Posts in M&A

Surveying the Law, Chancery Declines to Dismiss a Claim that a 35% Holder was the Controlling Stockholder of the Acquirer (as Well as the Target)

Voigt v Metcalf, C.A. No. 2018-0828-JTL (Del. Ch. Feb. 10, 2020).

This decision contains an instructive review of the factors the Court of Chancery will examine to determine whether a minority stockholder may in fact be a controlling stockholder in the circumstances of a specific transaction – an area of the law that has assumed increased importance after Corwin. More ›

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Chancery Holds That Res Judicata Precludes Plaintiff’s Claim for Information Rights Under Merger Agreement

Fortis Advisors LLC v. Shire US Holdings, Inc., C.A. No. 2018-0933-JRS (Del. Ch. Feb. 13, 2020).

The doctrine of res judicata bars a plaintiff from splitting claims arising from a single transaction into multiple actions. As this decision illustrates, the requirement to plead all claims arising from a transaction in a lawsuit to avoid claim preclusion on res judicata grounds may include a claim for information rights arising from a merger agreement. A party with information rights should carefully evaluate those rights when bringing a claim for breach of contract, and should not assume that subsequent claims for information rights under the contract will avoid claim preclusion under the doctrine of res judicata. More ›

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Chancery Finds Pleadings Sufficient to Support Claim that a Corporate Self-Tender Offer was Coercive

Davidow v. LRN Corp., C.A. No. 2019-0150-MTZ (Del. Ch. Feb. 25, 2020).

Delaware law does not invoke the entire fairness test for a voluntary, noncoercive offer by a corporation to buy its own shares. But, as this decision illustrates, Delaware courts will apply the entire fairness test where the self-tender is coercive or the board is interested or lacks independence in approving the transaction. More ›

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Appraisal of Panera Bread: Court of Chancery Again Defers to Deal Price, Denies Request for a Refund of the Amount of Synergies

In re Appraisal of Panera Bread Co., C.A. No. 2017-0593-MTZ (Del. Ch. Jan. 31, 2020).

JAB Holdings B.V. (“JAB”), a private company that also owns Einstein Bros., Caribou Coffee and Krispy Kreme, acquired Panera Bread Company (“Panera”) via a cash-out merger for $315.00 per share on July 18, 2017. Multiple dissenting shareholders (the “Petitioners”) filed an appraisal action, asserting that the fair value of their shares was $361.00 per share. Post-trial, the Court of Chancery disagreed with the Petitioners, ruling that the deal price minus synergies was the best evidence of fair value. This was because Panera had followed a reliable sale process and any flaws in that process did not undermine its reliability. Specifically, the Court held that, among other factors, the parties’ arm’s length negotiations, Panera’s disinterested and independent board, price increases during negotiations, the fact that no other parties bid on Panera either before or after the announcement of the merger, and the outreach that Panera did with potential buyers provided persuasive evidence of a reliable sale process. More ›

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Chancery Dismisses Stockholder Claims that a Minority Owner was a Controlling Stockholder or that a Majority of the Board was Beholden to the Minority Owner in Approving a Merger Transaction with the Minority Owner

In re: Essendant, Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019).

When as here a Delaware corporation’s charter contains an exculpation provision under Section 102(b)(7) of the Delaware General Corporation Law, stockholders who bring suit against directors who approve a merger transaction must allege violations of the duty of loyalty to state a non-exculpated claim. They may state such a claim if they adequately plead that a controlling stockholder breached duties for self-interested reasons, or that a majority of the board was self-interested or beholden to the buyer. They may also attempt to state a non-exculpated claim by claiming that a majority of the board acted in bad faith. To meet this bad faith standard, a plaintiff must plead facts showing that the decision to approve the transaction lacked any rationally conceivable basis associated with maximizing stockholder value. As the Court explained, allegations of mis- or non-disclosure will not suffice unless plaintiffs plead intentional misstatements or omissions based on a “factual narrative that would allow any inferential explanation of why these fiduciaries would so abandon their duties as to engage in bad faith." (emphasis in original). More ›

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Chancery Sustains Claims Against Board Chairman who Rolled Over Equity in Going-Private Transaction and Officers Who Crafted Misleading Disclosures

Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Dec. 31, 2019).

Plaintiff, a former stockholder of The Fresh Market, Inc. (the “Company”), brought claims arising out Apollo’s 2016 acquisition of the Company.

Because the directors benefited from exculpation under 8 Del. C. §102(b)(7), the plaintiff was required to sufficiently plead a breach of the fiduciary duty of loyalty. The Court rejected the novel argument that activist shareholders were exerting so much pressure on the board that the directors were motivated to protect their own reputations by approving a near-term sale. The Court reasoned that the directors’ reputations would be at far greater risk if they breached their duty of loyalty by orchestrating a sham auction, and that it would be irrational for them to harm their own pecuniary interests as shareholders. The Court also reasoned that, while they could have chosen other potentially value-enhancing paths, the decision to hold an auction and solicit bids from a wide field did not suggest “bad faith.”  More ›

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Chancery Provides Further Clarity Regarding Material Adverse Effect Clauses in Merger Agreements

Channel Medsystems, Inc. v. Boston Scientific Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019).

Material adverse effect clauses provide a form of buy-side protection in merger agreements. These often are complex provisions permitting the buyer to avoid closing under the right circumstances, usually involving an actual or reasonably expected serious business deterioration. Channel Medsystems represents the latest decision from the Delaware courts interpreting and applying a material adverse effect clause. Here, the Court of Chancery held that a buyer’s termination of a merger agreement was invalid because the fraudulent conduct of an officer of the seller, which rendered certain contractual representations materially false, did not have, nor was reasonably expected at the time of termination to have, a material adverse effect on the seller. More ›

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Chancery Construes Sellers’ APA Contractual Representations Concerning Customer Relationships and Changes in the Business, Finds No Breach

Julius v. Accurus Aerospace Corp., C.A. No. 2017-0632-MTZ (Del. Ch. Oct. 31, 2019).

This case serves as a cautionary tale when sellers’ representations in a purchase agreement fail to fully protect against the business risks in question.  According to the Court, this approach encourages contracting parties to allocate risks and draft agreements with precision.  This principle also aligns with Delaware’s pro-contractarian policy to enforce strictly the terms of parties’ agreements, especially when sophisticated parties at arm’s-length negotiate those agreements. More ›

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Chancery Finds Prospective Purchaser May Pursue Breach Claims Against Target Despite Termination Fee Payment

Genuine Parts Company v. Essendant Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019).

Termination fee provisions are commonplace buy-side protection in M&A transactions intended to recoup a failed prospective purchaser’s otherwise sunk costs.  They can also provide substantial sell-side protection when drafted as an exclusive remedy.  But, as this decision illustrates, the level of protection depends on each contract’s specific terms.        More ›

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Chancery Again Defers to Deal Price in Appraisal

In re Appraisal of Columbia Pipeline Group, Inc., Cons. C.A. Nos. 12736-VCL (Del. Ch. Aug. 12, 2019).

In Columbia Pipeline Group, the Court of Chancery applied the appraisal precepts established by the recent appellate precedent in DFC, Dell and Aruba to conclude that the deal price was a persuasive indicator of fair value.  After framing the current state of appraisal law and thoroughly examining the sales process, the Court found that the merger was the result of an arms-length transaction with a third party, and contained sufficient indicia of a fair process to conclude that the deal price was a reliable indicator of fair value.  In support of its finding that the sales process was fair, the Court also pointed to the lack of conflicts at the board level, the acquiring company’s due diligence, and that the target company contacted other potential buyers that all failed to pursue a merger. Additionally, the Court found that the target company extracted multiple price increases during the deal-negotiation process, and that no other bidders emerged during the post-signing phase, which is a factor that the Supreme Court emphasized in analyzing the fairness of the deal process in Aruba.   More ›

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Chancery Determines Appraisal “Fair Value” Below Merger Consideration, Questions Judicial Notice of Valuation Scholarship

In re Appraisal of Jarden Corp., Consol. C.A. No. 12456-VCS (Del. Ch. July 19, 2019).

This decision presents another cautionary tale for stockholders of a target public company who consider seeking statutory appraisal instead of accepting the merger consideration. More ›

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Chancery Denies Motion to Dismiss Claim for Breach of Earn-Out When Unable to “Divine any Meaning” From Provision

Western Standard, LLC v. SourceHOV Holdings, Inc., C.A. No. 2018-0280-JRS (Del. Ch. July 24, 2019).

Defendant Pangea acquired BancTec through a merger agreement that provided for an earn-out to former BancTec stockholders in the event that Pangea’s controlling stockholder realized certain returns on its post-merger stock.  Plaintiff alleged that the earn-out was triggered when Pangea’s parent company became a wholly owned subsidiary of another company through a stock-for-stock transaction. More ›

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Chancery Dismisses Merger Challenge Concerning Board’s Delegation of Merger Negotiations and Management’s Undisclosed Compensation Discussions

In re Towers Watson & Co. Stockholder Litigation, C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019).

The ultimate responsibility for considering a merger falls on the board to carry out consistent with each director's fiduciary duties.  But management usually takes the lead role in negotiating with the counterparty.  It is not uncommon for stockholder plaintiffs to make hay out of a board allowing potentially conflicted members of management to pick up that mantle.  Sometimes those circumstances support a claim for breach of fiduciary duty and sometimes they do not.  This motion to dismiss decision addresses claims in that context, with the Court of Chancery finding the case falls in the latter category. More ›

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Chancery Upholds Adequacy of Description of Buyer’s Indemnification Claims but Finds Indemnification Request for Pending Litigation Unripe Because Buyer Failed to Allege it Had “Incurred” Losses

Horton v. Organogenesis Inc.,C.A. No. 2018-0537-KSJM (Del. Ch. July 22, 2019).

Sellers in merger agreements generally agree to indemnify buyers for certain “Losses” but require the buyers to provide timely notice of claims.  Whether an indemnification claim succeeds depends on the language the parties use to define the indemnification obligation. In Horton, the seller agreed that indemnification claims would survive if the buyer provided by June 24, 2018 written notice “stating in sufficient detail the nature of, and factual and legal basis for, any such claim for indemnification” and an estimate and calculation of the amount of Losses, if known, resulting therefrom. The buyer timely sent a notice of indemnification with one-paragraph descriptions of the factual and legal basis of each of its five claims, which it said “may involve breaches of representations and warranties in the Merger Agreement.” It also sought a second category of indemnification for Losses arising out of pending litigation. As to the first category, the Court found the buyer’s one-paragraph descriptions sufficient even though the buyer did not specify the specific sections of the merger agreement it claimed were breached. This was because “sellers are charged with knowledge of their representations and warranties in the Merger Agreement.” As to the second category, the Court granted the seller’s motion to dismiss without prejudice, because the buyer had not adequately pleaded that it had incurred any costs, fees or adverse judgments in the litigation.

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Court of Chancery Addresses Stockholder Standing to Enforce Corporate Contracts, Declines to Dismiss Claim for Breach of Anti-Takeover Protections Akin to Section 203 of the DGCL

Ark. Teacher Ret. Sys. v. Alon USA Energy, Inc., C.A. No. 2017-0453-KSJM (Del. Ch. Jun. 28, 2019).

Section 203 of the Delaware General Corporation Law, an anti-takeover statute, prohibits a target from entering into a business combination with an acquirer for three years from the date that the acquirer first obtains 15% or more of the target’s stock, unless the target’s board pre-approves the transaction crossing the 15% threshold.  Here, to avoid Section 203’s three-year anti-takeover period, an acquirer sought pre-approval of its acquisition of a 48% block of shares.  The target’s board agreed, but on the condition that the acquirer enter into an agreement that retained Section 203’s three-year standstill period for one year.  A stockholder-plaintiff later brought suit arguing the acquirer failed to comply with the one-year standstill, and thus breached the agreement.  It also argued the acquirer’s breach of the agreement to shorten Section 203’s three-year standstill period to one year in effect revived the longer period, such that the merger was void ab initio under the DGCL.  When the defendants moved to dismiss claiming the stockholder-plaintiff lacked standing to enforce the target corporation’s agreement with the acquirer, the Court held that the stockholder sufficiently alleged it had standing as an intended third-party beneficiary.  The Court reasoned that provisions of the Delaware General Corporation Law have been likened to a contract that stockholders may enforce by suing directly.  Section 203 in particular was enacted to benefit stockholders by limiting hostile takeovers and encouraging fair, non-coercive acquisition offers.  Here, the target’s agreement with the acquirer adopted those protections for the same apparent purpose of directly benefitting stockholders. More ›

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