“Chalking Up a Victory for Deal Certainty,” Delaware Court of Chancery Orders That Contested Merger Close
Last Friday, soon-to-be Chancellor McCormick issued a decision in Snow Phipps Group, LLC v. KCake Acquisition, Inc. that ordered the defendant buyers to specifically perform their agreement to acquire DecoPac Holdings, Inc. (“DecoPac” or the Company), which sells cake decorations and technology for use in supermarket bakeries. The 125-page decision, which opens with a quote from the incomparable Julia Child (“A party without cake is just a meeting”), and is rightly described by the Court as a “victory for deal certainty,” offers a detailed analysis of several common contractual provisions in the time of COVID-19. Despite its length, it is a must-read for those interested in the drafting and negotiation of M&A agreements generally, and their operation during the COVID-19 pandemic specifically.
Back to the Future: New Lines Drawn for Poison Pills
In a tale of what is old is new again, the Delaware Court of Chancery reviewed the propriety of a poison pill — a bulwark of the 1980s takeover era — but in the context of shareholder activism against the backdrop of the COVID-19 pandemic. Vice Chancellor Kathaleen McCormick’s detailed review of the pertinent case law and fact-specific decision to permanently enjoin The Williams Companies, Inc.’s extraordinary 5% poison pill offers a number of lessons for directors considering the adoption or renewal of a similar device. The Williams Cos. S’holder Litig. (Del. Ch. Feb. 26, 2021).
“An Ounce Of Prevention Is Worth A Pound Of Cure”: Effective Practices for Board Minutes and Related Board Materials
The above-referenced turn of phrase was penned by Benjamin Franklin in admonishing his fellow Philadelphians to take heed of fire prevention strategies. Although the benefits discussed here are short of life-saving, attention to implementation and periodic review of your practices for the preparation and maintenance of board minutes and related materials can yield significant dividends in managing and mitigating litigation risk, including the risk of personal liability for directors. In addition to providing an accurate record of board decisions, to the extent that minutes evidence directors’ good faith, diligence, and absence of conflict (or appropriate handling of conflict), minutes can help support early termination of stockholder suits for breach of duty. Attention to board (and board committee) minutes is especially important given the increase in demands by would-be stockholder plaintiffs for corporate books and records to assist them in assessing potential claims and constructing their allegations.
Caremark Claims: Not Mission Impossible, but Still Risky Business for Plaintiffs
The Court of Chancery provided its latest guidance on so-called Caremark claims in a New Year’s Eve opinion issued by Vice Chancellor Glasscock in Richardson v. Clark, an action brought derivatively by a stockholder of Moneygram International, Inc. The opinion dismissing the claims, in which the Court had some fun with film titles from Tom Cruise’s career, provides an important level-setting because some have questioned whether Delaware’s courts are lowering the bar for claims alleging that a board of directors failed in its oversight duties. Richardson should provide some comfort to directors that the standards have not changed: absent particularized allegations of bad-faith action (or inaction) by a board, such claims should not survive a motion to dismiss.
“New” Special Committee May Not Dismiss Case Brought by “Old” Special Committee
The Court of Chancery recently rejected a special committee’s motion to dismiss a case that had been commenced on the company’s behalf by a prior special committee. The decision clarifies the standard applicable to the unusual dueling-committee circumstances and offers several reminders of the rigorous assessment applicable to a board committee’s request to terminate litigation filed on the company’s behalf. (more…)
Sharpening The “Tools At Hand”: Delaware Supreme Court Holds Stockholders May Access Books And Records Without Proof Of An Actionable Future Claim
The Delaware Supreme Court recently affirmed Vice Chancellor Laster’s decision requiring the production of corporate books and records in an action some have characterized as expanding the scope of Section 220 actions. These decisions, however, largely affirm the long-standing statutory mandate that a requesting stockholder must state a “proper purpose” for inspection (not what the stockholder intends to do with the resulting records) and confirm that a stockholder investigating potential wrongdoing need not prove it has actionable claims in order to proceed.
Finally, Some COVID-19-Related M&A Guidance: Court of Chancery Issues Decision Analyzing MAE and Ordinary Course Provisions During COVID-19
The Court of Chancery recently allowed a buyer to walk away from an acquisition due to, among other things, the seller’s failure to satisfy the ordinary course covenant because of changes made to the operating business in response to the COVID-19 pandemic. The opinion, penned by Vice Chancellor Laster, is the first decision offering post-trial guidance as to the application of material adverse effect (MAE) and ordinary course provisions during the pandemic. Its guidance on the application of these provisions should be of interest for all negotiating M&A deals and other commercial agreements generally, and during the COVID-19 pandemic in particular.
In AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, plaintiff sought to sell a subsidiary that owned an approximately US$5.8 billion portfolio of luxury hotels. The deal was signed in September 2019, and was slated to close in April 2020. Due to COVID-19, shortly before the planned closing, the seller made material changes to its business. These included closing two hotels entirely, gutting operations at 13 others, terminating or furloughing staff, and cutting spending on marketing and capital expenditures. The seller filed a complaint seeking specific performance to force a closing; the buyer responded with counterclaims contending, among other things, that it had no obligation to close because an MAE occurred, and the seller breached the ordinary course provision. The Court’s rulings on both of these points are highly instructive.
Delaware Supreme Court Holds That Appraisal Actions Do Not Constitute “Securities Claims” Covered by D&O Policy
The Delaware Supreme Court reversed a decision of the state’s Superior Court, holding that an appraisal action arising from Vista Equity Partners’ acquisition of Solera Holdings, Inc. (Solera) did not fall within the definition of a “Securities Claim” for the purposes of coverage under Solera’s primary and excess directors’ and officers’ insurance policies (D&O Policies). The decision cautions that such policies should be carefully reviewed on a periodic basis, and that would-be buyers should do the same during diligence.
Delaware Supreme Court Reaffirms Import of Deal Value in Resolving Appraisal Petitions
The Delaware Supreme Court recently reaffirmed that, absent significant market or process concerns, deal price should be a significant (if not outcome-determinative) factor in the appraisal of Delaware corporations.
In 2017, Sibayne Gold, Ltd. (Sibayne) acquired Stillwater Mining Co. (Stillwater) in a reverse triangular merger that entitled the holder of each Stillwater share to $18 of merger consideration at closing. Petitioners, former Stillwater stockholders, perfected their appraisal rights — a judicial determination of the “fair value” of their holdings — and argued that a flawed deal process made the $18 per share deal price unreliable. This included an increase in commodity prices between signing and closing that increased Stillwater’s value by nine percent.
Court of Chancery Invokes Rarely Successful “Fraud-on-the-Board” Theory, Permitting Duty of Loyalty Claims to Proceed
The Court of Chancery recently allowed to proceed post-closing claims that a merger was completed at an inadequate price, premised largely on allegations that the Company’s CEO and chairman was conflicted and tilted the process in favor of the buyer. This decision serves as a reminder for fiduciaries considering end stage transactions — including the Court’s reminder that “the sins of just one fiduciary can support a viable Revlon claim.”