Case Law Developments

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Acquisition agreements in private M&A transactions frequently contain language that purports to limit the purchaser’s recourse against the seller for extra-contractual misrepresentations, even if fraudulent, in order to allocate among the parties the risk of potential post-closing losses.  Such limitations on liability are generally enforceable under Delaware law when they have been specifically negotiated between sophisticated parties,[1] and are commonly implemented through a combination of a so-called “entire agreement” integration clause and an “exclusive representation” provision.  Delaware case law had previously suggested that such provisions might need to contain specific language to serve as an effective disclaimer, but the Delaware Court of Chancery recently ruled, in the context of a motion to dismiss, in Prairie Capital III, LP v. Double E Holding Corp. (Del. Ch. Nov. 25, 2015), that no “magic words” are required so long as the parties’ intention is unambiguous.
Continue Reading Disclaimers of Extra-Contractual Liability in Delaware Following Prairie Capital III, LP v. Double E Holding Corp.

In the latest turn in the long-running LBO-related fraudulent conveyance litigation brought in connection with the Lyondell bankruptcy,[1] on November 18, 2015, Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York (the “Court”) issued a decision (the “Decision”) on motions to dismiss the intentional fraudulent transfer claims and the state-law constructive fraudulent transfer claims brought by representatives for shareholders of Lyondell Chemical Company (“Lyondell”) against Edward Weisfelner (the “Trustee”), trustee of two trusts established for Lyondell’s creditors.  In re Lyondell Chem. Co., No. 09-10023 (REG), 2015 WL 7272996 (Bankr. S.D.N.Y. Nov. 18, 2015).  The Decision dismissed the intentional fraudulent transfer claims based on the failure to adequately plead the Lyondell Board’s intent to defraud the company’s creditors by entering into the leveraged buyout.  However, the Court left in place the state-law constructive fraudulent transfer claims against former shareholders – notwithstanding securities safe harbors in the Bankruptcy Code that would generally preclude such claims – and, in the process, demarcated the boundaries between intentional and constructive fraudulent transfer claims.
Continue Reading SDNY Bankruptcy Court Reaffirms Rigorous Pleading Standards in Lyondell LBO Fraudulent Conveyance Action

A recent opinion [1] from the Delaware Superior Court addresses the not uncommon situation of a buyer of a business seeking to pursue remedies against the seller that are not specified in the purchase agreement based on allegations of fraudulent conduct by the seller or its representatives.  Specifically, the buyer acquired the shares of a company that had a liability (an obligation to make an “earn-out” payment to the former owners of a previously acquired company) that became payable after completion of the acquisition.  The buyer sued the seller alleging that the seller (and not the acquired company) should be responsible for satisfying the earn-out liability when it became due.
Continue Reading Yet Another Reminder that “Boilerplate” Matters

Valeant’s hostile bid for Allergan was one of 2014’s most discussed takeover battles.  The situation, which ultimately resulted in the acquisition of Allergan by Actavis plc, included a novel structure that involved a “partnership” between Valeant and the investment fund Pershing Square.  In particular, a Pershing Square-controlled entity having a  small minority interest owned by Valeant, acquired shares and options to acquire shares constituting more than nine percent of Allergan’s common stock.  Such purchases were made by Pershing Square with Valeant’s consent and with full knowledge of Valeant’s intentions to announce  a proposal to acquire Allergan.  Pershing Square and Valeant then filed a Schedule 13D and Pershing Square then supported Valeant’s proposed acquisition.  Ultimately Pershing Square made  a very substantial profit on its investment when Allergan was sold to Actavis.
Continue Reading An Update on Insider Trading and Tender Offers: The 14e-3 Claims from the Allergan/Valeant Takeover Battle Survive a Motion to Dismiss

October featured significant M&A opinions from Delaware that are already having an impact on board processes and relationships between corporations and their financial advisors.  While the most recent opinion dismisses claims against the financial advisor for aiding and abetting breaches of duties by the target board, a careful reading of the case reveals that the decision is unlikely to change the practical impact of the holdings from earlier in the month.
Continue Reading What Do the Recent Delaware Opinions Mean for Corporate Board Processes and Relationships with Financial Advisors?

Re-affirming the significance of stockholder approval in corporate governance, the Delaware Supreme Court recently held that transactions approved by a fully informed, uncoerced stockholder vote will be reviewed under the business judgment rule when not subject to the entire fairness standard of review.  Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015).  Last Friday, the Court unanimously affirmed Chancellor Bouchard’s dismissal of a post-closing damages action in In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).  The opinion by Chief Justice Strine canvassed Delaware authority from as far back as 1928 to find extensive support for the proposition that “the approval of the disinterested stockholders in a fully informed, uncoerced vote that was required to consummate a transaction has the effect of invoking the business judgment rule.”  Op. at 7-8 n.19.
Continue Reading Corwin v. KKR: The Significance of Stockholder Approval

Addressing motions to dismiss in connection with the acquisition of Zale Corporation by Signet Jewelers, Vice Chancellor Parsons (in In Re Zale Corporation) dismissed claims against the Zales directors (under DGCL §102(b)(7)) and Signet, but denied dismissal of claims against Zales financial advisor.  Based on the allegations in the plaintiffs’ complaint, before being engaged, the financial advisor told the Board it had “limited prior relationships and no conflicts with Signet,” even though it had received approximately $2 million in fees in the year before the merger agreement.  More significantly for the Court, the complaint alleged that the financial advisor did not disclose – until after the merger agreement was signed – that it had made a presentation to Signet advocating a purchase of Zales shortly before Signet approached Zales, and that a senior member of the team that presented to Signet later became a member of the team that advised Zales.
Continue Reading Further Chancery Court Guidance on Financial Advisor Aiding and Abetting Claims

For practitioners in the Delaware Court of Chancery, the facts of In re Riverbed Tech., Inc.[1] are all too familiar.  After Thoma Bravo sought to take Riverbed private, a class of stockholders challenged the transaction, claiming that the company had been undervalued, the sales process was undermined by conflicts of interest, and the disclosures in the preliminary proxy statement were inadequate.  As in many other cases—after all, litigation has become a virtual certainty in large merger and acquisition transactions of public companies[2]—Riverbed agreed to make supplemental disclosures before the stockholder vote and pay plaintiffs’ attorney’s fees, in exchange for defendants receiving a broad release from liability for all claims arising from the transaction.  Although Vice Chancellor Glasscock reduced the amount of attorney’s fees awarded due to misgivings about the value of the benefits achieved in light of the broad scope of the release, he approved the settlement.
Continue Reading The Implications of Riverbed for Disclosure-Only Settlements

Continuing the long line of precedent confirming the primacy of the board of directors in the governance of a Delaware corporation, the Delaware Court of Chancery recently invalidated a stockholder-adopted bylaw that attempted to grant stockholders the right to remove and replace corporate officers, even in situations where the corporation’s board of directors objected to such removal.  In a brief 25-page opinion,[1] Vice Chancellor Noble held that, although stockholders generally have the broad power to adopt and amend bylaws, that right is not unlimited and the bylaw at issue would “unduly interfere with directors’ management prerogatives under Section 141(a)” of the Delaware General Corporation Law (the “DGCL”).
Continue Reading Gorman v. Salamone: Delaware Court of Chancery Strikes Down Bylaw Granting Stockholders the Right to Remove and Replace Officers

In a recent Delaware Chancery Court decision, Vice Chancellor Laster considered yet another challenge to the approval by a “conflicts committee” of a master limited partnership (“MLP”) in the energy sector of a transaction with the MLP’s parent company. Although the Vice Chancellor noted criticism of the process undertaken by the conflicts committee as portrayed in the complaint by holders of the publicly-traded  units of the MLP, the Court nonetheless dismissed the complaint due to the limited ability to challenge the transaction under the partnership agreement (which was typical for MLPs).
Continue Reading Pendulum Swings the Other Way in New Conflicts Committee Decision, But Scrutiny and Criticism of Independent Directors Continues