May 01, 2020

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane

M&A Law

M&A Deal Activity in Time of COVID-19

By Yelena Dunaevsky

COVID-19 has claimed many M&A deals in the past month, the largest being Xerox Holdings Corporation’s termination of its proposed $32.85 billion hostile takeover of HP Inc. on March 31, 2020. Xerox wrote in its press release that “[t]he current global health crisis and resulting macroeconomic and market turmoil caused by COVID-19 have created an environment that is not conducive to Xerox continuing to pursue an acquisition of HP Inc.” Quite a few companies are finding themselves in a similar situation.

Bloomberg Law reports that, as of April 8, 2020, 66 M&A deals were terminated since the WHO’s declaration of the pandemic on March 11, 2020, including, in addition to the Xerox-HP deal, the $3 billion WeWork-Softbank tender offer. According to White & Case, the US volume of M&A deals in March 2020 was only about half of what it was in January 2020. According to Reuters, Canada’s M&A deal activity was down almost 57% in the first quarter from a year ago reaching its lowest level since 2015. 

However, White & Case claims that the impact of the pandemic on pending deals may be overstated and that most pending US M&A deals are proceeding as planned. Out of 57 of deals valued at US$1 billion or more that were announced in Q1 of 2020, six already closed, 49 are still pending without any publicly announced changes and only two have been terminated or disputed so far.

Delaware Chancery Court Finds Credible Basis of Mismanagement in Sale of Linkable Networks, Inc.

By John Adgent

On April 3, 2020, the Delaware Chancery Court (the “Court”) ordered Linkable Networks, Inc., whose business before ceasing operations in 2017 provided a scalable network connecting credit card holders to a national group of brands, retailers and restaurants (“Linkable”), to produce additional documents in response to a books and records request by Paraflon Investments, Ltd., a private investment company (“Paraflon”).

Paraflon first invested in Linkable in 2014 and became one of its largest investors after contributing over $7 million. Thereafter, Linkable “hemorrhaged cash” due to its “voracious appetite” and never reached profitability. Desperate, Linkable sought additional capital from Blue Chip Venture Capital, a Linkable investor whose affiliate sat on Linkable’s board (“Blue Chip”). Blue Chip signed a term sheet for further investment, but Linkable declined to pursue the funding after accusing Blue Chip of walking back on the term sheet by forcing different terms. Ultimately, Linkable abstained from counter-signing the final Blue Chip investment agreement and did not attempt to enforce the signed Blue Chip term sheet, even when Linkable approached insolvency. Instead, Linkable sold to the Collinson Group in 2017 “for pennies on the dollar.” Before the sale closed, Paraflon made a formal demand for inspection under Delaware General Corporation Law Section 220, stating as its proper purpose a desire to investigate possible mismanagement and wrongdoing. Linkable made voluntary productions but Paraflon filed a complaint for four allegedly unaddressed requests.

Of those requests, the Court found a credible basis of mismanagement surrounding the abandoned Blue Chip financing and ordered the production of documents concerning the transaction. According to Paraflon, Linkable declining to enforce its term sheet with Blue Chip at a time of dire financial condition was inexplicable and could not be attributed to the exercise of business judgment. Paraflon also alleged Linkable declined to enforce Blue Chip’s commitment to provide funding as a concession to the Blue Chip affiliate who sat on Linkable’s board. The Court found that this evidence demonstrated that Linkable was in desperate need of cash when it abandoned the Blue Chip financing and its decision not to attempt to enforce the term sheet was at least questionable. Additionally, Paraflon raised a valid concern that Blue Chip’s presence on the Board may have improperly influenced the decision not to enforce the term sheet. Therefore, Paraflon presented evidence that, in the midst of imminent demise, the board elected not to pursue Linkable’s right to access capital for reasons other than the best interests of the company and its stockholders. 

Connecticut Federal Judge Dismisses Derivative Suit Claiming Bank’s Proxy Statement Misled Investors in Voting on Merger 

By Mary Lindsey Hannahan

On April 16, 2020, the U.S. District Court for the District of Connecticut (the “Court”) dismissed a shareholder suit claiming that SI Financial Group, Inc. (“SI FI”), the parent company of the Connecticut-based full service Savings Institute Bank and Trust Company (“SI Bank”), and Berkshire Hills Bancorp Inc. (“Berkshire”), the parent company of Berkshire Bank and acquirer of SI Bank, violated federal proxy statement rules by using a misleading proxy to encourage shareholders to approve the bank’s merger. The plaintiff claimed that the proxy omitted material information necessary for shareholders to make an informed decision regarding Berkshire’s acquisition of SI Bank. Specifically, the majority of plaintiff’s alleged omissions related to financial metrics used by SI FI’s board of directors’ financial advisor to render its fairness opinion. The proxy statement described the fairness opinion and the valuation analyses performed to develop and support it. But, the proxy did not include key inputs and assumptions underlying those valuation analyses. The Court recognized that without that information, SI FI’s shareholders could not fully understand the underlying analyses and thus decide how much merit to give the fairness opinion when voting whether to approve the merger. The plaintiff contended that if these omitted inputs and assumptions had been disclosed, they would have significantly impacted the mix of information available to SI FI’s voting shareholders.

The Court pointed out that while an omission can violate federal securities rules if “either the SEC regulations specifically require disclosure of the omitted information in a proxy statement, or the omission makes other statements in the proxy statement materially false or misleading,” the shareholders in this case failed to meet either standard. The shareholders did not argue that SEC rules required disclosure of the omitted information; instead, they relied on the second test, claiming that statements in the proxy were made misleading due to the omission of information. To succeed on such a claim, a plaintiff must specify a statement in the proxy that was allegedly made misleading due to omitted information and the reasons why such statement is misleading. The shareholders’ complaint listed numerous allegations that the omitted metrics would have been helpful to a shareholder in making an informed decision. However, the fact that omitted information would be useful, relevant or even material does not mean that omission of that information makes a statement misleading. The Court highlighted that while the shareholder’s allegations spoke to the materiality of the missing information, their claims lacked any “non-conclusory allegation that these omissions rendered any statement in the Proxy false or misleading.” The Court thus agreed with the defendant banks—SI FI and Berkshire—that the shareholders failed to state a claim that the proxy statement encouraging a vote to approve the merger was misleading and dismissed the suit.

International M&A

Rescissory Damages Distinguish Plaintiff’s Breach of Contract and Fraud Claims, Defeating Defendant’s Motion to Dismiss

By Whitney Robinson

On April 7, 2020, the Superior Court of Delaware (the “Court”) denied defendant’s motion to dismiss a fraud in the inducement claim stemming from allegations that the defendant lied about its organic products complying with industry standards and regulations. In late 2017, Firmenich Inc., a Swiss fragrances and flavors developer and manufacturer (“Firmenich”), entered into an Asset Purchase Agreement (the “APA”) to buy Natural Flavors, Inc., a natural and organic flavors manufacturer (“Natural Flavors”). Natural Flavors represented to Firmenich that it produced organic products that complied with the regulations of the United States Department of Agriculture’s (the “USDA”) Natural Organic Program. But, after the acquisition closed in February 2018, Firmenich learned that Natural Flavors’ products did not meet organic qualifications and misrepresented the ingredients used in its products, which did not meet the USDA’s organic regulations. Natural Flavors had one set of records for auditors and regulators reflecting the formulas that were consistent with regulations and a different set showing what it actually produced. The APA represented that the products produced by Natural Flavors complied with applicable government regulations. Firmenich filed suit after learning of the misrepresentations for breach of contract, fraud, and unjust enrichment, but the Court dismissed the fraud claim under the duplicative damages bar because the fraud damages and breach of contract damages were not distinguishable from each other.

Firmenich addressed the duplicative damages bar in its amended complaint, pleading in the alternative fraud in the inducement, unjust enrichment, and breach of contract, and seeking rescissory damages for fraud in the inducement. The Court asked the parties to address “the narrow issue” of whether pleading rescissory damages in the amended complaint helps in distinguishing the fraud damages from the breach of contract damages. After considering precedent, the Court concluded it could not “construct a seamless trail of legal analysis” on the rescissory damages issue. The Court stated it does not matter “whether the difference in damages is based on the actual method of calculation, or whether the difference in actual recoverable damages constitutes a legal distinction.”  The Court denied the motion to dismiss the fraud claim, stating that the rescissory damages did distinguish the breach of contract and fraudulent inducement claims and thus, both claims could proceed.

Stockholder Class Action Over Akebia Therapeutics Inc. Merger with Keryx Biopharmaceuticals Inc. Dismissed

By Whitney Robinson

On April 15, 2020, the U.S. District Court for the District of Delaware (the “Court”) dismissed a proposed stockholder class action suit for failure to state claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.  This case, which is a consolidation of three actions, was brought by stockholders of Keryx Biopharmaceuticals Inc., a biopharmaceutical company that produced an FDA approved chronic kidney treatment (“Keryx”), regarding its acquisition by Akebia Therapeutics Inc., a biopharmaceutical company that focuses on kidney disease treatments (“Akebia”). Under the merger agreement, Keryx would merge with and into a wholly owned Akebia subsidiary, leaving Akebia as the surviving entity post-merger. Additionally, for each share of Keryx stock owned, stockholders would get 0.37433 shares of Akebia stock. Before the merger, Baupost Group L.L.C., a hedge fund (“Baupost”), owned 21% of Keryx’s stock and about $164.75 million of its convertible notes. When Keryx announced the merger, its board of directors also announced that Baupost would convert the notes into Keryx stock prior to the merger and then vote its shares in favor of the merger. Keryx stockholders approved the merger in December 2018, and the closing occurred the next day.

The plaintiffs alleged that the Schedule 14A Definitive Proxy Statement (the “Proxy”) issued before the Keryx stockholder vote had material misleading statements and omissions. Specifically, the plaintiffs alleged that certain unaudited financial projections included in the Proxy (the “Projections”) were based on missing information and misled stockholders. Next, the plaintiff alleged that the Proxy did not include all the material information about the Baupost negotiations and its agreement to convert the convertible notes and vote its shares to approve the merger.

The Court found the Proxy did “clearly and expressly disclaim[] the accuracy of the Projections,” thus, the §14(a) claim that the Projections were materially false and misleading failed. The Proxy indicated the Projections were not reliable sources of information regarding future results, were not provided to effect voting decisions, and would not be updated. The Court also noted the Projections fell within the Private Securities Litigation Reform Act’s forward-looking statements safe harbor because the Proxy identified the Projections as forward-looking and included a “Cautionary Statement Regarding Forward-Looking Statements” section with the Projections.

The Court also found that the plaintiffs’ claim that the Proxy did not contain all the material information regarding the Baupost negotiations was not actionable because “omissions constitute violations only if they are both material and make other statements false or misleading.”  Here, the claim failed because there was no allegation as to how the absence of information about the Baupost negotiations was false or misleading. Additional §20(a) claims against members of the Keryx board of directors failed because the §14(a) claims were not cognizable. Thus, the Court granted defendants’ motion to dismiss for failure to state a claim.

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.