recent developments in delaware m&a law · •delaware general corporation law § 262 “(a)...

Attorney Advertising Prior results do not guarantee a similar outcome. Copyright ©2018 Sullivan & Cromwell LLP

Recent Developments in Delaware M&A Law Recent developments in appraisal actions; Further clarification of the scope of Corwin and MFW doctrines; Post-Trulia litigation trends; The first Delaware Chancery Court decision finding an MAE.

Brian T. Frawley

John L. Hardiman

Robert A. Sacks

October 2018

1 Copyright ©2018 Sullivan & Cromwell LLP Copyright ©2018 Sullivan & Cromwell LLP

1

Notable Developments

• Recent Developments in Appraisal Actions

Delaware Supreme Court and Court of Chancery continue to emphasize deal price and market price as important but not presumptive evidence of fair value.

• The Maturation of Corwin and MFW Doctrines

Delaware courts refine the Corwin analysis and clarify the MFW test for reviewing transactions with controlling stockholders.

• Post-Trulia Consequences

Movement of routine deal litigation away from Delaware

D&O Insurance—the “bump-up” exclusion

• Extra Credit: The Delaware Court of Chancery issues the first Delaware decision allowing termination of a merger agreement based upon a Material Adverse Effect.


2

Recent Developments in Appraisal Proceedings


3

Appraisal Background

• Continued Trend Toward Deal Price

• Unaffected Market Price Becomes a Bigger Factor

• Litigating Appraisal Becomes More and More Expensive, Creating a Settlement Arbitrage


4

The Appraisal Statute

• Delaware General Corporation Law § 262

“(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to § 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock under the circumstances described in subsections (b) and (c) of this section . . . .”

• In a simplified sense, a stockholder who has not voted in favor of a merger (a dissenting stockholder), generally, has the right to sue for an appraisal of the “fair value” of the shares that the dissenting stockholder is owed.

• A proper party must hold record stock and must “continuously hold [] such shares through the effective date of the merger.”

https://1.next.westlaw.com/Link/Document/FullText?findType=L&pubNum=1000005&cite=DESTT8S228&originatingDoc=N24ADD19039AF11E6B0E897393DF36488&refType=LQ&originationContext=document&transitionType=DocumentItem&contextData=(sc.DocLink)




5

The Appraisal Remedy

• Since the limitations on M&A actions following Corwin and curtailment of settlements after Trulia, appraisal actions have become and remain a popular remedy.

• In December of 2017, the Delaware Supreme Court handed down a landmark appraisal opinion in Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017).

• Consistent with its earlier opinion in DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017), the Supreme Court emphasized the importance of deal price as evidence of fair value but again declined to adopt a judicial presumption in favor of deal price.

• This year, four of the five (soon to be seven) members of the Court of Chancery have had an opportunity to apply the teachings of Dell in a post-trial decision.

Continued


6

Appraisal Decisions –Dell and its Aftermath

Case Date Judge Deal

Price

Fair

Value

Primary Valuation

Method

Dell, Inc. v. Magnetar Global Event

Driven Master Fund Ltd., 177 A.3d 1

(Del. 2017)

12/14/2017 Valihura $13.75 $13.751 Deal Price1

Verition Partners Master Fund Ltd. v.

Aruba Networks, Inc., 2018 WL

922139 (Del. Ch. Feb. 15, 2018)

2/15/2018 Laster $24.67 $17.13 Unaffected market

price

In re Appraisal of AOL Inc., 2018 WL

1037450 (Del. Ch. Feb. 23, 2018) 2/23/2018 Glasscock $50.00 $48.702 DCF

Blueblade Capital Opportunities LLC

v. Norcraft Cos., Inc., 2018 WL

3602940 (Del. Ch. July 27, 2018)

7/27/2018 Slights $25.50 $26.16 DCF

In re Appraisal of Solera Holdings,

Inc., 2018 WL 3625644 (Del. Ch. July

30, 2018)

7/30/2018 Bouchard $55.85 $53.95 Deal price less

synergies

1 On remand, the parties settled the appraisal petition at the deal price, plus interest.

2 Following reargument, the Court adjusted its DCF valuation to $47.08 per share. 2018 WL 3913775 (Del. Ch. Aug.

15, 2018).


7

In re Appraisal of Dell Inc. Chancery Decision

• In In re Appraisal of Dell Inc., 2016 WL 3186538 (Del. Ch. May 31, 2016), Vice Chancellor Laster declined to adopt the deal price as the most reliable indicator of fair value.

• According to the Court of Chancery, there were a number of impediments that “undercut the relationship between the Final Merger Consideration and fair value” including:

Use of an LBO pricing model rather than a DCF model.

Lack of meaningful competition during the pre-signing phase.

An informational asymmetry between management and potential bidders during the go-shop phase.

• The Court also rejected using the Company’s stock price as evidence of fair value theorizing that there was a “valuation gap” between the market’s (short-term) perceptions and the Company’s (long-term) operative reality.

• The Court relied exclusively on its own DCF analysis to reach a fair value figure of $17.62 per share, approximately 28% above the deal price of $13.75.


8

Dell, Inc. v. Magnetar – The Supreme Court’s Decision

• On appeal, the Delaware Supreme Court reversed the Court of Chancery.

• The Supreme Court found that the Court of Chancery erred by relying exclusively on its own DCF analysis and failing to give any weight to “market data.”

The Court noted that “the market for Dell’s shares was actually efficient and, therefore, likely a possible proxy for fair value,” and that the trial court’s own findings suggest that the features of MBO transactions which may render deal price unreliable were largely absent.

The Supreme Court held that the Court of Chancery’s decision to afford no weight to deal price was based on assumptions that were inconsistent with accepted financial principles and the factual findings made by the trial court.

• The Supreme Court remanded to the Court of Chancery with direction to find fair value “based on reasoning that is consistent with the record and with relevant, accepted financial principles.”


9

Verition Partners v. Aruba Networks (Laster)

• HP acquired Aruba Networks, Inc. at a price of $24.67 per share.

• In a February 15, 2018 decision, the Court found that “once Delaware law has embraced a traditional formulation of the efficient capital markets hypothesis, the unaffected market price provides a direct route to the same endpoint, at least for a company that is widely traded and lacks a controlling stockholder.”

The Court, applying Dell, declined to defer to deal price, instead finding fair value at $17.13 per share, based on the thirty-day average unaffected market price for Aruba’s stock prior to news of the deal.

The Court also interpreted the Supreme Court’s decision in Dell as discouraging reliance on a DCF analysis where reliable market-based evidence is readily available.

• The Court found that Aruba stock was widely traded, information about the company was widely available and the company had no controlling stockholder, so the Court concluded that unaffected market price was “the best evidence of Aruba’s fair value as a going concern, exclusive of any value derived from the merger.”


10

In re Appraisal of AOL Inc. (Glasscock)

• Verizon acquired AOL in an all-cash merger at a price of $50 per share.

• The Court declined to defer to deal price and instead employed a DCF analysis to find fair value at $48.70 per share—2.6% less than the deal price.

• In a February 23, 2018 decision, the Court determined that the transaction process was not “Dell Compliant” taking particular note that:

The merger agreement had been protected by no-shop and matching rights provisions.

AOL’s CEO had made “unusually preclusive” statements that “signaled to potential market participants that the deal was ‘done,’ and that they need not bother making an offer.”

The Court reasoned that a less restrictive negotiating environment may have resulted in a higher price for AOL, and was thus unwilling to accept deal price as the measure of fair value.

• The Court relied solely upon its own DCF valuation, with the deal price relegated “to a role as a check on that DCF valuation.”

• After reargument, the Court lowered its determination of fair value to $47.08 per share.


11

Blueblade Capital v. Norcraft (Slights)

• Fortune Brands Home & Security, Inc. acquired Norcraft in an all-cash merger at a price of $25.50 per share.

• In a July 27, 2018 decision, the Court declined to defer to deal price, instead using a DCF analysis to find fair value at $26.16 per share—approximately 2.6% more than the deal price.

The Court noted that “significant flaws” in the merger process undermined the reliability of the deal price as an indicator of Norcraft’s fair value.

There was no pre-signing market check, Norcraft’s lead negotiator was focused on securing benefits for himself, and the deal’s go-shop provision was rendered ineffective “by a clutch of deal-protection measures.”

• The Court concluded that, given the unreliability of the deal price and the lack of evidence addressing whether Norcraft’s unaffected trading price was probative of Norcraft’s fair value, DCF analysis was the best method to determine fair value.


12

In re Appraisal of Solera Holdings (Bouchard)

• Vista Equity Partners acquired Solera Holdings, Inc. in an arm’s-length, all-cash merger at a price of $55.85 per share.

• In a July 30, 2018 decision, the Court deferred to deal price, less synergies, finding a fair value of $53.95 per share—approximately 3.4% less than the deal price.

• The Court noted that the sale process “was characterized by many objective indicia of reliability,” with the process directed by an independent special committee and “was conducted against the backdrop of an efficient and well-functioning market for Solera’s stock.”

• The Court concluded that the deal price was the most reliable evidence of fair value and, after adjusting for synergies, was deserving of “sole and dispositive weight in determining the fair value” of Solera.


13

Further Refinements in Post-Closing Damage Claims under Corwin and MFW


14

Corwin Background

• Following a stock-for-stock merger in which KKR & Co. L.P. (“KKR”) paid a 35% premium for the stock of KKR Financial Holdings LLC (“Financial Holdings”), several shareholders challenged the merger in the Court of Chancery.

• Plaintiffs made two claims:

1. Financial Holdings’ board members breached their fiduciary duties by agreeing to the merger.

2. KKR was a controlling stockholder of Financial Holdings, subjecting the merger to enhanced scrutiny and entire fairness review.

• The Court of Chancery rejected both claims, and the Delaware Supreme Court affirmed. Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).


15

Corwin: Fully Informed Vote Invokes BJR

• After first rejecting the claim that KKR was a controlling stockholder, the Court also held that the transaction was subject to the business judgment standard of review because the merger “was approved by a majority of the shares held by disinterested stockholders of KFN in a vote that was fully informed.”

• “[W]hen a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.”

This, according to the court, will avoid costly “judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction themselves.”

Stockholders can still “easily protect themselves at the ballot box by simply voting no.”


16

BJR Effectively Ends Scrutiny of Most Transactions

• Corwin: A fully informed, uncoerced vote of the disinterested stockholders invokes BJR standard of review.

Conclusion that BJR applies “insulates the transaction from all attacks other than on the grounds of waste.” In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 1001 (Del. Ch. 2014).

Delaware Supreme Court has noted that this rule effectively renders transactions unreviewable, because the waste doctrine is ill-suited for application to a transaction in which shareholders receive consideration that they voted to accept. Singh v. Attenborough (2016).

• This standard places tremendous importance on getting deal disclosures right: Accurate, complete and clear.


17

Limits of Corwin

• Stockholder vote must have been on the transaction that is challenged as the basis for the breach of fiduciary duty.

“The policy underlying Corwin . . . was never intended to serve as a massive eraser, exonerating corporate fiduciaries for any and all of their actions or inactions preceding their decision to undertake a transaction for which stockholder approval is obtained.” In re Massey Energy Co. Derivative & Class Action Litig., 160 A.3d 484, 507 (Del. Ch. 2017).

• The Corwin prerequisites: (i) “not subject to the entire fairness standard,” (ii) “approved by a fully informed” vote, (iii) “of the disinterested stockholders,” and (iv) that is “uncoerced.”

• Although Corwin is in the nature of an affirmative defense, Plaintiffs must plead facts that would render it inapplicable. In re Solera Holdings, Inc. S’holder Litig. (Del. Ch. 2017).


18

Corwin: “Not Subject to Entire Fairness Review”

• The exception noted in Corwin for transactions “subject to entire fairness” was

not entirely clear, as any transaction that is shown to involve a breach of duty is

likely subject to entire fairness review.

• The Court of Chancery has found that “the only transactions that are subject to

entire fairness that cannot be cleansed by proper stockholder approval are those

involving a controlling stockholder.” Larkin v. Shah (Del. Ch. 2016).

• Nevertheless, this means that, even in the case of a less than 50% stockholder, a

transaction with a stockholder that Delaware law would deem to “control” the

company cannot be cleansed by a stockholder vote under Corwin.

• In re Tesla Motors, Inc. Stockholder Litigation, 2018 WL 1560293 (Del. Ch.

Mar. 28, 2018): The Court ruled that Elon Musk, the owner of 22% of Tesla’s

stock, was plausibly alleged to control Tesla, such that the approval by

disinterested Tesla stockholders of its acquisition of an entity Musk owned a

minority interest in was potentially subject to entire fairness and outside

Corwin.


19

Corwin: “Fully Informed Vote”

• Corwin did not alter the disclosure duty or materiality standards long applied by Delaware courts.

• The Board must disclose fully and fairly all information within its control that is material to the voting decision. In re Solera Holdings, Inc. S’holder Litig. (Del. Ch. 2017).

• The need to allege a disclosure violation to avoid Corwin has led many plaintiffs to seek access to corporate records for use in crafting a viable disclosure claim, whether through books and records demands, other litigations, or appraisal proceedings.


20

Corwin: “Fully Informed Vote”

• Morrison v. Berry, 191 A.3d 268 (Del. 2018) The Delaware Supreme Court reversed a Corwin dismissal, based entirely on

discrepancies between the description of various events in the proxy when compared to the wording of various internal documents on the same subject that were received in response to a books and records demand.

This case is notable for the level of detail with which the Court scrutinized these internal records when contrasting their content with the language deployed in the proxy.

• Appel v. Berkman, 180 A.3d 1055 (Del. 2018) Corwin dismissal reversed because failure to disclose the reason founder and

director voted against transaction (revealed in records request) was material.

• In re Appraisal of Columbia Pipeline Group, Inc., 2018 WL 4182207 (Del. Ch. Aug. 30, 2018)

Chancery Court granted a motion challenging the confidentiality of court filings in an appraisal proceeding, which plaintiffs’ counsel sought to unseal for use in a separate post-closing fiduciary duty lawsuit.

The Court ruled that the documents should be made public, despite language in the protective order that discovery in the appraisal proceeding could be used only for purposes of that action.

Continued


21

Corwin: “Disinterested Stockholders”

• Since Corwin, there has been little or no discussion about who qualifies as a disinterested stockholder, for the simple reason that the outcome of the vote is rarely sufficiently close to merit further inquiry.

• In Tesla Motors, the plaintiffs claimed that the Court should exclude all overlapping stockholders among the acquiror and the target. The Court did not reach that issue.

• As in other areas of Delaware law, the vote required likely is approval by the holders of a majority of the outstanding shares held by disinterested stockholders – approval by a majority of votes cast likely is insufficient. But see Olenik v. Lodzinski, 2018 WL 3493092 (Del. Ch. Jul. 20, 2018) (“Of the voted shares not held by Oak Valley or the Company’s executive officers, 99.7% voted in favor of the Transaction.”)


22

Corwin: “Uncoerced Vote”

• In two recent cases, the Court of Chancery denied motions to dismiss based upon allegations that the vote was structurally coercive in that stockholders were alleged to have been induced to vote for some reason other than the economic merits of the transaction.

In re Saba Software (Del. Ch. 2017): The court found coercion sufficiently pled where board allegedly agreed to fire sale following deregistration in order to avoid SEC scrutiny, leaving “stockholders to choose between a non-premium sale or holding potentially worthless stock.”

Sciabacucchi v. Liberty Broadband (Del. Ch. 2017): The Court found structural coercion sufficiently pled in respect of a vote on the issuance of equity to an insider where approval of that issuance was a prerequisite to a vote on a related but independent merger.

• In re Rouse Properties, Inc., 2018 WL 1226015 (Del. Ch. Mar. 9, 2018): The Court rejected a claim that the vote was coerced because the deal was timed to coincide with a temporary downturn in the target’s stock price for, among other reasons, the fact that the stockholders had more recent, improving financial results by the time of the vote.


23

MFW: Controlling Stockholder Transactions

• Delaware has long held that, in a transaction between the Company and its

controlling stockholder, defendants can shift the burden of proof under entire

fairness review to plaintiffs if the defendants show that the transaction

was either

i. negotiated by a well-functioning special committee of independent directors; or

ii. conditioned on the approval of a majority of the minority shareholders.

• Kahn v. M&F Worldwide Corp. (Del. 2014) took that much further: BJR applies to transaction with controlling stockholder where:

i. The controller conditions the transaction at the outset on the approval of both a special committee and a majority of the minority stockholders;

ii. the special committee is independent;

iii. the special committee is empowered to freely select its own advisors and to say no definitively;

iv. the special committee meets its duty of care in negotiating a fair price; and

v. the vote of the minority is informed and uncoerced (i.e., Corwin).


24

MFW in Practice

• The elements of the MFW framework relating to the independence and functioning of the special committee have been the subject of decades of cases on these subjects, with fairly well-settled guideposts.

• The need to show that the special committee functioned properly and met its duty of care in negotiating a fair price raised some concerns initially that an MFW defense could not succeed at the pleading stage.

While this remains a high hurdle, Delaware courts have ruled that it can be met at the motion to dismiss stage.

In re Books-A-Million, Inc. Stockholders Litigation, 2016 WL 5874974 (Oct. 10, 2016): The Court ruled that the complaint must “ple[a]d grounds to take the transaction outside of the M & F Worldwide framework.”

“If the defendants have described their adherence to the elements identified in M & F Worldwide ‘in a public way suitable for judicial notice, such as board resolutions and a proxy statement,’ then the court will apply the business judgment rule at the motion to dismiss stage unless the plaintiff has ‘pled facts sufficient to call into question the existence of those elements.’” Id.


25

MFW in Practice

• NRG Yield v. Crane, 2017 WL 7053964 (Del. Ch. Dec. 11, 2017): The Delaware Chancery Court also applied business judgment review, under MFW, to a corporate recapitalization.

The deal proposed by a controller was a recapitalization that would perpetuate its control.

The Court rejected the argument that MFW should be confined to controller squeeze-out transactions, reasoning instead that “the MFW framework should apply to all transactions where the controller receives a non-ratable benefit to potentially lower the standard of review.”

• Although the court concluded that the recapitalization was a conflicted controller transaction to which entire fairness review presumptively applied, the Court found that business judgment review was the appropriate standard because each element of the MFW framework was met.

Continued


26

MFW: Approvals Conditioned Ab Initio

• Several recent cases have provided needed guidance on the requirement

in MFW that the controller condition its proposal “ab initio” on the

approval by a disinterested special committee and a vote of the

disinterested stockholders, which Delaware courts found means before

any negotiations take place.

• Olenik v. Lodzinski, 2018 WL 3493092 (Del. Ch. Jul. 20, 2018).

The parties had “extensive . . . exploratory” discussions prior to the controller submitting an offer letter, which written offer was conditioned on approvals by a special committee and minority stockholders.

The Court rejected the claim that the earlier discussions qualified as negotiations, which “ignores the important distinction between ‘discussions’ about the possibility of a deal and ‘negotiations’ of a proposed transaction after the ‘discussions’ lead to a definitive proposal.”


27

MFW: Approvals Conditioned Ab Initio

• Flood v. Synutra Int’l, Inc., 2018 WL 4869248 (Del. Oct. 9, 2018).

The Delaware Supreme Court ruled that, even though the controller’s initial offer letter omitted reference to the MFW requirements, the ab initio requirement was met by inclusion in a second offer letter shortly thereafter.

The Court stated that, “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, . . . and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied.”

Continued


28

Post-Trulia Litigation Trends


29

Pre-Trulia Background

• Prior to Trulia (Jan. 22, 2016), over 90% of mergers had been accompanied by Delaware shareholder lawsuits claiming that disclosures were insufficient and seeking to enjoin the merger.

• In exchange for releasing stockholder claims, plaintiffs would only demand enhanced disclosures.

• These proceedings almost invariably led to early settlements so that the company could move forward with the merger. Courts generally approved these settlements with little scrutiny.

• The settlements often included broad releases that were not limited to disclosure claims.

• As shareholders’ counsel received fees for these disclosure-only settlements, and there was little risk to bringing the claim, the incentives were skewed toward bringing such actions regardless of the actual quality of disclosures.


30

In re Trulia, Inc. Stockholder Litigation

• Trulia involved a typical class action filed soon after the announcement of a stock-for-stock merger between Zillow, Inc. and Trulia, Inc., alleging that the directors had breached their fiduciary duties by putting misleading disclosures in the joint proxy statement.

• The litigation was quickly settled in return for supplemental disclosures, with a broad release that covered “any claims arising under federal, state, statutory, regulatory, common law, or other law or rule” relating in any way to the merger.

• The parties requested that the Court of Chancery approve the settlement, including a $375,000 award of attorneys’ fees to plaintiffs’ counsel.


31

The Court Rejects the Settlement and Announces Heightened Scrutiny

• The Court of Chancery rejected the proposed settlement:

The disclosures provided inadequate consideration for the broad release of claims.

The disclosures were immaterial because they provided information that was already public or otherwise provided specific data points used by Trulia’s financial advisor not required by Delaware law.

• The Court criticized the value of such settlements, expressed concern about the breadth of the releases being given, and announced a prospective approach that signaled the death-knell of such settlements in Delaware:

“These settlements rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with rigor.”

“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, and the subject matter of the proposed release is narrowly circumscribed . . . .”


32

Aftermath of Trulia

• The Court proposed two ways in which disclosure claims could be subjected to judicial review outside the settlement context:

Litigate the disclosure claim through a preliminary injunction motion, in which the plaintiff would bear the burden to demonstrate a reasonable likelihood of proving that “the alleged omission or misrepresentation is material.”

Voluntarily supplemental disclosures that moot some or all of the plaintiffs’ claims, incentivizing defendants to oppose excessive attorneys’ fees for plaintiffs’ counsel and thereby reducing frivolous claims.

• Plaintiffs’ lawyers have not exhibited any appetite to pursue the first option.

• Yet disclosure challenges continue, often outside of the Court of Chancery, and often in a different form.


33

Aftermath of Trulia

• M&A suits filed in Delaware have fallen.

• Although some plaintiffs have sought to pursue deal litigation outside of Delaware, forum selection clauses in many companies’ charters or bylaws can prevent such forum shopping.

• The Trulia court urged sister courts to adopt similar heightened standards for disclosure-only settlements to avoid forum shopping.

Some jurisdictions have done so, while others have not.

At least one court that has not adopted the strict Trulia approach has noted that such settlements may be in the best interests of the corporation. See Gordon v. Verizon Comm., Inc., 148 A.D.3d 146 (N.Y. App. Div. 2017).

• Even in Delaware, plaintiffs’ counsel can still be awarded mootness fees (although admittedly smaller). See In re Xoom Corp. Stockholder Litig., No. CV 11263-VCG, 2016 WL 4146425 (Del. Ch. Aug. 4, 2016).

Continued


34

Aftermath of Trulia

• Many transactions still attract disclosure litigation of the type designed to extract a fee, akin to a deal tax.

Modest cost and desire to avoid risk to closing make resolution compelling even if claims are not deemed substantial.

• Current Trends:

Threatened litigation that is never actually initiated but resolved privately for supplemental disclosure in return for payment of a negotiated fee to plaintiffs’ attorneys following the closing of the transaction: No Release.

Litigation filed in federal court under Section 14, either in addition to or in lieu of state fiduciary duty claims.

Dismissal of litigation on mootness grounds following supplemental disclosures in return for payment of a negotiated mootness fee following closing of the transaction that is not judicially approved: No Release.

Judicially approved settlement of litigation in return for supplemental disclosures, payment of a fee to plaintiffs’ counsel, and a Release Limited to Disclosures.

Not the currently favored approach.

Continued


35

The “Bump-Up” Exclusion in Director & Officer Insurance Policies

• Given the proliferation of litigation surrounding most substantial M&A transactions, many companies and their directors take comfort in the protections afforded to them by D&O insurance.

• D&O insurance generally provides coverage, subject to a substantial retention, for “Wrongful Acts,” including breaches of fiduciary duty, subject to various exclusions.

• One exclusion found in many D&O policies is commonly referred to as the “bump-up” exclusion; for example: “In the event of a Claim alleging that the price or consideration paid or proposed to be paid

for the acquisition of all or substantially all of the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.”

• Since a common claim in litigation surrounding many mergers is that the directors of the target breached their fiduciary duties by failing for one reason or another to get the best and highest price for their shareholders, the meaning and application of this exclusion could have significant consequences.


36


• The meaning and effect of this exclusion are currently being litigated in California in a case arising out of Amgen’s acquisition of Onyx Pharmaceuticals.

Onyx’s directors were sued in California Superior Court for breaching their fiduciary duties in entering into a merger agreement with Amgen by failing to maximize the price to be paid to Onyx’s shareholders.

Following the closing of the transaction, and while summary judgment motions were pending several months before trial, the litigation was settled for $30 million.

The primary carrier (AIG) paid the remainder of its limits toward the settlement; however the excess carriers (Old Republic, RLI and Allied World) refused to fund the remainder (approximately $26 million), relying on the “bump-up” exclusion in the AIG primary policy to claim that the payment was not covered Loss because it effectively reflected an increase in the price paid to Onyx shareholders for their shares.

• The case was recently tried and is awaiting decision, but to date the California court has: (i) determined that the payment of plaintiffs’ counsels’ fees ($9.7 million) awarded from the $30 million is not reimbursable as fees paid by Onyx but is part of the Loss that is subject to the exclusion if applicable, and (ii) there are disputed issues as to intent, common understanding, and objectively reasonable expectations.

Continued


37


• This appears to be the first case in which a court will interpret the scope of this exclusion.

• While the purpose of an exclusion of this sort is to avoid making an insurer pay for what is effectively increased merger consideration, in virtually any M&A case the damages to shareholders from a breach of fiduciary duty (other than disclosure) are measured in a diminution in what they received for their stock.

• If interpreted as the excess insurers contend, it could effectively eliminate coverage for the costs of settling substantive breach of fiduciary duty claims in many merger cases.

• If any gap in D&O coverage for these situations results and is not corrected through negotiating policy terms in the future, the next ground could be whether claims of this sort are indemnifiable as involving a non-exculpated duty of loyalty.

Continued


38

Yes, Virginia, There Is an MAE


39

Breaking News: MAE Clauses Are Alive and Well in Delaware

• It has long been said by Delaware practitioners that no Delaware Court has never found a Material Adverse Effect (“MAE”) that justified termination of a public company merger agreement.

• That is exactly what Vice Chancellor Laster did earlier this month in Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018).

• Lest anyone believe it has become easy to terminate a merger on MAE grounds in Delaware, it took the Vice Chancellor 246 pages to justify his decision, and the breathtaking detail contained in the opinion likely was included to signal to the market that a successful MAE litigant will remain a quite rare occurrence.


40

The Akorn Decision

• As the Chancery Court noted, as did several prior decisions rejecting MAE arguments, “[a] buyer faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its obligation to close” a transaction.

• The intensively fact-based opinion in Akorn found that the stark deterioration in Akorn’s financial results, as well as its significant regulatory and operational issues, met the Delaware MAE standard of being material and durationally significant.

This deterioration over four quarters included year-over-year quarterly revenue declines of more than 25%, operating income declines of more than 80%, and net income declines of more than 90% in each of the four quarters after the merger agreement was executed.

Moreover, EBITDA declined by 86% and adjusted EBITDA by 51% in 2017 compared to 2016, and the decline was in stark contrast to a prior five-year consistent growth in EBITDA.

Akorn’s poor performance also contrasted markedly with that of its industry peers, and showed no signs of a near-term rebound.

recent developments in delaware m&a law · •delaware general corporation law § 262 “(a)...

Documents