Earnout provisions in acquisition agreements can be a useful tool in bridging the valuation gap by deferring portions of the purchase price until certain post-closing milestones are achieved, and they are particularly common in developmental-stage pharmaceutical transactions.  Practitioners should take note of the September 5, 2024 opinion in Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., in which the Delaware Court of Chancery held a buyer, Alexion, liable for breach of contract both for its failure to use commercially reasonable efforts to achieve milestones for which future earnout payments may have become due and for its failure to pay an earned milestone payment to selling securityholders of Syntimmune, Inc.[1]

Continue Reading Delaware Court of Chancery Finds Buyer Failed to Use Commercially Reasonable Efforts in Pharma Milestone Payment Case

On August 14, 2024, the U.S. District Court for the Western District of Missouri (the “District Court”) issued a decision ordering a permanent injunction against rules promulgated by the Missouri Securities Division, colloquially referred to as Missouri’s “Anti-ESG” Rules, requiring that broker dealers and investment advisers disclose to and obtain written consent from customers if their investment decisions or advice “incorporate[] a social objective or other nonfinancial objective” (the “Rules”).  The District Court held the Rules were preempted by both the National Securities Markets Improvement Act of 1996 (“NSMIA”) and the Employment Retirement Income Security Act of 1974 (“ERISA”).  The District Court also held the Rules violated the First Amendment’s protection against compelled speech and were unconstitutionally vague.  The decision highlights the limits of U.S. state power in policing the social objectives broker dealers and investment advisers incorporate into their practice and, if not overturned on appeal, suggests that broker dealers and investment advisers may face less legislative pushback, at least at the state level, in pursuing environmental, social, and governance (“ESG”) objectives in the future.

Continue Reading District Court Holds Missouri’s “Anti-ESG” Rules are Preempted by Federal Law, Violate First Amendment, and are Unconstitutionally Vague[1]

In a May 31, 2024 opinion, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging the sale of a public company with a controlling private equity sponsor to an unrelated, arms-length buyer, finding that the sale was potentially tainted by conflicts of interest.[1]  In particular, the court found that it was reasonably conceivable that the private equity sponsor’s receipt of an early termination payment under a tax receivable agreement put into place upon the target company’s initial public offering was a material non-ratable benefit, which may have led the sponsor to push for a sale (which would trigger the early termination payment), even if remaining a standalone company would have been better for the minority stockholders. The opinion also touches on important issues relating to financial advisors’ advice in connection with such a sale. While tax receivable agreements (“TRAs”) are common in sponsor-backed and “Up-C” IPOs, this case highlights a rarely considered issue involving these agreements, and the need for careful navigation of related potential conflicts of interest in a sale process where a private equity sponsor, and TRA beneficiary, continues to control the public company.

Continue Reading Delaware Chancery Court Finds Private Equity Sponsor’s Tax Receivable Agreement Potentially Led to Conflicted Sale Process

On April 4, 2024, the Delaware Supreme Court issued its decision on a stockholder suit challenging the fairness of IAC/InterActiveCorp’s separation from its controlled subsidiary, Match Group, Inc.[1]  In this decision, the Delaware Supreme Court provided clarity and guidance on two important issues involving the application of the MFW framework.

Continue Reading Delaware Supreme Court Provides Important Guidance on Application of MFW Framework to Controlling Stockholder Transactions

On March 6, 2024, the U.S. Securities and Exchange Commission approved in a 3-2 vote final rules that require most reporting companies to provide certain climate-related information in their registration statements and annual reports filed with the SEC. This memorandum summarizes a portion of the final rules, the amendments to Regulation S-X, as amended (Regulation S-X), under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act), that require a new footnote in audited financial statements, analyzes some of the key challenges these requirements may impose and concludes with some general takeaways. This memorandum does not address the GHG emissions and attestation report disclosure requirements or the governance, business, risk and targets disclosure requirements set forth in the final rules’ amendments to Regulation S-K, as amended (Regulation S-K), under the Securities Act and Exchange Act.

Continue Reading SEC’s Final Climate-Related Disclosure Rules: A Closer Look at the Climate Note to Audited Financial Statements

On Friday, March 15, 2024, the Council of the European Union reached an agreement on a final version of the Corporate Sustainability Due Diligence Directive (“CS3D”). The vote on an earlier version of the CS3D had been postponed several times after some Member States announced that they were going to abstain from voting. After further changes and compromises, the now agreed version obtain the required majority amongst Member States. The last step for the directive to enter into force now is for it to be approved by the European Parliament. The CS3D seeks to integrate human rights and environmental concerns into business operations and to promote sustainable and responsible business behavior along the supply chain and require the remaining Member States to implement the due diligence requirements it sets out into law.

Continue Reading Update on the Corporate Sustainability Due Diligence Directive

In a February 28, 2024 opinion, the Delaware Court of Chancery confirmed an arbitrator’s award resulting in a seller of a $40 million company unexpectedly having to pay a buyer over twice that amount – $87 million – in a customary post-closing purchase price adjustment. The adjustment seems to have resulted from an ambiguity in the purchase agreement involving a drafting technicality in the definition of “Closing Date Indebtedness” and seller and buyer taking a different view of the pre- and post-closing accounting treatment of indebtedness of a joint venture in which the target company held a one-third interest due to an internal reorganization conducted at buyer’s request. Despite the court’s view that the award was economically divorced from the intended goals of the purchase agreement, it awarded summary judgement for the buyer, concluding that the arbitrator acted within the scope of his authority. The case illustrates the importance of understanding the accounting implications of legal drafting in the customary purchase price adjustment sections of a purchase agreement, as well as the choice of what type of dispute resolution mechanism is selected by the parties for purchase price adjustment disputes.

Continue Reading Raw Deal: Seller Ordered to Pay Buyer Over Twice the Purchase Price in Post-Closing Purchase Price Adjustment Dispute