DealLawyers.com Blog

Here’s news from Steve Haas of Hunton & Williams:

On November 26th, the Delaware Court of Chancery issued a significant ruling with important implications for private company M&A transactions. The litigation, Cigna Health and Life Insur. Co. v. Audax Health Solutions, was brought by a former target stockholder that did not vote in favor of a cash-out merger. The stockholder refused to sign a letter of transmittal that contained a release of claims and appointment of a stockholders’ representative. The stockholder also objected to post-closing indemnity obligations that were imposed by the merger agreement on all stockholders (including non-signatories).

First, the court refused to enforce the release contained in the letter of transmittal. The court held that the release was not supported by consideration because it was not expressly contemplated in the merger agreement. “Because the Release Obligation is a new obligation Defendants seek to impose on [the stockholder] post-closing,” Vice Chancellor Parsons wrote, “and because nothing new is being provided to [the stockholder] beyond the merger consideration to which it became entitled when the Merger was consummated and its shares were canceled, I find that there is no consideration for the Release Obligation in the Letter of Transmittal.”

Second, the court refused to enforce the indemnification obligations imposed on the non-signatory stockholder through the merger agreement. Although Section 251(b) of the Delaware General Corporation Law (“DGCL”) allows the terms of a merger agreement to be “made dependent upon facts ascertainable outside of such agreement,” the court held that the merger consideration was not sufficiently determinable as required under the DGCL. The court based its conclusion on the fact that the indemnity, though limited to certain types of claims, survived “indefinitely” and was capped at the merger consideration received by the stockholder. “[D]espite literally complying with the ‘facts ascertainable’ provision of Section 251(b),” the court explained, “the value of the merger consideration itself is not, in fact, ascertainable, either precisely or within a reasonable range of values.”

The court denied the stockholder’s motion for judgment on the pleadings on a third claim, which challenged the appointment of the stockholders’ representative, finding that the record on that issue was not fully developed.

Lessons Learned

Cigna is an important case for private company M&A transactions where the number of target stockholders makes a stock purchase agreement impractical. Here are a few initial take-aways on an opinion that will continue to be scrutinized by practitioners:

– The court did not address whether the release would have been enforceable if included in the merger agreement. The court also did not address other approaches for obtaining a release. For example, a release in a letter of transmittal could be supported by separate consideration, such as offering stockholders the option to receive an additional payment or a mutual release of claims from the company if they grant the release.

– The court did not rule broadly that imposing indemnification obligations on non-signatories to a merger agreement is unenforceable under the DGCL. In fact, the court stated that its opinion with respect to the indemnification obligations focuses only on “the fact that certain aspects of [the indemnification obligations] are not limited in terms of (1) the amount of money that might be subject to a clawback and (2) time.” The opinion thus leaves open that a more limited survival period and cap could suffice. Still, cautious buyers will continue to require as many stockholders as possible (and certainly the key stockholders) to sign the merger agreement or a support agreement.

– Vice Chancellor Parsons went out of his way to indicate that this was a “limited holding” that did not address “escrow agreements, nor does it rule on the generally validity of post-closing price adjustments requiring direct repayment from the stockholders.”

– M&A parties can be expected to explore additional ways to allocate risk when a private company is widely held. For example, stockholders might be offered a choice to receive a higher per share price if they sign-on to a post-closing indemnity or a lower per share price with limited or no post-closing obligations. In addition, representation and warranty insurance has become increasingly popular in recent years, particularly in transactions where financial sponsors seek limited post-closing exposure.

– M&A parties should keep in mind Vice Chancellor Laster’s 2010 decision in Aveta v Cavallieri, which found that certain post-closing price adjustments to be determined through a stockholders’ representative were permissible under Section 251(b). Still, the precise contours of a stockholders’ representative’s authority have not been fully defined by the courts, and Cigna declined to rule on this issue.

In this podcast, Waheed Hassan discusses Alliance Advisors’ launch of its new “Board Risk Score” product, including:

– What is the purpose of the Board Risk Score?
– What factors does the score take into account, and why did Alliance Advisors select those factors?
– Which companies are scored? And how often or when are companies scored?
– What information does a company’s score reveal?
– What should a company do with the information?
– How does a company get its score?

Always interesting, here is what has become an annual memo from Wachtell Lipton about dealing with hedge funds. There are more memos about this topic in our “Shareholder Activism” Practice Area…

Recently, I blogged about this PwC survey that found that nearly one-in-three directors say their board has interacted with an activist shareholder. Here’s a response from Michael Levin of “The Activist Investor”:

This PwC survey is rather flawed. As a measure of sentiment among big company directors it’s okay, although I don’t quite care what big company directors think about most subjects. The meeting figure that leads your blog post probably overstates the percentage. My read of the survey methodology indicates that 29% of the surveyed directors met with an activist investor in the past year. I suspect strongly that they surveyed multiple directors on the same board, though. If they adjust the sample for individual boards, rather than among directors, they’ll find that the percentage is much lower.

From another angle, though, I’d love to see the figure at – or close – to 100%. Directors should meet with all investors, frequently and substantively, including the activist ones.

Here’s news from this blog by Akin Gump’s Nicole Sprinzen & Jennifer Hildebrand (there’s memos posted on this development in our “FCPA” Practice Area):

Earlier this week, the U.S. Department of Justice (DOJ) issued its second public opinion release of the year in response to a question posed regarding the applicability of the U.S. Foreign Corrupt Practices Act (FCPA) to a propounded set of facts. The opinion announced a decision by the DOJ not to take enforcement action against a U.S. issuer who uncovered evidence of potential illicit payments and substantially inadequate records while conducting due diligence on an intended foreign acquisition target. The DOJ affirmed its position taken in prior publicly released guidance by making clear that the U.S. issuer’s acquisition of the foreign company would not expose the issuer to liability for the foreign company’s prior illegal conduct, where the conduct was not actionable under the FCPA at the time the conduct occurred because there was no U.S. jurisdiction over the conduct under the statute.

An acquiring company may find little practical comfort in the conclusion of the opinion release where it intends to acquire 100 percent of the acquisition target. The opinion acknowledged the basic principle of corporate law—that, by acquiring all the outstanding shares of a company, the acquirer may also acquire successor liability over “the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations.”
Under the DOJ’s FCPA enforcement program, issuers and domestic entities may request opinion letters from the U.S. Attorney General regarding “whether certain specified, prospective—not hypothetical—conduct” conforms to the DOJ’s current FCPA enforcement policies. Opinion letters issued by the DOJ do not have any precedential force over future FCPA cases but are intended to serve as general guidance and are released publicly to afford wide availability of that guidance.

The opinion letter released this week concerned a multinational company headquartered in the United States that was in the midst of conducting pre-acquisition due diligence on its target — a foreign corporation with no employees or operations in the United States. The due diligence inquiry turned up more than $100,000 in likely improper payments made to government officials within the foreign target’s country and prevalent inaccuracies and discrepancies in its records. None of the payments were made to or through a U.S. person or issuer. The opinion release also noted that the U.S. acquirer determined that no contracts or assets acquired through bribery would remain in operation following the acquisition from which the U.S. acquirer would receive any financial benefit. Despite the would-be FCPA violations, the DOJ confirmed that the U.S. acquirer would not face successor liability, because the payments had “no discernible jurisdictional nexus to the United States;” therefore, they were not subject to FCPA enforcement.

However, the DOJ’s opinion provided important cautionary guidance regarding successor liability, affirming its previously articulated principle (in guidance issued jointly in November 2013 by the U.S. Securities and Exchange Commission and the DOJ, FCPA — A Resource Guide to the U.S. Foreign Corrupt Practices Act) that, in general, an acquiring company may become liable as a successor for pre-existing FCPA violations committed by an acquired company where those violations were subject to the FCPA’s jurisdiction when committed. Going further, the DOJ opinion also raises the suggestion of liability in more nuanced circumstances, such as when an acquiring company becomes the post-acquisition beneficiary of illegal conduct committed prior to the acquisition, for instance, by passively benefiting from a target company’s pre-existing contract obtained by paying bribes. Of course, although not stated in the opinion release, post-acquisition conduct could also result in culpability for the acquiring company.

The DOJ’s opinion release serves as a reminder to U.S. issuers to conduct careful due diligence, during both the pre- and post-acquisition phases, to determine whether a target or acquired entity was previously subject to the FCPA. Failure to investigate, suspend and address illegal pre-acquisition conduct could still generate successor liability for the issuer if it stands to later benefit from the wrongdoing.

Moreover, through its opinion release, the DOJ reinforced its view of the importance of bringing a new acquisition within the fold of the acquiring company’s effective compliance program. The release noted that, while the foreign target had no written compliance policy or code of conduct and did not demonstrate an awareness of anti-bribery laws, the acquiring company had already taken pre-closing steps to begin to remediate these issues and had set out a schedule for integrating the acquiring company’s compliance, training, accounting, and recordkeeping policies and procedures on the target company.

As noted in this Akin Gump blog:

The AG Deal Diary team found that “The Structure of Stockholder Litigation: When Do the Merits Matter?” authored by Minor Myers (Assistant Professor at Brooklyn Law School) and Charles Korsmo (Assistant Professor at Case Western Reserve University School of Law) presents an interesting perspective.

The authors analyzed if the merits matter in stockholder litigation challenging mergers, by comparing class actions alleging fiduciary breach and those seeking stockholder appraisal. They found that the merits appear to matter very little in fiduciary duty class action litigation, where deal size is the strongest predictor of litigation. The authors attribute the difference in the incidence and intensity of fiduciary duty litigation (versus appraisal actions) to certain features of the structure of such litigation, such as a class comprised of all shareholders, lead plaintiffs with small holdings and plaintiffs’ attorneys who control the claims.

Yesterday, the SEC’s Office of the Chief Accountant & Corp Fin jointly released Staff Accounting Bulletin #15 to rescind portions of the interpretive guidance included in its SAB Series for what’s known as pushdown accounting. To reflect private sector developments in GAAP, the SAB #115 rescinds SAB Topic 5.J. entitled New Basis of Accounting Required in Certain Circumstances. The new bulletin brings existing guidance into conformity with FASB Update No. 2014-17 – Business Combinations (Topic 805): Pushdown Accounting, a consensus of the FASB Emerging Issues Task Force, which was ratified by the FASB last month and issued yesterday too…

Here’s a set of league tables from FactSet listing the investment banks that most often represent companies against activists, as well as the law firms that most often represent companies. In addition, the top law firms that represent activists are listed…

We have just posted the transcript for our recent webcast: “Anatomy of a Proxy Contest: Process, Tactics & Strategies.”

Here’s an excerpt from this WilmerHale memo (there’s a bunch of memos on this development in our “Antitrust” Practice Area):

In a stark reminder that the US antitrust agencies continue to take illegal premerger coordination—commonly known as “gun jumping”—very seriously, two producers of medium density fiberboard agreed to pay nearly $5 million in civil penalties and disgorgement for violations of the Hart-Scott-Rodino Act and Section 1 of the Sherman Act. The two defendants, Flakeboard America Limited and SierraPine, allegedly coordinated on the closure of a SierraPine MDF mill during the Department of Justice’s review of the proposed transaction between the companies. The complaint filed on November 7, 2014 and the DOJ’s accompanying papers are significant for other merging parties because they contain descriptions of pre-closing conduct that the DOJ is likely to view as prohibited and conduct that it is likely to view as permitted.