This Sidley Enhanced Scrutiny blog discusses the Delaware Chancery’s recent “rare pre-discovery dismissal of an entire fairness claim” in In re Skillsoft Stockholders Litigation (Del. Ch.; 2.25). The claim involved the acquisition of Codecademy by Skillsoft in November 2021, shortly after Skillsoft went public via de-SPAC. In the de-SPAC, Prosus acquired a 38.4% stake in Skillsoft. It also held a 24% interest in Codecademy. Skillsoft’s stock price decreased after the Codecademy acquisition was announced, and stockholders brought derivative claims, saying Prosus was a conflicted controller.
Despite finding that plaintiffs were excused from making a demand on the board and applying entire fairness with controller Prosus standing on both sides of the transaction, VC Laster still granted the defendants’ motion to dismiss.
Although entire fairness review applied, the court held, the complaint should still be dismissed entirely. The dispositive fact was that Prosus owned a bigger interest on the buy side of the transaction—37.5%, as opposed to 24% on the sell side. Prosus’s interests were aligned not with Codecademy but with Skillsoft. That was enough to conclude that economic fairness, or fair price, was satisfied. “In that setting, overpaying is not a way to transfer value. It’s a way to deplete value,” the court said. That was “enough to negate the inference of pricing unfairness, at least absent some other explanation.”
That fact eclipsed the court’s concerns about procedural fairness, including the contrary fact that there was “relatively little board involvement.” Because Prosus’s interest was aligned with Skillsoft, and the directors’ interests were aligned with Prosus, entire fairness was satisfied.
The blog notes that this is an uncommon outcome but not unheard of:
This was the “rare case,” Vice Chancellor Laster concluded, when “at the pleading stage, in the face of the application of the entire fairness test, [one] cannot reasonably infer [un]fairness.” Rare, but not unprecedented: as this blog previously reported, the Delaware Court of Chancery recently dismissed an entire fairness claim in White v. Hennessy, where Sidley represented the defendants.
Earlier this week in Siegel v. Morse (Del. Ch.; 4/25), the Chancery Court dismissed a stockholder challenge to a company’s recently amended advance notice bylaws as unripe — confirming that Delaware courts must be presented with a genuine dispute before undertaking an equitable review of a company’s bylaws. This Richards Layton alert describes the facts as follows:
In August 2023, the board of directors of The AES Corporation amended AES’s advance notice bylaws following the SEC’s adoption of the universal proxy rule. [An AES stockholder] sued AES and its board to challenge the amendments. Plaintiff originally claimed that the amended bylaws were facially invalid and that the board breached its fiduciary duties by amending the bylaws . . .
Plaintiff then amended his complaint in light of Kellner, removing his facial invalidity challenge and resting on his fiduciary claim. Plaintiff’s claim focused on two purported issues with the amended advance notice bylaws: the “acting in concert” definition and an ownership provision that required nominating stockholders to disclose any equity interest in AES (including synthetic and derivative ownership interests, short interests, and hedging arrangements), along with their history of ownership of stock or derivative interest in AES (the “Ownership Provision”). The Ownership Provision also required a nominating stockholder and any person “acting in concert” with such stockholder to disclose any performance-related fees they would receive if AES’s stock appreciated or depreciated.
The court took issue with the fact that the plaintiff wasn’t asking for himself or even asking for a friend. There was no pending or imminent proxy contest, plaintiff did not intend to nominate a director and could not identify any stockholder who “intends to run a proxy contest, is considering running one, or, for that matter, says he, she or it is ‘chilled’ . . . it appears Plaintiff seeks a declaration that the bylaw is ‘unenforceable’ as to all stockholders.”
Plaintiff tried to point to excerpts from slides prepared by the company’s counsel to suggest a selfish, disloyal or defensive motive, but VC Cook disagreed, saying the the board — like many boards — revisited the bylaws after the adoption of the universal proxy rules and the slides contained only “generic references to stockholder activism.” Such references do not “demonstrate that a genuine, extant controversy exists.” Accordingly, VC Cook found the challenge to be hypothetical and “precisely the sort of case” where the court should postpone review until a concrete dispute exists.
In 2024, the Uniform Law Commission published the Uniform Antitrust Premerger Notification Act for consideration by state legislatures. Per the ULC’s summary, to facilitate state AGs’ authority to enforce federal and state merger law, the act would create a process for a state AG to receive an HSR form when the person filing it has a principal place of business in the state or it (or its control person) had annual net sales in the state of goods or services involved in the transaction of at least 20% of the filing threshold.
As this S&C alert notes, the act has recently been signed into law in Washington State — the first state to enact it. But it’s also under consideration in other states. (Per this map from the ULC, it’s been introduced in California, Colorado, Hawaii, Nevada, Utah, Washington DC and West Virginia.)
The APNA requires that a copy of the HSR Form be provided contemporaneously to the Washington State Attorney General if the person making the HSR Act filing (i) has its principal place of business in Washington State, (ii) had annual net sales in Washington State of the goods or services involved in the transaction of at least $25.3 million (i.e., 20% of the current $126.4 million HSR Act threshold), or (iii) is a healthcare provider or organization, as defined under state law, conducting business in Washington State. The statute will become effective on July 27, 2025. It requires notice but does not have suspensory effect on a pending transaction.
The alert says that parties making HSR filings will now need to submit in Washington State if their principal place of business is located there or, if not, consider state-level sales data to determine whether a submission in the state is required. Moreover, a state-by-state jurisdictional analysis may end up being a necessary part of the HSR Act filing process to the extent additional states pass the act (and states are free to deviate from the uniform act). Of course, that has already been a reality for some transactions — as we’ve previously shared, there are many state laws on the books that require state-level filings but, thus far, those have mostly been limited to transactions that may impact health care in the state.
I recently blogged about the interesting circumstances surrounding the buyer’s decision to try to get out of the deal at issue in Desktop Metal v. Nano Dimension (Del. Ch.; 3/25). The lawsuit concluded with Chancellor McCormick requiring the buyer to sign a national security agreement with CFIUS to satisfy the final closing condition.
This Sheppard Mullin blog focuses on the court’s weight of the CFIUS-imposed national security-related conditions against the buyer’s contractual closing obligations. Here are the blog’s key takeaways:
Hell-or-High-Water Provision: A pivotal aspect of the court’s decision was the interpretation of a “hell-or-high-water” clause in the transaction merger agreement. This clause required Nano Dimension to undertake all necessary actions—including agreeing to several enumerated conditions typically requested by CFIUS—to secure approval, subject to limited exceptions (i.e., a condition that would require Nano to relinquish control of 10% or more of its business). The court found that Nano Dimension breached this obligation through both its negotiating posture with CFIUS in relation to the NSA and by delaying the CFIUS approval process.
CFIUS Approval Strategy: Desktop Metal’s operations in critical technology sectors resulted in a complicated CFIUS approval process. The ruling emphasized that transaction parties should be aware of the potential for CFIUS to rely on NSAs impacting post-closing operations to address potential national security risks associated with foreign control.
It concludes with this recommendation:
The court’s decision illustrates the importance of clear contractual language detailing the relative obligations of the parties to obtain CFIUS approvals. We recommend that transaction parties carefully consider the implications of CFIUS approval language included in transaction documents:
– For example, agreements should clearly delineate what conditions would be considered reasonable mitigation conditions that a potential buyer must accept (e.g., data security practices and auditing mechanisms) and those conditions that would not trigger an obligation to close (e.g., divestment of certain business lines or the use of proxy boards).
– The use of clear language outlining stakeholder alignment, permissible negotiation strategies and timing considerations with respect to CFIUS approval also contribute to the likelihood of a better outcome with CFIUS.
On Friday, Corp Fin posted a handful of new CDIs. Most address questions related to Dodd-Frank clawbacks, but new Exchange Act Rules CDI 253.03 addresses co-registrants in a de-SPAC transaction. Here it is:
A SPAC completed a de-SPAC transaction wherein the target company or companies were included as co-registrants on the effective Securities Act registration statement for the de-SPAC transaction. As a result, these co-registrants incurred an obligation to file reports under Section 15(d) of the Exchange Act upon effectiveness of the de-SPAC registration statement. Notwithstanding that a class of securities offered and sold using such registration statement remains outstanding, consistent with the Commission’s discussion beginning on page 204 of Release No. 33-11265 (Jan. 24, 2024), once the de-SPAC transaction has closed, the staff will not object if each target company files a Form 15 to suspend its 15(d) reporting obligations in reliance on Rule 12h-3 as long as the target company is wholly owned by the combined company and the target company remained current in its 15(d) reporting obligations through the date of filing the Form 15.
Ropes & Gray recently published a survey of trends in Private Equity mergers & acquisitions. One interesting development noted in the survey is the increasing use full equity backstops in PE deals. In a fully backstopped deal, the sponsor provides an equity commitment in the full amount of the purchase price, so that the deal will close even if the debt piece of the financing falls apart.
This deal structure has been around for some time, but in recent years, the use of reverse termination fees to provide sellers with some comfort about closing certainty has been a much more common approach. Ropes & Gray says that based on data from the deals the firm’s been involved with, that’s changed over the past year:
The thawing of the financing markets in 2024 made for a more competitive landscape, and PE sponsors increased their use of the “full equity backstop” (as compared to reverse termination fees (RTFs)) to make their bids more attractive. In the more challenging M&A landscape of 2023, the use of the full equity backstop declined in our dataset to the lowest level in five years, and over 60 percent of our 2023 transactions used the RTF construct. However, in transactions that R&G closed in 2024, PE sponsors once again took advantage of the “full equity backstop” structure, and 60 percent of our transactions included that construct, which was the highest percentage that we have ever seen.
The survey also found that financing conditions, which were common in prior decades, didn’t appear in any of the deals reviewed in 2024, and the average size of reverse termination fees for sponsor-backed deals that used that structure remained in the 5 to 6% range.
I’m on record as not being a fan of letters of intent. That being said, a lot of clients are, and every deal lawyer needs to know their way around the barrel full of issues associated with them. This recent Mintz memo provides an overview of some of the key issues that sellers should have a full understanding of before signing up for a letter of intent. This excerpt addresses purchase price adjustments:
In US M&A the standard is for businesses to be purchased on a cash free, debt-free basis and delivered with a normalized level of working capital. It is common for LOIs to simply leave it there; however, sellers should evaluate if it is favorable to have a bespoke calculation of working capital (i.e. specifically including or excluding certain items) and/or separate credits or adjustments to the purchase price for other items such as tax assets.
Additionally, sellers should evaluate if a working capital collar (i.e. a band surrounding the working capital target where no adjustment up or down is made) is appropriate to avoid nickel and diming in the ultimate working capital adjustment. Addressing these points at the LOI stage is more likely to yield a positive result for the sellers as the buyer is more likely to make concessions at this point in order to secure the deal and get the sellers to sign the LOI and agree to exclusivity.
Other topics include indemnification & RWI, earnout considerations, equity rollover arrangements, and exclusivity and other binding provisions of the LOI. If you’re looking for more resources on letters of intent, be sure to check out our “Letters of Intent” Practice Area and the discussion beginning on page 120 of the Practical M&A Treatise.
President Trump’s decision to impose unprecedented tariffs on nearly all countries has thrown markets into turmoil and have added another bundle of legal and business issues for dealmakers to consider as they work through potential acquisitions. This excerpt from a recent Squire Patton Boggs memo highlights some of the tariff-related legal considerations that both buyers and sellers should keep in mind. Here’s an excerpt:
– Due diligence – Consider the impact on valuation and financial metrics, supply chains and production, product costs and profitability, demand and price increases, and the relative effect on competitors. Due diligence should focus on tariff exposure in supply chains, reviewing import classifications and historical compliance with trade laws.
– Purchase agreements – Address tariff-related risks through pricing mechanisms, representations and warranties, and indemnification provisions. Key terms such as “Material Adverse Effect” or “Material Adverse Change” and “ordinary course of business” must be carefully considered.
– Policy matters – Obtain real-time policy advice from experts “in the know” to develop effective strategies to address potential future impacts. Influence policy through lobbying efforts, trade groups or otherwise to ensure you are heard at the right time, by the right people
Other legal considerations identified in the memo include how the changes to the competitive landscape resulting from tariffs may impact the review of a proposed transaction by governmental authorities and the need to develop mitigation strategies to reduce the financial impact of tariffs.
One of the points raised in the excerpt I quoted is the need to consider the implications of the new tariff regime on MAE or MAC definitions. Over on LinkedIn, Prof. Stephen Bainbridge raised the question of whether the fallout from “Liberation Day” would trigger MAC clauses and whether we can expect to see changes in tariff policies join the events that are specifically addressed in future MAC definitions. We may have to wait a bit for the answer to his first question, but it seems to me that’s inevitable that future MAC clauses are going to address the impact of changes in tariff policies in one way or another. After all, experience suggests that every calamity that leaves a scar on dealmakers usually gets added to that list.
I recently blogged about the possibility of constitutional challenges to Delaware’s SB 21. That possibility became a reality last week with the filing of a complaint in a case captioned Plumbers & Fitters Local 295 Pension Fund v. DropBox. The case has been assigned to Chancellor McCormick, but the complaint was filed under seal, so we don’t yet know the details of its allegations. If the challenge is along the lines of what was suggested in that blog, a finding that SB 21 is unconstitutional could create the potential for some pretty significant collateral damage.
Here’s why – as noted in that blog, the argument that SB 21 is unconstitutional is premised on the idea that the Delaware General Assembly doesn’t have the authority under the state’s constitution to restrict the Chancery Court’s equitable jurisdiction to less than what it was in 1792. If that’s right, then at least one other significant statutory provision of Delaware law may be at risk. According to this 2011 law review article by Prof. Lyman Johnson – which Prof. Eric Talley cited in suggesting that SB 21 may be unconstitutional – the ability of LLCs to avoid judicial review of provisions in their operating agreements purporting to waive fiduciary duties also may run afoul of Delaware’s constitution.
While a conclusion that contractual fiduciary duty waivers weren’t bulletproof wouldn’t matter to public companies, it would be a very big deal to thousands of Delaware LLCs, and as the article points out, would make Delaware’s LLC statute much more indeterminant than those of many other states. So, in a worst-case scenario, a challenge to Delaware’s legislative efforts to address uncertainty regarding transactions with controlling stockholders could conceivably result not just in a judicial decision that invalidates key parts of those efforts, but one that creates significant uncertainty for alternative entities organized under Delaware law.
Last year, the Delaware General Assembly added Section 261(a)(1) to the DGCL in response to the Chancery Court’s 2023 decision in Crispo v. Musk. That statute provides, among other things, that a target company may include in a merger agreement a provision that allows the target to seek lost premium damages against a buyer that has breached its obligations to close. It’s been nearly a year since Section 261(a)(1) was adopted, and this recent White & Case memo analyzes the extent to which lost premium provisions have been included in merger agreements.
The authors reviewed merger agreements for public deals announced between August 1 and December 32, 2024 that were governed by Delaware law, had a minimum equity value of $250 million and provided for the acquisition of 100% of the target company’s equity. This excerpt summarizes their conclusions about the prevalence of lost premium damages provisions and the reasons why they may not have been included in some deals:
Of the 38 merger agreements reviewed, 22 of them (58%) provided for lost premium damages and 16 (42%) did not. The fact that slightly less than one-half of the agreements did not provide for lost premium damages is presumably due to the following reasons:
1. As discussed in greater detail below, of the 16 merger agreements that did not provide for lost premium damages, 13 of them (81%) followed the private equity model, which generally limits the target company’s remedies in the event the buyer fails to close the transaction in breach of the agreement to a reverse termination fee from the buyer and the right to sue the buyer for damages capped at the amount of that fee;
2. The outcome of arms’ length negotiations between the parties regarding the issue; or
3. An oversight by the parties in light of the relatively recent adoption of the amendments to Section 261(a)(i).
The memo also discusses the interplay among lost premium damages, other remedies and reverse termination fees, and identifies some key practice pointers.