October 02, 2020

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane, Yelena Dunaevsky

M&A Law

Tiffany & Co. Sues LVMH to Enforce 2019 Merger Agreement

By John Adgent

On September 9, 2020, Tiffany & Co., an American luxury jewelry company (“Tiffany”), announced that it filed a lawsuit in the Court of Chancery of the State of Delaware against LVMH Moët Hennessy-Louis Vuitton SE, a French conglomerate specializing in luxury goods (“LVMH”), to enforce the parties’ November 24, 2019 merger agreement (the “Merger Agreement”). According to Tiffany, the suit seeks an order to require LVMH to complete its acquisition of Tiffany pursuant to the terms that the parties agreed upon in the Merger Agreement.

That same day, LVMH announced that it would be unable to complete the acquisition in light of a succession of recent events that it said undermined the acquisition. Among these events, LVMH indicated that it received a letter from the French European and Foreign Affairs Minister that directed LVMH to “defer the acquisition of Tiffany until after January 6, 2021” due to the “threat of taxes on French products by the US.” According to Tiffany’s English translation of the letter, deferring the acquisition would purportedly support the French Foreign Affairs Minister’s stated intent to take measures to dissuade the American authorities from putting these tariff sanctions into effect.

LVMH also noted the current economic situation of Tiffany and its management of the COVID-19 pandemic. LVMH stated its disappointment in Tiffany’s first half results and its perspectives for 2020, which it claimed were “significantly inferior to those of comparable brands of the LVMH Group during this period.” As a result, LVMH alleged the occurrence of a material adverse effect and stated that it would “challenge the handling of the crisis by Tiffany’s management and its Board of Directors.” LVMH stated that it considered, among other things, “that Tiffany did not follow an ordinary course of business, notably in distributing substantial dividends when the company was loss making and that the operation and organization of this company are not substantially intact.”

Tiffany responded that LVMH’s material adverse effect claim was meritless and unsupported by the Merger Agreement and Delaware law. Tiffany also refuted any claims of mismanagement of the pandemic or operations outside the ordinary course of business. Tiffany specified that the Merger Agreement required the dividend payments and that it is in a strong liquidity position with cash reserves of approximately $1.1 billion and net debt of less than $350 million, both as of August 31, 2020.

Delaware District Court Grants Motion to Dismiss SunCoke Energy Partners Consolidated Class Action

By John Adgent

On September 9, 2020, the United States District Court for the District of Delaware (the “Court”) granted SunCoke Energy Partners, L.P.’s, an owner and operator of cokemaking plants (“SXCP”), motion to dismiss a consolidated class action complaint brought by a former unitholder (“Plaintiff”). Plaintiff’s claim challenged SXCP’s June 2019 acquisition by SunCoke Energy, Inc. (“SunCoke”), whereby SunCoke acquired all of the outstanding common units of SXCP that were not already owned by SunCoke at that time in a stock-for-unit transaction. Plaintiff unsuccessfully claimed that the merger violated the federal securities laws, SXCP’s partnership agreement and Delaware law.

Plaintiff first claimed SXCP violated §14(a) of the Securities Exchange Act, which prohibits solicitation of a shareholder’s vote in contravention of the rules and regulations prescribed by the Securities and Exchange Commission. This claim failed because a violation of §14(a) requires the plaintiff to prove “transaction causation,” which means that the solicitation materials themselves, not the particular defect therein, were an essential link in the accomplishment of the transaction. The Court explained that solicitation materials are only essential when they “link a directors’ proposal with the votes legally required to authorize the action proposed.” According to the Court, the Plaintiff failed to plead transaction causation because SunCoke owned a sufficient percentage of SXCP to approve the transaction without the other equity holders’ votes. Therefore, the solicitation materials were not an essential link in the accomplishment of the transaction.

Next, Plaintiff claimed that SXCP’s general partner and its board (together with SXCP, the “Defendants”) breached their fiduciary duties, contractual obligations and the implied covenant of good faith and fair dealing. Defendants countered that Plaintiff’s claim was barred because the Defendants complied with a safe harbor provision in SXCP’s partnership agreement by seeking and receiving approval from a conflicts committee for the merger. The Court noted the contractual nature of Delaware alternative entity law, which permits parties to “eschew a corporate-style suite of fiduciary duties and rights, and instead to provide for modified versions of such duties and rights—or none at all—by contract.” The Court pointed out, however, that parties may not eliminate the implied covenant of good faith and fair dealing. Considering these principles, the Court found that the Defendants were not liable for any breach due to their compliance with the safe harbor provision in the partnership agreement.

International M&A

New York District Court Rules that Officers of Ability, Inc. Must Face SEC Suit Over Misleading Merger Proxy Materials

By Mary Lindsey Hannahan

On September 4, 2020, the U.S. District Court for the Southern District of New York (the “Court”) refused to dismiss claims by the Securities and Exchange Commission (the “SEC”) against Antatoly Hurgin and Alexander Aurovsky, each an officer, director and co-founder of the predecessor of Ability, Inc., a publicly-traded provider of interception, monitoring, and other cyber intelligence tools (“Ability”), relating to the 2015 merger of Ability’s predecessor company, Ability Computer & Software Industries, a seller of cell phone and satellite interception products, with U.S.-based special purpose acquisition company, Cambridge Capital Acquisition Corp (“Cambridge”), resulting in the formation of Ability. The SEC alleged that Hurgin and Aurovsky committed fraud and violated proxy solicitation rules in connection with the merger.

Hurgin and Aurovsky are co-controlling shareholders, officers and directors of Ability and were controlling shareholders and officers of its predecessor entity. Cambridge and Ability were jointly responsible for preparing the merger proxy materials that were filed with the SEC and sent to shareholders. Ability’s financials, created by Hurgin or under his supervision, projected that Ability would make up to $110 million in 2016, substantially more than its 2015 revenue of roughly $22.1 million. However, following the merger, Ability lost its largest customer and has since suffered only net losses.

The SEC pointed to several misleading statements and omissions surrounding the merger to support its claims of (i) fraud in the offer or sale of securities and (ii) violations of Section 14(a) and Rule 14a-9 of the Securities Exchange Act of 1934 against both Hurgin and Aurovsky, and (iii) additionally, fraud in connection with the purchase and sale of securities under Section 10(b) and Rule 10b-5 against Hurgin. First, Ability did not own ULIN, an interception product for mobile devices, which is directly contrary to Hurgin’s statements at a November 2015 roadshow, of which a transcript was attached to Ability’s proxy materials. To the contrary, Ability’s later filings disclose that it was merely a ULIN reseller for a three-year term and entitled only to 50% of the revenues from ULIN sales. Second, Hurgin’s statements and the proxy materials misled investors regarding Ability’s business in Latin America. A Latin American police agency was Ability’s largest customer by far, representing about 80% of its backlog revenue prior to the merger. Hurgin stated during a pre-merger roadshow that Ability had a three-year agreement with the agency, but both Hurgin and Aurovsky knew that the police personnel who verbally committed to buy Ability’s products had since been fired. Third, the SEC alleged that Ability’s backlog and pipeline financials were misleading because they failed to disclose the reseller agreement with ULIN, and that the deal with the police agency was not finalized. Finally, the SEC pointed out that the proxy materials only included a report of one of the two companies hired to evaluate the merger—notably, the report of the one that did not conduct its own due diligence, stated that Ability’s backlog revenue was comprised of signed purchase orders, and projected revenue of $108 million in 2016. The other report, left out of the proxy materials, highlighted the risk of the verbal agreements, as opposed to signed purchase orders, constituting the majority of Ability’s backlog. Hurgin and Aurovsky each moved to dismiss the SEC’s claims against them as failing to state a claim upon which relief may be granted.

The Court analyzed each of the claims against Hurgin and found that the SEC adequately alleged that Hurgin made each material misstatement or omission and met the required “materiality” element of each claim, a high bar. The Court first determined that the SEC adequately alleged that Hurgin’s statements about Ability’s ownership of ULIN were in fact materially misleading and rebuffed Hurgin’s arguments that such statements were immaterial, stating “[t]he Court is not remotely persuaded that the fact that Ability did not own ULIN is ‘so obviously… unimportant to a reasonable investor that reasonable minds can differ on the question of materiality.’” The Court next found that the SEC properly alleged its claim that Hurgin’s representations about Ability’s relationship with the police agency were materially misleading, rejecting Hurgin’s argument that such statements were opinions and the risks were not known to Hurgin. “It strains credulity to argue that Hurgin ‘had no reasonable basis to think’ [the police personnel’s] terminations could endanger the potential orders and revenue from the police agency,” opined the Court. And lastly, the Court found that the claim that Hurgin made materially misleading statements and omissions about Ability’s pipeline and backlog figures in the proxy was viable, due to his misrepresentations about ULIN, the police agency’s orders, and inclusion of the report incorrectly stating that Ability’s backlog was “comprised of signed purchase orders.” Under the terms of the merger agreement and due to his leading role at Ability, the Court found Hurgin was responsible for the proxy materials. The Court accordingly denied Hurgin’s motion to dismiss on all claims.

With respect to Aurovsky, the Court similarly found that the SEC plausibly alleged its claim that he committed fraud in the offer or sale of securities and made material misstatements or omissions in the proxy statement, and thus denied his motion to dismiss. The claims required the SEC to plead only that Aurovsky was negligent in connection with the merger, and the Court agreed with the SEC that the negligence element did not require it to allege that Aurovsky “personally made or disseminated the allegedly misleading statements.” Additionally, Aurovsky owed a duty to Cambridge shareholders to review the proxy materials because (i) “Aurovsky put his reputation at issue in the proxy materials such that he owed a duty to Cambridge shareholders” and (ii) the SEC plead enough facts showing his heavy involvement in the merger—“a deal from which Aurovsky would make millions and millions of dollars”— to survive the motion to dismiss. Thus, the Court denied Aurovsky’s motion to dismiss, as well.

M&A Law

Takeover Battle Continues As CoreLogic Again Spurns Offer by Senator and Cannae

By Mary Lindsey Hannahan

The battle for control of CoreLogic Inc., as begun and discussed in July, rages on. On September 15, 2020, the board of directors (the “Board”) of CoreLogic Inc., a publicly-traded company providing consumer, financial and property data, analytics and services (“CoreLogic”), unanimously rejected a second unsolicited proposal from Senator Investment Group LP, a hedge fund manager (“Senator”), and Cannae Holdings Inc., a diversified holding company that manages and operates various companies and investments (“Cannae”). The revised proposal, received by the Board on September 14, 2020, offered to acquire all outstanding common shares of CoreLogic for $66.00 in cash, an increase in price of one dollar per share from Senator and Cannae’s July 2020 offer.

Other than the $1.00 per share price increase, the Board concluded that the revised proposal “is otherwise unchanged from the prior proposal” and “continues to significantly undervalue CoreLogic, raises serious regulatory concerns that have not been addressed, and is not in the best interests of shareholders.” As evidence of this undervaluation, the Board provided that since Senator and Cannae’s original proposal, “CoreLogic has reported strong second quarter financial results, significantly increased guidance for the remainder of 2020, 2021 and 2022 based on the strength of its business, raised its quarterly dividend by 50%, and committed to a $1 billion share repurchase.” The Board did not shy away from listing its reasons for unanimously rejecting the offer, concluding that “a de minimis 1.5% increase from a significantly inadequate price does not justify providing due diligence to a competitor or entering into an acquisition agreement at $66.00 per share, with or without a ‘go shop’ provision.” CoreLogic’s chairman of the Board emphasized his confidence that the company’s current plan will “produce value for our shareholders far in excess of $66.00 per share.”

This prickly back-and-forth between Senator/Cannae and CoreLogic has resulted in a Federal Trade Commission investigation, adoption of a shareholder rights by plan CoreLogic, and a special shareholder meeting scheduled for November 17, 2020 at which Senator and Cannae have proposed to replace a majority of CoreLogic’s Board with nine handpicked directors. In its September 10, 2020 letter to shareholders, CoreLogic aggressively advocated that shareholders vote down Senator/Cannae’s proposals at the special meeting and emphasized the experience and expertise of the current Board. CoreLogic has also launched a website (www.corelogicvalue.com) dedicated to its position to vote against the takeover proposal and detailing its reasoning as to why the proposal undervalues the company.

Threat of a Proxy Contest Alone is Insufficient to Show Directors are Conflicted

By Whitney Robinson

On September 11, 2020, the Delaware Chancery Court (the “Court”) granted defendants’ motion to dismiss a proposed class action suit that alleged a breach of fiduciary duties. The suit arose from the 2016 merger of Outerwall, Inc., a company focusing on fully automated self-service kiosks, whose business segments included Redbox, Coinstar, and ecoATM (“Outerwall”), and Apollo Global Management and its affiliates, a global alternative investment firm (“Apollo”), pursuant to which Apollo acquired 69.3% of Outerwall’s outstanding shares for $52 per share in an all-cash tender offer followed by a short-form merger. Prior to the merger, Engaged Capital, LLC, a company known for activist investing (“Engaged”), acquired 14.6% of Outerwall’s common stock and began making demands to the Outerwall board of directors. Engaged stated it would start a proxy contest, causing Outerwall to begin its sale process and thus leading to the deal with Apollo.

In 2019, the plaintiff, an Outerwall stockholder, filed this suit and alleged that Outerwall’s directors and an officer (together, the “Defendants”) breached their fiduciary duties of loyalty regarding the merger. Specifically, the plaintiff alleged that the Defendants did not maximize Outerwall’s value out of self-interest and accepted inadequate consideration, and did not disclose material information about the merger to stockholders.

The Court analyzed the merger under the enhanced standard of Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., and looked at whether the Defendants “maximize[ed] the sale price of the enterprise.”  Additionally, Outerwall’s charter contained an exculpatory provision, shielding directors from liability to the full extent under Delaware law, requiring the plaintiff to plead a non-exculpated breach of fiduciary duty. A non-exculpated claim can be shown by proving that the defendant directors acted in self-interest, could not act independently, or acted in bad faith. The plaintiff argued that the Defendants were conflicted because they were not independent and acted in self-interest, specifically arguing that the threat of the proxy contest by Engaged made the Defendants conflicted. But, the Court found the plaintiff did not adequately plead that the Defendants were conflicted regarding the merger, because the plaintiff only alleged the threat of the proxy contest by Engaged and not additional facts showing disloyalty. The Court noted that Delaware courts have been reluctant to find that the threat of a proxy contest alone is enough to make directors conflicted. Here, there were not any additional indicators pled that showed the Defendants breached their fiduciary duties. The Court likewise dismissed the plaintiff’s claims that certain of the Defendants were conflicted for reasons outside of the threat of the proxy contest.

Several of Pilot’s Fraud Claims Survive Motion to Dismiss in Suit over 2018 Manna Acquisition

By Whitney Robinson

On September 18, 2020, the Delaware Chancery Court (the “Court”) allowed two fraud claims and one breach of contract claim to survive a motion to dismiss. This action stems from the 2018 acquisition by Pilot Air Freight, LLC, a global shipping, supply chain management, and logistics company (“Pilot”), of substantially all the assets of Manna Freight Systems, Inc., a transportation and logistics management company (“Manna”), pursuant to an Asset Purchase Agreement (the “APA”). About seventeen months after closing the acquisition, Pilot filed suited against Manna and its owners (together, the “Defendants”), alleging fraud, breach of representations and warranties, and breach of the implied covenant of good faith and fair dealing. 

In this suit, there were, among other issues, certain issues regarding Manna’s key customers: Modus Furniture International (“Modus”), Personal Comfort Beds (“Personal Comfort”), and Big Fig Mattress (“Big Fig”). Pilot alleged that the Defendants misrepresented facts regarding these key customers in the disclosure schedules to the APA. Pilot claimed that Modus decreased its volume of services by 90% but Defendants disclosed it as occurring “in the ordinary course of business.”  Similarly, the Defendants argued that Personal Comfort’s termination as a customer was also “in the ordinary course of business,” even though Pilot alleged it was due to failures on the part of Manna. Lastly, Pilot alleged that the Defendants had received notice that Big Fig was terminating its relationship with Manna despite not disclosing it on the disclosure schedules relating to the APA. The APA also limited the time that claims for indemnification for a breach of a representation or warranty could be brought to fifteen months after the closing.

Regarding the fraud claims, the Defendants argued that Pilot’s claims should be dismissed for four reasons: (1) the claims were untimely, (2) the claims were in violation of the APA, (3) the claims were not pled with particularity, and (4) the claims were bootstrapped to the breach of contract claims. First, the fraud claims were timely because the APA specifically provides that intentional fraud claims can be brought “at any time,” and that “nothing in this Agreement shall limit” the right to bring such a claim. Thus, the 15-month limitation for breach of a representation and warranty claims found in the APA was not applicable to the intentional fraud claim. The Court found that Pilot pled the fraud claims with particularity as to its allegations regarding Modus, Personal Comfort and Big Fig as Manna’s customers. The Court also stated that the fraud claims were not bootstrapped to the breach of contracts claims because Pilot alleged the Defendants induced Pilot into closing, which is separate from the breach of contract claim, that the fraud damages are distinct from the contract breach damages, and since the breach of contract claims that implicate fraud were dismissed, there are not claims “to which the fraud claims can be bootstrapped.”

But, the Court did agree with the Defendants that the APA did not allow the extra-contractual fraud claims to survive because the APA specifically provided that Pilot was not relying on any representations or warranties outside of the APA. The Court noted, “[i]f a sophisticated party agrees he is relying only on those representations and warranties in a written contract, and says as much in the contract, he ‘may not reasonably rely on information that [he] contractually agreed did not form a part of the basis for [his] decision to contract.’”  Thus, the Court allowed two counts of fraud to move forward. The Court addressed the remaining breach of representation and warranty and breach of implied covenant claims, finding that these claims did not survive the motion to dismiss.

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.

Yelena Dunaevsky

Woodruff Sawyer

Yelena is a corporate finance and securities attorney and, as a member of Woodruff Sawyer’s transactional insurance brokerage team, advises clients on M&A- and IPO-related insurance solutions. Yelena specializes in SPAC transactions and is a frequent author of articles covering various aspects of corporate transactions and related insurance coverage. She serves as a managing editor of the American Bar Association’s Business Law Today.