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.
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.
Sidley Perspectives on M&A and Corporate Governance
Sidley is pleased to share the June 2024 issue of Sidley Perspectives on M&A and Corporate Governance, a quarterly newsletter designed to keep you current on what we consider to be the most important legal developments involving M&A and corporate governance matters.
“No Better than a Racket”: Seventh Circuit Cracks Down on Merger Objection Strike Suits
In a recent decision, the United States Court of Appeals for the Seventh Circuit outlined a mechanism by which shareholders can object to mootness fees paid to plaintiffs’ attorneys in merger objection suits. See Alcarez v. Akorn, Inc., 99 F.4th 368 (7th Cir. 2024). By allowing a shareholder to intervene and inviting the district court to scrutinize the propriety of the suit, the Seventh Circuit took a further step in its battle against the frivolous strike suits that have plagued M&A transactions for many years.
Buyer Beware: What to Know About the DOJ’s Policy on Self-Reporting in M&A
What happens when you buy somebody else’s problems? A new policy from the U.S. Department of Justice (DOJ) is encouraging companies to disclose the misconduct of the companies they buy. The DOJ says it won’t prosecute businesses that voluntarily report wrongdoing found during the mergers and acquisitions process.
An Arbitration by Any Other Name Is Still an Arbitration, Unless It’s an Expert Determination: Recent Cases Apply Delaware’s Authority Test to ADR Provisions
In M&A transaction agreements, contracting parties frequently negotiate a mechanism to make post-closing adjustments to the purchase price — for example, based on calculations of the target company’s working capital at the time of closing or an “earnout” based on the performance of the company for a specified period after closing. Because parties often disagree over these adjustments, the agreement generally will include a framework for resolving disputes. Although the particulars can vary, the parties typically will agree to negotiate in good faith and, if negotiations fail, to submit any remaining disputes to an independent accountant for final resolution. (more…)
Delaware Court of Chancery Says It’s Game Over on Massive Fees for “Miniscule” Work
Last month, in an oral ruling likely to bring great joy to the Delaware defense bar, Vice Chancellor Zurn issued an atypical “Statement of the Court” in Garfield v. Getaround that swiftly rejected an $850,000 fee request in a derivative action. Plaintiff sought the fee for its efforts in prompting Defendant Getaround Inc. to make changes to its voting structure. Calling attention to the slew of similar actions by stockholders following Garfield v. Boxed, Vice Chancellor Zurn said the “game is over” for attorneys’ “making a literal fortune off of a minuscule number of hours of work.”
Delaware Court of Chancery’s Chilly Response to Activision Blizzard Casts Doubt on Common M&A Practices
On February 29, 2024, the Delaware Court of Chancery issued an opinion in Sjunde AP-Fonden v. Activision Blizzard questioning a number of common practices for target companies in a merger, including the process for obtaining board approval of a merger agreement and the contents of the notice of the stockholders’ meeting to approve the merger agreement, and allowing a challenge to the validity of the subject merger to proceed. It is an important read for all involved in M&A and will undoubtedly have an impact on market practice.
A Reminder of Board Primacy: Delaware Court of Chancery Invalidates Stockholder Agreement Provisions Encroaching on Board-Level Decisions
On February 23, 2024, the Delaware Court of Chancery issued an opinion in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. invalidating certain stockholder agreement provisions that gave a significant stockholder broad pre-approval rights over corporate actions. The opinion serves as a reminder of the contours of board authority under DGCL Section 141(a) and how contractual agreements may “improperly constrain a board’s authority.” It remains to be seen if the decision will be appealed, but at present, it should be evaluated by parties considering contractual provisions that may directly or indirectly limit director decision-making.
“A Bad Bull”: Chancery Court Rejects Plaintiffs’ Fee Application in Oracle Derivative Litigation
Plaintiffs’ bid for a US$5 million mootness fee in In re Oracle Corp. Derivative Litigation, C.A. No. 2017-0337-SG was denied by Vice Chancellor Glasscock, who noted that “not even great counsel can wring significant stockholder value from litigation over an essentially loyal and careful sales process.”
