Quarterly Corporate / M&A Decisions Update| Q2 2019

Hogan Lovells

Below is our Quarterly Corporate / M&A Decisions Update for decisions in Q2 2019 and selected others. 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.

Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Del. Apr. 17, 2019)

Why is it important
In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., the Delaware Supreme Court reversed the Court of Chancery’s reliance on an acquired company’s pre-merger (or unaffected) share price in determining the fair value of the company’s shares in an appraisal action. Reaffirming recent precedent giving significant weight to market-tested deal prices, the Court held that the appropriate measure of fair value was the “deal-price-less-synergies.” Together with the Supreme Court’s recent appraisal decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017) and DFC Global Corporation v. Muirfield Valve Partners, L.P., (172 A.3d 346 (Del. 2017), Aruba completes a trilogy of decisions that are likely to have a strong deterrent effect on appraisal arbitrage, particularly in public deals, absent compelling reasons to believe the merger price is not a reliable indicator of value.

After PC-maker HP acquired Aruba – a network equipment firm – for US$24.67 per share, certain hedge funds purchased large amounts of Aruba’s common stock and filed an appraisal action after the merger closed. Following extensive discovery and a trial, Vice Chancellor Laster rejected the valuation methodologies proposed by both sides and determined that Aruba’s 30-day average unaffected market price of US$17.13 per share represented Aruba’s fair value. On appeal, the Delaware Supreme Court reversed and remanded. The Supreme Court rejected the Court of Chancery’s decision to rely exclusively on the stock price, finding that it was based on the erroneous premise that the deal-price-less-synergies figure incorporated reduced agency costs that would need to be estimated and subtracted from the company’s share price. The Delaware Supreme Court directed the lower court to increase its valuation to US$19.10 per share on remand, reflecting the deal price minus estimated synergies.

Please click HERE for a more detailed discussion of this case.

Olenik v. Lodzinski,
No. 392, 2018 (Del. Apr. 5, 2019)

Why is it important
In Olenik v. Lodzinski, the Delaware Supreme Court reversed in part the dismissal of a challenge to a controlling shareholder transaction, finding that the Court of Chancery incorrectly applied the framework established by Khan v. M & F Worldwide Corporation (“MFW”), 88 A.3d 635 (Del. 2014). Under the MFW framework, a controlling shareholder transaction may be subject to deferential review under the business judgment rule if it is conditioned from the outset of negotiations on (i) the approval of an independent, empowered special committee and (ii) the approval of an informed, uncoerced vote of the majority-of-the-minority shareholders. The Olenik decision provides important guidance on when a transaction begins for purposes of the MFW framework. Previous decisions indicated that the MFW protections must be in place when “substantive economic discussions” began. In Olenik, the Supreme Court clarified that “exploratory discussions” regarding value and potential offers may constitute substantive economic discussions triggering the need for the MFW protections to be in place, even if no definitive proposal has been made.

Two companies, Earthstone Energy, Inc. and Bold Energy III LLC, entered into discussions regarding an all-stock “up-C” transaction. At the time of discussions and negotiations, EnCap Investments, L.P., a private equity firm, allegedly held controlling interests in both Earthstone and Bold. Following ten months of preliminary discussions, Earthstone formed a special committee of the board to negotiate and approve the transaction. The special committee spent three months negotiating with Bold and ultimately approved the deal. A super majority of disinterested shareholders then approved the deal. An Earthstone shareholder brought claims against Earthstone, Bold, EnCap, and Earthstone management for breach of fiduciary duties and other related claims. The Court of Chancery dismissed the plaintiff’s claims, applying the business judgment rule based on its conclusion that Earthstone complied with the MFW framework. The plaintiff appealed to the Delaware Supreme Court.

The Delaware Supreme Court reversed in part and affirmed in part the decision of the Court of Chancery. The Supreme Court elaborated on its rulings under MFW and Flood v. Synutra, 195 A.3d 754 (Del. 2018) (summarized in our Q4 2018 Quarterly Corporate / M&A Decisions Update), clarifying what “up front” means for purposes of when the procedural protections of MFW must be in place to secure deferential business judgment review. The Supreme Court stated that the key is to have the protections in place “early in the process” and “before “substantive economic negotiation [takes] place.” The Supreme Court held that the Court of Chancery erred in finding that no substantive economic negotiations had taken place. A conflicted member of Earthstone management, who had led negotiations prior to the special committee being formed, had told the board that he was “negotiating” with EnCap and would make “an offer” prior to the formation of the special committee. Further discussions with EnCap, the trading of access to data rooms, and a number of valuation analyses convinced the Delaware Supreme Court that the plaintiff had sufficiently pleaded facts that demonstrated that MFW’s procedural protections were not in place “from the beginning.” Additionally, claims in Earthstone’s 10-K filing in 2017 belied claims by defendants that EnCap was no longer a controlling entity at the time of the merger. The Supreme Court affirmed the dismissal of the plaintiff’s disclosure claims and remanded to the Court of Chancery for further proceedings on the fairness claims.

Please click HERE for a more detailed discussion of this case.

In re Akorn Sec. Litig., 240 F. Supp. 3d 802 (N.D. Ill. 2017)

Why is it important
In what may turn out to be a milestone decision in M&A federal shareholder litigation, Judge Thomas M. Durkin of the District of Illinois abrogated settlement agreements that would have resolved three shareholder suits against Akorn, Inc. and its board of directors based on additional disclosures made by Akorn in connection with its acquisition by competitor Fresenius Kabi AG, and ordered plaintiffs’ counsel to return over US$320,000 in attorney’s fees. The Court found that the additional disclosures made by Akorn as a result of the lawsuits contained “nothing of value” to Akorn’s shareholders, and that the complaints therefore should have been dismissed. The ruling could result in significantly fewer shareholder class actions being filed in federal court challenging proxy statement disclosures relating to M&A transactions.

Plaintiffs sued Akorn and members of its board of directors seeking certain disclosures regarding Akorn’s acquisition by competitor Fresenius Kabi AG. Akorn revised its proxy statement and issued a Form 8-K, and Plaintiffs dismissed their lawsuits and settled for attorneys’ fees. An Akorn investor moved to intervene to challenge the settlements and payment of attorney’s fees. The Court denied the intervention motion, but it ordered briefing sua sponte on whether the settlements should be abrogated. Following briefing, the Court abrogated the settlements, finding that the cases should have been “dismissed out of hand,” that the extra disclosures Akorn had agreed to make “were worthless to investors,” and that the Court should exercise its “inherent authority to rectify the injustice that occurred as a result” of not immediately dismissing the plaintiffs’ complaints.

Please click HERE for a more detailed discussion of this case.

Scottsdale Ins. Co. v. CSC Agility Platform, Inc.,
2019 U.S. Dist. LEXIS 62985 (C.D. Cal. Feb. 4, 2019)

Why is it important
Scottsdale Insurance Co. v. CSC Agility Platform, Inc. provides important guidance regarding disclosures in an insurance renewal questionnaire at the time of a potential acquisition. The U.S. District Court for the Central District of California held that Scottsdale was entitled to recover its payments under a business and management indemnity insurance policy, subject to a reservation of rights, because the insured failed to disclose in the insurance renewal questionnaire a transaction that was under “serious consideration” even though no formal offer had been made at the time.

Two companies, ServiceMesh and Computer Sciences, entered into a business partnership. During the course of this partnership, the parties began due diligence and discussed the possibility of an acquisition. In the midst of these conversations, ServiceMesh renewed its business and management indemnity insurance with its provider, Scottsdale, and reported that it was not contemplating any transactions in the next 12 months. ServiceMesh was acquired by Computer Sciences three months after the policy went into effect. Subsequently, Computer Sciences brought suit again several employees of ServiceMesh for misrepresentations made as part of the acquisition. Scottsdale agreed to indemnify the individuals for the expenses related to defending the suit while reserving the right to deny coverage and recoup the expenses. After paying out the policy limit, Scottsdale brought suit to recover its costs.

The court found that Scottsdale was within its rights to deny coverage after determining that ServiceMesh’s answer regarding the contemplated acquisition was a material misrepresentation based on their discussions with Computer Sciences. The court analyzed the plain meaning of the term “contemplate,” noting that to contemplate “carries a connotation of serious consideration that goes beyond mere fleeting thoughts.” However, the court also found that a formal offer was not necessary for a transition to be “contemplated.” By holding that contemplation required “serious consideration,” the court viewed as distinct every start-up’s hopes of being acquired from situations like ServiceMesh’s, in which ServiceMesh and Computer Sciences conducted several meetings as well as due diligence. The court also denied the defendant’s cross motions to prevent Scottsdale from denying coverage based on theories of waiver and estoppel because of their subsequent knowledge of the transaction.

Please click HERE for a more detailed discussion of this case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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