© 2019 Morgan, Lewis & Bockius LLP

2019 JEGI MEDIA AND TECHNOLOGY CONFERENCE

LEGAL UPDATE

Robert W. Dickey January 17, 2019

THE BIG:

AKORN v. FRESENIUS (Del. December 7, 2018)

AKORN v. FRESENIUS

• Fresenius agreed to acquire Akorn in April 2017 • Following execution of the merger agreement, Akorn

experienced a dramatic decline in financial performance, including 51% decline in EBITDA compared to prior year

• Prompted by a whistleblower, Akorn also faced unexpected regulatory issues that would have cost $900 million to remediate – just over 20% of deal price

• Fresenius investigated and discovered bad acts by management, including cancellation of regular audits and failure to maintain sufficient data integrity system

• Fresenius notified Akorn that it was terminating the merger agreement, and Akorn sued

AKORN v. FRESENIUS

Takeaways: • Standard remains: effect must substantially threaten the

overall earnings potential of the target in a durationallysignificant manner

• Financial MAE not viewed through lens of buyer • But see footnote re: durational significance for

financial sponsors • Regulatory MAE viewed from both qualitative and

quantitative perspective • Court suggested in dicta that best efforts, commercially

reasonable efforts and other similar standards are functionally the same

THE SMALL:

CORPORATE VC DEALS AND

MINORITY STOCKHOLDER

EXIT ISSUES

CORPORATE VENTURE CAPITAL

• In 2018, corporate venture capital deals continued to increase both in terms of number of deals and aggregate deal value

• National Venture Capital Association observed that corporate VCs were involved in 16.1% of venture rounds by deal count, and accounted for 50.9% of VC capital investment

• Corporate VCs may offer greater resources to issuers • Corporate VCs may have different goals for exits – an IPO

or sale of entire company may not be desired

CORPORATE VENTURE CAPITAL

• Fiduciary duties of directors can be tricky to navigate, and conflicts can develop quickly

• Some corporate VCs appoint non-employees to boards, or insist on the right to appoint only an observer • But these approaches can create tension with the

notion that the corporate VC is bringing to the table strategic insight that a traditional VC does not

• It is often prudent for corporate VCs to consider carefully the extent to which confidential information regarding the issuer is shared internally

• Everyone in the ecosystem – the corporate VC, the issuer and any other investors – needs to reconsider assumptions about how the relationship will work

DUTIES OF DISCLOSURE TO MINORITY STOCKHOLDERS

• Cirillo Family Trust v. Moezinia (Del. Ch. July 11, 2018) • Endo Pharmaceuticals acquired DAVA Pharmaceuticals in

August 2014• All DAVA stockholders approved the merger by written

consent except for one – which held 0.27% of the outstanding shares

• The DGCL gives stockholders appraisal rights• Notice of appraisal rights was “clearly” legally deficient:

contained no financial information, description of the business or its prospects or discussion of the merger price

• “Odd procedural posture” meant that most of the stockholder’s claims were dismissed, but court permitted disclosure claims against officers to go forward

DRAG ALONG RIGHTS

• Halpin v. Riverstone National, Inc. (Del. Ch. Feb 26, 2015)• Greystar Real Estate Partners acquired Riverstone National

in June 2014• Stockholder holding 91% of outstanding shares approved

merger by written consent• Riverstone attempted to use a drag-along right in its

stockholders agreement to cut off appraisal rights• Use of drag right not allowed because notice provided

after closing, contrary to terms of agreement • Takeaway: read the agreement!

• Left open question of whether stockholders can waive appraisal rights in advance by contract

• That question was answered in 2018

DRAG ALONG RIGHTS

• Manti Holding, LLC et al. v. Authentix Acquisition Co. (Del. Ch. October 1, 2018)

• Blue Water Energy acquired Authentix in September 2017• Stockholders approved merger by written consent• Stockholders agreement required stockholders to “refrain

from exercise of appraisal rights” • Minority stockholders attempted to exercise appraisal

rights• Chancery Court rejected their arguments, holding that,

among other things, the provision did not violate public policy

• But minority stockholders are seeking reargument – more to come

THE UNKNOWN:

CFIUS

CFIUS

• CFIUS has historically been a bit of a black hole

• However, some elements were predictable

CFIUS

• Foreign Investment Risk Review Modernization Act (“FIRRMA”) enacted in August 2018

• On October 12, 2018, CFIUS released interim rule establishing pilot program

• Obligations with respect to CFIUS expanded in multiple ways: • Filing for transactions within scope now mandatory

instead of voluntary • Non-controlling investments now within scope (with

carveout for truly passive fund investments) • Adds new category of “critical technologies”: emerging

and foundational technologies

CFIUS

• “Emerging and foundational technologies” is not defined in interim rule

• However, some proposed categories are potentially quite expensive, such as: • “Machine learning technology, such as…planning (e.g.,

scheduling, game playing)”• “position, navigation, and timing (PNT) technology”

• Need to consider CFIUS with respect to deals where it might not have been considered before

• Big caveat: final implementing regulations have not yet been issued… and may not be until February 13, 2020

THANK YOU

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