United States: The Ropes Recap: Mergers & Acquisitions Law News - First Quarter 2015

The First Quarter 2015 edition of the Ropes & Gray M&A Newsletter. Topics addressed in this edition include:

News from the Courts

  • Chancery Court Denies Enforcement of Drag-Along Right in Transaction Where Notice to Minority Stockholders Improperly Provided After Majority Stockholder Approval
  • Price Paid to Ancestry.com, Inc. Stockholders Determined to be Fair, Despite Contrary Arguments from "Appraisal Arbitrage" Investors
  • In Earnout Dispute Cases, Chancery Court Rules on Implied Covenant of Good Faith and Scope of Arbitration
  • Chancery Court Declines to Apply Fee-Shifting Bylaw to Former Shareholder
  • Substantial Damages Awarded for Breach of Contractual Obligation to Negotiate in Good Faith

Delaware Legislative Update

Notable Deals

  • Kraft and Heinz to Merge in Deal Orchestrated by Warren Buffet and 3G Capital
  • Bidding War Ends for Salix Pharmaceuticals

London Update

  • The Small Business, Enterprise and Employment Bill: Timeline for Implementation of Key Corporate Aspects

Asia Update

  • China Continues Foreign Investment Reforms by Revising Foreign Investment Catalogue

NEWS FROM THE COURTS

Chancery Court Denies Enforcement of Drag-Along Right in Transaction Where Notice to Minority Stockholders Was Improperly Provided After Majority Stockholder Approval

In Halpin v. Riverstone National, Inc., the Chancery Court denied enforcement of customary drag-along rights where the controlling stockholders failed to properly exercise their drag-along rights in accordance with the governing stockholders agreement. The Chancery Court's decision highlights the importance of adhering to the letter of a stockholders agreement when exercising drag-along rights.

In Halpin, the acquisition of the company via a merger was approved by the written consent of the controlling stockholders. The stockholders agreement contained a customary drag-along right that required the minority stockholders to agree to a change of control transaction approved by the majority stockholders. When the company delivered an information statement to the minority stockholders after the merger was effectuated exercising the drag-along right and asking the minority stockholders to consent to the transaction after the fact, the minority commenced an appraisal action in lieu of consenting.

On summary judgment, the Chancery Court rejected the company's argument that the minority holders had waived their appraisal rights by virtue of agreeing to the drag-along rights in the stockholders agreement. The Court characterized the drag-along provision as an agreement by the minority stockholders to take action that, if taken, would have resulted in the waiver of their appraisal rights. But the minority stockholders were never called upon to take that action because the majority stockholders used their unilateral ability to approve the transaction by written consent. Consequently, the voting shares of the minority stockholders were extinguished before they received the information statement regarding the transaction and could be called upon to vote or provide their own consent. Had the majority holders followed the process contemplated by the stockholders agreement and compelled the minority holders to vote or consent in advance there would have been a different result.

The Court's ruling did not address the issue of whether it is possible for common stockholders to affirmatively waive statutory appraisal rights in advance in the form of an explicitly worded drag-along provision. While Delaware case law has held that preferred stockholders can affirmatively waive statutory appraisal rights in that manner, the issue of whether an advance waiver of statutory appraisal rights by common stockholders is enforceable remains unsettled.

Halpin v. Riverstone Nat'l, Inc., C.A. No. 9796-VCG (Del. Ch. Feb. 26, 2015)

Price Paid to Ancestry.com, Inc. Stockholders Determined to be Fair, Despite Contrary Arguments from "Appraisal Arbitrage" Investors

In a January 30, 2015 Chancery Court decision, In Re Appraisal of Ancestry.com, Inc., Vice Chancellor Glasscock found that the price paid for the $1.6 billion buyout of Ancestry.com ("Ancestry") by private equity firm Permira Advisers LLC ("Permira") was fair.

In recent years, certain hedge funds have pursued an investment strategy known as "appraisal arbitrage" pursuant to which they acquire stock of a public company after a merger is announced, in the hope that the Chancery Court will determine that the fair value of such stock is actually higher than the merger price. Under Section 262 of the Delaware Code, dissenting stockholders who have perfected appraisal rights have the right to a judicial determination of the fair value of their stock based on the value of the acquired firm as a going concern. The returns associated with appraisal arbitrage can be substantial, including because the statutory interest rate for appraisal awards (which begins to accrue as of the merger's effective date) is the Federal Reserve discount rate plus 5%. In 2012, for example, Orchard Enterprise Inc. was ordered to pay hedge funds that successfully exercised appraisal rights more than twice the per share merger price. Appraisal arbitrage is not, however, without its risks. In assessing fair value, the Chancery Court may also determine that the fair market value for shares of an acquired company is at or below the merger price.

The acquisition of Ancestry by Permira was announced on October 22, 2012 at a price of $32 per share, which represented a 41% premium above the trading price of Ancestry's stock. Ancestry subsequently received written demands for appraisal on behalf of hedge fund stockholders collectively holding approximately 1.4 million shares. On December 27, 2012, Ancestry's stockholders approved the transaction, with 99% of the shares present and voting at the meeting voting in favor of the transaction.

Acknowledging that he found the approach taken by valuation experts on either side to be "less than fully persuasive," Vice Chancellor Glasscock nevertheless determined that "fair value" was "best represented by the market price," noting that the discounted cash flow valuation came close to the market price and gave comfort that "no undetected factor skewed the sales process." The Chancery Court allowed the petitioners to collect interest, limiting their potential losses.

Many see In Re Appraisal of Ancestry.com, Inc. as a blow to the practice of appraisal arbitrage. There is language in the decision underscoring that the Chancery Court will look closely to the market in assessing fair value, barring exceptional circumstances, such as a poorly run sale process. In a transaction resulting from an arm's length process between independent parties where there are "no structural impediments" that might materially distort "objective market reality," the Court is likely to give "substantial evidentiary weight to the merger price as an indicator of fair value."

In a separate ruling earlier in January against Ancestry, the Chancery Court confirmed that for purposes of determining legal standing it is the record holder, not the beneficial owner, who must not have voted the shares for which appraisal is being sought. Furthermore, in the case of shares held in fungible bulk by a record owner, a record holder need only have at least as many shares not voted for in favor of a merger as those for which appraisal is being sought. Below, our Delaware Legislative Update summarizes some recently proposed amendments to the appraisal statute in response to the increasing prevalence of appraisal arbitrage.

In Re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. Jan. 30, 2015).

In Re Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. Jan. 5, 2015).

In Earnout Dispute Cases, Chancery Court Rules on Implied Covenant of Good Faith and Scope of Arbitration

Even the most carefully drafted earnouts can become fertile ground for legal battles. In two recent decisions, the Delaware Chancery Court explored legal issues that are commonly implicated in earnouts.

In Fortis Advisors LLC v. Dialog Semiconductor PLC, the Court considered an earnout construct under which the acquirer of the business was required to use "commercially reasonable best efforts" to achieve the earnout targets. The merger agreement also included a number of specific obligations and prohibitions on the acquirer in connection with its operation of the business during the earnout period. Although the fact-intensive issue of whether the acquirer met the standards of the earnout provision still remains to be litigated, the Court dismissed the seller's alternative theory that the acquirer's conduct had breached the implied covenant of good faith and fair dealing. The Court noted that the implied covenant only applies where the written contract has left a gap that must be filled, with the covenant being violated if one party acts in a way that is clearly contrary to what the parties would have agreed had they addressed the gap. In Fortis, however, the Court found that the earnout provision left no gaps in defining the standard for the acquirer's conduct during the earnout period, and as a result the implied covenant was not implicated. Fortis confirms that plaintiffs cannot use the implied covenant of good faith and fair dealing as an end-run around a clearly drafted standard of conduct in an earnout provision.

In Weiner v. Milliken Design, Inc., the Court refused to rule on certain issues relating to an earnout dispute where the earnout provision of the purchase agreement required the parties to submit earnout disputes to an arbitrator. The Court reasoned that, given that the parties' clearly expressed intention to arbitrate earnout disputes, the Court would not interfere with the arbitrator's discretion to adjudicate the dispute. Weiner illustrates that, as we described in our report on Garda USA v. SPX in the First Quarter 2013 edition of the Ropes Recap, Delaware Courts will give effect to arbitration provisions and parties should be aware that entrusting an arbitrator to interpret earnout or (in the case of Garda) purchase price adjustment provisions may result in a different interpretation than what might have been provided by a court.

Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB (Del. Ch. Jan. 30, 2015); Weiner v. Milliken Design, Inc., C.A. No. 9671-VCP (Del. Ch. Jan. 30, 2015).

Chancery Court Declines to Apply Fee-Shifting Bylaw to Former Shareholder

In deciding what it characterized as an issue of "first impression," the Chancery Court recently held a fee-shifting bylaw to be inapplicable due to the timing of the bylaw's adoption. The plaintiff in the action, Strougo v. Hollander, challenged the fairness of a 10,000-to-1 reverse stock split completed by First Aviation Services, Inc. ("First Aviation") on May 30, 2014. The transaction had the effect of involuntarily cashing out the plaintiff and making First Aviation a privately-owned company controlled by its chairman and chief executive officer. A few days later, on June 3, 2014, the company's board of directors adopted a fee-shifting bylaw modeled after the bylaw considered in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014).

Applying contract principles, Chancellor Bouchard held that the fee-shifting bylaw could have no application to the plaintiff because it was adopted after his interest in the corporation had been eliminated and he therefore was no longer a party to the bylaws at the time of the fee-shifting provision's adoption. The Court further reasoned that the omission of "former" stockholders from the text of Section 109(a) of the Delaware General Corporation Law indicated that that Section 109(a) only authorizes bylaws relating to the rights or powers of current stockholders.

The Court took care to emphasize that it was not called upon to decide broader issues involving the bylaw's application, including the "serious policy questions implicated by fee-shifting bylaws in general." As discussed below in our Legislative Update, the validity of fee-shifting bylaws remains subject to ongoing debate.

Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch. Mar. 16, 2015).

Substantial Damages Awarded for Breach of Contractual Obligation to Negotiate in Good Faith

The Second Quarter 2013 edition of the Ropes Recap summarized SIGA Technologies, Inc. v. PharmAthene, Inc., a case in which the Delaware Supreme Court affirmed that a contractual obligation to negotiate in good faith is enforceable. In that case, SIGA Technologies and PharmAthene had negotiated a "nonbinding" license agreement term sheet. After the negotiation of the term sheet, PharmAthene provided SIGA Technologies with a bridge loan and the parties subsequently negotiated and executed a merger agreement. Both the bridge loan and the merger agreement contemplated that the parties would "negotiate in good faith with the intention of executing" a license agreement should the merger fail. The merger ultimately did fail, and in its May 2013 decision the Delaware Supreme Court affirmed the Chancery Court's conclusion that SIGA Technologies breached its contractual obligation to negotiate a license agreement in good faith after such failure.

On January 15, 2015, the Delaware Chancery Court held that SIGA Technologies was liable to PharmAthene for a total judgment of $195 million, consisting of expectation damages of $113 million, plus pre-judgment interest, legal fees, costs and expenses. The Chancery Court further ordered that the remaining claims and counterclaims made by SIGA Technologies and PharmAthene be dismissed with prejudice, including claims by PharmAthene for specific performance related to the license agreement and term sheet. The resolution of this case serves as a reminder of the magnitude of the damages that can result from an agreement to negotiate in good faith set forth in a letter of intent.

PharmAthene v. SIGA Techs., Inc., C.A. No. 2627-VCP (Del. Ch. Jan. 15, 2015).

Click here to continue reading the quarterly recap of mergers and acquisition law news from the M&A team at Ropes & Gray LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions