ProfessorBainbridge.com

Ann Lipton finds the purity of the interpretative questions posed in two recent M&A case aesthetically pleasing

She explains here.

Material Adverse Effect Clauses in M&A: Is COVID-19 a Material Adverse Change?

Miller, Robert T., Material Adverse Effect Clauses and the COVID-19 Pandemic (May 18, 2020). Available at SSRN: https://ssrn.com/abstract=3603055 or http://dx.doi.org/10.2139/ssrn.3603055

This paper considers whether the COVID-19 pandemic, the governmental responses thereto, and actions taken by companies in connection with both of these constitute a “Material Adverse Effect” (MAE) under a typical MAE clause in a public company merger agreement. Although in any particular case everything will depend on the exact effects suffered by the company and the precise wording of the MAE clause, this paper concludes that, under a typical MAE clause, given the current tremendous contraction in economic activity, most companies will have suffered a material adverse effect as such term in used in the base definition of most MAE clauses. The question thus becomes whether the risks of a pandemic or of governmental responses thereto have been shifted to the acquirer under exceptions to the base definition. This paper considers some of the difficult causal questions that would arise in answering this question, including the relation of actions taken by the company to remain solvent while suffering the effects of COVID-19 and governmental lockdown orders, and concludes that, in some instances, a company will have suffered an MAE even if the MAE clause contains exceptions for pandemics, changes in law, or both.

The tax on M&A for the benefit of plaintiff lawyers has moved from state to federal court, but there's a glimmer of hope

I admit that that headline is not the most neutral one I've ever written, but C'mon. We've known for years that merger objection litigation is basically of no benefit to shareholders or companies. The only winners are lawyers. The plaintiffs' lawyers extract fees as part of a settlement that gives shareholders no meaningful benefits and, of course, the defense lawyers bill their clients.

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. ...

Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs' lawyers to an award of attorneys' fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public-company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorneys' fee awards.

Jill E. Fisch et. al., Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and A Proposal for Reform, 93 Tex. L. Rev. 557 (2015)

Kevin LaCroix reports:

These days just about every public company merger transaction draws at least one merger objection lawsuit. These lawsuits formerly were filed in Delaware state court alleging violations of Delaware law, but since the 2016 Delaware Chancery Court decision in the Trulia case, in which the court expressed its distaste for this type of litigation, the lawsuits have been filed in federal court based on alleged violations of Section 14 of the Securities Exchange Act of 1934. These cases, through frequently filed, are rarely litigated. They typically are resolved by the defendants’ voluntary insertion of supplemental proxy disclosures and agreement to pay the plaintiff a “mootness” fee.

Federal courts have basically rubber-stamped these settlements, which has just encouraged more lawsuits.

As LaCroix also reports, however, a company with a spine finally met a judge with a brain and the combination gave the merger objection suit the dismissal it so richly deserved. Go read the whole thing. 

 

Ann Lipton thinks VC Laster's Dell Decision is About Judicial Primacy Not Director Primacy

A few days ago, I posted VC Laster's Dell Decision Gives a Very Director Primacy Spin on MFW, in which I argued that:

In his recent opinion in In re Dell Techs. Inc. Class V Stockholders Litig., 2020 WL 3096748 (Del. Ch. June 11, 2020), Vice Chancellor Laster gave a very board-centric spin on the MFW rule. Tyler O'Connell's Morris James blog post explains:

The Delaware Supreme Court’s MFW decision provides a safe harbor for controlling stockholder buyouts that are conditioned upon approval of a special committee of independent directors and a majority-of-the-minority vote, provided, inter alia, “there is no coercion of the minority.” Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635, 645 (Del. 2014). The Court of Chancery’s recent decision in In re Dell Tech. Inc. Class V. S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020), held that a redemption of minority stockholders’ shares failed to satisfy MFW due to the company’s decisions to give the special committee an impermissibly narrow mandate and then bypass it to negotiate directly with minority stockholders. 

The Vice Chancellor didn't cite my work on director primacy, but the opinion is very much in the spirit of director primacy ....

I go on to explain. Ann Lipton, however, thinks I'm wrong. Instead, she thinks the decision is about judicial supremacy:

The part that I’m interested in, however, is Laster’s attention to the varying incentives of even the “disinterested” stockholders.  That’s what I was discussing in Shareholder Divorce Court, namely, how large institutional shareholders are likely to have cross-holdings that affect their preferences, and lead them to favor nonwealth maximizing actions at a particular company if they benefit the rest of the portfolio (after the article was published, I posted about additional empirical work in this area here).  Laster has historically been especially sensitive to these kinds of conflicts.  ...

The problem, though – as I discuss in Shareholder Divorce Court and What We Talk About When We Talk About Shareholder Primacy– is that if you’re going to recognize the heterogeneity of shareholder interest due to these different types of portfolio-wide investments, it’s unclear why a majority vote should be permitted to drag along the minority in a particular deal.  Which conflicts will we recognize as generating bias, and which will we ignore?  That’s the problem that cases like Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) and MFW are forcing Delaware to confront.  Laster’s far more willing to engage here; so far, other judges have, umm, avoided the issue. ...

In practical effect, it seems, Laster is less about director primacy than judicial primacy, in a way that often puts him at odds with other members of the Delaware judiciary.  (See, e.g., my discussion of Salzberg v. Sciabacucchi, and the differing views of the nature of the corporation expressed by Laster and the Delaware Supreme Court).  Because once you hold that shareholders are too biased to make decisions, that doesn’t necessarily lead to director primacy; instead, it creates more space for the judiciary to step in to protect the interests of the abstract notion of shareholder, distinct from the ones who actually cast ballots. 

It's an interesting spin. Professor Lipton is an exceptionally accomplished student of Delaware law, especially in the M&A context. Which worries me.

If she's right, and Laster is really pushing a view that when "shareholders are too biased to make decisions" the judiciary ought to step in, that's a serious break from how I understand Delaware law both descriptively and normatively.

Justice Jackson famously observed of the Supreme Court: “We are not final because we are infallible, but we are infallible only because we are final.”[1] Neither courts nor boards are infallible, but someone must be final. Otherwise we end up with a never-ending process of appellate review. The question then is simply who is better suited to be vested with the mantle of infallibility that comes by virtue of being final—directors or judges?

Corporate directors operate within a pervasive web of accountability mechanisms. A very important set of constraints are provided by a competition in a number of markets. The capital and product markets, the internal and external employment markets, and the market for corporate control all constrain shirking by directors and managers.[2] Granted, only the most naïve would assume that these markets perfectly constrain director decision making.[3] It would be equally naïve, however, to ignore the lack of comparable market constraints on judicial decision making. Market forces work an imperfect Darwinian selection on corporate decisionmakers, but no such forces constrain erring judges.[4] As such, rational shareholders will prefer the risk of director error to that of judicial error. Hence, shareholders will want judges to abstain from reviewing board decisions.

The shareholders’ preference for abstention, however, extends only to board decisions motivated by a desire to maximize shareholder wealth. Where the directors’ decision was motivated by considerations other than shareholder wealth, as where the directors engaged in self-dealing or sought to defraud the shareholders, however, the question is no longer one of honest error but of intentional misconduct. Despite the limitations of judicial review, rational shareholders would prefer judicial intervention with respect to board decisions so tainted.[5] The affirmative case for disregarding honest errors simply does not apply to intentional misconduct.

The mere fact that shareholders are heterogenous, however, does not mean that directors are conflicted. Absent evidence that the directors themselves are conflicted or beholden to someone who is, courts should not second-guess board decisions. Other Delaware jurists have consistently recognized this proposition:

Even in the takeover context, where Delaware courts have long acknowledged the potential for directors to be conflicted, Chancellor William Allen warned that Delaware courts need to employ “the Unocal precedent cautiously. . . . The danger that it poses is, of course, that courts—in exercising some element of substantive judgment—will too readily seek to assert the primacy of their own view on a question upon which reasonable, completely disinterested minds might differ.” City Capital Assocs. Ltd. P’ship v. Interco, Inc., 551 A.2d 787, 796 (Del. Ch. 1988).

In the same heightened scrutiny context, then VC and later Justice Jack Jacobs likewise observed that: “[a]lthough ‘enhanced scrutiny’ must be satisfied before business judgment rule presumptions will apply, that does not displace the use of business judgment in the board room.” QVC Network, Inc. v. Paramount Commc’ns, Inc., 635 A.2d 1245, 1268 (Del. Ch. 1993), aff’d, 637 A.2d 34 (Del. 1994).

In the past, VC Laster has recognized that Delaware law is director-centric. not judge-centric. See Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70 BUS. LAW. 33, 35 (2015) (“Delaware corporate law embraces a ‘board-centric’ model of governance."); In re CNX Gas Corp. Shareholders Litig., 2010 WL 2705147, at *10 (Del. Ch. July 5, 2010) ("Delaware law would seem to call for a consistently board-centric approach.").

One assumes he also recognizes that the logic of director primacy is one of judicial deference to the board's authority absent a conflict of interest or other evidence that the need for accountability justifies intervention.

What is a merger?

2/ @VolunteerTwit also linked to a video in which she and some colleagues discussed that issue. I'm going to have my fall M&A class watch it. It's quite good. https://t.co/NAzfUrwLhJ

— ProfessorBainbridge.com (@PrawfBainbridge) July 15, 2020

Yours truly quoted by Korn Ferry re being an M&A acquirer in COVID-19

From Briefings Magazine:

After lying low at the start of the outbreak, well-stocked firms are hunting for merger deals. Could that speed up any recovery? ...

Stephen Bainbridge, a UCLA law professor who specializes in M&A, says leaders are often overly optimistic about their ability to turn around businesses in deep trouble—and end up creating more financial problems than solving them. “Merging a failing company into a healthy one could get the healthy company in trouble,” says Bainbridge. “It could end up being dragged down.”

Or, as Bainbridge says, “Successful mergers depend on the ability to build a new team and integrate cultures in a way that gets buy-in from everyone as quickly as possible, and that’s going to be incredibly hard to do over Zoom.”

VC Laster's Dell Decision Gives a Very Director Primacy Spin on MFW

In his recent opinion in In re Dell Techs. Inc. Class V Stockholders Litig., 2020 WL 3096748 (Del. Ch. June 11, 2020), Vice Chancellor Laster gave a very board-centric spin on the MFW rule. Tyler O'Connell's Morris James blog post explains:

The Delaware Supreme Court’s MFW decision provides a safe harbor for controlling stockholder buyouts that are conditioned upon approval of a special committee of independent directors and a majority-of-the-minority vote, provided, inter alia, “there is no coercion of the minority.” Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635, 645 (Del. 2014). The Court of Chancery’s recent decision in In re Dell Tech. Inc. Class V. S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020), held that a redemption of minority stockholders’ shares failed to satisfy MFW due to the company’s decisions to give the special committee an impermissibly narrow mandate and then bypass it to negotiate directly with minority stockholders. 

The Vice Chancellor didn't cite my work on director primacy, but the opinion is very much in the spirit of director primacy:

MFW’s dual protections contemplate that the Special Committee will act as the bargaining agent for the minority stockholders, with the minority stockholders rendering an up-or-down verdict on the committee’s work. Those roles are complements, not substitutes. A set of motivated stockholder volunteers cannot take over for the committee and serve both roles.

The MFW framework contemplates that the special committee will act as “an independent negotiating agent whose work is subject to stockholder approval.” Flood, 195 A.3d at 767. Through the involvement of the special committee, the MFW framework ensures that there are “independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason ....” MFW, 88 A.3d at 644 (internal quotation marks and emphasis omitted). Like a board of directors in an arm’s-length transaction, the committee has superior access to internal sources of information, can deploy it’s the Board’s statutory authority under Section 141(a) as delegated to the committee under Section 141(c), and can “act as an expert bargaining agent.” In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618 (Del. Ch. 2005); see 8 Del. C. § 141(c). Like a board of directors, the committee “does not suffer from the collective action problem of disaggregated stockholders” and is therefore well positioned “to get the last nickel.” Id. at 619; see also In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 441 (Del. Ch. 2002) (“Delaware law has seen directors as well-positioned to understand the value of the target company, to compensate for the disaggregated nature of stockholders by acting as a negotiating and auctioning proxy for them, and as a bulwark against structural coercion.”).

He then described the shareholders' role in the MFW framework as being "more limited":

They have “the critical ability to determine for themselves whether to accept any deal that their negotiating agents recommend to them.” MFW, 88 A.3d at 644 (internal quotation marks omitted). But “the ability of disaggregated stockholders to reject by a binary up or down vote obviously ‘unfair’ deals does not translate to their ability to do what an effective special committee can do, which is to negotiate effectively and strike a bargain much higher in the range of fairness.” Cox Commc’ns, 879 A.2d at 619.

Laster's interpretation of the relative board and shareholder roles is consistent with the approach I outlined in The Geography of Revlon-Land, 81 Fordham L. Rev. 3277 (2013):

In their efforts to decide who decides, the Delaware courts have grappled with the limits of a target corporation's board of directors' power to act as a gatekeeper in corporate acquisitions. In other words, to what extent can the target's board of directors prevent the target's shareholders from deciding whether the company should be acquired?

In a merger, two corporations combine to form a single entity. In an asset sale, the selling corporation transfers all or substantially all of its assets to the buyer. In both transactions, approval by the target board of directors is an essential precondition.

In both major forms of statutory acquisitions, the board thus has a gatekeeping function. Shareholders have no power to initiate either a merger or asset sale, because the statute makes board approval a condition precedent to the shareholder vote. If the board rejects a merger proposal, the shareholders thus have no right to review that decision. Instead, the shareholder role is purely reactive, coming into play only once the board approves a merger proposal.

The board also has sole power to negotiate the terms on which the merger will take place and to enter a definitive merger agreement embodying its decisions. Shareholders have no statutory right to amend or veto specific provisions, their role typically being limited to approving or disapproving the merger agreement as a whole . . . .

If the board disapproves of a prospective acquisition, the would-be acquirer therefore must resort to one of the nonstatutory acquisition devices. The proxy contest, share purchase, and tender offer all allow the bidder to bypass the target board and make an offer directly to the target's shareholders. Since the 1960s, the tender offer has been the most important and powerful of these tools. Almost as soon as the hostile tender offer emerged as a viable acquirer tactic, however, lawyers and investment bankers working for target boards began to develop defensive tactics designed to impede such offers. If validated by the courts, these takeover defenses promised to reassert the board's primacy by extending its gatekeeping function to the nonstatutory acquisition setting.

Consider the poison pill, for example, which has been called the “de rigeur tool of a board responding to a third-party tender offer.” … Proponents of pills contend that these plans thus do not deter takeover bids, but rather simply give the target board leverage to negotiate the best possible deal for their shareholders or to find a competing bid. In any case, it is clear that “the poison pill has made the board the ‘gatekeeper’ instead of the shareholders.” As a result, target boards have been empowered to play an active--and often determinative--role in the very class of transactions originally designed to bypass them entirely.

NOL Poison Pills to make a comeback?

Interesting post from some Cleary lawyers.

COVID19 and mergers cratering left and right

Bloomberg reports:

The number of lawsuits asking courts to keep mergers on track is likely to grow as the coronavirus scrambles business deals worldwide and acquirers balk at the uncertainty, experts say. ...

The prospects of merger plaintiffs like Bed Bath will likely turn on provisions that assign risk, particularly “material adverse change” (MAC) and “material adverse event” (MAE) clauses, Tyler said.

There's been a lot of discussion of this issue over on Twitter, of which the following is a sample:

The #COVID19 outbreak has sent shockwaves through global financial markets. In this new alert, #TeamSPB London's Peter Crossley, Max Rockall and Maria Davies take a closer look at material adverse change clauses amid the #coronavirus outbreak. https://t.co/YkrzFo4AlU pic.twitter.com/q3IkDQGbNi

— Squire Patton Boggs (@SPB_Global) April 9, 2020

"Regarding the handful of terminated deals for which publicly filed agreements are available, none excluded outbreak of disease, epidemics, or the like from the scope of their material adverse effect (MAE) provisions—an exclusion that could have kept buyers on the hook." https://t.co/LYfeY5aNrV

— Ann Lipton (@AnnMLipton) April 8, 2020

Shots Fired: Recent Claims to Terminate M&A Deals Over COVID-19 Material Adverse Effects. #covid19 #coronavirus #troutmanpepper #mergersandacquisitions https://t.co/8iqCBpGWho

— Troutman Sanders (@tstweets) April 9, 2020

For prior coverage of MACs here at PB.com, see

The MAC is Back: Material Adverse Change Provisions After 'Akorn'

New article by a pair of Wachtell, Lipton lawyers sheds useful light on the status of material adverse change clauses: On December 7, 2018, the Delaware Supreme Court upheld the Delaware Court of Chancery’s October 1, 2018 decision wh...

Posted at 12:17 PM in Mergers and Takeovers | Permalink

New article by a pair of Wachtell, Lipton lawyers sheds useful light on the status of material adverse change clauses: On December 7, 2018, the Delaware Supreme Court upheld the Delaware Court of Chancery’s October 1, 2018 decision wh...

Deal making in the COVID19 era

M&A: "Auctions are accelerating in case conditions worsen. Sellers are choosing cash upfront over higher offers; and they’re doing it all over video chat while pets and children roam in the background." #MnA https://t.co/LGj8mGHAqw

— Grace Maral Burnett (@BurnettGraceM) March 24, 2020

Is the COVID-19 event a material adverse change for purposes of merger agreements?

In my Mergers and Acquisitions class, we discuss a material adverse effect clause that reads as follows:

"Company Material Adverse Effect" means any event, occurrence, fact, condition or change that is, or would reasonably be expected to become, individually or in the aggregate, materially adverse to (i) the business, results of operations, prospects, condition (financial or otherwise), or assets of the Company and its Subsidiaries, taken as a whole, or (ii) the ability of the Company to consummate the transactions contemplated hereby on a timely basis; provided, however, that, for the purposes of clause (i), a Company Material Adverse Effect shall not be deemed to include events, occurrences, facts, conditions or changes arising out of, relating to or resulting from: (a) changes generally affecting the economy, financial or securities markets; (b) the announcement of the transactions contemplated by this Agreement; (c) any outbreak or escalation of war or any act of terrorism; or (d) general conditions in the industry in which the Company and its Subsidiaries operate; provided further, however, that any event, change and effect referred to in clauses (a), (c) or (d) immediately above shall be taken into account in determining whether a Company Material Adverse Effect has occurred or would reasonably be expected to occur to the extent that such event, change or effect has a disproportionate effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the industries in which the Company and its Subsidiaries conduct their businesses.

The absence of such an event is a closing condition, so that if such an event occurs one or both parties could invoke it to justify terminating the deal.

It occurs to me that the COVID-19 crisis raises a great hypothetical as to the application of the MAE clause,

It seems obvious that the economic devastation being wrought by the coronavirus pandemic is "an event ... that is ... materially adverse to the business, results of operations, prospects, condition (financial or otherwise), [and] assets of the Company." 

As I explain in my book Mergers and Acquisitions, however, courts put the burden on the party seeking to invoke the clause to show that the allegedly material adverse effect will be significant and lasting. Accordingly, such a clause is treated as “a backstop protecting the acquirer from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner. A short-term hiccup in earnings should not suffice; rather the Material Adverse Effect should be material when viewed from the longer-term perspective of a reasonable acquiror.” IBP, Inc. v. Tyson Foods, Inc. (In re IBP, Inc. S'holders Litig.)., 789 A.2d 14, 68 (Del. Ch. 2001). See also  Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 738 (Del. Ch. 2008) (“The important consideration therefore is whether there has been an adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.”).

At this point, most commentators seem to be assuming that the impact of the pandemic will be felt over months or even years rather than just a short period.

So the question is whether any of the provisos are pertinent. Provisos (b) and (c) are inapplicable on their face. But what about (a)? Recall that it provides that "a Company Material Adverse Effect shall not be deemed to include events, occurrences, facts, conditions or changes arising out of, relating to or resulting from ... changes generally affecting the economy, financial or securities markets." A global pandemic like just such an event. But, as Gibson Dunn notes:

A pre-crisis MAE/MAC definition that makes no reference to COVID-19 (or even to pandemics or epidemics generally) may or may not be found to include the effects of COVID-19 in determining whether an MAE/MAC has occurred. In such cases, disputes may focus on whether definitional language that typically excludes general economic or market conditions and other broad based factors impacting the business climate or the target’s industry generally is sufficient to exclude the impact of COVID-19. Parties also may debate whether the potential impact of the virus was reasonably foreseeable at the time the agreement was signed or whether the impact is sufficiently long-lasting to be considered an MAE/MAC under applicable state law.

So if one of our parties wishes to invoke the MAE clause, they are going to have to prove that the event has had "a disproportionate effect on the Company and its Subsidiaries, taken as a whole, compared to other participants in the industries in which the Company and its Subsidiaries conduct their businesses." I'm having trouble thinking of a company that would be disproportionately affected by the pandemic compared to other companies in the same industry. Suggestions?

One wonders whether transaction planners will start adding pandemics to the war/terrorism clause of the standard MAE clause. Paul Weiss predicts that "it is likely that sellers will negotiate for more specific references to pandemics and epidemics in the exceptions to the definition of an MAE, just as terrorism exceptions became more commonplace following the events of September 11, 2001." Gibson Dunn agrees:

... both buyers and sellers would be well-advised to negotiate explicit language to address COVID-19 risk-allocation in the context of an MAE/MAC provision. We have seen this practice followed in response to past crises. We have already seen a fair number of more recent agreements that specifically exclude the impact of COVID-19 (most often building on an exclusion for any “pandemic” or “epidemic,” and sometimes only if it does not disproportionately affect a party) from the scope of an MAE/MAC definition. Whether excluding it completely or specifying a quantitative or qualitative level of financial or operational impact from COVID-19 that, if reached, would give rise to an MAE/MAC, specificity will guard against unexpected results.

Sean Griffith on the evolution of merger litigation

Ann Lipton informs us that:

Sean Griffith recently wrote a book chapter explaining how plaintiffs’ merger-related challenges developed over time.  Plaintiffs began by seeking disclosure-only settlements, but after Trulia stamped out the practice in Delaware, plaintiffs began bringing claims in federal court challenging corporate proxies under Rule 14a-9.  And once they got there, they realized they did not have to limit themselves to merger litigation, and began bringing other kinds of proxy-related claims, and eventually these morphed into individual, rather than class, actions.

Ann goes on to ponder DGCL 220 books and records inspections in the M&A context.

Delaware's Latest Guidance on Material Adverse Change Clauses

From Fried Frank:

Channel Medsystems, Inc. v. Boston Scientific Corporation (Dec. 18, 2019) is the Delaware Court of Chancery’s first decision issued since the Delaware Supreme Court’s 2018 Akorn decision to evaluate whether an acquiror had a right, under a merger agreement, to terminate a pending acquisition on the grounds that there was a “Material Adverse Effect” or “Material Adverse Change” in the target company. (We use “MAE” and “MAC” interchangeably in this memorandum.) Akorn was the first case in which the Court of Chancery, post-trial, found the existence of an MAE and the first post-trial Delaware decision to find that an acquiror had the right to terminate a merger agreement based on an MAE. In Channel, by contrast, Chancellor Bouchard ruled, after trial, that there was not an MAE and that the acquiror was required to close the merger.

Both Akorn and Channel involved the discovery, between signing and closing of a merger agreement, that a target company executive, without knowledge of the target, had submitted fraudulent reports to the Food and Drug Administration relating to the company’s products (in Akorn, the target’s key products, and in Channel, the target’s sole product). In Akorn, there was a dramatic decline in the target company’s financial performance and a severe and “durationally significant” loss of its potential future earnings due to the regulatory noncompliance. In Channel, however, before the acquiror sought to terminate the transaction, the FDA had accepted the target’s remediation plan (which indicated that FDA approval of the target’s product was likely); the remediation plan did not appear to involve significant ongoing costs or other effects on the target; and, prior to trial, the FDA approved the product. The Chancellor held that the acquiror had failed to prove, on a quantitative or qualitative basis, that an MAE would be reasonably expected to occur, and thus it did not have a right to terminate the agreement.

Lots more very helpful analysis follows.

Yours truly cited by Delaware Chancery Court in the Panera Bread Company Appraisal case

From Vice Chancellor Zurn's opinion:

The board of directors “has the sole power to negotiate the terms on which the merger will take place and to arrive at a definitive merger agreement embodying its decisions as to those matters.”⁴³⁴

⁴³⁴ Stephen M. Bainbridge, Mergers and Acquisitions 56 (2d ed. 2009) (citing 8 Del. C. § 251(b)); accord 8 Del. C. § 141 (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors ....”).

IN RE APPRAISAL OF PANERA BREAD COMPANY, CV 2017-0593-MTZ, 2020 WL 506684, at *25 (Del. Ch. Jan. 31, 2020).

The preponderance of the evidence shows that the board directed Shaich’s negotiations and “arrive[d] at a definitive merger agreement embodying its decisions as to th[ose] matters.”⁴⁶³

⁴⁶³ Bainbridge, supra note 434, at 56.

Id. at *26.

 

Mesa Petroleum's T Boone Pickens has died, RIP

T. Boone Pickens Jr. Dies. Lots of memories, including the landmark case, Unocal v. Mesa Petroleum. And representing him at Baker Botts. And meeting him on Capitol Hill. And his role in Anatomy of a Merger. RIP https://t.co/i18Gg4ERip

— Gordon Smith (@professor_smith) September 11, 2019

I once talked to Pickens about old stories of his raids, particularly Gulf, and the reception he got then vs activists today. My favorite quote: "One said 'He’s a fast buck artist.' Who in the hell wants to be a slow buck artist?" https://t.co/yUx33lMgsR

— Dave Benoit (@DaveCBenoit) September 11, 2019

There’s a great moment in this documentary at about 17:20 where T Boone Pickens calls himself a geologist and Sir James Goldsmith calls himself a grocer. If you were engaged in the corporate takeover wars of the 1980s, that’s Robin Williams level comedy. https://t.co/8lyitpfpg6 pic.twitter.com/3V5L2qUthz

— Professor Bainbridge (@ProfBainbridge) January 4, 2019