may represent only 5.95% of the post-business combination company and are only exercisable at a 20% premium.
This structure is less dilutive to stockholders than the typical founder share structure and, according to the prospectus, Pershing Square believes “this incentive structure is better aligned with our stockholders and potential merger partners.” However, it is important to note that Pershing Square holds 100 shares of Class B common stock (as opposed to the Class A shares offered in the IPO), with each share of Class B common stock carrying a number of votes such that, in the aggregate, the 100 shares of Class B common stock held by the sponsor have the voting power of 20% of the issued and outstanding common stock of Pershing Square Tontine immediately following the IPO.
– Non-detachable Warrants. In another significant departure from typical SPAC structure, an investor that elects to redeem its shares in response to the acquisition transaction entered into by the SPAC must also give up 2/3 of the warrants the investor received along with its SPAC shares. Traditionally, an investor kept all of its warrants if it redeemed its shares, leading to arbitrage opportunities for investors who could redeem their shares, recouping their original investment, and hold onto their warrants. This type of arbitrage opportunity still exists with Pershing Square Tontine, but its attractiveness is significantly diminished by the reduced number of warrants a redeeming stockholder will hold.
– “Tontine” Warrants. Pershing Square Tontine provides an additional incentive to stockholders to not redeem their shares in connection with the SPACS’s initial business combination. Not only do redeeming shareholders lose their warrants, but all warrants received by the company from redeeming shareholders will be put into a pool to be distributed pro rata to the shareholders who do not redeem their shares. The name “Tontine” is a reference to a 17th century investment plan into which investors contributed capital in exchange for their pro rata shares of an annuity payment, with each surviving investor’s share of the payment increasing as other investors died. Like the 17th century investment plan, this structure rewards those who remain.
The memo notes that there has generally been little variation in standard SPAC terms, but the Pershing Square deal appears to have engaged in a “major rewrite” of those terms that seems to have “turned the market on its head overnight.” These changes, which were intended to better align the interests of founders with those of investors, were favorably received by the market. Pershing Square’s SPAC closed up 6.5% on its first day of trading, and its shares traded as high as 9% above the IPO price that day.