Here’s an excerpt from this blog by Pillsbury’s Peter Gillon and Alexander Hardiman:
Recently, we have seen insurers assert the price change exclusion as a potential defense to coverage at the most critical moment: just when the litigants are seeking to settle shareholders’ breach of fiduciary duty claims against the directors and officers. The result has been to inject several complicating factors into the already difficult process of litigating and settling these claims. One factor is that the exclusion generally does not apply to defense costs, and therefore the insureds may be incentivized to continue litigation – particularly because after the merger closes, the parties in charge of the litigation (the executives of the acquirer), are unlikely to be in the cross-hairs of discovery and unlikely to be as concerned with the burden of litigation as the target’s former directors and officers.
Another factor is that pre-closing, the remedies may include increased disclosures and other non-monetary consideration, which may justify Plaintiffs’ attorneys’ fees, which are generally covered. For claims being litigated after the merger closing, settlement becomes more difficult, as non-monetary settlement terms are frequently no longer available as settlement tools, and directors’ monetary payments may be non-indemnifiable. (As in other derivative claims, Side A DIC coverage may drop down and fill in any coverage gaps).
Fortunately, policyholders have numerous avenues to challenge insurers’ assertion of the price change exclusion with respect to breach of fiduciary duty claims. First, because the exclusion requires that “the [acquisition] price or consideration is effectively increased” to be triggered, the exclusion should not apply unless there has in fact been an increase in the price paid for the acquisition as a result of the merger objection lawsuit.
Thus, for example, a settlement of a pre-merger closing suit which consists of increased disclosures and other non-monetary relief, plus plaintiffs’ attorneys’ fees, would not fall within the exclusion. Similarly, claims based on Sections 14(a) and 20 of the Securities Exchange Act, which typically seek damages for alleged misrepresentations or omissions in a proxy filing, would not implicate the exclusion because they do not seek a change in the acquisition price.
I’ve been meaning to blog about this development. Here’s an excerpt from this blog by Gunster’s Gus Schmidt:
The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.
This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few options for actually issuing securities outside of filing a registration statement and subjecting themselves to Exchange Act reporting obligations. This was particularly the case in instances where there were a large number of target company shareholders who were not deemed to be accredited investors and the acquirer could not rely on the private offering exemption.
Based on the new SEC staff interpretations, these issuers may now consider using Regulation A to issue equity in connection with business combination transactions. Although there are certain reporting and other obligations that would be required under Regulation A, they are significantly less burdensome than those that would be required of an Exchange Act reporting company. For that reason, Regulation A offering are sometimes referred to as “mini-IPOs.”
Joe Feldman is working on an article for the next issue of our Deal Lawyers print newsletter – and has put together this short 3-question survey about advice you provide clients towards preparing for – and mitigating the impact of – post-closing surprises. Any responses used in the article will be without attribution. Please participate…
We have posted the transcript for our recent webcast: “Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties.”
With yet another appraisal arbitrage decision in Delaware being widely written about – Longpath Capital v. Ramtron International (see these memos) – check out this paper written by the Analysis Group entitled “Appraisal Arbirtrage: Is There a Delaware Advantage?” The article posits that there are three significant economic advantages available to appraisal arbitrageurs under the current Delaware appraisal regime, each of which advantages parties seeking appraisal and creates an incentive for appraisal arbitrage.
In this decision – Fox v. CDX Holdings – the Delaware Court of Chancery was extremely critical of the valuation work of two valuation firms working on behalf of the seller. Significantly, this litigation relates to the sale of a private company – David Halbert, the founder of Caris, owned 70.4% of its fully diluted equity and JH Whitney VI, L.P. (“Fund VI”), a private equity fund, owned another 26.7%. Most of the remaining approximately 2.9% of Caris‘s fully diluted equity took the form of stock options that were cancelled in connection with the Merger. The plaintiff, Kurt Fox, sued on behalf of a class of option holders.
This decision highlights the potentially significant commercial, reputational and – if they had been named as defendants – legal and financial risks that financial advisors/valuation firms can face even when advising privately held companies with only a small percentage of the equity held by persons outside the control group. Luckily for the valuation firms, because the plaintiffs were option holders and not stockholders, this was a contract claim and Delaware law does not recognize a claim for aiding and abetting a breach of contract.
Separately, the opinion contains interesting dicta regarding providing aggressive projections (as opposed to fraudulent projections):
“During a sales process, a company may provide optimistic or bullish projections to bidders, even ‘extremely optimistic valuation scenarios for potential buyers in order to induce favorable bids.”16 There is an important line, however, between responsibly aggressive projections and outright falsehoods: “Pushing an optimistic scenario on a potential buyer is to be expected; shoveling pure blarney at that stage is another.”
Pennaco Energy, 787 A.2d at 713. “An optimistic prediction regarding a company‘s future prospects” may rise to the level of a “falsehood” if accompanied by “evidence that it was not made in good faith (i.e., not genuinely believed to be true) or that there was no reasonable foundation for the prediction.”
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16 In re Pennaco Energy, Inc., 787 A.2d 691, 713 (Del. Ch. 2001) (Strine, V.C.) (citations and internal quotation marks omitted); see also In re Topps Co. S’holders Litig., 926 A.2d 58, 76 (Del. Ch. 2007) (Strine, V.C.) (“[O]ne of the tasks of a diligent sell-side advisor is to present a responsibly aggressive set of future assumptions to buyers, in order to extract high bids.”).
As noted in this Reuters article, last month, nearly 60% of Rite Aid shareholders supported a non-binding shareholder proposal at the company’s annual meeting that asks that the company to limit the CEO’s golden parachute. This is a rare case of a rebuke of a golden parachute as similar measures at other companies only garnered an average of 33% support this proxy season…
This July-August issue of the Deal Lawyers print newsletter was posted a few weeks ago – & also sent to the printers – and includes articles on:
– Reflections on the DuPont Proxy Contest: What Happens Next?
– Finding the Antidote: Addressing Poison Put Provisions in Debt Instruments
– “Exclusive Forum” Bylaws: Fast Becoming a New Item on Deal Checklists
– Integration Clauses & Letters of Intent
– Joint Venture Agreements: An Interview
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Here’s an interesting piece (pg. 6) from “Proxy Insight” about the DuPont battle – and how much influence proxy advisors really have…