Mitigating Litigation Risk at the Deal Table M&A Part II

Mitigating Litigation Risk at the

Deal TableM&A Pre-Closing, Part II

Compartmentalizing Liability: Reducing Risk of

Veil-Piercing by Courts and Similar Outcomes

Businesses and individuals call on Brendan McPherson

to solve complex financial problems. Whether it is in

bankruptcy, real estate or general business, Brendan

utilizes his financial background and tenacious

personality to efficiently guide clients through their

dilemmas. When problems require judicial intervention,

clients benefit from Brendan’s significant trial experience

in bankruptcy, federal, and state courts. Brendan L. McPherson

Shareholder

Where Potential Risks Arise

Successor Liability &

Veil-Piercing 101

� Asset v. stock transactions

� General rule still applies:

– Stock acquisitions: liabilities travel

– Asset acquisitions: liabilities remain

Successor Liability 101

� Successor liability – the exception not the

rule

� Exception 1: express/implied agreement

� Exception 2: consolidation/merger – “de

facto”

� Exception 3: mere continuation

� Exception 4: fraud

Veil-Piercing 101

� a/k/a alter ego

� “the rare exception, applied in the case of

fraud or certain other exceptional

circumstances.” Dole Food Co. v. Patrickson,

538 U.S. 468, 474-75 (U.S. 2003)

Veil-Piercing 101

� Jurisdiction by jurisdiction distinction as to factors

� Key Element 1: control/domination by shareholder/member

� Key Element 2: control/domination caused fraud, unjust or inequitable act that should be corrected

� Exception, not the rule. But still fact intensive

Successor Liability &

Veil-Piercing 101

� Choice of law – must be analyzed

� What state’s law applies if seller is

incorporated in one state and buyer in

another?

� Internal affairs doctrine

� Restatement/most significant relationship

test

Compartmentalizing Liability

� Asset purchase agreements still the way to go

� Buy some but not all assets

� Change is a good thing

– Ownership

– Employees

– Customers

– Contracts

– Locations

Compartmentalizing Liability

� Observe corporate formalities

� Operate independently

� Assume liabilities with great caution

� Pay consideration where consideration is

owed

� Limit liability by contract?

Alternative Dispute Resolution:

Mediation and Arbitration

Stacy Carpenter is a resolution-focused trial attorney who understands the importance of identifying and employing a litigation strategy that is outcome driven, effective, and aligned with her clients’ business objectives. As chair of Polsinelli’sCommercial Litigation practice, she combines her strong advocacy skills and her strategic analysis to achieve positive and timely outcomes both in and out of the courtroom. Stacy works closely with clients to understand their business, build relationships, and manage their legal needs. She is active in the Colorado legal community, having served as the president of the Denver Bar Association, a long-time member of the Colorado Bar Association Board of Governors, and Chair of the Board of Directors for the Rocky Mountain Children’s Law Center. Stacy's litigation practice focuses on business disputes and real estate litigation.

Tom is an associate with substantial litigation

experience in the financial services industry. He

resolves disputes by listening to clients and

knowing how litigation affects their business.

Tom’s legal skills, industry knowledge, and

understanding of client goals help him obtain

cost-effective resolutions to complex legal

problems. Tom has successfully resolved: trade-

secret disputes; unfair competition cases;

breach of contract cases; claims arising under

federal and state consumer protection statutes;

and business fraud and business divorce

matters.

Stacy A. Carpenter

Shareholder | Commercial

Litigation Practice Chair

Thomas H. Wagner

Associate

What is Arbitration?

� Arbitration is an alternative form of dispute

resolution.

� Instead of going to court, parties agree in

advance to abide by the decision of one or

more arbitrators who act, in essence, like

private judges or referees.

� An arbitration award is binding, subject to court

review under extremely limited circumstances.

Arbitration Pros:

� Ability to select arbitrator/panel with subject matter expertise.

� Usually more speedy than litigation.

� Usually more flexible.

� Confidentiality.

� Lack of formality.

� Simplified rules of evidence and discovery.

� Can be cheaper than litigation.

Arbitration Cons:

� Not always cheaper than litigation.

� Very difficult to appeal bad decisions.

� Simplified rules of evidence and discovery

can make for unpredictable decisions.

� Lack of transparency.

� Questionable objectivity.

� Lack of precedent and unclear standards of

decision.

What is Mediation?

� Mediation is process in which an impartial

person, the mediator, facilitates negotiations

between disputing parties, helping them find a

mutually acceptable solution.

� What distinguishes mediation from arbitration

(and court litigation) is that the mediator has

no power to impose a solution.

10 THINGS TO CONSIDER WHEN

DRAFTING ARBITRATION CLAUSES

1. Make it mandatory

� “Shall,” not “may”

2. Interim step

� Mediation before arbitration?

3. Arbitrator selection

� Designate a provider

� How many arbitrators

� How are the arbitrators appointed

� Other considerations



4. What rules apply?

� Rules of provider such as AAA, JAMS or CPR

� Federal or state rules as guidelines

� Discovery

� Motion Practice

� Custom rules negotiated by parties

5. Interim relief

� Empower arbitrators to issue injunctions

� Expedited arbitration process for injunctions

� Carve out to allow preliminary injunctions in court



6. Cost and fee shifting

� Effect of arbitration rules

� Harmonize with other provisions of agreement

7. Appeal

8. Venue

9. Choice of law

10. Other considerations

� Language

� Time frame

Choice of Law Provisions in M&A

Agreements

Matt Knoop focuses his practice on preparing and trying a variety of civil litigation matters in state and federal courts throughout the country. The broad nature of Matt's practice reflects his diverse interests. He has experience representing numerous product manufacturers, suppliers, and service providers in catastrophic injury, wrongful death, and breach-of-warranty litigation. Matt also regularly represents clients in commercial, real estate, and intellectual property disputes.Matthew S. Knoop

Shareholder

Use of Choice of Law Provisions

Choice of law does not equal forum selection

Choice of law provisions almost always appear

in M&A agreements

� More often than forum selection clauses

� Vigorously negotiated

Which State’s Law Is Used?

� Delaware law frequently is chosen

� Strong association between acquirer’s

principal place of business and chosen law

� Outflow from Delaware to New York and

California

� Publicly held companies still tend to choose

Delaware in M&A agreements

Important Considerations

Enforceability

� Relationship between transaction and

jurisdiction

� Public policy – chosen law well-developed,

predictable?

� Restrictive covenants

Important Considerations

� Nature of the business – state-specific laws

� Statutes of limitation and survival provisions

� Available remedies – tort claim in addition

to contract claim?

� Tort reform – availability of punitive

damages?

Drafting Considerations

� A provision too narrowly drafted may result

in application only to construction and

interpretation of the contract and not to

extra-contractual claims

� Specify what law applies to both procedural

and substantive issues

Drafting Considerations

� Check conflict of laws provisions

� Venue provisions may impact what law

applies

� Use bold, CAPITALIZED, or underlined text

International Considerations

� Consistency between choices of forum and

law

� Rome Convention requires law of a country

� Differences between governing law and

foreign law

� Technical reasons (availability of certain

corporate vehicles, trusts)

Venue Selection

R. Montgomery Donaldson, Shareholder | Polsinelli

Monty 's practice focuses on business counseling and litigation, with an emphasis on matters involving

complex business transactions, corporate governance, securities, and special proceedings under the

Delaware General Corporation Law and alternative entity laws. Monty's litigation practice also involves a

diverse array of commercial matters, including commercial contract, consumer, and non-compete cases

venued in the District Court for the Federal District of Delaware, the Delaware Court of Chancery and the

Delaware Superior Court. In these and other matters, Monty routinely is called upon to serve as primary

counsel or as Delaware counsel in coordination with reputable firms located throughout the country and

abroad.

VENUE SELECTION

� What is “venue selection”?

– The contractual designation of a forum in which

disputes are to be resolved

– Venue selection can be narrow: e.g., disputes

over interpretation of terms of M&A agreement

– Venue selection can be broad: e.g., all disputes

arising from, concerning or otherwise related in

any way to the subject matter of the transaction

Venue Selection: The Benefits of

Control

– Can be permissive: Parties agree that suit may

be brought in XYZ jurisdiction, and agree further

that if suit brought there, will not challenge

venue or personal jurisdiction

– Can be mandatory: Parties agree that any suit

will be brought exclusively in XYZ jurisdiction,

without regard to considerations of forum non

conveniens etc.

VENUE SELECTION

� Venue selection is not an after-

thought.

� In fact, venue selection potentially is very

important.

� Why?

VENUE SELECTION

� Important because:

– Over 90% of M&A transactions valued over $100 M wind up in litigation, often multi-jurisdiction litigation

– Litigation presents potentially substantial cost that rarely is accretive to transaction or post-merger business

– Venue selection offers some degree of control/cost containment

– Potentially offers substantive benefits as well

Venue Selection: Party vs.

Shareholder Litigation

� In our prior webinar, discussed two

“species” of M&A-related litigation: (1)

litigation between or among the M&A

parties and (2) shareholder litigation

challenging the fairness of the deal or

allocation of consideration

� These litigation scenarios present two

distinct venue selection challenges. Why?

Venue Selection: Party vs.

Shareholder Litigation

� Parties to merger agreement bound by

venue selection provision contained in

agreement

� Not so for shareholders. So is M&A

shareholder litigation beyond control?

– Answer: NO, at least not with respect to

business entities organized under Delaware law

– Control shareholder litigation through charter or

by-law venue provision


Control

� Venue selection in merger agreement

� Hypo:

– Merger between Delaware corporation

headquartered in New York and Delaware

corporation headquartered in CA

– Six months after transaction, disputes arise

under indemnity provision


Control

– No venue selection provision

• Acquiror preemptively sues in CA seeking indemnity

• Seller preemptively sues in New York seeking

declaratory relief


Control

• Under either scenario:

– Home field advantage

– Local counsel

– Unfamiliar legal terrain (procedures, local rules, judges,

political orientation of court, etc.)

– COST: ↑ $ and Rme transporRng witnesses (likely to

include management team) to venue 3,000 miles away for

depositions, hearings


Control

� Now assume seller negotiated a venue selection clause choosing Delaware as exclusive venue

– Files suit seeking declaratory relief in DE Court of Chancery, nation’s preeminent business tribunal

– No juries, no punitive damages

– Rocket docket

– Sophisticated members of bench familiar with these disputes


Control

– Geographically close

– Counsel in New York fully familiar with DE law

and procedures (since many business disputes

are resolved in DE)

– Cost: ↓ in terms of $ and management Rme

– Decision: Sophistication; predictability


Control

� So potential benefits of control:

– Eliminate possible home field advantage

– Mitigate uncertainties: No jury; sophisticated fact-finder (not all courts are equal); politically neutral forum; well-developed case law

– COST: Mitigate time and cash investment associated with transporting witnesses to remote forum

– Already discussed potential benefits of alternative resolution process/venue

Venue Selection: Important

Considerations

� Mandatory v. Non-mandatory: If you desire

certainty, make sure language is former

– “may” versus “will”

� Scope -- Broad v. Narrow: Be mindful of the

difference; don’t want to find that dispute

you thought was covered is not

– “interpretation” versus “all disputes arising

under agreement or relating to” transaction


Considerations

� Enforceability:

– Most jurisdictions require reasonable nexus

between designated forum and transaction (can

be state of incorporation of one of parties);

agree to personal jurisdiction

– Cannot contractually expand jurisdiction of

court

• E.g., all disputes in Delaware Court of Chancery:

limited jurisdiction (statutory and equitable right or

remedy)


Considerations

� Multiple Agreements:

– Merger effected through multiple agreements

• Include identical venue selection provision in all of

them

• Potentially expensive to litigate whether subsidiary

transaction covered by venue selection provision in

merger agreement that could have been included in

subsidiary agreement but wasn’t


Considerations

� Venue Selection v. Choice of Law

– Not the same. By choosing venue, you have NOT likewise chosen applicable law and vice versa.

– Subject to substantive analysis of potentially applicable laws, sometimes a good idea to select law of chosen venue

• reinforces strength of venue selection

• court presumably more familiar with law in which it sits


Considerations

� Breach of Venue Selection Clause:

– Gives rise to right of enforcement

– Motion to dismiss

– Some jurisdictions will view as breach of an

affirmative covenant under agreement, subject

to any fee shifting provision in contract

Venue Selection:

The Shareholder Quandary

� We mentioned 2 types of M&A litigation: (1)

between or among transacting parties and

(2) shareholder litigation typically

challenging amount or allocation of price

� Also mentioned that venue selection clause

in M&A agreement bound parties to

agreement, but not so shareholders

� What to do?

Venue Selection:


� For Delaware corporations: Delaware

Senate Bill 75 (“SB 75”) was approved by the

House of Representatives on June 11, 2015

and signed into law by Delaware Governor

Jack Markell on June 25. The new law

enacted a very significant change to the

Delaware General Corporation Law, effective

August 1, 2015.

Venue Selection:


� Amendment to 8 Del. C. § 115:

– Confirms Boilermakers Local 154 Retirement

Fund v. Chevron Corporation, 73 A.2d 934 (Del.

Ch. 2013): charter or bylaws of Delaware corp.

may specify, consistent with applicable

jurisdictional requirements, that claims arising

under the DGCL, including claims of breach of

fiduciary duty (as asserted in M&A litigation),

must be brought only in the courts (including

the federal court) in Delaware.

Venue Selection:


� However, amendment invalidates provisions

selecting courts in a different State, or

arbitral forum, if it would preclude litigating

such claims in the Delaware courts.

� Effectively reverses the holding in City of

Providence v. First Citizens Bancshares, Inc.

et al., CA No. 9795-CB (Ch. Ct. Sept. 8,

2014).

Venue Selection: Take-Aways

– Venue selection not an after-thought: Pay

attention

• May help control cost of litigation

• May offer strategic advantages

– Not necessarily limited to M&A agreement(s)

• Consider charter or by-law provision that would

govern litigation filed by shareholders

Mitigating Litigation Risk at the

Deal Table

Thank you, and we hope that you will join us

for our next web cast on February 2, 2016

entitled, Claims by Acquirors, Sellers and

Unsuccessful Bidders.

Polsinelli provides this material for informational purposes only. The material provided in this presentation is general and is not intended to be legal advice. Nothing in this presentation should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.

Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements.

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