October 01, 2019

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

M&A Law

Termination Fee is Not Exclusive Remedy for Breach of No-Shop

By Sara Kirkpatrick and Lisa Stark

On September 9, 2019, the Delaware Court of Chancery (the “Court”) held that Genuine Parts Company (“GPC”) adequately pled facts to support a pleading stage inference that Essendant Inc. (“Essendant”) breached its merger agreement with GPC (the “Merger Agreement”) by terminating the Merger Agreement to pursue a transaction with non-party Sycamore Partners (“Sycamore”), pursuant to a superior proposal termination right. Further, the Court found that GPC adequately pled that its acceptance of a termination fee from Essendant did not preclude GPC from pursuing breach of contract claims against Essendant for its alleged breaches of the Merger Agreement.

Shortly before GPC and Essendant signed the Merger Agreement in April 2018, Sycamore expressed an interest in acquiring Essendant. After Essendant signed the Merger Agreement, Sycamore made an offer that Essendant’s board of directors determined was superior. Essendant’s right to enter into an agreement with respect to a superior proposal was conditioned on its compliance with the terms of the Merger Agreement. GPC alleged that Essendant breached the Merger Agreement by (i) terminating the Merger Agreement to pursue an inferior proposal, (ii) failing to require Sycamore to enter a confidentiality agreement with terms at least as restrictive as those in GPC’s confidentiality agreement, and (iii) failing to exercise reasonable best efforts to close the transaction. In September 2018, Essendant terminated the Merger Agreement and paid GPC a $12 million termination fee that was accepted by GPC.

GPC subsequently brought the action seeking damages for Essendant’s alleged breaches of the Merger Agreement. Essendant moved to dismiss on grounds that the termination fee paid to GPC was its sole remedy under the Merger Agreement.  The Court disagreed, finding that that the termination fee was not GPC’s exclusive remedy because Essendant breached the Merger Agreement’s non-solicitation provision.

Delaware Superior Court Declines to Find Obligation to Maximize Earn Out

By John Adgent

On September 17, 2019, Delaware’s Superior Court granted a motion to dismiss a claim that the implied covenant of good faith and fair dealing required a purchaser to maximize post-closing earn out payments.  The dispute arose from a transaction involving PCM, Inc. (“PCM”) and Collab9, LLC (“Collab9”).  Pursuant to an asset purchase agreement, PCM bought substantially all of the assets of En Pointe Technologies Sales, LLC (“En Pointe”), from Collab9.  In addition to the initial purchase price, PCM agreed to pay Collab9 a 36 month earn out, equal to 22.5% of En Pointe’s adjusted gross profit. 

Post-closing, Collab9 filed a complaint against PCM and En Pointe alleging breach of the implied covenant of good faith and fair dealing for failure to maximize earn out payments.  Specifically, Collab9 claimed that PCM and En Pointe: (i) maintained financial records in a way that made it impracticable to accurately determine the correct amounts for earn out payments; (ii) created a sham entity to move revenue off En Pointe’s books; and (iii) renewed certain contracts or transferred sales persons or accounts as a means of minimizing adjusted gross profit.

Based on the earn out provision, the Court found that PCM retained sole discretion to operate the business post-closing and the parties specifically agreed that PCM had neither an express nor implied obligation to maximize the earn out. To grant additional unspecified rights would grant Collab9 contractual protections that they failed to secure for themselves at the bargaining table.

CVS-Aetna Merger to Proceed Forward Following a Gruesome Legal Battle

By George Khoukaz

On September 4, 2019, the U.S. District Court for the District of Columbia approved a deal by the U.S. Department of Justice (the “DOJ”), clearing the way for CVS Health Corporation (“CVS”) to acquire Aetna Inc. (“Aetna”).

U.S. District Judge Richard L. Leon, despite a number of amici briefs arguing against the deal, approved the merger, reasoning that the evidence “persuasively support why the markets at issue are not only very competitive today, but are likely to remain so post-merger.”  As part of the $69 billion deal, Aetna is required to divest its Medicare Part D prescription drug plan (“PDP”) by selling it to WellCare Health Plans.  The deal will have to undergo federal court review under the Tunney Act (the “Act”) for its public interest implications.  The Act grants the DOJ significant discretion to identify and correct harm to competition, so much so that merger clearances usually sail through the process with limited court resistance.

Judge Leon recognized the Act’s reputation and indicated his willingness to undergo a more “thorough” public interest inquiry into the deal, stating a merger that impacts the lives of millions of Americans deserves careful attention and review.  “If the Tunney Act is to mean anything,” Judge Leon wrote, “it surely must mean that no court should rubberstamp a consent decree approving the merger of ‘one of the largest companies in the United States’ and the ‘nation’s third largest health-insurance company,’ . . . simply because the Government requests it!” 

At the end of the hearing, Judge Leon concluded that the merger is unlikely to give the parties anticompetitive leverage over its rivals, and CVS will still have to compete to retain its customers and maintain its current prices.   

Beyond the Transaction, FTC Flags Non-Compete Clause Based on Competitive Impact

By Colleen Pagnotta

On September 13, 2019, the Federal Trade Commission (“FTC”) stated in a complaint and proposed consent that the non-compete clause in the Purchase and Sale Agreement (“PSA”) in which NEXUS Gas Transmission LLC (“NEXUS”) was to acquire Generation Pipeline LLC (“Generation”) from a group of sellers, violated anti-trust and competition laws. Under the PSA, North Cost Gas Transmission (“NCGT”), a minority interest holder in Generation and whose primary asset is the North Cost Pipeline, was prohibited from competing with the Generation Pipeline for three years. The FTC determined the Generation Pipeline overlapped geographically with the North Cost Pipeline and found the non-compete created an agreement to (i) “eliminate actual and potential competition among market participants” and (ii) increase NEXUS’s ability to exercise market power unilaterally in the market.

Based on this finding, the FTC demonstrated it may take issue with a non-compete clause, even if the transaction itself does not bring about antitrust issues. To proceed with the transaction, the FTC required NEXUS and the group of sellers to (i) strike the non-compete clause and (ii) agree to reporting and compliance requirements for ten years. This enforcement action is evidence that the FTC continues to actively monitor transactions and is a reminder to parties to assess all parts of the transaction for possible antitrust issues. 

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.