Delaware Court Of Chancery – M&A Transactions
The Delaware Chancery Court’s recent decisions in Crispo v. Musk, West Palm Beach Firefighters v. Moelis & Company, Chordia v. Lee, and Sjunde AP-fonden v. Activision Blizzard, Inc. have caused some angst for merger and acquisition (M&A) practitioners. This blog will summarize those opinions and the statutory changes proposed by the Delaware Bar in response.
Crispo v. Musk
In Crispo v. Musk, the court decided on the ambiguous issue of when a target may assert a claim for premium damages in the event of a default by a buyer in an acquisition agreement. In essence, when a public company is the target in an acquisition, the board of directors act as agents for the shareholders, who will ultimately receive the merger consideration. Moreover, that merger consideration is almost always at a premium to pre-merger market price. Unfortunately, this creates a contractual legal issue, whereby if the buyer breaches the agreement, the only damage claim by the target
SEC Issues New Mergers And Acquisitions Related C&DI
Last week was a very busy regulatory week for the SEC, including issuing six new compliance and disclosure interpretations (C&DI) for merger and acquisition transactions, most of which directly impact SPAC business organization transactions; proposed rules on SPACs’ shell companies and the use of financial projections; proposed rules to modify the definition of “dealer” for purposes of broker-dealer registration requirements; and a new accounting bulletin impacting the accounting treatment of cryptocurrencies by exchanges. This blog will discuss the new C&DI.
Background
The rules related to disclosure obligations, including in Forms 8-K, S-4 registration statements and proxy materials, and the filing of exhibits associated with a material contract, including merger agreements, have evolved over the past few years (see here related to confidential treatment of material contracts – HERE). In March 2021, the SEC issued a statement discussing certain legal specifics associated with a SPAC, including expressing concerns regarding disclosures associated with a de-SPAC transaction (i.e., a business
Mergers And Acquisitions; Board Of Directors Responsibilities – Delaware
Recently the Delaware Chancery Court rejected an interested executive’s defense of a breach of fiduciary duty claim, reminding us of the importance of making full and accurate disclosures when seeking shareholder approval for a merger or acquisition transaction. In particular, in the case of In re Xura, Inc. Stockholder Litigation the Delaware Chancery Court denied a motion to dismiss brought against a merger target company’s CEO, alleging that he had orchestrated the company’s sale to a particular bidder based on his self-interest in the outcome of the transaction.
The CEO argued that his actions should have been judged by the deferential business judgement rule and not a higher entire fairness standard because the transaction was approved by a majority of the disinterested shareholders. The CEO relied on the 2015 Delaware Supreme Court case of Corwin v. KKR Financing Holdings which held that a transaction that would be subject to enhanced scrutiny would instead be reviewed under the deferential business judgment
Mergers And Acquisitions: Types Of Transactions
As merger and acquisition (M&A) transactions completed its most active year since the financial crisis, it is helpful to go back to basics. Activity has been prevalent in all market sectors, including large, mid and small cap and across all industries, including biotech, financial services, technology, consumer goods and services, food and beverage and healthcare, among others.
Although I’ve written about M&A transactions multiple times, this will be the first time I’ve given a broad overview of the forms that an M&A transaction can take.
Types of Mergers and Acquisitions
A merger or acquisition transaction is the combination of two companies into one resulting in either one corporate entity or a parent-holding and subsidiary company structure. Mergers can categorized by the competitive relationship between the parties and by the legal structure of the transaction. Related to competitive relationship, there are three types of mergers: horizontal, vertical and conglomerate. In a horizontal merger, one company acquires another that is in the
Mergers And Acquisitions – The Merger Transaction
Although I have written about document requirements in a merger transaction previously, with the recent booming M&A marketplace, it is worth revisiting. This blog only addresses friendly negotiated transactions achieved through share exchange or merger agreements. It does not address hostile takeovers.
A merger transaction can be structured as a straight acquisition with the acquiring company remaining in control, a reverse merger or a reverse triangular merger. In a reverse merger process, the target company shareholders exchange their shares for either new or existing shares of the public company so that at the end of the transaction, the shareholders of the target company own a majority of the acquiring public company and the target company has become a wholly owned subsidiary of the public company. The public company assumes the operations of the target company.
A reverse merger is often structured as a reverse triangular merger. In that case, the acquiring company forms a new subsidiary which merges with the
Mergers And Acquisitions: Board of Director Responsibilities
I have written about mergers and acquisitions, including reverse mergers, extensively in the past, but as both traditional mergers and acquisitions and reverse mergers are a large part of my practice, it is a topic worth revisiting and drilling down on regularly. In fact over the past year, the M&A market has been booming with activity. A question that often arises involves the obligations of the board of directors during the merger process.
Board of Directors’ Fiduciary Duties in the Merger Process
State corporate law generally provides that the business and affairs of a corporation shall be managed under the direction of its board of directors. Members of the board of directors have a fiduciary relationship to the corporation, which requires that they act in the best interest of the corporation, as opposed to their own. Generally a court will not second-guess directors’ decisions as long as the board has conducted an appropriate process in reaching its decisions. This
Legal & Compliance, LLC Adds Lazarus Rothstein, Esq. as Of Counsel as Economic Confidence Builds in 2013 among its Clients
WEST PALM BEACH, FLORIDA (January 10, 2013) – Legal & Compliance, LLC is pleased to announce that Lazarus Rothstein, Esq. has recently joined the firm as Of Counsel to bring additional depth to its corporate and securities law practice. Mr. Rothstein has been a legal and business executive for a wide variety of public and private companies based in South Florida with worldwide operations.
Mr. Rothstein has held senior legal positions at CD International Enterprises, a company that produces pure magnesium in China and provides business and financial corporate consulting services; Elizabeth Arden, a global prestige fragrance and beauty products company with operations in over 17 countries; Sports Authority, the nation’s largest full-line sporting goods retailer, operating over 385 stores throughout the United States; Daleen Technologies, a billing and customer care software provider; and Let’s Talk Cellular & Wireless, a specialty retailer of wireless communication products and services that operated over 270 stores in the United States. In his role
The ABA Pushes To Allow For The Payment Of Finder’s Fees
In April of this year, the American Bar Association Private Placement Broker Task Force delivered to the SEC and published a recommendation for a limited federal exemption from SEC registration for securities intermediaries that would be able to assist in the private raise of capital for both private and public entities. The Task Force previously published a lengthy recommendation and even drafted proposed rules, in June 2005, and has been advocating the rules since that time. The full text of both the April 2012 submission and June 2005 report with proposed rules can be read on the SEC website.
The SEC’s Position and Current Rules on Finder’s Fees
The Securities and Exchange Commission (SEC) strictly prohibits the payments of commissions or other transaction based compensation to individuals or entities that assist in a capital raise, unless that entity is a licensed broker dealer.
Periodically, and most recently in April 2008, the SEC updates its Guide to Broker Dealer Registration explaining
Mergers and Acquisitions – The Acquisition Agreement
Simply stated, the acquisition agreement sets forth the financial terms of the transaction and legal rights and obligations of the parties with respect to the transaction. It provides the buyer with a detailed description of the business being purchased and provides for rights and remedies in the event this description proves to be materially inaccurate. The agreement spells out closing procedures, pre-conditions to closing and post-closing obligations. The agreement provides for representations and warranties and the rights and remedies if these representations and warranties are inaccurate.
The main components of the acquisition agreement and a brief description of each are as follows:
Representations and Warranties
Representations and warranties generally provide the buyer and seller with a snapshot of facts as of the closing date. In respect to the seller, facts are generally related to the business itself, such as that the seller has title to the assets, there are no undisclosed liabilities, there is no pending litigation or adversarial situation
