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.
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: Carl F. Barnes
The Federal Trade Commission announced recently that the maximum civil penalty for violations of the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 have increased from $16,000 to $40,000 per day. The increase was effective this past Monday, August 1, 2016, but will also apply to violations occurring prior to that date. The full text of the revised rules was published in the Federal Register on June 30.
The FTC last increased the maximum civil penalty in 2009, from $11,000 per day to $16,000 per day. The present increase is the result of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, which directs federal agencies to implement a “catch-up” inflation adjustment based on a prescribed formula. Starting in January 2017, the FTC will increase its maximum civil penalties annually, just as it adjusts HSR filing thresholds.
A premerger notification gives the FTC and the Department of Justice, which share jurisdiction over HSR, the ability to review a transaction for anti-competitive effects and determine whether to seek injunctive or other relief before it closes. Recent enforcement actions are good reminders of a few fundamental facts:
- Every day of noncompliance with HSR is a separate violation, so fines can mount extraordinarily quickly.
- “Premerger,” though that’s the word used in the title of the Act, is really a misnomer: HSR obviously applies to mergers and acquisitions of entire companies (if the filing thresholds are met), but it also applies to some transfers of assets (including patents and real estate), to some minority investments, and to certain licenses, leases and other transactions that don’t look like mergers at all.
- Finally, the Act and the rules implementing it are highly technical and complex. Although the FTC has a long-standing practice of being lenient on first-time, inadvertent offenders, everyone involved in the purchase, sale or other transfers of business assets or equity interests should pay careful attention to the potential application of HSR and consult with skilled counsel. Now more than ever.
For more information, please contact Carl F. Barnes.
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.
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.
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?