Ruling that the value of certain supplemental transaction disclosures in the context of a $15 billion merger was “nil,” the Seventh Circuit Court of Appeals recently overturned an award of attorneys’ fees to plaintiffs’ counsel in the context of merger litigation. On August 10, 2016, in the case In Re: Walgreen Co. Stockholder Litigation, case number 15-3799, writing for the 7th Circuit, Judge Posner, following a recent trend of decisions denying requests for attorneys’ fees to attorneys representing shareholders challenging a merger, adopted Delaware’s Trulia standard for approval of such settlements.
The case In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) decided by the Delaware Chancery Court held in part that “[t]o be more specific, practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission….”
In Walgreen, the plaintiffs’ counsel successfully forced the defendant company to furnish supplemental disclosures regarding the proposed transaction. The Court in analyzing the supplemental disclosures in the context of the transaction and information that had been previously disclosed to the stockholders determined that the additional disclosures were largely worthless. As a result, the 7th Circuit held that the additional disclosures did not meet the clearer standard that the disclosures be “plainly material” and the Court held that the settlement award to plaintiffs’ counsel should be rejected by the lower court.
Based on the recent trend of courts to reject payment of fee only settlements in the context of merger litigation, evidence suggests that the filing of so called “strike suits” has begun to decrease.
For more information please contact Joe Marrow.
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.
By: Mark J. Tarallo
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.
The Delaware Supreme Court recently upheld the Chancery Court’s decision in Huff Fund Investment Partnership v. CKx, Inc. with respect to assessing the merger price in an acquisition. On February 12, 2015, in a short, two-page order, the Court affirmed the holding of the Chancery Court in its determination of the “fair value” of CKx for the reasons set forth by the Court of Chancery in its prior opinions.
The Chancery Court had addressed the issue of appraisal for stockholders of CKx who had exercised their appraisal rights in lieu of accepting the cash-out price which otherwise would have been received in the sale of CKx to the acquiror. The Chancery Court noted that the sales process “has been challenged, reviewed, and found free of fiduciary and process irregularities” and that CKx was sold “after a full market canvas and auction”. It also acknowledged that the Court is not permitted to “rely presumptively on the price achieved by exposing the company to the market” and, pursuant to the Delaware appraisal statute, must “evaluate ‘all relevant factors’”, without taking into account any potential change in the value that could occur as a result of or in anticipation of the merger transaction itself.
The Chancery Court reviewed two different valuation methodologies presented by the parties to the lawsuit. First, it considered and rejected the proposed valuation based upon a comparable company analysis because the guideline companies were not truly comparable to CKx – the companies were not of a similar size, none of the companies owned assets similar to CKx’s assets and none of the companies competed with CKx. Second, the Court considered and rejected the discounted cash flow analysis approach because the Court found that the five-year cash flow projections were unreliable; “without reliable five-year projections, any values generated by a [discounted cash flow] analysis are meaningless.” Additional future revenue remained uncertain and the unreliability of these estimates created significant difficulty in preparing an appropriate discounted cash flow analysis. Without reliable cash flow projections, the Court was unable to determine fair value using a discounted cash flow analysis method.
In analyzing whether it should ignore the merger price in determining the fair value of CKx, the Chancery Court stated that it has “an obligation to consider all relevant factors, and that no per se rule should presumptively or conclusively exclude any of those factors from consideration.” In this situation, given that the Court could not look to any appropriate comparable companies, comparable transactions or reliable cash flow projection models, the consideration given in the transaction was the best indicator of the actual value of CKx. CKx’s transaction process was “thorough, effective, and free from any spectre of self-interest and disloyalty,” with several potential buyers presenting offers and CKx engaging a financial advisor to assist with the transaction to negotiate the best possible price for CKx’s stockholders. The Chancery Court therefore concluded that the merger price was the “most relevant exemplar of valuation available.”
The Delaware Supreme Court’s affirmation of the lower court’s decision in this case is an important reminder for stockholders contemplating exercising appraisal rights that the merger price may very well be used during an appraisal proceeding as an appropriate method to determine the fair value of a company.
Any questions regarding this topic, please feel free to contact Mary Beth Kerrigan directly.
By: Carl Barnes
M&A deal protection measures, such as requirements for exclusive negotiations, no-shop provisions, break-up fees, matching rights and other devices, have long been accepted by the Delaware courts – as long as they do not unreasonably preclude potential bidders who might otherwise want to top an existing offer and provide greater value to a target’s stockholders.
Although no one deal protection measure can be analyzed in a vacuum, and each measure must be considered in the context of other protection devices adopted in the particular deal, the Delaware courts routinely find that break-up fees in the range of 3-4% of the transaction’s equity value are not unreasonable. In smaller deals, break-up fees may be even higher. The Chancery Court in In re Answers Corporation Shareholders Litigation, Consol. C.A. No. 6170-VCN (April 11, 2011), for example, called a break-up fee equal to 4.4% of equity value “near the upper end of a ‘conventionally accepted’ range,” but noted that, in the context of a “relatively ‘small’ transaction” such as Answers, “a somewhat higher than midpoint on the ‘range’ is not atypical.” And the Court in In re The Topps Company Shareholder Litigation, Consol. CA. No. 2786-VCS (June 14, 2007), determined that, although a break-up fee, including payment of the bidder’s expenses, of 4.3% was “a bit high in percentage terms,” it was “explained by the relatively small size of the deal.”
Against that background comes the recent Chancery Court decision in In re Comverge, Inc. Shareholders Litigation, Consol. C.A. No 7368-VCP (November 25, 2014). Here, in a challenge to a completed merger, the plaintiffs alleged, among other things, that the board of directors of the target Comverge, Inc. had breached their fiduciary duty by agreeing to a break-up fee of as much as 13% of Comverge’s equity value. How’d that happen?
After a difficult negotiation, Comverge agreed to be acquired by H.I.G. Capital, L.L.C. for $1.75 per share in a transaction that valued Comverge’s equity at approximately $48,000,000. HIG also negotiated a break-up fee of $1,206,000 if Comverge terminated the deal during a 30-day no-shop period and $1,930,000 if Comverge terminated the deal after the expiration of the go-shop. In either case, Comverge also agreed to reimburse HIG for up to $1,500,000 of expenses. If Comverge were to pay the lower of those break-up fees (including the maximum expenses), the total payable to HIG would be 5.55% of Comverge’s equity value; with the higher fee, the total payable would be 7.0% of its equity value.
Citing prior decisions in Answers and Topps, referred to above, the Court wrote that “even assuming the lesser 5.55% metric is used … that percentage tests the limit of what this Court has found to be within a reasonable range for termination fees … even for a micro-cap acquisition like this one … in which the case law tends to provide somewhat greater latitude in this regard.”
But it gets even more interesting. In connection with the merger agreement, HIG agreed to provide Comverge with a $12,000,000 bridge loan that was convertible into 8,571,428 shares of Comverge’s common stock at a conversion price of $1.40 per share. The plaintiffs argued any other bidder would need to pay at least $1.76 per share to top HIG’s offer and repay the $12,000,000 in debt (plus interest at 15%). Alternatively, if HIG elected to convert its note into Comverge’s common stock and then tender that stock into a superior offer, the topping bidder would have to pay $3,085,000 more to acquire Comverge than the approximately $48,000,000 HIG had offered.
The plaintiffs argued that the $3,085,000 should be considered part of the break-up fee and that, in doing so, the total termination payment would actually be 13% – or more – of Comverge’s equity value. The defendants, not surprisingly, disagreed. The Court, however – which, in acting on the defendants’ motion to dismiss, was required to determine only “whether it is reasonably conceivable that the [convertible debt] could have functioned, in effect, as part of an unreasonably high termination fee” – concluded that, yes, that was reasonably conceivable.
And what’s at stake? For Comverge’s former directors, the deal’s long done, and so the fight is over whether they are personally liable for breaches of their fiduciary duties by approving the terms of the deal. Unless the parties settle, the Court will ultimately rule on whether the repayment or conversion of the HIG bridge loan should be considered part of the break-up fee and – whatever that conclusion – whether the fee could have had the effect of unreasonably precluding other potential bidders from making topping offers. And would the former directors be protected by the business judgment rule and by provisions of Comverge’s charter, insulating them from personal liability for breaches of the duty of care pursuant to Section 102(b)(7) of the Delaware General Corporation Law? Maybe not: the Court warned that “if the [bridge loan is] taken as contributing to the preclusive effect of the termination fee and the expense reimbursements, it conceivably is true that the Board’s apparent passive acceptance of those terms without any pushback was ‘so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith’.”
For the rest of us, the easy take-away from Comverge is that economic terms that may appear facially unrelated to deal protection – such as a convertible note – might be viewed by unhappy stockholders, frustrated suitors and the courts as unreasonably preclusive. But the bigger picture is the reminder that all deal protection measures must be reasonable under the circumstances. Although every deal is different and the ways in which these devices might be structured and combined are apparently limitless, the courts continue to provide guidance. It’s up to M&A lawyers and their clients to pay close attention to that guidance.
For more information, please contact Carl Barnes.
By: Joseph C. Marrow
On January 15, 2015, the Delaware Chancery Court awarded PharmAthene, Inc. approximately $195,000,000 in damages stemming from a failure of SIGA Technology, Inc. to negotiate a license agreement in good faith. See PharmAthene, Inc. v. Siga Technology, Inc., No. 2627-VCP (Del. Chancery Court Jan. 15, 2015). The decision describes the damages phase of a case previously reported in our publication M&A Today (March 2014), SIGA Technologies, Inc. v. PharmAthene, Inc., 2013 WL 2303303 (Del. May 24, 2013) (the “SIGA Case”).
As we reported concerning the SIGA Case:
“In the SIGA Case, the Delaware Supreme Court held that a party’s agreement to negotiate the terms of a license in good faith in accordance with a term sheet was enforceable. Additionally, the breaching party could be held accountable for expectation (“benefit-of-the-bargain”) damages as a result of negotiating the license in bad faith.” (emphasis added).
The Delaware Supreme Court held that the obligation to negotiate in good faith, as described in the term sheet, was enforceable even though the term sheet indicated that it was non-binding. Equally important, the Delaware Supreme Court held that the breaching party could be liable for the more punitive expectation or benefit-of-the-bargain damages, as opposed to reliance damages. The Delaware Supreme Court remanded the case to the Chancery Court which imposed the damages award described above.
The decision of the Delaware Chancery Court once again signals a warning to parties negotiating term sheets governed by Delaware law. Parties to non-binding term sheets should carefully consider whether to include obligations to negotiate in good faith. Parties may either want to remain silent on the issue or affirmatively state that there is not an obligation to negotiate in good faith. Additionally, the parties may want to consider language limiting the remedies available to the other party in the event of the breach of the term sheet.
For more information please contact Joseph C. Marrow.
By: Mark Tarallo
In Fortis Advisors v. Dialog Semiconductor, C.A. No. 9522-CB, the Delaware Chancery Court rejected several claims made by the selling shareholders’ representative relating to the conduct of the buyer in relation to the earn-out. The equityholders of iWatt, Inc., sold their shares (in a transaction structured as a merger) to Dialog Semiconductor PLC, in a transaction that included both a cash payment and an earn-out. The Merger Agreement included language that the buyer would use “commercially reasonable best efforts” to operate the acquired business to achieve the earn-out, and also included a list of several specific obligations, covenants and restrictions applicable to the buyer in connection with the post-closing operation of the business. When the earn-out targets were not met, Fortis, as the shareholders’ representative, sued the buyer for, among other things, breach of the implied covenant of good faith and fair dealing. The buyer filed a motion to dismiss relating to the claims, and the Chancery Court ruled in favor of the buyer with respect to the allegations of breach of the implied covenant of good faith and fair dealing. The Chancery Court found that the Merger Agreement included very specific terms relating to the operation of the business in connection with the earn-out, and that “the allegations of the complaint fail to state a claim for breach of the implied covenant because Fortis has not identified, as it must, a gap in the Merger Agreement to be filled by implying terms through the implied covenant.” In light of the decision, parties that are negotiating acquisition documents under Delaware law should be careful not to rely on the implied covenant for post-transaction enforcement where the documents contain specific language addressing the obligations of the parties, as the Delaware courts will not impose the implied covenant where there is no gap in the documents.
For more information regarding this topic, please contact Mark Tarallo.