Posts tagged M&A

Court of Chancery Rejects Claim of Financial Support for Merger

James Cable LLC v. Millennium Digital Media Systems LLC, C.A. 3637-VCL (June 11, 2009)

When a party to a merger agreement must rely on the financial support of a third party to complete the deal, that must be spelled out in written agreement.  Absent that written commitment, the deal is then just an option to close held by the party without assets who is then fee to back out.

This decision rejects some clever attempts to make up for the lack of an agreement to fund the deal.  The Court held that the "affiliate privilege" bars a claim that a parent entity wrongly caused its subsidiary to back out of the transaction by refusing funding.  Other theories of recovery such as a contract claim were also dismissed for want of facts to support them.

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Delaware Supreme Court Limits Revlon and Defines Good Faith, Again

Lyondell Chemical Company v. Ryan, C.A. 401, 2008 (Del Sup March 25, 2009)

In this expected reversal of a decision by the Court of Chancery, the Supreme Court has again defined what constitutes "bad faith." The reversal was expected because of the unusual action of the Supreme Court in taking an interlocutory appeal from a decision denying summary judgment . The trial court's decision was considered controversial by some, although the critics exaggerated its significance, as the trial court itself explained when it had refused to certify the appeal.

First, the Supreme Court decided that Revlon duties did not come into play when the Board had rejected a merger proposal. No surprise there, and this is largely a technical point.

Second, the Court repeated, more forcefully than in the past, that only when a disinterested board "knowingly and completely failed to undertake their responsibilities" will it be said to act in bad faith. This means that grossly negligent conduct is not bad faith when there is no scienter involved.

Most significantly, in this case there was no real evidence that the Board knew what it was doing was wrong. It had competent legal and financial advisers, the merger price was a good one, and a "fiduciary out" clause permitted at least some possibility of a competing offer.

Saint Louis University law professor Matt Bodie offers an interesting view on the decision over at the PrawfsBlawg.

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Court of Chancery Denies Request for Reformation of Merger Agreement

Metcap Securities LLC v. Pearl Senior Care Inc., C.A. 2129-VCN (Del. Ch. Feb. 27, 2009)

 

In this decision the Court explains when it will grant reformation of a contract based on mistake. Most importantly, it held that an attorney was authorized to agree to the amendment to a contract that his client later argued was a mistake. The circumstances were very unusual, but the key point remains that reformation will not be granted when in hindsight a concession is later regretted.

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Court of Chancery Explains the Role of Merger Subs

Alliance Data Systems Corporation v. Blackstone Capital Partners V, LP, C.A. 3796-VCS (Del. Ch. Jan. 15, 2009)

 

Here the target tried to argue that the parent entity should be responsible to pay damages for its sub’s failure to close under the facts of this case. It claimed that as all the parties knew the parent had to support the sub to get the deal done, the merger agreement should be read to imply that obligation. The Court of Chancery rejected that argument as inconsistent with the terms of the merger agreement and noted that if the target knew of the risk and failed to cover that risk by securing the parent's guarantee in its agreements, then that was too bad.

 

Many mergers involve the use of a new, assetless entity that is a subsidiary of the real acquiror, as a merger partner. When the parent does not guarantee the obligations of the sub, however, the merger agreement then is really just an option for the parent to exercise or not as it sees fit. For if the sub does not close the merger, the other parties to the deal are left without a real remedy. This insulation of the parent entity is understood and intended, and is a risk the target is willing to take to get the best price.

 

 

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Court of Chancery Upholds Post Merger Arbitration

Aveta Inc. v. Bengoa, C.A. 3598-VCL (Del. Ch. Dec. 11, 2008)

 

It is now common to provide for post merger payouts and the arbitration of any disputes about those payouts. This case illustrates the problem of what happens when one party feels it does not have enough information to go into arbitration where discovery may be limited. The Court held that when the obligation to arbitrate is not conditioned on the receipt of information, arbitration will be ordered and the parties will be left to deal with the arbitrators over information exchange issues.

 

The answer is to provide clearly for adequate information exchange rights in the arbitration.

 

 

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Court of Chancery Upholds Merger Agreement

Hexion Specialty Chemicals Inc. v Huntsman Corp., C.A. 3841-VCL (Del. Ch. Sept. 29, 2008)

This ninety-one page opinion is must reading on how to interpret a merger agreement and on the parameters of the obligation to proceed in good faith to close a deal. In upholding the obligation to at least try to obtain the financing to close, the Court goes into great detail on why the party seeking to escape its obligations bears a heavy burden to explain actions it has taken that may impede its ability to get financing or otherwise close a deal that it no longer finds attractive.

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Court of Chancery Breaks New Ground with Remedy

In re Loral Space and Communications Consolidated Litigation, C.A. 2808-VCS (September 19, 2008).

This decision covers the now familiar ground of a review of an interested transaction with a controlling parent company that is blessed by a dysfunctional special committee.  After finding the transaction was not fairly negotiated, and not substantively fair as well, the Court has granted an unusual remedy. Rather than awarding money damages, the Court has ordered the deal be restructured to make it fair, by converting the preferred stock issued to the parent to non-voting common stock.

The opinion is also particularly interesting for its discussion of the role of the special committee used in this transaction. The committee apparently felt its role was to get the best terms in the deal proposed by the parent company to make it "fair," rather than to question whether the deal was in their company's best interest. The committee's assumption that they could not just say no was in error.

The decision also touches on the rights of bondholders when a major bondholder has its consent to redemption effectively purchased. The Court noted that it is not unusual for indenture covenants to preclude that vote buying, and the absence of such a prohibition here was fatal to the complaining bondholders.

[UPDATE: The Delaware Supreme Court affirms this decision on July 23, 2009.]

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Court of Chancery Permits Reasonable Time To Invoke MAC Clause

Henkel Corp. v. Innovative Brands Holdings LLC, C.A. 3663-VCN (Del. Ch. Aug. 26, 2008)

Merger agreements frequently permit a merger to be terminated in the event of a materially adverse change to the business of the company to be acquired. When the right to invoke such a MAC clause is not set by the agreement, this decision holds that it must be invoked within a reasonable time. What is reasonable depends on the circumstances.

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Court of Chancery Details Board Duties in a Merger

Ryan v. Lyondel Chemical Company, C.A. 3176-VCN (July 29, 2008)

This decision is a textbook explanation and summary of the Delaware case law on the duties of a board of directors when considering a takeover proposal. The Court first sets out the Revlon duties in detail including the effect on those duties when the Barkin "exception" may apply. Next, the Court explains how to comply with the principles of both Omnicare and Unocal concerning defensive measures that protect the proposed transaction. Finally, the Court explains why in the context of a summary judgment motion that the otherwise disinterested board may have its good faith questioned.

This last part of the decision is surely its most controversial. While the Delaware statute protects directors from attacks on their decisions based on their lack of care, the loophole has always been that the statute does not protect from act not taken in good faith. When does a lack of care turn into a lack of good faith is the question.

In a series of decisions such as the Disney case, the Delaware Supreme Court has tried to set out some guidance on this issue. However, the test to be applied is still vague and in the context of a summary judgment motion when all inferences must be drawn in favor of the plaintiff, the test becomes even more difficult in application. This decision illustrates that problem and is worth reading for that issue alone.

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Superior Court Dismisses Negligent Misrepresentation Claim Because Contract Barred Reliance On Extra-Contractual Representations

Transched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2008 WL 948307 (Del. Super. Apr. 2, 2008)

This case illustrates Delaware’s objective theory of contract interpretation and underscores the importance of certain standard contractual provisions. 

The plaintiff purchased software from the defendants and argued that it incurred significant losses due to material misrepresentations, including, for example, the extent of completion of the software.  The defendants argued that the material misrepresentation claim was barred by the plain language of the contract, namely the exclusive remedy clause, integration clause, and disclaimer of extra-contractual representations. 

The contract stated that indemnification was the exclusive remedy “in respect of any breach of or default under this Agreement . . . .”  The integration clause stated that the written agreement was the entire agreement.  And, the reps and warranties clause stated that the seller was making no representation or warranty in respect of any of its assets.  The court held that the thrust of these three provisions was unambiguous: “no representations made outside of the four corners of the Agreement are to be given consideration by the parties in interpreting the terms.”  That is, the provisions precluded the plaintiff’s argument that it justifiably relied on the extra-contractual claims made by the defendants.

Accordingly, the Superior Court dismissed the plaintiff’s negligent misrepresentation claim.   

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Class Action Filed Against Bear Stearns in Delaware Seeking to Enjoin Acquisition by JPMorgan

See latest developments on 03/31/08 above: Last Thursday, a class action complaint was filed against Bear Stearns and its directors in the Court of Chancery.  The complaint alleges that the company has failed to maximize shareholder value by agreeing to be purchased by JPMorgan Chase for $2 per share.  The complaint further alleges that, by agreeing to the deal, the company has favored numerous constituencies over the shareholders. 

 

Update: The New York Times reports  that JPMorgan Chase raised its offer to $10 per share.  Professor Ribstein has commented , along with Pileggi. 

 

Further Update: An additional class action was filed against Bear Stearns on Monday by the Wayne County Employees' Retirement System .  And, yesterday a TRO was filed on behalf of the plaintiffs in both actions, seeking to enjoin the sale, which is set to close on April 8.  Both actions, and the accompanying TRO, have been assigned to Vice Chancellor Parsons. 

 

 

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Additional Complaints Filed Against Yahoo! in Delaware

Yesterday, February 27, 2008, two new complaints were filed against Yahoo! in the Court of Chancery. The first is a class and derivative action, Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Yahoo!, C.A. 3578. The second, Mercier v. Yahoo!, C.A. 3579, an additional class action to those previously filed.

The plaintiff in the second action, Vernon A. Mercier, was also the lead plaintiff in Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786 (Del. Ch. 2007). In a decision in that action last August, Vice Chancellor Strine denied the plaintiff’s application for a preliminary injunction and found that directors fearing that stockholders are about to make an unwise decision that poses the threat that all stockholders will irrevocably lose a unique opportunity to receive a premium for their shares have a compelling justification for a short postponement in the merger voting process to allow more time for deliberation.  The decision is worth reviewing for its interesting discussion of the interplay between the Blasius and Unocal doctrines.    

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Court of Chancery Dismisses Suit Over Decision To Not Pursue A Merger

Gantler v. Stephens, C .A. No. 2392-VCP (February 14, 2008).

This decision illustrates the confusion that exists over the scope of review of a board's decision to not pursue a merger and largely eliminates the uncertainty. Briefly, the board here decided not to pursue a merger opportunity and the potential acquirer then withdrew its offer. The court held that the business judgment rule applied to the decision not to take the offer. In doing so, the court declined to apply the heightened scrutiny used under the Unocal decision as the board did not take any defensive steps to stop the suitor from going forward on its own.

Instead, the court held that to invoke a higher level of review, the plaintiff must show the board acted in bad faith or was not properly advised. Mere allegations that the board made the wrong decision are insufficient. More ›

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District Court Finds That Participation in Delaware Merger Confers Jurisdiction, Denies Motion to Dismiss

G & G LLC v. White, 2008 WL 205150 (D. Del. Jan. 25, 2008)

In this opinion declining to dismiss for lack of personal jurisdiction, the District Court found that it had personal jurisdiction over both the directors/officers of a Delaware corporation and over a foreign corporation that invested in a Delaware corporation. Plaintiff was a Virginia limited liability company that loaned $2.5 million to a Utah corporation. Plaintiff was granted a security interest in the Utah corporation’s assets, and perfected that interest by filing the required financing statements in Utah. However, the Utah corporation subsequently was merged with and into a Delaware corporation. Plaintiff asserted that this was done at the insistence of various defendants that were seeking to invest in the Utah corporation after Plaintiff informed them that it would not agree to subordinate its security interest to theirs. Plaintiff posited that the investor defendants thereafter controlled the Utah corporation and the Delaware corporation it was merged into, and fraudulently concealed the merger to prevent Plaintiff from perfecting its security interest upon the merger, while at the same time perfecting their own in Delaware. Plaintiff pointed to numerous instances where the Utah corporation, the Delaware corporation, their counsel, the directors/officers of the Delaware corporation (who were appointed by the investor defendants), and the investor defendants failed to notify Plaintiff of the merger and/or made misrepresentations regarding the continuing status of the corporation as a Utah corporation. Taking the allegations as true, the Court found that the actions of the investor defendants and the directors they appointed was sufficient to confer specific jurisdiction over them.  More ›

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Court of Chancery Explains Contract Interpretation Rules

United Rentals Inc v. RAM Holdings Inc. C.A. No. 3360-CC (December 12 and 21, 2007). 

In these two decisions the Court of Chancery sets out how it will interpret a contract. Following the objective theory of contract interpretation, the court searches for the "common understanding" of the parties. It will not hear evidence of a party's subjective mental impressions or unilateral understandings.

However, the court will apply the "Forthright Negotiator Principle" when a contract is ambiguous. Under that approach, a reasonable interpretation of contract language of one of the parties will be binding on the other party to the contract if he knew or should have known of the other party's understanding and did not object to it when the contract was signed. Silence then may be fatal.

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