International M&A
European Commission Approves DS Smith’s €1.7B Acquisition of Europac
By Chris Johnson
On November 14, 2018, the European Commission (the “Commission”) contingently approved a proposed acquisition by DS Smith PLC, a manufacturer of paper and packaging products (“DS Smith”), of Papeles y Cartones de Europa, S.A., known as Europac., also a manufacturer of paper and packaging products (“Europac”).
The Commission’s investigation of the acquisition was originally announced on June 14, 2018, and focused on: (i) “the market for corrugated cases in Western France, in view of the strong combined market position of DS Smith and Europac and the loss of competitive constraint that the transaction would cause,” and (ii) whether or not the competition level would be reduced in “the market for corrugated sheets, and consequently corrugated cases, in Portugal, as the merged entity would have had a strong market position on the sheet market and faced limited constraints from competitors.” To address the Commission’s concerns, DS Smith offered to divest two French plants and a Europac plant in Portugal. The Commission believes the divestitures will shift the overall market share by only five percent and approval is contingent on such divestitures.
Mergers & Acquisitions Law
Sonic Shareholder Files a Proposed Class Action Suit Over Planned Acquisition by Inspired Brands
By David Marshburn
On November 1, 2018, a shareholder of Sonic Corp., a fast-food chain known for its drive-in restaurant service (“Sonic”), filed a class action lawsuit in the United States District Court for the District of Delaware in an attempt to halt the proposed $2.3 billion acquisition of Sonic by Inspire Brands, Inc., and SSK Merger Sub, Inc. (together, “Inspire Brands”), a restaurant company whose portfolio includes more than 4,700 Arby’s and Buffalo Wild Wings locations. Under the terms of the proposed transaction, originally announced on September 25, 2018, Inspire would acquire the shares of Sonic’s common stock from shareholders at a price of $43.50 per share.
In the complaint, the plaintiff alleges that Sonic violated the Securities Exchange Act of 1934 (the “Exchange Act”) by omitting material information related to the proposed acquisition in the company’s proxy statement filed with the Securities Exchange Commission (the “SEC”). This omission, plaintiff contends, renders Sonic’s proxy statement false and misleading in violation of Section 14(a) and Section 20(a) of the Exchange Act. The plaintiff asked the court to enjoin Sonic from proceeding with the proposed acquisition, issue a declaration that Sonic violated relevant provisions of the Exchange Act, and grant an award of the plaintiff’s reasonable attorney’s fees. The suit is currently pending in the United States District Court for the District of Delaware.
Caveat Emptor Reaffirmed by Delaware Court of Chancery
By Casey Kidwell
On November 26, 2018, Vice Chancellor Joseph R. Slights III (the “Chancellor”), relying on the caveat emptor doctrine, issued an opinion in favor of Latisys Holding, LLC (the “Seller”), ruling buyers should manage risk by addressing and allocating it clearly in their contracts. Zayo Group, LLC (the “Buyer”) claimed Seller breached the terms of the Stock Purchase Agreement, and as a result, was owed $22 million in damages. The central issue in this case was whether the Seller was required to inform the Buyer if a customer elected not to renew one of their contracts with the Seller before closing. The SPA required the Seller notify the Buyer if the Seller received written notice from a customer intending to “cancel, terminate, materially modify or refuse to perform” their contract with the Seller. The court found this provision ambiguous, forcing it to examine the negotiating record as extrinsic evidence to determine the parties’ intent. According to the Chancellor, the SPA drafting history made it clear that the Seller made no commitment to inform the Buyer of customer’s willingness to renew their expiring contract. Furthermore, the Seller expressly declined to make that commitment when the Buyer proposed it during the negotiations. The Chancellor concluded the courts must honor and enforce the bargain struck, stating, “[w]hile our common law and our Uniform Commercial Code have eased the harsh reality of caveat emptor somewhat, its core doctrinal premise remains.”
Post Holdings to pay $1 Million to Former Shareholders of National Pasteurized Eggs
By JP Barker
In an opinion issued on October 29, 2018, the Delaware Chancery Court (the “Court”) ruled that buyers in a stock acquisition could not avoid the burden of their stock purchase agreement to pay back tax refund and insurance proceeds while retaining the benefits of such agreement, allowing them to pursue their action for indemnification. In October 2016, Michael Foods of Delaware, Inc., a wholly owned subsidiary of Post Holdings, Inc. (together, the “Buyers”) acquired all of the existing shares of National Pasteurized Eggs, Inc. (the “Sellers”). Nearly a year later, the Buyers sued the former shareholders of the Sellers (the “Shareholders”) under claims of fraud and breach, seeking indemnification and requesting all the proceeds from the $7.5 million escrow fund established under the SPA. The Shareholders counterclaimed, seeking the remittance of nearly $1 million in tax refunds and insurance proceeds related to pre-closing periods that were collected by the Buyers post-closing, payable to the Shareholders under the SPA. The Buyers sought to avoid the payment under two theories: (i) the tax refund and insurance proceeds were invalid claims because Shareholders breached the representations and warranties of the SPA, and (ii) any proceeds that may have been available to Shareholders should be offset by the amount sought by Buyers.
The Court did not agree with the Buyers, asserting the Buyers could not avoid the burden of their agreement to pay back tax refund and insurance proceeds while retaining the benefits of the SPA allowing them to pursue their action for indemnification. Further, the Court did not agree with the “netting” claim advanced by the Buyers. The Court looked to the language of the SPA, noting that despite allowing offset from tax refunds or insurance proceeds for money owed to the Buyers, the SPA did not allow this same offset for money merely claimed by the Buyers. The Buyers were ordered to pay the tax refund and insurance proceeds to the Shareholders despite the Buyers pending claim for indemnification.