Matthew P. Salerno

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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

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

With a stroke of the pen, the Delaware Court of Chancery invalidated commonplace provisions in scores of stockholder agreements relating to public corporations and likely many more relating to private corporations.  In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company (“Moelis”)[1], Vice Chancellor J. Travis Laster, struck down an entire package of stockholder veto rights and held that provisions in a stockholder agreement purporting to restrict the size of the board of directors, requiring the board to recommend in favor of a stockholder nominee, requiring the board to fill any vacancy on the board with a stockholder nominee or to include a stockholder nominated director on committees of the board, are all facially invalid as a matter of Delaware law.  Vice Chancellor Laster noted that many of these provisions would have been valid if set out in the corporation’s certificate of incorporation, rather than in the stockholder agreement.Continue Reading Delaware Court of Chancery Invalidates Common Provisions in Stockholder Agreements

In a May 29, 2023 opinion by the Delaware Chancery Court addressing a claim by sellers for specific performance under a merger agreement following buyer’s termination for breach of the capitalization representation, the court found that sellers breached the capitalization representation under the merger agreement based on the post-signing discovery that a former employee held phantom equity in a subsidiary of the target company.  Despite buyer’s concession that the financial value of the former employee’s interest in the subsidiary was “minor relative to the deal value,”[1]  the court concluded that buyer was entitled to terminate the merger agreement since the capitalization representation was brought down flat at closing (and not subject to any de minimis or materiality qualifier).Continue Reading Private Equity Buyer Permitted to Walk From Deal Based on Capitalization Representation Breach

In Snow Phipps v. KCAKE Acquisition, the Delaware Court of Chancery ordered the buyer (Kohlberg) to close on its $550 million agreement to purchase DecoPac, a cake decorations supplier.  In doing so, the court easily rejected the buyer’s claims that the COVID-19 pandemic resulted in a material adverse effect (“MAE”) and that the steps…

Late last week – for the first time in 40 years – the SEC announced a settlement of an internal controls case against an issuer arising from its repurchase of its own shares. The SEC found that Andeavor bought back $250 million of stock without first engaging in an adequate process to ensure that the…

In Miramar Police Officers’ Retirement Plan v. Murdoch[1] the Delaware Court of Chancery dismissed plaintiff’s claims, refusing to hold that an “unambiguous” boilerplate successors and assigns clause operated to bind a spun-off company to the terms of a contract entered into by its former parent company.  The contract at issue generally restricted the former parent company from adopting a poison pill with a term of longer than one year without obtaining shareholder approval.  The decision will serve as a reminder to practitioners to carefully consider  the impact that significant corporate transactions could have on their clients’ contractual rights and obligations. 
Continue Reading Successors, Assigns and Spincos, Oh My!: Binding Spincos to Parent Obligations Requires Specificity