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.
Here’s something John shared on TheCorporateCounsel.net blog yesterday:
Last week, ISS published the results of its most recent benchmark policy survey, and this year, respondents had quite a bit to say about poison pills. The survey is part of ISS’ annual global policy development process and was open to all interested parties to solicit broad feedback on areas of potential ISS policy change for 2025 and beyond. The survey’s results reflect responses from investors and non-investors. This latter group is comprised primarily of public companies & their advisors. Not surprisingly, the survey found that they differ when it comes to what’s acceptable when it comes to poison pills. Here are some of the highlights:
– When asked if the adoption by a board of a short-term poison pill to defend against an activist campaign was acceptable, 52% of investor respondents replied “generally, no”, while 65% of non-investor respondents replied “generally, yes”.
– When asked whether pre-revenue or other early-stage companies should be entitled to greater leeway than mature companies when adopting short-term poison pills, 56% of investors and 43% of non-investors said that such companies should be entitled to greater leeway on the adoption of a short-term poison pill, as long as “their governance structures and practices ensure accountability to shareholders.”
– When asked about whether a short-term poison pill trigger set by a board below 15 percent would be acceptable, the most common response among investor respondents was “No” (39%), while the largest number of non-investor respondents (38%) said “yes, the trigger level should be at board’s discretion.”
– When asked whether a “two-tier trigger threshold, with a higher trigger for passive investors (13G filers) would be considered a mitigating factor in light of a low trigger, 78% of non-investor respondents said “yes, it should prevent the pill from being triggered by a passive asset manager who has no intention of exercising control.” On the investor, while 41% agreed with the majority of non-investor respondents, 48% considered that “no, all investors can be harmed when a company erects defenses against activist investors whose campaigns can create value, so the lowest trigger is the relevant datapoint.”
Also, it turns out that investors like their pills to be “chewable.” The survey found that nearly 60% of investors found a qualifying offer clause in a pill to be important and a feature that should be included in every pill. A small majority (52%) of non-investors said that this feature was “sometimes important” depending on the trigger threshold and other pill terms.
Last Thursday, the FTC & DOJ announced final rules that modify the premerger notification rules, Hart-Scott-Rodino (HSR) Premerger Notification and Report Form and instructions. The changes were proposed by the agencies in June 2023, and the final rules reflect a number of modifications in response to public comment. This Dechert article lists these key changes from the proposed form:
– Narrowing the scope of limited partner disclosures (which the FTC noted was in response to the Comment submitted by Dechert’s antitrust/competition group);
– Limiting the amount of required information to be disclosed regarding directors and officers, and eliminating the proposal to disclose positions held by board observers;
– Removing the requirement to submit the draft forms of documents; and
– Not adopting many of the labor-related requirements.
Dechert suggests the following aspects of the new rules are still expected to significantly increase the burden on merging parties:
– Expanding the relevant custodians for providing transaction-related documents analyzing competition beyond officers and directors, to include the supervisor of each merging party’s deal team;
– Requiring the submission of certain ordinary course documents related to competition, market shares, competitors, or markets for products and services where the filing parties overlap;
– Adding new disclosure obligations relating to products or services that are in development;
– Requiring sellers to disclose prior acquisitions in the same or related lines of business;
– Increasing the amount of required disclosure regarding investors in the buyer and other entities in the same ownership chain, including limited partners with board/management rights;
– Increasing the requirements on filings made off of letters of intent or similar preliminary agreements to now require a draft agreement, term sheet, or other dated document containing certain material terms of the transaction;
– Mandating disclosure of foreign subsidies, as required by Congress pursuant to the Merger Filing Fee Modernization Act of 2022; and
– Requiring the translation of foreign language documents.
The FTC’s announcement also stated that it is lifting its temporary suspension on early termination of filings made under the Hart-Scott-Rodino Act (which has been in place since February 2021) once the final rules come into effect (90 days after publication in the Federal Register) since the rules will help “inform the processes and procedures used to grant early terminations” because it “will provide the agencies with additional information necessary to conduct antitrust assessments.”
The FTC also announced a new online portal for public comment on proposed transactions:
In addition to these updates to the HSR Form, the Commission is also introducing a new online portal for market participants, stakeholders, and the general public to directly submit comments on proposed transactions that may be under review by the FTC. The Commission welcomes information on specific transactions and how they may affect competition from consumers, workers, suppliers, rivals, business partners, advocacy organizations, professional and trade associations, local, state, and federal elected officials, academics, and others.
Glenn West has an article in Business Law Today on the Chancery Court’s decision in Labyrinth v. Urich, (Del. Ch.; 1/24). We blogged about that decision back in January and I guess you might consider it “old news” at this point, but one thing I’ve learned is that if Glenn writes something about reliance disclaimers, all deal lawyers would be well advised to read it. Here’s the conclusion of the article, where Glenn tells you what you need to do when drafting a reliance disclaimer if you want it to be effective against fraud claims:
To defeat extra-contractual fraud claims, (a) actual disclaimers of reliance should be used, not simple “no representations” statements; (b) disclaimers of reliance should be properly placed in the acquisition agreement so that they are coming from the point of view of the buyer; and (c) the disclaimer of reliance should be “robust” (i.e., disclaim reliance on an exhaustive list of things that might be provided or discussed in the lead-up to the execution of the agreement). And, based on Labyrinth, including an independent investigation provision does not necessarily add anything and may in fact do more harm than good, particularly when it suggests that there was a lot of information provided by the seller upon which the buyer relied.
In light of the FTC & DOJ’s invitation to the public to “drop a dime” on serial acquirors and other actions targeting private equity, a recent Mintz memo offers guidance on pre- and post-acquisition best practices that will help sponsors avoid trouble with the DOJ. This excerpt says that positioning the sponsor and a newly acquired portfolio company to take advantage of the DOJ’s voluntary disclosure program & implementing a rigorous compliance program are essential:
Deploying appropriate resources after completing a deal to assess risk, detect and address any existing issues, and put proper protections in place before executing a growth strategy is the best practice and the model for successful investments in the current environment with amped-up scrutiny of private equity deals. Doing so quickly after a buy-side deal to take advantage of the six-month safe harbor is critical. On the sell-side, assessing any risk and possibly disclosing it ahead of the sale process eliminates the risk of a deal getting scuttled during diligence or significantly impacting the value of the asset.
While self-disclosure will certainly not be the best option in every situation in which a potential issue is detected, it is an option that must be considered, and quickly, to ensure the greatest benefit if that route is pursued. A robust compliance program’s key function is to prevent any wrongdoing before it occurs or detect it quickly if it does. Private equity sponsors who neglect to do a quick but deep enough dive after an acquisition or neglect to implement an appropriate compliance function in those regulated industries where it’s warranted run an increased risk of coming into the crosshairs of the DOJ and becoming a scapegoat for the supposed evils of private equity.