February 08, 2019

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

International M&A

European Court of Justice Overturns European Commission’s Block of UPS-TNT Merger

By Chris Johnson

On January 16, 2019, The European Court of Justice (the “Court”) found the European Commission (the “Commission”) infringed upon United Parcel Service, Inc.’s (“UPS”) right to defend itself in connection with the investigation of its proposed acquisition of TNT Express NV, an international express deliverer of small parcels (“TNT”).  The Commission originally blocked the deal in 2013, claiming the proposed acquisition would burden consumers in 15 countries by reducing the already limited supply of express parcel delivery.

The Court held the Commission violated UPS’s right to defend itself when the Commission amended its econometric model used to evaluate the merger without giving the parties notice.  The Court reasoned the Commission’s assertion that it didn’t need to disclose and permit responses to all tweaks to the economic modeling is “contrary to the principle of observance of the rights of the defence and [EU law], which, first, require the Commission to base its decisions only on objections in respect of which the interested parties have been able to comment and, second, establishes a right of access to the file.” The Court also refused to raise the standard of proof required to reverse a decision made by the Commission when a party’s rights to defense have been encroached upon, because doing so “would run counter to the objective of encouraging [the Commission] to show transparency in the development of econometric models used in merger control procedures and undermine the effectiveness of subsequent judicial review of [the Commission’s] decisions.”

BASF Wins Approval from European Commission for Acquisition of Solvay, SA

By David Marshburn

On January 18, 2019, the European Commission (the “Commission”) conditionally approved the $1.85 billion acquisition of Solvay S.A.’s nylon business, a Belgian chemical and plastics manufacturer (“Solvay”), by BASF SE, a German chemical company (“BASF”). The proposed deal, originally announced in September 2017, initially raised anticompetitive concerns with the Commission, leading the Commission to launch an in-depth investigation into the potential anticompetitive impact.  The Commission was concerned BASF would become the only fully-vertically integrated competitor in the nylon compounds market, requiring competitors of BASF to rely on BASF to supply them with one or more essential inputs.

Under the terms of the conditional clearance, the Commission will require Solvay to divest four nylon factories located in France, Poland and Spain to a single buyer and enter into long-term agreements with certain suppliers to meet requirements of the divested business. In addition, Solvay and BASF also agreed to form a joint venture between their newly merged entity and the eventual buyer of the divested assets. If all remaining closing conditions are met, the parties anticipate the transaction will close in the second half of 2019.

Tesaro Investor Files Suit Over $5 Billion Merger Deal with GlaxoSmithKline

By Lora Wuerdeman

On January 4, 2019, a stockholder’s proposed class action against Tesaro Inc., a cancer drug manufacturer (“Tesaro”), filed in Delaware federal court, claimed the proposed $5.1 billion merger with GlaxoSmithKline, a British pharmaceutical company (“GSK”), is based on false and misleading financial analyses. Pursuant to the terms of the merger agreement entered into on December 3, 2018, GSK will acquire all of Tesaro’s outstanding common stock for $75.00 per share in cash, with the tender offer set to expire on January 14, 2019. The complaint asserts the solicitation statement filed with the U.S. Securities and Exchange Commission on December 14, 2018, omits certain financial information such as all line items used to tabulate earnings before interest and taxes and includes misleading earning projections. The suit alleges various violations of the Securities Exchange Act of 1934, as amended, and seeks to stop the merger from proceeding or, in the alternative, if the merger does proceed, to rescind it and award whatever damages shareholders sustain as a result. Additionally, the complaint demands that Tesaro and its executives file a new solicitation statement “that does not contain any untrue statements of material fact.”

M&A Law

Delaware Supreme Court Strikes Down Use of the Covenant of Good Faith and Fair Dealing to Force Exit Sale by Minority Members

By Casey Kidwell

On January 17, 2019, the Delaware Supreme Court (the “Court”) overturned the Court of Chancery’s (the “Chancery Court”) opinion granting certain minority owners of a large joint venture the ability to force a sale (“Exit Sale”) of a limited liability company (the “Company”) based on the implied covenant of good faith and fair dealing.  The Chancery Court found contractual gaps in the Company’s limited liability company operating agreement (the “Agreement”) on how a minimum return on investment provision should be applied to later admitted members, with such provision in turn determining whether a later admitted member had a right to block an Exit Sale.  In short, the Chancery Court determined later admitted members did not have such a right under the Agreement because an alternative finding would have allowed for “a harsh result by effectively blocking an Exit Sale.”

The Court reversed the Chancery Court’s decision, holding that the Agreement did not have contractual gaps, but rather, granted discretion to the board to determine how to set the terms and conditions of later admitted members and that deferring this determination until admission was a contractual right.  The Court went on to caution use of the implied covenant of good faith and fair dealing, explaining such covenant is a limited and extraordinary remedy that does not apply when the contract addresses the conduct at issue.

Delaware Supreme Court Tosses $1.6 Million Insurance Liability Claim by US Ecology Inc.

By George Khoukaz

On January 17, 2019, the Delaware Supreme Court (the “Court”) affirmed the ruling against US Ecology Inc. (the “Seller”) in its suit against ASPV Holdings Inc. (the “Buyer”), the buyer of Allstate Power Vac Inc., the Seller’s subsidiary (the “Subsidiary”), for repayment of $1.6 million in non-covered insurance payments.  In November 2015, the Seller sold the Subsidiary in a stock sale that included accrued insurance reserves for auto and workers’ compensation, but such reserves were significantly lower than the actual bills the Seller was facing. After the sale, the Seller demanded post-sale repayment for the claims incurred prior to the closing. The claims at issue were submitted to, and denied by, the insurance providers post-closing.  In June 2018, the Court of Chancery (the “Chancery Court”) originally dismissed claims of unjust enrichment against the Buyer and the Subsidiary, holding the purchase agreement did not require the Buyer to assume the non-covered insurance payments incurred before the closing, and in addition, the unjust enrichment claim was barred by a release in the closing documents.  On appeal, Buyer’s counsel argued that Seller should have negotiated for those expenses to remain as liabilities of the Subsidiary if Seller actually desired that such terms be in place.  The Chancery Court agreed with Buyer’s position, denying Seller’s claim and affirming the Chancery Court’s earlier ruling.

Ryan Thomas

Counsel, Bass Berry & Sims PLC

As mergers and acquisitions (M&A) and securities counsel to numerous national companies and private equity firms, Ryan Thomas has closed more than $50 billion in M&A transactions, and more than $60 billion in overall transactions, including both the largest domestic LBO, and the largest private equity-backed IPO at the time. Ryan’s practice focuses on public and private companies within the healthcare, media, retail, government services, life sciences and technology industries, among others.

Chauncey Lane

Counsel; Husch Blackwell, LLP

Boards and senior executives of public and private companies and investment management firms call on Chauncey for his knowledge and experience in mergers and acquisitions and capital market transactions. In this role, Chauncey regularly assists domestic and international clients with buy-side and sell-side mergers, divestitures, asset acquisitions, going-private transactions, debt and equity offerings, corporate governance and corporate restructurings. Chauncey is an active member of the Business Law Section’s Mergers and Acquisitions Committee and Federal Regulation of Securities Committee.