WELCOME TO THE ROPES RECAP OF THE THIRD QUARTER OF 2018
WHILE ACTIVITY REMAINED STRONG, particularly during the end of the quarter, little noteworthy case law came out during the third quarter of 2018. Then, the day after the quarter ended, the Delaware Chancery Court released Akorn v. Fresenius, and got the entire M&A world talking. As the dust settles, it doesn't seem as if Akorn will be most debated because of its facts (most view it as a bespoke holding, as evidenced by the 246 pages it took VC Laster to walk us through it), but rather because it has made every M&A lawyer change one of their most tried and true statements about M&A agreements—notably, that the Delaware courts had never before found a "Material Adverse Effect." Well, assuming the decision survives appeal, they now have.
Beyond Akorn, we did see a couple of key decisions from the Chancery Court. The court rejected a preliminary injunction to block a stockholder vote on the proposed $7 billion merger of drywall producer USG Corp with Gebr. Knauf AG. In a bench ruling, the Court decided that the hostile-takeover protections in DGCL Section 203 did not apply simply because USG's largest stockholder had discussed possible per-share deal terms with the proposed buyer, as the two never had a meeting of the minds on the point. In addition, in Olenik v. Lodzinski, the court provided further support for its holding in Kahn v. M&F Worldwide Corp., as it upheld the structure of the transaction in question, which, among other things, included a majority of the minority vote so that the controlling private equity firm who stood on both sides of the transaction could not force its will on minority stockholders. As such, the court applied the business judgment rule, noting its preference in such situations to not second-guess the decisions of corporate fiduciaries, absent a finding of corporate waste. The court also clarified the ab initio requirement from the MFW decision. Finally, the court continued the line of cases providing that minority stockholders could be considered controllers with its decision in Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC. In that matter, the court found that a minority stockholder had used the contractual consent rights granted to it as a preferred stock investor, together with "hardball" negotiating tactics, to force Basho to the brink of insolvency, which left it with no choice but to accept oppressive financing terms from that stockholder.
The Chancery Court also decided a handful of new appraisal cases during the quarter. In two, Blueblade Capital Opportunities, LLC v. Norcraft Companies, Inc. and Solera Holdings, the court rejected the deal price as a measure of fair value based on the respective pre-transaction processes and deal terms. Both cases showed the court's willingness to get into the weeds on these matters, particularly if it believes the negotiation among the parties has been limited by process, terms or otherwise.
The Delaware Supreme Court provided further guidance on how to apply the Corwin standard to M&A transactions—notably, that disclosures to stockholders must faithfully reflect all material facts in order for the parties to benefit from the application of the more director-favorable business judgment rule. In Morrison v. Berry, the Supreme Court reversed a dismissal by the Chancery Court, providing a cautionary reminder that "partial and elliptical disclosures" can leave stockholders less than fully informed in a transaction, and if so, a board can lose the benefits of the business judgment rule.
Outside of the courts, we did see some noteworthy new law relating to M&A and corporate goverance. The third quarter of 2018 saw California adopt a minimum quota for women on boards of directors of public companies headquartered in the state. The California law is like no other in the nation, as it requires companies with at least five board members to have at least two female board members by 2021 (and more, in the case of larger boards). Whether the law will withstand constitutional challenges and whether or not other states will follow suit remains to be seen.
We also saw enactment of landmark CFIUS legislation. With the Foreign Investment Risk Review Modernization Act, the Committee on Foreign Investment in the United States has been empowered with an added level of scrutiny and influence in M&A transactions involving foreign investments in U.S. businesses. The new law expands the scope of transactions potentially subject to CFIUS review, provides CFIUS the ability to suspend transactions mid-review and, for the first time, requires mandatory filing for certain transactions. Not to be outdone by the U.S., the UK government also published details of its proposed new regime for the scrutiny of foreign investment that may have national security implications. Those proposals are contained in the National Security and Investment White Paper, and a draft Statutory Statement of Policy Intent, which expand on recent reforms that gave the U.K. government greater powers to screen mergers on national security grounds, where the target is involved in the production of military or dual-use technologies or certain other types of advanced technologies.
Finally, in deal practice, we note that the "MeToo" movement has started to impact purchase agreements—buyers are not just focused on diligence for such issues, but have begun to request specific representations and warranties to provide more adequate disclosure around sexual harassment claims or similar matters raised against or by company employees.
Overall, the third quarter of 2018 (and the day after) brought interesting developments across the M&A world. That, plus a heavy flow of continued deal activity (some of which we note on the final pages of this report), made for another active quarter. As always, we encourage you to reach out to any member of your Ropes team (or the Ropes Recap team) with any questions regarding the contents of this Ropes Recap or any other M&A legal developments that interest you. We look forward to continuing to bring you M&A news, trends and legal developments in the future.
Thank you.
Ropes Recap Editors
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