M&A Litigation in the United States

This article is an extract from TLR The Mergers & Acquisitions Review – Edition 16. Click here for the full guide.

I Introduction

M&A litigation in the United States has remained an active area over the past year, with cases continuing to raise some of the same legal issues that we have seen develop in the past several years. The Delaware courts continued to refine substantive doctrines under Corwin and MFW (discussed further in Sections II and III, respectively), which provide defendants with strong bases for dismissing many complaints. At the same time, Section 220 ‘books and records’ actions continued to be filed increasingly more as a means for stockholders to obtain pre-lawsuit discovery in order to plead a complaint that may stand a stronger chance of withstanding a motion to dismiss (discussed in Section IV).

Meanwhile, the federal courts have finally seen a decline in the previously large numbers of M&A lawsuits challenging disclosures contained in merger proxy statements under the federal securities laws (discussed in Section VI). Part of the decline is no doubt due to the lower levels of M&A activity in 2022, particularly involving US public companies. It may also mark a change in attitude as to how to respond to these matters on defendants’ part. As we have noted before, such actions have in the past almost always settled for supplemental disclosures of dubious value to stockholders and with attorneys’ fees for the plaintiffs’ lawyers, but some courts have signalled that this trend need not continue, including by refusing to award attorneys’ fees when contested, and the parties may be getting that message.

The past three years also saw a number of M&A cases involving disputes between the parties, most notably those arising from ‘busted deals’ that were due to close after the covid-19 pandemic shut down much of the economy, and in which the Delaware courts grappled with the meaning of key merger agreement provisions such as the definition of ‘material adverse effect’ and interim operating covenants. This past year also saw the Musk-Twitter transaction put M&A litigation and obscure issues of Delaware law back on the front page of the news (discussed in Section VII).

II Post-closing damages claims: the corwin defence

As we have written in previous versions of this chapter, the Delaware courts have underscored the deference afforded to merger transactions approved by a fully informed, disinterested and uncoerced stockholder vote. In Corwin v. KKR Financial Holdings, the Delaware Supreme Court unanimously held that arm’s-length transactions (i.e., ones that do not involve a controlling stockholder on both sides of the deal, as in a minority buyout) approved by a fully informed, uncoerced vote of a majority of the disinterested stockholders will be reviewed under the deferential business judgment rule.2

Since Corwin, the Court of Chancery has repeatedly dismissed post-closing challenges to non-controller stockholder-approved transactions at the pleading stage of the litigation.3 Subsequent decisions clarified that Corwin applies to two-step mergers under Section 251(h) of the Delaware General Corporation Law (DGCL) (involving a tender offer followed by a short-form merger);4 and that the fully-informed, uncoerced and disinterested stockholder vote extinguishes all claims relating to the merger, including aiding and abetting claims against third parties.5

However, some limits on the Corwin doctrine have emerged. First, it does not apply when the transaction involves a conflicted controlling stockholder (if so, then deference under the business judgment rule will apply only if the transaction is conditioned ab initio on the approval of disinterested stockholders and by an independent special committee, as discussed below).6 Notably, even though the Court of Chancery ruled that, on the unique facts of the case before it, it was reasonably conceivable that a 22.1 per cent stockholder had sufficient influence over the transaction to be considered a controller, and thus Corwin cleansing did not apply, the court did not make the same inference with respect to a 35.3 per cent stockholder in another case.7 In yet another case, however, the court rejected allegations that a minority stockholder was a controller, even though that stockholder succeeded in defeating the incumbent directors in a proxy contest.8 These cases demonstrate that application of the Corwin doctrine is a fact-intensive inquiry, in which the court is ‘mindful of the practical reality of an alleged controller’s voting power’.9

Second, the Court of Chancery has cautioned that Corwin‘s cleansing effect will apply only when the stockholder vote is not coerced.10

Third, the stockholder vote also must be fully informed.11 In Morrison v. Berry, the Delaware Supreme Court held that the failure to disclose ‘troubling facts regarding director behavior’ in negotiating the deal, which ‘would have helped [stockholders] reach a materially more accurate assessment of the probative value of the [company’s] sale process’, precluded Corwin-cleansing in that case.12 The court emphasised that plaintiffs were not required to allege that the information, if disclosed, would have made a reasonable stockholder less likely to approve the deal; rather, it was enough to plead that ‘there is a substantial likelihood that a reasonable stockholder would have considered the omitted information important when deciding whether to tender her shares or seek appraisal’.13 In In re USG Corp Stockholder Litigation, the Court of Chancery denied Corwin cleansing for similar reasons where the board, despite disclosing that it had a firm view of the company’s intrinsic value during the sale process and a concurrent proxy contest, did not disclose that its view of intrinsic value was materially higher than the deal price it ultimately recommended stockholders accept.14

Both of these cases provide an interesting case study in what follows when Corwin cleansing is denied. In Morrison, even though the Delaware Supreme Court had rejected the defendants’ Corwin defence based on its finding that the board failed to disclose material facts, the Court of Chancery nonetheless dismissed claims against the company’s outside directors in light of the company’s ‘Section 102(b)(7)’ provision exculpating directors from monetary liability for breaches of the duty of care.15 Similarly, even though the court in USG denied the directors’ Corwin defence, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision.16

But in Morrison, the Court of Chancery then denied a motion by the board’s financial adviser to dismiss the claim that it aided and abetted a breach of fiduciary duty by the board.17 While noting that the underlying fiduciary duty claims against the directors had been dismissed, the court explained that was not fatal to the aiding and abetting claims under RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015).18 In that case, the Delaware Supreme Court held that an adviser who creates an ‘informational vacuum’ that results in the board failing to satisfy its Revlon duties may be liable for aiding and abetting the board’s breach of fiduciary duty even if the directors themselves would be exculpated from any liability for that underlying breach of fiduciary duty (as was the case here).19

Of course, notwithstanding the directors’ successful 102(b)(7) defence in these cases, Corwin remains an important tool for defendants in post-closing damages litigation (and, for example, would have resulted in dismissal of the aiding and abetting claim against the financial adviser in Morrison). Indeed, because of the significance of Corwin cleansing, boards are routinely advised to disclose all conceivably material facts to their stockholders before they vote on a deal.

III Cases involving controlling stockholders

As explained in previous versions of this chapter, until 2014, all controlling stockholder buyouts were evaluated under the onerous entire fairness standard regardless of the procedural protections used in the deal process. That changed with the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide Corporation, commonly referred to as MFW, which held that the business judgment rule (not entire fairness) will apply if the controlling stockholder buyout is expressly conditioned ab initio on the approval of a special committee of the independent directors and approval of a majority of the disinterested stockholders (the dual approval conditions).20

In October 2018, in Flood v. Synutra International, Inc, the Delaware Supreme Court clarified that the ab initio requirement is satisfied as long as the dual approval conditions were in place before the onset of substantive economic bargaining, even if they were not included in the controller’s initial offer.21 Further, in April 2019, in Olenik v. Lodzinski, the Delaware Supreme Court further clarified the line between preliminary discussions – which may be conducted before MFW‘s dual protections are put in place without forfeiting the ability to invoke the business judgment rule under MFW – and substantive economic discussions, which may not be.22 There, the parties had engaged in a joint valuation exercise in the months before the controller conditioned its offer on the dual protections, and the court found it was ‘reasonable to infer that these valuations set the field of play for the economic negotiations to come’, an inference that was further supported by the fact that, as alleged in the complaint, the offers that were subsequently made and ultimately accepted were close to the ‘indicative valuations’ that had been presented several months earlier.23

Since Olenik, a series of cases have addressed the ab initio requirement, further clarifying when that requirement is met. In all three cases, the Court of Chancery held that the parties had not met the ab initio requirement, confirming that the court will perform a fact-intensive analysis of discussions held before MFW‘s dual protections are in place, and suggesting it looks at these types of discussions with a sceptical eye. In Arkansas Teacher Retirement System v. Alon USA Energy, the target company created a special committee and retained advisers before the parties conditioned the transaction on MFW‘s dual protections.24 The parties also entered into a confidentiality agreement, and several meetings took place between the controller’s CEO and the target’s chairman. The court found that ‘structure, exchange ratio and price terms’ were addressed at those meetings, thus defeating the ab initio requirement and expanding Synutra’s ‘substantive economic’ requirement to include not just price terms but discussions about the mix of consideration. The court also relied on the confidentiality agreement and the special committee’s retention of advisers as supporting its ruling, though those facts were not enough on their own to defeat application of MFW.

In Salladay v. Lev, a confidentiality agreement was executed, due diligence began and the target indicated to the buyer a price range to which it would be receptive, all prior to the formation of a special committee.25 The Court of Chancery found that the price indication was sufficient to defeat the ab initio requirement, as it ‘set the stage for future economic negotiations’. Similarly in In re Homefed Stockholder Litigation, pre-special committee discussions of an acceptable deal structure – this time between the controller and a large stockholder – led the court to conclude that MFW protections did not apply.26 The court reasoned that these talks, which occurred before the MFW protections were agreed to, effectively prevented the special committee from doing its work. Furthermore, in MH Haberkorn 2006 Trust v. Empire Resorts, Inc, the Court of Chancery concluded that the ab initio requirement was not satisfied by a letter agreement previously entered into between the controller and the company that provided that the controller would not engage in a going-private transaction unless the transaction was subject to approval of both:

  1. a majority of disinterested board members or a special committee; and
  2. a majority of shares entitled to vote that were unaffiliated with the controller – where the transaction was negotiated in August 2019 and the terms of the letter agreement were set to expire in February 2020.

The Court of Chancery explained that, even though the conditions were in place prior to the commencement of negotiations, because of the impending expiration of those terms, the transaction did not satisfy the timing requirements of MFW. The Court relied, in particular, on the allegation that the controller had indicated to the special committee that it would not commit to extending the MFW conditions beyond the February 2020 contractual term, and the Court thus explained that ‘for the ab initio requirement to mean anything and to accomplish the goal of eliminating otherwise-present bargaining pressures, the condition must be irrevocable’.27

In In re Dell Technologies Inc Class V Stockholders Litigation, the court found other deficiencies in the defendants’ attempt at following the MFW framework. Specifically, the court rejected application of MFW because it found the complaint reasonably alleged that the special committee and minority faced coercion in deciding whether to approve the transaction (including because the controller maintained the right to force an alternative transaction if they rejected the proposed transaction), among other reasons.28

However, MFW protections are not impossible to obtain from the courts. In Franchi v. Firestone, the Court of Chancery granted the defendants’ motion to dismiss under the MFW framework because it found that an acquisition by the target company’s controlling stockholder involved robust price negotiations, approval by an independent special committee and an informed vote by a majority of the minority stockholders.29

One key point from these decisions (aside from the difficulty of effectively implementing MFW protections) is that courts will reject application of MFW where they find actions they view as restricting the special committee’s negotiation capabilities, and that effectively define the contours within which the committee can work.

IV Books and records actions under section 220

In part in response to Corwin and MFW, which raised the bar for plaintiffs in post-closing damages actions to plead facts to survive a motion to dismiss, there has been a steadily high level of stockholder inspection demands under Section 220 of the DGCL, as well as actions brought in the Court of Chancery to compel the production of books and records pursuant to Section 220(c).30 Plaintiffs regularly use the documents obtained in this way to plead post-closing damages complaints, increasing the chances that those complaints survive motions to dismiss.

The Delaware Supreme Court has held that Section 220 may entitle stockholders to more than just minutes and other formal board materials, but only to the extent such formal materials are insufficient to satisfy the stockholder’s proper inspection purpose. For example, in KT4 Partners LLC v. Palantir Techs Inc, the court explained that ‘if a company . . . decides to conduct formal corporate business largely through informal electronic communications [rather than through formal minutes and resolutions], it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which Section 220 entitles them’.31 However, the court emphasised that this ‘does not leave a respondent corporation . . . defenseless and presumptively required to produce emails and other electronic communications. If a corporation has traditional, non-electronic documents sufficient to satisfy the petitioner’s needs, the corporation should not have to produce electronic documents.’32

In a decision that has no doubt fuelled an increase in Section 220 demands (and likely diminished the number of demands that are actually litigated, as defendants agree to provide requested documents without the need for litigation), the Delaware Supreme Court affirmed the Court of Chancery’s ruling in AmerisourceBergen Corp v. Lebanon Cty Employees’ Rt Fund, granting broad latitude to Section 220 plaintiffs. In AmerisourceBergen, the court held that stockholders seeking to investigate credible allegations of mismanagement by corporate directors need not identify the ‘ultimate objective’ of their inspection requests. Emphasising that the ‘credible basis’ standard applied to Section 220 actions is the ‘lowest possible burden of proof,’ the court further ruled that Section 220 plaintiffs are not required to show that suspected mismanagement giving rise to the inspection request is actionable – signalling a willingness on the part of Delaware courts to grant pre-suit discovery to stockholder plaintiffs even where there is no apparent indication that actionable claims exist.33 The court also held in AmerisourceBergen that the Chancery Court was within its discretion to grant the Section 220 plaintiffs the right to conduct a Rule 30(b)(6) deposition of the company to explore what relevant information exists to satisfy the Section 220 demand (and where the information is held), in addition to ordering the company to provide core board-level materials.34 Noting that KT4 Partners did not ‘establish any bright line rules regarding discovery in all Section 220 actions’, the court declined to set clear limits on plaintiffs’ discovery requests.35

In another cautionary development for corporations subject to Section 220 demands, the Court of Chancery sua sponte granted leave for plaintiffs to move for an award of attorneys’ fees and expenses, and then later granted the plaintiffs’ motion for such fees and expenses, in response to what the court viewed as the defendant corporation’s ‘overly aggressive litigation strategies’ and unwillingness to cooperate with the Section 220 demand by refusing to provide a single document during pre-litigation discovery.36

Taken together, these two cases counsel that companies carefully consider whether to withhold core materials. The Delaware courts have now established not only that a stockholder plaintiff faces a very low burden to show that it has a proper purpose for its Section 220 request, but also that resistance to disclosure perceived by the courts as too aggressive could result in broader grants of discovery under Section 220 and even the payment of plaintiffs’ litigation expenses.

V Demand futility

Two cases from 2021 clarified the standards that may apply to shareholder breach of fiduciary claims. Though both cases were brought outside the M&A context, their reasoning applies equally to M&A litigation in which shareholders have sought to bring derivative claims. In the United States, shareholder litigation can be brought as either a direct or derivative claim. Direct actions are for harm directly suffered by the shareholder and can be brought either individually by one or more shareholders or on a class-wide basis. Derivative actions, in contrast, are for harm suffered by the corporation. They involve a stockholder suing on behalf of the corporation, for example against certain directors for losses they allegedly caused the company. Although there are many issues courts examine when determining whether a suit is direct or derivative, the overall inquiry is whether the corporation itself or the plaintiffs individually (1) suffered the alleged harm and (2) would receive the benefit of any remedy.37 Before a shareholder can bring a claim derivatively, she or he must have first made a demand on the board to pursue the litigation (in which case the shareholder will likely be stuck with the board’s decision) or plead that the board was conflicted and, as such, a demand would have been futile. In the event the shareholder tries to plead demand futility, the shareholder must satisfy the heightened pleading standard of Chancery Court Rule 23.1(a).

In a decision last year, the Delaware Supreme Court clarified the demand futility standard for shareholder derivative suits, establishing a new test for determining when a shareholder may proceed with litigation without first taking the complaint to the company board of directors. In United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, the plaintiff stockholder declined to make a pre-litigation demand of the board in connection with its claim that Facebook directors breached their duties of care and loyalty by wrongfully approving a stock reclassification that would allow Mark Zuckerberg to sell the majority of his shares in the company while maintaining voting control.38 In holding that the plaintiff failed to establish demand futility, the Delaware Supreme Court adopted a new three-part test. The test evaluates:

  1. whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
  2. whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
  3. whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.

If any of the three prongs are satisfied as to at least half of the directors on the board, demand is properly considered futile.

In 2021, the Delaware Supreme Court also abrogated its 2006 decision in Gentile v. Rossette, which allowed ‘dual-natured’ claims for breach of fiduciary duty – that is, claims that are simultaneously both direct and derivative – where the economic and voting interests of minority stockholders were diluted by a controlling shareholder.39 In Brookfield Asset Management, Inc v. Rosson, former stockholder plaintiffs sued the company board of directors for breach of fiduciary duty for improperly allowing an additional stock purchase by a majority stockholder to dilute existing stockholders’ shares.40 The claim was clearly derivative under Tooley, but the Chancery Court was ultimately bound by the Gentile exception to find that the plaintiffs had a permissible direct claim for economic harm. Ruling on an interlocutory appeal from the Chancery Court, the Delaware Supreme Court held that Gentile conflicted with Tooley in creating a direct cause of action for shareholders arising from fundamentally derivative claims.

In overturning Gentile, the court is closing the door to direct suits in the context of a controlling shareholder where the shareholder’s claim is premised on a theory of dilution.41 As a result, shareholders will be limited to bringing such claims derivatively; however, often a shareholder’s standing to assert these derivative claims is distinguished by the merger or the disposition of their shares through other means. Furthermore, in light of the three-part test for demand futility adopted by Zuckerberg, shareholders will have to show that a demand to the board of directors would have been futile at the time the suit is filed.

VI Federal disclosure suits

As we have previously mentioned, in recent years, most public company mergers have attracted one or more boilerplate complaints, usually filed by the same roster of plaintiffs’ law firms, asserting that the target company’s proxy statement contains materially false or misleading statements. These complaints usually also assert that the stockholder meeting to approve the merger should be enjoined unless and until the company ‘corrects’ the false or misleading statements by making supplemental disclosures. Not too long ago, cases like this tended to be filed in the Delaware Court of Chancery and other state courts asserting breaches of state-law fiduciary duties, including the duty of disclosure. After the Delaware courts cracked down on these suits in the 2016 Trulia decision,42 the vast majority of these cases today are filed in federal court under Section 14 of the Securities Exchange Act of 1934.

Almost none of these cases are actually litigated. Instead, they usually follow a by-now-familiar pattern: after one or more complaints are filed, defendants (usually the target company and its board of directors) offer to make supplemental disclosures to ‘moot’ the plaintiffs’ claims (even though defendants rarely believe there is any merit to the claims); perhaps after some back-and-forth negotiation (sometimes not), the plaintiffs agree to withdraw their claims in light of the supplemental disclosures; the plaintiffs’ lawyers then seek a ‘mootness fee’, supposedly in compensation for the ‘benefit’ provided in the form of the supplemental disclosures; and the defendants (usually after some negotiation) agree to pay the fees, which ends the case. (Because no class-wide release is obtained, the courts typically never get involved.) This practice has been widely criticised as imposing a ‘merger tax’ without providing any benefits to companies or stockholders. However, given the strong incentives to avoid delaying the overall transaction, as well as to minimise litigation costs and risk, most defendants elect not to litigate these cases (despite their weaknesses on the merits), and thus the practice has continued. There are some signs over the past couple of years, however, that it may be reaching its end.

First, the filing of these cases has continued to decline significantly. In the first half of 2022, these federal M&A filings were just 28 per cent of their 2021 total, and are at less than 3 per cent of their peak in 2017. Part of this is no doubt due to the significantly reduced level of M&A activity as a result of current market conditions. However, the decline is becoming a more evident year-over-year trend. Some other factors also seem to be driving this change.

In Karp v. SI Financial Group, Inc, for example, the defendants chose not to follow the usual playbook and actually litigated the plaintiff’s Section 14 claim. The district court granted the defendants’ motion to dismiss, ruling that the plaintiff had failed to plead that any statement in the proxy was rendered false or misleading by the omissions of facts the plaintiff alleged were material and not disclosed.43

In so ruling, the court highlighted a fundamental difficulty that plaintiffs in these strike suit merger cases often have in successfully pleading a Section 14 claim. Unless a plaintiff can show that the proxy statement omitted a fact required to be disclosed by SEC regulations (which is often a tall task), the plaintiff must plead that some omitted fact renders a statement in the proxy materially misleading. Importantly, unlike Delaware duty-of-disclosure claims, the omission of a material fact alone is not enough to state a Section 14 claim. Instead, the plaintiff must plead – with particularity, not merely with conclusory allegations – how the allegedly omitted fact renders the proxy statement disclosures materially misleading. However, without knowing the facts that have been omitted – and because of the discovery stay imposed by the Private Securities Litigation Reform Act (PSLRA) – plaintiffs will have difficulty obtaining such facts at the pleading stage, particularly because there is no equivalent tool to a Section 220 books and records claim under the federal proxy rules. SI Financial showed that, in the typical strike suit merger case, plaintiffs have a significant challenge of actually pleading a viable Section 14 claim.

The fees upon which plaintiff firms could previously rely are also likely a factor. In those situations where the parties are unable to agree on a mootness fee for any supplemental disclosures defendants make and the fee dispute is litigated, judges are casting a skeptical eye on the practice by plaintiffs’ counsel and are reducing the fees requested or denying them altogether.44 Furthermore, a much awaited decision from the Seventh Circuit Court of Appeals on whether such mootness fees are warranted could have a very significant impact on whether this type of nuisance litigation continues at all.45

VII M&a litigation between the parties

i Busted deal litigation in the covid-19 era

The covid-19 pandemic spurred a number of lawsuits between parties to merger agreements. Buyers attempted to terminate merger or purchase agreements for deals signed before the pandemic that had not yet closed by March 2020, when widespread lockdowns occurred and the economy went into a recession. While the effects of the pandemic had a broad adverse impact across the economy, several industries were particularly hard hit, including retail, travel and entertainment. Many buyers refused to close, alleging that the pandemic constituted a material adverse effect (MAE), or that the seller’s response to it constituted breaches of interim operating covenants. Sellers responded by bringing actions, primarily in the Delaware Court of Chancery, to enforce the sales. Though some of these cases settled, as the parties renegotiated or walked away from deals struck prior to the pandemic, in a few cases the Delaware Chancery Court made fact-specific determinations as to whether the transactions at issue should be consummated.

Some buyers argued that the covid-19 pandemic or its effects constitute an MAE, permitting the buyer to terminate the agreement, and refused to close. In Snow Phipps v. KCAKE Acquisition, the owner of DecoPac holdings, the world’s largest supplier of cake decorations, agreed to sell the company to a private equity buyer.46 In April 2020, the buyer refused to close, arguing that the covid-19 pandemic had resulted in an MAE and that the target had been disproportionally affected. The seller sued in the Delaware Court of Chancery, seeking specific performance compelling the buyer to close and requesting an expedited proceeding to allow the seller to obtain a specific performance remedy before the termination of previously arranged acquisition financing. The court ordered the buyer to close, finding that no MAE had occurred, because the seller’s sales rebounded quickly, an exception for events ‘related to government orders’ applied, and the seller had complied with the ordinary course covenant despite taking, among other things, cost-cutting measures in light of the pandemic because it had been the company’s practice for years to reduce costs in tandem with sales declines.47 The court also sidestepped the near-universal construct in leveraged buyouts that the seller will be entitled to a specific performance remedy requiring the buyer to close only if the buyer’s debt financing is also available. The court – pointing to the ‘prevention doctrine’ – concluded that the buyer’s failure to use reasonable best efforts to obtain the debt financing was a breach of the agreement, and therefore the buyer could not rely on the unavailability of debt financing to avoid being required to specifically perform its obligations under the contract.48

Similarly, in Realogy Holdings v. Sirva Worldwide, the seller filed suit in Delaware to enforce an agreement to sell a corporate relocation business after the buyer refused to close based on an alleged MAE arising from the pandemic.49 As in Snow Phipps, the seller sought to expedite the proceeding to allow the seller to obtain a specific performance remedy before the termination of previously arranged acquisition financing. Here, however, the court granted the motion to expedite on a more reasonable timetable, and a motion to dismiss was heard two months later on the question of whether specific performance was available as a remedy. At oral argument, the court dismissed the case, holding that the seller (plaintiff) had caused the termination of the financing by naming one of the guarantors as a co-defendant in the action, in violation of the terms of the financing agreement, and the plaintiff was therefore no longer entitled to specific performance.

In Forescout v. Ferrari Holdings,50 the buyer alleged that the pandemic constituted an MAE disproportionately affecting the target, and that the buyer would no longer be able to obtain the necessary debt financing. The seller offered to finance the debt portion of the deal itself if that were true, but the buyer refused. The seller subsequently sued for specific performance. A week before trial, the parties agreed to complete the transaction at a reduced purchase price.

Some buyers have also alleged that sellers have breached interim operating covenants by taking certain actions in response to the pandemic. There is currently some debate as to whether ordinary course covenants require a target to continue operating in the same way it did in the past, or whether the target is required to take potentially extraordinary steps to reasonably manage the business in extraordinary times, particularly where others in the industry are taking those kinds of steps. In AB Stable v. MAPS Hotels, a seller sought to enforce the agreed sale of a portfolio of hotels in the Delaware Chancery Court.51 The buyer refused to close, alleging (among other things) that the seller failed to continue operating the hotels in the ordinary course because it ‘allowed material business relationships to deteriorate’ during government-mandated quarantine orders in connection with the covid-19 pandemic. Following a trial, the court ruled that even though the pandemic fell within the ‘natural disasters and calamities’ exception to the agreement’s MAE clause, the buyer was not obligated to close because the seller had not complied with the ordinary course provision.52 The court rejected the seller’s argument that it engaged in ‘ordinary course of business based on what is ordinary during a pandemic’, in part because the parties’ contract required that ‘ordinary course’ be evaluated only with respect to the seller’s own ‘past practice’ and not how other companies responded to the pandemic under similar circumstances.53 The court noted, however, that in the event of government-mandated shutdowns, a party’s obligation to operate in the ordinary course ‘would be discharged’, because ‘[n]o one is required to comply with an illegal contract, and no one receives damages based on a breach of an unenforceable obligation’.54 The Delaware Supreme Court unanimously affirmed, stating that the Court of Chancery ‘concluded correctly that the Seller’s drastic changes to its hotel operations in response to the COVID-19 pandemic without first obtaining the Buyer’s consent breached the ordinary course covenant and excused the Buyer from closing’.55

SP VS Buyer v. L Brands raised the same issue. There, the buyer of a group of retail brands alleged that the seller had failed to continue operating in the ordinary course, including because it had ‘voluntarily furloughed’ a substantial percentage of its employees, failed to sell the last season’s merchandise as a result of the pandemic, and stopped paying rent on US stores – actions that were not consistent with the company’s past practice.56 The seller countered that these actions were consistent with steps almost every other company in its industry was taking. The case settled shortly after it was filed, with the parties agreeing to walk away from the deal without either side paying any break-up fee.

Another case, Simon Property Group, Inc v. Taubman Centers, Inc,57 raised the same issues, but there the buyer terminated on grounds that the seller allegedly failed to comply with the ordinary course operating covenant because it did nothing – that is, because it failed to take extraordinary steps to respond to the business and economic circumstances brought on by the pandemic. The buyer also alleged that, given that the seller’s business (operating upscale malls) was particularly hard hit by the pandemic, an MAE had occurred excusing its obligation to close. The parties reached a settlement in the case hours before trial in Michigan state court in November 2020, agreeing to a modified buyout at a lower price-per-share than initially agreed.

Several other recent cases involved disputes over other closing conditions. In Khan v. Cinemex, the seller brought suit seeking to compel the sale of a chain of movie theatres where the buyer argued it could not close because it could not exercise its right to inspect the theatres because of travel restrictions imposed by local governments in response to the pandemic.58 Shortly after the lawsuit was filed, the buyer filed for bankruptcy, and the case remains stayed. In another case, Bed Bath & Beyond v. 1-800-Flowers.com, the seller sued the buyer for specific performance when the buyer postponed closing because of uncertainty surrounding the pandemic.59 The buyer argued, among other things, that it was unsure it could fulfil the remaining closing conditions as a result of the pandemic, which included an in-person closing. The companies settled the dispute, agreeing that the deal would go ahead at a reduced purchase price.

Finally, much attention has been paid this past year to the Elon Musk-Twitter take-private dispute. In April 2022, Musk offered to purchase Twitter and take it private for US$43 billion, after previously acquiring 9.1 per cent of the company’s stock and becoming its largest shareholder. But in July, Musk announced that he would terminate the transaction, claiming that Twitter breached information and cooperation covenants, made ‘materially inaccurate representations’ in the merger agreement that are ‘reasonably likely to result’ in an MAE, and failed to comply with the ordinary course covenant by terminating certain employees and slowing hiring. Twitter filed suit in July 2022 to enforce the merger agreement and asked the Chancery Court to issue an injunction requiring Musk to close. On 4 October 2022, however, Musk made an about-turn and announced that he would move forward with the acquisition after all and, on 27 October 2022, the transaction closed.

VIII Delaware legislative developments

i Delaware general corporation law 102(b)(7)

Effective as of 1 August 2022, Delaware General Corporation Law (the DGCL) permits the extension of exculpation rights to executive officers. As referenced above, Delaware law has long permitted a Delaware corporation to eliminate or limit the personal liability of directors for monetary damages arising from their breaches of their fiduciary duty of care, subject to basic exceptions. Delaware has now amended Section 102(b)(7) to expand this exculpation right to permit corporations to provide the protection to executive officers as well. This change is a response to the increasing frequency of shareholder suits brought against executive officers, in addition to directors. It has not been uncommon for courts to dismiss claims against the directors because they were exculpated under the corporation’s charter, but to allow claims to proceed against the officers, who are not similarly exculpated. If corporations adopt this provision, it should remedy this inconsistency and at a minimum allow for equal treatment of both officers and directors.


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