M&A/PE Quarterly Newsletter, July 2024

Table of Contents:

• Judicial Spotlight on Disclosure of Financial Advisors' Conflicts and Fee Arrangements

• Practice Points on Stockholder Governance Rights After Moelis and Wagner

• Court Indicates New Skepticism Toward SPAC Litigation-Hennessy Capital

• Court Dismisses Fiduciary Claims Against Directors for Awarding Grants Exceeding Permitted Cap in Interim Covenant, Which Led to Purchase Price Reduction-Anaplan

• U.S. Supreme Court Holds Arbitrability Is to be Decided by the Courts (Not the Arbitrator) Where the Parties Have Multiple Contracts that Conflict on the Issue-Coinbase v. Suski

• Court Interprets an Earnout that Provides "Complete Discretion" to the Buyer But Is Subject to an Efforts Obligation to Achieve the Earnout -Cephalon

• Other Developments of Interest

• Fried Frank M&A/PE Briefings Issued this Quarter

Judicial Spotlight on Disclosure of Financial Advisors' Conflicts and Fee Arrangement

Several recent Delaware decisions have found disclosure about financial advisors' fees and conflicts of interest in a merger proxy or information statement to have been materially inadequate. These decisions reinforce the judicial trend in Delaware over several years toward a greater focus on disclosure generally with respect to conflicts of interest, and specifically with respect to financial advisors' conflicts-and also highlight the significant consequences that flow from materially inadequate disclosure. The decisions underscore that, in most cases, it is better to err on the side of more rather than less disclosure regarding advisors' potential conflicts and fees-even when they are arguably not material, they did not affect the advisors' opinions or advice, and the board conducted a good process.

In two of the recent cases, Sarasota Firefighters' Pens. Fd. v. Inovalon Hldgs. (May 1, 2024) and Dearborn Pol. & Fire Rvsd. Rtmt. Sys. v. Bkf. Asset Mgt. (Mar. 25, 2023), the Delaware Supreme Court, finding that the disclosure was materially inadequate, overturned the Court of Chancery's pleading-stage dismissal of the cases under MFW (given MFW's requirement that minority stockholders' approval of a conflicted-controller transaction be fully informed). In both of these cases, the Delaware Supreme Court emphasized that a board's decision whether to engage advisors notwithstanding their actual or potential conflicts involves a separate, and different, analysis than the decision, if the advisors are engaged, as to what disclosure is required with respect to their potential conflicts. In a third decision, Firefighters' Pens. Sys. of Kansas City, MO v. Fdtn. Bldg. Matls. (May 31, 2024), the Court of Chancery found financial advisors potentially liable for aiding and abetting fiduciary breaches in connection with a decision to sell the company after its Up-C IPO, as the advisors' contingent fee structures may have aligned their interests with the sponsor-controller rather than the minority stockholders.

Inovalon: In Inovalon, in connection with a conflicted-controller transaction, the special committee engaged a financial advisor ("Financial Advisor 1") and subsequently added as a second advisor in light of Financial Advisor 1's potential conflicts ("Financial Advisor 2"). With respect to Financial Advisor 1, the Supreme Court held:

• Concurrent representations.The proxy disclosure was inadequate in stating that Financial Advisor 1 would receive "customary compensation" for it concurrent representations of the buyer and one of its co-investors in four unrelated transactions, without disclosing the specific amount of the fees for the concurrent representations. Without disclosing the specific fees, the company's stockholders "could not compare [the advisor]'s concurrent fees from counterparties with the [$42 million of] fees collected from [the company] in this Transaction," and therefore they were prevented "from contextualizing and evaluating [the advisor]'s concurrent conflicts of interest."
  
  
• Prior representations. The proxy disclosed that Financial Advisor 1 "had and continued to have" banking relationships with the buyer and certain of the buyer's co-investors, for which it received "customary compensation," and that the advisor had received $15.2 million in fees from the buyer in the previous two years. However, it was not disclosed that the advisor had received nearly $400 million of fees from the co-investors during that period. That lack of information created a misleading impression "as to the rough scale of the omitted fees"-that is, disclosing the amount of fees earned from the buyer in the two prior years misleadingly suggested that the undisclosed fees earned in the concurrent representations were of a similar magnitude, when, in fact, the undisclosed fees were about 25 times the disclosed fees and 10 times the fees earned in the transaction at issue.
  
  
• Misleading use of the word "may."The Supreme Court held that the proxy was materially misleading in stating that Financial Advisor 2 "may provide financial advisory or other services, in the future," to the company, the buyer and the buyer's co-investors, and "may receive compensation" therefor-when in fact the advisor already was providing such services and "thus there was an actual concurrent conflict."

• Overstated role of the advisor.The Supreme Court made clear its view (although, to avoid "piling on" reasons for reversing the lower court's decision, the Supreme Court did not so hold) that the disclosure was materially misleading in overstating the Financial Advisor 2's role. According to the Court, the disclosure suggested that the advisor had been fully involved in the market outreach part of the sale process, while it seemed that Financial Advisor 1 actually had run the process (with Financial Advisor 2 having had only an "analytical and supervisory role"). The misleading disclosure suggested to stockholders that Financial Advisor 2 had more ability than it actually did to counteract the conflicts of Financial Advisor 1, the Court stated.

Dearborn:In Dearborn,the Delaware Supreme Court held, with respect to the financial advisor engaged by a special committee in connection with a conflicted-controller transaction:

• Equity stake in the controller.It was reasonably conceivable that the financial advisor's nearly half-billion equity stake in affiliates of the controller, even though amounting to just 0.1% of the advisor's total investment portfolio, would be viewed by stockholders as material information in connection with their assessment of the advisor's objectivity with respect to the transaction. The court noted that the advisor's equity stake was not held merely of record on behalf of clients, but primarily for the benefit of the advisor, including persons working on the matter.
  
  
• Misleading use of the word "may."It was materially misleading to disclose that the advisor "may have committed and may commit in the future" to invest in private equity funds managed by the controller when the advisor "had indeed already invested nearly half a billion dollars." While the investment was disclosed in the advisor's form 13F, the disclosure "[made] it less likely that a stockholder would have been prompted to locate [the advisor's holdings in the controller] in its publicly piled form 13F," the court stated.

• Amount of increased management fees.The disclosure relating to the increased management fees that would be paid to the advisor following the transaction was materially inadequate-as the proxy disclosed that increased fees would be owed, and disclosed the "complex" formula that would determine the fees, but did not disclose that the parties had already projected that the increase would be $130 million.

Also of note, with respect to the legal advisor engaged by the committee, the Supreme Court held that it was reasonably conceivable that the advisor's conflicts relating to its previous advisement of the controller on prior unrelated transactions, and particularly relating to its concurrent advisement of the controller on a separate equity investment, was material information that should have been disclosed to the stockholders. The court wrote that the "ongoing relationship with [the controller] raise[d] the legitimate concern that [the advisor] might not want to push [the controller] too hard given the nature of their ongoing lawyer-client relationship which includes the ethical duty of zealous advocacy."

Fdtn. Bldg. Matls.: In connection with a sale of the company following its Up-C IPO, the board engaged a financial advisor (the "Board Financial Advisor"), and later established a special committee, which engaged a financial advisor (the "Committee Financial Advisor"). The special committee was created in light of the sponsor-controller's potential conflicts of interest arising out of the Up-C structure-in particular, the sponsor's right, which is usual, upon a change of control of the company, to terminate the standard tax receivable agreement (TRA) it had entered into with the company in connection with the IPO and thus receive an early termination payment (ETP) thereunder.

The Court of Chancery, in a decision issued by Vice Chancellor J. Travis Laster, held that the sponsor directors may have breached their fiduciary duties by deciding to sell the company, as it was reasonably conceivable, at the pleading stage, that the decision was motivated by the sponsor's interest in obtaining the ETP-which, the court found, was inferably more advantageous to the sponsor than its maintaining the company as an independent entity and receiving lower payments under the TRA. The court also held that the special committee of independent directors may have breached its fiduciary duties by being passive and too deferential to the sponsor's wishes.

With respect to the Financial Advisors, the Court of Chancery held:

• Aiding and abetting liability. It was reasonably conceivable, at the pleading stage, that both advisors may have aided and abetted the fiduciary breaches, as their respective contingent success fees were tied in part(albeit minimally) to the sponsor's receipt of the ETP. In the court's view, the fee structure aligned the advisors' interests with the sponsor's interests rather than the minority stockholders' interests.
  
  
• Amount of fees. The plaintiff sufficiently pled that the financial advisors' compensation arrangements were not adequately disclosed, as the information statement disclosed the aggregate fees that each advisor would receive, without indicating that part of the fee was tied to whether the sponsor received the ETP. The court rejected the financial advisors' argument that including the ETP amount in the calculation of their success fees was immaterial. Including it added only an additional $448,000 for the advisor to the board and $313,600 for the advisor to the committee. The court stressed that the draft engagement letter the advisor to the board initially sent to the board did not include the ETP in the calculation of the success fee, and that the sponsor had added it in. The court wrote: "If [the ETP's inclusion was immaterial], then why did [the sponsor] revise the engagement letter to include it? At this stage, it is reasonable to infer that [the sponsor] made the change believing it would affect [the advisor]'s behavior. If [the sponsor] simply wanted [the advisor] to receive more money, [the sponsor] could have nudged up the percentage. At the pleading stage, those pled facts make it reasonable to infer that the change was material to both [the sponsor] and [the advisor]." With respect to the financial advisor to the special committee, the court reasoned, if inclusion of the ETP was immaterial, "[O]nce again, why include it?"
  
  
• Contingent fee. While not so holding in the case (to avoid "piling on" reasons for not dismissing the claims), in its discussion, the court stressed that the Committee Financial Advisor had been engaged for the specific purpose of advising the committee relating to the conflicts arising from the ETP. The court wrote: "It is one thing to pay contingent compensation to the financial advisor charged with securing the best deal reasonably available. It is another thing to pay contingent compensation to the financial advisor who is supposed to be willing to tell the special committee that the deal should not happen. Because of that different role, a special committee's financial advisor should not receive contingent compensation…[and] certainly should not receive contingent consideration tied to the conflict that the special committee was created to address, using a compensation arrangement that the special committee and its counsel had flagged as problematic for the financial advisor representing the company."

Practice Points

• Consider the need for specificity of details when disclosing financial advisor fees in a merger proxy statement. Stating the specific amount of fees (rather than referencing "customary compensation") generally is not required unless the information may be material to stockholders and is quantifiable. There is no bright-line test as to materiality. Critically, the analysis as to what information is material and thus is required to be disclosed must be made from the perspective of the stockholders (not the board or the advisor). Broadly speaking, the Delaware courts have been trending over the years toward more emphasis on requiring that specific details on advisor fees be provided. Note that, based on Inovalon, where the specific amount of one fee is disclosed but another fee is described as "customary compensation," the court may view the disclosure as leaving stockholders unable to "contextualize" the advisor's conflicts, particularly if the disclosed and undisclosed fees vary significantly. (As discussed above, in Inovalon, the amount of the fees for the transaction at issue was disclosed but the amount of the fees for concurrent representations of the buyer in unrelated transactions was not; and the amount of the fees received from the buyer for prior representations was disclosed, but the amount of fees received from the buyer's co-investors was not.)
  
  
• Consider use of the word "may." As a general matter, it may be insufficient for an advisor to disclose an already existing concurrent representation with a company or its affiliates by stating that the advisor "may" have represented the company or its affiliates in the past or may represent them in the future. Similarly, it may be insufficient for disclosure of an already existing investment in a company or its affiliates to state that the advisor "may" invest in the company or its affiliates.
  
  
• Seek to ensure that merger proxy disclosure is consistent with special committee and board minutes and other contemporaneous records. It is now commonplace for plaintiffs, in support of claims of inadequate or misleading disclosure in a merger proxy, to offer side-by-side columns showing word-for-word differences between corporate minutes and proxy disclosure. The court has sometimes viewed even single-word differences as compelling in suggesting that the proxy disclosure is inaccurate or misleading. Drafters of proxy statements should seek to ensure that the disclosure in the proxy is fully consistent with the information contained in any corporate document that may be obtained under a Section 220 demand (such as minutes, board presentations, other board materials, and internal and external emails or other informal communications). In addition to ensuring an accurate description of events, care should be taken to describe accurately the roles played by retained advisors.
  
  
• Special committees should be proactive in seeking conflict information from their advisors-and, generally, should err on the side of more disclosure rather than less with respect to advisors' potential conflicts. Also, advisors should be proactive in providing conflict information (even if it is not specifically requested). A special committee should consider and discuss the appropriateness of engaging a firm that has prior relationships or concurrent representations with the counterparty or its affiliates, or that has other conflicts-and should document in the meeting minutes the reasons for engaging an advisor notwithstanding its potential conflicts. Depending on the specific facts and circumstances, a special committee should consider whether any special procedures should be put in place to address possible risks in connection with any potential conflicts of its advisors (such as limiting the advisor's role, engaging a second advisor, requiring the advisor to report promptly any communications with specified parties, requiring the advisor to be accompanied by a committee member for certain communications, and so on). It should be kept in mind that the analysis as to whether to engage an advisor notwithstanding conflicts is separate and different from the analysis as to what information about potential conflicts has to be disclosed to stockholders.
  
  
• Care should be taken in the process of structuring and setting an advisor's fees. Where the advisor's role relates to evaluation of whether a transaction should be done, a contingent fee could be viewed by the court (as in Fdtn. Bldg. Matls.) as incentivizing the advisor to conclude that the transaction should be done. Also, generally, where an advisor provides a draft engagement letter to a special committee, the negotiation of the compensation should be between the advisor and the committee (rather than, for example, as in Fdtn. Bldg. Matls., involving an allegedly conflicted company-controller). Particularly where a conflicted party proposes additional compensation for the advisor, beyond what the advisor requested in its draft engagement letter, a court may draw negative inferences as to the conflicted party's purpose in proposing the additional compensation and the potential effects on the advisor.

Practice Points on Stockholder Governance Rights After Moelis and Wagner

In Moelis (Feb. 23, 2024), the Court of Chancery held that the longstanding corporate practice of granting governance rights in stockholders agreements violates DGCL Section 141(a)'s mandate that the business affairs of a Delaware corporation be managed by its board of directors unless otherwise set forth in the company's charter. In Wagner v. BRP Group, Inc. (May 28, 2024), the court held that, even if the Section 141(a) problem is resolved, the granting of certain governance rights in stockholders agreements may violate other sections of the DGCL. Accordingly, the court may still view certain governance rights granted in stockholders agreements as facially invalid-even if a company utilizes the corporate governance mechanism the court endorsed in Wagner as solving the Section 141(a) issue identified in Moelis, and even if legislation to resolve the Section 141(a) problem-Senate Bill No. 313 (the "Pending Legislation")-is enacted, as is expected imminently.

In Wagner, the stockholders agreement at issue granted a stockholder pre-approval rights over (i) actions regarding senior officers (including hiring and firing them, as well as filling vacancies) (the "Officer Pre-Approval Requirement"); (ii) charter amendments (the "Charter Pre-Approval Requirement"); and (iii) a list of eleven types of significant transactions (the "Transaction Pre-Approval Requirement"). The court readily concluded that these rights would have violated Section 141(a), as they addressed "core management matter[s]" and sought to "regulate core areas of board power,…in a very substantial way." But, Vice Chancellor J. Travis Laster (who also decided Moelis) held, these rights did not violate Section 141(a) due to a corporate governance mechanism to which the parties agreed, which, the court held, returned sufficient discretion to the board such that Section 141(a) was not violated.

The mechanism required that the stockholder provide his pre-approval if a committee of the company's eight independent directors unanimously determined, in good faith, that the action at issue was in the best interests of the corporation (the "Committee Provision"). The court acknowledged that the restrictions the mechanism imposed (such as the unanimous quorum and vote requirements) "make a big difference" in terms of their "real world" effect. However, the court stated, under Section 141(a) jurisprudence, restrictions on the board that are only procedural in nature are permissible-as they do not dictate, substantively, what decisions the Board will make. (We note that the Pending Legislation, if enacted, would solve the Section 141(a) problem without the need for a mechanism like the Committee Provision.)

The court held further, however, that, although the Committee Provision solved the Section 141(a) problem for all of the Pre-Approval Requirements, each of them violated other sections of the DGCL. First, the court held that the Officer Pre-Approval Requirement violated Sections 142(b) and (e), which require that officers be chosen, and vacancies filled, as prescribed by the bylaws or determined by the board. In this case, the court stressed, the bylaws did not provide for a stockholder to be able to take actions with respect to senior officers. Second, the court held that the Charter Pre-Approval Requirement violated Section 242, which provides that, to effectuate a charter amendment, the board must adopt a resolution declaring the advisability of the amendment and calling for a stockholder vote, and then a majority of the outstanding stock entitled to vote must vote in favor. Those two events "must occur in precise sequence for the amendment to be effective," the court stated. Third, the court held that the Transaction Pre-Approval Requirement may well have violated Section 252 if the restriction on mergers had been drafted to apply at the corporate level, although in this case the provision was drafted to apply only at the LLC level so Section 252 did not apply.

Practice Points

• A board should consider granting any significant governance rights in the charter, to the extent possible. This should be readily accomplished in the context of a company about to go public. Amendment of the charter of an already public company to provide such rights presents logistical issues in terms of obtaining the necessary stockholder approval, as well as fiduciary duty issues in terms of justifying the grant of rights in a post-IPO context. In addition, a stockholder vote would be required to amend the charter if changes are later desired.
  
  
• A board should consider a tailored approach in granting (or reinforcing) stockholder governance rights. Based on Wagner, for governance rights in a stockholders agreement, a mechanism such as the Committee Provision should be considered to solve the Section 141(a) problem (unless the Pending Legislation is enacted, in which case a Committee Provision would not be necessary). Then, in addition, the board, together with legal counsel, should consider all other potentially applicable sections of the DGCL and whether, based on Wagner, there are structures that would not violate those sections. For example:
  
  
  • In Wagner, the court suggested that Section 242 (charter amendments) would not be violated if a stockholder's approval right were structured as an "additional vote" coming after the statutorily required votes of the board and the stockholders generally-rather than as a pre-approval right that "introduce[s] a threshold requirement before the statutory mechanism can proceed." Thus, with respect to rights granting a stockholder approval over actions that are subject to statutory voting requirements, consideration could be given to structuring the right as a post-approval (rather than pre-approval) right-similar, the court stated in Wagner, to the common situation in which a transaction subject to statutory board and stockholder approvals may be conditioned also on approval by a majority-of-the-minority stockholders.
    
    
  • In Wagner, the court emphasized with respect to Section 142 (officers) that the Company's bylaws did not authorize a contractual counterparty to control the hiring and firing of senior officers. Thus, with respect to any governance rights as to which the DGCL permits actions to be taken "as prescribed by the bylaws or determined by the board," a board could consider providing in the bylaws that such actions can be taken as set forth in any stockholders agreement the company has and/or may enter into. (We note, however, that the court injected an element of doubt with respect to this approach, stating that it was not addressing whether "the Charter or the Bylaws could empower a contractual counterparty to control [such matters relating to senior officers], because nothing in the [Company's] Charter or Bylaws [even] purport[ed] to allow it.")

• We expect some continued uncertainty with respect to stockholder governance rights. In Moelis and Wagner, the court has conveyed significant, general judicial skepticism toward the validity of governance rights in stockholders agreements. And, based on Wagner, it may remain unclear, even if the Pending Legislation is enacted, to what extent Moelis would or would not be negated beyond just solving the Section 141(a) issue.

Court Indicates New Skepticism Toward SPAC Litigation-Hennessy Capital

While SPACs are "dead," SPAC-related litigation has proliferated, as many de-SPACed companies have performed poorly and the Court of Chancery has sustained claims against SPAC fiduciaries in numerous cases. However, the court has now issued its first decision-In re Hennessy Capital Acquisition Corp. (May 31, 2024)-dismissing common so-called "MultiPlan claims" at the pleading stage of litigation. The decision has been appealed to the Delaware Supreme Court.

MultiPlan claims are claims that a SPAC's fiduciaries interfered with the SPAC public stockholders' ability to redeem their SPAC shares in connection with a de-SPAC merger, usually on the basis of allegations of materially flawed disclosure to the stockholders in the merger proxy or information statement. The court generally has applied the entire fairness standard of review in these cases given conflicts it views as inherent in the SPAC structure; and the court's focus has been on whether the stockholders were able, freely and on an informed basis, to exercise their redemption right, which was their "key protection."

In Hennessy, Vice Chancellor Lori W. Will (who also issued the MultiPlan opinion) expressed strong skepticism toward the validity of MultiPlan claims generally. The Vice Chancellor wrote: "The success of a few cases [challenging SPACs] begat a host of others…. Remarkably similar complaints accuse SPAC directors of breaching their fiduciary duties based on flaws in years-old proxy statements that became problematic only when the combined company underperformed. Poor performance is not, however, indicative of a breach of fiduciary duty. Conflicts are not a cause of action. And pleading requirements exist even where entire fairness applies…. To allow this faulty claim to proceed would fuel perverse incentives and invite strike suits."

In Hennessy, the stockholders overwhelmingly approved the $2.4 billion de-SPAC merger, and almost no stockholders chose to redeem their stock. The merger proxy statement had described the target company's business model-which was unique for an electric vehicle company startup in that it focused, in part, on a "subscription" model under which consumers would effectively rent cars on a monthly basis. Three months after the merger closed, based on input from management and a consulting company, the target announced that was changing its subscription model to a more customary sales-based model. The stock price fell sharply. The plaintiff-stockholder brought suit, claiming that the SPAC's sponsor and directors had breached their fiduciary duties by touting an outdated business model that the target abandoned. The court declined to draw the "double inference" that the target had made the decision to change the business model pre-closing and that the SPAC's board knew this. Those inferences, the court held, were belied by the plaintiff's own allegations and the documents incorporated into his complaint.

The Vice Chancellor distinguished the series of prior decisions that have rejected dismissal of MultiPlan claims, on the basis that, in this case, the complaint related to "actions by [the target]'s post-closing board-a body made up of directors who were (with one exception) not on the SPAC's board." The court stressed that the plaintiff had not pled facts supporting a reasonable inference that changes to the business model were "known or knowable" by the SPAC's board before the de-SPAC merger closed-"[t]hat is, no unfair dealing vis-à-vis the redemption right [was] pleaded," the court stated. While entire fairness review applied given the SPAC fiduciaries' conflicts of interest, "[i]rrespective of the standard of review," the plaintiff failed to plead a reasonably conceivable breach of fiduciary duty claim against the SPAC's fiduciaries as it could not "fairly be inferred that the defendants withheld knowable information material to public stockholders deciding whether to redeem or invest in the combined company."

We note the following key points:

• Hennessy has interrupted the string of successes plaintiffs have had in suits alleging Multiplan claims. The court reinforced Multiplan's holding that entire fairness generally will apply to claims against SPAC sponsors, given conflicts of interest the court views as inherent in the SPAC structure. However, the court's dismissal of the claims at the pleading stage, its general tone in the opinion, and its emphasis that pleading standards still apply even in the entire fairness context, seem to indicate that the court will be approaching Multiplan claims with more skepticism. (Separately, we note that the decision is one of a growing, although still very small, number of cases indicating that pleading stage dismissal is possible even when entire fairness review applies.)
  
  
• The decision appears to cast doubt on the viability of commonly made Multiplan claims based on challenges to disclosure about a company's future, post-merger prospects. The court noted that, unlike this case, inprior cases, where MultiPlan claims survived the pleading stage, the claims were based on allegations that material "concrete facts about the merger target's prospects were kept from public stockholders"-that is, the information that was allegedly omitted "was known or knowable by directors and officers acting consistent with their fiduciary duties." The court stressed that, for a Multiplan claim to succeed, the plaintiff has to plead "material facts that were known or knowable" by the defendants before the merger.
  
  
• The court confirmed that a plaintiff making a Multiplan claim must plead a viable disclosure violation. Because the court found material disclosure violations in MultiPlan, and in all of the cases since then asserting MutliPlan claims, it has been an unanswered question whether a viable disclosure claim must be pled to support a Multiplan claim-or whether, instead, SPAC fiduciaries' alleged conflicts and the de-SPAC merger's alleged unfairness could themselves be sufficient to state a breach of fiduciary duty claim regardless of the adequacy of the disclosure. (See here our Briefing on the MultiPlan decision, and here on the Delman v. GigACquisitions3 decision, where we note this open issue.) In Hennessy, the court answered that a viable disclosure claims must be made, as "the linchpin of MultiPlan was ensuring that a public stockholder's decision to redeem shares or participate in the merger be freely exercisable and fully informed." As such, "a claim premised solely on [a fiduciaries' conflicts, which implicate the duty of loyalty,] would seemingly be non-viable if public stockholders had a fair opportunity to exercise their redemption rights."
  
  
• The court amplified entire fairness in the SPAC context. The court explained that the fair dealing component of the entire fairness inquiry "in this context considers whether public stockholders were free to redeem without interference from conflicted fiduciaries," and "fairness of the de-SPAC merger is not the focus." The court also stated that a SPAC's alleged overpayment for a de-SPAC target company does not create a claim under MultiPlan, but rather would constitute a derivative claim (that would be subject to the demand futility defense).

Court Dismisses Fiduciary Claims Against Directors for Awarding Grants Exceeding Permitted Cap in Interim Covenant, Which Led to Purchase Price Reduction-Anaplan

In In re Anaplan Stockholders Litigation, the Court of Chancery, at the pleading stage, dismissed fiduciary claims against certain officers and directors of Anaplan, Inc. who, between signing and closing a merger agreement, issued over $157 million in new equity grants to current and new employees (including $9.5 million to one of the director-officers) notwithstanding the allegedly heavily negotiated interim covenant in the merger agreement that set a cap of $105 million in new equity grants without the prior approval of the buyer. The buyer's consent had been sought for the initial grant that only slightly exceeded the limit, but not for the several subsequent grants. The plaintiffs alleged that the defendants "either were recklessly indifferent to or deliberately ignored" the interim covenant. Vice Chancellor Nathan A. Cook wrote: "Plaintiff's allegations suggest that Defendants either expected consent to follow as a matter of course or were guided by the adage that it is easier to ask for forgiveness than permission."

Upon learning of the grants, the buyer insisted on, and the defendants agreed to, a $400 million reduction in the $10.7 billion purchase price (lowering the previously agreed $66 per share merger price to $63.75 per share). The merger proxy statement explained that there was a dispute with the buyer relating to the equity grants, and that it was resolved through reduction of the purchase price. The merger price nonetheless represented a 41% premium. The stockholders approved the merger with 98.8% voting in favor.

The plaintiffs brought suit, seeking to recover the $400 million haircut to the merger price, claiming that the directors violated their fiduciary duties by knowingly causing the company to breach the interim covenant, and (under Revlon) by not "obtaining and maintaining" the highest sale price reasonably available. The defendants argued that: the plaintiff's claims were derivative rather than direct; the directors did not knowingly breach the contract; the alleged breach of contract did not support a fiduciary duty claim; and, in the alternative, a stockholder cannot invoke Revlon for non-board action nor an alleged failure to maintain stockholders' (conditional) entitlement to a merger premium.

The court stated that the case "raise[d] fascinating questions of fiduciary law," but concluded that those questions need not be resolved as, even if all of them were resolved in the plaintiff's favor, the outcome still would be dismissal under Corwin, given that the stockholders approved the merger in a fully informed and uncoerced vote. Most critically, the court found that the merger proxy statement disclosed the situation in full, giving the stockholders "the material information they needed-including, most importantly, about the price-to make an informed decision whether or not to vote in favor of the Revised Merger Agreement." The court emphasized throughout the opinion that the revised price still represented a significant premium (41%) for the stockholders, and the court noted that the price reduction resolved a dispute that otherwise would have led to costly litigation.

Fully informed stockholder vote. The court stressed that the Supplemental Proxy, "[i]mmediately up front," set forth the board's position ("which was readily understandable to any stockholder reading it") that the board believed the company had acted in good faith and in compliance with the original Merger Agreement, but that a bona fide dispute had arisen with the buyer on that issue. The Supplemental Proxy explained that, "rather than continue to dispute the issue and risk losing the deal, the Board made the business judgment that it was in the best interests of Anaplan and its stockholders to agree to a price reduction in return for securing the still-premium transaction and enhanced closing certainty." Further, there were "an additional eight pages laying out in substantial detail the Board's position, [the buyer]'s position, the dispute between the counterparties, and the negotiations over an amended merger agreement over a roughly two-week period." The court also noted that, while the defendants, in their briefing, responded in detail to the disclosure deficiencies alleged in the plaintiff's Complaint, the plaintiff did not engage with the defendants' arguments in its answering brief, but instead "regurgitate[d] the allegations in the Complaint"-and thereby waived the claim that the vote was not fully informed.

Uncoerced stockholder vote. The plaintiff argued that the stockholder approval was situationally coerced, as the stockholders, to receive a premium, had to approve the revised deal although the original deal was better. The court stated that "the difference between good, better, and best here is not grounds for situational coercion." The court wrote that situational coercion occurs when stockholders must choose between approving a transaction or maintaining a status quo that is "so unattractive that it prevents a stockholder vote [in favor of the transaction] from operating as a clear endorsement of [the] transaction." Here, the revised merger agreement "still reflected a substantial premium both to [the company]'s unaffected share price and to its expected share price if stockholders voted not to approve the Merger." A merger, or the vote thereon, is not situationally coercive under Delaware law "simply because the merger offers a premium relative to the expected trading price for shares if stockholders do not approve the deal." Here, the stockholders "had a choice to accept the revised merger or to vote it down and thereby retain…their interest in a multibillion-dollar company with significant revenue."

No waste. The plaintiffs contended that there was corporate waste as the board's actions led to a reduced merger price without the company getting anything in return. The court wrote: "Plaintiff fails to explain how the Board's determination to enter into the Revised Merger Agreement rather than pursue uncertain, costly, and time-consuming litigation to force the acquiror to close is waste, particularly when the revised deal terms provide a 41% premium along with [other concessions the buyer agreed to, including] substantially enhanced closing conditions that ensure a swift and certain closing."

U.S. Supreme Court Holds Arbitrability Is to be Decided by the Courts (Not the Arbitrator) Where the Parties Have Multiple Contracts that Conflict on the Issue-Coinbase v. Suski

In Coinbase, Inc. v. Suski (May 23, 2024), the U.S. Supreme Court, in an opinion by Justice Ketanji Jackson Brown, unanimously held that, where parties' multiple contracts conflict as to whether disputes arising between the parties must be decided by an arbitrator or by a designated court, the court (not the arbitrators) must decide whether the dispute is to be resolved by the court or in arbitration. The Supreme Court concluded that the critical inquiry in this situation is a fundamental contract interpretation issue-i.e., whether the parties agreed to arbitrate-which is an issue to be judicially decided.

In this case, the Users Agreement between Coinbase, Inc. (a digital asset trading platform) and its users, which all Coinbase users agreed to when creating their Coinbase accounts, provided that an arbitrator would decide all disputes that arose between the parties. The Users Agreement included a so-called delegation clause-stating that the arbitrator also would decide any issue as to whether a dispute that arose was arbitrable. However, when Coinbase ran a sweepstakes contest (for the chance to win Dogecoin), the Official Rules provided that the California courts would have sole jurisdiction over any controversies arising under the contest. Certain users who participated in the sweepstakes filed a putative class action in federal district court in California, alleging that the sweepstakes violated California state law. The district court denied Coinbase's motion to compel arbitration, holding that, under California contract law, the Official Rules superseded the User Agreement. The U.S. Court of Appeals for the Ninth Circuit affirmed.

The U.S. Supreme Court granted certiorari "to answer the question of who-a judge or an arbitrator-should decide whether a subsequent contract supersedes an earlier arbitration agreement that contains a delegation clause." Emphasizing that "arbitration agreements are simply contracts," and that "[a]rbitration is strictly a matter of consent," the Supreme Court viewed as the "first question in any arbitration dispute…: What have these parties agreed to?" The court noted three categories of issues that parties may agree to arbitrate: (i) the merits of a dispute (the resolution of which depends on the applicable law and relevant facts); (ii) the arbitrability of a dispute (i.e., whether the parties agree to arbitrate the merits); and (iii) disputes regarding who should have the power to decide the arbitrability issue. This case, the court stated, fell within a new, fourth category (related to (iii) above)-namely, what happens if parties have multiple agreements that conflict as to who decides the arbitrability of a dispute.

The Supreme Court reaffirmed that, where parties have entered into an agreement that provides for arbitration, with an effective delegation clause, any arbitrability disputes are to be decided by the arbitrator. In this case, however, where there was more than one contract and they conflicted-"one sending arbitrability disputes to arbitration, and the other explicitly or implicitly sending arbitrability disputes to the courts"-then, "a court must decide which contract governs," applying basic contract principles.

In an earlier decision involving Coinbase-Coinbase, Inc. v. Bielski (2023))-the U.S. Supreme Court ruled that, where a party claims a right to arbitrate, court proceedings must be paused to allow that party the ability to pursue its alleged arbitration right without having to litigate the dispute in court at the same time. Suski, however indicates that, in the context of multiple agreements with conflicting dispute resolution provisions with respect to arbitrability, the parties must litigate the issue in court

Court Interprets an Earnout that Provides "Complete Discretion" to the Buyer But Is Subject to an Efforts Obligation to Achieve the Earnout -Cephalon

In Himawan v. Cephalon, Inc. (Apr. 30, 2024), the Court of Chancery, in a post-trial decision, held that the buyer (the "Buyer") of a life sciences company (the "Company"), and the buyer's successor (together with the Buyer, the "Defendants"), did not breach their obligation under an earnout provision to use "commercially reasonable efforts" ("CRE") to develop and obtain regulatory approvals for the Company's single pharmaceutical product, "RSZ," for use in the treatment of two diseases, "EA" and "EoE." The Merger Agreement provided for payment of $250 million upfront to the Company's stockholders; and "milestone" payments of $200 million if RSZ received regulatory approvals for EA, and an additional $200 million if for EoE. The EA milestones were achieved (and a $200 million earnout paid). But the EoE milestones were not achieved, as the Defendants abandoned attempts to commercialize RSZ for EoE after testing result for EA, although not entirely successful, showed more promise than testing for EoE. The plaintiffs alleged that the Defendants had breached their contractual obligation to use CRE to commercialize RSZ for EoE.

The case centered on the language of the earnout provisions, which stated that (i) the Buyer had "complete discretion" with respect to the development of, and obtaining regulatory approvals for, RSZ (the "Discretion Clause"); and (ii) the Buyer's discretion was subject to an obligation to use CRE to develop and commercialize RSA so as to achieve the milestone targets (the "CRE Obligation"). "CRE" was defined as "the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [the Company], with due regard to the nature of efforts and cost required for the undertaking at stake." The plaintiffs argued that the CRE obligation was "akin to a best efforts obligation, under which the Defendants had to pursue commercialization…unless it would be unreasonable to do so." The Defendants argued that the CRE clause only obligated them to act in good faith.

Court interpreted the CRE definition to set an objective standard-but rejected comparison to similarly situated companies that sought to develop drugs for EoE. At the earlier, motion to dismiss stage of the litigation, Vice Chancellor Sam Glasscock III had suggested that one way to interpret the CRE definition would be to "compare the efforts of similarly-situated pharmaceutical companies and their actions in the real world" in developing different drugs for EoE. After trial, however, the Vice Chancellor determined that this method was unworkable, as "no exemplar companies operate under the actual conditions of Defendants." Rather, the circumstances of companies developing drugs, even if for the same condition (in this case, EoE), vary.

The Vice Chancellor concluded that the best interpretation of the contract was that "the parties meant to impose the CRE requirement on the buyer, as it found itself situated, but…the requirement went beyond buyer's subjective good faith. It imposed an objective standard-this is the meaning of the imposition of a requirement to exercise such efforts and commitment of such resources as a company with substantially the same resources and expertise as the buyer." In other words, "if a reasonable actor [when] faced with the same restraints and risks [with respect to developing RSZ] would go forward in its own self-interest, the buyer is contractually obligated to do the same." That is, the court stated, "if a reasonable actor [when] faced with the same restraints and risks would go forward in its own self-interest, the buyer is contractually obligated to do the same."

Court rejected analogy to CRE clauses in merger agreements. The court rejected the plaintiffs' analogy to cases involving merger agreement provisions requiring a party to use reasonable or best efforts to complete a merger. In this case, "the full language" of the parties' agreement "stresses…the complete discretion of the buyer to develop, or not, the assets purchased. Limiting that discretion to require objective commercial reasonableness, given the facts as they exist, only means, in my view, that Defendants may not avoid the earn-outs in a way that is commercially unreasonable," the court wrote. Further, the court stated, the reference to due regard for efforts and costs "means that the Defendants may eschew development where the circumstances reasonably indicate, as a business decision, that they not go forward. This includes all the costs and risks involved, including the milestone payments and the opportunity costs faced by Defendants, as evidenced by the provision that the reasonableness be measured against the actions expected of a company with substantially the same resources and expertise as the buyer."

Court adopted the reasoning in ev3 v. Lesh. The court noted ev3 v. Lesh, where a merger agreement provided for milestone payments upon achievement of FDA approval and marketability of a medical device, which was at the buyer's sole discretion but cabined by exercising such discretion in good faith. The buyer in that case asserted that the development costs for the medical device to secure regulatory approval were astronomical, and concluded that the further investment required to secure FDA approval and bring the product to market was not worthwhile. The court stated in ev3 that it would not constitute bad faith to refuse to proceed if, after taking into account the milestones and development costs, the pursuit was not expected to yield a commercially reasonable profit. However, it would constitute bad faith, the court stated in ev3, if the expected profit were in fact commercially reasonable but the company delayeddevelopment in order to avoid making the milestone payments. In Cephalon, the court stated that it was adopting the reasoning in ev3, "with the caveat that the provision in question there required subjective good faith," while in Cephalon the standard was "objectively reasonable efforts."

Defendants' actions were commercially reasonable. The court found that the Defendants' actions were commercially reasonable, as the record at trial established that "RSZ for EoE was not likely to receive regulatory approval." The court found it "notable" that the Defendants "did undertake approval of RSZ for EA, where the preliminary test results were more favorable than for EoE, that they were successful in doing so, and the milestone payment were made to Plaintiffs." It was "[t]he different circumstances regarding EoE [that] led to a different result."

Sellers could have bargained for more protection. The court acknowledged that its interpretation of the contract language "gives sellers little protection, since it is invoked only to disallow actions of the buyer that would be against the buyer's self-interest." But that is what the plaintiffs bargained for, the court stated:

[The buyer] purchased an option to buy [the target] to acquire its rights to RSZ. The initial test of RSZ for EoE was not successful, but the subsequent test for EA, also not fully a success, showed more promise. [The buyer] then exercised its option. It purchased [the target] and RSZ for a cash payment, with the discretion to develop RSZ as it saw fit, cabined only by objective commercial reasonableness. If it proved commercially reasonable to undertake the commercialization, and if [the buyer] were successful in such an undertaking, the sellers would be entitled to milestone payments. But [the buyer] was not required to take actions not in its self-interest, measured objectively. [The target] was free to have bargained for more, but this was the bargain the parties actually struck.

Ambiguity when complete discretion is granted, subject to an efforts obligation. The decision underscores the contractual ambiguity that may arise-whether in earnouts or other types of agreements-where complete discretion is granted to a buyer (for example, to develop a product) but the buyer is subject to an efforts obligation. Notably, to interpret the CRE definition, the court focused on the surrounding language, which indicated that the buyer had complete discretion with respect to developing and obtaining regulatory approvals for RSZ. Where the parties intend to impose an objective standard with respect to a CRE obligation, they should seek to make clear whether the standard is (a) based on what actions similarly-situated companies have taken or would take in similar situations (a purely objective standard), or, instead, (b) what actions this company views as reasonable (a purely subjective standard), or, instead, (c) a what actions a reasonable actor facing the same opportunities and risks as the buyer faces would take in its own self-interest (a hybrid objective-and-subjective standard). Notably, the court found (a) unworkable and (b) inconsistent with the definition of CRE in the contract. Accordingly, the court applied (c), evaluating the reasonableness of the Defendants' actions in the context of the Buyer's unique facts and circumstances.

Other Developments of Interest

U.S. Supreme Court's Overturns Chevron Deference, Likely Complicating Regulatory Compliance Decisions for Regulated Companies

The U.S. Supreme Court (June 26, 2024) overturned the decades-old principle of Chevron deference. As a result, to the extent that Congress has enacted a statute without specific instructions with respect to the subject matter of the law, it will be the courts-rather than, under Chevron deference, the agencies Congress has charged with administering the law-who will interpret the law. As a result, companies in regulated industries will have an opportunity to challenge in court agencies' regulations, with a greater likelihood of success than previously, as the court can no longer automatically defer to the agency's interpretation of the law under which the regulations were promulgated. However, regulations grounded in foundational law-that is, regulations that are based on specific authority granted to the agency in the statute-will not face a greater likelihood than before of being overturned. The uncertainty that will now arise will be over whether or not the regulations being challenged fall into the category of regulations that Congress specifically authorized the agency to issue.

For example, the SEC has issued new regulations requiring disclosure, in a specific format, of a company's emissions data and climate-related risks; and requiring private fund advisors to disclose fees, compensation, costs, and performance quarterly for private investments. The question now will be whether the SEC was specifically authorized to issue such regulations, as part of its specific authorization (in statutes enacted in 1933, 1934, and 1940) to regulate the markets and protect investors by requiring disclosure that keeps investors informed about important business matters-or whether, instead, the disclosure requirements go beyond the kind of regulation the SEC was specifically authorized to issue.

In the meantime, where there is doubt, some companies may choose to take more risk than previously in their compliance with regulations that they believe fall outside what has been specifically legislatively authorized; and, at the same time, agencies may be more cautious in seeking to enforce regulations that arguably fall outside what was specifically authorized and may be more reluctant to issue new regulations (for example, to govern new areas, such as cryptocurrencies). More challenges to regulations, by industry groups and others, generally is expected-and this will create more uncertainty surrounding regulations issued and enforced by agencies, complicating decisions for the entities regulated.

Just after the Supreme Court's decision was issued, the Securities Industry and Markets Association and the Financial Services Institute, announced that they had joined onto a lawsuit seeking to overturn the Department of Labor's new "Fiduciary Rule" (relating to when entities or person providing investment advice to plans subject to ERISA or the IRC tax code would be deemed to be fiduciaries). The Fiduciary Rule was issued earlier this year and was to become effective in September.

Delaware Supreme Court Grants Interlocutory Review of TripAdvisor Decision, Against Chancery's Recommendation

The controller and directors of TripAdvisor, Inc. filed for an interlocutory appeal to the Delaware Supreme Court of the Court of Chancery's decision in Palkon v. Maffei ("TripAdvisor") (Feb. 20, 2024). The lower court had recommended against interlocutory review, arguing that the court had applied settled law and that the Supreme Court would benefit from reviewing the case on a more developed record. However, on April 6, 2024, the Supreme Court exercised its discretion to grant interlocutory review, stating that it would be beneficial and provide certainty to determine the appropriate standard of review for a decision to reincorporate.

The Court of Chancery had held that the decision by the TripAdvisor defendants to reincorporate from Delaware to Nevada involved an interested-party transaction-which provided a non-ratable benefit to the defendants, as it would secure for them a lower potential for liability given Nevada's allegedly lower fiduciary standards as compared to Delaware's, at the expense the company's minority stockholders, who would suffer a corresponding reduction in their litigation rights. The court therefore held that the entire fairness standard of review applies, and rejected dismissal of the defendants' motion to dismiss the plaintiff's claims of breach of fiduciary duties in connection with the decision to reincorporate. Vice Chancellor Laster's opinion thus indicated that the court would not bar a corporation's reincorporation from Delaware to a lower-fiduciary-standards state, but that, under entire fairness, some kind of compensation might have to be provided to the minority stockholders for the reduction in their litigation rights.

Court Rejects Dismissal of Claims Against Directors for Stock Buybacks that Delivered Control to a Stockholder-Hertz Global Holdings

In Cascia v. Farmer (June 20, 2024), the Court of Chancery, in a bench ruling issued by Chancellor Kathaleen St. J. McCormick, found it reasonably conceivable, at the pleading stage, that (i) several directors of Hertz breached their fiduciary duties to the company and its stockholders by authorizing $4 billion in stock buybacks that resulted in a stockholder (a private equity firm) owning more than 50% of the company's outstanding shares without having paid anything for the control position; and (ii) the now-controlling stockholder may have been unjustly enriched as a result of obtaining control via the buybacks. The stockholder owned 41.75% of the company's stock when the company emerged from bankruptcy in June 2021, but its stake rose to 43.5%, and then to nearly 60%, when stock buyback programs in November 2021 and June 2022, respectively, reduced the company's outstanding shares.

The court found it reasonably conceivable, at the pleading stage, that the company's directors, before they approved the 2022 buyback program, knew that the program potentially could launch the stockholder into a control position. The Chancellor wrote: "It's just not hard to do that math." Finding the inference less clear with respect to the 2021 buyback program, the court dismissed the claims relating to that program, but without prejudice so that the claims can be brought again if additional facts emerge in discovery.

Need for Clarity When Drafting Definition of "Laws and Regulations"-Bitgo v. Galaxy

In Bitgo Holdings, Inc. v. Galaxy Digital Holdings, Ltd. (May 22, 2024), the Delaware Supreme Court reversed the Court of Chancery's dismissal of a target company's claims that a buyer had impermissibly terminated the parties' Merger Agreement. The buyer had argued that its termination of the Merger Agreement was permissible because, under the provision requiring delivery to the buyer of the "2021 Company Audited Financial Statements," as defined in the agreement, the financial statements the target had delivered to the buyer were insufficient. The Court of Chancery viewed the buyer's interpretation of the merger agreement provisions relating to delivery of the financial statements as more reasonable than the target's interpretation, and dismissed the case. On appeal, however, the Supreme Court held that the parties' respective interpretations both were plausible-therefore, the definition was ambiguous and the Court of Chancery should have considered extrinsic evidence to determine which interpretation was correct.

The Merger Agreement required that the financial statements be prepared in accordance with "Applicable Law" and in a form that complied with the requirements of Regulation S-X for an offering of equity securities pursuant to a registration statement on Form S-1 for a non-reporting company. "Applicable Law" was defined as any law, rule or regulation enacted or applied by a Governmental Authority, and authoritative interpretations thereof, binding on or applicable to a party. By contrast, the merger agreement's "General Definitions" section provided that any references to law or Applicable Law meant any such law or Applicable Law as amended or supplemented from time to time and any rules, regulations and interpretations promulgated thereunder.

The day after the Merger Agreement was signed, the SEC Staff issued SAB 121. The financial statements the target delivered to the buyer under the Merger Agreement did not reflect SAB 121 (but noted that the company would have to apply the SAB in future financial statements and stated that the company was in the process of evaluating SAB 121's impact on the company). The buyer claimed that the financial statements were therefore not prepared in compliance with Laws and Regulations (and particularly as they could not be used to support a registration statement under Reg S-X). The company claimed that SAB 121 was not a "Law" or "Regulation" because, first, it was not applicable to the company until sometime in the future and, second, as stated in the SAB, it was not a binding interpretation, just guidance as to the SEC Staff's practices.

The decision is notable for underscoring (i) that so long as an agreement provision is reasonably susceptible of more than one reasonable interpretation, the provision is "ambiguous"-even if one interpretation is more reasonable than another; and (ii) that provisions requiring compliance with laws and regulations must be clear as to whether the laws and regulations are those existing at the time of signing of the agreement or as amended thereafter, and which kinds of interpretations of the laws and regulations must be applied.

Tesla Stockholders Approve Musk's $56 Billion Compensation Package that the Court Had Voided

On June 13, 2024, the stockholders of Tesla, Inc. ratified the company's grant of a $56 billion dollar ten-year compensation package for CEO Elon Musk that the Court of Chancery, in Tornetta v. Musk (Jan. 30, 2024), had ordered rescinded. (Of note, at the same meeting, the stockholders approved Tesla's reincorporation from Delaware to Texas.)

In Tornetta, the court had found, after trial, that the Tesla board breached its fiduciary duties to the company and its stockholders by approving such an outsized compensation package without actively negotiating with Musk and instead simply deferring to his wishes. The court had concluded that the board approving the package was not independent of Musk, and that the minority stockholder approval of the package had not been fully informed as the disclosure was materially flawed. In response, Tesla submitted the same compensation package to the stockholders for ratification. Proxy firms ISS and Glass Lewis both had recommended voting against the pay package-but Tesla has an unusually high percentage of retail investors. The issue that will now be before the court is whether approval of the pay package by the stockholders, after the fact, affects the court's rescission of the package based on a finding of fiduciary breaches.

Chancery Rejects Dismissal of Fiduciary Claims Against LLC Manager Where LLC Operating Agreement Did Not Waive Fiduciary Duties-Maric v. Guerrero

In Maric Healthcare, LLC v. Guerrero (June 14, 2024), the Court of Chancery declined to dismiss claims that the manager of a limited liability company that provided opioid treatment services violated his fiduciary duties by poaching the company's clients. The LLC Agreement provided the defendant, as manager, with "full, complete, and exclusive authority and discretion, and the responsibility and duty" to, among other things, "control the business, policies, property, and affairs of the LLC. The LLC Agreement also provided that he would be "subject to the fiduciary duties that would be due by an officer or director of a Delaware corporation to such corporation." The plaintiffs alleged, and the court at the pleading stage found it reasonably conceivable, that, while serving as manager and president of the company, the defendant "began taking steps to establish a competing opioid treatment center" and conspired with a nurse at the company "to transfer existing patients to the competing opioid treatment center."

Vice Chancellor Cook stated that: (i) under Delaware law, by default, LLC managers owe fiduciary duties akin to those owed by directors of a corporation; (ii) under Delaware law, an LLC can, in its governing agreement, eliminate a manager's fiduciary duties; and (iii) the LLC Agreement did not eliminate the manager's fiduciary duties. Indeed, "quite to the contrary," the LLC Agreement specifically provided that the Manager would be subject to the same fiduciary duties that would be due by an officer or director of a Delaware corporation to such corporation. The court found that the plaintiffs sufficiently pled unchallenged facts making it reasonable conceivable that the defendant, over a two-year period while still working as the Manager and President of the company, had set up the competing opioid clinic and "facilitated the transfer of" approximately 70 of the company's patients and at least five of its employees.

Chancery Court Clarifies Anti-Reliance Provision Must be Included in a Merger Agreement for Pleading-Stage Dismissal of Fraud Claims Against a Buyer-Trifecta v. WCG

In Trifecta Multimedia Holdings Inc. v. WCG Clinical Services LLC (June 10, 2024), the Court of Chancery held, at the pleading stage, that the founder-seller (the "Seller") of a healthcare technology company (the "Company") sufficiently pled a fraud claim against the Company's buyer (the "Buyer"). The Seller, who agreed to defer nearly one-third of the $214 million purchase price as an earnout based on future revenue targets, contended that it was fraudulently induced into choosing the Buyer over other bidders and that the Buyer then made it impossible to reach the milestone revenue targets. The Buyer allegedly asserted that it would be the best partner for growth, and promised that it would permit the Company to continue operating autonomously, would support the Company's sales and marketing efforts, and would generally help the Company with securing new contracts and selling its unique flagship product.

Soon after the closing, the Buyer split the Company's flagship product into two separate products, eliminating its main competitive advantage as an integrated solution; refused to allow sales personnel to market the product as an integrated solution; interfered with the Company's ability to secure new customers; refused to supply the Company with the resources it needed to succeed (cutting the salesforce to one person, after allegedly having promised to grow the force to over a hundred); and denied the Company autonomy to operate. The Seller contended that these were intentional acts, designed to ensure that the earnout revenue milestones would not be met. Ultimately, the Company did not meet its milestone revenue targets and no earnout payments were made.

The court held, at the pleading stage, that the Seller sufficiently pled the required scienter and justifiable reliance elements of fraud. With respect to scienter, the court found it reasonably conceivable that the Buyer did not simply breach contract obligations, but made promises that at the time it intended not to keep. The court noted that the Buyer's actions came so soon after the merger closing. The court also noted the record of the Buyer's private equity backer in having its portfolio companies acquire tech companies to boost their implied valuation when going public (which the Buyer was in the process of doing at the time of the purchase), with the deals structured for minimal up-front consideration and large backend payments and the back-end payments then not being made.

With respect to justifiable reliance, the court noted that the issue generally is not suitable for determination at the pleading stage as it requires a facts-intensive inquiry. Here, however, the determination could be made because the Purchase Agreement, although it included an integration clause, did not contain an anti-reliance clause. The court wrote: "[A]n integration clause, standing alone, is not sufficient to bar a fraud claim; the agreement must also contain explicit anti-reliance language." The court rejected the Buyer's contention that, in Albertsons, the court created an exception to that rule. The Albertsons decision stated that "[w]hile anti-reliance language is needed to stand as a contractual bar to an extra-contractual fraud claim based on factual misrepresentations, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises." The court acknowledged that some decisions "distinguish between misrepresentations of fact (fraud in the factum) and other types of misrepresentation (fraudulent inducement)," but stressed that "the prevailing majority rule does not draw that distinction." Instead, "the majority rule asks[] whether a fraudulent misrepresentation (as opposed to, say, a warranty) has been made and whether the party asserting the fraud would have entered the agreement had it known the representation was false…" Here, the court concluded, it was reasonable to infer the plaintiffs had relied on the Buyer's representations in choosing the Buyer as a strategic partner over other viable alternatives.

Also of note, the court rejected the Seller's argument that the Buyer's actions constituted a breach of the implied covenant of good faith. The court stated that the alleged "gap" in the agreement related to language that the parties had discussed and decided not to include-which ordinarily would result in rejection of a claim of breach of the implied covenant. But, the court stated, in this case the language was not included because the Buyer's lawyer had stated (erroneously) that the language was unnecessary as the concepts were already covered by the implied covenant-thus, if the lawyer knew that his advice about the implied covenant was wrong, that could support the fraud claim. However, the court stated, the plaintiff did not plead any facts to support an inference that the lawyer knew that his advice was wrong, thus he may simply have been mistaken, which would not support the fraud claim.

Need for Clarity When Drafting Purchase Price Adjustments-SM Buyer v. RMP Seller

In SM Buyer LLC v. RMP Seller Holdings, LLC (Feb. 28, 2024), the Court of Chancery upheld an arbitrator's determination that, in connection with the $40 million sale of a company, the seller had to pay $87 million to the buyer under the parties' customary purchase price adjustment provisions in their purchase agreement. The dispute between the parties arose primarily over their conflicting interpretations of the definition of "Closing Date Indebtedness" in the purchase agreement-specifically, whether it included the $109 million of debt of a joint venture in which the target company held a one-third interest due to an internal, pre-closing reorganization conducted at the buyer's request in connection with the purchase. The purchase agreement provided for mandatory arbitration.

The arbitrator decided that the definition, read literally, included the joint venture's debt. The court observed that the arbitration award appeared to be "economically divorced from the intended transaction," as it significantly changed the purchase price although there was no actual change in the value of the general partner interest at issue. The court upheld the award, however, on the basis that the arbitrator had acted within the scope of his authority, given that including the joint venture's debt was consistent with the definition of "Closing Date Indebtedness" set forth in the parties' agreement. The court distinguished the Delaware Supreme Court's SPX v. Garda (2014) decision, where the court rejected the arbitrator's determination because it was contrary to the "plain and unambiguous" text of the parties' purchase agreement.

The decision underscores that drafters, to ensure that the parties' intentions are reflected in purchase price adjustment provisions, must consider what the accounting treatment will be on the company's financial statements for assets and debts of the company's joint ventures, subsidiaries, and affiliates. Also, the decision reaffirms that arbitration awards will be overturned by courts only under very narrow circumstances, even when the court disagrees with the award.

Fried Frank M&A/PE Briefings Issued this Quarter

Chancery Scrutinizes Sponsor and Advisor Conflicts Under Up-C Structure-FBM

We discuss Firefighters' Pension System v. Foundation Building Materials, Inc., in which the Court of Chancery, at the pleading stage of litigation, declined to dismiss claims challenging a sponsor's and board's decision to sell a company following its Up-C initial public offering, based on conflicts arising out of the sponsor's receipt of an early termination payment under the tax receivable agreement it had entered into with the company in connection with the IPO. The court found it reasonably conceivable at the pleading stage that the decision to sell the company was influenced by the sponsor's desire to receive the early termination payment. The court applied entire fairness review, as it viewed the receipt of the early termination payment as a non-ratable benefit to the Sponsor. The court held that the plaintiff sufficiently pleaded that (i) the sponsor, its representatives on the company's board, and the company's CEO may have breached their fiduciary duties to the minority stockholders; (ii) the independent directors on the special committee may have breached their fiduciary duties to the minority stockholders of loyalty; and (iii) the financial advisors to the board and to the special committee may have aided and abetted the fiduciary breaches. Notably, while tax receivable agreements with early payment provisions on change of control of the company have been commonly used in Up-C IPOs, de-SPAC transactions, and other sponsor-backed IPOs, the conflicts identified in this case have rarely been addressed by the court. We also discuss ways this decision may be distinguishable from future cases based on a number of factors.

Del. Dispatch (Law360 Column): Chancery's Evolving Approach to Caremark

In this article, we discuss a recent trend, in late 2023 and early 2024 Caremark cases, of dismissal of claims at the pleading stage of litigation. In these cases-Clem v. Skinner (Walgreens Boot Alliance), Conte v. Greenberg (Skechers USA), In re ProAssurance, and Segway v. Cai-the court reemphasized the historical trope that Caremark is among the most difficult theories in corporate law upon which a plaintiff might hope to win a judgment, and the court expressly discouraged the "reflexive filing" of Caremark claims following corporate mishaps. In our view, while this trend is notable, the facts in these cases were not so egregious as to present a real test of the court's overall approach to Caremark cases-and, notwithstanding these cases, there is no indication that the court would be unlikely to find potential Caremark liability at the pleading stage in cases that involve egregious facts following the occurrence of an extreme corporate trauma.

Delaware Supreme Court Rejects Recent Efforts to Limit MFW and Amplifies Special Committee Requirements-Match Group

We discuss Match Group, an important decision in a series of recent Delaware decisions that indicate continued judicial skepticism with respect to transactions involving controllers. The Supreme Court decided that MFW will continue to be applicable to all conflicted-controller transactions (rather than, as some have advocated, only to squeeze-out mergers). Further, the Supreme Court established, for the first time, that, to obtain business judgment review under MFW, all members of the special committee (not just a majority) must have been independent. The Supreme Court reaffirmed, however, the concerns about controllers' inherent coercion (as reflected in the MFW framework) do not excuse demand on the board with respect to derivative claims against a controller-which should be helpful in defending against strike suit derivative claims against controllers. Finally, we note the broad language the court used in respect of the issue of director independence, finding possible non-independence on the basis of personal feelings of gratitude to, and "mutual respect" with, the company and the controller.

A more welcoming Panel? Takeover Panel seeks to narrow application of UK Takeover Code

We discuss the launch by the Code Committee of the UK Takeover Panel of a public consultation on a proposed new, simplified jurisdictional framework that, if adopted, would narrow the scope of companies to which the UK Takeover Code would apply. The new framework would sweep away the complexity of the existing rules, and reduce the number of companies currently subject (or potentially subject) to the Code, including those which are registered in the UK but listed overseas (such as on the NYSE or Nasdaq). Th proposal marks something of a retreat from the more expansive approach of the Panel to jurisdictional matters seen in recent years.

Treasury Issues Proposed Rule to Implement Outbound Investment Regime

We discuss the Proposed Rule issued (June 21, 2024) by the U.S. Treasury Department to implement President Biden's October 2023 Executive Order establishing a regime to restrict certain outbound investment to China.

Court Refuses FTC Request for Injunctive Relief Against a Non-Controlling Private Equity Investor

Our Antitrust & Competition Group discusses a case in which a federal district court dismissed a private equity firm from an FTC lawsuit seeking to enjoin the firm and its portfolio company from making future "roll-up" acquisitions of anesthesia practices and abusing the company's alleged dominant market position. While the decision confirms a major limitation on the FTC's ability to add private equity firms with minority investments as defendants in suits seeking injunctive relief, scrutinizing and challenging roll-up strategies will remain a focus for the FTC and the Department of Justice, as evidenced by the agencies' recent announcement that they are seeking information from the public about roll-up transactions that may have harmed competition.

European Foreign Direct Investment: Practical Thoughts to Cut Through the Red Tape

Our Antitrust & Competition Group discusses the unprecedented uptick over the last 12 months in foreign direct investment regimes emerging in Europe-meaning that investors wishing to acquire companies in the EU may have to obtain authorizations from a growing number of national authorities before they can close their transactions. In addition to the 2020 EU FDI Screening Regulation, and the UK's 2022 National Security and Investment Act, in the last quarter alone there have been further significant developments relating to FDI regimes in the context of M&A, with a need for attention to certain key considerations in the constantly evolving environment.

Issues in Internal Investigations

Our Litigation Group discusses key considerations for companies and counsel before, during, and after an internal investigation. Regulators in recent years have implemented a variety of initiatives to further incentivize timely self-reporting and cooperation; and that increased regulatory emphasis on the speed with which companies detect and address misconduct highlights the importance of thorough and efficient internal investigations.

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