November 01, 2019

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

M&A Law

Delaware Supreme Court Rules that “Novel” Disclosure Issue Is Not Ripe for Review

By Mary Lindsey Hannahan

On October 14, 2019, the Delaware Supreme Court (the “Court”) refused to revive an investor suit arising out of the August 2014 acquisition of DAVA Pharmaceuticals, Inc. (“DAVA”), by Endo Pharmaceuticals, Inc. (“Endo”). The Court ruled that The Cirillo Family Trust (the “Trust”), which owned about 0.27% of DAVA’s shares as of the merger, failed to show that the Court should overturn the Chancery Court’s opinion, affirming summary judgment in favor of DAVA and its directors.

The Trust argued that the corporation surviving the merger, in addition to DAVA’s board of directors, owed a duty to disclose all material information to stockholders of the surviving corporation. The disclosure would enable the stockholders to make an informed decision on whether to exercise their appraisal rights.

However, the Court characterized this additional disclosure requirement as a “novel question,” and held that it was not ripe for review. The Court reasoned that because the Trust had not attempted to bring a claim of breach of the duty to disclose against DAVA or its successor, the Chancery Court appropriately declined to rule on the issue.

Delaware Chancery Court Finds No Separate Class Voting Right in Merger Suit

By John Adgent

On October 11, 2019, the Delaware Chancery Court (the “Court”) denied in part and granted in part a motion to dismiss arising from an asset sale (the “Transaction”) between Pro Performance Sports, LLC (the “Company”), and Implus Footcare, LLC. Three common unitholders (the “Plaintiffs”) challenged the Transaction, alleging that the Company, as a senior preferred unitholder, and the directors (collectively the “Defendants”), breached the Company’s LLC Agreement (the “Agreement”) by failing to obtain the Plaintiff’s approval of the Transaction. Specifically, the Plaintiffs asserted common unit holders had a right to vote as a separate class under the Agreement. Ultimately, the Court found that the Plaintiffs did not have a separate class voting right and dismissed the claim.

The Court adopted the Defendants’ interpretation of the Agreement, relying on the Agreement’s plain language and three canons of interpretation.  The text of the applicable provision demonstrated an intent to convey special rights to the Series A Preferred Unitholder. Additionally, under the presumption of consistent usage cannon, the court also noted that the phrase “voting separately as a class” appeared nowhere in the relevant provision of the Agreement, but appeared in numerous other sections where the parties intended class-specific voting.  Thus, had the drafters of the Agreement intended to provide class-specific voting rights, they knew how to do so.

Second Circuit Finds Stone Key’s Contract with Monster Acquirer Terminated, Not Entitled to Fees for Later Transactions

By Whitney Robinson

On October 11, 2019, the Second Circuit affirmed a S.D.N.Y. (the “Court”) judgment in a contract dispute between Stone Key Partners LLC and Stone Key Securities LLC (together, “Stone Key”), and Monster Worldwide, Inc. (“Monster”), finding that Monster does not owe Stone Key $8.9 million in fees for three transactions. The dispute arose from a 2012 engagement letter (the “Engagement Letter”) in which Stone Key conducted a strategic review of Monster to help secure a potential acquirer. After failing to find an acquirer, Monster sold 49.99% of its interest in its Korean subsidiary in December 2013, its remaining interest in the subsidiary in 2015, and sold Monster itself in 2016 (collectively, the “Transactions”). Stone Key asserted that (i) it was entitled to fees for the Transactions under the Engagement Letter as qualifying transactions, and (ii) the agreement was not properly terminated in writing.

Stone Key argued it was entitled to recover a fee from the December 2013 sale of Monster’s Korean subsidiary because it constituted “a sale of a material portion of the assets or operations of [Monster] and its subsidiaries taken as a whole” (a “Partial Sale Transaction”). The Court affirmed that while this transaction was within the Engagement Letter’s one-year tail period, it was not a Partial Sale Transaction.

Next, the Court, agreeing with the district court’s ruling, found the termination provision to be ambiguous.  The Court also held that termination was not conditioned on written notice nor did it place Stone Key in an ongoing engagement in absence of written termination. Thus, the Transactions fell outside of the agreement, terminating in August 2013, and Stone Key was not entitled to fees.

Lastly, Stone Key argued it was entitled to expenses incurred before the Engagement Letter’s execution, but the Court rejected this argument as those fees were “in connection with” Stone Key’s performance under the Engagement Letter.

Caremark Claim Survives Motion to Dismiss Against Clovis Board of Directors

By Colleen Pagnotta

On October 1, 2019, in In re Clovis Oncology Derivative Litigation, the Delaware Chancery Court (the “Court”) denied a motion to dismiss in a derivative action against the Clovis Oncology, Inc. (“Clovis”) board of directors (the “Board”). The breach of fiduciary duties action included one Caremark based failure to monitor claim. A Caremark claim requires the plaintiff to plead with particularity that the directors either (i) failed to establish a regulatory system for critical operations of a company, or (ii) established an oversight system, but undertook a conscious decision to ignore red flags that appeared through the system’s regulation.

The Court held that the plaintiffs satisfied the high standard of a Caremark claim to survive the motion to dismiss. Specifically, the court found the plaintiffs alleged particularized facts to demonstrate that the Board made a conscious decision to ignore many indications that management did not comply with FDA regulations during the clinical trial of Clovis’s new drug Rociletinib (“Roci”). The Court noted that the Board (i) was provided information about the Roci clinical trial, (ii) knew that management was inaccurately reporting calculations from the clinical trial and did not address such reports, and (iii) had enough experience in the industry to understand the violations of the protocols and procedures. Collectively, the plaintiff’s allegations of the Board’s failure to monitor was sufficient to survive a motion to dismiss.

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.