Back by popular demand, corporate partner Mary Beth Kerrigan was a panelist at an encore panel of this year’s ABA Business Law Annual Meeting in Boston. Mary Beth discussed complex issues that arise in acquisitions of venture-backed companies.
The webinar included varying topics, including disproportionate allocation of indemnity risk among stockholders/stakeholders, complex waterfalls, and much more. Congratulations to Mary Beth on another job well done!
To learn more about the conference, visit the ABA’s event page.
In an article published in ALM’s Corporate Counsel, corporate partner Shannon Zollo commented on Facebook’s M&A due diligence ahead of its approximately $2 billion acquisition of virtual reality developer Oculus VR. Video game creator ZeniMax Media Inc. sued Oculus, and Facebook once it purchased Oculus, on several allegations, including copyright infringement. In the trial, Facebook’s CEO Mark Zuckerberg was questioned about whether the one weekend his company was given to perform due diligence was enough time.
Shannon notes that “as a general rule, due diligence under normal conditions can take at least a few weeks, if not a few months”, and that proper due diligence could be difficult to conduct under such a short time frame, especially when intellectual property is a key component of the deal. Jury deliberations have begun in the trial.
For further detail on the case and on Shannon’s comments on due diligence, read the full article.
By: Joe Marrow
Continuing a recent trend, a Delaware Chancery Court judge recently denied a request for an award of attorneys’ fees and expenses in connection with the Keurig Green Mountain Inc. shareholder litigation. On July 22, 2016, in the case In Re: Keurig Green Mountain Inc. Shareholders Litigation, case number 11815, Chancellor Andre G. Bouchard considered a petition seeking an award of attorneys’ fees and expenses to the attorneys representing shareholders that had challenged the acquisition of Keurig.
On behalf of the shareholders, the lawyers had questioned the deal disclosures that had been made by Keurig in its proxy statement. As a result of the action, Keurig made certain supplemental disclosures to the shareholders. The attorneys representing the shareholders then sought an award of $300,000 of fees and expenses from Keurig. Keurig’s attorneys opposed the petition arguing that the supplement disclosures merely confirmed information that had previously been provided in the proxy statement. Chancellor Bouchard agreed and denied the petition on the basis that disclosures in question were not beneficial to the shareholders. Chancellor Bouchard has taken a strong position against granting significant fee awards in the context of disclosure-only settlements in shareholder litigation.
For more information, please contact corporate attorney Joe Marrow.
By: Mark J. Tarallo
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.
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.
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.
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.
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.
In this week’s video, M&A attorney Scott Bleier explains why working capital is a vital piece of the M&A transaction. What is working capital? In its simplest definition, working capital is current assets over current liabilities. Buyers want to buy a business with enough working capital to keep this going without an immediate need for a cash infusion. Sellers, conversely, don’t want to sell the business with too much working capital or cash — as they want to realize as much profit as possible. So how do you negotiate a target working capital amount for 2 or 3 months? And what happens when disputes arise over the working capital post-closing?
On January 15, 2015, the Federal Trade Commission (FTC) issued its annual press release announcing revised jurisdictional thresholds for 2015 in connection with reportable transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The new thresholds apply to transactions that close on or after February 20, 2015. 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 2014 to 2015:
|Test||2014 Threshold||2015 Increased Threshold|
|Size of Transaction||$75.9 million||$76.3 million|
|Size of Person (smaller)||$15.2 million||$15.3 million|
|Size of Person (larger)||$151.7 million||$152.5 million|
|Size of Transaction (Size of Person Inapplicable)||$303.4 million||$305.1 million|
The FTC made no adjustment to the filing fees to be paid in connection with transactions, but did, however, adjust the thresholds for application of the filing fees: for transactions valued between $76.3 million and up to $152.5 million, the filing fee is $45,000; for transactions valued at $152.5 million and up to $762.7 million, the filing fee is $125,000; and for transactions valued at $762.7 and above, the filing fee is $280,000.
Read the full text of the FTC press release.
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 Joseph C. Marrow.
By Mark Tarallo
A recent opinion issued by the Delaware Chancery Court may have a significant impact on the way acquisition transactions are structured. The opinion considers a merger between a company called Audax Health Solutions (Target) and UnitedHealth/Optum (Buyer). Cigna Insurance was a large shareholder of Target. The merger between Target and Buyer was approved by written consent of 66.9% of the Target shareholders, and the certificates of Merger were filed, consummating the merger. Cigna did not vote in favor of the merger. The written consents incorporated a “Support Agreement,” pursuant to which the shareholders of Target granted a release and agreed to certain indemnity obligations. Some of the indemnity obligations included an indefinite indemnity period with respect to some of the fundamental representations in the merger agreement between Buyer and Target.
After the consummation of the merger, Cigna requested in writing that it be paid its merger consideration. Buyer refused, indicating that Cigna would be paid only upon executing and submitting the Written Consent/Support Agreement to Buyer. Cigna refused to sign the Written Consent/Support Agreement and sued Buyer. After hearing arguments from both Cigna and Buyer, the court issued its decision. The two most significant components of the court’s ruling are as follows:
- Once the merger has been consummated, shareholders are entitled to their merger consideration, without the requirement of having to execute and deliver any sort of consent, waiver, Support Agreement, etc. The court specifically ruled that the release is ineffective (so Cigna has the right to receive the merger consideration it is owed AND sue for some sort of breach that resulted in a reduced price) because no additional consideration is being offered for it. The court ruled that with respect to a shareholder who has not voted in favor of the merger, once the merger is consummated all other obligations are extinguished and the shareholder is entitled to be paid the merger consideration without any further action by such shareholder.
- Because some of the indemnification obligations are indefinite as to time and amount, the court struck them down, taking the position that they violate Section 251 of the DGCL, since the shareholders cannot know with any degree of certainty how much of the merger consideration they will ultimately retain.
The name of the case is Cigna Insurance v. Audax Health Solutions, Inc., and the full text can be found here .