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
Most negotiated acquisition agreements contain a provision 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.
Attendees will learn the basics of an M&A transaction from start to finish. The class will cover sample forms for the different types of transactions as well as customary related documents, and a discussion of the provisions typically contained in such agreements.
Key topics to be discussed:
- Pre-Transaction Considerations
- Basic Transaction Structuring-Tax, Liability Protection and Other Considerations
- Transaction Documentation
- Post-Closing Matters
- Recent Delaware Case Law
- Ethical Issues
Live broadcast or self-study versions available. Register at MyLawCLE.
By: Joseph Martinez
In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLP, the Delaware Court of Chancery held that the pre-merger attorney-client privilege of a corporation which is acquired in a merger transaction governed by Delaware law passes to the surviving corporation. Chancellor Strine’s opinion interpreted Section 259 of the Delaware General Corporation Law to be clear on the point that “all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the surviving or resulting corporation.” The ruling went on to state that without a contractual provision to the contrary, even the seller’s pre-merger attorney-client communications with respect to the merger itself would pass to the surviving corporation.
The Court stated in Great Hill that if a seller is interested in retaining control of pre-merger attorney-client communications or the attorney-client privilege itself, the parties can “use their contractual freedom in the manner shown in prior deals to exclude from the transferred assets the attorney-client communications they wish to retain as their own.” In addition to including contractual provisions in an agreement, sellers also should physically segregate the privileged communications which it wants to retain from those being transferred to the buyer.
Great Hill is only applicable to mergers governed by Delaware law. While many corporate statutes are similar to that of Delaware, care should be given to investigate what the potential outcomes might be in another state. In this Delaware ruling, the Court declined to follow a 1996 New York Court of Appeals case, Tekni-Plex, Inc. v. Meyner & Landis, which held that pre-merger attorney-client communications regarding merger negotiations are retained by the seller and do not pass to the surviving corporation.
Merger agreements have often included a waiver permitting seller’s counsel to continue representing the seller following a closing, including with respect to matters that may be adverse to the buyer or the company surviving the merger. Following Great Hill, Sellers would also be advised to address the question of what happens to pre-merger attorney-client communications and the attorney-client privilege.
For more information about Great Hill or questions about the attorney-client communications related to a merger, please contact Joe Martinez.