Court of Chancery Opinion Highlights the Importance of Clear Integration and Non-Reliance Provisions in M&A Agreements

Judge Medinilla’s recent opinion in Cytotheryx, Inc. v. Castle Creek Biosciences, Inc. is a reminder for practitioners to carefully consider whether an integration clause in a purchase agreement will be sufficient to bar extra-contractual misrepresentation claims. And although fraud claims arising out of M&A transactions often are brought against sellers, the decision also offers an example of how those claims can be brought against purchasers, particularly in transactions using stock consideration.

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Sale of Buyer’s Equity Provides “Good Faith” Justification for Not Earning Earnout

As we have written about in the past, earnout provisions in M&A agreements are often ways to find value and bridge a buyer’s and seller’s differing expectations of the future.  But they also are ripe for litigation, especially if the buyer changes the way the business is run or pursues other opportunities that may affect the earnout.  Such disputes are highly fact-specific and often turn on the unique issues facing the acquired business.  A recent case from the Delaware Court of Chancery illustrates an example of a buyer not having to pay an earnout when its conduct to not enter into new business with a potential customer was influenced by a simultaneous transaction to sell an equity stake in the buyer.

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SPAC Litigation Continues to Churn in the Belly of the Chancery Beast

As this blog has consistently observed, although the well of SPAC mergers substantially dried up a few years ago, the wave of lawsuits stemming from those de-SPAC mergers has not abated. In the latest decision addressing claims for breach of fiduciary duty arising from a de-SPAC merger, Solak v. Mountain Crest Capital LLC, Vice Chancellor Glasscock bemoaned “the bulge of SPAC carcasses [that] continues to be digested in equity.” Yet, despite acknowledging that the allegations were not strong and hewed “close to the line between an adequate and an inadequate claim,” he allowed the claims to proceed past a motion to dismiss.

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Chambers 2024 Global Practice Guide for Shareholders’ Rights and Shareholder Activism

The 2024 Chambers Global Practice Guide for “Shareholders’ Rights & Shareholder Activism”, with contributions from Kai Liekefett, Derek Zaba, Ram Sachs, and Evan Grosch, is now available. The guide provides an overview of corporate governance and shareholder activism based on the latest legal developments and market trends.

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Equity Has Its Limits: Chancery Rejects Bid For An “Equitable Eraser”

It may seem obvious that “[e]quity cannot bless th[e] deliberate violation of an explicit statutory prohibition,” but in the recent Delaware Court of Chancery decision, TS Falcon I, LLC v. Golden Mountain Financial Holdings Corp., Vice Chancellor Lori Will reminded us of this maxim in the context of setting record dates for annual stockholders’ meetings.  As discussed herein, the court declined to bless the defendants’ deliberate violation of the express language of Section 213(a) of the Delaware General Corporation Law, and further rejected the defendants’ request that the court apply Section 205 to cure this “defective corporate act.”

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Watch What You Say: Disparaging Comments May Trigger Contractual Repurchase Rights Even If Shielded From A Defamation Claim

A recent Delaware decision has demonstrated the limits of the absolute litigation privilege, holding that it did not protect an LLC member from claims that his defamatory statements triggered contractual repurchase rights of his membership interests. Absolute litigation privilege, in Delaware and many other jurisdictions, protects parties from actions for allegedly defamatory statements made during a judicial proceeding that are relevant to the case. While Judge Paul R. Wallace found absolute litigation privilege served an important interest in allowing parties to speak freely once in litigation, those public policy concerns do not always apply when a party is seeking to enforce private contractual rights resulting from the alleged breach of a non-disparagement claim. In so holding, the court demonstrated that Delaware courts will continue to show caution before allowing public policy interests to obviate the obligations in sophisticated parties’ private contracts.

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Words Matter: Different Definitions of “Commercially Reasonable Efforts” Lead to Different Results in Drug-Development Earnout Disputes

Acquisitions of biotech companies with development-stage drug candidates often include earnout agreements.  The buyer pays the seller’s stockholders with cash or stock upfront, and the seller’s stockholders are entitled to additional payments if the drug or drugs in development reach certain milestones, often culminating in FDA approval or commercialization.  Achieving those milestones can take many years and requires the buyer to make substantial investments in clinical trials and regulatory approval.  Because the right to earnout payments depends to a significant degree on a buyer’s actions in developing the asset, a seller will seek a provision in the acquisition agreement requiring the buyer to use commercially reasonable efforts in drug development.

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<a target=‘_blank’ href="https://www.sidley.com/en/people/s/stern-andrew-w">Andrew W. Stern</a>

Andrew W. Stern

New York
<a target=‘_blank’ href="https://www.sidley.com/en/people/n/newell-charlotte-k">Charlotte K. Newell</a>

Charlotte K. Newell

New York
<a target=‘_blank’ href="https://www.sidley.com/en/people/a/austin-elizabeth-y">Elizabeth Y. Austin</a>

Elizabeth Y. Austin

Chicago
<a target=‘_blank’ href="https://www.sidley.com/en/people/b/bartlett-jaime-a">Jaime A. Bartlett</a>

Jaime A. Bartlett

San Francisco
<a target=‘_blank’ href="https://www.sidley.com/en/people/d/ducayet-james-w">Jim Ducayet</a>

Jim Ducayet

Chicago
<a target=‘_blank’ href="https://www.sidley.com/en/people/g/garcia-yolanda-c">Yolanda C. Garcia</a>

Yolanda C. Garcia

Dallas

<a target=‘_blank’ href="https://www.sidley.com/en/people/h/heyworth-james">James Heyworth</a>

James Heyworth

New York
<a target=‘_blank’ href="https://www.sidley.com/en/people/k/kaplan-alex-j">Alex J. Kaplan</a>

Alex J. Kaplan

New York
<a target=‘_blank’ href="https://www.sidley.com/en/people/l/lopez-jodi-e">Jodi E. Lopez</a>

Jodi E. Lopez

Los Angeles
<a target=‘_blank’ href="https://www.sidley.com/en/people/m/muenz-jon">Jon Muenz</a>

Jon Muenz

New York
<a target=‘_blank’ href="https://www.sidley.com/en/people/r/ross-ian-m">Ian M. Ross</a>

Ian M. Ross

Miami
<a target=‘_blank’ href="https://www.sidley.com/en/people/s/sheppard-hille-r">Hille R. Sheppard</a>

Hille R. Sheppard

Chicago
<a target=‘_blank’ href="https://www.sidley.com/en/people/s/sultanian-heather">Heather Benzmiller Sultanian</a>

Heather Benzmiller Sultanian

Chicago
<a target=‘_blank’ href="https://www.sidley.com/en/people/v/velevis-robert-s">Robert S. Velevis</a>

Robert S. Velevis

Dallas
<a target=‘_blank’ href="https://www.sidley.com/en/people/w/wechkin-robin-e">Robin E. Wechkin</a>

Robin E. Wechkin

Seattle

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