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M&A Update May 14, 2020 Bryn Vaaler and Brian Burke

Materials PowerPoint Presentation Dorsey eUpdate: CFIUS Abruptly Imposes New Notice Filing Fees (4/29/20) Dorsey eUpdate: Increase in HSR Reportability Thresholds and Other HSR Developments (1/30/20) Dorsey eUpdate: Channel Reinforces that Akorn is the Ceiling not the Floor for MAE Terminations (1/10/20)

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M&A UPDATE – MAY 2020

Materials & Attendance FormAre available for download from Dorsey’s reminder email sent from [email protected].

Return your completed attendance form to [email protected].

Q&AIf you have questions, you are welcome to contact the presenters or call on your trusted Dorsey contact.

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M&A Update


M&A UpdateMay 2020

Bryn Vaaler Brian [email protected] [email protected]

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The end of an era!

• In July 8 letter to Delaware Governor John Carney, Chief Justice Leo E. Strine, Jr., announced he intended to resign from Delaware bench in fall after 27 years of public service. – 2014-2019: Chief Justice, Delaware Supreme Court

– 2011-2014: Chancellor, Court of Chancery

– 1998-2011: Vice Chancellor, Court of Chancery

– 1992-1998: Counsel, Delaware Governor Thomas Carper

• Retired effective October 31, 2019.

• At age 56, joining Wachtell Lipton as Of Counsel.

• Contemplating a return to pubic service?

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Justice Seitz Replaces Strine as Chief Justice

• On October 24, Governor Carney nominated 63-year-old Justice Collins J. Seitz, Jr., to replace Strine as Chief Justice. Approved by Delaware Senate on November 7.

• Known as “CJ,” Seitz has served as Associate Justice since 2015. Before that he was a litigator in Delaware in private practice. Received undergraduate degree from University of Delaware and law degree from Villanova University.

• His father, Collins J. Seitz (1914-1998), served as Vice Chancellor (1946-1949), Associate Justice of Delaware Supreme Court (1949-1951) and Chancellor (1951-1966) before appointment to federal bench where he served on Third Circuit Court of Appeals from 1966 until his death in 1998.

• The senior Seitz was known as one of the greatest jurists in Delaware history and was responsible for school desegregation opinions that helped pave the way for Brown v. Board of Education of Topeka in the 1950s.

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VC Montgomery-Reeves Elevated to DE Supreme Court

• Vice Chancellor Tamika Montgomery-Reeves was sworn into new position on December 5 after being approved by Delaware Senate on November 7. She served on Court of Chancery since 2015.

• First African-American to sit on Delaware Supreme Court, as she had been on Chancery Court.

• Before joining Chancery Court, she was in private practice in corporate and securities litigation with Wilson Sonsini in Delaware and Weil Gotshal in New York.

• Received undergraduate degree from University of Mississippi and law degree from University of Georgia. After law school, she clerked for Chancellor William B. Chandler.

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Paul A. Fioravanti, Jr., Replaces Montgomery-Reeves on Chancery Court

• Sworn in as Vice Chancellor on February 10, 2020.

• A Delaware native, before joining Chancery Court he was a corporate and commercial litigator at Prickett Jones in Wilmington.

• VC Fioravanti received undergraduate degree from University of Delaware and legal degree from the University of Maryland, where he was editor-in-Chief of the MARYLAND LAW REVIEW.

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Death of Chancellor William T. Allen

• Served as Chancellor from 1985 to 1997. Died on October 13 at age 71.

• Since leaving bench, he taught at NYU Law School and was Of Counsel at Wachtell Lipton.

• Allen became Chancellor at height of 1980s takeover frenzy and oversaw the progeny of Van Gorkom, Revlonand Unocal during the age of contested and hostile takeovers.

• Nearly universally viewed as the greatest American corporate jurist of the 20th Century, although he was not always in accord with the heightened M&A liability profile that Delaware case law of the late 1980s and 1990s imposed, at least in theory, on corporate directors.

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Legacy of Chancellor Allen

• Among many decisions, Allen is remembered for his watershed opinions in:– Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988)

(applying an extreme “compelling justifications” standard of review to unilateral board actions the primary purpose of which is to impair the stockholder franchise); and

– In re Caremark Int’l Deriv. Lit., 698 A.2d 959 (Del. Ch. 1996) (defining directors’ duty of oversight as proactive duty that is not satisfied by sitting back and waiting for “red flags;” directors have obligation to establish reasonable oversight systems that help ensure relevant information is reported up to senior management and the board; breach of duty results from board acting in bad faith and either putting no systems in place or ignoring information reported up; thus, one of hardest breaches of duty to prove)

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A Combined Legacy: The “Long Goodbye” of Duty of Care as a Real Basis for Director Liability in M&A

“The fiduciary duty of care has become more aspirational than a real legal basis for potential director liability in M&A in the Age of DGCL §102(b)(7), Corwin v. KKR Financial Holdings LLC (Del. 2015) and In re Volcano Corp. Stockh’rs Lit. (Del. Ch. 2016).“At the 32nd Annual Tulane Corporate Law Institute in New Orleans on Thursday and Friday, March 5 and 6, 2020, a panel led by former Delaware Chief Justice Leo Strine . . . observed that the current state of Delaware law on this point traces its roots back to former Chancellor William T. Allen’s antipathy to the notorious Smith v. Van Gorkom (Del. 1985) decision and his “audacious” (Strine’s word) opinion in In re Caremark Int’l Deriv. Lit. (Del. Ch. 1996), in which he held that a breach of duty of care in the oversight context required bad faith on the part of directors to result in liability, essentially making duty of care, at least in the oversight context, a subsidiary of duty of loyalty (without the necessity of showing improper benefit inuring to the directors), as was eventually recognized by the Delaware Supreme Court in Stone v. Ritter (Del. 2006).

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A Combined Legacy: The “Long Goodbye” of Duty of Care as a Real Basis for Director Liability in M&A

“In the shadow of Van Gorkom and Revlon (Del. 1986), it took decades for the Delaware courts to confirm in Corwin and Volcano that the barrier for director liability for duty of care breach in M&A decision-making – at least with respect to transactions that have been approved by fully-informed, disinterested stockholders – went beyond even the bad faith standard for monetary liability in DGCL Section 102(b)(7) to an essentially ‘irrebuttable’ subsidiary region of the duty of loyalty involving ‘waste.’’’

• Bryn Vaaler, Dorsey Deal Dividends blog (March 12, 2020)

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Securities Act §11 and §12 claims

• Under Securities Act of 1933 as originally written, federal and state courts had concurrent jurisdiction over claims under §§11 or 12.

• The Private Securities Litigation Reform Act of 1995, to curb abusive class-action fraud litigation involving nationally traded securities, imposed procedural requirements and restrictions for such cases filed in federal court.

• To avoid PSLRA restrictions, plaintiffs began bringing securities fraud class action claims based on state law in state courts, leading Congress to adopt the Securities Litigation Uniform Standards Act in 1998. – SLUSA prohibited plaintiffs from bringing state law claims in state court if they were based on

misstatements, omissions, deception or manipulation in connection with purchase or sale of securities (with so-called “Delaware carve-outs” for exclusively derivative claims and those based on breach of fiduciary disclosure duties).

– SLUSA also modified jurisdictional provisions under Securities Act, muddying waters on whether §§11 and 12 claims could still be brought in either federal or state court.

• This led to split in federal circuits, resolved by U.S. Supreme Court in Cyan, Inc. v. Beaver Cty Empls. Ret. Fund, 138 S. Ct. 1061 (2018). – In Cyan, Court held class actions filed in state court which asserted violations of Securities Act

could NOT be removed to federal courts and plaintiffs wishing to sue under Securities Act could maintain action in either state or federal court.

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Sciabacucchi v. Salzberg, 2018 Del. Ch. LEXIS 578

• Corporations and their advisers prefer fighting Securities Act claims in federal court where they have PSLRA protections.

• By analogy to Delaware exclusive forum certificate or bylaw provisions authorized by the Court of Chancery in Boilermakers Local 154 Ret. Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), and later by the Delaware legislature by adopting DGCL §115 in 2015, some Delaware corporations began including provisions in their charters providing that federal district courts are sole and exclusive forum for private claims under Securities Act (a “Federal Forum Provision” or “FFP”).

• In 2017, Blue Apron Holdings, Inc., Roku, Inc. and Stitch Fix, Inc., all Delaware corporations, filed IPO registrations with the SEC. Each had included an FFP in its certificate.

• Plaintiff Sciabacucchi, who bought shares of common stock in these issuers in IPO or after-market, brought suit in Delaware Chancery Court seeking declaratory judgment that FFPs were invalid.

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Held: Federal Forum Provisions are invalid!

• Boilermakers holds that a Delaware corporation can adopt a forum-selection provision in its certificate or bylaws for internal-affairs claims by stockholders.

• The decision explicitly notes that such a provision cannot dictate the forum for tort or contract claims against the company, even if the plaintiff happens to be a stockholder.

• A Securities Act claim, like a tort claim or contract claim, is external to the corporation and cannot be governed by FFP, even if plaintiff happens to be a stockholder.

• VC Laster: “The constitutive documents of a Delaware corporation cannot bind plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law. In this case, the Federal Forum Provisions attempt to accomplish that feat. They are therefore ineffective and invalid.”

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Salzberg v. Sciabacucchi, 2020 Del. LEXIS 100

• Delaware Supreme Court reverses, holding that stockholder-approved FFP is valid on its face.

• Reasoning: Validity of FFP turns on terms of DGCL §102(b)(1), which authorizes inclusion in certificate of incorporation of:– any provision for the management of the business

and for the conduct of the affairs of the corporation; and

– any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders or any class of the stockholders . . . if such provisions are not contrary to the laws of this State.

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Salzberg v. Sciabacucchi (cont’d)

• Reasoning (cont’d):– Boilermakers and its statutory embodiment in DGCL §115 limited their application

to “internal corporate claims,” as defined. – But Boilermakers and §115 did not indicate that forum provisions must be limited

to “internal corporate claims” to come within the broad scope of DGCL §102(b)(1). – DGCL §115 did not delimit scope of DGCL §102(b)(1) either implicitly or explicitly. – Securities Act §11 claims are “internal” In that they arise from internal corporate

conduct on part of board and therefore fall within scope of §102(b)(1). – Unlike §11 claims, tort claims for personal injury or a contract claim are external

because no board action is present and they are unrelated to the corporate-stockholder relationship.

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Salzberg v. Sciabacucchi (cont’d)

• Federal Forum Provisions raise no federal or state policy concerns:– Must be stockholder-approved to fall within DGCL §102(b)(1). – No real policy concerns directing §11 claims to federal courts that are more

experienced in dealing with them.

• Policy concerns could arise relating to the internal nature of such claims if most states refuse to respect enforceability of FFPs.

• Facially valid FFPs may still succumb to arguments that their application in particular circumstances is “unreasonable and unjust,” or invalid due to fraud or overreaching or contravened by strong public policy concerns under the U.S. Supreme Court’s Bremen principles.

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Expect To See More of These in Delaware IPO Certificates of Incorporation

“Unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933. Any person or entity purchasing or otherwise acquiring any interest in any security of the Company shall be deemed to have notice of and consented to this provision.”

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History of MAC/MAE clauses in Delaware

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• Material Adverse Change/Material Adverse Effect clauses, even those drafted broadly, have been interpreted narrowly by Delaware courts. Until 2018, no Delaware court had ever relieved a buyer from performance based on MAC/MAE condition.– To show MAC/MAE, party seeking escape must show adverse change is significant, long-term,

durational and not foreseen.

• IBP, Inc. v. Tyson Foods, Inc., 789 A.2d. 14 (Del. Ch. 2001) (VC Strine) – Held: Tyson must complete $4.7 billion acquisition of IBP; broad MAC clause (without standard

carve-outs for industry-wide or economy-wide effects), interpreted under NY law, not triggered.– MAC clauses should be read “as a backstop protecting the acquiror 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 MAC] should be material when viewed from the longer-term perspective of a reasonable acquiror.”

– Key factors: IBP knew of issues when it signed; strategic buyer means MAC must be long-term. Substantial evidence Tyson personnel were not really concerned about bad events and were trying to manufacture an “out” due to buyer’s remorse.

• Hexion Spec. Chems., Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)– No MAC had occurred because of “disappointing” financial results at target. Change must be

“consequential to the company’s long-term earnings over a period of years.” Projected Huntsman EBITDA only 3.6% less than predicted at signing.

– Hexion paid Huntsman $425 million to settle litigation, plus $325 million reverse break-up fee.

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Broad MAC/MAEs continue in regular use

• Along with other subjective terms (e.g., “reasonable efforts” or “best efforts” or operate in “ordinary course”), MAC/MAEs serve as fulcrums for parties to renegotiate price or negotiate a way out of deals where problems arise post-signing at target.

• Osram Sylvania Inc. v. Townsend Ventures, 2013 Del. Ch. LEXIS 281– VC Parsons refuses to dismiss post-closing damages claims based on breach of

representations by Seller, including no MAC since signing. – Finds “reasonably conceivable” that laundry list of short-term bad financial and other

developments (intentionally hidden from buyers) could be found to constitute MAC.

• Cooper Tire v. Apollo (Mauritius) Holdings, 2014 Del. Ch. LEXIS 223– Apollo tries to use pre-closing labor disruptions at target to re-negotiate price.– Cooper sues alleging Apollo breached covenant to use “reasonable best efforts” to

renegotiate Cooper-USW labor contract.– Court found Apollo used “reasonable best efforts” and had good-faith but erroneous belief

that labor disruptions could be MAC.– Parties eventually backed out of deal for failure of financing condition.

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A widely followed near miss . . .• In January 2016, Abbott Laboratories agrees to acquire medical test maker Alere for $56

per share or total consideration of $5.8 billion.

• In February 2016, big troubles begin for Alere:– Alere delays filing financials with SEC; receives SEC subpoena on revenue recognition

practices in Africa; discloses criminal subpoenas from DoJ re FCPA issues in Africa, Asia and Latin America;

– NYSE issues notice of delisting for Alere stock;– Alere sues Abbott in Chancery Court claiming foot-dragging in obtaining regulatory approvals,

trying to escape agreement and focus on $25-billion St. Jude acquisition. Abbott counters: Alere not providing information;

– Alere discloses weaknesses in internal controls when it finally releases annual report;– Government notifies Alere’s Arriva unit that Medicare enrollment would be revoked because it

submitted claims for 211 dead patients.

• December 2016: Abbott sues in Chancery Court to terminate based on MAC clause. Much speculation in media that this MAC claim is potentially strong enough to proceed.

• April 2017: With warning from VC Glasscock that both sides likely to be “unhappy” if litigation continues and hearing coming up, Abbott and Alere agree to proceed with deal at $51 per share or total consideration of $5.3 billion (8.9% decrease in value).

• October 2017: Deal closes.

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Akorn, Inc. v. Fresenius Kabi AG, 2018 Del. Ch. LEXIS 325

• Following five-day trial, VC Laster holds German pharmaceutical company Fresenius is entitled to terminate Merger Agreement to acquire U.S.-based specialty generic drug manufacturer Akorn for $34 per share or total consideration of $4.75 billion ($4.3 billion in cash and assumption of $450 million in debt) and not close because:1. General MAE: For four quarters after merger agreement signed, “Akorn’s business performance

fell off a cliff” which constituted a MAE giving Fresenius the right not to close;2. Bring-Down Condition: Extensive data integrity problems at Akorn made FDA regulatory

compliance representations not true as of last possible closing date (“Outside Date”) with consequences that would reasonably be expected to constitute a MAE, giving Fresenius right to terminate unless in material breach of its own obligations;

3. Covenant Compliance Condition: Akorn had not complied with its obligation under the Merger Agreement to use commercially reasonable efforts to operate in ordinary course of business in all material respects through closing, and such failure could not be cured by Outside Date, giving Fresenius right to terminate unless in material breach of its own obligations; and

4. No Material Breach of Fresenius’s Obligations: Fresenius NOT in material breach of its own obligations to use reasonable best efforts to complete merger or its commitment to secure antitrust approvals (with no efforts-based qualifier), permitting termination under 2 or 3 above.

• 246-page opinion with excruciating detail on facts leading up to Merger Agreement and from date signed in April 2017 to April 22, 2018 termination by Fresenius.

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Distilling facts to their essence

1. Financial drop “off a cliff.” VC Laster finds “dramatic, unexpected and company-specific.” Continuing for over a year with no sign of abatement. Historically unprecedented. Disproportionate to competitors.

2. Serious and pervasive FDA data integrity problems that could not be remedied by latest relevant date in M&A timeline and substantially reduced value of target. Discovered by Buyer due to multiple whistleblower letters after signing. Buyer immediately begins serious investigation with expert help. Buyer discovers “bad egg” in target’s QC oversaw problematic filings, some intentional. Target slow to mount serious investigation; removes “bad egg” but retains as consultant. Target does not begin remediation until prompted by FDA. VC Laster finds Target would have 20% drop in value due to FDA problems and delays and

interruptions in sales of multiple products, based on expert testimony.

3. Buyer acts in nearly perfect manner. No games or display of questionable motives, just seriously trying to get deal done right but without giving up rights to terminate.

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Delaware Supreme Court affirms on expedited appeal

• On December 7, 2018, Delaware Supreme Court summarily affirms VC Laster in Akorn, Inc. v. Fresenius Kabi Ag, 2018 Del. LEXIS 548

– “We need not and do not address every nuance of the complex record.”

– The “factual record adequately supports the Court of Chancery’s determination [based on IBP and Hexion] that Akorn had suffered a material adverse effect (“MAE”) . . . that excused any obligation on Fresenius’s part to close.”

– “Likewise, we conclude that the record adequately supports the Court of Chancery’s declaration that Fresenius properly terminated the merger [for material breach of Bring Down Condition.]”

– Because of expedited appeal, Supreme Court does not address whether Akorn also breached Covenant Compliance Condition.

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Looking ahead back then . . .

• Fresenius was a case with very extreme facts:– Devastating financial drop off the cliff that was by all accounts

completely unexpected, very sudden and sustained over a full year. Akorn’s decline disproportionate to peers.

– Breach of regulatory compliance was extensive, pervasive and probably included actual fraud. Akorn’s failure to investigate and begin remediation was incredible.

– Fresenius was open and above board in expressing its concern and taking steps to pursue its right to terminate without any indication of manufacturing exit or ceasing steps toward closing.

• Case is an illustration of just how hard it is for a buyer to get out of a deal via MAE in Delaware. Fresenius’s threading of the needle was nearly flawless.

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Channel Medsystems, Inc. v. Boston Scientific Corp., 2019 Del. Ch. LEXIS 1394

• 2013-2017: Boston Scientific (“Buyer”) invests $11 million in Channel Medsystems(“Target”), an early stage medical device company with one product in development –a cryotherapy endometrial ablation device, Cerene – in process of FDA approval.

• November 1, 2017: Buyer enters into Merger Agreement to acquire Target.– Comprehensive reps and warranties permitting Buyer’s exit if MAE resulted from breach.– Buyer obligated to use “commercially reasonable efforts” to complete transaction.– Buyer compelled to complete deal only if Cerene received FDA approval by September 30, 2019.

• December 2017: Target discovers “bad egg” – VP of QC – who falsified third-party testing invoices and stole $2.6 million. Some falsified testing reports were in FDA submissions.– Target immediately puts “bad egg” on leave and launches investigation with expert help.– Target produces formal report by independent third-party inspector.– Fully transparent to Buyer and FDA every step of the way.

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After trial, Chancellor rules for Target• April 2018: FDA accepts Target’s remediation plan, making it likely Cerene

would be approved on schedule.

• May 11, 2018: Despite likelihood of timely FDA approval, Boston Scientific terminates Merger Agreement, claiming breach of reps and warranties having MAE. (FDA approved Cerene on March 28, 2019.)

• September 2018: Target sues in Chancery Court, seeking specific performance. Four-day trial and post-trial hearings completed by early September 2019.

• Post-trial holding by Chancellor:1. “Bad egg” falsifications DID result in breach of reps and warranties regarding legal

compliance and related matters (due to “materiality scrape”), but because of Target’s investigation and remediation, no MAE. Buyer has burden of proving MAE at point of termination.

2. Buyer failed to use “commercially reasonable efforts” to consummate merger. Buyer demonstrated little interest in investigation and remediation.

3. Buyer not fraudulently induced to invest $11 million before signing Merger Agreement.

4. Target entitled to specific enforcement.

• Boston Scientific has appealed ruling to Delaware Supreme Court.

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Distilling facts to their essence

1. No financial drop “off a cliff.” Target was not selling generic drugs with financial history and competitors to compare to. Progress solely measured in advances toward FDA approval of Cerene. Buyer made no serious showing of material quantitative decline in Target value.

2. Inaccurate FDA filings were investigated and remediated in timely manner. Target immediately launched investigation and came up with remediation plan with full transparency to Buyer and FDA. Result was only relatively minor delay at FDA and approval very likely within Merger Agreement timeline at point of termination.

3. Buyer seemed relatively uninterested in investigation and remediation until it had to justify its termination. Seems more like games and case of buyer’s remorse. Court basically rejected post-hoc argument that troubled history of Cerene FDA approval could

subject it to future product liability concerns. Held: Mere possibility of lawsuit does not contribute to MAE unless accompanied by evidence of possible liability and loss.

Evidence of Buyer’s desire to sell off entire operations in Target’s product area.

• See Dorsey & Whitney LLP Corporate Update: “Channel Reinforces that Akorn is the Ceiling Not the Floor for MAE Terminations” (January 10, 2020)

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We don’t know yet . . .

• Over 150 significant M&A deals pending as of mid-March 2020, representing over $500 billion in economic value.– Vast majority of M&A Agreements (90+%) DO NOT treat COVID-19 or any other global

pandemic or related effects EXPLICITLY in MAC/MAE, either in affirmative definition of MAC/MAE (the Swiss cheese) or in carve-outs (the holes in Swiss cheese), including traditional Act of God or Force Majeure carve-out. Not clear how courts would treat it.

– For example of MAC/MAE explicitly calling COVID-19 out as INCLUDED in the Act of God-Force Majeure carve-out, see Morgan Stanley’s acquisition of E*Trade (announced February 20, 2020). Carve-out is subject to disproportionate effect override that could bring COVID-19 back into MAC/MAE calculation in some cases.

• See Matthew Jennejohn, Julian Nyarko & Eric Talley, Coronavirus Is Becoming a “Majeure” Headache for Pending Corporate Deals, THE CLS BLUE SKY BLOG (March 19, 2020)

• First complaint filed in Chancery Court by target seeking specific performance of M&A deal by buyer trying to exit based on COVID-19 as MAC/MAE. Bed Bath & Beyond, Inc. v. 1-800-Flowers.com, Inc., No. 2020-0245 (Del. Ch. April 1, 2020). Many more filings and deal unwinding expected.

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Other pending COVID-19 excuse cases (as of April 22, 2020)

• Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249-, compl. (Del. Ch. Apr. 2, 2020)

• Omar Khan, SCGC, Inc. v. Cinemex USA R/E Holdings, No. 20-1178, compl. (S.D. Tex. Apr. 2, 2020)

• WiLine Networks, Inc. v. Inconnu, LLC, C.A. No. 20-556-, compl. (D. Or. Apr. 3, 2020)

• Buckeye Partners, LP v. GT USA Wilmington, C.A. No. 2020-0255-, compl. (Del. Ch. Apr. 6, 2020)

• Oberman, Tivoli & Pickert, Inc. v. Cast & Crew Indie Services, LLC, C.A. No. 2020-0257-PAF, compl. (Del. Ch. Apr. 6, 2020; red. Apr. 9, 2020)

• The We Co. v. Softbank Group Corp., C.A. No. 2020-0258-, compl. (Del. Ch. Apr. 6, 2020)

• Energy Earth, LLC v. Just Energy (US) Corp., C.A. No. 2020-22395, compl. (Tex. Dist. Apr. 8, 2020)

• Highgate Hotels v. +42 W 35th Property, C.A. No. 2020-0279-, compl. (Del. Ch. Apr. 13, 2020)

• SP VS Buyer v. L Brands, Inc. [Victoria’s Secret], C.A. No. 2020-0297-, compl. (Del. Ch. Apr. 22, 2020)

– THE CHANCERY DAILY maintains a list of coronavirus-related complaints here.http://chanceryblog.com/court-procedure/#covid-19-litigation

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Four lines of cases1. In re Trulia Inc. Stockh’r Lit., 129 A.3d 884 (Del. Ch. 2016): Strict new “plainly material” standard for

approval of disclosure-only settlements in M&A litigation. Jill Fisch, Sean Griffith & Steven Davidoff Solomon, Confronting the Peppercorn Settlement in Merger Litigation: An

Empirical Analysis and a Proposal for Reform, 93 U. TEX. L. REV. 557 (2015)

2. Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014): Controlling-stockholder M&A transactions that would otherwise be subject to “entire fairness” review are subject to BJR if certain procedural safeguards in place.

3. Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015): If merger does not involve controlling stockholder, irrebuttable BJR applies in post-merger damages claim where there has been fully informed, uncoerced approval by majority of disinterested stockholders. Even if Revlon or Unocal would otherwise apply. In re Volcano Corp. Stockh’r Lit., 143 A.3d 727 (Del. Ch. 2016): Corwin applies where majority of disinterested shares

tendered into §251(h) two-step transaction where no stockholder vote.

4. DFC Global Corp. v. Muirfield Value Partners, 172 A.3d 346 (Del. 2017); Dell, Inc. v. Magnetar Global Event Driven Master Fund, 177 A.3d 1 (Del. 2017): Deal price (less synergies) and pre-deal market value should normally be given great deference in determining “fair value” absent clear process failures or market irregularities (consistent with ECMH). DCF and other methodologies are exception, not rule.

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Controlling stockholder transactions: Entire fairness

1. Transactions between controller and corporation or non-controlling stockholders, such as freeze-out, when challenged in Delaware courts, are governed by entire fairness standard of review. Kahn v. Lynch Comm’n Systems, 638 A.2d 1110 (Del. 1994)– Entire fairness, most exacting standard, consists of both substantive fairness (fair price) and

procedural fairness (fair dealing). Burden of proof on controlling stockholder.– Injunction or restitutionary recovery.

2. Sale of controlling interest or whole controlled corporation to third party is NOT governed by entire fairness UNLESS controller gets different consideration. See, e.g., Abraham v. Emerson Radio Corp., 901 A.2d 751 (Del. Ch. 2006); John Q. Hammon Hotels Inc. Stockh’rLit., 2011 Del. Ch. LEXIS 1.

• Traditional Lynch doctrine: Independent negotiating structure may shift burden of proof.– Special committee of disinterested directors; OR– Majority-of-minority stockholder approval.

• Shifting burden of proof only makes significant difference where evidence in equipoise. Whoever bears burden, if entire fairness is standard, cases are almost never susceptible of summary dismissal. Almost always questions of fact for trial. Thus, increasing settlement value of claims and their frequency. In re Cox Comm. Stockh’r Lit., 879 A.2d 604 (Del. Ch. 2005)

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Entire fairness is not a death sentence!

• Coster v. UIP Companies, 2020 Del. Ch. LEXIS 36– Co-founder of UIP dies, leaves 50% equity interest to wife, Mrs. Coster, who

has never been involved in business. After his death, UIP board consists of three directors: Schwat (other co-founder and 50% owner); Bonnell(senior UIP executive; always promised major ownership interest as part of succession planning not completed before co-founder’s death); and Cox (another senior UIP executive).

– After months of negotiation, Schwat and Mrs. Coster fail to agree to terms of buyout or other arrangement to get cash to Mrs. Coster.

– Mrs. Coster calls twice for stockholder meetings to elect directors. But voting deadlock at both meetings results in board consisting of same three holdover directors.

– Mrs. Coster sues in Chancery Court to appoint custodian.

– UIP board hires independent valuation firm to value UIP as going concern and approves sale of one-third interest in UIP to Bonnell for one-third of independent valuation.

– Mrs. Coster brings new suit to cancel sale of shares to Bonnell.

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VC McCormick: Stock sale was entirely fair!

• After a two-day trial that included 336 exhibits, eight fact witnesses and three expert witnesses, VC McCormick finds:– Entire fairness is standard of review because majority of UIP board

approving sale to Bonnell were interested: Schwat (because putting stock in Bonnell’s friendly hands gave him ability to break deadlock in his favor) and Bonnell (because he gained equity interest in UIP).

– The valuation expert hired by UIP board was sufficiently independent to support finding of both fair dealing and fair price.

– DCF-based methodology used in valuation of UIP supported finding of both fair dealing and fair price.

– Mrs. Coster’s expert witness did not succeed in challenging board’s independent valuation.

• See also The Frederick Hsu Living Trust v. Oak Hill Capital Partners III, LP, C.A. No. 12108-VCL, memo. op. (Del. Ch. May 4, 2020) (After 10-day trial, VC Laster finds controller sustained burden of proof of entire fairness of cash-accumulation strategy aimed at redemption of controller’s shares)

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MFW or “unified” approach to controlling stockholder transactions

• Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014). BJR, not entire fairness, governs review of controlling-stockholder freeze-out merger, if and only if:

1. Controller conditions transaction ab initio on approval of both Special Committee and majority of minority stockholders;

2. Special Committee is independent;3. Special Committee is empowered to freely select own advisors and say no definitively;4. Special Committee acts with care;5. Minority vote is informed; and6. There is no coercion of minority (e.g., threat of follow-up tender at lower price).

• SEPTA v. Volgenau, 91 A.3d 562 (Del. 2014) (applies same rule to sale of controlled-company to third-party buyer where controller gets different consideration)

• Olenik v. Lodzinski, 2019 Del. LEXIS 177 (ab initio means before any “substantive economic negotiations“ (e.g, sharing valuations or valuation models) have occurred)

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MFW permits dismissal on pleadings for challenges to freeze-outs and other controller transactions

• Swomley v. Schlecht, 2014 WL 4470947 (Del. Ch.), aff’d, 128 A.3d 992 (Del. 2015) (freeze-out merger)

• In re Books-A-Million Inc. Stockholders Lit., 2016 WL 5874974 (Del. Ch.) (freeze-out merger)

• In re Martha Stewart Living Omnimedia Inc. Stockh’r Lit., 2017 Del. Ch. LEXIS 151 (sale of controlled company to third-party for differing consideration)

• IRA Trust FBO Bobbie Ahmed v. Crane, 2017 Del. Ch. LEXIS 843 (reclassification of capital)

• In the Matter of Kenneth Cole Prod., Inc. Sh’r Lit., 2016 WL 2350133 (N.Y. Ct. App.) (freeze-out under NY law)

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In re Amtrust Financial Services, 2020 Del. Ch. LEXIS 74

• Some interesting new wrinkles in MFW motion to dismiss.• 2015: Derivative claims brought against entire board of public insurance company

AmTrust, Inc. relating to approval of conflicted transaction involving AmTrustfounding family members and another insurance company (“Cambridge Action.”)– All AmTrust board members answer complaint instead of moving to dismiss, except one.– Judge denies motion to dismiss and calls core allegations “very troubling.”– Expert testimony later estimates potential joint and several net liability of directors in

Cambridge Action at no less than $15 to 25 million and possibly more than $300 million.

• 2018: AmTrust founding family members owning 55% of voting equity join with PE firm to propose MBO conditioned on MFW safeguards ab initio. Special Committee of four AmTrust directors unrelated to founding family negotiate buyout price of $13.50 per share.– June 3: Day before stockholder meeting, proxies insufficient to approve by majority of

minority, due in part to criticism by ISS and dissent led by Carl Icahn (holds large position). Meeting adjourned.

– June 4: Icahn meets with MBO group and agrees to support buyout at $14.75 per share. Special Committee not part of that meeting but later approves new price.

– June 21: Adjourned stockholder meeting approves at $14.75. 67% of minority vote in favor.– Plaintiffs sue AmTrust officers and directors for breach of fiduciary duty.

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Special Committee directors move to dismiss based on MFW and DGCL §102(b)(7)

• Chancellor: Motion to dismiss denied as to 3 of 4 Special Committee directors under MFW:– Appeared to reject plaintiff’s argument that MFW did not apply because

Special Committee did not initially negotiated $14.75 price with Icahn. Appeared open to defense argument that Icahn could negotiate that price due to majority-of-minority approval requirement, thus showing MFWworked in this case.

– But reasonably conceivable 3 of 4 directors who were defendants in Cambridge Action had conflict of interest in extinguishing viable and material derivative claims through MBO. Fourth director joined board after Cambridge Action.

• Chancellor: Motion to dismiss denied as to 3 of 4 Special Committee directors under §102(b)(7):– Reasonably conceivable Cambridge Action defendants acted in bad faith in

approving MBO to extinguish viable and material derivative claims.

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Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015)

• J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 WM. MITCHELL L. REV. 4 (2014) (Dorsey & Whitney Foundation Lecture)

• If merger is not subject to entire fairness standard (due to controller), BJR standard of review applies in post-merger damages claim where there has been fully informed, uncoerced approval by majority of disinterested stockholders. – It doesn’t matter that Unocal or Revlon would otherwise apply.

• Singh v. Attenborough, 137 A.3d 151 (Del. 2016)

– CJ Strine rejects “gross negligence” as standard to overturn BJR after stockholder approval.

• “Absent a stockholder vote and absent an exculpatory charter provision, the damages liability standard for an independent director . . . is gross negligence, even if the transaction was a change-of-control transaction. Therefore, employing this same standard after an informed, uncoerced vote of the disinterested stockholders would give no standard-of-review-shifting effect to the vote. When the [BJR] standard of review is invoked because of a vote, dismissal is typically the result.”

– “Waste” should have been standard applied, and no rational argument that waste occurred here. Stockholders unlikely to approve wasteful transaction.

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In re Volcano Corp. Stock’r Lit., 143 A.3d 727 (Del. Ch. 2016)

• VC Montgomery-Reeves dismisses post-closing Revlon damages claims against board of Volcano following two-step cash acquisition by Philips Holding USA structured as tender offer and merger (without stockholder approval) under DGCL §251(h).

• Holds:

– Fully informed, uncoerced tender of majority of stock by disinterested stockholders in two-step transaction pursuant to §251(h) has same cleansing effect under Corwin as fully informed, uncoerced approval by disinterested stockholders; and

– Standard of review is BJR that may only be overcome by plaintiff showing of “waste” (“Irrebuttable BJR”), not “gross negligence” (“Rebuttable BJR”).

– Affirmed in Lax v. Goldman, Sachs & Co., 156 A.3d 697 (Del. 2017)

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Limits of Corwin

• Only scrubs approved transaction, not bad things that preceded it– In re Massey Energy Co. Deriv. & Class Action Lit., 2017 Del. Ch. LEXIS 74

• Approval must be fully informed– Van Der Fluit v. Yates, 2017 Del. Ch. LEXIS 829; Lavin v. West Corporation, 2017 Del. Ch. LEXIS 866;

Morrison v. Berry, 2018 Del. LEXIS 319

• Approval must not be coerced– In re Saba Software, Inc., 2017 Del. Ch. LEXIS 52 (stockholder approval of merger coerced for Corwin

purposes where only alternative was delisting and illiquid stock); Sciabacucchi v. Liberty Broadband Corp., 2017 Del. Ch. LEXIS 93 (Corwin did not protect unattractive transaction where “structurally coercive” because stockholders had to approve unattractive transaction as a condition to getting to approve attractive transaction)

• Entire fairness must not apply due to controlling stockholder– Corwin predicated on finding that KKR not a controller.– Entire fairness due to conflicts at board level (i.e., majority of board not disinterested) not enough to

remove from Corwin. Larkin v. Shah, 2016 Del. Ch. LEXIS 134– In re Rouse Properties Fiduciary Lit., 2018 Del. Ch. LEXIS 93; In re Tesla Motors Stockh’r Lit., 2018 Del.

Ch. LEXIS 102

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Watershed determination in analysis: Is there a controlling stockholder?

• Two-pronged test. Under Kahn v. Lynch Comm’n Systems, 638 A.2d 1110 (Del. 1994), stockholder is controlling if he or she:1. Owns more than 50% of voting power, OR

2. Exercises actual domination and control over business and affairs of the corporation

• Facts and circumstances inquiry.

• Not enough to show stockholder could theoretically have exercised control. Must have actual control.

• Sufficient if controls with respect to specific transaction in question; need not be day-to-day overall control.

– In re Tesla Motors, Inc. Stockh’r Lit., 2020 Del. Ch. LEXIS 51 (If plaintiff shows actual control over transaction, it is not necessary also to show alleged controller actually coerced a stockholder vote to prove controller status. Coercion is inherent in controller status in Delaware.)

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Facts and circumstances “scatter-plot”

• Delaware courts have found “control” where individual or group had:– 49%: O’Reilly v. Transworld Healthcare, 745 A.2d 902 (Del. Ch. 1999) (MTD)– 43.3%: Kahn v. Lynch Comm’n Systems, 638 A.2d 1110 (Del. 1994) (Post-T)– 40.34%: In re Primedia, Inc. Deriv. Lit., 910 A.2d 248 (Del. Ch. 2006) (MTD)– 35%: In re Cysive Inc. Sh’r Lit., 836 A.2d 531 (Del. Ch. 2003) (Post-T) (“Outer boundary”)– 22.1%: In re Tesla Motors Stockh’r Lit., 2018 Del. Ch. LEXIS 102 (MTD)– 17.3%: In re Zhongpin Stockh’rs Lit., 2014 Del. Ch. LEXIS 252 (MTD) (Controlled day-to-day

operations; facts supported absence of normal board governance).

• But no “control” where individual or group had:– 46%: In re Western Nat’l Corp Sh’r Lit., 2000 Del. Ch. LEXIS 82 (SJ)– 33.7%: In re Crimson Exploration Inc. Stockh’r Lit., 2014 Del. Ch. LEXIS 213 (MTD) (Key factor is

control over board re transaction in question – “scatter-plot nature of the holdings”)– 33.5%: In re Rouse Properties Fiduciary Lit., 2018 Del. Ch. LEXIS 93 (MTD)– 27.7%: In re Mortons Rest. Gr’p, Inc. Sh’r Lit., 74 A.3d 656 (Del. Ch. 2013) (MTD)– 21.5%: In re Sanchez Energy Deriv. Lit., 2014 Del. Ch. LEXIS 239 (MTD)

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Guidance on control groups

• Sheldon v. Pinto, 220 A.2d 245 (Del. 2019). New leading Delaware Supreme Court case on when stockholders may be considered a control group.– Confirms Chancery Court dismissal of entire fairness claim brought by founders who

were diluted by stock issuances. – TEST: Group of stockholders exercises “control” collectively, if “they are connected in

some legally significant way – such as by contract, common ownership, agreement or other arrangement – to work together toward a shared goal.”

– There must be more than a “mere concurrence of self-interest.” Strongest factor is agreement to work toward transaction in question.

• Here, venture investors with over 60% of voting power and history of co-investment, had voting agreement requiring them to vote in favor of three board designees (who then selected two more directors and selected CEO).

• But agreement did not require directors or stockholders to vote in any other way. No agreement to vote for or veto power over transaction in question (dilutive issuance) or subsequent buyout of company.

• To permit dilutive issuances, venture firms had all voted to convert to common stock, then signed written consent amending certificate to permit dilutive issuances.

– Held: Not reasonably conceivable plaintiffs would show control group existed.

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Additional guidance on control groups

• Cited approvingly in Sheldon v. Pinto: – Hansen Medical, Inc. Stockh’r Lit., 2018 Del. Ch. LEXIS 197 (control group found)

• Two individuals and affiliated entities had 21-year history of co-investing.• Filed as “group” under Regulation 13D-G of Securities Exchange Act of 1934.• Voting agreement required vote on transaction and permitted them exclusive roll-over rights.

– van der Fluit v. Yates, 2017 Del. Ch. LEXIS 829 (control group not found)• Investor rights agreement had no obligations with respect to transaction.

• New Chancery Court decision applying Sheldon v. Pinto:– Garfield v. Blackrock Mortg. Ventures, LLC, 2019 Del. Ch. LEXIS 1400 (control group found)

• Investors had 46.5% of vote and unilateral veto power over reorganization that was subject of entire fairness claim.

• Investors consulted directly in formulating reorganization and had exclusive weigh-in rights before board considered proposal.

• “As in Hansen, voting power, concurrence of interests, historical ties, and transaction-specific coordination give rise to a reasonably conceivable inference” of control group status.

• Held: Corwin is inapplicable; entire fairness applies where MFW safeguards not present.

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Watershed determination: No controlling stockholder

1. If transaction is not sale of control, then traditional BJR applies unless a majority of the board is interested (making entire fairness the standard). In the event of gross negligence, DGCL §102(b)(7) applies unless there is “bad faith.”

2. If transaction IS sale of control, then Revlon applies unless a majority of the board is interested (making entire fairness the standard). Fully informed approval by non-interested stockholders makes irrebuttable BJR applicable under Corwin. DGCL §102(b)(7) is also available to protect directors unless there is “bad faith.”

3. What if a majority of the board is not disinterested in the transaction?– Normally entire fairness would apply.– If fully informed approval by non-interested stockholders, then Corwin still can make

irrebuttable BJR applicable. See Larkin v. Shah, 2016 Del. Ch. LEXIS 134– What if Corwin does NOT apply due to disclosure issues but transaction is fully negotiated

and approved by special committee of disinterested directors? DGCL §102(b)(7) is available to protect disinterested directors. What about the interested directors?

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Note: §102(b)(7) and Cornerstone doctrine!

• “A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct – be it Revlon, Unocal, the entire fairness standard, or the [BJR].” – In re Cornerstone Thera. Inc. Stock’r Lit., 115 A.3d 1173 (Del. 2015)

• In other words, in the face of a DGCL §102(b)(7) exculpation provision, in order to succeed in keeping a director in fiduciary duty damages claim, plaintiff must show that director was self-interested, lacking in independence or acting in bad faith REGARDLESS of the standard of review applied to transaction.– Plaintiff has to provide proof of duty of loyalty breach by director.

– Remember: Officers are not covered by statutory DGCL exculpation.

• See also Voigt v. Metcalf, 2020 Del. Ch. LEXIS 55 (independent, disinterested directors’ Cornerstone motion to dismiss granted)

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Category 1: No sale of control so governed by traditional BJR

In re Towers Watson & Co. Stockh’rs Lit., 2019 Del. Ch. LEXIS 278

• Stock-for-stock merger of publicly-held equals with no controllers and majority independent boards.

• VC McCormick dismisses damages claims for breach of fiduciary duty against Towers board based on BJR and DGCL §102(b)(7).– “The defendants have moved to dismiss this action. In briefing, the defendants focused on arguing

the recently fashionable Corwin doctrine that a fully informed stockholder vote restored the [BJR]. But this decision need not reach Corwin, as long-settled corporate law principles warrant business judgment deference. Namely, the plaintiffs do not argue that the merger, a mostly stock-for-stock transaction between widely held, publicly traded entities is subject to enhanced scrutiny under Revlon. Nor do they challenge any deal protection devices to trigger enhanced scrutiny under Unocal. The transaction thus is presumptively subject to the [BJR], and the plaintiffs must plead facts sufficient to rebut or overcome this presumption in order to state a claim.”

• However, VC McCormick cites Corwin for proposition that overcoming BJR where transaction approved by either fully informed and disinterested board or stockholder requires showing of “waste” (as opposed to gross negligence).

• Since no reasonably conceivable allegations of waste or bad faith, claims dismissed.

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Category 2: Sale of control so Revlon applies unless cleansed by Corwin; board majority disinterested

Morrison v. Berry, 191 A.3d 268 (Del. 2018)

• J. Valihura overturns Corwin-based dismissal of post-closing damages claims below in two-step acquisition of The Fresh Market by PE buyer Apollo Global Management (with founder Ray Berry and son Brett rolling over 9.8% of equity) based on disclosure failure in SEC Schedules 14D-9 and TO.

• Held: Defendants did not meet burden of proving approval fully informed. “Reasonable stockholder” would have found these alleged omissions material. Depth of Berry commitment to Apollo undermined sale process:

1. Berry had agreement with Apollo before auction began; he told board he did not.2. Berry told board multiple times he would do rollover with Apollo and not others. Clear preference for

Apollo.3. Berry threatened to sell shares if board did not begin sale process; believed company no longer

positioned to prosper as public company.4. Board did not disclose they also formed Special Committee to begin process as a result of pressure

from existing activist stockholders.

• Supreme Court declined to find alternative grounds under §102(b)(7) exculpation shield to uphold lower court dismissal against directors under Cornerstone doctrine.

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This time: motion to dismiss under Cornerstone

Morrison v. Berry, 2019 Del. Ch. LEXIS 1412

• Case goes back to VC Glasscock for Cornerstone motion to dismiss pursuant to DGCL §102(b)(7).

• VC Glasscock: – “Although Revlon applies to the underlying company sale process . . . this does

not change the requirement that the Plaintiff plead a non-exculpated claim.”– For fiduciary-duty damages claim to survive against a defendant director, plaintiff

must plead allegations that the director was either self-interested, lacked independence or acted in bad faith.

– To state a claim for bad faith conduct, “the Plaintiff must allege the Director Defendants ‘knowingly and completely failed to undertake their responsibilities.”

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Claims dismissed as to directors (except Berry); claims against Berry and officers continue

Morrison v. Berry, 2019 Del. Ch. LEXIS 1412

• VC Glasscock: Plaintiff failed to adequately plead that directors (other than Berry) were self-interested, lacking in independence or acted in bad faith, notwithstanding failures in disclosure.– Plaintiff states claim for breach of duty of loyalty against Berry, who

withheld information and lied to the board.

– General Counsel Duggan is officer only, consequently not covered by §102(b)(7). Plaintiff adequately pleads claim for breach of duty against him. Standard is gross negligence. Possibly duty of loyalty claims as well due to transaction-triggered compensation.

– CEO is both officer and director. Claims are dismissed insofar as director but not as officer. Possibly duty of loyalty claims as well due to transaction-triggered compensation.

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In re Essendant, Inc. Stockh’r Lit., 2019 Del. Ch. LEXIS 1404

• Sale of control of office supply wholesaler, Essendant, Inc., in two-step cash transaction with PE firm Sycamore. Revlon applies unless cleansed by Corwin.

• Post-merger damages claims against directors and officers for breach of fiduciary duty. Defendants move to dismiss under Corwin and Cornerstone-§102(b)(7). Plaintiff claims Sycamore is controller and material flaws in SEC disclosures.

• VC Slights: All claims dismissed on the pleadings.– At 11% ownership and no other governance rights, Sycamore is not a controller.

– No allegations of any director self-interest or lack of independence.

– Court need not reach the validity of Corwin defense because regardless of standard of review, plaintiffs have not alleged disclosure or other process or substantive fiduciary breaches that make a finding of “bad faith” or “waste” reasonably conceivable.

– Although not exculpated, allegations regarding CEO’s separate acts as officer, not director, also do not give rise to reasonably conceivable breach of duties of care or loyalty.

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Category 3: Sale of control; board majority NOT disinterested

Salladay v. Lev, 2020 Del. Ch. LEXIS 78

• Three of six board members of Intersections, Inc., publicly held technology company, own directly or indirectly, large equity positions in company. Also have significant debt investments in it. Company is pressed for cash.

• iSubscribed Investor Group interested in acquiring Intersections for cash plus major debt investment, with three board members rolling over majority of their equity and exchanging their debt. iSubscribed forms WC SACD as acquisition vehicle.

• Intersections board forms Special Committee consisting of other three directors. Special Committee hires financial advisers and counsel. After canvassing other possible buyers, Special Committee agrees to deal with WC SACD at $3.68 per share plus $30 million in new debt financing.

• After approval by full board, Intersections enters into Merger Agreement (contemplating two-step acquisition) and Note Purchase Agreement. Three directors to roll over equity, exchange debt and get other deal-related consideration.

• Stockholders bring fiduciary duty claims against all six directors seeking damages. Allege material disclosure failures in tender offer documentation.

• Directors move to dismiss. Plaintiffs drop claims against three Special Committee members voluntarily.

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VC Glasscock: Motion to dismiss by other three directors denied!• No allegations of controller in this case. But majority of board was NOT

disinterested in this case, so normal standard of review is entire fairness.• Two ways standard of review could shift to BJR (as opposed to simply

shifting burden of proof on entire fairness). Either:– Fully-informed stockholder approval or tender by majority of disinterested

stockholders could shift standard under Corwin/Volcano. See Larkin v. Shah, 2016 Del. Ch. LEXIS 134. OR

– Fully-informed approval by Special Committee of independent and disinterested directors could shift standard under dictum in In re Trados Inc. Stockh’r Lit., 73 A.3d 17 (Del. Ch. 2013) (“Trados II”).

• But dismissal not possible here because:– Complaint establishes reasonably conceivable case for material defects in tender offer

disclosures, so Corwin/Volcano not applicable; AND– Special Committee took charge after “substantive economic negotiations” had already

occurred. In order for Special Committee approval to have effect of shifting standard to BJR, must meet the same ab initio requirement as MFW safeguards under Olenik.

• So, entire fairness remains standard of review, and motion to dismiss denied.

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This is new law being shaped in dictum . . .

• Traditional Lynch doctrine would say that effective approval by Special Committee would shift burden of proving entire fairness from defendant directors to plaintiff to prove lack of entire fairness. – Cf. Brownstein, Roth, Tetelbaum, McLeod & Lu, Use of Special

Committees in Conflict Transactions, The M&A Journal (August 2019) (Special Committee approval alone shifts burden of proof of entire fairness but dual MFW safeguards are required to lower standard of review to BJR).

• But dictum in Trados II and growing progeny for shifting of standard of review, not just burden of proof.

• See also Voigt v. Metcalf, 2020 Del. Ch. LEXIS 55 (VC Laster: “And even if the Board did lack a disinterested and independent majority, then the [BJR] would still apply if the Board relied on the Committee’s recommendation, unless the Committee itself lacked a disinterested and independent majority.”)

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63


Market-based notion of fair value• DFC Global Corp. v. Muirfield Value Partners, 172 A.3d 346 (Del. 2017)

– Fair value doesn’t mean “highest conceivable value” for stockholders but “what would fairly be given to them in an arm's-length transaction.” No presumption of deal price as fair value, but deal price should be best evidence when (i) robust sale process, (ii) sale to arm’s-length third party and (ii) no self interest.

• Dell, Inc. v. Magnetar, 177 A.3d 1 (Del. 2017)– Deal price deserved “heavy, if not dispositive, weight” where sale process had "fair play,

low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of [the largest stockholder's] votes.”

– Efficient capital market hypothesis (ECMH) is bedrock principle in Delaware. Arguments based on informational inefficiency of market almost never justify deviation from market-based approach to fair valuation and use of DCF or other expert methodology.

• Verition Partners Master Fund v. Aruba Networks, 2019 Del. LEXIS 197

– Market price is an indicator of economic value; but when “market price is further informed by the efforts of arm's length buyers of the entire company to learn more through due diligence, involving confidential non-public information, and with the keener incentives of someone considering taking the non-diversifiable risk of buying the entire entity, the price that results from that process is even more likely to be indicative of so-called fundamental value.”

– Deal price less reasonable estimate of synergies is best indicator of fair value where sale process has been robust and arm’s-length.

– No additional reduction for “reduced agency costs” which is tantamount to control premium.

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New valuation cases

• In re Stillwater Mining Co., 2019 Del. Ch. LEXIS 320 (VC Laster: “This decision concludes that the deal price is the most persuasive indicator of fair value. Relying on any of the other valuation metrics would introduce error.”)

• Manichaean Capital, LLC v. SourceHOV Holdings, Inc., 2020 Del. Ch. LEXIS 38 (VC Slights: Where company is privately held with no trading market and parties agree there was no real “sale process” run in connection with acquisition, DCF methodology is most reliable tool for determining fair value.)

• In re Panera Bread Co., 2020 Del. Ch. LEXIS 42 (VC Zurn finds sale process adequate to use deal price of $315 per share minus estimated synergies of $11.56 per share for fair value of $303.44 per share)

BUT . . .

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New statutory interpretation case

• In re Panera Bread Co., 2020 Del. Ch. LEXIS 42

– Company had already prepaid dissenting stockholders the deal price of $315 to cut off accrual of statutory interest rate (5% over the Federal Reserve discount rate) pursuant to DGCL §262(h) (as amended in 2016).

– VC Zurn holds that stockholder is NOT required to reimburse the excess of prepayment over fair value under §262(h). Statute does not speak to issue of reimbursement but most commentators have speculated that reimbursement would not be required. Consistent with treatment of mandatory prepayment under the Model Business Corporation Act (which also does not explicitly address the issue).

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Need Credit?Return your completed sign-in to: [email protected].

QuestionsIf you have questions, you are welcome to follow-up directly with the presenters or call on your trusted Dorsey contact.


Bryn R. VaalerOf Counsel Minneapolis, [email protected] (612) 343-8216

Bryn helps dorsey lawyers and clients stay ahead of the latest developments in law and practice. He designs and implements in-house professional development and training for lawyers, clients and staff through Dorsey U. Bryn is also Of Counsel in the firm's Corporate Group and advises on corporate and securities law matters.

For 11 years, Bryn was a professor of law at the University of Mississippi Law School, where he taught Contracts, Corporations, Corporate Finance Law and Securities Regulation. He was a member of the ABA Corporate Laws Committee from 2000-2006.

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Brian BurkeAssociate [email protected] Minneapolis, Minnesota(612) 492-6118

Brian advises clients on complex mergers and acquisitions in a variety of industries, including health, energy, technology and agriculture. Additionally, Brian regularly assists clients with corporate governance, securities regulation, technology commerce and commercial contract matters.

Prior to attending law school, Brian worked for General Electric as a financial analyst in its Financial Management Program and as an internal auditor with GE’s Corporate Audit Staff. As an auditor, Brian conducted financial and compliance audits of industrial and capital GE businesses, both domestic and international.

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CORPORATE UPDATE A PUBLICATION OF THE CORPORATE GROUP OF DORSEY & WHITNEY LLP

April 29, 2020

CFIUS Abruptly Imposes New Notice Filing Fees

Lawrence Ward and Nelson Dong

Beginning May 1, 2020, the Committee on Foreign Investment in the United States (“CFIUS”) will require a filing fee in connection with any formal notice of a “covered transaction” or a “covered real estate transaction.” The U.S. Treasury Department made the announcement of the implementation of these filing fees on April 27, 2020 through an interim rule with its request for public comments until June 1, 2020. (See the interim rule here.) As of the date of this alert, CFIUS has set the escalating amount of the filing fee based on the value of the underlying transaction according to the following tiers:

Transaction Value Range Filing Fee $0 to $499,999.99 $0 $500,000 to $4,999,999.99 $750 $5,000,000 to $49,999,999.99 $7,500 $50,000,000 to $249,999,999.99 $75,000 $250,000,000 to $749,999,999.99 $150,000 $750,000,000 or more $300,000

Historically, CFIUS has not had any authorization from Congress to charge any filing fee. However, under Section 1723 of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), Congress for the first time gave CFIUS the power to begin collecting such filing fees to help offset its expenses in conducting national security reviews and investigations of foreign investments or acquisitions under Section 721 of the Defense Production Act. Under FIRRMA, CFIUS was authorized to collect fees in connection with any formal written notices filed but not with any of the new mandatory declarations that were also created by FIRRMA.

However, despite having had this authority for nearly two years, CFIUS had chosen not to announce the adoption of filing fees even as it went ahead with a number of other key changes. (See our earlier alerts here: February 7, 2020; October 30, 2019; October 23, 2018; and August 15, 2018.) In connection with FIRRMA, CFIUS initially implemented a critical technologies Pilot Program in November 2018 that contained no filing fees. Additionally, in October 2019, CFIUS announced further significant amendments to its existing regulations that finally became effective on February 14, 2020, but again without any filing fees. Nevertheless, on March 9, 2020, CFIUS published a notice of proposed rulemaking to establish filing fees for “covered transactions” under the Regulations Pertaining to Certain Investments in the United States by Foreign Persons found in 31 CFR Part 800 (“Part 800”) and for “covered real estate transactions” under the Regulations Pertaining to Certain Transactions by Foreign Persons

2

Involving Real Estate in the United States (“Part 802”). The proposed rule created a new Subpart K to Part 800 and 802.

Under the proposed rule, CFIUS was accepting comments on the proposed filing fees only until April 3, 2020. CFIUS appears to have received only five comment letters.1 Importantly, the timing of the release of the proposed rule and the date on which comments were originally due coincided with the time that virtually all U.S. companies were very distracted by the adverse effects of the COVID-19 pandemic. CFIUS itself acknowledged the impact of the COVID-19 pandemic on public comments and so has extended the new comment period until June 1, 2020.

Despite requesting additional comments, given the growing volume of CFIUS’s work and the added government resources that must be devoted to that work, on April 27, CFIUS determined that implementing filing fees in line with the 2018 FIRRMA authorization was appropriate at this time. Moreover, the U.S. Government is now facing massive new federal expenditures to respond to the COVID-19 crisis even as its own income tax revenues will fall sharply because the nation faces a deep recession and many millions of Americans have lost their jobs. CFIUS will only charge the filing fee in connection with formal written notices filed with it but not in connection with mandatory declarations that were also created under FIRRMA. Importantly, however, if the parties to a mandatory declaration ultimately file a formal written notice with CFIUS, then the relevant filing fee would apply to that notice.

In practice, since 2018, in connection with certain mandatory declarations filed under the CFIUS Pilot Program, CFIUS had ultimately still required the parties to those declarations to submit formal written notices after reviewing those declarations, which then elongated the entire CFIUS process and thus significantly delayed closing of those transactions. Because of these potential timing uncertainties created by the added risk CFIUS would still insist upon a formal notice even after a mandatory declaration, many parties strategically opted to skip the mandatory declaration step altogether and just to file a full written notice instead. Now, with the new filing fee requirement and such declaration-type transactions, parties will be faced with a new threshold choice between paying the filing fee in connection with a written notice or the timing uncertainties involved with filing only a mandatory declaration and then being required by CFIUS to file a full written notice (that would then have further legal costs plus the applicable filing fee).

Under the new rule, the parties must pay the filing fee electronically to the U.S. Treasury Department and CFIUS will not begin its 45-day review until the applicable filing fee has been paid. Under the rule, the transaction value is “the total value of all consideration that has been or will be provided in the context of the transaction by or on behalf of the foreign person that is a party to the transaction, including cash, assets, shares or other ownership interests, debt

1 One comment letter from an anonymous source requested that filing fees not be implemented at this time.

Another comment letter requested that CFIUS lower the proposed filing fees, adjust how the value of the transaction would be calculated, and requested that the filing fee be due within 15 days of CFIUS beginning its review (as opposed to before CFIUS starts its review). Still another comment letter requested that CFIUS determine the transaction value (and thus the filing fee due) based on the U.S. operations of the target company. In its April 27 notice, CFIUS rejected this important comment by indicating that parties to a transaction negotiate and arrive at the overall transaction value in the standard course of dealmaking but did include a very limited exception for transactions where the value of the U.S. business is less than $5,000,000 but the overall transaction value is $5,000,000 or greater.

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forgiveness, or services or other in-kind consideration.” The new rule also provides detailed guidance on determining the value of consideration, including determining valuation in connection with multi-phase and contingent equity interest or earn-out transactions. Additionally, the new rule makes clear that CFIUS is not bound by the parties’ determination of the transaction value and so CFIUS might potentially impose a filing fee based upon its own assessment of the transaction value and presumably could force the parties to pay that fee or CFIUS would just refuse to start its review of the transaction.

Dorsey attorneys are available to advise both U.S. and foreign parties to international investments or acquisitions and to navigate these unique national security review procedures under the CFIUS laws and regulations.

______________________ About Dorsey & Whitney LLP Clients have relied on Dorsey since 1912 as a valued business partner. With locations across the United States and in Canada, Europe and the Asia-Pacific region, Dorsey provides an integrated, proactive approach to its clients' legal and business needs. Dorsey represents a number of the world's most successful companies from a wide range of industries, including leaders in the banking, development & infrastructure, energy & natural resources, food, beverage & agribusiness, healthcare, and technology industry groups, as well as major non-profit and government entities. ©2020 Dorsey & Whitney LLP. This article is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by reading this article. Members of the Dorsey & Whitney LLP group issuing this communication will be pleased to provide further information regarding the matters discussed therein.


January 30, 2020

Increase in HSR Reportability Thresholds and Other HSR Developments Michael Lindsay, Jaime Stilson, James Nichols and Anthony Badaracco

On January 28, 2020, the Federal Trade Commission (FTC) announced the annual adjustment of the thresholds that trigger premerger reporting obligations (and the mandatory waiting period) under the Hart-Scott Rodino (HSR) Act, which will apply to transactions closing 30 days after publication of the announcement in the Federal Register. The FTC also announced adjusted thresholds that trigger prohibitions on certain interlocking memberships on corporate boards of directors, which will become effective immediately on publication in the Federal Register. Both sets of thresholds will then remain in effect until the 2021 adjustment. Earlier this month the FTC also announced the annual adjustment for maximum daily civil penalties for noncompliance with the HSR Act’s requirements. Finally, 2019 also saw another failure-to-file penalty as well as another challenge to a transaction that had gotten through the waiting period without objection.

Background

The HSR Act requires parties to give advance notice to the FTC and Department of Justice (DOJ) of any acquisition of voting securities, assets, or non-corporate interests where the value exceeds certain dollar-based size thresholds. If the transaction is reportable, the parties cannot close until after a mandatory waiting period (typically thirty days, subject to early termination if the transaction does not present any antitrust issues). The waiting period allows the agencies to review the proposed transaction and determine whether it raises antitrust issues that require further investigation. Either agency can investigate (although only one agency will do so), and if the investigation is not completed during the initial waiting period, then the waiting period may be extended. Ultimately, the investigating agency must decide whether to challenge the transaction (or, potentially, reach a compromise with the parties that addresses the agency’s antitrust concerns but permits the transaction to go forward).

Basic Size Tests

The size thresholds that trigger the reporting obligation, and other dollar-based thresholds in the HSR Act, are adjusted (to reflect annual percentage increases in Gross National Product) each year. The most significant effect of the annual indexing is to increase the “size of transaction”1 and “size of persons”2 tests:

1 The test includes the value of all of the voting securities (and certain assets) of the acquired person that the

acquiring person will hold after the transaction is complete, including voting securities of the acquired person that the acquiring person already owns.

2 “Person” means the ultimate parent of the legal party to a transaction (including all entities controlled by the ultimate parent).

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Transactions resulting in holdings valued at or below $94 million in voting securities and/or assets of the seller are not reportable (subject to the rules on aggregation).

Transactions resulting in holdings valued at more than $376 million are reportable (unless exempted) regardless of the size of persons.

Transactions resulting in holdings valued at more than $94 million but less than $376 million are reportable (unless exempted) if the “size of persons” test is satisfied. ◦A person with $188 million in total assets or annual net sales acquires (or acquires from) a manufacturing person with $18.8 million in total assets or annual net sales; or

▪ A person with $188 million in total assets or annual net sales acquires (or acquires from) a non-manufacturing person with $18.8 million in total assets; or

▪ A person with $18.8 million in total assets or annual net sales acquires (or acquires from) a person with $188 million in total assets or annual net sales.

Notification Thresholds

In addition to these basic tests, the HSR Act provides five separate “notification thresholds,” with a new report required before completing an acquisition that would result in crossing the next threshold. With the indexing, the notification thresholds will be:

An aggregate total amount of voting securities of the acquired person valued at greater than $94 million but less than $188 million;

An aggregate total amount of voting securities of the acquired person valued at $188 million or greater but less than $940.1 million;

An aggregate total amount of voting securities of the acquired person valued at $940.1 million or greater;

Twenty-five percent of the outstanding voting securities of an issuer if valued at greater than $1.8802 billion; or

Fifty percent of the outstanding voting securities of an issuer if valued at greater than $94 million.

Exemptions

The increases also affect some of the exemptions from reporting requirements. For example, 16 C.F.R. § 802.50 exempts the acquisition of assets located outside the United States “unless the foreign assets the acquiring person would hold as a result of the acquisition generated sales in or into the U.S. exceeding $50 million (as adjusted) during the acquired person's most recent fiscal year” (emphasis added). With the most recent adjustment, this exemption applies unless the assets generated sales in or into the U.S. of more than $94 million.

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Filing Fees

The HSR filing fees have not increased, but the levels that trigger larger filing fees have increased.

The basic filing fee remains $45,000 and is payable on transactions valued at more than $94 million but less than $188 million.

For transactions valued at more than $188 million but less than $940.1 million, the filing fee is $125,000.

For transactions valued at more than $940.1 million, the filing fee is $280,000.

Civil Penalties for HSR Violations

Parties who close on a reportable transaction without having filed complete notifications (including all documents required to be included under Item 4(c) and 4(d) of the notification form) and observing the waiting period are subject to civil penalties. As of January 28, 2020, the current annually indexed maximum daily penalty is $43,280.

The agencies continue their active enforcement of HSR compliance and do not hesitate to seek civil penalties for violations—especially for repeat offenders. On August 28, 2019, the FTC announced that it had reached a settlement with Third Point LLC and three related funds (“Third Point”) regarding FTC allegations that the funds had failed to comply with the HSR notification and waiting period for their acquisition of shares of DowDuPont Inc. Third Point agreed to pay $609,810 in civil penalties.3 The FTC’s decision to seek civil penalties was likely based on the Third Point’s 2015 violation of the HSR Act by improperly relying on the investment-only exemption for an otherwise reportable acquisition of voting securities.

Expiration or Early Termination Is No Shield Against Enforcement Actions

The HSR notification process provides the FTC and DOJ an opportunity to review transactions before they close, but it is not an “approval” process. In 2019 the FTC demonstrated again that a transaction can be challenged even if the parties filed their HSR notifications and the waiting period expired. In July 2019, the FTC granted early termination for Post Holdings Inc.’s proposed acquisition of TreeHouse Foods Inc.’s private label cereal business, but in December 2019, the FTC announced that it was commencing an administrative challenge to the transaction.4 The parties later abandoned the transaction.5 This echoes the DOJ’s 2017 challenge of Parker-Hannafin’s acquisition of ClarCor Inc.—which DOJ filed six months after the waiting period had expired, and well after the parties had closed the transaction.6

3 See Federal Trade Commission, Press Release, Three Third Point Funds Agree to Pay $609,810 in Civil Penalties

for Violating the Hart-Scott-Rodino Act (Aug. 28, 2019). 4 See Federal Trade Commission, Press Release, FTC Alleges Post Holdings, Inc.’s Proposed Acquisition of

TreeHouse Foods, Inc.’s Private Label Ready-to-Eat Cereal Business Will Harm Competition (Dec. 19, 2019). 5 PR Newswire, TreeHouse Foods, Inc. Terminates Agreement to Sell Ready-to-Eat Cereal Business to Post

Holdings; Announces Re-Marketing of the Business (Jan. 13, 2020). 6 Matthew Perlman, What To Know About Post-Closing Merger Challenges, Law360 (Oct. 10, 2017).

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Interlocking Directorates – Increased Thresholds and Other Issues

In its January 28 announcement, the FTC also updated the thresholds for the Clayton Act Section 8’s prohibition on interlocking directorates. The Act prohibits one person from serving as an officer or director of two competing companies when each company has capital, surplus and undivided profits of more than $38,204,000 for Section 8(a)(1) and competitive sales of more than $3,820,400 for Section 8(a)(2)(A). These updated thresholds are effective immediately upon publication.

The leaders of the enforcement agencies have suggested over the last year or so that they are considering initiating new enforcement actions in this area. Specifically, in May 2019, Assistant Attorney General Makan Delrahim stated that an “area the Division is looking into is the law governing interlocking directorates and bringing it forward to account for modern corporate structures.”7 A few months earlier, in December 2018, the then-Principal Deputy Assistant Attorney General Andrew Finch stated that the DOJ is “looking at common ownership and interlocking directorate issues more closely” and is “currently thinking about” whether Section 8 could apply to other entities such as private equity firms or LLCs that may have board appointment rights.8 Similarly, in a blog post dated June 26, 2019, the FTC’s Bureau of Competition offered a reminder that “there are unexpected restructuring and acquisition circumstances through which companies and their boards can wake up one morning to find themselves in a potentially problematic interlock situation.”9


7 See Makan Delrahim, Don’t “Take the Money and Run”: Antitrust in the Financial Sector, at 4, presented at

Fordham University School of Law’s Conference on Antitrust in the Financial Sector: Hot Issues and Global Perspectives (May 1, 2019). Available at: https://www.justice.gov/opa/speech/file/1159346/download.

8 See Andrew C. Finch, Concentrating on Competition: An Antitrust Perspective on Platforms and Industry Consolidation, at 13–14, presented at Capitol Forum’s Fifth Annual Tech, Media & Telecom Competition Conference (December 13, 2018). Available at: https://www.justice.gov/opa/speech/file/1120486/download.

9 Michael E. Blaisdell, Interlocking Mindfulness, FTC: Competition Matters (June 26, 2019). Available at: https://www.ftc.gov/news-events/blogs/competition-matters/2019/06/interlocking-mindfulness.


January 10, 2020

Channel Reinforces that Akorn is the Ceiling not the Floor for MAE Terminations Layne Smith, Akosua Owusu-Akyaw and Brian Burke

2018’s landmark decision Akorn, Inc. v. Fresenius Kabi AG marked the first time that the Chancery Court upheld a buyer’s use of a Material Adverse Effect (MAE) clause to terminate a merger agreement. However, the Court’s reasoning in the case suggested that the favorable ruling was based on the particularity of the facts and that the general standard for successfully invoking such a clause remains high. The Court’s recent decision in Channel Medsystems v. Boston Sci. Corp. confirms the continuation of that high standard and reaffirms the Delaware Court’s stance that the MAE clause cannot be invoked to alleviate the effects of “buyer’s remorse” or undesirable business decisions.

Background

On November 1, 2017, Channel and Boston Scientific entered into an agreement and plan of merger. Shortly after entering into this agreement, Channel’s Vice President of Finance discovered that, the company’s Vice President of Quality had falsified documents as part of a self-enrichment scheme that netted him around $2.5 million. An investigation into the scheme revealed that a number of the falsified documents had been sent to the FDA as part of Pre-Market Approval (PMA) for one of the company’s products.

Channel immediately launched an internal investigation, fired the Vice President of Quality, quickly began remediation action, hired a third party company to assess their facilities, informed the FDA of the falsification, and informed Boston Scientific of the situation. The FDA found Channel to be highly cooperative and after a thorough investigation, which pushed back Channel’s original PMA timeline by a few months, the FDA approved the PMA. The delay had no effect on the original closing date, however, Boston Scientific argued that the fraud rendered a number of the representations and warranties inaccurate, thereby triggering the MAE clause of the merger agreement, and opening the door for a buyer termination.

The Court’s Decision

In its analysis, the Court first addressed whether or not the representations and warranties were materially inaccurate. The Court engaged in this analysis because the language in the representations and warranties used materiality qualifiers and did not include a materiality scrape provision. A materiality scrape provision is an agreement between the parties to ignore the materiality qualifiers in favor of an over-all MAE standard. To determine materiality, the Court relied on the “total mix” standard used in Akorn, which asks whether there is a substantial

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likelihood that a reasonable investor would view the information or action as having significantly altered the total mix of information.

Based on that standard, the Court determined that the inaccuracies caused by the fraud were material. However, the Court concluded that, even though material, the inaccuracies did not rise to the height of causing a Material Adverse Effect. In its reasoning, the Court reaffirmed the standard for MAE found in Akorn and prior cases which states, that for a buyer to invoke a MAE clause to avoid its obligation to close, the buyer must show, that the MAE is material when viewed from the long-term perspective. The important consideration being whether there has been an adverse change in the target’s business that is consequential to the company’s long-term earning power measured in years rather than months.

Along with reaffirming this high MAE standard, the Court offered an important clarification to the temporal ambiguity created by the “reasonably be expected” language often found in MAE clauses. Similar to Akorn, the MAE clause in Channel stated that: “…each of the representations and warranties of Channel contained in [the] Agreement … shall have been true and correct at the time originally made… except to the extent that the failure of any such representation and warranties to be true and correct does not have and would not reasonably be expected to have a Material Adverse Effect on Channel.”

The phrase “reasonably be expected” suggests a future looking standard, but does not specify at what point during the merger the buyer’s reasonable expectation of a future breach should be measured, nor does it spell out how far in the future that expectation can be projected. The Chancery Court clarified that the expectation of material breach should be measured at the moment when the buyer actually terminates the merger agreement, as opposed to the date when the inaccuracies were discovered. In Channel, as the party seeking to terminate, Boston Scientific had the burden of showing a reasonable expectation of a future Material Adverse Effect when the termination notice was given. Since Channel was able to rectify its issue with the FDA and still gain PMA well before notice was given, the Court found that Boston Scientific failed in meeting its burden. This clarification can provide helpful guidance for sellers thinking of invoking the clause or buyers trying to analyze whether an MAE has occurred.

Conclusion

Channel v. Boston Scientific reaffirms that despite the Chancery Court’s decision in Akorn in 2018, the bar for invoking a MAE clause to terminate a merger agreement is still high. Material inaccuracies in the representations and warranties are not enough to trigger a Material Adverse Effect. Rather, the buyer must show that at the time of termination that there is a future expectation of a long-term adverse effect on the earning power of the target business.


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