When the FTC sued to enjoin Microsoft’s acquisition of Activision Blizzard (well-known for its popular Call of Duty video games), it argued that Microsoft would make the game exclusive to Xbox, diminishing competition with Sony’s PlayStation. In a May ruling in FTC v. Microsoft Corp., the Ninth Circuit affirmed the District Court’s denial of the FTC’s request to enjoin the merger, and the FTC subsequently dropped the related administrative litigation. Jody Boudreault of Baker Botts walks through the Ninth Circuit’s decision in an article for Bloomberg and offers suggestions for documenting and clearing vertical mergers subject to antitrust scrutiny, utilizing the dispositive factors outlined in the decision.
For example, the Ninth Circuit considered whether Microsoft was incentivized to foreclose external sales. In finding that it was not, it cited the importance of PlayStation sales to Call of Duty’s success (2x that on Xbox) and the fact that Microsoft could suffer reputational harm by removing Call of Duty from PlayStation.
Given those two important factors cited by the Ninth Circuit, the article suggests:
– That parties to vertical mergers use “deal assessment materials and future projections” to “carefully document business strategies and realistic post-merger plans involving third-party sales” and
– That parties to vertical mergers develop evidence of potential reputational risks from post-closing anticompetitive behavior.
It makes numerous other recommendations based on the Ninth Circuit’s reasoning.
On Wednesday, the Delaware Supreme Court issued its decision in In re Columbia Pipeline Group, Inc. Merger Litigation, (Del. 6/25), which reversed a Chancery Court ruling finding a buyer liable for $400 million in damages for aiding and abetting breaches of fiduciary duty by the target’s directors and officers.
In a 99-page opinion authored by Justice Traynor, the Court relied heavily on its recent Mindbody decision, which was issued after the Chancery Court’s Columbia Pipeline decision. The opinion notes that there are four elements that must be established in order to prevail on an aiding and abetting claim: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, (3) knowing participation in that breach of the defendants, and (4) damages proximately caused by the breach.”
The “knowing participation” element was the central issue in this case, and the Chancery Court held that this element could be established through constructive knowledge. Subsequently, Mindbody clarified that a plaintiff must show that the buyer had actual knowledge of both the breach itself and that its own conduct regarding the breach was improper (i.e., “culpable participation”) in order to establish knowing participation.
Justice Traynor said that the circumstances cited by the Chancery Court were insufficient to satisfy this actual knowledge requirement. As in Mindbody, the Court also concluded that aggressive bargaining tactics in the buyer’s own self-interest do not constitute the kind of culpable participation that can give rise to aiding and abetting liability:
[A]n aider and abettor’s participation in a primary actor’s breach of fiduciary duty must be of an active nature. It must include something more than taking advantage of the other side’s weakness and negotiating aggressively for the lowest possible price. Put another way, a bidder who has not colluded or conspired with its negotiating counterpart, who does not create the condition giving rise to a conflict of interest, who does not encourage his counterpart to disregard his fiduciary duties or substantially assist him in committing the breach, does not aid and abet the breach.
Similarly, as in Mindbody, the Court held that failures to comply with contractual obligations to notify the target of misstatements in its proxy materials were insufficient to establish the kind of substantial assistance to the breach contemplated by the knowing participation requirement:
Our analysis of a claim that a buyer aided-and-abetted disclosure breaches by a seller, however, is not a question of whether the buyer breached its contractual obligation alone. Instead, we evaluate whether the buyer’s conduct constitutes “substantial assistance” in the seller’s disclosure breaches. “Substantial assistance” in this context extends beyond “passive awareness of a fiduciary’s disclosure breach that would come from simply reviewing draft Proxy Materials.”
The Court said that in order to establish that the buyer provided substantial assistance, the plaintiff had to demonstrate that the buyer “knew that its failure to abide by its contractual duty to notify [Columbia] of potential material omissions in the Proxy Materials was wrongful and that its failure to act could subject it to [aiding-and-abetting] liability.” In other words, “the knowledge that matters for the second prong of [the knowing participation element] is knowledge that the aider and abettor’s own conduct wrongfully assisted the primary violator in his disclosure breach.”
Last week, Meredith blogged about the Chancery Court’s decision to grant motions to certify certain constitutional questions relating to SB 21 to the Delaware Supreme Court. A recent AO Shearman blog reports that the Court has accepted both questions certified to it. This excerpt specifies the questions that the Supreme Court will review and where things go from here in these proceedings:
Plaintiffs moved for certification of two constitutional questions concerning the amendments to Section 144 of the DGCL by SB21, specifically: (i) whether the elimination of the Court of Chancery’s ability to award “equitable relief” or “damages” in circumstances where the safe harbor is met violates the Delaware constitution by purporting to divest the court of its equitable jurisdiction, and (ii) whether the retroactive application of SB21 “violate[s] the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested.”
A briefing schedule will be set this week, indicating that the Delaware Supreme Court is moving quickly to resolve questions around SB21. Perhaps indicating the judiciary’s desire for clarity, stays have been issued in several cases currently pending before the Court of Chancery where similar constitutional questions are implicated.
A recent Paul Hastings memo discusses spin-offs as a potential alternative for biotech companies to unlock value. While the memo focuses on that industry, much of its discussion of the key legal and business considerations associated with a spin-off applies to companies in any industry considering such a transaction. This excerpt addresses some of the issues that need to be addressed when considering how to separate the businesses and employees involved in the transaction:
Planning for a spin-off involves identifying assets and liabilities to be separated, allocation of employees, identifying and addressing shared assets and contracts, consents, waivers, notices and possibly transition services agreements.
If the businesses to be separated are tightly integrated or are expected to have significant business relationships following the spin-off, it could take more time and effort to allocate assets and liabilities, identify personnel that will be transferred, separate employee benefits plans, obtain consents relating to contracts and other rights, and document ongoing arrangements for shared services (e.g., legal, finance, human resources and information technology) and continuing supply, intellectual property sharing and other commercial or operating agreements.
Other topics addressed include tax matters, intellectual property and licensing, legal and contractual considerations and public company considerations.
For an M&A blogger, the earnout litigation following Alexion Pharmaceuticals’ 2018 acquisition of Syntimmune is one of those gifts that keep on giving. We’ve already blogged about Vice Chancellor Zurn’s 2021 decision to deny Alexion’s motion to dismiss the case and her 2024 post-trial opinion finding that Alexion had breached its obligations under the earnout provisions of the merger agreement. Last week, in Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch.; 6/25), the Vice Chancellor turned her attention to the issue of damages.
If you decide to tackle this opinion, bring your calculator, because it’s as math-heavy a piece of work product as I’ve seen this side of NASA. A lot of that math was necessary to lay out and assess both sides’ arguments concerning the probability that specific earnout payment milestones would be achieved. Vice Chancellor Zurn concluded that the strongest probability evidence was derived from Alexion’s own estimates of the probability of technical and regulatory success of Syntimmune’s experimental drug made shortly before the breach.
Vice Chancellor Zurn then calculated each earnout milestone’s expected payment by weighting the amount of the milestone payment by its probability of achievement. Regrettably, more math ensued. When it was finally “pens down,” the Vice Chancellor determined the present value of expected milestone payments based on their expected payment dates and then applied an annual discount rate to certain milestone payments. Adding it all up, she concluded that Syntimmune’s stockholders were entitled to pre-interest damages in the amount of $180,944,915.32.
Yeah, I’m sorry that the preceding paragraph isn’t exactly a model of clarity. I’m doing the best I can here, but complex mathematical calculations aren’t exactly in my wheelhouse – the “C” I got in Calculus my freshman year in college remains my proudest academic achievement! So maybe the best way for me to exit from this blog is to say that I think the most important takeaway from Vice Chancellor Zurn’s opinion is her view of how the customary “expectation damages” measure for breach of contract claims should be approached when dealing with earnout milestones.
Citing the Chancery Court’s recent decision in Fortis Advisors v. Johnson & Johnson, (Del. Ch.; 9/24), the Vice Chancellor concluded that when a buyer’s breach of its efforts obligation made earnout milestones impossible to achieve, the expected value of those milestone payments at the time of the breach should be calculated by weighting each milestone by the proven likelihood it would be achieved:
SRS’s injury is best understood as the lost expected value of each milestone as compared before and after Alexion’s breach of its CRE Obligation. As in Fortis, an expected value approach reflects the theory behind expectation damages, which aim to put “the nonbreaching party in as good a position as he would have been in had the contract been performed, and no better.”
Compensating for lost expected value, rather than with full value whenever earnout payments are likely and zero value whenever earnout payments are unlikely, strives to hit the mark on the parties’ reasonable expectations, rather than award windfalls for some promisees and goose eggs for others.
In a speech on June 4 at the George Washington University Competition and Innovation Lab Conference, Deputy Assistant AG Bill Rinner addressed how the Antitrust Division of the DOJ will approach merger review. While he stressed a commitment to robust enforcement, he also emphasized that the Division does not view dealmaking with inherent suspicion.
This Troutman Pepper Locke Regulatory Oversight blog lists these key takeaways for how the Division plans to handle merger reviews:
– The Antitrust Division has a strong preference for structural remedies or divestitures, not behavioral remedies, and it will “welcome” parties’ proposals to divest to third-party buyers – fix-it-first proposals.
Where structural remedies are more complicated and involve ongoing commercial entanglements inherent to the industry, the agency would consider use of strong monitoring and enforcement mechanisms.
Divestiture buyers will be rigorously reviewed to ensure that they have the incentive and ability to replace lost competition in every way, including product or service quality.
– It will not use its merger enforcement authority as leverage to get relief from the parties not related to the harm to competition that allegedly flows from the transaction itself.
– Second requests will only be issued where the Antitrust Division has merger-related concerns, not to build a civil or criminal conduct investigation.
– The agency will be transparent with parties about where it has concerns so that the parties can focus their advocacy on addressing those concerns.
– The Antitrust Division will not send letters to parties suggesting that an investigation is ongoing and if the parties proceed with the transaction, they will “close at their own risk.”
– The agency will seek judicial sanctions where parties systematically abuse legal privilege or withhold or alter documents required by the HSR Act.
In two decisions last spring, the Supreme Court overruled Chancery Court decisions that had dismissed challenges to transactions on the basis that MFW‘s conditions were met. In both cases, the Supreme Court found that certain undisclosed conflicts of interest involving financial advisors were material and held that the stockholder vote approving the deal was not fully informed, so defendants’ motion to dismiss fiduciary duty claims should be denied. The second of those decisions was in City of Sarasota Firefighters Pension Fund v. Inovalon Holdings (Del.; 4/24). Just this week, Chancellor McCormick addressed the defendants’ supplemental motions to dismiss raised on remand — including that the claims should be dismissed because defendants are entitled to exculpation — in City of Sarasota Firefighters Pension Fund v. Inovalon Holdings (Del. Ch.; 6/25).
In denying the motion to dismiss on this basis, Chancellor McCormick found that it was reasonably conceivable that defendants failed to disclose the advisor conflicts and exaggerated another advisor’s role in market outreach knowingly and in bad faith. In so finding, she points to the significance of this information in the eyes of the Supreme Court to support an inference that it is reasonably conceivable the defendants withheld information from the proxy statement to make the process look better.
The defendants argued that it was unreasonable to infer bad faith because “’it took a review by the Supreme Court . . . to clarify that such facts were material.’ If the trial court did not view this information as material, how can one fault the Committee Defendants?” The Chancellor acknowledged that this was a fair question but said it ignores the law in the case. The Supreme Court determined the information was material, and it is reasonably conceivable that the defendants withheld it knowingly, which is enough to state a non-exculpated claim.
Jasper Street’s latest newsletter highlights notable activist campaigns that went to a vote in May, including those at Phillips 66, WEX, Harley-Davidson, US Steel, and NHI. It shares the following key takeaways from these campaigns:
Governance Still Drives Outcomes: ISS’s support for Elliott at Phillips 66 was heavily governance-focused. Boards must address entrenchment, refreshment, and independent leadership proactively and with an objective lens.
Passive vs. Active Dynamics Matter: The Phillips 66 vote was a clear example—passive investors backed management, while actives backed Elliott. Companies must recognize that governance concerns flagged by ISS and Glass Lewis can resonate with actives, but passive investors often hesitate to back a full dissident slate.
Withhold Campaigns Can Be Equally Dangerous: The WEX and Harley-Davidson outcomes show that withhold campaigns are powerful tools that can force change at companies targeted by activists. Shareholders can voice their frustration en masse, sometimes leading to immediate change or these campaigns build momentum for future contests—even without immediate director turnover, they send a clear message.
It’ll be interesting to see if there is a corresponding increase in proxy contests next year, with “vote-no” campaigns — possibly to, as Andrew Freedman of Olshan said, “test the waters and perhaps consider a contest next year” — on the rise.
Late last month, John blogged about the Delaware Chancery Court’s decision in Vejseli v. Duffy, (Del. Ch.; 5/25) in which Vice Chancellor David upheld a board’s rejection of dissidents’ nominees but allowed the dissidents to resubmit their nominations after concluding the board breached its fiduciary duties when it reduced the number of directors up for election. This Fried Frank alert discussing the decision provides some related practice points for boards considering nomination notices. Here are some of the suggestions:
– A board should understand and be able to articulate the specific corporate purpose for which it rejects a nomination notice. Even if rejection of a nomination notice may be legally permissible on the basis that it does not comply with the company’s advance notice bylaw requirements, the rejection also must be equitable—that is, done for the purpose of advancing a legitimate corporate purpose, and not for pretextual, selfish, or disloyal reasons.
– When considering a nomination notice, a board should consider whether the notice complies with the requirement that all agreements relating to the nomination must be disclosed. Given the court’s focus in Ionic on the validity and importance of this requirement for an informed stockholder vote, a board evaluating a nomination notice should carefully consider what its advance notice bylaw requires with respect to disclosure of agreements and whether the requirement has been met.
– Boards should consider specifying in an advance notice bylaw that recently terminated agreements and surviving provisions of terminated agreements must be disclosed. Even if (as in Ionic) the bylaw does not so provide expressly, the board should consider whether non-disclosure of such agreements or provisions renders the nomination notice at issue non-compliant.
– A board should make governance changes on a “clear day” when possible. Such actions, even if defensive in nature, will be reviewed under the business judgment rule. If such actions are defensive, affect the stockholder franchise, and are not adopted on a clear day, then enhanced scrutiny under the Coster standard will apply instead.
– There remains an open issue as to how broadly the Coster standard applies. It has not been clear whether the Coster standard applies only to board responses taken on a “rainy day” when they relate to the election of directors or issues touching on control—or, instead, as may be suggested by certain language in Coster, it applies to all stockholder votes. As Coster and Kellner, and now Ionic, all have involved elections of directors, the question remains unanswered.
Shortly after SB 21 was signed into law, John blogged about the possibility of constitutional challenges to the legislation — which soon thereafter became reality. Shortly after that challenge was filed, on May 6, a shareholder plaintiff filed a derivative claim challenging the fairness of an asset purchase transaction that closed in April 2024 between Clearway Energy and its majority stockholder. The transaction was approved by a committee of directors determined to be independent by the company’s board under NYSE listing standards, but not by vote of the shareholders.
In that case, before defendants answered or filed a motion to dismiss, plaintiff moved to certify certain questions of constitutional law to the Delaware Supreme Court, which Vice Chancellor Will granted late last week. The motion was unopposed and stated:
– The Constitutional Questions are of first instance in this State and relate to the constitutionality, construction or application of a statute of this State which has not been, but should be, settled by the Supreme Court . . .
– Answering the Constitutional Questions now will minimize uncertainty for transaction planners seeking to design transactions to take advantage of Senate Bill 21’s revisions to [Section] 144 (the “Safe Harbor Provisions”) and provide clarity for stockholders with potential fiduciary claims affected by Senate Bill 21.
Here are the questions to be addressed by the Delaware Supreme Court if cert is accepted:
– Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?
– Does Section 3 of Senate Bill 21— applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?
I think (please reach out if you know otherwise!) that this is the first case where cert was granted to address constitutional challenges to SB 21. For those interested, Anthony Rickey of Margrave Law is posting on LinkedIn regularly about SB 21 — and tracking cases involving challenges to the legislation.