Below is our Quarterly Corporate / M&A Decisions Update for decisions in Q4 2020. This update is designed to highlight selected important M&A, corporate, and commercial court decisions on a quarterly basis. Brief summaries of each decision appear below with links to more robust discussions.
Please click HERE for discussion of key decisions from Q3 2020.
In re Nine West LBO Sec. Litig., No. 20 MD. 2941 (S.D.N.Y. Dec. 4, 2020)
Summary
In 2014, Sycamore Partners Management LP (Sycamore) acquired The Jones Group (Jones) in a leveraged buyout. The merger provided for five different components: (1) Jones would merge with a Sycamore affiliate and become “Nine West Holdings” (Nine West); (2) Sycamore would contribute at least US$395 million in equity to Nine West; (3) Nine West would increase its debt from US$1 billion to US$1.2 billion; (4) Jones shareholders would receive US$15 per share; and (5) two high-end brands, along with another business unit, would be sold to other Sycamore affiliates for less than fair market value.
The Jones board approved the merger unanimously. Before the deal closed, however, Sycamore changed the terms, contributing less equity and causing Nine West to incur more debt. Following the closing of the deal, several stockholders filed suit. Nine West created a special litigation committee (SLC) to investigate the claims; the SLC recommended the company not pursue the stockholder claims, which were subsequently settled.
Four years after the merger closed, Nine West filed for bankruptcy. Nine West’s litigation trustee and indenture trustee filed suit against the former officers and directors of Jones, alleging breach of fiduciary duties, aiding and abetting breach of fiduciary duty, fraudulent conveyance, unjust enrichment, and violations of state law, all in connection with the 2014 merger. Both the officers and directors moved to dismiss. The court granted in part and denied in part the motions.
The court began its analysis by addressing several procedural arguments the defendants made.
- First, the court found that the litigation trustee was not a “Releasing Person” under the settlement, and thus the 2014 settlement of the stockholder derivative claims did not release any claims he had against the officers and directors.
- Second, the defendants argued that the litigation trustee’s claims were barred by res judicata based on the 2014 litigation. The court disagreed, finding that the stockholder claims and the litigation trustee’s claims pursued different interests. The 2014 stockholder claims alleged that the defendants sold the company for too little, while the litigation trustee alleged that the defendants distributed too much money to shareholders, thereby bankrupting the company. Therefore, the shareholders that brought the derivative claims did not represent the interests of the litigation trustee.
- Third, the court found that as a matter of applicable state law, the conclusion of the company’s special litigation committee bore only on the stockholder claims, not claims asserted by the company or the litigation trustee.
Moving on to the defendants’ substantive arguments, the court denied the director defendants’ motion to dismiss the claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty against the directors. The court considered whether the litigation trustee had rebutted the application of the business judgment rule by alleging either (1) that the majority of the board was interested in the transaction, or (2) the directors did not approve the transaction in good faith after a reasonable investigation. The court found that the litigation trustee failed to plead that the directors were interested in the transaction.
However, the court concluded that the litigation trustee successfully pleaded that the directors failed to conduct a reasonable investigation into whether the 2014 transaction “as a whole” would render Nine West insolvent. Rejecting the argument that the director defendants had no obligation to investigate the impact of post-closing transactions that they would not be asked to authorize on Nine West’s solvency, the court found that the litigation trustee adequately pleaded that the multiple steps of the LBO transaction “collapse into a single integrated plan” and that the harm – potential insolvency – was “foreseeable.” The court also found evidence of recklessness, thereby precluding the application of the company’s exculpatory clause. However, the court granted the non-director officers’ motion to dismiss the fiduciary duty claims, finding that the litigation trustee failed to allege that the officers had the ability to halt the transaction.
As for the remaining claims, the court also found that the fraudulent conveyance claims against the officers could go forward against certain officers, while the claims against others were time-barred. The officers’ motion to dismiss the unjust enrichment claims was uncontested, and therefore the court dismissed those as well.
AB Stable VIII LLC v. MAPS Hotels and Resorts One, LLC, No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020)
Summary
On September 10, 2019, a subsidiary of a Chinese conglomerate (the Seller) agreed to sell its interests in Strategic Hotels & Resorts LLC, a company that owns fifteen luxury hotels, to Mirae Asset Financial Group (the Buyer), a Korean financial services company, for US$5.8 billion. Closing was to occur on April 17, 2020, but the Buyer declined to close, asserting that the pandemic constituted an MAE excusing the Buyer from performing and that the Seller had not satisfied its obligation to operate the business in the ordinary course, including because the Seller had taken extraordinary steps, such as shutting down hotels, in response to the pandemic. On April 27, 2020, the Seller sued in an attempt to force the sale, and the Buyer responded by filing for declaratory relief.
The court rejected the Buyer’s MAE argument, finding that the pandemic fell within a contractual MAE exclusion for “calamities” even though the exclusion did not cover pandemics expressly. Applying principles of contract interpretation, the court held that a plain reading of the exception for “calamities” encompassed the effects resulting from the COVID-19 pandemic with reference to certain dictionary definitions of the term, among other things. The court agreed with the Buyer, however, on the issue of whether the Seller had operated the target business in the ordinary course. The court found that the Seller had operated the business in an extraordinary manner that was not consistent with the Seller’s past practice in response to the pandemic, thus violating the Seller’s ordinary course covenant, satisfaction of which was a condition to closing. In so holding, the court rejected the Seller’s argument that management must be afforded flexibility to engage in “ordinary responses to extraordinary events[,]” such that management should be deemed to have “operated in the ordinary course of business based on what is ordinary during a pandemic.”
The court also found that the Seller was not able to produce clean title insurance, as required in the contract, after failing to disclose numerous pending lawsuits.
Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0173-KSJM (Del. Ch. Nov. 24, 2020)
Summary
In 2001, Gilead received FDA approval for a life-saving HIV drug, Viread® (tenofovir disoproxil fumarate (TDF)). In late 2019 and early 2020, four sets of plaintiffs sent Gilead books and records demand under Section 220 of the Delaware General Corporate Law. The demands alleged that Gilead sought to protect the market for TDF by delaying market entry of generic versions of TDF and delaying the development of a safer substitute of TDF, tenofovir alafenamide (TAF). The plaintiffs sought to inspect documents relating to these allegations.
After Gilead declined to provide documents in response to the demands, each of the plaintiffs filed suit. Gilead answered the complaints and requested that the court order the plaintiffs to coordinate their efforts, which the parties subsequently stipulated to do. Gilead moved for a protective order against discovery requests directed at it, which the court denied. The court held a trial on June 23, 2020 and the parties completed post-trial briefing on August 26, 2020.
Based on all the evidence before it, the court ordered that Gilead produce certain categories of documents and pay the plaintiffs’ attorneys fees. In Delaware, “[w]hen a stockholder seeks inspection for the purpose of investigating wrongdoing, the stockholder must demonstrate a credible basis to suspect possible wrongdoing.” The “credible basis” standard imposes “the lowest possible burden of proof,” which does not require a stockholder to prove that the wrongdoing “actually occurred,” or “to show by a preponderance of the evidence that wrongdoing is probable.” The court concluded that the plaintiffs met this standard, rejecting all of Gilead’s arguments, which the court characterized as largely going to the merits of the dispute. Ultimately, the court found that the plaintiffs had put forward sufficient evidence to demonstrate that there was a “credible basis” to seek books and records from Gilead under Section 220. In addition, the court granted the plaintiffs leave to move for fee-shifting.
In re Mindbody, Inc. Stockholders Litigation, No. 2019-0442-KSJM (Del. Ch. Oct. 2, 2020)
Summary
Richard Stollmeyer founded Mindbody, Inc. (Mindbody or the Company) in 2001 and became the Chairman of the board of directors and CEO of the company in 2004. In 2012, venture capital firm Institutional Venture Partners (IVP) purchased stock in Mindbody and, in 2014, IVP’s general partner, Eric Liaw, was appointed to the Mindbody board of directors. Following two key acquisitions in 2018, Mindbody’s stock price increased significantly.
Before Mindbody went public in 2015, and again in 2017, Stollmeyer communicated with Vista Equity Partners (Vista) regarding the prospect of a take-private sale of Mindbody. Vista, however, “chose not to engage in buyout talks at that time because Mindbody stock was trading ‘at an all-time high.’” In 2018, however, Vista changed its mind and expressed interest in acquiring Mindbody. Following the expression of interest, Mindbody management lowered the Company’s guidance and, on the earnings call for Q4 2018, noted several challenges facing the Company. In response, Mindbody’s stock price fell.
Later in November 2018, Mindbody pursued a take-private transaction, forming a Transaction Committee that hired a financial advisor to select potential bidders, including Vista. After some price negotiation, on December 23, 2018, the board approved the sale to Vista, which was announced on December 24, 2018.
Following the announcement of the transaction with Vista, the plaintiffs brought suit against Stollmeyer, Brett White, Mindbody’s CFO and COO, and Liaw, alleging that they breached their fiduciary duties by “initiating, timing, and tilting the sales process in favor of Vista in their own self-interest” and by “failing to disclose all material information to Mindbody stockholders’ in advance of the stockholder vote on the Merger.” The shareholders asserted that each was conflicted because: (1) Stollmeyer was motivated by his desire to obtain liquidity and the prospect of future employment, (2) Liaw was motivated by IVP’s desire to exit the investment, and (3) White was motivated by the prospect of future employment.
The court declined to dismiss the claims against Stollmeyer and White. Applying enhanced scrutiny under Revlon, the court found that the plaintiffs sufficiently alleged that Stollmeyer was motivated by his own desire for liquidity and his own employment prospects, and that Stollmeyer purposely drove down the stock price and provided Vista with “information and timing advantages” throughout the sales process. In so holding, the court held that the formation of an independent committee to oversee the transaction, standing alone, was insufficient to overcome a pleading-stage inference of conflict. Similarly, the court concluded that the plaintiffs’ adequately alleged that White either acted with gross negligence or reckless indifference throughout the sales process, including in altering Mindbody’s forecasts and providing timing and informational advantages to Vista.
With regard to Liaw, however, the plaintiffs’ allegations that Liaw was motivated to liquidate IVP’s investment were insufficient to allege a claim for breach of fiduciary duty. The court found the complaint lacked any allegations that Liaw was involved in lowering the Company’s guidance or in providing Vista any advantages during the sales process.
Finally, the court declined to find that a fully informed stockholder vote supported dismissal under Corwin. Based on the allegations against Stollmeyer, the court stated that “[g]enerally, where facts alleged make the paradigmatic Revlon claim reasonably conceivable, it will be difficult to show on a motion to dismiss that the stockholder vote was fully informed.” Here, the court found that the allegations regarding Stollmeyer’s alleged undisclosed conflicts were sufficient to defeat a Corwin defense at the pleading stage.
In re Solera Insurance Coverage Appeals, No. 413, 2019 (Del. Oct. 23, 2020)
Summary
Solera Holdings, Inc. (Solera), a software company, carried excess D&O insurance policies, with coverage up to US$55 million, from three different insurers. The Delaware Superior Court previously found that the D&O insurance policies covered costs stemming from an appraisal action against Solera following Solera’s acquisition by an affiliate of Vista Equity in 2016 for US$55.85 a share. After a full hearing, the trial court determined that fair value was US$53.95, less than what Solera’s shareholders received in the acquisition. But Solera was ordered to pay US$38 million in pre-judgment interest, and incurred US$13 million in fees in connection with those proceedings. Solera sought to recover those amounts under its D&O policies. The D&O policy language at issue related to losses resulting from “any Securities Claim,” a term specifically defined in the policy as “any actual or alleged violation” of a securities law.
The court’s analysis centered on whether an appraisal action could reasonably be described as stemming from a “violation” of a law or rule regulating securities and whether allegations of wrongdoing were required for a matter to be a “Securities Claim” under the D&O Policy. The trial court held that a “violation” did not require an allegation of wrongdoing, and thus a demand for appraisal – which “is an allegation that the company contravened” the right of shareholders to receive fair value – was a “Securities Claim” under the policy.
Reversing that decision, the Delaware Supreme Court held that the plain meaning of “violation” indicates an element of wrongdoing and that the wrongdoing is largely irrelevant to an appraisal action. The statutory appraisal action, the court held, was designed to remedy a specific problem of individual shareholders withholding consent and blocking mergers by providing a method for such shareholders to obtain a neutral, “independent” assessment of fair value. The court acknowledged that there are cases in which courts look at indicators of unfairness in the sales process in ascertaining fair value, which could suggest that wrongdoing was an important consideration, but held that this inquiry only went to the weight of the corporation’s evidence of fair value, but was not otherwise relevant to an appraisal action.
In re Uber Technologies, Inc. Securities Litigation, No. GCG-19-579544 (Cal. Super. Ct. Nov. 16, 2020)
Summary
In 2018, the U.S. Supreme Court ruled in Cyan Inc. v. Beaver County Employees Retirement Fund that state and federal courts have concurrent jurisdiction over claims brought under the Securities Act of 1933. That decision led to a significant increase in securities class action lawsuits filed in state courts.. In response to the Cyan ruling, numerous corporations added a provision to their certificate of incorporation or charter requiring that any claims brought under the Securities Act be brought exclusively in federal court. If enforced, these provisions could limit or prevent plaintiffs from bringing securities class actions in state court under Cyan. In re Uber joins a growing list of cases in which these clauses have been tested and found to be enforceable.
The plaintiffs in Uber brought Securities Act claims in California state court against Uber and certain officers, directors, and underwriters involved in Uber’s IPO, alleging that Uber’s offering documents omitted material facts necessary to make other statements not misleading. The plaintiffs filed similar claims in federal court, but violated the forum selection clause in Uber’s charter by also bringing suit in state court. The charter provided that federal court “shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.”
The court found that Uber’s forum selection clause was enforceable and dismissed the complaint in its entirety, including with respect to the underwriter defendants, who were not parties to the charter. The court found that the forum selection clause did not violate the Securities Act’s bar on removal to federal court, and did not violate Cyan because Cyan dealt with jurisdiction rather than the enforceability of a contractual forum selection clause. The court also found that the forum selection clause was not substantively unconscionable or otherwise unenforceable because Uber’s stockholders were on notice of the terms of Uber’s charter when they purchased Uber’s stock, and that enforcing the forum selection clause was therefore within a reasonable buyer’s expectations. The court agreed with the plaintiffs that the forum selection clause, which was located deep within Uber’s governing documents, was procedurally unconscionable, but this finding was insufficient to invalidate the clause because the court found it was not substantively unconscionable, including because the clause did not eliminate or otherwise limit the plaintiffs’ substantive rights under the Securities Act and only affected the forum in which those claims could be brought. Finally, the court dismissed the plaintiffs’ claims against the underwriter defendants involved in Uber’s IPO on the grounds that Uber’s forum selection clause was broadly drafted to cover “any complaint” arising under the Securities Act.
Travelport Ltd and others v WEX Inc; Olding and others v WEX Inc ([2020] EWHC 2670 (Comm)) (English High Court, Queen's Bench Division (Commercial Court))
Summary
In this case, the first English commercial court dispute which was brought about by the COVID-19 pandemic, the court was asked, at a preliminary hearing, to construe Material Adverse Effect (MAE) provisions in a share purchase agreement (SPA). WEX Inc, a fintech providing corporate payments solutions, entered into an SPA to purchase 100 percent of the shares in eNett Ltd and Optal Ltd (together, the Target) for US$1.7 billion. The Target’s business was providing virtual payment solutions, with 97 percent of its client base in the travel industry.
The MAE provisions in the SPA at the center of the dispute operated such that, if conditions resulting from the pandemic caused a disproportionate effect on the Target’s financial condition as compared to other participants in the Target’s industry, WEX was not obliged to close. WEX alleged that a MAE had occurred due to the COVID-19 pandemic. The sellers, being the shareholders of the Target, alleged otherwise and brought an action seeking specific performance.
The central question at the preliminary hearing was which “industry” the Target should be measured against for purposes of determining if the Target had suffered a disproportionate impact from the COVID-19 pandemic that could constitute an MAE. WEX contended that the term “industry” should be construed as referring to the business-to-business (B2B) payments industry, which is the broad industry the Target operates in. The Sellers contended that it was the travel payments industry (TPI), which comprises participants who deal in B2B payment products in the travel industry and is effectively a sector within the broader B2B payments industry.
The court found that the word “industry” should be given its ordinary and natural meaning because in a heavily negotiated contract the court “must assume that all wording has been carefully scrutinized by lawyers and is used wittingly and advisedly.” The court also considered Delaware law, particularly Akorn Inc v Fresenius Kabi AG, No. 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. October 1, 2018), for guidance as to the purpose of MAE provisions in M&A agreements, which indicated that they operate to allocate market/industry risk to the buyer, and company-specific risk, to the seller. The court noted that foreign law was informative rather than binding, and that the parties were ultimately at liberty to allocate risks through an MAE clause through the language they chose.
Given the dearth of English case law on MAE provisions, this was a significant decision, which illustrates the need for careful drafting of MAE provisions in M&A agreements. In its ruling, the court stated that the term “industry,” in a sense, “helped no-one” and that “it may well be that one result of this case is that future drafters will do differently.”
[View source.]
