The Delaware Supreme Court, Court of Chancery, and Complex Commercial Litigation Division of the Superior Court continued to serve as the preeminent courts for corporate and M&A litigation in 2021. The courts issued a historic volume of opinions, orders, and transcript decisions that provide valuable guidance regarding issues highlighted in this GT Update, including potential liability of board advisors, officers, and buyers in M&A; limits on stockholder voting, communications, and takeover activities; interpretation of M&A provisions related to material adverse effects, ordinary course operation, and fraud claims; the scope of protections for directors acting in reliance on experts; and access to director emails, texts, and records via statutory demands and litigation discovery. We expect this level of activity and development of corporate law principles to continue in 2022.
Access to corporate records, via books and records demands and litigation discovery, continues to represent an important element of Delaware corporate litigation, with parties seeking greater support for their litigation positions via formal and informal records, including directors’ notes and emails. Stockholders demanding inspection of corporate books and records under Section 220 of the DGCL have been granted access to directors’ documents, emails, and text messages when those records reflect information relevant to the stockholder’s inspection demand that was not covered by meeting minutes, resolutions, and other formal documentation. Although Delaware courts denied access to material unrelated to the inspection demand or covered by attorney-client privilege, stockholders were able to inspect emails, text messages, and phone records where traditional board records were bereft of information regarding a regulatory settlement being investigated by the stockholder, including the company’s condition that a settlement provide the CEO with a liability release, and traditional records suggested that directors were discussing those matters by email and text message.[43] The court does not blithely allow access to informal records but has stated that a company should not resort to bad faith rejection of meritorious inspection demands or take overly aggressive positions to dispute such a demand.[44] Nor may a company fail to update its stock ledger to prevent a new stockholder’s ability to demand inspection.[45]
In other circumstances, stockholders were denied inspection of informal records such as directors’ notes, emails, and text messages. Inspection demands under Section 220 of the DGCL, one regarding potentially inaccurate financial statements and the other regarding a government investigation into potential violations of federal laws, were denied when the stockholders failed to demonstrate either that formal board materials were insufficient or that informal board materials were necessary.[46] Similarly, in a discovery dispute related to fiduciary duty claims arising from a controlling stockholder transaction, a director successfully asserted attorney-client privilege over email communications in an account managed by a former employer.[47] The court explained that there is a reasonable expectation of privacy when using the company’s email for company-related business (even if the company monitors that account), but use of a non-company email account may allow an outsider to access otherwise privileged or confidential communications. In this case, the director’s expectation of privacy was reasonable under the former employer’s policy that expressly acknowledged the email account could be used for personal use but also provided that emails may be monitored for certain reasons. Section 220 of the DGCL was misused, however, by a director seeking books and records for use in an individual breach of contract claim[48] and by a stockholder using the corporate records for interests as creditor.[49] Despite directors’ generally unfettered right to corporate information, directors were unable to compel discovery of privileged documents related to the board’s discussion of the separation of those directors from the company.[50]
Parallel transactions. The independent legal significance of each step of a complex transaction is important for deal planning, reflecting an outgrowth of the enabling provisions of the DGCL and Delaware’s contractarian view of parties’ rights. Delaware courts have, however, found it appropriate at times to look beyond the form of a transaction. In a merger case, stockholders holding one class of stock with the right to no less favorable treatment in a merger than holders of the company’s other class of stock were cashed out while the company’s controlling stockholder entered into an agreement to exchange shares of one or both classes of stock for equity in a post-merger company.[51] Although the exchange was effected under an exchange agreement separate from the merger agreement, interlocking references and conditions in the two agreements supported a claim that the exchange violated the charter. In another merger case, where all stockholders received a pre-closing dividend representing approximately 98% of the aggregate deal consideration, the court explained that the dividend value would be a relevant factor in an appraisal proceeding for determining whether stockholders had received fair value for their shares in the merger.[52]
Rights offering disclosure. A rights offering can provide a means of financing a company but can also raise concerns when it results in significant swings in ownership or is effected under inequitable circumstances. Delaware courts have addressed previously the dynamics around rights offerings and in 2021 again provided insights regarding related disclosure obligations.[53] One company, in parallel with its efforts to sell its interest in a professional soccer club, solicited existing investors to participate pro rata in loans to the company that came with a right to a premium payment upon a sale of the club, which closed only months after the loan transaction. The court rejected a claim that the likelihood of the sale was inadequately disclosed, stating the company had disclosed certain details about the club sale process and was not required to provide a blow-by-blow description of fluid sale negotiations.
Appraisal rights. Delaware law regarding the appraisal remedy in a merger has developed significantly in recent years. In 2021, the Delaware Supreme Court concluded that sophisticated and informed stockholders, who were represented by counsel and had bargaining power, may voluntarily agree to waive their appraisal rights in exchange for valuable consideration.[54] The court noted that appraisal is not a nonwaivable feature of a corporation, and affirmed that the company could enforce a stockholder’s appraisal waiver under an agreement with the company and that such an appraisal waiver is not a stock restriction that must be contained in the charter. In a novel case, a stockholder was permitted to bring an action to enforce an appraisal judgment against both the buyer in a merger and subsidiaries of the acquired holding company, on the basis of traditional and reverse veil piercing theories, because the buyer may have inequitably used a securitization facility to upstream funds from the subsidiaries to the buyer, leaving the company unable to satisfy the appraisal judgment.[55]
In several other cases, Delaware courts held that: (1) payment of a pre-closing dividend that represented approximately 98% of the aggregate deal consideration was a relevant factor that the court could take into account when determining fair value in an appraisal action;[56] (2) a stockholder may obtain damages in a fiduciary duty action even when the merger price was equal to the fair value determined in a companion appraisal proceeding;[57] (3) DCF was a reliable indicator of fair value in an appraisal proceeding where deal price was not a reliable indicator of fair value because there was no efficient market for the private company stock, the board held no meetings after receiving the indication of interest, and there was no solicitation of other offers;[58] and (4) deal price less synergies was a reliable indicator of fair value where there was a lone third-party bidder, there were no board conflicts, the company actively engaged in diligence and negotiations, and there was an unencumbered post-signing market check.[59]
MAE, ordinary course, and requisite efforts. Three provisions from M&A agreements that have received significant attention from the Delaware courts during the upheaval of the COVID-19 pandemic relate to material adverse effects, ordinary course conduct, and required efforts. Each of these provisions may be tailored to the specifics of a transaction, with the Delaware courts closely reading and adhering to the precise wording. But Delaware 2021 case law also established a framework for interpreting these provisions. In two post-trial decisions, the buyer unsuccessfully argued that an MAE had occurred by failing to demonstrate the durational significance of the adverse effect that has become a hallmark of the courts’ MAE analysis. In the first case, the buyer alleged that sales downturns and cost-cutting by the target (a cake-decorating technology company) had constituted an MAE and breached the ordinary course covenant in the M&A agreement.[60] But the changes were not durationally significant and were consistent with the company’s past practice in downturns; in fact, the buyer had breached its reasonable best efforts obligation under the M&A agreement by developing draconian forecasts that ignored management’s optimistic projections in connection with demands for better financing terms. In the second case, a change to the Medicare reimbursement rate for the target medical device company didn’t have a disproportionate effect relative to the industry, and that change was also covered by an exclusion from the definition of MAE for changes in law.[61] The court also noted that an MAE was not limited to only unknown changes. But in a third case, the selling company may have breached the ordinary course covenant in the relevant M&A agreement by going beyond legally mandated closure of yoga studios and furloughing or terminating employees.[62]
The Delaware Supreme Court also weighed in by affirming two Court of Chancery decisions from 2020 regarding these provisions. First, the Court found breaches of obligations to use reasonable efforts to close and all necessary efforts to avoid legal impediments, but declined to order either damages (because no breach affected the ultimate legal impediment result) or a reverse termination fee (because the M&A agreement was not terminated properly and was then terminated by the other party).[63] Second, the Court closely examined relevant Delaware precedent and held that an adaptation common across an industry constituted a breach of the ordinary course covenant when there was overwhelming evidence that the adaptation was outside of past practices and the M&A agreement’s ordinary course covenant was based on the seller’s past practices, not industry practices or commercially reasonable efforts.[64] The Court also affirmed that the ordinary course covenant was not subject to the MAE provision where the two provisions contained different materiality standards, the ordinary course covenant didn’t refer to the MAE provision, and the two provisions served different purposes.
Termination, earnouts, fraud claims, and remedies. M&A provisions related to termination and remedies also received the Delaware courts’ attention in 2021. In one case, the buyer had discretion in the M&A agreement to operate the business but could not act with the intent of decreasing a selling stockholder earnout based on revenue milestones.[65] That buyer’s post-closing shift of the company’s operations from revenue-generating e-commerce business to revenue-light brick and mortar business may have been intended to avoid the earnout in breach of the agreement. In another case, a right to terminate upon a direct or indirect transfer of rights under a distribution agreement was not triggered by alleged upstream changes in control, nor did changes in upstream board composition constitute a change of control.[66] In a busted-deal case, the non-terminating party was obligated under the merger agreement to reimburse the terminating party for a previously paid termination fee, because the terminating party’s breach of ordinary course and interim operating covenants was not excused by an “in all material respects” qualifier, which was construed by the court as less onerous than a material breach standard.[67]
Additionally, Delaware courts continued to provide guidance regarding M&A agreement provisions limiting fraud claims: (1) an integration clause was sufficient, even without a non-reliance provision, to prevent a fraud claim based on the buyer’s misrepresentations of future intent (rather than statements of fact) for business operations, which was specifically negated by the provisions of the M&A agreement;[68] (2) the absence of a non-reliance provision allowed fraud claims based on extracontractual factual misrepresentations to proceed in two cases despite the presence of an integration clause (in one agreement)[69] and an exclusive remedies provision (in the other agreement);[70] (3) contracts could not set limits on liability for fraud with respect to a party who knew the representations were false or with respect to the time when such a claim may be brought,[71] or with respect to the amount of a party’s liability for knowing fraud;[72] (4) intentional or deliberate fraud does not include reckless fraud;[73] and (5) equitable fraud provides for different remedies than common law fraud.[74]
Other notable takeaways concerning M&A agreements included: (1) a party terminating the merger agreement had no remedy for an alleged willful breach by the counterparty when only fraud (and not willful breaches) was carved out of the effect of termination provision;[75] (2) in the absence of the parties’ provision otherwise in the agreement, the status of a person as an affiliate of a party to an agreement was measured at the time of the party’s alleged breach of the agreement;[76] (3) a choice of law provision, stating that an agreement shall be governed by and construed in accordance with the laws of the selected state, only applied to contract claims and not tort or statutory claims;[77] and (4) a seller waived attorney-client privilege to the extent of communications on a server transferred under an asset purchase agreement.[78]
[43] See, e.g., Employees’ Retirement System of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS (Del. Ch. Feb. 10, 2021) [Facebook]; see also Durham v. Grapetree, LLC, No. 343, 2019 (Del. Jan. 26, 2021) [Grapetree] (LLC member granted inspection of emails under an analogous provision of the DLLCA to Section 220).
[44] Pettry v. Gilead Sciences, Inc., C.A. Nos. 2020-0132-KSJM; 2020-0138-KSJM; 2020-0155-KSJM; 2020-0173-KSJM (Del. Ch. July 22, 2021) [Gilead Science] (shifting stockholder’s fees in a 220 proceeding for company’s glaringly egregious conduct with respect to a good faith books and records demand). Contra Facebook (Del. Ch. Feb. 10, 2021) (commending parties for focusing on documents and not being overly aggressive in disputing purpose).
[45] Knott Partners LP v. Telepathy Labs, Inc., C.A. No. 2021-0583-SG (Del. Ch. Nov. 23, 2021) [Telepathy Labs].
[46] Jacob v. Bloom Energy Corporation, C.A. No. 2020-0023-JRS (Del. Ch. Feb. 25, 2021) [Bloom Energy]; Gross v. Biogen Inc., C.A. No. 2020-0096-PAF (Del. Ch. Apr. 14, 2021) [Biogen].
[47] In Re Dell Technologies Inc. Class V S’holders Litig., Consol. C.A. No. 2018-0816-JTL (Del. Ch. Sept. 17, 2021) (TRANSCRIPT).
[48] SerVaas v. Ford Smart Mobility LLC, C.A. No. 2020-0909-LWW (Del. Ch. Nov. 9, 2021) [Journey Holdings].
[49] Georgia Notes 18, LLC v. Net Element, Inc., C.A. No. 2021-0246-JRS (Del. Ch. Nov. 18, 2021) [Net Element].
[50] In re Howard Midstream Energy Partners, LLC, C.A. No. 2021-0487-LWW (Del. Ch. Sept. 22, 2021).
[51] Nantahala Capital Partners II Limited Partnership v. QAD Inc., C.A. No. 2021-0573-PAF (Del. Ch. July 15, 2021) (TRANSCRIPT) [QAD].
[52] GGP.
[53] Feldman v. AS Roma SPV GP, LLC, C.A. No. 2020-0314-PAF (Del. Ch. July 22, 2021) [AS Roma].
[54] Manti Holdings, LLC v. Authentix Acquisition Co., Inc., No. 354, 2020 (Del. Sept. 13, 2021) [Authentix].
[55] Manichaean Capital, LLC v. Exela Technologies Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021) [Exela Technologies].
[56] GGP.
[57] Columbia Pipeline.
[58] SourceHOV Holdings Inc. v. Manichaean Capital LLC, No. 215, 2020 (Del. Jan. 22, 2021) [SourceHOV].
[59] In re Appraisal of Regal Entertainment Grp., C.A. No. 2018-0266-JTL (Del. Ch. May 13, 2021).
[60] Snow Phipps Group, LLC v. KCAKE Acquisition, Inc., C.A. No. 2020-0282-KSJM (Del. Ch. April 30, 2021) [DecoPac Holdings].
[61] Bardy Diagnostics, Inc., v. Hill-Rom, Inc., C.A. No. 2021-0175-JRS (Del. Ch. July 9, 2021) [Bardy Diagnostics].
[62] Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249 (Del. Ch. July 20, 2021) (TRANSCRIPT) [CorePower Yoga].
[63] Cigna Corp. v. Anthem, Inc., No. 364, 2020 (Del. May 3, 2021) [Anthem; Cigna].
[64] AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, No. 71, 2021 (Del. Dec. 8, 2021) [Strategic Hotels & Resorts].
[65] Shareholder Representative Services LLC v. Albertsons Companies, Inc., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021) [DineInFresh].
[66] The American Bottling Company v. BA Sports Nutrition, LLC, C.A. No. N19C-03-048 AML CCLD (Del. Super. Dec. 22, 2021) [BodyArmor].
[67] The Williams Companies, Inc. v. Energy Transfer LP, C.A. No. 12168-VCG (Del. Ch. Dec. 29, 2021) [Williams; Energy Transfer].
[68] DineInFresh.
[69] McDonald’s Corp. v. Easterbrook, C.A. No. 2020-0658-JRS (Del. Ch. Feb. 2, 2021) [McDonald’s].
70] Fortis Advisors LLC v. Johnson & Johnson, C.A. No. 2020-0881-LWW (Del. Ch. Dec. 13, 2021) [Auris Health].
[71] Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021).
[72] Spay, Inc. Stack Media Inc., C.A. No. 2020-0540-JRS (Del. Ch. Dec. 21, 2021) [Stack Media].
[73] Express Scripts, Inc. v. Bracket Holdings Corp., No. 62, 2020 (Del. Feb. 23, 2021).
[74] Auris Health.
[75] Yatra Online, Inc. v. Ebix, Inc., C.A. No. 2020-0444-JRS (Del. Ch. Aug. 30, 2021).
[76] Symbiont.IO, Inc. v. Ipreo Holdings, LLC, C.A. No. 2019-0407-JTL (Del. Ch. Aug. 13, 2021).
[77] ARKRAY America, Inc. v. Navigator Business Solutions, Inc., C.A. No. N20C-12-012 MMJ [CCLD] (Del Super. June 9, 2021).
[78] Serviz, Inc. v. The ServiceMaster Company, LLC, C.A. No. N20C-03-070 PRW [CCLD] (Del. Super. Dec. 6, 2021).
About this Author
Nate Emeritz provides clients with Delaware corporate law advice relating to fiduciary duties and statutory requirements. He guides clients through each stage of a company’s life cycle, including formation and conversion from other entity types, corporate governance and internal investigations, stock issuances and preferred stock investments, mergers, acquisitions, asset sales, dividends, stock repurchases, and tender offers, dissolution, liquidation, and winding up, and other statutory matters. Nate regularly represents private and public companies and their boards of…
Justin E. Mann focuses his practice on corporate matters, with an emphasis on transactions involving Delaware corporations, limited liability companies, and limited partnerships. He advises public and private companies in connection with mergers and acquisitions, public offerings, asset sales, stock purchases and issuances, contests for corporate control, going-private transactions, and structuring and operation of funds and joint ventures. Justin also routinely advises on corporate governance matters, including statutory ratifications, and renders third-party and nonconsolidation opinions…
Kelly A. Terribile has broad experience representing public and private companies in connection with mergers and acquisitions, recapitalizations, asset sales, and stock purchases and issuances, including contests for corporate control and going-private transactions. Kelly is also experienced with the General Corporation Law of the State of Delaware, the Delaware Revised Uniform Limited Partnership Act, and the Delaware Limited Liability Company Act, and opinions with respect to such statutes and Delaware law.
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