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M&A Key Delaware Law Updates for 2014 Implications of Important Rulings for Standard for Deal Review, D&O Fiduciary Duties, Forum Selection and Attorney-Client Privilege
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THURSDAY, MARCH 6, 2014
Presenting a live 90-minute webinar with interactive Q&A
Michael D. Allen, Director, Richards Layton & Finger, Wilmington, Del.
Samuel T. Hirzel, Partner, Proctor Heyman, Wilmington, Del.
Patricia O. Vella, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del.
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M&A Key Delaware Law Updates For 2014
March 6, 2014 Michael D. Allen (302) 651-7760 [email protected]
Standard of Review - Going-Private Transactions
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Going-Private Transactions The applicable standard of review which will be applied by
Delaware courts to going-private transactions in which controlling stockholders are involved is an evolving area of the law.
The role of the controlling stockholder in the transaction and the protective devices utilized in the process, if any, may dictate the applicable standard of review.
A nuanced factual analysis will also be employed by Delaware courts in assessing whether protective devices, such as use of a special committee or a majority-of-the-minority vote should be credited.
Three flavors – (i) controlling stockholder on other side, (ii) controlling stockholder getting different consideration and (iii) controlling stockholder receiving the same consideration.
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Going-Private Transactions (Controller as Buyer) - MFW In In re MFW S’holders Litig., the Court of Chancery granted
summary judgment in an action challenging a merger of M&F Worldwide with its controlling stockholder
The Court of Chancery found that business judgment standard of review applies to a controlling stockholder merger when it is subject, from the outset, to: Negotiation and approval by a fully functioning and duly
empowered special committee of independent directors; and The uncoerced, fully informed vote of a majority of the minority
outstanding stockholders The Court of Chancery distinguished Kahn v. Lynch and its
progeny (which would have resulted in application of entire fairness ab initio)
Appeal is pending in the Delaware Supreme Court 8
Going-Private Transactions (Controller as Buyer) - Dole In In re Dole Food Co., Inc. S’holder Litig., the Court of
Chancery denied stockholder plaintiffs’ motion to expedite proceedings relating to the going-private transaction by Dole’s 40% stockholder that fit within the MFW framework
The Court of Chancery found that, although the plaintiffs alleged colorable claims, there was no irreparable harm because “this is one of those situations where there is a monetary damages remedy that is available.”
A distinction was made by the Court of Chancery between third party transactions, in which the need for expedition and potential injunction relief prior to closing is greater, and controlling stockholder transactions, in which the stockholders can litigate to obtain “real money.” 9
Going-Private Transactions (Different consideration for Controller) - Volgenau In SEPTA v. Volgenau, the Court of Chancery held that a merger
between a corporation with a controlling stockholder and a third-party private equity buyer was entitled to review under the business judgment rule due to the use of “robust procedural protections”
Noting that the circumstances in MFW were slightly different because the controller in MFW stood on both sides of the transaction, the Court of Chancery held that the business judgment rule would nonetheless apply if the procedural protections set forth in In re John Q. Hammons Hotels Inc. S’holder Litig. were met, namely: Transaction recommended by disinterested and independent special
committee; Special committee had sufficient authority and opportunity to bargain on
behalf of minority (including the ability to hire independent advisors); Transaction approved by stockholder in non-waivable majority of
minority vote; and Vote was fully informed and non-coercive
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Going-Private Transactions (Same consideration for Controller) – Morton’s/Synthes Recent decisions of the DE Court of Chancery have generally
confirmed that where a controlling stockholder receives the same consideration as all other stockholders, entire fairness will not apply.
In In re Morton’s Restaurant Group, the Court of Chancery stated: “[T]h presumption is that a large blockholder, who decides to take
the same price as everyone else, believes that the sale is attractive, and this is a strong indication of fairness and that judicial deference is due.”
In In re Synthes, the Court of Chancery stated: There are only “narrow circumstances” where a controlling
stockholder’s desire to sell in a transaction according equal treatment to all stockholders would create a disabling conflict of interest.
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Single Bidder Transactions
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Single Bidder Transactions - Plains In In re Plains Exploration & Production Co. S’holders Litig., the
Court of Chancery denied plaintiffs’ motion to preliminarily enjoin the merger, notwithstanding that the board did not form a special committee, allowed the CEO to direct the negotiations, failed to conduct a pre-signing market check and agreed to various deal protection devices Decision not to conduct a pre-signing market check was
reasonable because both options—completing the transaction or remaining a stand-alone company—“were financially attractive,” and the directors had “relevant expertise and experience [to] support a reasonable inference that they were informed and competent to make an appropriate decision” as to the fairness of the merger
In a single bidder transaction, the board must “rely more extensively on its own knowledge and the knowledge of its financial advisor in determining whether the proposed transaction is priced fairly.” 13
Single Bidder Transactions - NetSpend In Koehler v. NetSpend Holdings, Inc., the Court of Chancery
denied plaintiff’s motion for preliminary injunction despite finding that a majority of an independent and disinterested board of directors likely breached its fiduciary duties
The Court concluded that the defendant directors did not act reasonably to maximize stockholder value by pursuing a single bidder negotiating strategy where the directors: Agreed to deal protection devices that effectively foreclosed a post-
signing market check, including a don’t ask, don’t waive standstill; and Relied on a fairness opinion that was a “particularly poor simulacrum of
a market check” Discussing the weakness of the fairness opinion, the Court noted
that although the weakness of the fairness opinion did not demonstrate that the price was unfair, it did indicate that it was a poor substitute for a market check, thereby contributing to the unreasonableness of the single bidder sales process as a whole
Notwithstanding the foregoing, because no alternative bidder had emerged, the Court of Chancery declined to enjoin the merger
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Fiduciary Duty Considerations in Transactions with Venture-Backed Companies
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Venture Backed Companies – Trados In the post-trial decision in In re Trados Inc. Shareholders
Litigation, the Court of Chancery found a merger in which the common stockholders received no consideration to be entirely fair. Designees of four VC funds holding preferred stock and
representing the controlling interest constituted four of the seven board members.
Total consideration paid in the merger was $60 million: $52 million to preferred stockholders, $8 million to management incentive plan, and $0 to common stockholders.
Previously, allegations that four of the seven directors were serving on the board at the behest of the preferred stockholders were found to be sufficient to rebut the presumption of the business judgment rule.
The Court of Chancery concluded that, although the process was not fair and the directors’ testimony was not credible, the board’s decision to approve the merger was entirely fair because the common stock had no economic value before the merger, and the appraised value of the common stock was zero.
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Venture Backed Companies – Trados The Court of Chancery reasoned that the process was not fair
because the directors:
analyzed the transaction from the perspective of holders of preferred stock;
did not consider how to fairly allocate the funds payable pursuant to the management incentive plan among the common and preferred stockholders;
did not consider how the management incentive plan skewed the negotiation and structure of the merger in a manner adverse to the common stockholders;
did not understand that their role was to maximize value for the common stockholders; and
did not consider conditioning the merger on the approval of a majority of the disinterested common stockholders.
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Venture Backed Companies – Trados In addition to finding that the common stock had no economic
value, the Court of Chancery determined that there was no reasonable prospect to generate value for the common stock because none of the VC funds would invest more money and the company could not return to the venture debt market or self-fund its business plan.
Although the board had approved resolutions finding that the
fair market value of the common stock was $0.10 per share for the purposes of making option grants, the Court found that valuation was arbitrary and false.
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Venture Backed Companies – Carsanaro
In Carsanaro v. Bloodhound Technologies, Inc., the Court of Chancery denied defendants’ motion to dismiss a complaint alleging breaches of fiduciary duties and statutory violations in connection with several rounds of venture capital financings.
The company issued five series of preferred stock. The former common stockholders alleged that the last two capital raises were
pushed through by the controlling venture capital firms, unfairly diluted the common stockholders, undervalued the company and improperly benefited the venture capital firms and management.
Plaintiffs challenged two additional transactions: A 1-for-10 reverse stock split of the common stock in connection with the last
round of capital raising, and A merger in which the common stockholders received $36,000 of $82.5 million in
merger proceeds after the board approved a management incentive plan that allocated $15 million of the proceeds to the company’s management.
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Venture Backed Companies – Carsanaro
The Court of Chancery found that the board’s approval of the last two rounds of financing and of the merger were subject to entire fairness. The directors were dual fiduciaries for the company and the
venture capital firms purchasing the preferred stock. The “diversion of 18.87% of the Merger consideration through the
[management incentive plan] supports reasonable inference that the Merger was unfair.”
The Court held that the complaint stated a claim that the
reverse stock split was not effective because the charter amendment as filed was different from the amendment approved by the board and stockholders.
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Michael D. Allen
Director
302.651.7760
This presentation and the material contained herein are provided as general information and should not be construed as legal advice on any specific matter or as creating an attorney-client relationship. Before relying on general legal information or deciding on legal action, request a consultation or information from a Richards, Layton & Finger attorney on specific legal needs.
Copyright © 2014 Richards, Layton & Finger, P.A. All rights reserved.
For Additional Information
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DELAWARE’S RESPONSE TO THE MULTI-FORUM LITIGATION PROBLEM
Forum Selection Provisions & Doctrinal Improvements to the Doctrine of Forum Non Conveniens and the First Filed Rule
Samuel T. Hirzel, II PROCTOR HEYMAN LLP
Background
PROCTOR HEYMAN LLP 23
Delaware does not hold a monopoly on corporate class and derivative litigation.
Multi-forum litigation proliferated in the past decade and the Court and practitioners struggled with how to deal with this problem. In re Allion Healthcare Inc. S’holders Litig., 2011 WL 1135016, *4 (Del. Ch. Mar. 29, 2011) (Chandler, C.) (“Judges, defense
counsel and the plaintiffs’ bar are now routinely confronted with these sorts of disputes and have yet to come up with a workable solution. The potential problems, as one can imagine are numerous. Defense counsel is forced to litigate the same case – often identical claims – in multiple courts. Judicial resources are wasted as judges in two or more jurisdictions review the same documents and at times are asked to decide the exact same motions. Worse still, if a case does not settle or consolidate in one forum, there is the possibility that two judges would apply the law differently or otherwise reach different outcomes, which would then leave the law in a confused state and pose full faith and credit problems for all involved. Efficiency and comity would be better served if these cases were litigated in one jurisdiction.”)
Cornerstone Research reported last year that filings in both Chancery and another court have increased from 40% in 2007 to 72% in 2012.
Motions filed in multiple courts asking to proceed in one forum – later deemed not helpful by the Court of Chancery. Klein v. Walton, C.A. No. 7555-CS, tr. at 8-9 (Del. Ch. July 16, 2012); Compellent Techs., Inc. S’holder Litig., C.A. No. 6084-VCL, tr. at 24 (Del. Ch. Jan. 13, 2011).
Forum Selection Clauses in Bylaws and Charters
PROCTOR HEYMAN LLP 24
In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 960 (Del. Ch. 2010) (“if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.”) (Laster, V.C.).
Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934
(Del. Ch. 2013) (Strine, C.). Chancellor Strine found that forum selection bylaws are statutorily
valid under 8 Del. C. § 109(b) and contractually valid and enforceable. The Court addressed facial validity of the bylaws only, and left open
the possibility that application of such bylaws in specific factual scenarios may be unreasonable or inequitable.
Appeal did not proceed.
Proposed Doctrinal Improvements
PROCTOR HEYMAN LLP 25
One of the more significant “developments” in Delaware was the retirement of Chief Justice Steele, and the elevation of Chancellor Strine to Chief Justice of the Delaware Supreme Court
Leo E. Strine, Jr., Lawrence A. Hamermesh & Matthew C. Jennejohn,
Putting Stockholders First, Not the First-Filed Complaint, 69 BUS. LAW. 1 (2013). Advocates a doctrinal rebuttable presumption of the forum of the
chosen state of incorporation when dealing with corporate litigation filed in multiple fora. Placing greater emphasis on voluntary choice of law and the development of
precedential guidance by the courts of the state responsible for supplying the chosen law in a forum non conveniens analysis and the internal affairs doctrine rather than increasingly irrelevant geographic considerations.
Eliminating the traditional deference to first-filed cases except where the later action is an attempt to undo or circumvent progress in the first-filed proceeding.
“Prior Law Changed”
PROCTOR HEYMAN LLP 26
On February 20, 2014, the Delaware Supreme Court issued an opinion on the doctrine of forum non conveniens.
Martinez v. E.I. DuPont de Nemours & Co., Inc., --- A.3d ---, 2014 WL 685685 (Del. Feb. 20, 2014). Both Chancellor Strine and Vice Chancellor Noble sat on the en banc panel by designation.
The Court found that the trial court did not abuse its discretion in dismissing the case on forum non conveniens grounds in an action filed in Delaware by Argentine nationals against DuPont (headquartered in Delaware) claiming that they were exposed to asbestos while working in textile plants located in Argentina.
Previously we had cases such as Candlewood timber Grp., LLC v. Pan American Energy, LLC, 859 A.2d 989, 1002-03 (Del. 2004) in which the Court seemed to bend over backwards to keep even cases involving Argentine real property in Delaware even where it required foreign law to be introduced through expert witnesses.
The Court noted that “Delaware’s jurisprudence in forum non conveniens cases is well established” and applied the traditional Cryo-Maid factors, but clarified (or changed) prior case law by explaining that “although the overwhelming hardship standard is stringent, it is not preclusive.”
In affirming the Superior Court’s dismissal in favor of Argentina, the Court noted: “the Superior Court acted fully within its discretion under our precedent by giving weight to the novelty and importance of the legal issues presented in this case – especially
since the governing law is set forth in Spanish, not English. That court permissibly concluded that those issues were more appropriately determined by the courts of the only sovereign whose law is at stake – Argentina – just as this Court has recognized that novel or important issues of Delaware law are best determined by Delaware courts.”
“just as our cases have recognized the plaintiff’s substantial interest in having important open questions of Delaware law decided by our courts, a principled application of that reasoning must give reciprocal weight to defendant’s interest in having important issues of foreign law decided by the courts whose law governs the case.”
Justice Berger issued a rare, and strongly worded dissent: “In order to make a statement about Delaware’s corporate franchise, the majority announces a non-existent ‘tension among our prior forum non conveniens decisions that we cannot ignore.’ The majority then disregards stare decisis, overrules settled law, and focuses on an issue of Argentine law, which may not be at all novel or difficult, as a basis to find ‘overwhelming hardship.’ In the past, this Court has not used its decisions to send messages on other subjects. In the past, this Court has not changed the law without a compelling reason. In the past, this Court has been forthright in its analysis of the trial court’s decision and its own precedent. The majority opinion takes an unsettling new approach to this Court’s decisionmaking.”
The majority address these concerns in the Opinion of the Court, noting that “prior decisions gave inadequate weight” to the Cryo-Maid factor addressing “the importance of the right of all parties (not only plaintiffs) to have important, uncertain questions of law decided by the courts whose law is at stake….”
ATTORNEY-CLIENT PRIVILEGE
Traps for the Unwary Client
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Who Holds the Privilege After an Acquisition?
PROCTOR HEYMAN LLP 28
Great Hill Equity Partners v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013) (control over all privileged communications passes to the surviving corporation in a merger) (Strine, C.). Buyer corporation brought action against seller corporation alleging that seller
corporation fraudulently induced the acquisition. Buyer discovered communications between seller and seller’s outside counsel on seller’s
computer system. Seller asserted the privilege over those communications. Buyer filed a motion to resolve the privilege dispute. The Court reasoned that the issue was one of statutory interpretation under Section 259
of the DGCL (“all property, rights, privileges… and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation…”).
The Court found that “all” means “all,” which included privileged pre-merger communications that related to the merger negotiations.
The Court rejected contrary reasoning in a New York case applying New York privilege law and a Delaware case that relied on that New York case when addressing an asset purchase agreement governed by New York law but that did not address Section 259 of the DGCL.
Recognizing the contractarian nature of Delaware corporate law, the Court noted that the merger agreement can provide otherwise.
Directors’ “Unfettered” Rights to Company Privileged Communications
PROCTOR HEYMAN LLP 29
Kalisman v. Friedman, 2013 WL 1668205 (Del. Ch. Apr. 27, 2013) (directors have unfettered access to company privileged documents in derivative litigation) (Laster, V.C.). Kalisman’s entity sought to replace all of the directors except for Kalisman. Defendant Directors began acting behind Kalisman’s back and cut him out of board level discussions
with the exception of required notices through the use of committees. Defendant Directors negotiated a recapitalization without Kalisman’s involvement. Defendant Directors then sought to postpone the meeting to permit stockholders that bought shares
in connection with the recapitalization to vote. Kalisman filed an action challenging the postponement of the meeting, the new record date, and the
completion of the recapitalization. He subpoenaed the Company and the Special Committee’s legal advisors, and the Director Defendants invoked the privilege – basically seeking all of the board’s communications with counsel regarding their strategic maneuvers.
The Court held that as a director, Kalisman had essentially an unfettered right to information, including privileged information, and the Company could not pick and choose which directors get information by asserting the privilege.
There are, however, exceptions. The Court noted that this right could be diminished by an “ex ante agreement among the contracting
parties.” Once the Board openly created a sub-committee of the Special Committee, the sub-committee could
assert privilege. Once the parties’ interests became adverse – here at the vote on the challenged recapitalization – Kalisman
could no longer have a reasonable expectation that he was a client of the Board or the Special Committee’s counsel.
Use of Company Email Accounts
PROCTOR HEYMAN LLP 30
In re Info. Mgmt. Servs., Inc. Deriv. Litig., 2013 WL 4772670 (Del. Ch. Sept. 5, 2013) (Laster, V.C.). Trusts owning 50% of the common stock of IMS alleged that two of the
Company’s three most senior officers mismanaged IMS in breach of their fiduciary duties.
Officers invoked privilege over documents from their IMS email accounts in which they consulted with their personal lawyers and advisors regarding the dispute.
Trusts moved to compel because IMS reserved the right to monitor IMS accounts removing any reasonable expectation of privacy.
The Court found that the emails were not privileged.
Business vs. Legal?
PROCTOR HEYMAN LLP 31
MPEG LA, L.L.C v. Dell Global B.V., 2013 WL 6628782 (Del. Ch. Dec. 9, 2013) (privilege) (Parsons, V.C.). In camera inspection of a sampling of documents from a privilege log consisting of (a) communications that included Dell’s in-house
legal director who allegedly served in a mixed role in the dealings between the parties, (b) emails sent among non-lawyers reflecting an intent to seek legal advice, and (c) emails among non-lawyers providing or seeking information to facilitate legal advice.
The attorney-client privilege protects only: Communications themselves, not the underlying facts of those communications. Legal advice, not business or personal advice.
Where business and legal advice are inseparable in a communication, the communication will be considered privileged only if the legal issues predominate.
If the business and legal advice can be segregated, they must be redacted and produced. In very close calls, the Court will err on the side of the privilege. With limited exceptions the Court upheld the assertion of privilege finding that the communications were for the purposes of
facilitating legal services or mixed business and legal communications that could not be easily redacted.
AM General Holdings LLC v. Renco Group, Inc., 2013 WL 2668627 (Del. Ch. Apr. 18, 2013) (work product) (Noble, V.C.). AMG as a contractual matter was required to value the revalued capital accounts – a business function. AMG had lawyers perform this work, including reviewing the contract and valuing accounts. “Simply because the persons doing the work are lawyers does not necessarily support the conclusion that lawyer-based privileges
are in effect…. The key question is why was each document created? If created because of a contract requirement, it is likely not privileged. If created in anticipation of litigation, it is likely privileged. The difficulty arises when both considerations played a role in the preparation of the document.”
The Court itself noted that drawing the line between business functions and legal functions is not easy – “figuring out where the preparation of a contractually-required document falls on a continuum between performance of a basic contractual function and performing legal analysis is not an easy one, especially where the descriptions of the documents are meager.”
The Court ultimately looked at the timeframes in which the documents were created and permitted AMG to redact attorney mental impressions, including potential settlement considerations, predictions as to how the Court might resolve the issue, and discussions of how the dispute might evolve.
APPRAISAL LITIGATION
Merger Price as Evidence of Statutory “Fair Value”?
PROCTOR HEYMAN LLP 32
Appraisal Litigation
PROCTOR HEYMAN LLP 33
Section 262 of the DGCL provides a procedure for a judicial determination of the “fair value” of shares of stock of Delaware corporations in certain types of mergers.
Section 262 of the DGCL grants the Court significant discretion to determine the “fair value” of the shares and “take into account all relevant factors.”
The Court has historically expressed a strong preference for DCF based valuations using contemporaneous management projections.
The Court is not bound by the price paid in the merger even when that price is the result of arms’ length negotiations and, indeed, the Delaware Supreme Court has specifically rejected any presumption in favor of the merger consideration as evidence of “fair value” in an appraisal action.
Huff Fund Investment Partnership v. CKx, Inc., 2013 WL 5878807 (Del. Ch. Nov. 1, 2013) (Glasscock, V.C.)
PROCTOR HEYMAN LLP 34
Appraisal of the Company holding the rights to, among other things, license American Idol. The transaction occurred while the Company was renegotiating its contracts with Fox for American Idol. Petitioner relied on management’s projections, including management’s projections for future revenues from American
Idol – which had also been shared with potential lenders. Respondent disregarded the forecasted increases in license fees for American Idol and assumed a lower growth rate.
The Court rejected both parties’ valuation methodologies finding that: the inputs to the comparable companies and comparable transactions analyses simply were not comparable and; the parties’ respective DCF valuations were not reliable because they were based on unreliable projections compiled by
the Company’s management. Without reliable projections or truly comparable companies or transactions, the Court was unable to conduct a reliable valuation
based on either a comparables analysis or a DCF analysis.
With no reliable valuation methodologies to use, the Court fell back on the merger consideration as an indicator of value. The Court relied on former Vice Chancellor Strine’s analysis in Union Illinois 1995 Inv. Ltd. P’ship v. Union Fin. Grp., Ltd., 847
A.2d 340, 357 (Del. Ch. 2004), which placed 100% weight on the merger consideration. The Court distinguished the Delaware Supreme Court’s decision in Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del.
2010), which rejected an attempt to have the Supreme Court reform appraisal law by imposing a new presumption in favor of the merger price as evidence of fair value, reasoning that the merger consideration remains a “relevant factor” for the Court of Chancery to consider in an appraisal action.
The Court gave the parties leave to submit additional briefing regarding whether the merger consideration included synergies that would need to be backed out or failed to include other elements of value that were not reflected in the merger consideration.
Another Unreliable Projection
PROCTOR HEYMAN LLP 35
Investors in several recent mergers (Dell, Dole Foods, 3M/Cogent) have exercised or announced an intention to exercise appraisal rights.
In some cases, investors have bought into the appraisal action, buying shares in anticipation of seeking appraisal if there is not a price bump.
If the merger consideration less synergies continues to be used as evidence of fair value these investors may be better off accepting the merger consideration that includes those synergies. Huff, if it stands up on appeal, may chill this trend.
The use of the merger consideration as evidence of “fair value” in appraisal litigation is another issue to watch for from the Supreme Court under the stewardship of Chief Justice Strine – who was, of course, the author of Union Illinois.
M&A Key Delaware Law Updates for 2014
Patricia O. Vella
Morris, Nichols, Arsht & Tunnell LLP
March 6, 2014
© 2014 Morris, Nichols, Arsht & Tunnell LLP 8028431
Technical Delaware Law Issues
1. Non-Reliance Provisions
2. Survival Clauses & Statues of Limitation
3. Attorney Client Privilege
4. Ratification
38
Non-Reliance Provisions Transdigm Inc. v. Alcoa Global Fasteners, Inc., 2013 WL 2326881 (Del. Ch. May 29,
2013) At diligence session, TransDigm representatives “responded that there were no[]” price disputes,
supplemental agreements, or negotiations with a key customer when, in fact, approximately two years earlier, it had agreed to a 5% price reduction not due to take effect for another year due to the specific customer’s dissatisfaction with existing pricing terms. Additionally, the customer recently had informed TransDigm that it was considering moving approximately 50% of its business to a competitor.
Non-reliance clause: “Buyer has undertaken such investigation and has been provided with and has evaluated such documents and information as it has deemed necessary to enable it to make an informed decision with respect to the execution, delivery and performance of this Agreement and the transactions contemplated hereby. Buyer agrees to accept the Shares without reliance upon any express or implied representations or warranties of any nature, whether in writing, orally or otherwise, made by or on behalf of or imputed to TransDigm or any of its Affiliates, except as expressly set forth in this Agreement.”
Missing: disclaimer of “accuracy and completeness” of diligence materials.
Court declined to dismiss fraud claims based on active concealment because, “[c]onsistent with this representation, . . . Alcoa reasonably could have relied on the assumption that TransDigm was not actively concealing information that was responsive to Alcoa’s inquiries and that TransDigm was not engaged in a scheme to hide information material to Alcoa’s purchase of [the target]. In other words, the language in Section 5.8 does not clearly disclaim reliance on the type of concealment and omission that Alcoa alleges here.” 39
Non-Reliance Provisions Anvil Hldg. Corp. v. Iron Acq. Co., Inc., 2013 WL 2249655 (Del. Ch. May 17, 2013)
Similar facts to Alcoa—Buyer alleged that the defendants knew of pricing disputes and material pricing changes with a key customer, “but deliberately hid this information” and “delayed making any official arrangements with [the customer] until the Transaction had closed.”
Non-reliance & integration clause: Neither the Company nor any Seller “makes any other express or implied representation or warranty with respect to the Company . . . or any Seller or the transactions contemplated by this Agreement” and “[t]his Agreement . . . constitutes the entire Agreement among the Parties (and the Sellers’ Representatives) with respect to the subject matter of this Agreement and supersede[s] all other prior agreements and understandings, both written and oral, between the Parties with respect to the subject matter of this Agreement.”
But: Indemnification provision carved out claims for fraud.
Court declined to dismiss fraud claims because, “[t]he Sections just quoted do not state that the parties disclaim reliance upon extra-contractual statements. They indicate that the Company represented that neither it nor any Seller was ‘making any other express or implied representation or warranty with respect to the Company’ and that the Purchase Agreement constitutes the entire agreement of the parties. The Buyer’s fraud claim is not precluded by this promise. . . . In addition, the parties to this Purchase Agreement agreed to ‘reserve[] all rights with respect to’ any claims based on fraud or the bad faith of any party. Thus, other language in the Purchase Agreement provides further evidence that the parties intended that fraud claims could be based on extra-contractual representations.”
40
ENI Holdings, LLC v. KBR Gp. Hldgs., LLC, 2013 WL 6186326 (Del. Ch. Nov. 27, 2013) A survival clause (Section 6.01) stated that representations and warranties “terminate on” March
23, 2012 (approximately 15 months after closing). An indemnification provision then stated, “Subject to the limitations set forth in this Article VI,” that the seller agreed to indemnify the purchaser for any losses resulting from breaches of representations and warranties and went on to provide a notice procedure for submitting such indemnification claims.
Court found the termination date in the survival clause to be a contractual agreement to shorten the statute of limitations for breaches of representations and warranties and that compliance with the notice procedure was not sufficient to preserve a claim unless an actual lawsuit was filed before the representations and warranties “terminated.” “It is not a reasonable interpretation of the SPA that [the buyer] can preserve a lawsuit based
on an expired representation or warranty merely by providing notice before the applicable Termination Date.”
But Court allowed fraud claims to proceed after finding that the contract was ambiguous as to whether the parties intended for the contractual time limitation to apply to fraud claims as well.
The Court also expressly confirmed prior precedent, GRT, Inc. v. Marathon GTF Tech., Ltd., 2011 WL 2682898 (July 11, 2011), that an ordinary survival clause is sufficient to constitute a contractual agreement to shorten otherwise applicable limitations periods under similar facts.
Survival Clauses & Statutes of Limitation
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Delaware cases prohibit extending 3-year statute of limitations for contracts.
It is possible to have a 20-year limitations period if a contract is “under seal.”
To be considered “under seal”:
Debt instruments (e.g., mortgages, promissory note) – Only require minimal reference to a seal.
Other instruments signed by individuals – Only require minimal reference to a seal (e.g., the word “seal” next to signature).
Other instruments signed by corporations and other entities – Arguably need to demonstrate intent for the instrument to be sealed (e.g., recital and representation in body of contract).
Note: Although we are not aware of a case on point, it appears logical that a statute of limitations may be shortened with respect to a contract under seal.
Takeaway: consider SOL issues.
Survival Clauses & Statutes of Limitations
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Contract Outs: Three types of provisions to consider: Control of the Privilege
Mechanics of transfer or carve-out; who controls the privilege What communications are covered
Notice provisions to the extent privilege is not left exclusively with seller Use of Information—Second level protections where buyer agrees:
Not to assert waiver by virtue of seller turning over documents Not to offer into evidence sell-side, merger-related communications To waive the right to discover or obtain from sell-side counsel or stockholders’
representative documents covered by the privilege Advanced Waiver
Identify “clients” pre- and post-closing Informed Consent from buyer and target Agree not to move to disqualify sell-side counsel Agree not to assert that former counsel is barred from disclosing matters learned during the
course of the representation to the former stockholder and/or seller parties
Attorney Client Privilege: Great Hill—Drafting Lessons and Implications
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Ratification: “Void” Acts
Corporate acts in violation of the authority granted by the DGCL or the corporation’s charter or bylaws are “void.”
Examples: Over issuing stock; Issuing blank check stock not within the board’s blank check powers; “Out of order” approval of charter amendment or merger agreement; or Elections of directors with the wrong stockholder vote.
“Void” acts, transactions and stock cannot be ratified or otherwise validated on equitable grounds. See, e.g., STARR Surgical Co. v. Waggoner, 588 A.2d 1130 (Del. 1991); Blades v.
Wisehart, 2010 WL 4638603 (Del. Ch. Nov. 17, 2010).
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Boris v. Schaheen, 2013 WL 6331287 (Del. Ch. Dec. 2, 2013) Two purported stockholders attempted to replace the company’s board of directors, which in turn
led to a dispute over who validly held stock and could remove and appoint directors. The purported board approvals of various stock issuances, however, were not reflected in written instruments, such as board resolutions or unanimous written consents. Additionally, official stock ledgers were not updated or maintained as new issuances occurred. Although undisputed that the boards intended to issue many shares of stock, there were no formal, contemporaneous written instruments officially approving these purported issuances.
The Court noted that the DGCL contemplates “a formal approach to corporate governance, particularly for changes of the corporation’s capital structure” and that “[s]tock is not validly issued unless the board of directors exercises its power [to issue stock] in conformity with statutory requirements.” The Court then held that, implicitly under DGCL § 151(a), “stock is valid only if it is issued pursuant to a written instrument evidencing board approval of the stock issue. . . . That the board failed to comply with Section 151(a) by not approving the certificate [of designation for the preferred stock at issue] or issue in a written instrument that the issued stock was void.”
On appeal.
Ratification: Boris v. Schaheen
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§ 204(a): “[N]o defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in this section or validated by the Court of Chancery in a proceeding brought under § 205 of this title.” The legislative history describes § 204 as a “safe harbor” “intended to overturn”
STARR and Blades. Caution: The history goes on to say that § 204 addresses only “the technical validity”
of void acts; the statute “is not intended to modify the fiduciary duties applicable to either the approval or effectuation of a defective corporate act . . . . Defective corporate acts, even if ratified under this section, are subject to traditional fiduciary and equitable review.”
§ 205: Empowers the Court of Chancery to determine the validity of any defective corporate act (whether ratified under § 204 or not), hear challenges to ratification under § 204, and modify or waive any of the procedures otherwise required by § 204.
Effective April 1, 2014. 46
A New Solution—§§ 204 & 205
Three Basic Steps Step 1: Board adopts a resolution. § 204(b).
Contents specified by statute. Special rules regarding director quorum and voting. Board may reserve power to abandon the resolution at any time before effectiveness.
Step 2: Submit resolution for stockholder vote. § 204(c). Statutory notice to all stockholders (voting or nonvoting) as of both now and the time
that the defective corporate act occurred (with some exceptions). § 204(d). Special rules regarding stockholder quorum and voting. Exceptions where stockholder vote not required, but a similar statutory notice still
required in these cases. § 204(g)
Step 3: File “certificate of validation.” § 204(e). Result: Retroactive authorization, unless a stockholder prevails in a
challenge to ratification under § 205. § 204(f). 47
§ 204 – Ratification Procedure
In addition to the “self help” ratification procedures of § 204, new § 205(a) & (e) confers exclusive jurisdiction on the Delaware Court of Chancery to: Determine the validity and effectiveness of any defective corporate act (whether
ratified, or purported to have been ratified, under § 204 or not); Determine the validity and effectiveness of the ratification of any defective corporate
act under § 204; Modify or waive any of the § 204 procedures to ratify a defective corporate act; and Determine the validity of any corporate act or transaction and any stock, rights or
options to acquire stock.
In other words, § 205 provides both an independent procedure for validating defective corporate acts and putative stock as well as judicial supervision over § 204 ratifications.
The Court may decline the requested relief—§ 205 is discretionary. 48
§ 205 – Judicial Validation
Thank You
Patricia O. Vella Morris, Nichols, Arsht & Tunnell LLP
(302) 658-9200 [email protected]
Morris, Nichols, Arsht & Tunnell LLP 49
