Deals where preferred stockholders come out whole while common stockholders end up with peanuts often end up with the common stockholders crying foul. Wei v. Levinson, (Del. Ch.; 6/25), is the latest example of that kind of case to make its way to the Chancery Court. The case arose out of Amazon’s $1.3 billion acquisition of Zoox. Under the terms of that transaction’s merger agreement, most of the merger consideration went to the target’s noteholders and preferred stockholders, without much leftover for its common stockholders.
The plaintiffs asserted breach of fiduciary duty claims against the target’s directors and certain of its officers, as well as aiding and abetting claims against Amazon. The defendants responded by filing a motion to dismiss those claims. In her opinion, Chancellor McCormick refused to dismiss claims against the management directors and directors affiliated with the preferred stockholders, but she dismissed claims against the other members of the board and the aiding and abetting claims against Amazon.
The plaintiffs’ fiduciary duty claims were premised on alleged conflicts of interest on the part of the director and officer defendants. With respect to the directors who were appointed as representatives of the preferred stockholders, the plaintiffs pointed to the economics of the two series of preferred stock laid out in the target’s charter documents. In effect, the terms of the preferred created a “dead zone” above around $1.07 billion in merger consideration where no preferred stockholder received additional consideration unless the deal price exceeded $2 billion. The plaintiffs argued that within that zone, the preferred directors had no incentive to risk losing the value the preferred stockholders would receive in a deal by pushing to increase the value of the deal for the common.
Chancellor McCormick agreed. She cited Vice Chancellor Laster’s comments in Trados to the effect that it was “intermediate cases” – transactions in which preferred holders get paid out while common stockholders lose most of their investment & and future upside – that give rise to conflicts. The Chancellor said this was a “classic intermediate case,” and that the establishment of a bonus plan for members of management paid for in part by the common stockholders added fuel to the conflict of interest fire:
Atop the typical distortive effects that the economic rights of preferred stockholders offer in the intermediate case, the Bonus Plan supplied an additional conflict. At first, the Board contemplated that the preferred stockholders and noteholders would absorb the full cost of the Bonus Plan for the first $1 billion of consideration. But the preferred stockholders and noteholders never approved that deal and ultimately sought to re-trade, placing the preferred and common stockholders at odds on the question of allocation. In the end, the Board approved a deal that imposed 25% of the costs of the Bonus Plan on the common stockholders.
She concluded that it was reasonably conceivable that the plaintiff’s claims would be evaluated under the entire fairness standard, and that the plaintiffs were required to plead that the merger was “not the product of both fair dealing and fair price.” Chancellor McCormick concluded that the plaintiffs adequately alleged unfair dealing by the preferred directors, management directors and a noteholder director, but failed to plead that the other directors were conflicted. As a result, the process-based claims against those directors only supported a claim that they breached their duty of care, as to which they were entitled to exculpation under the Chancery Court’s 2015 decision in Cornerstone Therapeutics. She therefore dismissed those claims.
Chancellor McCormick declined to dismiss the plaintiffs’ claims against the management directors. She concluded that the plaintiffs’ adequately pled conflicts of interest due to non-ratable benefits that they would receive from the Amazon transaction and statements made after the deal indicating that they did not attempt to maximize the target’s value in negotiating a potential sale. However, she dismissed the aiding and abetting claim against Amazon, holding that the plaintiffs failed to adequately plead that, even if Amazon was aware of the conflicts of interest among the target’s fiduciaries, it took any action to exploit them.
We’ve previously blogged about a Virginia federal court’s decision holding that a D&O policy’s “bump-up” exclusion precluded coverage for a $90 million settlement of litigation arising out of the Towers Watson’s 2016 merger with Willis Group. Over on The D&O Diary, Kevin LaCroix reports that the district court’s decision was affirmed on appeal by the 4th Circuit. Here’s an excerpt from Kevin’s summary of the 4th Circuit’s decision:
In a May 28, 2025, opinion written by Judge G. Steven Agee for a unanimous three-judge panel, the Fourth Circuit affirmed the district court, holding that the bump-up exclusion precludes coverage for the underlying settlement, including the portion of the settlement that ultimately went toward attorneys’ fees.
In concluding that the exclusion applied to preclude coverage, the appellate court agreed with the district court that the settlements do “represent” an amount by which the merger price was “effectively increased.” The “real result” of the settlements, the appellate court said, was that the shareholders received additional consideration for their relinquished shares.
In reaching this conclusion about the settlement, the appellate court rejected Towers Watson’s argument that the settlement of the Virginia class action could not trigger the exclusion because it asserted only violations of Section 14(a), for which a purchase price adjustment is not an available remedy. The court said that this argument, “while clever, is beside the point.” The appellate court’s said that its role is not to assess the substance of the underlying claims, but rather whether or not the settlement itself represented an effective increase in the merger consideration – which the appellate court concluded that it did.
The 4th Circuit’s hostility to the argument that remedies for proxy disclosure claims do not involve an increase in the purchase price stands in sharp contrast to a recent Delaware decision addressing that issue. In Harman International Industries v. Illinois National Insurance, (Del. Supr. 1/25), the Delaware Superior Court rejected an insurer’s claim that the settlement of a shareholder class action lawsuit alleging false and misleading disclosures in the merger proxy involved an increase in the purchase price.
– Background information on SRS Acquiom’s M&A Deal Terms Study
– Seller-favorable v. buyer-favorable trends in deal terms
– Valuation and deal structure trends
– Evolution of purchase price adjustment terms
– Earnout terms and usage trends
– Trends in escrows, indemnification and survival periods
– RWI usage and its impact on deal terms
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.
Five years ago, the Treasury Dept. announced an initiative to enhance its efforts to identify and investigate CFIUS “non-notified” transactions. A recent Cooley memo reviews the firm’s experiences with non-notified CFIUS inquiries since the beginning of the enforcement initiative, and identifies trends, outcomes and investigatory practices that it has observed. Here’s an excerpt summarizing the firm’s general observations:
As may be expected, our experience reveals a focus on investments from China, with about 56% of our inquiries involving Chinese investors. (Singapore placed second in our data, appearing in 14% of our matters.) We also observed a focus on US businesses that operate in industries generally perceived to present national security vulnerabilities (i.e., life sciences, cybersecurity, AI, semiconductors and battery technologies). In this sense, our data reflect non-notified outreach consistent with the policy motivations behind the Foreign Investment Risk Review Modernization Act (FIRRMA) and its implementing regulations.
Perhaps surprising however, is the proportion of “TID [Tech, Infrastructure, Data] US businesses” to non-TID US businesses that CFIUS has targeted with non-notified inquiries. In our matters, most (i.e., 58%) of the US businesses did not deal in “critical technology,” “critical infrastructure” or “sensitive personal data.” We regard this statistic to indicate that a company’s “TID” status is a poor proxy for the presence of perceived national security vulnerabilities. This stands to reason, as many companies with “critical technology” (e.g., common encryption functionality in software) do not present colorable national security issues, whereas other companies (e.g., in the life sciences industry) may have sensitive know-how with national security implications, but no critical technology.
Also notable is the size (measured by dollar value) of the transactions targeted with non-notified inquiries. Several of the transactions in our data set involved venture investments under $1 million. As with a company’s “TID” status, transaction size seems to be a poor proxy for the presence of national security concerns arising from a transaction. What is certain from our experience, however, is that non-notified inquiries can impose disproportionate burdens on small venture-backed US businesses. When a relatively small transaction is targeted with a non-notified inquiry, the cost of responding to CFIUS can represent a significant portion of the total transaction costs of the deal.
The memo also addresses the CFIUS inquiry process for non-notified deals, which apparently leaves much to be desired. Cooley says that the Q&A process itself is quite burdensome, often is not initiated until years after closing, involves significant imbalances in the time provided to respond to inquiries and the time that Treasury takes to respond, and lacks finality.
In a memorandum opinion from late April in Faiz Kahn v. Warburg Pincus, LLC (Del. Ch.; 4/25), the Chancery Court addressed claims relating to the acquisition of urgent care provider, CityMD, by an affiliate of Walgreens Boots Alliance. Specifically, the court dismissed claims by physician-cofounder minority members of CityMD that an amendment to CityMD’s LLC agreement eliminating the minority members’ tag-along right to participate in transactions on the same terms as CityMD’s PE-affiliated majority investors breached the implied covenant of good faith and fair dealing.
The urgent care provider’s limited liability company agreement gave minority members a tag-along right to participate in transactions on the same terms as private equity-affiliated members. The agreement permitted amendments to such rights if a vote of the affected member class was secured. It also waived fiduciary duties owed by the private equity affiliates and allowed them to act in their own interests.
The private equity affiliates negotiated disparate consideration for themselves in the merger. Thus, an amendment to the limited liability company agreement was required to eliminate the minority’s tag-along right. The requisite class vote was obtained after members received a detailed information statement.
About a year after the transaction closed, the minority members’ consideration lost value when Walgreens disclosed a $12.4 billion goodwill impairment charge due to downward revisions in the company’s forecast. Plaintiffs filed suit.
In dismissing the claims, Vice Chancellor Will states that the implied covenant is “a limited and extraordinary legal remedy” that only applies when the contract does not address the conduct at issue. Therefore, the first step in an implied covenant assessment is to determine whether the contract has a gap.
Here, the LLC Agreement explicitly addressed the matters at issue. It set out requirements to amend its terms—including the tag-along right—leaving no gap for the implied covenant to fill . . . the LLC Agreement contemplates amendments adversely affecting the rights of a particular class of units and outlines the steps required for approval of such amendments.
And because the LLC agreement waived fiduciary duties and permitted the WP investors to act in their own interests, it also “has no gap preventing the WP Investors from negotiating for disparate consideration—or undertaking an Amendment to permit it. By its very terms, the LLC Agreement allowed the WP Investors to put their interests ahead of Class B unitholders, so long as the WP Investors complied with the LLC Agreement’s terms.”
Here’s something John posted on TheCorporateCounsel.net late last week:
Texas has been getting most of the headlines in the DExit sweepstakes, but earlier this week, the Nevada legislature adopted amendments to the state’s corporate statute that provide a reminder that The Silver State is still a formidable competitor in the race to dethrone Delaware as the nation’s preferred jurisdiction of incorporation.
The most notable changes involve enabling Nevada corporations to adopt charter provisions waiving jury trials for stockholder lawsuits, and defining the fiduciary duties owed by controlling stockholders, establishing a procedure for cleansing transactions involving controlling stockholders, and limiting their liability. This excerpt from a Business Law Prof Blog on the amendments summarizes the changes affecting controlling stockholders:
Duties
The legislation also addresses controlling stockholder duties. The Nevada Business Law Section explains the change as providing:
that the only fiduciary duty owed by a controlling stockholder is to refrain from exerting undue influence over a director or officer with the purpose and proximate effect of inducing a breach of fiduciary duty by said director or officer that (a) results in liability under NRS 78.138 and (b) involves a contract or transaction where the controlling stockholder has a material and nonspeculative financial interest and results in a material, nonspeculative and nonratable financial benefit to the controlling stockholder.
Cleansing
The changes allow for disinterested directors to approve a transaction with a controlling stockholder, granting a presumption that there was no breach of fiduciary duty.
The proposed amendment further provides the presumption that there is no breach of fiduciary duty by a controlling stockholder if the underlying contract or transaction has been approved by either (1) a committee of only disinterested directors or (2) the board of directors in reliance upon the recommendation of a committee of only disinterested directors.
Liability
The legislation also gives controlling stockholders protection similar to the Nevada business judgment rule for officers and directors. It also notes that Nevada aims to “maintain Nevada’s competitive advantage as a leader in stable, predictable and common-sense corporate law.”
The amendments also address Delaware’s Activision-Blizzard decision by clarifying that Nevada directors do not need to approve “final” merger documents and allowing them to use their business judgment to decide when the documents are sufficiently “substantially final” for board approval.
This Debevoise article discusses compensation issues unique to take-private transactions — a “darling” among PE sponsors in recent years. In addition to the application of Section 280G, required compensation disclosure, “say on parachute” shareholder vote and treatment of outstanding public company equity awards, the alert highlights the need to understand — and address — possible exposure to executives departing and invoking “good reason” clauses for seemingly small changes in reporting structures post-closing.
Public company executives frequently have employment agreements or change-in-control severance plans entitling them to severance or benefits if they resign for “good reason” following a change in control. Common triggers include material reductions in salary or benefits; a substantial diminishment of the executive’s title, authority, duties or responsibilities; or requirements to relocate beyond a set distance. Severance at public companies is typically generous and pegged to levels higher than private companies.
Changes at a target company that naturally occur as a result of a take-private transaction may provide C-suite executives with the ammunition they need to invoke their “good reason” clause. For example, a CFO losing public company financial reporting and investor relations duties might point to a perception of diminished responsibility as a basis to resign and collect severance. Even when such claims are not ultimately valid, the mere assertion of those claims can be disruptive and potentially expensive to resolve.
PE buyers can mitigate this risk by reviewing and renegotiating “good reason” provisions before closing. Executives may be asked to waive any potential triggers tied solely to the shift from public to private status so that it is clear the transaction itself does not automatically allow an executive to walk away with severance. These discussions will often occur in connection with the negotiation of post-closing equity and other compensation arrangements, subject to the timing and disclosure considerations discussed.
Did you know we have an “Executive Compensation” Practice Area with resources relating to compensation issues in M&A (like this alert)? Check it out for more!
This alert from Squire Patton Boggs points out the increasing risk that US export control and sanctions laws present to both US and non-US targets — meaning increased successor liability and post-closing business continuity risks in the M&A context — as a result of US agencies using export control restrictions and economic sanctions as national security tools. The alert recommends a risk-based due diligence strategy on export controls and sanctions compliance depending on factors like the target’s industry, the applications for its products/services, its reliance on distributors or other business partners, activity in or with high-risk countries and the strength of the target’s compliance functions and provides a list of typical due diligence requests plus common representations and warranties that address related risk.
If a particular risk is identified, the alert says the acquirer may want to consider one or more of the following:
– Voluntary Self-Disclosure (VSD) – A VSD to the relevant US authority could be an option to address identified instances of potential violations (i.e., not just for high-risk areas, but for specific transactions). VSDs for potential violations are looked upon favorably in M&A and can result in reduced penalties or none at all. A VSD could be required before closing, which is best to mitigate an acquiror’s risks, but could create transaction timing issues. If submitted after closing, the VSD does not create timing issues for the transaction but would result in the acquiror assuming the risk of any penalties. This option is often used in conjunction with indemnity and insurance tools – see next bullets.
– Special Indemnity Agreement – This is a negotiated line-item indemnity to resolve potential violations identified in diligence. A special indemnity agreement could address the risk of penalties arising from a post-closing VSD strategy or, depending on the relevant statute of limitations, provide cover for the acquiror in case an investigation is launched.
– Representations and Warranties Insurance (RWI) – RWI products would protect the acquiror when violations are discovered post-closing in violation of a representation and warranty. This insurance product can be costly and also imposes a level of pre-closing diligence obligations that, if issues are identified, could result in exclusions from the coverage.
To sum it up — the alert encourages buyers to be more proactive on this issue — both in due diligence and in transaction planning/drafting.
Wachtell Lipton recently published the 2025 edition of its 234-page “Takeover Law and Practice” publication. It addresses recent developments in M&A activity, activism and antitrust, directors’ fiduciary duties in the M&A context, key aspects of the deal-making process, deal protections and methods to enhance deal certainty, takeover preparedness, responding to hostile offers, structural alternatives and cross-border deals. As always, the publication is full of both high-level analysis and real-world examples.
Here’s how the publication summarizes unsolicited M&A activity in 2024:
Hostile and unsolicited transactions accounted for approximately 11% of global M&A activity in 2024, compared to about 8% in 2023 and 10% in 2022. Two prominent examples of unsolicited M&A in 2024 were Alimentation Couche-Tard’s unsolicited $47 billion bid for Seven & i Holdings and Allen Media’s $30 billion unsolicited offer to acquire Paramount Global. Paramount ultimately agreed to merge with Skydance Media after facing a variety of bids.
Last year’s crop of unsolicited approaches broadly vindicated prior experience: serious, well-funded, fairly valued proposals can result in the sale of a target, generally to the highest bidder in a sale process. Opportunistic behavior typically is not rewarded, particularly when taken against companies that are well-prepared. Takeover preparedness remains critical in today’s M&A environment.
When a Delaware court concludes that dissident stockholders haven’t complied with a valid advance notice bylaw, it doesn’t usually give them another bite at the apple, but that’s what the Chancery Court did earlier this week in Vejseli v. Duffy, (Del. Ch.; 5/25). In that case, Vice Chancellor Bonnie David concluded that allowing the dissidents to resubmit their nominations was an appropriate remedy for actions by the board that inequitably interfered in the election process.
In an effort to thwart a proxy contest seeking to replace two members of the board of Ionic Digital, the company’s directors adopted a resolution reducing the size of the board to five and the number of directors to be elected at the company’s annual meeting to one. The board also rejected the dissidents’ nominees because of their failure to comply with certain informational requirements contained in Ionic’s advance notice bylaw. Applying the “Blasius minus” standard of review, Vice Chancellor David upheld the board’s decision to reject those nominations but concluded that the board breached its fiduciary duties when it reduced the number of directors up for election.
In fashioning a remedy, the Vice Chancellor determined that the dissidents were entitled to an injunction invalidating the board’s resolution reducing the size of the board & number of nominees. The defendants argued that the board should be able to fill the vacancy created by her decision, but she concluded that “[a] remedy that would permit the directors who breached their fiduciary duties to choose who will serve on the Board is no remedy at all” and opted to reopen the nomination window under the company’s advance notice bylaw.
The defendants argued that since the dissidents failed to comply with information requirements contained in the bylaw, they should be barred from resubmitting nominations during the new nomination period. Vice Chancellor David didn’t agree:
Under the unusual facts of this case, I disagree for two reasons. First, it is true that in most circumstances, Plaintiffs would not get a “do-over” after failing to comply with the Advance Notice Bylaw. But here, it is not Plaintiffs’ but the Board’s wrongful conduct that necessitates reopening the nomination window.
Second, the trial record does not support Defendants’ position that Plaintiffs intentionally “concealed” material information. . . Defendants offer no real reason why Plaintiffs should not be permitted to submit a new nomination notice during the reopened nomination window so that, with the benefit of full disclosure, Ionic’s stockholders, who have not been able to exercise their voting rights since the Company’s incorporation, can finally decide for themselves who should serve on the Board.
She also ordered Ionic to disclose the key aspects of the Court’s ruling to its stockholders, including the new date for its annual meeting and the order to reopen the nomination window.