If a Delaware corporation adopts an exclusive forum bylaw, does that mean its controlling shareholder has consented to jurisdiction in Delaware if it gets sued? According to Vice Chancellor Laster’s recent decision in In re Pilgrim’s Pride Derivative Litigation (Del; 3/19), the answer to that question is yes – at least in certain situations. This excerpt from this recent Morris James blog explains:
Stockholders that control Delaware corporations find themselves subject to fiduciary duties. According to this Court of Chancery decision, in certain situations, they also might find themselves subject to personal jurisdiction in Delaware in connection with the controlled-corporation’s adoption of a Delaware forum-selection bylaw. Past Delaware cases have found that, by expressly consenting to a Delaware forum for disputes, parties may also be deemed to have impliedly consented to personal jurisdiction here. But this decision is the first to find implied consent by a controlling stockholder through the controlled-corporation’s adoption of a forum-selection bylaw.
The blog notes that VC Laster emphasized the fact-specific nature of his holding. The company adopted the forum-selection bylaw on the same day that it approved a $1.3 billion acquisition of a business from its allegedly cash-strapped parent. The bylaw’s language specifically covered any fiduciary duty claim against a stockholder of the company, and a majority of the members of the board that adopted it were officers of the controller or its affiliates.
Stay tuned to this case – as this Dechert memo observes, in the portion of his opinion addressing the appropriate standard of review, the Vice Chancellor suggested the possibility of further evolution in the standard applicable to controlling shareholder transactions:
Although both parties assumed that the operative standard of review would be entire fairness, Vice Chancellor Laster suggested of his own accord that there could be another way aside from the MFW framework in certain controller transactions to lower the standard of review to the business judgment rule.
Citing to an article by Lucian Bebchuk and Assaf Hamdani, the Court proposed that if a transaction is approved by directors who are not only independent, but who are nominated and can be removed by the minority stockholders—whom the article describes as “enhanced-independence directors”—the transaction should qualify for the more lenient business judgment rule standard of review.
Seyfarth Shaw recently published the 2019 edition of its “Middle Market M&A SurveyBook”, which analyzes key contractual terms for more than 160 middle-market private target deals signed in 2018. The survey focuses on deals with a purchase price of less than $1 billion. Here are some of the highlights:
– Approximately 37.5% of non-insured deals surveyed provided for an indemnity escrow. The median escrow amount in 2018 for the non-insured deals surveyed was approximately 10% of the purchase price, with approximately 83% of the non-insured deals having an indemnity escrow amount of 10% or less, but only about 16% of the non-insured deals having an indemnity escrow amount of 5% or less.
– Approximately 55% of the insured deals surveyed provided for an indemnity escrow. The median escrow amount in 2018 for the insured deals surveyed was approximately 0.9% of the purchase price. The vast majority of insured deals had an indemnity escrow amount of less than 5% and, of those deals, nearly 94% had an escrow amount of 0.5%.
– Approximately 83% of non-insured deals had a survival period for reps & warranties of between 12-18 months, while approximately 9% of those deals provided that reps & warranties would not survive the closing.
– Approximately 70% of insured deals had a survival period for reps & warranties of between 12-18 months, but nearly 27% of insured deals provided that reps & warranties would not survive closing.
– Approximately 90% of non-insured deals surveyed provided for an indemnity basket. Of the non-insured deals providing for an indemnity basket, approximately 31% were structured as threshold/tipping baskets, and approximately 69% were structured as a deductible. This was generally consistent with past years (76% in 2017, 72% in 2016, and 75% in 2015 used a deductible).
– Approximately 73% of insured deals surveyed provided for an indemnity basket, compared to approximately 81% in 2017. The relative infrequency of indemnity baskets in insured deals versus non-insured deals is likely due to the increase in “no survival” deals when insurance is used, and therefore a basket is not relevant. Of the insured deals providing for an indemnity basket, approximately 8% were structured as threshold/tipping baskets, and approximately 92% were structured as a deductible, an increase from 2017 (86%).
The survey also covers other indemnity-related provisions, carve-outs from general survival provisions, fraud exceptions & definitions, and governing law provisions.
This McKinsey memo addresses the importance of a well-designed communications program to the success of an M&A transaction. Here’s the intro:
Structured communications play a critical role in mergers by preventing the distractions that often accompany them and could even damage the existing businesses. In addition, the communications plan lays a foundation for the combined organization’s future success. It is one of the few merger workstreams that go “live” immediately, as soon as merger conversations begin. The communications team announces the deal and then helps to develop, engage, and manage integration planning and execution.
A strong communications strategy and plan promote business continuity by ensuring that the right messages are communicated and reinforced to minimize the anxiety of employees, boost morale, and retain talent. They also convey the combined organization’s future vision and strategy to key stakeholders—both internal and external, including customers, regulators, vendors, and employees. In this way, the plan builds momentum and enthusiasm for the merger and corrects any misinformation and myths that might arise about it.
The communications plan is a vital tool to inform and influence stakeholders before transactions close, so it is critical to start early and get the message right, both before and after the close.
The memo reviews the role of communications across the deal’s timeline, from due diligence through post-closing integration, and outlines a process to build a communications strategy, to execute & monitor that strategy, and to improve communications about the deal.
This Richards Layton memo reviews this year’s proposed amendments to the Delaware General Corporation Law. Here’s an excerpt summarizing the proposed changes:
If enacted, the 2019 amendments to the General Corporation Law would, among other things
– add new provisions relating to the documentation of transactions and the execution and delivery of documents, including by electronic means, and make conforming changes to existing provisions;
– significantly revise the default provisions applicable to notices to stockholders under the General Corporation Law, the certificate of incorporation or the bylaws, including by providing that notices may be delivered by electronic mail, except to stockholders who expressly “opt out” of receiving notice by electronic mail;
– consistent with the foregoing, update the provisions governing notices of appraisal rights and demands for appraisal;
– update the procedures applicable to stockholder consents delivered by means of electronic transmission;
– clarify the time at which a unanimous consent of directors in lieu of a meeting becomes effective; and
– make various other technical changes, including with respect to incorporator consents and the resignation of registered agents.
The amendments, with the exception of those relating to appraisal rights, would be effective on August 1, 2019. The amendments to Section 262 (appraisal) would be effective for merger agreements entered into on or after August 1, 2019.
My recent blog about the Rent-A-Center case noted that the company’s claim for a $126.5 million reverse termination fee remains pending in the Chancery Court. This Cleary Gottlieb blog addresses why we should pay close attention to the Court’s decision on that part of the case.
The blog points out that reverse termination fees don’t carry the kind of fiduciary duty baggage associated with seller termination fees, and are simply a matter of contract. They are often sought by sellers if the parties anticipate that antitrust regulators will either oppose the deal or require significant divestitures or demand other remedies unacceptable to the buyer.
Vintage is likely to counter Rent-A-Center’s emphasis on the terms of the contract with an argument that the fee is an unenforceable penalty. This excerpt says that the consequences of a decision in favor of Vintage could have a significant impact on how parties address antitrust risk going forward:
Should the court side with Vintage on this issue, it could potentially lead sellers to demand more express commitments from buyers in terms of offering specific divestitures and behavioral remedies to the agencies rather than relying on the stick of a large reverse termination fee coupled with a general obligation to use commercially reasonable efforts or reasonable best efforts to obtain clearance. In addition, sellers may be reluctant to proceed with a transaction involving heightened antitrust risk.
While the Delaware courts have never addressed the issue of whether a reverse termination fee involves a penalty, the issue of whether a breakup fee cast as a liquidated damages clause involved a penalty was addressed at length by the Delaware Supreme Court in Brazen v. Bell Atlantic, 695 A.2d 43 (Del. 1997). Although a lot of water has gone under the bridge on deal protections since that case, the Court’s analysis of the penalty issue may be relevant in this case as well.
This Locke Lord memo suggests that a recent Delaware case may be reason for PE fund representatives on portfolio company boards to take a closer look at their D&O coverage exclusions. Here’s the intro:
In a case with implications for director and officer protections, and of particular relevance to principals of private equity firms, the Delaware Superior Court recently denied two former directors coverage under a D&O insurance policy. In Goggin v. National Union Fire Insurance Company of Pittsburgh, the Court construed a “capacity” exclusion in the policy to exclude coverage of an underlying claim that arose out of the directors’ positions as investors in the company, despite the fact that their alleged misconduct was a breach of their duties as directors and thus on its face eligible for coverage.
Goggin and Goodwin were investors in U.S. Coal Corporation beginning in 2007 and 2008, becoming directors in 2009 and remaining in that position until their resignations in 2014 and 2012, respectively. During their terms as directors, in an attempt to reinvigorate the failing U.S. Coal via debt repurchases and other recapitalization activities, they formed two investment vehicles for which they acted as manager or investor. Shortly after U.S. Coal entered bankruptcy in 2014, suit was brought alleging that Goodwin and Goggin breached their fiduciary duties and committed other acts for their own personal benefit.
The carrier disputed coverage, contending that the claim was attributable to actions taken by the directors in their capacity as investors, not as directors. The Court applied a “but for” test & held that because the fiduciary duty claims would have failed but for their roles with the investment vehicles, the carrier was off the hook. The blog notes that exclusions like these can significantly impact PE investor/directors during down round financings or in other distressed situations involving portfolio companies.
This morning, the Delaware Supreme Court will hear oral arguments in the appeal of Vice Chancellor Laster’s decision in the Aruba Networks appraisal case. The proceedings are scheduled for 10:00 am EDT, and will be livestreamed if you’re interested in checking them out. If you’d like to get up to speed on the case, I’ve blogged about Aruba Networks several times here and over on “John Tales” – and you should also check out this recent blog from Steve Hecht & Glen McGillivray.
After all these years, the scariest movie I’ve ever seen remains “The Exorcist” – and I’ve seen it a lot, because one of my high school teachers had a part in it & he wasn’t shy about finding excuses to show it to us. Reading law blogs doesn’t typically send a chill down my spine like The Exorcist does, but there’s one exception – Weil’s “Global Private Equity Watch.” Glenn West & his colleagues have a knack for coming up with scenarios involving seemingly inconsequential oversights that can turn into disasters.
This time, they’ve chosen a topic that is inherently terrifying – the perils of texts & emails. And the blog warns that when it comes to those kinds of communications between PE Funds’ representatives on portfolio company boards, there’s a lot to be scared about. Here’s an excerpt from the intro:
Unlike communications among the private equity firm’s professionals concerning the status and performance of its investment in a portfolio company, communications among two or more board members serving on behalf of a private equity firm regarding their actions as board members may constitute “books and records of the company” for which any other director may, with a proper purpose, demand the right to inspect under Section 220 of the Delaware General Corporation Law.
In this modern age, of course, those communications can include any of the various forms of electronic communications and social media now available, including text messages (by mobile carriers or via social media) and emails. And it matters not that those communications may have been sent through your or your firm’s phone, or on your firm’s email server or your private email account. Understanding this fact may cause some pause before pressing send on a text message to your colleague and fellow board member concerning another board member’s approach or competence in considering an appropriate course of action for the company.
Directors’ rights to inspect books & records are much broader than shareholders’ rights – a director with a proper purpose has a virtually unfettered right to access the company’s books & records. The blog points out that in a recent decision involving the dispute between “Papa John” Schnatter & Papa John’s Pizza, the Delaware Chancery Court held that if directors use personal accounts and devices to communicate about corporate matters, they should expect to produce such information to the company.
Anybody who’s received communications from PE directors opining on their fellow board members will quickly realize what a horror show a books & records request might just turn out to be.
Francis Pileggi recently blogged about a Delaware Superior Court decision holding that claims for attorneys’ fees arising out of a breach of a merger agreement didn’t accrue until after the Delaware Supreme Court ruled on the underlying breach of contract claim & the defendants refused to pony up. Here’s an excerpt:
A recent decision by the Complex Commercial Litigation Division of the Delaware Superior Court in Winshall, et al. v. Viacom International, Inc., (Del. Super.: 2/19), ruled that a claim for indemnification was not ripe until a final adjudication, after appeal, was decided. In a matter involving a claim for indemnification for attorneys’ fees based on a finding of a breach of a merger agreement by the Court of Chancery, which was affirmed by the Delaware Supreme Court, the Superior Court held that a subsequently filed indemnification claim was not barred by the statute of limitations because the claim did not become ripe until the affirmance by the Delaware Supreme Court. See Slip op. at 17-19.
In contrast, the court dismissed the plaintiff’s claims for indemnity for taxes and diminution in value based on the defendant’s delay in making contractual earnout payments. Unlike the claim for legal fees, the court held that these claims accrued at the time the applicable provisions of the merger agreement were breached, and that the statute of limitations on them had run.