In the final rule, the SEC asserts “that the structured data requirements will enhance the usability of the SPAC disclosures. These structured data requirements will make SPAC disclosures more readily available and easily accessible to investors and other market participants for aggregation, comparison, filtering, and other analysis.” The new disclosures are unique to the SPAC and de-SPAC business structure and will require new XBRL elements (the tagging labels applied to specific disclosures).
The tagging varies from narrative disclosures which require block text tagging to numeric or qualitative data which requires detailed tagging. The SEC will propose and implement a new taxonomy to define these elements. Once final, the SEC will post the new SPAC taxonomy ahead of the June 30, 2025 tagging deadline to ensure filers and their service providers have time to prepare for Inline XBRL tagging.
Tagging of the new prospectus disclosures will be required beginning with a SPAC’s IPO filing (i.e. an S-1 or F-1 filing). This is a significant change in existing tagging requirements. Previously, every corporate IPO was exempt from tagging. Every registration statement in the SPAC process will require tagging, except for any S-4 or F-4 filed by the private target.
The taxonomy update referenced above was released on March 17.
Delaware law has long been the default option when it comes to the law governing acquisition agreements. However, with the Lone Star State making a full court press to replace Delaware as the nation’s preferred jurisdiction of incorporation, parties to acquisition agreements may eventually face calls for their agreements to be governed by Texas law. This Gibson Dunn memo reviews some of the similarities and differences between Delaware and Texas law when it comes to key issues in acquisition agreements. This excerpt points out that one area where the two states may part company is the topic of “sandbagging”:
In Texas, practitioners commonly state that reliance on the seller’s representations is required for a buyer to bring a claim for indemnification. In other words, the buyer’s knowledge does matter if the contract is silent with respect to the buyer’s ability to recover for breaches of which it had pre-closing knowledge.
The policy behind this approach is that the buyer did not rely on the representation to its detriment by closing the transaction if the buyer knew the representation was false prior to closing. However, the case law in Texas addressing sandbagging is less than clear. While there is nothing in the case law suggesting that Texas follows Delaware’s view, there is not a modern case specifically accepting the proposition that the “default” in Texas is that pre-closing knowledge matters in the context of sandbagging.
Parties to agreements governed by either Delaware or Texas law can include contractual provisions specifically allowing or disallowing sandbagging. But if Texas governing law applies, it would be particularly advisable to allow or disallow sandbagging explicitly rather than remaining silent because there is some uncertainty in how Texas courts would address the issue.
Other areas addressed by the memo include non-reliance clauses, MAE provisions, lost premium damages, successor liability, and statutes of limitations.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by FGS Global’s John Christiansen. We spoke with John about a variety of topics, including how investor relations and shareholder engagement are being shaped by the need to prepare for shareholder activism. Topics covered during this 24-minute podcast include:
– How the recent 13D/13G CDIs have changed investor engagement practices.
– The increasing importance of retail investor engagement.
– The challenging M&A market’s impact on activism.
– How current economic uncertainty is affecting operational activism.
– “Break the glass” plans and how to use them effectively
– Using earnings calls and investor days to defend against activism
– Tips on better communicating the company’s story to investors
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
Earlier this week, in Frank v. Mullen and B. Riley Financial, (Del. Ch.; 5/25), the Chancery Court rejected allegations that B. Riley, a minority stockholder of National Holdings Corporation, was a controlling stockholder and that its acquisition of the company should be evaluated under the entire fairness standard. The plaintiff cited several factors that it claimed supported his allegations of control, including B. Riley’s 46% ownership interest and support from other large stockholders, its alleged outsized influence over the board and control over the merger process, and the target board’s perceptions that the stockholder had control.
All of this didn’t get the plaintiff much traction with the Court. Vice Chancellor Zurn concluded that none of the factors cited by the plaintiff provided the kind of clout over the target’s board that the plaintiff claimed, and that in combination, they did not represent actual control. Instead, she concluded that what those factors provided the buyer with was leverage, which it was permitted to use:
Here, Plaintiff argues BRF exerted control over National for purposes of the merger, assumed fiduciary duties to National and its stockholders, and forced National into a conflicted transaction that warrants, and fails, entire fairness review. Plaintiff pleads that BRF had a great deal of leverage in the negotiations. But leverage in an arm’s-length negotiation is not tantamount to control over the special committee or board. The question is not what cards BRF held; the question is whether BRF controlled how the special committee played its cards. Plaintiff fails to plead facts that show BRF controlled the special committee or National’s board in the merger process.
VC Zurn observed that B. Riley had no board representation, committed to follow the MFW framework on multiple occasions during the negotiation process, was subject to a standstill, and that the plaintiff did not plead that B. Riley controlled the target’s board or the special committee. While B. Riley did advise the target that it was not interested in selling to a third party and that it would pursue a change in control transaction after its standstill expired, the Vice Chancellor did not view either of those statements as interfering with the special committee’s control of the process.
The Vice Chancellor acknowledged that a take-private deal by a large stockholder involves the potential for a conflicted controller transaction, but said that where that stockholder doesn’t exercise actual control over the company’s business and affairs, independent directors can keep that stockholder out of the boardroom by engaging in an arm’s-length negotiation process. By so doing, they can keep the presumptions of the business judgment rule. Ultimately, she concluded that “[w]hen there is an independent special committee, an independent board, and a clean process, a plaintiff cannot plead actual control over the transaction simply by pointing to a large blockholder’s negotiating leverage.”
If there’s anything more likely to result in busted deal litigation than a binding letter of intent with a distressed seller, I haven’t encountered it. The Delaware Superior Court’s recent decision in Cercacor Labs v. Metronom Health, (Del. Super.; 4/25), in which the Court was called upon to address competing allegations of a breach of an LOI, is a case in point.
The defendant Metronom was a pre-revenue medical device company that had exhausted its funding and was winding down its operations when it began discussing a potential sale to Cercacor, a health and fitness technology company. Discussions moved quickly due to the target’s dire financial straits, and after a full day of negotiations, the parties entered into an LOI for a potential acquisition on the eve of Metronom shutting its doors.
The LOI contemplated that the buyer would acquire the target or its assets on a “cash free, debt free” basis in exchange for 100,000 shares of the buyer’s stock. The LOI conditioned Cercacor’s acquisition proposal on satisfactory completion of due diligence and the negotiation and execution of a definitive acquisition agreement. It also contained a binding exclusivity provision as well as language obligating the parties to use good faith efforts to negotiate a definitive agreement as promptly as practicable. During that period, Metronom agreed to “operate its business in the ordinary course consistent with past practice.” Cercacor also agreed to pay the target’s operating expenses during the negotiating period (which it did).
As often happens when a buyer tries to catch a falling knife, things began to go south between the parties shortly after the LOI was signed. Cercacor alleged that Metronom was dragging its feet on responding to due diligence requests and in obtaining debtholder releases. In turn, Metronom complained that it took Cercacor nearly a month to deliver a draft asset purchase agreement, which it also contended inaccurately described the business being acquired. Ultimately, things deteriorated to a point where the parties ended up in court.
The buyer’s complaint threw the kitchen sink at Metronom, alleging breach of the LOI, breach of the implied covenant of good faith and fair dealing, conversion, unjust enrichment, and fraudulent inducement. The target counterclaimed, alleging that Cercacor breached its obligations under the LOI and the implied covenant.
While the Court cleared some of the underbrush and dismissed a portion of each parties’ claims, it let stand each party’s claims that the other breached the LOI. In refusing to grant Cercacor’s motion for summary judgment, the Court concluded that a material issue of fact existed as to whether the LOI required the target to deliver debtholder releases:
The parties first breach-of-contract dispute is one of interpretation—they disagree regarding whether the term “cash free, debt free” obligated Defendants to secure releases from Metronom’s debtholders. When “the issue before the Court concerns contract interpretation, `summary judgment is appropriate only if the contract in question is unambiguous.'” A term is ambiguous when it is “reasonably. . . susceptible of different interpretations.”
Under that standard, the phrase “cash free, debt free” in the LOI is ambiguous. Both parties invoke expert testimony, fact witness depositions, and extrinsic evidence, to support their interpretation of “cash free, debt free.” While the weight of this evidence suggests the parties intended the LOI to require Metronom to secure debtholder release, the Court doesn’t weigh evidence on a summary judgment motion. Because “cash free, debt free” is reasonably susceptible to more than one interpretation, the LOI is ambiguous regarding whether Metronom had to secure debtholder releases. And that precludes summary judgment on that issue.
Cercacor’s motion for summary judgment on its claims that Metronom dragged its feet in due diligence met the same fate, with the Court noting that these allegations involved factual issues that were inappropriate to resolve via summary judgment. For similar reasons, the Court also declined to grant summary judgment on Metronom’s counterclaim alleging that Cercacor breached the LOI by “delaying and stalling” the closing.
In addition to these issues, a sideshow involving the target CEO’s alleged efforts to renegotiate the deal in order to sweeten the pot for himself resulted in Cercacor’s assertion of tortious interference claims which the Court declined to dismiss.
As I’ve said before, I’ve never been a fan of letters of intent, and the hot mess created by this one isn’t likely to make me rethink that position.
In our latest “Deal Lawyers Download” Podcast, Gibson Dunn’s Branden Berns, Ryan Murr and James Moloney joined me to discuss how recent actions by the SEC have influenced the way that reverse mergers are structured and the implications of those actions for companies considering such a transaction. We addressed the following topics in this 35-minute podcast:
– Overview of reverse mergers and their rationale
– Evolution of the Corp Fin Staff’s position on shell company status
– Implications of SPAC rules for reverse mergers generally
– How changes in rules and interpretations have influenced structure of revers mergers
– The new limitations on the “sign & close” structure and remaining uncertainties
– Key considerations for parties considering a reverse merger
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 john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. 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 Mayer Brown alert outlines a three-step process for evaluating conflict transactions following the DGCL amendments that took effect in March. Below, I’ve streamlined the outline. It also contains details on and analyses of each of these steps and sets forth procedural safeguards to invoke the safe harbors.
Step One: Does the act or transaction involve a controlling stockholder or a control group?
Is there a controlling stockholder or a control group?
If the corporation has a controlling stockholder or a control group, are they involved in the act or transaction?
Is the act or transaction a going private transaction?
Step Two: If the act or transaction does not involve controlling stockholders or a control group, are directors or officers of the corporation involved?
Step Three: Are the safe harbor requirements met?
Determine which directors and stockholders are disinterested.
Will the corporation rely on the fairness safe harbor?
The alert concludes with this reminder:
What if a conflicted transaction fails to qualify for a safe harbor? If a conflicted transaction fails to satisfy any of the safe harbor criteria, including the fairness fallback, the relevant directors, officers, controlling stockholders, and control group members may be exposed to liability, including monetary damages, for breaches of their fiduciary duties. Delaware courts will assess whether to impose liability based on the individual conduct of such corporate actors:
– For breaches of the duty of care, controlling stockholders benefit from §144(d)(5) exculpation, and directors and officers may benefit from similar exculpation under the certificate of incorporation, subject to limitations relating to bad faith, intentional misconduct, knowing violations of law, and receipt of an improper personal benefit.
– Breaches of the duty of loyalty cannot be exculpated and will result in liability if proven that the director, officer, or controlling stockholder acted in a self-interested manner adverse to stockholder interests, lacked independence, or acted in bad faith.
The §144 safe harbors are not exclusive protections and do not preclude other Delaware common law protections, including circumstances under which the business judgment rule is presumed to apply.
Michael Levin at The Activist Investor has been closely tracking US proxy contests since the universal proxy rules. He recently released these stats on the 2025 proxy season so far and committed to distributing weekly updates to his listserv through July. Here’s the data as of April 24:
Pending proxy contests: 29
Activist seeking:
– all available BoD seats: 14 companies
– majority of available BoD seats: 9 companies
– less than majority of available BoD seats: 4 companies
– single BoD seat: 2 companies
Completed proxy contests: 7
Activist gains:
– all available BoD seats: 2 companies – more than 1 BoD seats: 1 company – only 1 BoD seat: 1 company – no BoD seats: 3 companies
He also lists out all the new proxy contests added since his last update in March and the ones that have since been settled and abandoned.
Earlier this week, in Thompson Street Capital Partners, IV v. Sonova (Del. Sup.; 4/25), the Delaware Supreme Court reversed the Chancery Court’s March 2024 dismissal of a complaint alleging an indemnification claim notice was insufficient under the terms of a merger agreement and that escrowed funds should not be held in a claim reserve beyond the indemnity escrow expiration date. Both the merger agreement and related escrow agreement set forth procedures governing the submission of a claim notice, and the Chancery Court’s order had distinguished the analysis governing release of the indemnity escrow fund (governed by the escrow agreement) from the analysis of whether the buyer waived its right to pursue indemnification (governed by the merger agreement) and focused on the buyer’s compliance with the less onerous terms in the escrow agreement.
On appeal, the plaintiff argued that the Chancery Court erred in finding that the escrow agreement’s internal notice clause governed the case “to the exclusion” of the notice provision in the merger agreement, which required that notice include an estimated amount and copies of written evidence. They also pointed to this sentence in the merger agreement provision governing claim procedures:
The Purchaser Indemnified Parties shall have no right to recover any amounts pursuant to Section 9.2 unless the Purchaser notifies the Members’ Representative in writing of such Claim pursuant to Section 9.3 on or before the Survival Date.
Pointing to the integration clause, the Supreme Court read the merger and escrow agreements as a unitary contractual scheme and sought to give effect to the notice provisions in both agreements – meaning the buyer also had to comply with the specificity requirements in the merger agreement. And, unfortunately for buyer, the sentence above “clearly and unambiguously conditioned [buyer’s] right to recover any amounts” on its compliance with the merger agreement notice requirements so that failure to provide sufficient notice meant a potential forfeiture of buyer’s indemnification rights. The merger agreement’s “no waiver” provision didn’t change that outcome since “where specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one.”
Since it was “reasonably conceivable” on the record that buyer failed to comply with the merger agreement’s notice requirements, the final analysis was whether noncompliance may be excused because, in Delaware, “common law abhors a forfeiture.” On that issue, the Supreme Court remanded the decision to the Chancery Court for additional fact-finding since the record was insufficient to settle the materiality and disproportionate forfeiture issues that factor into the excusal analysis.
In January, Vice Chancellor Laster issued a post-trial opinion in In Re Dura Medic Holdings, Inc. (Del. Ch.; 1/25) addressing fiduciary duty claims by a target company’s co-founder related to post-acquisition financing from its controlling stockholder. The court found that the financings were not entirely fair. Notably, as a remedy, it applied equitable subordination — treating the parent-level, unsecured subordinated promissory note issued as part of the merger consideration as if the target company had issued it, giving it priority over the challenged financings. Here are the facts involved, from this Sidley Enhanced Scrutiny blog:
In May 2018, Comvest took a controlling stake in Dura Medic, a durable medical equipment supplier. Under the agreement, the selling stockholders, including the co-founder, received $18 million in cash consideration, and a $12 million Seller Note . . . Dura Medic needed cash while new management sought to right the ship, so Comvest, which was then the controlling stockholder of the Company, injected additional funds over four financings. Two of the financings were structured as debt, and two were structured as preferred equity.
The financings provided for a 15% interest rate and, notably, were structurally senior in priority to the co-founder’s Seller Note: the financings were at the operating company level whereas the Seller Note was a debt of the operating company’s parent entity. The Court observed that no outreach to third party sources of financing was conducted, and no market analysis of the terms of the financings was performed before the financings closed. The co-founder challenged the Comvest financings as a breach of Comvest’s fiduciary duty to the Company. The Court of Chancery applied the exacting entire fairness standard of review because Comvest was the controlling shareholder, and Dura Medic’s board lacked an independent and disinterested majority.
VC Laster found that no indicia of fair process or substance were present and rejected the argument that the participation offer to minority stockholders evidenced fairness. Consequently:
To remedy the breach, the Court of Chancery equitably subordinated the challenged financings to be junior to the Seller Note. Equitable subordination, while not a common remedy, may be ordered where a creditor’s inequitable conduct has a detrimental effect on other creditors. It can be a powerful remedy in a distressed entity where subordinated claims may have a greater risk of going unpaid.
In re Dura Medic Holdings, Inc. is a reminder that both publicly traded and privately held companies are best served to consider best practices—substantive and procedural—in related-party transactions. When parties fail to do so, unique equitable remedies may result.