In August, Vice Chancellor Lori Will issued a post-trial memorandum opinion in TS Falcon I, LLC v. Golden Mountain Financial Holdings Corp.(Del. Ch.; 8/24). The case involves a board’s decision to set a retroactive record date for an annual stockholder meeting, which the defendants sought to validate under Section 205 of the DCGL. This Sidley blog explains the circumstances of the retroactive record date, which was evidently not, based on the facts, accidental.
This act was undertaken after a 35% stockholder provided notice of its intent to exercise a contractual option to increase its stake from 35% to 44.9%. The defendants did so to sidestep the plaintiff stockholder’s notice and, ultimately, to shortchange the plaintiff’s voting rights regarding board nominees. This effort was effective: at the annual meeting, the defendants’ preferred nominees won the vote.
I suspect nearly every reader of this blog is aware that this is not permitted by the DGCL. But, just in case, the blog has this reminder:
Section 213 of the Delaware General Corporation Law addresses the fixing of dates for determination of stockholders of record for annual meetings. Part (a) thereof states expressly that “the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors.” In other words, if the board meets on June 15 and passes a resolution on that same day to set a record date, the record date cannot precede June 15.
Plaintiff, the disenfranchised stockholder, filed suit challenging the annual meeting and seeking invalidation of the election results and restoration of the prior directors. Defendants petitioned for validation under Section 205, asking the court to overlook the deliberate violation of Section 213(a).
The court weighed [the five non-exhaustive factors under Section 215(d)], and held that due to the lack of “ambiguity or potential uncertainty” in Section 213(a), “I cannot conclude that the Director Defendants set the record date believing that they were following Section 213(a)” because defendants “purposefully” violated the DGCL with the goal of “set[ting] a record date of one day before Falcon sent notice of its intent to exercise” its option. The court also concluded that the remaining factors weighed against the defendants, including that granting validation of the record date would harm the plaintiff and other shareholders because “the record date was purposefully fixed in contravention of the DGCL to frustrate a large stockholder.”
Vice Chancellor Will stated that “Section 205 is not an equitable eraser for purposeful violations of clear statutes” and ordered that the prior directors be reinstated.
As this Cooley M&A blog notes, earnouts are a much more common — and high-stakes — feature of life sciences M&A deals than non-life sciences deals, which only included an earnout 21% of the time according to SRS Acquiom’s 2023 Life Sciences M&A Study. They also lend themselves to interpretive disagreements. Vice Chancellor Laster once observed in Airborne Health Inc. v. Squid Soap, that “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome.” Inevitably, this is especially true in life sciences M&A, where the earnout is more likely to comprise a very significant portion of the total deal consideration.
Not surprisingly, then, life sciences earnouts have been keeping the Delaware Chancery Court very busy in recent months. The blog walks through some recent decisions, including Fortis Advisors v. Medtronic Minimed (Del. Ch.; 7/24), Fortis Advisors v. Johnson & Johnson (Del. Ch.; 9/24) and Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch. 9/24), and then shares key takeaways, with some practical steps practitioners can take to avoid unnecessary heartburn with a negotiated earnout down the road. Here are a few:
– Consider specifying post-closing plans – If the parties are contemplating an inward-facing commercially reasonable efforts standard, the parties may want to consider whether to include more specific requirements, rather than relying on a typical reference to how the buyer develops, launches and commercializes products with similar market potential and all of the factors the buyer can take into account in making those decisions. Further, the parties should consider whether the economic impact of the potential milestone payments can be taken into account by the buyer in making decisions.
– Access to earnout information – Sellers should keep in mind that following a closing, the stockholder representatives’ insights into the buyer’s actions or omissions may be limited to the buyer’s sanitized periodic reports on their efforts to achieve the milestones. The plaintiffs in the J&J case had the advantage of a carryover workforce that had knowledge of the actions taken by J&J, but often the buyer does not retain the target’s employees to complete the product development or commercialization of products.
– Impact of acquisition on earnout obligations – Buyers that acquire targets that have outstanding earnout obligations from prior acquisitions need to consider how to conduct due diligence on the target’s compliance (or lack thereof) with commercially reasonable efforts obligations and should not assume that, post-closing, they can eliminate the target’s encumbered programs based on their own standard decision-making process.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by David Farkas, Head of Shareholder Intelligence in the US for Georgeson, to discuss Schedule 13F filings & stock surveillance services. Topics covered during this 18-minute podcast include:
– Overview of Schedule 13F and why 13F filings aren’t reliable indicators of activity in a company’s stock
– Strategies activists use to avoid tipping their hands through a 13F filing
– The role 13F filings can play in a company’s efforts to identify an activist building a position in its stock
– Additional actions a company can take to determine if an activist is building a position
– The role of stock surveillance services
– Implications of rulemaking petition to amend 13F rules
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
According to Dykema’s “20th Annual M&A Outlook Survey”, the big stories for 2025 are the burgeoning use of AI in the deal process and an expectation that private equity will lead a resurgence in deals next year. Here are some of the survey’s significant findings:
– Nearly seven in 10 dealmakers believe PE investors will drive M&A growth in 2025, as firms look to deploy $2.5 trillion in available capital, despite recent challenges such as lower valuations and reduced deal activity.
– AI is transforming industries and rapidly becoming a key deal driver. Nearly three-quarters find that companies are seeking to integrate AI capabilities, acquire businesses leveraging the technology, and use it to streamline M&A processes.
– 77% of dealmakers feel that regulators have increased their scrutiny of M&A deals. As a result, 80% have increased their emphasis on due diligence in the past 12 months.
– Over half of respondents believe the automotive M&A market will strengthen in the next 12 months, driven by a shift to hybrid engines, the need to increase supply chain resiliency, and collaboration between automakers/suppliers and technology providers.
– ESG’s influence on dealmaking is fading, with only 55% of respondents prioritizing it in target selection—down from last year—and one-third now saying they are unlikely to screen for ESG risks, compared to 19% in 2023.
– Similar to results from the 2023 report, respondents anticipate the healthcare, energy, and financial services industries to see the most M&A activity in 2025.
A recent Cooley blog reviews Delaware case law addressing specific performance and draws some conclusions from those decisions about the circumstances under which a Delaware court is – and is not – likely to order specific performance of a merger agreement. Here’s an excerpt with the key takeaways:
– Control what is in your hands. A party is more likely to get an award of specific performance when most of the conditions to closing the transaction have already been satisfied. If completion of a financing is required, the plaintiffs should specify what actions the court needs to order the buyer to take to complete the financing.
– Keep your side of the street clean. Any party seeking specific performance should make sure that it does not have “unclean hands” that could give the court a basis for denying relief.
– Protect your ability to pursue an array of damages. Make sure the merger agreement includes a very clear specific performance provision where the parties agree that monetary damages are not an adequate remedy, and breach would (not could) result in an irreparable harm. Parties also may want to consider specifying in the provision that the target may seek alternative remedies, including lost premium damages, and an order of specific performance.
– Dissuade delay tactics. Along the same lines, the merger agreement should make clear that the ability to terminate it is suspended while a party is seeking specific performance, thus prohibiting a delaying party from pushing proceedings past the outside date for an easy “out.”
– Consider the best dispute options. When dealing with non-US counterparties, consider which jurisdiction is best for obtaining an order of specific performance against the non-US counterparty, especially when there is no international treaty for mutual recognition of judgments.
Earlier this year, the Chancery Court held that a standard contractual integration clause was insufficient to bar claims premised on a buyer’s alleged assurances to assist in growing the target’s business post-closing. Last week, in Cytotheryx, Inc. v. Castle Creek Biosciences, (Del. Ch.; 10/24), the Chancery Court reached the same conclusion in the context of a buyer CEO’s oral assurances that it had removed any obstacles to obtaining lender approval required to permit the seller to exercise a contractual redemption right.
The case arose out of Cytotheryx’s sale of its majority stake in a biotech startup to Castle Creek in exchange for cash and preferred shares in the buyer. The terms of those preferred shares included in Castle Creek’s charter provided for a redemption right, but that right was subject to the condition that its exercise did not violate Castle Creek’s charter or “other then existing governance documents or debt financing documents.” During the course of the merger negotiations, Castle Creek’s CEO allegedly represented that any obstacles to obtaining lender approval for Cythotheryx to exercise its redemption right had been removed.
When Cytotheryx subsequently tried to exercise that right, Castle Creek pointed to language in its credit agreement prohibiting such a transaction and advised Cytotheryx that its lenders had refused to consent to the redemption. Cytotheryx sued, alleging fraud and promissory estoppel. Castle Creek pointed to the language of the charter and the merger agreement’s integration clause, which provided that the merger agreement “contains the entire understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior agreements and understandings, oral and written, with respect hereto.”
As in this year’s prior case on integration clauses, the defendants pointed to the Chancery Court’s 2014 decision in Black Horse Capital v. Xstelos Holdings, which enforced an integration clause to bar reliance on extra-contractual representations. Superior Court Judge Vivian Medinilla, sitting in Chancery by designation, distinguished this case from Black Horse Capital and held that the integration clause – when read together with the agreement’s fraud reservation – wasn’t enough to defeat the seller’s fraud claim:
Unlike Black Horse, where the alleged misrepresentations directly contradicted the terms of the agreement, here, the alleged misrepresentations about lender approval for redemption are not expressly contradicted by the Agreement. The Charter’s provision on which Defendants rely does not necessarily contradict representations that lender approval had been obtained or would not be an issue. Further distinguishing Black Horse, the alleged misrepresentations here occurred before and after closing of the Merger Agreement to include statements made by Castle Creek’s CEO over a year after closing that Castle Creek would honor its obligation to redeem the shares.
Moreover, the Merger Agreement preserves Cytotheryx’s right to bring an action for fraud, “relating to the representations, warranties, and covenants contained in this Agreement.” Defendants do not dispute this. The fraud reservation is “explicit and unambiguous.” Delaware law does “not protect a defendant from liability for a plaintiff’s reliance on fraudulent statements made outside of an agreement absent a clear statement by that counterparty—that is, the one who is seeking to rely on extra-contractual statements—disclaiming such reliance.”
Judge Medinilla observed that Cytotheryx not only didn’t give a clear statement of non-reliance, but that the merger agreement clearly and explicitly reserved its right to bring fraud actions arising from the Merger Agreement and related documents. As a result, she concluded that the integration clause did not bar Cytotheryx from bringing fraud claims, and rejected the defendants’ efforts to dismiss its promissory estoppel claims on similar grounds.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by Jim McRitchie, one of the leading voices in retail investor activism. Topics covered during this 37-minute podcast include:
– Collaboration among investors to influence corporate governance
– Top retail investor priorities for next year’s proxy season
– Deciding which companies receive shareholder proposals
– Measuring a proposal’s success
– Important factors in deciding whether to settle a proposal
– How companies can respond constructively to shareholder proposals
– How investors can maximize their ability to influence corporate governance
– Impact of election and changes at the SEC
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
– Trends in the number and size of post-closing indemnification claims
– How claims trends differed for deals with R&W insurance
– Why tax claims continue to be most common
– The dramatic rise in undisclosed liability claims coming out of the competitive 2021 M&A market
– How often and to what extent earnouts are paid
– The impact of earnout renegotiations
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
This Morrison Foerster alert discusses a recent SEC enforcement action under Section 14(e) of the Exchange Act and Rule 14e-8 thereunder in connection with a failed tender offer. Here’s the background from the alert:
Esmark first announced its tender offer to acquire all issued and outstanding shares in U.S. Steel for $35 per share (equity value of $7.8 billion) in a press release on August 14, 2023. This announcement came a day after Cleveland-Cliffs Inc. (“Cliffs”) announced its offer to acquire U.S. Steel in a mixed cash and stock offer, with an implied total consideration of $35 per share ($17 in cash and 1.023 shares of Cliffs).
The next day, [its Founder/Chairman and former CEO] provided an interview on CNBC to discuss Esmark’s proposed tender offer. Mr. Bouchard emphasized that, unlike Cliffs, Esmark had provided an all-cash offer. He further noted that Esmark had “$10 billion in cash committed to the deal,” and that it would not put up any of Esmark’s assets as collateral in connection with the offer. The initial offer period was to run from August 14, 2023 to November 30, 2023. However, on August 23, 2023, Esmark withdrew its offer.
In its investigation, the SEC found that Esmark did not even have 1% of the required $7.8 billion in cash required to complete the tender offer as of August 31, 2023. Consequently, the SEC determined that Esmark and Mr. Bouchard lacked a reasonable belief that they would have the means to complete the tender offer and that their public announcements had violated Section 14(e) of the Exchange Act and Rule 14e-8 thereunder.
Esmark and its Founder/Chairman and former CEO agreed to civil penalties of $500,000 and $100,000, respectively.
The alert discusses numerous other enforcement actions arising out of Rule 14e-8 and notes that this most recent enforcement action appears to break the prior pattern of bringing these actions in conjunction with Rule 10b-5 or other sections of the Exchange Act and allegations of price manipulation:
The Esmark case is thus the latest indicator of the SEC’s vigilance towards ensuring the veracity of tender offer communications under Rule 14e-8, separate and additional to any obligations under Rule 10b-5. This shift is evident from recent SEC activities and comments, which could suggest a more proactive stance in scrutinizing the authenticity and feasibility of future tender offer announcements. The case aligns with the SEC’s commitment to maintaining investor trust by holding entities accountable for misleading announcements about their ability to complete a tender offer.
The September-October Issue of the Deal Lawyers newsletter was just sent to the printer. It is also available now online to members of DealLawyers.com who subscribe to the electronic format. This issue’s article “Delaware’s Recent Controlling Stockholder Decisions” discusses several decisions by Delaware courts in recent years that address:
– Identifying when a transaction involves a controlling stockholder;
– The standards of conduct and review applicable to a controller’s exercise of its voting power;
– The application of the entire fairness standard in transactional and nontransactional settings; and
– The procedural protections necessary to permit a controller transaction to be subject to review under the business judgment rule.
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.