M&A Today: “Materiality Scrape” Provisions and the Business Judgment Rule

“Materiality Scrape” Provisions in Merger/Acquisition Agreements

By: Scott Bleier

In connection with the sale of a business, the seller will typically make a series of factual representations and warranties about its business to the buyer. The scope of these representations and warranties is often the subject of significant negotiation by legal counsel to both the buyer and seller and, invariably, one of the areas of “give and take” between the parties is determining which representations and warranties will be qualified as to the seller’s knowledge and/or materiality. As a countermeasure, the buyer may attempt to have these knowledge and materiality qualifiers be disregarded for the purposes of determining the seller’s post-closing indemnification obligations to the buyer. While both parties may advance valid arguments for and against disregarding these types of qualifiers, middle-ground “compromise” positions should be considered in an effort to consummate the transaction.

For an in-depth look at both the buyer and seller arguments for introducing or avoiding “Materiality Scrape” language, read the full article here.


Delaware Courts Apply Business Judgment Rule to Controlling Stockholder Transactions

By: Mark Tarallo

In the past, the Delaware Chancery Court has typically applied the “entire fairness” standard when evaluating a proposed takeover transaction undertaken by a controlling shareholder. This approach was clearly articulated in Kahn v. Lynch Communication Systems, Inc. 638 A.2d 1110 (Del. 1994), wherein the court stated that “the exclusive standard of judicial review in examining the propriety of an interested cash-out merger transaction by a controlling or dominating shareholder is entire fairness” and that “[t]he initial burden of establishing entire fairness rests upon the party who stands on both sides of the transaction.” Kahn, 638 A.2d 1110, 1117 (Del. 1994). The entire fairness standard has two components, fair price and fair dealing, each of which must be satisfied independently. It is a burdensome standard that places the obligation on the defendant(s) to show that all aspects of the transaction were ultimately fair to the shareholders.

In two recent cases, the Delaware Supreme Court upheld Chancery Court rulings applying the business judgment rule to evaluate controlling stockholder takeovers. Read the full article to learn how a business judgment ruling benefits the defendants and provides a clear roadmap for controlling stockholders.

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