Chancery Court Rules on “Fair Value”

By: Mark J. Tarallo

MJT Headshot Photo 2015 (M0846615xB1386)In two recent cases, the Delaware Chancery Court rejected the idea that the merger price in an arm’s- length transaction always represents fair value.  In Appraisal of Dell, Inc. (May 31, 2016) and Appraisal of DFC Global Corp. (July 8, 2016), the Chancery Court carved out exceptions to the long-standing doctrine that the merger price that a third party was willing to pay represented “fair value”, for purposes of Chapter 262 of the Delaware General Corporate Law.  In both cases, the Chancery Court found that there were specific, enumerated factors that made the merger price inadequate as a measure of fair value, despite the fact that the seller in both cases ran an aggressive and thorough sales process.

As the Chancery Court noted in Dell:

“In this case, the Company’s process easily would sail through if reviewed under enhanced scrutiny. The Committee and its advisors did many praiseworthy things, and it would burden an already long opinion to catalog them. In a liability proceeding, this court could not hold that the directors breached their fiduciary duties or that there could be any basis for liability. But that is not the same as proving that the deal price provides the best evidence of the Company’s fair value.”

Similarly, in DFC, the Chancery Court stated:

“Although this Court frequently defers to a transaction price that was the product of an arm’s-length process and a robust bidding environment, that price is reliable only when the market conditions leading to the transaction are conducive to achieving a fair price.”

The full text of each opinion is linked above, and they are worth reviewing to analyze the factors that the Vice Chancellors considered when rendering their opinions.  While the best defense against “fair value” claims remains a full and robust sales process, it is important to consider the factors cited by the Vice Chancellors that may lead to a different result if a post-sale appraisal claim is made.

For more information, please contact corporate attorney Mark J. Tarallo.

MBBP’s Carl Barnes to be Panelist on MCLE M&A Program

For the third time in four years, MBBP Attorney Carl Barnes will be a panelist on MCLE’s Representations, Warranties, Indemnification and Termination Provisions: Drafting and negotiating to allocate risk in business transactions program. Carl will discuss drafting and negotiating key provisions of M&A agreements, with a focus on drafting considerations arising out of recent Delaware case law. CFB Headshot Photo 2015 (M0846497xB1386)

This year’s program will take place from 2:00 to 5:00 p.m. on June 27th at the MCLE Conference Center in Boston, MA. The conference will also be available by both live and recorded webcast. To attend the program or to participate in the live webcast, register here.

Wording of Reliance Provisions Critical in M&A Deals

By: Mark J. Tarallo

Most negotiated acquisition agreements contain a provisioMJT Headshot Photo 2015 (M0846615xB1386)n that the buyer is relying only on the specific representations and warranties provided by the seller in the purchase agreement, and not any outside documentation.  However, a recent case in the Delaware Chancery Court has made it clear that it is critical that this representation be properly worded in order to protect the buyer.  In FdG Logistics LLC v. A&R Logistics Holdings, Inc., (C.A. No. 9706-CB, February 23, 2016) the Chancery Court let stand certain fraud claims made by the buyer because the “reliance” provision of the Merger Agreement did not include “any affirmative expression by buyer (1) of specifically what it was relying on when it decided to enter the Merger Agreement or (2) that it was not relying on any representations made outside of the Merger Agreement.”  Instead, the Chancery Court ruled that the reliance provision served as merely “a disclaimer by the selling company of what it was and was not representing and warranting.”

The Merger Agreement at issue in FdG Logistics contained a reliance provision that stated:

Except as expressly set forth in this Article 5, the company makes no representation or warranty, express or implied, at law or in equity and any such other representations or warranties are hereby expressly disclaimed …. Notwithstanding anything to the contrary, (a) The company shall not be deemed to make to Buyer any representation or warranty other than as expressly made by the company in this agreement and (b) The company makes no representation or warranty to Buyer … unless also expressly included in the representations and warranties contained in this Article 5….

The Merger Agreement also contained an integration clause providing that:

“This Agreement, the Transaction Documents and the documents referred to herein and therein contain the entire agreement between the Parties and supersede any prior understandings, agreements or representations by or between the Parties, written or oral, which may have related to the subject matter hereof in any way.”

Despite the presence of these provisions, the Chancery Court found that the fraud claims of the buyer (based on extra-contractual statements made to buyer before it entered the Merger Agreement) should survive a motion to dismiss, on the grounds that the Merger Agreement did not contain an affirmative statement  by buyer that the buyer was not relying on any information, materials or documents provided outside of the Merger Agreement.

The Chancery Court’s decision is consistent with its holdings in Anvil Holding Corp. (where the agreement contained similar language and the court allowed the claims to stand) and Prairie Capital III, L.P. v. Double E Holdings Corp, where the court dismissed the fraud claims based on the affirmative statements made by the buyer in the purchase agreement (which stated, in part, that “[i]n making its determination to proceed with the Transaction, the Buyer has relied on (a) the results of its own independent investigation and (b) the representations and warranties of the Double E Parties expressly and specifically set forth in this Agreement” and that “THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED . . . ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES….”

The holding in FdG Logistics makes it clear that the Chancery Court will continue to evaluate these claims in the context of the statements made by the buyer in the purchase agreement.

For more information, please contact Mark J. Tarallo.

Registration Now Open: M&A Considerations for Venture-Backed Companies

VERY LIMITED SEATING! Join us on Thursday, May 19, for an impressive panel presentation by experienced deal makers providing an insider’s perspective on what it takes to successfully position a venture backed company for sale and get a deal done!  Our experts include Brady Bohrmann of Avalon Ventures, Ted Gillick of EMC Corporation, and Douglas Melsheimer of Bulger Partners. The panelists represent the unique perspectives of a buyer, seller, and banker and each brings years of experience in venture-backed M&A. This panel will be moderated by MBBP corporate attorney Jon Gworek.

Among the topics they will address:

  • How can a company best position itself for a successful exit?
  • Who are the various stakeholders in an M&A transaction and are their interests aligned?
  • What key considerations do buyers apply in assessing strategic fit?
  • What best practices will help ensure a smooth transaction when both parties want to get a deal done?

The event starts at 4:00pm at the Cambridge Innovation Center. Register today!

Carl Barnes Panelist on Fairness Opinions

CFB Headshot Photo 2015 (M0846497xB1386)MBBP Attorney Carl Barnes will be a panelist in the webinar “When and Why Should a Board Require an Independent Fairness Opinion,” presented as part of the BDO KNOWLEDGE Webinar Series program. The discussion will focus on what fairness opinions are, what they are not, valuation techniques, and the role fairness opinions play in helping directors to fulfill their fiduciary duties in M&A and other transactions.

This moderated panel will be held from noon to 1:00pm, Boston time, on May 5. To register, please visit BDO’s event registration page.

Shannon Zollo Panelist at AMAA New England Chapter Meeting

Attorney Shannon Zollo will be a panelist at the upcoming Alliance of Merger &SSZ Headshot Photo 2015 (M0846567xB1386) Acquisition Advisors New England Chapter meeting on Monday, May 9th from 4-7pm. The AMAA is the premiere international organization serving the needs of middle market M&A professionals worldwide through educational and transactional support. The New England Chapter serves as a more local resource for face to face connections, education, and professional opportunities.

This upcoming meeting is on the topic of “Bridging the Valuation Gap – Earn Outs”. Specifically, the panelists will discuss the use of earn outs in M&A, structural considerations, measurement methods, legal issues, tax implications, valuation and financial reporting, and potential pitfalls.

To learn more and to register, check out the AMAA New England Chapter Event page.

 

2015 M&A Year in Review

The MBBP M&A team has extensive experience guiding clients through the complexities of M&A transactions in diverse markets. Over the last decade, we have represented hundreds of publicly-traded and privately-held companies in transactions, both buyers and sellers, valued from several million dollars up to hundreds of millions of dollars.

deals(Click image to see more.)

Last year’s Mergers and Acquisitions front was no different. In 2015, MBBP completed a variety of M&A transactions in diverse fields such as oil and gas processing and email security and encryption, and encompassing industries as varied as digital game development and biotechnology, software architecture and optic lens assembly.

Read more about our 2015 M&A deals. Cheers to a successful year for our clients!

M&A Today: February 2016 Issue

Save the Date! The 2016 M&A Panel Series kicks off on Friday, April 29th!
Watch this spot. Registration will open soon!

This month’s M&A Today newsletter can be read in full here.

Tips for Enforcing Indemnification Provisions John J. Tumilty and Joseph C. Marrow

Your company has completed an acquisition of a strategic partner for a purchase price of $40 million. In the representations and warranties in the acquisition agreement, the seller informed you that its financial statements were true and correct as of the date of the closing. Post-transaction you discover that the financial statements, as presented, were inaccurate and misleading. What recourse do you have?

Read our tips on determining whether or not to make an indemnification claim.

Permanent Exclusion of Gain on Sales of Qualified Small Business Stock – Robert M. Finkel

Holders of certain qualified small business stock (QSBS) can permanently exclude 100% of up to $10 million of gain realized on the sale of QSBS. The benefit, provided for under Section 1202 of the Internal Revenue Code, was recently made permanent as part of the Protecting Americans from Tax Hikes Act (PATH) in December 2015. Entrepreneurs and investors will, of course want to consider the QSBS benefit when structuring investments; but QSBS benefits are sure to be an important consideration for both buyers and sellers when evaluating the economics of an exit transaction.

Learn more here.

IP Due Diligence: Patentability vs. Patent Infringement – Sean D. Detweiler

M&A transactions often require IP due diligence investigations when technology is involved, and it can be critically important to understand issues like what technology is owned by a company, what technological developments are in the pipeline that can be protected with patents, and whether the company has freedom-to-operate by making and selling their current or planned goods and services without infringing another’s patent rights. Understanding the difference between patentability and patent infringement is important to understanding the overall IP position.

Read the full article here.

 

Download the PDF newsletter.

Delaware Chancery Court Strikes Another Blow Against “Disclosure-Only” Settlements

By: Mark J. Tarallo

MJT Headshot Photo 2015 (M0846615xB1386)In a decision issued on January 22, 2016, in In re Trulia, Inc. Stockholder Litig., (“Trulia”), the Delaware Chancery Court struck another blow against “disclosure-only” settlements.  In Trulia, Chancellor Andre Bouchard rejected a proposed disclosure-only settlement and in a strongly worded opinion stated that “the Court’s historical predisposition toward approving disclosure settlements needs to be reexamined,” and that the Chancery Court would be “increasingly vigilant in scrutinizing the “give” and the “get” of such settlements to ensure that they are genuinely fair and reasonable to the absent class members.”

Disclosure-only settlements are common in litigation arising out of M&A transactions.  As Chancellor Bouchard noted:

“It has become the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel.”

In rejecting the settlement, Chancellor Bouchard ruled that “from the perspective of Trulia’s stockholders, the “get” in the form of the Supplemental Disclosures does not provide adequate consideration to warrant the “give” of providing a release of claims to defendants and their affiliates, in the form submitted or otherwise.” The Trulia ruling may signal the end of such settlements in Delaware.  The full text of the opinion can be found here.

For more information, please contact Mark Tarallo.

Revised HSR Thresholds 2016

By Jonathan M. CallaJMC Headshot Photo 2015 (M0846508xB1386)

On January 21, 2016, the Federal Trade Commission (FTC) issued its annual press release announcing revised jurisdictional thresholds for 2016 in connection with reportable transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).  These new HSR thresholds will go into effect 30 days after they are published in the Federal Register, which is expected to happen prior to the end of January, 2016.  The thresholds apply to transactions that satisfy the “size of transaction” test (transaction value) and the “size of person” test (either in terms of annual sales or total assets).  The thresholds are adjusted annually to reflect changes to the domestic gross national product.  The following chart reflects the increased thresholds from 2015 to 2016:

Test 2015 Threshold 2016 Increased Threshold
Size of Transaction $76.3 million $78.2 million
Size of Person (smaller) $15.3 million $15.6 million
Size of Person (larger) $152.5 million $156.3 million
Size of Transaction (Size of Person Inapplicable)  $305.1 million  $312.6 million

Adjustments to the filing fees to be paid in connection with the transactions will be as follows:

  • $45,000 for transactions valued between $78.2 million but below $156.3 million.
  • $125,000 for transactions valued between $156.3 million but below $781.5 million.
  • $280,000 for transactions valued at or above $781.5 million.

Read the full text of the FTC Press Release here.

All parties should carefully consider the implications of the HSR Act on all transactions and should consult with counsel to determine whether an HSR filing is required.

For more information please contact Jonathan M. Calla.