September 03, 2019

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

Mergers and Acquisitions Law

Delaware Chancery Court Clarifies Method of Interpreting a Private M&A Indemnification Clause

By George Khoukaz

On July 31, 2019, the Delaware Chancery Court (the “Court”) held that a buyer breached a securities purchase agreement (the “Agreement”) by violating the tax indemnification procedure outlined in the Agreement.  Matthew Hill and his father (collectively, the “Sellers”) filed a lawsuit against LW Buyer, LLC (the “Buyer”), claiming that the Buyer, by settling tax claims without notifying the Sellers, violated the indemnification procedure agreed upon by the parties. 

The tax indemnification clause in the Agreement required that the Sellers indemnify the Buyer for any previously unpaid taxes, provided that the Buyer notify the Sellers of such a breach within one year from the closing date by providing the specific factual basis of the claim in reasonable detail. After closing, the Buyer determined that certain sales and use taxes were owed by the Sellers for the pre-closing period.  The Buyer paid the amount owed, and provided the Sellers with a written notice one day before the end of the one-year period.  The Buyer insisted its notice provided the sellers with enough information to be aware of the basis for its claims, while the Sellers’ complaint alleged the claim notice “failed to specify a single inaccuracy or provide any background information about the alleged inaccuracies.”

However, in its decision, the Court focused less on the contents of the Buyer’s notice and more on the procedure the Buyer followed to notify the Sellers of the tax claim.   The Court held that the Buyer’s assumption of unilateral control over the tax claims and its unilateral settlement without notifying the Sellers violated the procedure agreed upon under the Agreement, and therefore barred recovery for the Buyer.

International M&A

Delaware Chancery Court Upholds Stillwater Deal Price in $2.2B Sale to Sibanye

By Lora Wuerdeman

On August 21, 2019, the Delaware Chancery Court (the “Court”) ruled that the $18.00 per share price paid for the Stillwater Mining Co. (“Stillwater”), in its $2.2 billion sale in 2017 to Sibanye Gold Limited (“Sibayne”) was the fair value of the business. Pursuant to a merger agreement between Stillwater and Sibanye, Stillwater common stock was converted at closing into the right to receive $18.00 per share, subject to the right of each holder to seek appraisal. Two large investors of Stillwater (the “Investors”) sought a court appraisal contending that Stillwater’s fair value was higher than $18.00 per share. Although both sides included discounted cash flow (“DCF”) share value calculations in their arguments, they were significantly different, with the Investors landing on $25.91 per share and Stillwater at $17.63 per share.  The Court found that the sale process was sufficiently reliable to make the deal price the most persuasive indicator of fair value, providing that “[n]either side proved that its DCF valuation provided a persuasive indicator of fair value. The experts disagreed over too many inputs, and the resulting valuation swings were too great, for this decision to rely on a model when a market-tested indicator is available.”   

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.