Delaware Court Of Chancery Finds Controlling Investor’s Cash-Accumulation Strategy In Advance Of Preferred Stock Redemption Payments Satisfied Entire Fairness
On May 4, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that a controlling investor’s efforts to accumulate cash in anticipation of its preferred stock redemptions were entirely fair. Frederick Hsu Living Trust v. ODN Holding Corp., No. 12108-VCL (Del. Ch. May 4, 2020). Plaintiff, a common stockholder of ODN Holding Corporation, alleged that the private equity firm that held a controlling interest—including a majority of the common stock and a series of preferred stock—along with the company’s directors and officers, breached their fiduciary duties by engaging in a cash accumulation strategy, rather than seeking to enhance the company’s long-term growth. Having previously sustained plaintiff’s claims at the pleadings stage, the Court held that defendants proved at trial that their conduct was entirely fair and entered judgment in favor of defendants.
Delaware Court Of Chancery Holds That A Special Committee Must Be Constituted Ab Initio In Order To Cleanse A Transaction Involving A Conflicted Board Majority
On February 27, 2020, Vice Chancellor Sam Glasscock III denied a motion to dismiss breach of fiduciary duty claims brought by a former stockholder of Intersections, Inc. (the “Company”), challenging the take-private acquisition of the Company. Salladay v. Lev, C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020). The complaint alleged that the Company was sold at an unfairly depressed price and that insiders influenced the transaction to divert consideration to themselves. Moreover, plaintiff asserted that the transaction was subject to entire fairness review because at least half the directors were conflicted by virtue of having rolled over substantial portions of their equity into the merger. Although defendants did not contest that a majority of the board was conflicted, they argued that the claims should be dismissed under the business judgment rule because the deal was negotiated and approved by a special committee of unconflicted directors. The Court, however, held that “to effectively cleanse a transaction . . . the special committee must be constituted ab initio . . . prior to substantive economic negotiations.” The Court denied the motion to dismiss because it found that the complaint adequately pleaded the existence of substantive economic negotiations before the special committee was empowered.
Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Squeeze-Out Merger Because Special Committee Members Were Allegedly “Interested”
On February 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by former shareholders of AmTrust, Inc., challenging the take-private buyout of the company by its controlling stockholders and a private equity firm. In re AmTrust Financial Services, Inc. Stockholder Litigation
, C.A. No. 2018-0396-AGB (Del. Ch. Feb. 26, 2020). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp
., 88 A.3d 635 (Del. 2014) (“MFW
”)—the buyout group conditioned its offer on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Plaintiffs challenged the independence of three of four members of the special committee because the buyout allegedly was expected to extinguish their potential liability in a pre-existing derivative action. The Court held that the MFW
requirement of “independent” special committee approval “was intended to ensure not only that members of a special committee must be independent
in the sense of not being beholden to a controlling stockholder, but also that the committee members must have no disabling personal interest
in the transaction at issue.” Therefore, the Court found the transaction subject to entire fairness rather than business judgment review and denied the motion to dismiss as to the controlling stockholders and their affiliated directors.
Delaware Court Of Chancery Dismisses Transaction-Related Breach Of Fiduciary Duty Claims After Board Terminates Merger In Favor Of An Alternative Acquisition
On December 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by former stockholders of Essendant Inc. after it was acquired in a tender offer and cash-out merger by a private equity firm. In re Essendant Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019). The claims focused on Essendant’s decision to terminate a merger agreement providing for a stock-for-stock merger with Genuine Parts Co. (“GPC”) in favor of an all-cash deal offered by the private equity firm. Plaintiffs’ central allegation was that Essendant’s directors breached their fiduciary duties by failing to obtain the maximum value reasonably available. Highlighting that Essendant’s charter contained an exculpatory provision, as authorized under 8 Del. C. § 102(b)(7), the Court explained that the claims against them could only be maintained if the complaint adequately pleaded a breach of the duty of loyalty. The Court held that plaintiffs failed to plead facts sufficient to show that Essendant’s board was dominated and controlled by the acquiror, or that a majority of the directors had acted in self-interest or bad faith.
Delaware Court Of Chancery Orders Acquiror To Consummate Merger Finding That Misrepresentations Did Not Amount To A Material Adverse Effect
On December 18, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ruled that defendant Boston Scientific Corporation was not entitled to terminate its merger agreement with plaintiff Channel Medsystems, Inc. Channel Medsystems, Inc. v. Bos. Sci. Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019). After the merger agreement was signed, plaintiff—a pre-approval stage medical device company with one product—discovered that its vice president of quality had falsified various documents as part of a multiyear scheme in which he stole $2.6 million from the company. According to the Court, upon discovery, plaintiff was “transparent” with the FDA and with defendant regarding the fraud finding and “acted with dispatch to address it.” Defendant nevertheless notified plaintiff that it was terminating the merger based on provisions in the agreement that permitted termination for misrepresentations that would be expected to result in a “Material Adverse Effect.” Following trial, the Court found that—notwithstanding plaintiff’s breaches of certain representations, including with respect to the accuracy of its FDA submissions—there was no reasonable expectation of a Material Adverse Effect. The Court emphasized that plaintiff did obtain FDA approval for its medical device, which demonstrated that it was “safe and effective” and undercut defendant’s claim that defendant would need to “remediate and retest” the device at great cost before marketing. The Court thus granted specific performance and directed defendant to close the merger.
District Of Maryland Dismisses Post-Merger Securities Class Action, Finding Omission Of Public Information Relating To Financial Advisor’s Analysis Did Not Render Proxy Materially Misleading
On December 4, 2019, Judge Ellen L. Hollander of the United States District Court for the District of Maryland dismissed with prejudice a stockholder class action suit against Gramercy Property Trust (“Gramercy” or the “Company”), a real estate investment trust (“REIT”), and its financial advisor for failure to state a claim under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Hurtado v. Gramercy Property Trust, No. ELH-18-2711 (D. Md. Dec. 4, 2019). Following Gramercy’s August 2018 sale to an affiliate of the Blackstone Group L.P. (“Blackstone”), plaintiff filed suit against the financial advisor (which was represented by Shearman & Sterling), Gramercy, and certain of its officers and directors, alleging that defendants materially misled Gramercy’s stockholders by issuing a proxy statement that omitted information plaintiff claimed was relevant to Gramercy’s market value at the time of the merger.
Delaware Court Of Chancery Rejects Demand To Inspect Books And Records Under Section 220 To Aid In Proxy Contest
On November 14, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery rejected a demand by stockholders of Occidental Petroleum Corporation under Section 220, 8 Del. C. § 220, for documents and information relating to the corporation’s acquisition of Anadarko Petroleum and related transactions. High River Ltd. P’ship, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019). According to the Court, plaintiffs considered the transactions “bad deals” and acknowledged that their primary purpose in seeking the documents was to aid them in their proxy contest to replace certain directors. In a post-trial decision in favor of the corporation, the Court explained that “an imminent proxy contest is not enough to earn access” to broad sets of documents relating to “substantive business decisions.”
Delaware Court Of Chancery Finds Certain Safe Harbor Protections Inapplicable To Approval Of Merger With General Partner’s Affiliate
On October 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted partial summary judgment to a common unitholder of Regency Energy Partners LP (“Regency”) challenging a merger with an affiliate of Regency’s general partner. Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019). Plaintiff alleged that defendants (Regency’s general partner and its affiliates) breached the limited partnership agreement by approving the merger even though they “did not believe that the [m]erger was in the best interests of Regency.” Defendants argued that their approval was protected under three “safe harbors” in the agreement: (i) reasonable reliance upon the opinion of an investment banker; (ii) “special approval” by an independent conflicts committee; and (iii) a majority vote of the common unitholders unaffiliated with the general partner. Finding a genuine issue of fact as to whether the general partner’s board actually relied on the opinion of the investment banker, the Court denied defendants’ motion for summary judgment. The Court, however, determined plaintiff demonstrated that one of the members of the conflicts committee was not independent. Accordingly, the Court found the “special approval” safe harbor unavailable and granted partial summary judgment to plaintiff on that point. Because the proxy provided to common unitholders stated that the conflicts committee was independent, the Court found it misleading and granted partial summary judgment to plaintiff on the unavailability of the unitholder vote safe harbor.
Second Circuit Affirms Denial Of Certain Claims For Investment Banking Fees
On October 11, 2019, the United States Court of Appeals for the Second Circuit affirmed a decision by District Judge Jesse Furman denying in part breach of contract claims for advisory fees brought by investment bank Stone Key LLC and its affiliate against its former client, Monster Worldwide, Inc. Stone Key Partners LLC v. Monster Worldwide Inc.
, No. 18-2804 (2d Cir. October 11, 2019). As discussed in our prior post
, the trial court had denied claims for fees related to a transaction that it found post-dated termination of the advisor’s contract and a claim for an earlier transaction that it found did not qualify as a “partial sale” for which the advisor was entitled to a fee. Significantly, as we discussed, the trial court also based its denial of the claim related to the earlier transaction on its finding that the partial sale fee provision in the engagement letter amounted to an unenforceable agreement to agree. By summary order, the Second Circuit affirmed largely for the reasons articulated by the lower court. However, because the Second Circuit agreed that the earlier transaction did not constitute a “partial sale” under the contract and affirmed the lower court’s denial of the claim on that basis, the Second Circuit “decline[d] to consider whether the compensation provision itself was enforceable.” Summary orders do not have binding precedential effect.
Delaware Court Of Chancery Applies Entire Fairness Standard To Breach Of Fiduciary Duty Claim Arising From Asset Sale That Benefited Senior Preferred Unitholder
On October 11, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed all but one claim arising out of an asset sale by Pro Performance Sports, LLC (“Pro Performance”) to private equity firm Implus Footcare LLC (“Implus”) in which the senior unitholder, venture capital fund Steelpoint Capital Partners, LP (“Steelpoint”), received all of the sale consideration. JJS Ltd. et al., v. Steelpoint CP Holdings LLC et al., C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019). The common unitholders challenged the sale, asserting that the LLC managers breached their fiduciary duties by structuring and approving the transaction and violated the terms of the LLC Agreement because the common unitholders were not permitted to vote as a separate class on approval of the sale. The Court dismissed the claims based on the LLC Agreement, but sustained the fiduciary duty claim.
Delaware Court Of Chancery Finds Allegations Of Personal And Professional Relationships Sufficient To Excuse Pre-Suit Demand
On September 30, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action for breach of fiduciary duties in connection with BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial LLC. In re BGC Partners, Inc. Deriv. Litig., C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019). Plaintiffs alleged that BGC’s CEO and Chairman was a controlling stockholder of both companies who purportedly disproportionately benefited from the transaction. The Court rejected plaintiffs’ argument that demand was “automatically” excused because the transaction was subject to entire fairness review as a result of the allegations regarding a purported controlling stockholder on both sides of the deal. Nevertheless, based on its “holistic” review of the complaint’s allegations of the CEO’s alleged unilateral ability to remove directors, as well as his alleged relationships with a majority of the other directors, the Court held that the complaint adequately pleaded demand futility because the allegations created a reasonable doubt as to the independence of those directors.
Delaware Court Of Chancery Denies Motion To Dismiss Merger Agreement Breach Claims Even Though Defendant Paid The Contractual Termination Fee
On September 9, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied Essendant Inc.’s motion to dismiss an action for breach of a merger agreement brought by Genuine Parts Company (“GPC”). Genuine Parts Co. v. Essendant, Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019). The claims arose after defendant terminated the two office supply companies’ merger agreement in favor of an acquisition of defendant by a private equity firm. The Court held that the complaint adequately pled that defendant had materially breached the merger agreement’s non-solicitation provision and the agreement did not unambiguously limit plaintiff’s possible recovery to the termination fee.
Delaware Court Of Chancery Again Dismisses Aiding And Abetting Claims For Pleading Deficiencies
On July 15, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed an aiding and abetting claim asserted against a private equity buyer and its principals in a stockholder class action involving breach of fiduciary duty claims against the former CEO of a technology company in connection with its take-private sale to the private equity buyer. In re Xura Inc. Stockholder Litigation
, C.A. No. 12698-VCS (Del. Ch. July 12, 2019). As we discussed in a prior post
, Vice Chancellor Slights declined to dismiss a different stockholder’s breach of fiduciary duty claims against the former CEO based on his allegedly self-interested participation in the merger, but the Court dismissed aiding and abetting claims asserted against the buyer and its principals. In re Xura, Inc. Stockholder Litigation
, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018).
Ten days after this opinion was issued, a different stockholder filed a “nearly identical” complaint—this time asserting class action claims—
raising “the same theories of aiding and abetting” that the Court had dismissed just days earlier. In a separate summary order, the Court denied the former CEO’s motion to dismiss this new complaint. In this decision, the Court dismissed the aiding and abetting claims for the same reason it did so in the prior suit—the complaint failed to include “well-pled allegations that [the buyer] ‘knowingly participated’ in the … alleged breaches of fiduciary duty.”
Delaware Court Of Chancery Holds Merger Agreement Preserved Sellers’ Ability To Assert Privilege Over Pre-Merger Attorney-Client Communications, Notwithstanding The Transfer Of Those Communications To The Buyer
On May 29, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery ruled that plaintiff Shareholder Representative Services LLC (“Shareholder Representative”) as the designated representative of Radixx Solutions International, Inc.’s (“Radixx”) selling stockholders, retained the ability to assert privilege over Radixx’s pre-merger attorney-client communications in a post-closing litigation against the acquiring company, RSI Holdco, LLC (“Holdco”). Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019). Specifically, the Court held that by its plain terms the merger agreement between the parties preserved the privilege, even though the communications were physically transferred to the buyer at closing. Therefore, the Court granted plaintiff’s request for a protective order and barred Holdco from using or relying on any of Radixx’s pre-merger attorney-client communications.
Delaware Supreme Court Affirms Judgment In Favor Of Defendant On The Basis Of Plaintiffs’ Failure To Prove Damages
On May 16, 2019, the Supreme Court of Delaware affirmed a judgment by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery in favor of Potomac Capital Partners II, LP on claims by shareholder plaintiffs that the activist investor aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. In re PLX Technology Inc. S’holders Litig.
, C.A. No. 571, 2018 (Del. May 16, 2019). As discussed in our post regarding that decision
, the Court of Chancery found in a post-trial opinion that defendant had aided and abetted breaches of fiduciary duty but also concluded that plaintiffs failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged. On appeal, plaintiffs contended that the Court of Chancery erred in deciding the damages issue by importing principles from appraisal jurisprudence to give deference to the deal price. In a summary order, the Delaware Supreme Court affirmed the Court of Chancery’s “decision that the plaintiff-appellants did not prove that they suffered damages.” The Court expressly declined to reach defendant’s arguments on cross-appeal that it had not aided and abetted any breaches of fiduciary duty because its affirmance on the damages issue “suffices to affirm the judgment.”
Delaware Court Of Chancery Holds Merger Termination Valid After Plaintiffs “Forgot” To Provide A Notice To Extend, But Reserves Decision On Reverse Termination Fee
On March 14, 2019, after a two-day trial, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery rejected requests by plaintiff Vintage Capital Management, LLC and its affiliates for a declaration that defendant Rent-A-Center, Inc.’s termination of the parties’ merger was ineffective and an order that the parties must proceed with the deal. Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019). Pursuant to the merger agreement, both parties had a right to provide a notice of extension by the contractual “End Date.” If neither party elected to extend, then either could terminate the agreement thereafter. Plaintiffs argued that both parties had been working toward closing the deal and had expressly recognized that the closing could not occur until after the End Date. On this basis plaintiffs contended that the contractual notice of extension had been effectively provided or waived. But the Court held that defendant’s termination of the merger agreement after plaintiffs apparently “forgot” to provide a notice of extension by the End Date was valid. However, the Court reserved judgment on defendant’s counterclaim for a reverse termination fee pending supplemental briefing, noting that it was “dubious whether the parties meant for a reverse breakup fee to apply in this situation.”
Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Contract Claim For Failure To Use “Commercially Reasonable Efforts” To Obtain Regulatory Approval For Pharmaceuticals
On December 28, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to dismiss a breach of contract claim brought by former stockholders of Ception Therapeutics, Inc. (“Ception”) against pharmaceutical company Cephalon, Inc. (“Cephalon”), which acquired Ception, alleging violations of an earn-out provision in their merger agreement. Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018). Ception claimed that Cephalon failed to use “commercially reasonable efforts,” as defined in the merger agreement, to obtain FDA approval for an antibody as treatment for a specific medical condition. The Court found that because the agreement defined the standard for “commercially reasonable efforts” objectively, with reference to the effort that would have been expended by other companies similarly situated, the question of what constituted “commercially reasonable efforts” could not be decided on the pleadings. The Court also dismissed an implied covenant claim against Cephalon and tortious interference claims against Teva Pharmaceutical Industries Ltd. and its affiliates (together, “Teva”), which acquired Cephalon after the Cephalon-Ception merger.
Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm. In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
Delaware Supreme Court Affirms Landmark Decision That Found MAE Justified Termination Of Deal
On December 7, 2018, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s landmark ruling that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”). Akorn, Inc. v. Fresenius Kabi AG
, C.A. No. 2018–0300–JTL (Del. Dec. 7, 2018). As discussed in our post
on the Court of Chancery’s decision, Akorn sued for specific performance after Fresenius walked away from the deal citing the discovery of various regulatory compliance problems, which Fresenius asserted amounted to a material adverse effect (“MAE”). The Court of Chancery concluded that Akorn violated not only multiple representations and covenants in the merger agreement but also the general MAE provision, ruling that an MAE had occurred and termination of the deal was justified. Concluding that the factual record adequately supported the determination that Akorn’s breach of its regulatory representations and warranties gave rise to an MAE and that Akorn had suffered a general MAE, the Delaware Supreme Court affirmed the dismissal of Akorn’s claims.
Delaware Court Of Chancery Declines To Dismiss Fiduciary Duty Breach Claims In Connection With Take-Private Acquisition Of Recently Delisted Company
On November 20, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss a putative class action asserting claims for breach of fiduciary duty brought by former stockholders of Tangoe, Inc. (the “Company”) against former members of its board of directors in connection with the take-private acquisition of the Company by a private equity buyer group in June 2017. In Re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del Ch. Nov. 20, 2018). Plaintiffs alleged that defendants recommended an ill-advised and self-interested sale while a restatement of audited financials was pending and following the NASDAQ delisting of the Company. Defendants contended that they were entitled to business judgment rule deference under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015)—because a majority of stockholders tendered their shares—and that dismissal was also required because of an exculpatory charter provision pursuant to 8 Del. C. § 102(b)(7). But the Court concluded that the alleged failures to provide adequate company financial information and to disclose the status of the restatement efforts precluded dismissal under Corwin. The Court also found that plaintiffs adequately pled a non-exculpated claim for breach of the duty of loyalty, given the timing and structure of certain director compensation adjustments, which allegedly incentivized a change in control and supported an inference that defendants acted out of material self-interest.
Delaware Court Of Chancery Holds Alleged Breaches Of Representations Do Not Excuse Buyers’ Noncompliance With Post-Closing Obligations Where Buyers Seek To Enforce Claims For Indemnification
On October 29, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery entered final judgment on counterclaims seeking to enforce covenants in a stock purchase agreement requiring the buyers to remit certain tax refunds and insurance proceeds. Post Holdings, Inc. and Michael Foods of Delaware, Inc. v. NPE Seller Rep LLC, C.A. No. 2017-0772 AGB (Del. Ch. Oct. 29, 2018). National Pasteurized Eggs, Inc. (“NPE”) was sold pursuant to a stock purchase agreement. Thereafter, the buyers initiated an action asserting claims for fraud and breaches of representations and warranties, seeking indemnification under the agreement. The sellers filed counterclaims to enforce covenants in the agreement requiring the buyers to remit certain tax refunds and insurance proceeds. The buyers argued that their obligation to remit such proceeds “should be excused” because of the sellers’ alleged prior material breach. Granting judgment on the pleadings to the buyers, the Court held that “buyers cannot continue to accept the benefits of the contract—as they seek to do in this action through their claim for indemnification—while disclaiming their contractual obligation to remit the tax refunds and insurance proceeds to the sellers promptly after they were received.”
Finding Insufficient Proof Of Damages, Delaware Court Of Chancery Enters Judgment In Favor Of Defendant Despite Finding Fiduciary Duty Breaches
On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found in a post-trial opinion that Potomac Capital Partners II, LP (“Potomac”), an activist investor, aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. (“PLX”) in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”), but entered judgment in favor of Potomac because plaintiffs failed to show causally related damages. In re PLX Technology Inc. S’holders Litig.
, C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). After the deal closed, plaintiffs alleged that the sale process was unreasonably influenced by Potomac’s managing member, who became a director of PLX and chaired the special committee charged with exploring strategic alternatives for the company. As discussed in our prior post, see
Shearman & Sterling LLP, Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment
, Need-to-Know Litigation Weekly, Feb. 21, 2018, https://www.lit-ma.shearman.com/declining-to-find-enhanced-scrutiny-inapplicable-
, the Court previously denied a summary judgment motion filed by Potomac, finding that the PLX board’s actions in connection with the sale were subject to enhanced scrutiny and disputes of material fact existed as to whether the sale process was reasonable. Following trial, the Court concluded that although Potomac aided and abetted breaches of fiduciary duty by PLX’s board, plaintiffs had failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.
Delaware Court Of Chancery Rules For The First Time That MAE Justifies Termination Of Deal
In a first-of-its-kind ruling, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled post-trial that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”). Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc., and Fresenius SE & Co. KGaA, C.A. No. 2018–0300–JTL (Del. Ch. Oct. 1, 2018). Fresenius walked away from the deal after discovering various data integrity and regulatory compliance problems, asserting that the issues were so serious that they amounted to a material adverse effect (“MAE”). Akorn sued for specific performance, alleging that Fresenius was merely suffering from buyer’s remorse. Vice Chancellor Laster concluded that Akorn violated not only multiple representations and covenants in the merger agreement but also the general MAE provision, ruling that an MAE had occurred.
Finding That The Implied Covenant Of Good Faith And Fair Dealing Could Not Import Revlon-Type Duties, Delaware Supreme Court Affirms Dismissal Of Breach Claim
On September 20, 2018, the Delaware Supreme Court affirmed the dismissal of claims for breach of the implied covenant of good faith and fair dealing brought against the controlling unitholder and its affiliates on the board of a company that provides services to children with disabilities in connection with the sale of that company. Miller v. HCP Trumpet Investments, LLC, No. 107, 2018 (Del. Sept. 20, 2018). Pursuant to a waterfall set forth in the company’s operating agreement (the “OA”), the controlling investor was entitled to nearly all of the first $30 million in proceeds in the event of a sale. The OA, which included an explicit waiver of fiduciary duties, provided that the board could approve a sale of the company to an independent third party and “determine in its sole discretion the manner in which [such sale] shall occur, whether as a sale of assets, merger, transfer of [m]embership [i]nterests or otherwise.” After the company was sold for $43 million, minority members sued for breach of the implied covenant of good faith and fair dealing, arguing that it imposed an obligation to conduct an “open-market” sale process to ensure maximum value for all members. Although the Delaware Supreme Court disagreed with the Delaware Court of Chancery’s holding that the implied covenant did not apply to the sale, the Court affirmed the dismissal on the basis that the implied covenant did not imply Revlon-type sale requirements.
Delaware Court Of Chancery Denies Motion To Dismiss LPA Breach Claims, Including Aiding And Abetting Claim Against Financial Advisor
On August 29, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied defendants’ motions to dismiss an amended complaint in a long-running lawsuit arising from a sale of an interest in a pipeline by a general partner to a master limited partnership in which it held a controlling interest. Mesirov v. Enbridge Energy Co. Inc.
, C.A. No. 11314 (Del. Ch. Aug. 29, 2018). Plaintiff, a common unitholder of a Delaware master limited partnership (the “MLP”), brought claims for breach of the MLP’s Limited Partnership Agreement (“LPA”) against the general partner (the “GP”), its parent, and other affiliates. Plaintiff alleged that the GP acted in bad faith by purportedly selling the interest for $1 billion even though it had previously acquired the same interest from the MLP five years earlier for $800 million and earnings metrics had declined over the period by 20%. As discussed in our previous post
, Vice Chancellor Slights originally dismissed this suit in April 2016, but the Delaware Supreme Court reversed and remanded in March 2017, holding that bad faith was sufficiently pleaded. Here, Vice Chancellor Slights denied the GP’s motion to dismiss claims for breach of the LPA, finding them to be duplicative of the claims in the motion rejected by the Delaware Supreme Court in 2017. Vice Chancellor Slights also declined to dismiss new claims for aiding and abetting against the GP’s financial advisor, which had delivered a fairness opinion regarding the transaction.
Finding Merger Agreement Provisions Regarding Milestone Payments Ambiguous, Delaware Court Of Chancery Denies Dismissal Of Post-Merger Breach Claims
On August 10, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of contract claims stemming from a merger agreement pursuant to which defendant, Stora Enso AB, acquired non-party, Virdia, Inc. Fortis Advisors LLC v. Stora Enso Ab, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018). Plaintiff, Fortis Advisors LLC, as shareholder representative of Virdia’s pre-merger equity holders, asserted that Stora Enso breached the merger agreement in connection with its failure to achieve certain post-closing milestones obligating it to make certain contingent milestone payments. Finding competing interpretations of the merger agreement both reasonable, the Court declined to dismiss the breach claims.
Southern District Of New York Denies Claims For Investment Banking Fees, Holding That The Engagement Terminated And The “Agreement To Agree” Was Unenforceable
On August 10, 2018, Judge Jesse Furman of the United States District Court for the Southern District of New York denied claims for advisory fees brought by investment bank Stone Key Partners LLC (together with Stone Key Securities LLC, “Stone Key”) against its former client, Monster Worldwide, Inc. (“Monster”). Stone Key Partners LLC v. Monster Worldwide, Inc., Case No. 1:17-cv-3851-JMF (S.D.N.Y. Aug. 10, 2018). Monster engaged Stone Key in April 2012 to assist in a “review of strategic alternatives,” including a possible sale, and agreed to compensate Stone Key if it entered into certain transactions within 12 months of any termination of the engagement; Monster engaged another financial institution as a co-advisor. The engagement letter with Stone Key did not clearly require written notice of termination and provided that Stone Key would be paid 55% of a fee that “shall be mutually acceptable . . . and consistent with compensation agreements customarily agreed to by” investment banks for similar transactions in connection with any “partial sale” transaction within the tail period. The Court found that the engagement ended in August 2013, when it was clear (in the eyes of the Court) that the sale exploration process was over, and thus denied claims for transactions completed in 2015 and 2016. The Court also rejected as unenforceable the partial sale fee provision, finding it to be an unenforceable agreement to agree.
Finding Disclosures Inadequate To Merit Application Of Corwin, Delaware Supreme Court Reverses Court of Chancery Dismissal Of Post-Closing Breach Of Fiduciary Duty Claims
On July 9, 2018, the Delaware Supreme Court reversed and remanded a decision by the Delaware Court of Chancery to dismiss stockholder class claims for breach of fiduciary duty brought against the former directors of The Fresh Market (TFM) after its acquisition in a two-step take-private merger by affiliates of Apollo Global Management, LLC (“Apollo”). Morrison v. Berry
, No. 445, 2017 (Del. July 9, 2018). As discussed in our prior post
on this case, the Court of Chancery dismissed claims that the sale process undertaken by TFM was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor. Specifically, the Court of Chancery concluded that the facts regarding the involvement of TFM’s founder with Apollo were adequately disclosed in connection with the tender offer—in which 68.2% of shares were tendered—and the deal was therefore subject to the deferential business judgment rule under Corwin v. KKR Financial Holdings LLC
, 125 A.3d 304 (Del. 2015). Finding that the complaint adequately alleged several “materially incomplete and misleading” disclosures, the Delaware Supreme Court reversed.
Delaware Supreme Court Clarifies Standard For Contract Formation, Reversing And Remanding Court Of Chancery Decision On Enforceability
On May 24, 2018, in an opinion by Justice Karen L. Valihura, the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery dismissing breach of contract and related claims. Eagle Force Holdings, LLC, et al. v. Campbell
, C.A. No. 10803-VCMR (Del. May 24, 2018). As discussed in our prior post
on this case, the Court of Chancery found that a limited liability company agreement and associated contribution agreement under which plaintiff-appellant purported to bring claims were not binding because they lacked several “essential” terms. Reversing, the Delaware Supreme Court concluded that the agreements “sufficiently address[ed] all issues identified by the trial court as material to the parties.” But the Court remanded for reconsideration of the evidence to make a finding on the parties’ “intent to be bound.”
Delaware Court Of Chancery Relies On Corwin To Dismiss Post-Closing Fiduciary Duty Claims After Finding Acquiror Was Not A Controlling Stockholder
On March 9, 2018, Vice Chancellor Joseph R. Slights III, of the Delaware Court of Chancery, dismissed a stockholder class action complaint seeking damages for alleged breaches of fiduciary duty by directors of Rouse Properties Inc. (“Rouse”) and its 33.5% stockholder, Brookfield Asset Management, Inc. (“Brookfield”), arising out of Rouse’s merger with Brookfield in 2016. In Re Rouse Properties, Inc. Fiduciary Litigation
, C.A. No. 12194-VCS (Del. Ch. Mar. 9, 2018). Plaintiffs, pre-merger stockholders of Rouse, alleged that breaches of fiduciary duty by a special committee of the Rouse board that negotiated the deal, and Brookfield, as an alleged controlling stockholder, led to a transaction that grossly undervalued Rouse. The Court found that the complaint did not come even “remotely close” to pleading that Brookfield exercised the “managerial clout and retributive power to infer actual control.” Concluding that Brookfield was not a controlling stockholder, the Court dismissed the breach of fiduciary duty claims against Brookfield and, in light of the approval of the deal by a majority of the disinterested stockholders, applied the business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC
, 125 A.3d 304 (Del. 2015), to dismiss the claims against the special committee directors as well.
Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims In Connection With Two-Step Merger, Despite Finding Corwin Inapplicable
On November 30, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed breach of fiduciary duty claims against the board of Opower, Inc. (“Opower”) in connection with Opower’s acquisition by Oracle Corporation (“Oracle”). Van der Fluit v. Yate
s, C.A. No. 12553-VCMR (Del. Ch. Nov. 30, 2017). The Court found that the failure to disclose that certain executives who received transaction-related benefits were the primary negotiators of the transaction constituted a material disclosure violation. Therefore, the Court declined to rely on stockholder approval to cleanse the transaction under the doctrine of Corwin v. KKR Financial Holdings LLC
, 125 A.3d 304 (Del. 2015), because the tender was not fully informed. Nevertheless, the Court granted defendants’ motion to dismiss, concluding that plaintiff had failed to plead a non-exculpated claim for breach of the duty of loyalty.
Texas Federal District Court Invalidates IRS Regulations Limiting Inversion Transactions
On September 29, 2017, the United States District Court for the Western District of Texas granted summary judgment in favor of the U.S. Chamber of Commerce and Texas Association of Business, holding that the Internal Revenue Service (“IRS”) and U.S. Treasury Department violated the Administrative Procedures Act (“APA”) when they promulgated an anti-inversion rule that ultimately inhibited the merger of Allergan PLC and Pfizer Inc. Chamber of Com. of the U.S., et al. v. Internal Revenue Service, et al.
, No. 1:16-CV-944-LY (W.D. Tex. Oct. 6, 2017) (Amended Order). Specifically, the Court found that the government agency defendants were required—but failed—to provide the public and affected parties adequate notice and an opportunity to comment on the proposed anti-inversion rule before enacting it. The ruling, which also held that plaintiffs had standing to challenge the rule (and that the government agencies had authority to implement it), creates an opening for other companies considering a possible inversion transaction.
Delaware Court Of Chancery Orders Specific Performance, Finding Plaintiff Did Not Breach Its Contractual Obligation To “Reasonably Cooperate”
On September 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ordered defendant, Comdata, Inc. (“Comdata”), to specifically perform under, and pay damages for its termination of, its merchant agreement with plaintiff, TA Operating LLC (“TA”). TA Operating LLC v. Comdata, Inc., C.A. No. 12954-CB (Del. Ch. Sept. 11, 2017). Specifically, the Court held that defendant’s termination of the merchant agreement could not be excused because plaintiff had not materially breached its obligation to “reasonably cooperate” with defendant to implement new technology “as soon as reasonably practical.” In making this determination, the Court engaged in a “fact-specific inquiry” and relied in part on the parties’ “course of conduct,” finding that plaintiff had “made good progress” before encountering technological issues that caused delays and highlighting that defendant stayed “silen[t]” until it purported to terminate the agreement.
In A Post-Trial Opinion, Delaware Court Of Chancery Dismisses Breach Of Contract And Fiduciary Duty Claims For Lack Of Personal Jurisdiction
On September 1, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims for breaches of contract and fiduciary duty brought by plaintiffs against a prospective business partner, finding that the forum selection clause in which defendant consented to personal jurisdiction in Delaware was part of an unenforceable contract. Eagle Force Holdings, LLC v. Campbell
, C.A. No. 10803-VCMR (Del. Ch. Sept. 1, 2017). Specifically, the Court found that a limited liability company agreement and associated contribution agreement (the “Transaction Documents”) under which plaintiffs purported to bring claims were not binding because they lacked several “essential” terms. Absent agreement on these critical points, the Court held that the parties “did not intend to bind themselves to the written terms of the Transaction Documents.” Finding no other grounds for personal jurisdiction, the Court dismissed the action.
Delaware Chancery Court Dismisses Post-Closing Challenge To Two-Step Merger Under Corwin Finding Tendering Stockholders Were Fully Informed
On July 13, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a former stockholder’s breach of fiduciary duty claims against the former directors of Diamond Resorts International (“Diamond”) and an aiding and abetting claim against Diamond’s financial advisor in connection with Apollo Global Management LLC’s (“Apollo”) acquisition of Diamond in a two-step merger under Section 251(h) of the Delaware General Corporation Law, 8 Del. C.
§ 251(h). Appel v. Berkman
, C.A. No. 12844-VCMR (Del. Ch. July 13, 2017). Relying on Corwin v. KKR Financial Holdings LLC
, 125 A.3d 304 (Del. 2015) and In re Volcano Corp. Stockholder Litigation
, 143 A.3d 727 (Del. Ch. 2016), the Court held the merger was “cleanse[d]” because “the disinterested stockholders of Diamond were fully informed and uncoerced when they overwhelmingly accepted the tender offer.”
Delaware Chancery Court Declines To Dismiss Acquiror’s Post-Closing Indemnification Claims In Light Of Contractual Ambiguity In Stock Purchase Agreement
On May 3, 2017, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery declined to dismiss a lawsuit brought by the buyer of EMSI Holding Company (“EMSI”) asserting post-closing claims for indemnification against the sellers—the company’s former investors—for allegedly fraudulent representations made by EMSI in the Stock Purchase Agreement (“SPA”). EMSI Acquisition, Inc. v. Contrarian Funds, LLC, et al
., C.A. No. 12648-VCS (Del. Ch. May 3, 2017). Specifically, the Court concluded that extrinsic evidence is required to resolve an ambiguity in the SPA as to whether plaintiff’s indemnification claims were subject to contractual limitations on recovery. Significantly, the Court also declined to import a heightened pleading standard from federal securities fraud cases to assess whether the complaint adequately pleaded that the representations were fraudulent. Separately, the Court dismissed plaintiff’s additional claim for the “confirmation” under the Delaware Arbitration Act of an auditor’s post-closing determination—pursuant to the SPA—of purchase price adjustments, because the SPA “explicitly provide[d]” that the auditor was “acting as an expert and not an arbitrator.”
Delaware Supreme Court Determines “Reasonable Best Efforts” Provisions Impose Affirmative Obligations, But Affirms Chancery Court’s Refusal To Enjoin Merger Termination
On March 23, 2017, the Supreme Court of Delaware affirmed the Court of Chancery’s denial of an injunction sought by plaintiff The Williams Companies, Inc. to prevent defendant Energy Transfer Equity, L.P. from terminating a merger of the two energy companies. The Williams Companies., Inc. v. Energy Transfer Equity, L.P.
, C.A. Nos. 12168 & 12337 (Del. Mar. 23, 2017). The 4-1 decision authored by Justice James T. Vaughn, Jr. determined that the Chancery Court erred by “adopt[ing] an unduly narrow view of the obligations imposed” by defendant’s covenants in the merger agreement to use “reasonable best efforts” to consummate the deal and “commercially reasonable efforts” to secure an opinion from its outside tax counsel—a condition precedent to the merger—that the transaction qualified for tax-free treatment. According to the Delaware Supreme Court, those provisions “placed an affirmative obligation on the parties to take all reasonable steps to obtain the [tax-free] opinion and otherwise complete the transaction.” Nevertheless, the Supreme Court affirmed the denial of the injunction because the Chancery Court found that defendant’s conduct (or lack thereof) did not “materially contribute” to outside tax counsel’s decision not to issue the tax-free opinion.
Delaware Supreme Court Reverses Dismissal Of LPA Breach Claims, Holding General Exculpatory Provisions Did Not Preclude Claims For Breaches Of Specific Provisions And Easing The Standard For Pleading Bad Faith
On March 20, 2017, the Supreme Court of Delaware reversed the Court of Chancery’s dismissal of a lawsuit challenging a transaction between affiliated entities. Brinckerhoff v. Enbridge Energy Co.
, No. 273, 2016 (Del. Mar. 20, 2017). Plaintiff, a common unitholder of a Delaware master limited partnership, Enbridge Energy Partners, L.P. (the “MLP”), brought suit against several defendants, including the general partner Enbridge Energy Co. (“EEP GP”); its controlling parent, Enbridge, Inc. (“Enbridge”); another affiliate of each; and certain directors and officers of these entities. Plaintiff alleged that defendants approved a transaction involving conflicts of interest in bad faith and in violation of certain provisions of the MLP’s Limited Partnership Agreement (“LPA”). In reversing the dismissal, the Court held that (1) “good faith” and other provisions in the LPA exculpating the general partner from monetary damages can replace default fiduciary duties with a contractual good faith standard, but do not preclude equitable relief or alter the affirmative obligations under the LPA; and (2) bad faith was sufficiently alleged under the LPA “if the plaintiff pleads facts supporting an inference that [the general partner] did not reasonably believe it was acting in the best interest of the [MLP].”
Delaware Chancery Court Focuses On Negotiation History In Denying Former Securityholders A Milestone Payment Based On The Interpretation Of An Ambiguous Merger Agreement
On March 15, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery decided, post-trial, that a biopharmaceutical company was not required to pay a $50 million “milestone payment” under the terms of a merger agreement. Shareholder Representative Services LLC v. Gilead Sciences Inc. et al., C.A. No. 10537-CB (Del. Ch. Mar. 15, 2017). As noted by the Court, this case turned on the interpretation of one word—“indication”—as it was used in a merger agreement. Finding the term “ambiguous when construed within the four corners of the merger agreement,” the Court relied on extrinsic evidence—primarily related to the negotiation history—to determine that the limited approval of a drug to treat a narrow subpopulation of blood cancer patients did not constitute the requisite approval for a specified “indication” that would trigger the contractual milestone payment.
Delaware Chancery Court Dismisses Fraud Claim As Barred By Purchase Agreement Anti-Reliance Provisions
On November 30, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted, in part, ValueClick Inc.’s motion to dismiss in a fraud and contract dispute over alleged misrepresentations relating to the sale of certain of its subsidiaries to IAC Search, LLC. IAC Search, LLC v. Conversant LLC (f/k/a ValueClick, Inc.)
, C.A. No. 11774-CB, 2016 WL 6995363 (Del. Ch. Nov. 30, 2016). ValueClick, now known as Conversant LLC, sold six subsidiaries — including Investopedia, LLC — to IAC for $90 million in January 2014 pursuant to a Stock and Asset Purchase Agreement (the “Purchase Agreement”). In its complaint, IAC alleged that ValueClick fraudulently induced IAC to overpay for Investopedia by supplying false information to IAC during the due diligence process. IAC also asserted several claims for breaches of representations and warranties included in the Purchase Agreement. Although the Court upheld some of the breach of contract claims, Chancellor Bouchard found that “certain provisions of the [Purchase Agreement] add up to a clear disclaimer of reliance on extra-contractual statements that bar IAC’s claim for fraud.”
Southern District of New York Grants Partial Summary Judgment Rejecting Successor Liability in Copyright Infringement Dispute
On July 15, 2016, Judge Naomi Buchwald of the United States District Court for the Southern District of New York granted partial summary judgment to defendant Cowen & Company, LLC (“Cowen”) on successor liability claims brought by Energy Intelligence Group, Inc. and Energy Intelligence Group (UK) Limited (together, “EIG”). Energy Intelligence Grp., Inc. v. Cowen & Co.
, No. 14-cv-03789 (S.D.N.Y. July 15, 2016). The Court held that the assignment of the assets of Dahlman Rose & Company LLC (“Dahlman”) to Cowen following the acquisition of Dahlman by Cowen’s parent company, Cowen Group, did not create successor liability for alleged copyright infringement by Dahlman. In so holding, the Court rejected the plaintiffs’ argument that two exceptions to the rule against successor liability for the assignment of assets applied, namely that Cowen had either expressly assumed Dahlman’s tort liability or that the acquisition was a de facto
Delaware Chancery Denies Williams’ Request to Enjoin ETE from Terminating $38 Billion Deal
On June 24, 2016, Vice Chancellor Sam Glasscock III of the Delaware Chancery Court issued a memorandum opinion denying a request by plaintiff The Williams Companies Inc. (“Williams”) to enjoin defendant Energy Transfer Equity L.P. (“ETE”) from terminating its merger agreement with Williams. Williams Cos. v. Energy Transfer Equity, L.P.
, C.A. No. 12168-VCG, memo op. (Del. Ch. June 24, 2016). Vice Chancellor Glasscock held that ETE was contractually entitled to terminate the merger because a mutual condition precedent—the issuance of a tax opinion by ETE’s counsel, Latham & Watkins LLP (“Latham”), that the transaction should receive tax-free treatment under Section 721(a) of the Internal Revenue Code (the “721 Opinion”)—was not satisfied. Central to the decision was the Vice Chancellor’s conclusion that Latham’s determination was made in good faith. Although Williams has appealed the decision, ETE terminated the merger as of June 29, 2016.