This Wachtell memo discusses the Delaware Chancery Court’s recent decision in Nguyen v. Barrett, which makes it clear that if a plaintiff has a disclosure claim, it better be brought before closing:
The court rejected the plaintiff’s suggestion that “Delaware has recently established a new regime,” under which a plaintiff can elect to bring disclosure claims before or after the stockholder vote: “To be clear, where a plaintiff has a claim, pre-close, that a disclosure is either misleading or incomplete in a way that is material to stockholders, that claim should be brought pre-close, not post-close.” Only that rule, the court explained, encourages litigants to seek a remedy for disclosure problems “pre-close, at a time when the Court can insure an informed vote.”
The court also addressed the differing standards that apply to pre-closing and post-closing litigation involving disclosure claims:
Dismissing the amended complaint, the court emphasized the contrast between a “pre-closedisclosure claim, heard on a motion for preliminary injunctive relief,” and a “disclosure claim for damages against directors post-close.” A pre-close claim, the court explained, requires a plaintiff to show only “a reasonable likelihood . . . that the alleged omission or misrepresentation is material,” while a post-close damages claim carries substantial additional burdens, including the obligation to plead that the directors violated their disclosure duties “consciously,” “intentionally,” or in “bad faith.” Finding no allegations that demonstrated this “extreme set of facts,” the court ruled that the damages claims could not stand.
Applying the post-closing damages standard, the Chancery Court rejected claims premised on disclosure of projections used in the fairness opinion and the contingent nature of the financial advisor’s fee.
This Perkins Coie memo reviews the FTC & DOJ’s HSR Annual Report for fiscal 2015. Here’s a summary of the key findings:
– The number of HSR filings increased 8.3% in fiscal 2015, compared to fiscal year 2014. The percentage of transactions investigated decreased 13.1%. The percentage of investigated transactions leading to second requests dropped 2.1%, but the percentage of challenges to reported deals increased 17.4%.
– The agencies continue to enforce the HSR Act’s notification and waiting period requirements in “failure to file” situations, as reflected in the $480,000 civil penalty to be paid by Caledonia Investments plc for its failure to make the required HSR filing prior to a 2014 acquisition of voting securities of Bristow Group Inc.
This recent SRS Acquiom paper suggests that M&A lawyers are still sorting out the privilege issues raised by the Delaware Chancery Court’s 2013 decision in the Great Hill Equity Partners case – which held that the seller’s attorney-client privilege transferred to the buyer following the closing of a merger. According to the paper, here’s how dealmakers have addressed the decision in their merger agreements:
– One-third of the merger agreements surveyed don’t address the privilege issue at all.
– More than half of the remaining agreements assign the privilege to the target shareholders as a group, or to the shareholder group and their representative.
– One-third of the agreements that address privilege assign it to a single shareholder representative.
Assigning ownership and control of the privilege to a single representative avoids the potential for inadvertent waiver and uncertainties about who can assert the privilege. The white paper also notes that approximately one-third of all of the agreements surveyed included language prohibiting the buyer from using privileged communications to assert claims against the target’s shareholders. We’ve calendared a webcast on this topic: “Privilege Issues in M&A.”
This Cleary blog speculates on what the future of M&A litigation in a post-Corwin environment might look like:
As the Delaware Supreme Court narrows the avenues for post-closing challenges to mergers, we expect that plaintiffs’ lawyers will increasingly seek to base their merger suits on specific allegations of conflicts that may have tainted the oversight of processes to sell companies in hopes of supporting claims for breaches of the duty of loyalty and the applicability of the enhanced scrutiny of the entire fairness doctrine.
Public company merger agreements routinely contain provisions – such as indemnification covenants – protecting directors from pre-merger claims. If director conflicts become fertile ground for litigation, will these arrangements be subjected to greater scrutiny? Probably not:
Although these protections constitute a special benefit for these insiders that is not shared with the other stockholders, they are not generally viewed as grounds for claims of disabling conflicts. These merger agreement benefits are typically redundant assurances to comply with pre-existing, ordinary course commitments to these insiders and therefore, except for the incremental outlay for the customary purchase of a six-year D&O tail policy, do not increase costs.
Other contractual provisions protecting directors from pre-deal claims may be subject to closer scrutiny. The Delaware Chancery Court’s recent decision in In re Riverstone National provides a framework for evaluating when arrangements like this may present an issue:
– The personal benefit to the directors must be real, as opposed to highly contingent. Thus, the potential claims from which the directors are being protected by the merger agreement must not be hypothetical claims, but ones that appear to be claims that would have survived motions to dismiss by the defendant directors.
– At the time of the negotiation of the merger agreement, the defendant directors benefitting from these merger agreement provisions must be aware of both these imminent exposures to pre-merger claims and the beneficial provisions in the merger agreement.
– The potential liability against which these director are being insulated must be of a magnitude that is material to the directors in question.
Tune in tomorrow for the webcast – “Middle Market Deals: If I Had Only Known” – to hear Joe Feldman of Joseph Feldman Associates talk about how to best avoid post-closing deal surprises for a mid-market deal. Please print these “Course Materials” in advance.
This blog from Anthony Rickey of Margrave Law reports on his survey of post-Trulia disclosure-only settlements in Delaware and other jurisdictions – and the results may come as a bit of a surprise:
The Walgreen decision has led at least one academic to suggest that “[I]t appears Trulia is on its way to general acceptance in the context of merger litigation.” Yet decisions endorsing Trulia appear to be less common than approvals of disclosure settlements.
Courts in California, Delaware, Indiana, Michigan, New York, Ohio and Virginia have approved a total of 14 disclosure-only settlements in M&A litigation subsequent to the Trulia decision. Not all of these cases involved Delaware companies – but eight of them did, including three settlements approved by the Delaware Chancery Court itself.
This Davis Wright memo reminds buyers not to overlook FCC licenses in their due diligence investigations – even in deals that don’t involve telecom companies:
All sorts of non-telecommunications companies – energy providers, railroads, interstate trucking lines, toll-road operators, airlines, manufacturers, retailers, and numerous others — rely upon radio and telecommunications facilities in the operation of their businesses. Those facilities may be used for voice communications, equipment and systems monitoring, or data collection, transport and analytics. Eschewing third party and common carrier services, many companies instead utilize their own private radio and telecom facilities to support their mainstay businesses.
Ownership or control of licensed facilities can’t be transferred without FCC approval – and applications need to be filed well in advance. Big problems can result if this approval requirement isn’t addressed:
Failure to obtain advance FCC approval can delay closing, expose the parties to an acquisition to stiff FCC penalties, result in license conditions or denial, and give rise to disputes between the parties that may lead to post-closing adjustments or even litigation.
The memo relates a cautionary tale involving a large Canadian railway that completed two deals in 2008 without knowing that the sellers had FCC licenses:
Seven years later, the buyer discovered not only that the prior transactions were consummated without securing FCC approval of transfer of the licenses, but that the buyer subsequently had constructed, operated, modified and relocated other wireless facilities without FCC approval – leading to it having more than 100 unauthorized facilities by the time of its disclosure to the FCC.
The buyer voluntarily disclosed its violations and cooperated with the FCC’s investigation. Nevertheless, it was fined $1.2 million – even though the FCC found that the company’s actions were taken in support of the safe operation of its facilities and that its facilities caused no harmful interference.
In this memo, Goodwin Procter reviews recent FTC & DOJ enforcement activity dealing with the Clayton Act’s prohibition on director interlocks – and offers some practical compliance advice:
– Be sure to include a component on the antitrust laws in your corporate compliance policies. This will ensure that all Board members, officers, and employees are well aware of the law.
– Perform a compliance check at least yearly by asking your Board members, officers, and employees if they serve on other Boards.
– Know who you are from top to bottom; be aware if any subsidiaries or affiliates compete with any other entities in which the company is also invested – whether directly or indirectly
– Be conscious of your firm’s identity. As a firm’s mission shifts or it acquires or expands into new product lines, it may become newly competitive with other firms. Director interlocks violations certainly can emerge as these shifts take place.
– In any transaction where Board seats may shift, be sure to add a interlocks check to the closing checklist.
– Be mindful that even if there isn’t a technical violation, there could be conflict of interests implicated by dual-Board service.
This memo from Philip Giordano of Kaye Scholer weighs in on the implications of the DOJ’s enforcement activity on taking board seats & minority ownership stakes in a competitor.
Last month, the Federal Trade Commission adopted amendments to its HSR Premerger Notification Rules, streamlining the instructions to the HSR form & making it easier to file by allowing parties to submit the HSR form (and all accompanying documents) on a DVD. The FTC will continue to accept paper filings – but will not accept filings submitted partially on DVD and partially on paper…
Here’s an excerpt from this piece about what current practices exist for non-disclosure agreements:
To understand current market practice on these issues, we surveyed agreements dated between January 1, 2014 and December 31, 2015. We found 66 examples in Securities and Exchange Commission filings, including 31 mutual and 35 unilateral NDAs. Delaware law governed sixty-two percent of the agreements, and an additional 20% were written under New York law. The most common agreement term was two years (40%). One agreement remained in effect for five years, (the longest term), and two for only six months (the shortest). Ten agreements (15%) did not specify a termination date, implying a perpetual term, and six others provided for presumptively perpetual survival of the agreement’s confidentiality provisions.