Tag: Acquisition agreements


Delaware Court: Seating Board Designee Subject to Reasonable Conditions Not a Breach

Steven Epstein is a partner and Co-Head of the Mergers & Acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Epstein, Robert C. Schwenkel, John E. Sorkin, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Partners Healthcare Solutions Holdings, L.P. v. Universal American Corp. (June 17, 2015), the Delaware Chancery Court granted summary judgment to defendant Universal American Corp. (“UAM”), rejecting the contentions of one of UAM’s largest stockholders, Partners Healthcare Solutions Holdings (“Partners”), that UAM had breached a board seat agreement by imposing conditions on the seating of Partners’ designee to the UAM board that were not provided for in the agreement. Partners, a subsidiary of a private equity firm, acquired its stake in UAM through, and the board seat agreement had been entered into in connection with, UAM’s acquisition of a subsidiary of Partners (the “Portfolio Company”). The dispute relating to the seating of Partners’ board designee arose at the same time that UAM and Partners were involved in a separate fraud litigation arising from the Portfolio Company’s performance after the merger.

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Integration Clauses and Letters of Intent

John A. Fisher is counsel in the Mergers & Acquisitions group at Sidley Austin LLP. This post is based on a Sidley update by Mr. Fisher, Sharon R. Flanagan, and Jack B. Jacobs. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Shareholders of an acquired company in a merger transaction sued the purchaser, arguing that certain provisions of a pre-merger letter of intent survived the merger. The Supreme Court of Delaware held that although the merger agreement provided for the survival of portions of the letter of intent, the integration clause of the merger agreement did not transform non-binding provisions of the letter of intent into binding obligations of the purchaser.

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Lazard v. Qinetiq: Important Lessons for Structuring Earn-Outs

David W. Healy and Douglas N. Cogen are partners and co-chairs of the Mergers & Acquisitions Group at Fenwick & West LLP. The following post is based on a Fenwick publication by Mr. Healy and Mr. Cogen. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

A recent Delaware Supreme Court case authored by Chief Justice Strine upholds the literal meaning of an earn-out provision that limited the buyer from taking action “intended to reduce or limit an earn-out payment.” The court rejected the argument that buyer’s actions, which it likely knew would reduce the likelihood of an earn-out payment, met the intent-based standard the parties had agreed on in lieu of various affirmative post-closing covenants that had been rejected by the buyer. The court also rejected the seller’s argument that it could rely on the implied covenant of good faith and fair dealing to impose an objective standard and thereby avoid the burden to prove that the buyer intentionally violated such provision. The case has implications for buyers’ and seller’s negotiating strategies around post-closing operations covenants related to earn-outs and as to the impact of such covenants on the interpretation of the implied covenant of good faith and fair dealing. The case is Lazard Technology Partners, LLC, v. Qinetiq North America Operations LLC, April 23, 2015, Strine, L., 2015 WL 1880153, and it can be found at http://business.cch.com/srd/LazardTechnology-v-Qinetiq.pdf.

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Freeing Trapped Cash in Cross-Border Deals

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert.

In private company transactions, dealmakers often spend significant amounts of time talking about how to treat the cash held by an acquisition target. For example, if the buyer and the seller are negotiating price on the assumption that the target will be sold on a cash-free, debt-free basis, how does the purchase price get adjusted for cash that the target continues to hold at the time of closing? If the deal includes a working capital adjustment, how will cash and cash equivalents be taken into account? What are the procedures for measuring how much cash the target holds at closing?

In cross-border deals, the issues about how to deal with target cash often become significantly more complex. Businesses that operate around the world may have cash in several different countries. Regulatory and tax concerns may limit both the seller’s and the buyer’s ability to transfer cash held by the target from one country to another. Questions about how to deal with the target’s cash must be answered with these constraints in mind.

The balance of this post discusses some of the solutions that buyers and sellers use to resolve trapped cash issues in cross-border deals.

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A Modest Strategy for Combatting Frivolous IPO Lawsuits

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients.

With a minor change to the customary lock-up agreement, issuers and underwriters may be better able to fight frivolous IPO lawsuits. By allowing non-registration statement shares to enter the market, underwriters may prevent Section 11 strike-suiters from “tracing” their shares to the IPO. This could enable ’33 Act defendants to knock out the lawsuits against them.

Basics of Section 11 Standing and Tracing

Section 11 of the Securities Act of 1933, 15 U.S. Code § 77k, provides a private remedy for those who purchase shares issued pursuant to a registration statement that is materially false or misleading. The remedy applies to “any person acquiring such security.” Section 11(a). That is, a person may assert a claim with respect to shares issued pursuant to the particular registration statement.

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New Decision Holds Some Post-Closing Purchase Price Adjustment Provisions Unenforceable

The following post comes to us from Lisa R. Stark and Jessica C. Pearlman, partners in the Corporate/Mergers & Acquisitions practice at K&L Gates LLP, and is based on a K&L Gates publication by Ms. Stark and Ms. Pearlman. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In private company acquisitions, it is common for the buyer to require that a portion of the merger consideration be set aside in escrow as an accessible source of funds to cover the buyer’s post-closing indemnification claims relating to breaches of the target company’s representations and warranties and other specified contingencies. However, the buyer might demand additional protection if its losses under such claims exceed the escrow amount by insisting upon collection of the full loss from the target company’s stockholders. If the losses are significant and the indemnification obligations are uncapped or have a sufficiently high cap, this could require the target company’s stockholders to return their full pro rata share of the merger consideration to the buyer.

Although the Delaware courts have previously upheld post-closing purchase price adjustments, a recent decision found common provisions unenforceable in certain circumstances. Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., C.A. No. 9405 (Del. Ch. Nov. 26, 2014) (V.C. Noble). In this case, the merger agreement and related Letter of Transmittal (the “LoT”) required the target company’s stockholders (1) to indemnify the buyer, up to their pro rata share of the merger consideration, for the target company’s breaches of its representations and warranties, and (2) to release the buyer and its affiliates from any and all claims relating to the merger. The Court found these common provisions unenforceable under the facts in Cigna; accordingly, this decision has significant implications for other private company acquisitions by merger.

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Value Protection in Stock and Mixed Consideration Deals

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, David B. Feirstein, and Joshua M. Zachariah.

As confidence in M&A activity seems to have turned a corner, the use of acquirer stock as acquisition currency is a serious consideration for executives and advisers on both sides of the table. A number of factors play into the renewed appeal of stock deals, including an increasingly bullish outlook in the C-level suite and higher and more stable stock market valuations, as well as deal-specific drivers like the need for a meaningful stock component in tax inversion transactions (see recent post on this Forum).

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Delaware Court: Corporation’s Own Stock Purchases not a “Business Combination”

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Activision Blizzard, Inc. v. Hayes, No. 497, 2013 (Del. Nov. 15, 2013), the Delaware Supreme Court addressed the question of whether the purchase by Activision Blizzard, Inc. (“Activision”) of shares of its own stock, as well as net operating loss carryforwards (“NOLs”), from Vivendi, S.A. (“Vivendi”) constituted a “merger, business combination or similar transaction” under Activision’s amended certificate of incorporation and, as a result, required the approval of stockholders. The Court held that, despite its form as the combination of two entities, the transaction at issue did not require the approval of stockholders. “Indeed,” observed the Court, “it is the opposite of a business combination. Two companies will be separating their business connection.”

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Multiple-Based Damage Claims Under Representation & Warranty Insurance

The following post comes to us from Jeremy S. Liss, partner focusing on capital markets and mergers and acquisitions at Kirkland & Ellis LLP, and is based on a Kirkland publication by Mr. Liss, Markus P. Bolsinger, and Michael J. Snow.

Private equity funds are increasingly using representations and warranties (R&W) insurance and related products (such as tax, specific litigation and other contingent liability insurance) in connection with acquisitions as they become more familiar with the product and its advantages. [1] Acquirors considering R&W insurance frequently raise concerns about the claims process and claims experience. A recent claim against a policy issued by Concord Specialty Risk (Concord) both provides an example of an insured’s positive claims experience and highlights the possibility for a buyer to recover multiple-based damages under R&W insurance.

R&W Insurance Advantages

Under an acquisition-oriented R&W policy, the insurance company agrees to insure the buyer against loss arising out of breaches of the seller’s representations and warranties. The insurer’s assumption of representation and warranty risk can result in better contract terms for both buyer and seller. For example, the seller may agree to make broader representations and warranties if buyer’s primary recourse for breach is against the insurance policy, and the buyer may agree to a lower cap on seller’s post-closing indemnification exposure as it will have recourse against the insurance policy. In addition, R&W insurance often simplifies negotiations between buyer and seller, resulting in a more amicable, cost-effective and efficient process.

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Don’t Ask/Don’t Waive Standstills & Attorneys’ Fees in Delaware

This post is based on a Morris, Nichols, Arsht & Tunnell LLP client memorandum by Morris Nichols’ Delaware Corporate Counseling Group partners Andrew M. Johnston, Eric Klinger-Wilensky, and associate Jason S. Tyler, and Morris Nichols’ Delaware Corporate & Business Litigation Group partners William M. Lafferty and John P. DiTomo. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Court of Chancery Revisits Covenants Against Waiving “Don’t Ask/Don’t Waive” Provisions

In a recent bench ruling, In re Complete Genomics, Inc. Shareholder Litigation, the Court of Chancery offered new insight into the ability of a target board to promise an acquiror that the target will not waive a “don’t ask/don’t waive” standstill provision.

A “don’t ask/don’t waive” standstill provision is typically found in a confidentiality agreement that a target requires potential bidders to enter into before being entitled to receive sensitive target information. The “don’t ask/don’t waive” provision precludes a potential bidder from making a private approach to the target board and from requesting any waiver of the standstill itself. If the target later signs a merger agreement with another party containing a negative covenant prohibiting the waiver of standstill agreements, the “don’t ask/don’t waive” and the negative covenant (the “Coupled Provisions”) preclude the previous bidder from ever providing a topping bid to the target.

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