In a memorandum opinion from late April in Faiz Kahn v. Warburg Pincus, LLC (Del. Ch.; 4/25), the Chancery Court addressed claims relating to the acquisition of urgent care provider, CityMD, by an affiliate of Walgreens Boots Alliance. Specifically, the court dismissed claims by physician-cofounder minority members of CityMD that an amendment to CityMD’s LLC agreement eliminating the minority members’ tag-along right to participate in transactions on the same terms as CityMD’s PE-affiliated majority investors breached the implied covenant of good faith and fair dealing.
The urgent care provider’s limited liability company agreement gave minority members a tag-along right to participate in transactions on the same terms as private equity-affiliated members. The agreement permitted amendments to such rights if a vote of the affected member class was secured. It also waived fiduciary duties owed by the private equity affiliates and allowed them to act in their own interests.
The private equity affiliates negotiated disparate consideration for themselves in the merger. Thus, an amendment to the limited liability company agreement was required to eliminate the minority’s tag-along right. The requisite class vote was obtained after members received a detailed information statement.
About a year after the transaction closed, the minority members’ consideration lost value when Walgreens disclosed a $12.4 billion goodwill impairment charge due to downward revisions in the company’s forecast. Plaintiffs filed suit.
In dismissing the claims, Vice Chancellor Will states that the implied covenant is “a limited and extraordinary legal remedy” that only applies when the contract does not address the conduct at issue. Therefore, the first step in an implied covenant assessment is to determine whether the contract has a gap.
Here, the LLC Agreement explicitly addressed the matters at issue. It set out requirements to amend its terms—including the tag-along right—leaving no gap for the implied covenant to fill . . . the LLC Agreement contemplates amendments adversely affecting the rights of a particular class of units and outlines the steps required for approval of such amendments.
And because the LLC agreement waived fiduciary duties and permitted the WP investors to act in their own interests, it also “has no gap preventing the WP Investors from negotiating for disparate consideration—or undertaking an Amendment to permit it. By its very terms, the LLC Agreement allowed the WP Investors to put their interests ahead of Class B unitholders, so long as the WP Investors complied with the LLC Agreement’s terms.”
Here’s something John posted on TheCorporateCounsel.net late last week:
Texas has been getting most of the headlines in the DExit sweepstakes, but earlier this week, the Nevada legislature adopted amendments to the state’s corporate statute that provide a reminder that The Silver State is still a formidable competitor in the race to dethrone Delaware as the nation’s preferred jurisdiction of incorporation.
The most notable changes involve enabling Nevada corporations to adopt charter provisions waiving jury trials for stockholder lawsuits, and defining the fiduciary duties owed by controlling stockholders, establishing a procedure for cleansing transactions involving controlling stockholders, and limiting their liability. This excerpt from a Business Law Prof Blog on the amendments summarizes the changes affecting controlling stockholders:
Duties
The legislation also addresses controlling stockholder duties. The Nevada Business Law Section explains the change as providing:
that the only fiduciary duty owed by a controlling stockholder is to refrain from exerting undue influence over a director or officer with the purpose and proximate effect of inducing a breach of fiduciary duty by said director or officer that (a) results in liability under NRS 78.138 and (b) involves a contract or transaction where the controlling stockholder has a material and nonspeculative financial interest and results in a material, nonspeculative and nonratable financial benefit to the controlling stockholder.
Cleansing
The changes allow for disinterested directors to approve a transaction with a controlling stockholder, granting a presumption that there was no breach of fiduciary duty.
The proposed amendment further provides the presumption that there is no breach of fiduciary duty by a controlling stockholder if the underlying contract or transaction has been approved by either (1) a committee of only disinterested directors or (2) the board of directors in reliance upon the recommendation of a committee of only disinterested directors.
Liability
The legislation also gives controlling stockholders protection similar to the Nevada business judgment rule for officers and directors. It also notes that Nevada aims to “maintain Nevada’s competitive advantage as a leader in stable, predictable and common-sense corporate law.”
The amendments also address Delaware’s Activision-Blizzard decision by clarifying that Nevada directors do not need to approve “final” merger documents and allowing them to use their business judgment to decide when the documents are sufficiently “substantially final” for board approval.
This Debevoise article discusses compensation issues unique to take-private transactions — a “darling” among PE sponsors in recent years. In addition to the application of Section 280G, required compensation disclosure, “say on parachute” shareholder vote and treatment of outstanding public company equity awards, the alert highlights the need to understand — and address — possible exposure to executives departing and invoking “good reason” clauses for seemingly small changes in reporting structures post-closing.
Public company executives frequently have employment agreements or change-in-control severance plans entitling them to severance or benefits if they resign for “good reason” following a change in control. Common triggers include material reductions in salary or benefits; a substantial diminishment of the executive’s title, authority, duties or responsibilities; or requirements to relocate beyond a set distance. Severance at public companies is typically generous and pegged to levels higher than private companies.
Changes at a target company that naturally occur as a result of a take-private transaction may provide C-suite executives with the ammunition they need to invoke their “good reason” clause. For example, a CFO losing public company financial reporting and investor relations duties might point to a perception of diminished responsibility as a basis to resign and collect severance. Even when such claims are not ultimately valid, the mere assertion of those claims can be disruptive and potentially expensive to resolve.
PE buyers can mitigate this risk by reviewing and renegotiating “good reason” provisions before closing. Executives may be asked to waive any potential triggers tied solely to the shift from public to private status so that it is clear the transaction itself does not automatically allow an executive to walk away with severance. These discussions will often occur in connection with the negotiation of post-closing equity and other compensation arrangements, subject to the timing and disclosure considerations discussed.
Did you know we have an “Executive Compensation” Practice Area with resources relating to compensation issues in M&A (like this alert)? Check it out for more!
This alert from Squire Patton Boggs points out the increasing risk that US export control and sanctions laws present to both US and non-US targets — meaning increased successor liability and post-closing business continuity risks in the M&A context — as a result of US agencies using export control restrictions and economic sanctions as national security tools. The alert recommends a risk-based due diligence strategy on export controls and sanctions compliance depending on factors like the target’s industry, the applications for its products/services, its reliance on distributors or other business partners, activity in or with high-risk countries and the strength of the target’s compliance functions and provides a list of typical due diligence requests plus common representations and warranties that address related risk.
If a particular risk is identified, the alert says the acquirer may want to consider one or more of the following:
– Voluntary Self-Disclosure (VSD) – A VSD to the relevant US authority could be an option to address identified instances of potential violations (i.e., not just for high-risk areas, but for specific transactions). VSDs for potential violations are looked upon favorably in M&A and can result in reduced penalties or none at all. A VSD could be required before closing, which is best to mitigate an acquiror’s risks, but could create transaction timing issues. If submitted after closing, the VSD does not create timing issues for the transaction but would result in the acquiror assuming the risk of any penalties. This option is often used in conjunction with indemnity and insurance tools – see next bullets.
– Special Indemnity Agreement – This is a negotiated line-item indemnity to resolve potential violations identified in diligence. A special indemnity agreement could address the risk of penalties arising from a post-closing VSD strategy or, depending on the relevant statute of limitations, provide cover for the acquiror in case an investigation is launched.
– Representations and Warranties Insurance (RWI) – RWI products would protect the acquiror when violations are discovered post-closing in violation of a representation and warranty. This insurance product can be costly and also imposes a level of pre-closing diligence obligations that, if issues are identified, could result in exclusions from the coverage.
To sum it up — the alert encourages buyers to be more proactive on this issue — both in due diligence and in transaction planning/drafting.
Wachtell Lipton recently published the 2025 edition of its 234-page “Takeover Law and Practice” publication. It addresses recent developments in M&A activity, activism and antitrust, directors’ fiduciary duties in the M&A context, key aspects of the deal-making process, deal protections and methods to enhance deal certainty, takeover preparedness, responding to hostile offers, structural alternatives and cross-border deals. As always, the publication is full of both high-level analysis and real-world examples.
Here’s how the publication summarizes unsolicited M&A activity in 2024:
Hostile and unsolicited transactions accounted for approximately 11% of global M&A activity in 2024, compared to about 8% in 2023 and 10% in 2022. Two prominent examples of unsolicited M&A in 2024 were Alimentation Couche-Tard’s unsolicited $47 billion bid for Seven & i Holdings and Allen Media’s $30 billion unsolicited offer to acquire Paramount Global. Paramount ultimately agreed to merge with Skydance Media after facing a variety of bids.
Last year’s crop of unsolicited approaches broadly vindicated prior experience: serious, well-funded, fairly valued proposals can result in the sale of a target, generally to the highest bidder in a sale process. Opportunistic behavior typically is not rewarded, particularly when taken against companies that are well-prepared. Takeover preparedness remains critical in today’s M&A environment.
When a Delaware court concludes that dissident stockholders haven’t complied with a valid advance notice bylaw, it doesn’t usually give them another bite at the apple, but that’s what the Chancery Court did earlier this week in Vejseli v. Duffy, (Del. Ch.; 5/25). In that case, Vice Chancellor Bonnie David concluded that allowing the dissidents to resubmit their nominations was an appropriate remedy for actions by the board that inequitably interfered in the election process.
In an effort to thwart a proxy contest seeking to replace two members of the board of Ionic Digital, the company’s directors adopted a resolution reducing the size of the board to five and the number of directors to be elected at the company’s annual meeting to one. The board also rejected the dissidents’ nominees because of their failure to comply with certain informational requirements contained in Ionic’s advance notice bylaw. Applying the “Blasius minus” standard of review, Vice Chancellor David upheld the board’s decision to reject those nominations but concluded that the board breached its fiduciary duties when it reduced the number of directors up for election.
In fashioning a remedy, the Vice Chancellor determined that the dissidents were entitled to an injunction invalidating the board’s resolution reducing the size of the board & number of nominees. The defendants argued that the board should be able to fill the vacancy created by her decision, but she concluded that “[a] remedy that would permit the directors who breached their fiduciary duties to choose who will serve on the Board is no remedy at all” and opted to reopen the nomination window under the company’s advance notice bylaw.
The defendants argued that since the dissidents failed to comply with information requirements contained in the bylaw, they should be barred from resubmitting nominations during the new nomination period. Vice Chancellor David didn’t agree:
Under the unusual facts of this case, I disagree for two reasons. First, it is true that in most circumstances, Plaintiffs would not get a “do-over” after failing to comply with the Advance Notice Bylaw. But here, it is not Plaintiffs’ but the Board’s wrongful conduct that necessitates reopening the nomination window.
Second, the trial record does not support Defendants’ position that Plaintiffs intentionally “concealed” material information. . . Defendants offer no real reason why Plaintiffs should not be permitted to submit a new nomination notice during the reopened nomination window so that, with the benefit of full disclosure, Ionic’s stockholders, who have not been able to exercise their voting rights since the Company’s incorporation, can finally decide for themselves who should serve on the Board.
She also ordered Ionic to disclose the key aspects of the Court’s ruling to its stockholders, including the new date for its annual meeting and the order to reopen the nomination window.
There are always a lot of issues to keep in mind when negotiating termination fees, including most prominently the size of the fee, whether it is calculated by reference to enterprise or equity value, and the circumstances that will give rise to an obligation to pay the fee. This Debevoise article reviews current market practice surrounding termination fees and reverse termination fees. This excerpt addresses some things to keep in mind when negotiating the size of the fee:
Equity value is the typical metric, though there may be circumstances that warrant looking at enterprise value too. Relating the size of the break-up fee to equity value is the most common approach. However, the Delaware Court of Chancery in Lear and later in Cogent acknowledged that relating the fee to enterprise value could also be appropriate for transactions with highly leveraged targets, because most such acquisitions require the buyer to pay for the company’s equity and refinance all of its debt.
The typical size of termination fees is in the 2.0% – 3.5% range. Generally speaking, the most common range for termination fees is between 2.0% and 3.5% of equity value though negotiations may result in a termination fee outside of this range. In Houlihan Lokey’s most recent termination fee study, the smallest termination fee observed was 0.2% and the largest was 6.0%.6 The Delaware Court of Chancery has mentioned, while declining to decide the issue of whether a termination fee was coercive, that a 6.3% termination fee “seems to stretch the definition of range of reasonableness.” The average termination fee for deals announced in 2024 was 2.4% of equity value, slightly down from 2.5%, 2.7% and 2.9% in 2023, 2022 and 2021, respectively.
But, there is no bright-line test for reasonableness. Delaware courts have been clear that a purely formal, mechanical view based on percentage is not sufficient and there is no percentage that is per se acceptable. The reasonableness of the size of the termination fee will necessarily be informed by the specific deal dynamics. A target company board should take the same approach when assessing a termination fee proposal from a buyer.
The article notes that the reasonableness of a particular fee needs to be assessed holistically based on the facts and circumstances surrounding the deal, including the negotiating history, the parties’ relative negotiating strength, and the economic effect of other deal protection features, such as expense reimbursement obligations.
With the new HSR form imposing greater burdens on filers, companies may want to consider the advice in this Akerman memo, which outlines steps that companies can take in the ordinary course of business to ease the compliance burden. This excerpt offers some suggestions on managing and generating information about competitors, customers, and suppliers:
It is recommended that any list or comparison of competitors should include at least four competitors or should include a disclaimer that makes it clear that the competitors are examples and are not intended to be a comprehensive list of competitors.
When preparing an HSR filing for a transaction that involves competitors, the filing parties will be required to provide their top 10 customers. It is helpful to have an updated list of complete names and contact information for these top 10 customers.
Similarly, when preparing an HSR filing for a transaction that involves entities at different points of the same supply chain, the filing parties will be required to provide their top 10 customers and/or top 10 suppliers. It is helpful to have an updated list of complete names and contact information for these top 10 customers and customers.
The memo also has recommendations on data gathering and management practices for information about officers and directors, minority shareholders, prior acquisitions, revenue allocations based on NAICS codes, and plans or reports that analyze market shares, competition, competitors, or markets.
We’ve posted the transcript for our “2025 DGCL Amendments: Implications & Unanswered Questions” webcast. Our panelists – Gibson Dunn’s Julia Lapitskaya, Morris Nichols’ Eric Klinger-Wilensky, and Hunton Andrews Kurth’s Johnathon Schronce – provided their insights into this year’s controversial DGCL amendments. Topics addressed included an overview of the amendments, their implications for transactions with insiders, their impact on the books and records demand process, and some of the unanswered questions raised by the amendments.
Here’s a snippet from Eric Klinger-Wilensky’s comments on how these changes may influence the approach to preparing board and committee minutes addressing a potential transaction covered by the safe harbors:
I think you’re going to see more focus on, have there been sufficient allegations that the board or committee did not act in good faith or without gross negligence? I will tell you, we as a firm, I think, have a bunch of committees going on now, and I’m erring on the side of putting more in the minutes to really demonstrate everything the committee did. Probably would’ve been in the minutes anyhow but maybe a little bit more detail to talk about what the committee looked at.
Members of this site can access the transcript of this program. If you are not a member of DealLawyers.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
The Department of the Treasury’s Outbound Investment Security Program (OISP) — which became effective in January and requires notifications for or prohibits certain U.S. investments in Chinese companies — is now being actively enforced. Treasury inquiries have begun despite suggestions of reform in the America First Trade Policy memorandum and Bloomberg’s recent report that Treasury Secretary Scott Bessent spoke with Congress about developing clear outbound investment rules for China. Here’s more from this Cooley alert:
Treasury has been actively monitoring transactions for potential OISP violations and has begun reaching out to US investors that may have participated in a prohibited or notifiable transaction in violation of the OISP’s complex regulations. In just the first week of May, we have seen early OISP enforcement outreach, with Treasury sending multiple enforcement inquiries to US investor clients suspected of involvement in transactions implicating the OISP regime. […]
For those acquainted with the CFIUS post-closing (i.e., “non-notified”) inquiry regime, the OISP enforcement outreach regime will seem familiar. Indeed, the three-person team at Treasury administering the OISP enforcement regime are former CFIUS officials with deep experience in cross-border transaction dynamics. Additionally, the OISP team operates under the same management umbrella as CFIUS within Treasury’s Office of Investment Security.
The alert says that transacting parties need to consider OISP — even when an investment target doesn’t have obvious connections to China — and despite expectations that the OISP will change in the future. The memo says changes “are likely to broaden the scope of the OISP to cover additional technologies and industries (i.e., beyond the currently covered semiconductor, quantum computing and AI sectors)” but will hopefully also include more explicit “definitions and guardrails for transaction parties.”