November 02, 2020

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane, Yelena Dunaevsky

M&A Law

Southern District of New York Dismisses WuXi PharmaTech Section 10(b) Suit

By John Adgent

On October 14, 2020, the United States District Court for the Southern District of New York (the “Court”) granted WuXi PharmaTech (Cayman) Inc.’s, a pharmaceutical technology corporation (“WuXi”), motion to dismiss a consolidated class action complaint brought by a former securityholder, Altimeo Asset Management (“Altimeo”). Altimeo’s claim alleged that WuXi defrauded its former securityholders in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by concealing plans to relist several of its subsidiaries on foreign stock exchanges following a go-private merger. Altimeo claimed that by concealing the plans to relist its subsidiaries, WuXi depressed the merger price paid to its former securityholders in the transaction to take WuXi private.

The Court dismissed the claim after finding that Altimeo failed to plausibly allege a material misrepresentation or omission as required for a claim under Section 10(b). The Court first noted that WuXi’s proxy materials disclosed that “[t]he buyer group may consider re-listing the Company’s equity on the Chinese or Hong Kong stock exchanges, which may have higher valuations.” Thus, WuXi explicitly disclosed that a future relisting at a higher valuation was possible and, according to the Court, a reasonable investor would have understood that possibility.

Thereafter, the Court noted the “nearly identical claims” brought by Altimeo in a separate case in August against Qihoo 360 Tech. Co. that alleged that Qihoo concealed plans to relist on a Chinese stock exchange following a go-private transaction. As with its prior case, the Court determined that Altimeo’s complaint could survive a motion to dismiss only if it plausibly alleged that WuXi had already adopted—but did not disclose to the public—an actual, concrete plan to relist. The Court concluded that Altimeo’s allegations failed to evidence a concrete plan because the allegations relied on news articles that consisted of speculation by analysts or comments made long after the merger. The Court found the allegations in the articles “far too conclusory, insufficiently particular, and devoid of details confirming their reliability.” Therefore, Altimeo’s allegations provided only an inference that WuXi was considering relisting and could not support a Section 10(b) claim.

Delaware Chancery Court Maintains Paradigmatic Revlon Claim against Mindbody, Inc. Founder

By John Adgent

On October 2, 2020, the Delaware Chancery Court (the “Court”) denied a motion to dismiss a claim for breach of fiduciary duty brought against the founder, CEO and Chairman, Richard Stollmeyer (“Stollmeyer”), of Mindbody, Inc., a cloud-based business management and payments software service provider (“Mindbody”). The stockholders alleged that Stollmeyer breached his fiduciary duties due to a conflict of interest in connection with the 2019 sale of Mindbody to Vista Equity Partners (“Vista”) for $36.50 per share. Specifically, the stockholders claimed that Stollmeyer inappropriately tilted the sale process in favor of Vista due to his personal interests in a need for liquidity and the prospect of future employment with Vista.

The Court determined that as a final-stage transaction, Mindbody’s cash-for-stock sale was subject to the enhanced scrutiny standard applicable under Revlon. Accordingly, the Court examined whether Stollmeyer performed his fiduciary duties in the service of the specific objective of maximizing the sale price of the enterprise. The Court explained that the paradigmatic Revlon claim involves a conflicted fiduciary who is insufficiently checked by the board and who tilts the sale process toward his own personal interests in ways inconsistent with maximizing stockholder value.

Applying this standard, the Court found that the stockholders sufficiently plead a claim for breach of fiduciary duty against Stollmeyer on account of the pleaded facts tracking “the paradigmatic Revlon plotline.” Stollmeyer was conflicted because he had an interest in near-term liquidity and an expectation that he would receive employment after the sale with Vista that would be accompanied by significant equity-based incentives. Stollmeyer also allegedly tilted the sale process by strategically driving down Mindbody’s stock price and providing Vista with informational and timing advantages during the due-diligence and go-shop periods. Further, Stollmeyer allegedly withheld material information from the Mindbody board, which failed to adequately oversee Stollmeyer. Moreover, the Court rejected the assertion that the sale was ratified under Corwin by a fully-informed, uncoerced stockholder vote. To the contrary, the stockholder vote was not fully informed in view of the allegations as to Stollmeyer’s conflict of interest according to the Court.

Shire Pharmaceuticals Must Make $45 Million Milestone Payment Post-Merger with BioTech Company

By Mary Lindsey Hannahan

On October 12, 2020, the Delaware Chancery Court (the “Court”) held that Shire Pharmaceuticals LLC, a specialty biopharmaceutical company (“Shire”), owes shareholders of FerroKin BioSciences, Inc., a clinical stage biotechnology company that Shire acquired in 2012 (“FerroKin”), a $45 million milestone payment under the parties’ March 2012 Agreement and Plan of Merger (the “Merger Agreement”). Under the Merger Agreement, Shire was to make the $45 million milestone payment to FerroKin’s former shareholders upon the initiation of Phase III clinical trials for FerroKin’s experimental iron chelation drug, deferitazole. The Merger Agreement further provided the milestone would be “deemed achieved” on December 31, 2015, regardless of whether Phase III trials had been initiated at that time, “unless the failure to achieve the milestone was ‘a result of a Fundamental Circumstance.’” The Merger Agreement defined “Fundamental Circumstance” as “a circumstance in which material safety or efficacy concerns made it impracticable to produce and sell or to obtain regulatory approval for deferitazole.”

Following December 31, 2015, Shire refused to make the milestone payment, declared that a Fundamental Circumstance had occurred and ended the deferitazole program entirely. FerroKin’s shareholders’ representative then filed suit on behalf of the shareholders seeking the $45 million payment plus interest and attorneys’ fees. Shire pointed to a string of challenges during the drug’s development process and its high costs, including two specific events: (1) a study that found that deferitazole may cause increases in tumors in rats and (2) the Federal Drug Administration’s subsequent hold on the drug due to those results. The Court, even assuming for the sake of argument that either of those events constituted a Fundamental Circumstance, found that Shire failed to prove that its failure to move forward into Phase III clinical trials was “a result of” either of those occurrences. The Court parsed through the evidence produced at trial to conclude that “Shire altered deferitazole’s development timeline such that Shire’s failure to initiate Phase III clinical studies by December 31, 2015, was inevitable, notwithstanding any Fundamental Circumstance that later occurred.” Thus, Shire’s delay in initiating clinical trials was not due to any Fundamental Circumstance but instead “was ‘a result of’ a series of routine drug development delays and financially motivated business decisions.”

The Court determined that “[e]ven in the absence of the fundamental circumstance [Shire] claim[s] to have occurred, Phase III clinical trials would still have been delayed past December 31, 2015.” Accordingly, the Court found in favor of the FerroKin former shareholders and upheld Shire’s obligation to make the $45 million payment.

COVID-19 Exclusions Continue to Play a Major Role in R&W Insurance Policies

By Yelena Dunaevsky, Esq., Woodruff Sawyer

COVID-19 Exclusions began to appear in Representations and Warranties Insurance (RWI) policies in early March of 2020. Initially, they took the form of blanket exclusions from coverage for any claims or issues that in any way related to COVID-19. Examples of blanket exclusionary language included statements like “the policy will exclude losses that are attributable to negative effects of COVID-19 and related viruses” and “the policy will exclude losses for, arising from or based upon coronavirus (including any resulting COVID-19 sickness, SARS-CoV-2, or any mutation or variation thereof) or any voluntary, government or other regulatory sanctioned or recommended response thereto.”

The insurers received a lot of push back from the market in response to this type of blanket exclusionary language. The insureds and the insurance brokers argued that such broad language could be interpreted to exclude almost all claims because all business and other activities of the target companies were bound, at least in the immediate future, to somehow relate to COVID-19. To find a palatable middle-ground, over the next few months the insurers began introducing exclusion modifications until AIG ultimately led with the following language, which, at the moment, remains the narrowest in the market: “policy would exclude any losses arising out of, resulting from or to the extent increased by the failure to protect any employee, contractor, officer, director, manager, agent, customer, client, supplier, distributor or any other person from the transmission of a novel coronavirus, including the coronavirus disease (COVID-19) or any evolution thereof.” With this narrow language, however, AIG also took the opportunity to introduce a premium pricing increase. A few insurers followed with a similar exclusion language formulation almost immediately after and others are likely to do so as well.

Insurers are likely to ask questions relating to the following topics to help them get to a satisfactory position on COVID-19 and allow them to remove the interim COVID-19 exclusion: (1) the continued impact of COVID-19 on the company; (2) discussions between buyer and seller relating to the impact of COVID-19 on the target’s business in the interim period; (3) instances of COVID-19 cases or illnesses at the target; and (4) concerns expressed by the target’s customers or suppliers about meeting targets or maintaining expected levels of activity.

The exact evolution of the COVID-19 exclusions in representations and warranties policies is difficult to predict, but they are likely to become less stringent and more focused on the business and particular conditions of the target as well as the due diligence conducted. A 2020 Claims Study published by Liberty Global Transaction Solutions at the end of September, 2020 is anticipating new COVID-19-related trends to emerge in the next 12 months. The study is predicting that insurance underwriters will more closely focus on areas of exposure relating to: (1) “third-party claims, including in connection with labor-related issues and material contracts that have been terminated on the basis of an apparent force majeure;” (2) “claims relating to key customer insolvency where, pre-signing, there were circumstances that were known to the warrantors that indicated that the relevant customer was in financial difficulty;” and (3) “claims relating to the incorrect use of the various job retention schemes that were implemented by national governments in the wake of COVID-19.”

Delaware Court Finds Alphatec Breached Preemption Rights Provision of Purchase Agreement with L-5 Healthcare Partners 

By Mary Lindsey Hannahan

On October 12, 2020, the Delaware Chancery Court (the “Court”) granted L-5 Healthcare Partners, LLC’s, a healthcare-dedicated institutional investor (“L-5”), motion for judgment on the pleadings in part by declaring that Alphatec Holdings, Inc., a publicly traded holding company providing spine surgery solutions (“Alphatec”), triggered L-5’s preemption rights and Alphatec’s later contingent proposal did not satisfy those rights. This suit arose out of the parties’ March 2018 Securities Purchase Agreement (the “Purchase Agreement”), pursuant to which L-5 purchased 25,000 shares of Alphatec’s stock for $25 million and “requires that whenever Alphatec authorizes the issuance and sale of common stock equivalents to a third-party buyer, Alphatec must first offer L-5 a pro rata opportunity to participate in that issuance at the same price and on the same terms.” In November 2018 and again in June 2019, Alphatec issued warrants convertible into its common stock to a third party, Squadron Medical Finance Solutions LLC (“Squadron”), pursuant to a credit agreement with Squadron. Following the 2019 issuance, Alphatec proposed that L-5 acquire warrants based on a mix of terms from Alphatec’s 2018 and 2019 agreements with Squadron, and further subject to approval by Alphatec’s board of directors and Squadron. L-5, dissatisfied with the proposal, subsequently filed suit to enforce its preemption rights and to seek fee-shifting and indemnification for expenses associated with this suit under the Purchase Agreement.

Section 4.18(a) of the Purchase Agreements details L-5’s preemption rights, providing that for so long as L-5 maintains a certain ownership threshold (which was maintained throughout the relevant time period), if Alphatec authorizes the issuance and sale of common stock or equivalents to a third party, it will first offer to sell a pro rata portion of such securities to L-5 “at the same price and on the same terms” as offered to the third party. Section 4.8 of the Purchase Agreement imposes indemnification obligations on Alphatec for expenses, including attorney’s fees, relating to any breach of the Purchase Agreement, and Section 5.9 further grants that the prevailing party in such action is entitled to reasonable attorney’s fees and other related expenses. L-5 claimed that: (i) Alphatec’s 2019 agreement with Squadron triggered its preemption rights; (ii) Alphatec breached the Purchase Agreement by failing to offer L-5 stock on the same terms as offered to Squadron; and (iii) Alphatec is required to indemnify and reimburse L-5 under Sections 4.8 and 5.9 of the Purchase Agreement.

Given that the parties agreed the warrants offered to Squadron were common stock equivalents under the Purchase Agreement, the Court first analyzed whether Alphatec “authorize[d] the issuance and sale” of the warrants to Squadron so as to trigger L-5’s preemption rights. The Court found that the issuance was “unequivocally an ‘issuance and sale’ that Alphatec ‘authorize[d]’” and dismissed Alphatec’s counterargument that the agreement with Squadron did not “authorize” the issuance because it was subject to certain conditions. The Court pointed out that the “presence of a condition [in the agreement with Squadron] did not render that consideration—the issuance of warrants—somehow less ‘authorized,’’” and accordingly held that L-5’s preemption rights were triggered. The Court next found that Alphatec’s proposal to L-5 was not an “offer to sell” under the Purchase Agreement in light of its contingent nature. It was contingent on both board approval and negotiations with Squadron; further, even if L-5 had accepted the proposal, Squadron could functionally veto any issuance of warrants to L-5 through restrictive covenants contained in its agreement with Alphatec. Thus, due to these contingencies on any issuance to L-5, the Court held the proposal “lacked sufficient finality to constitute an offer” and was merely “a promise to further negotiate and not an ‘offer to sell’ as required by Section 4.18 of the Purchase Agreement.” Alphatec therefore failed to honor L-5’s preemption rights by failing to offer to sell L-5 common stock. The Court left open for later resolution analysis of Alphatec’s affirmative defenses, what terms Alphatec would have to offer to L-5 to match those offered to Squadron, and whether L-5 was entitled to indemnification and/or reimbursement for fees.

International M&A

Delaware Supreme Court Upholds Chancery Court’s Share Price Determination in Stillwater Mining Co. Sale

By Whitney Robinson

On October 12, 2020, The Delaware Supreme Court (the “Court”) affirmed the 2019 determination of share price by the Delaware Chancery Court (the “Chancery Court”) in the Stillwater Mining Company sale.  Stillwater Mining Company, a company that mined and processed platinum group metals (“Stillwater”), sold to Sibanye Gold Ltd, a South African precious metals mining company (“Sibanye”), in 2017, when Stillwater shares were priced at $18 per share.  In 2016, following a decline in stock price, the Stillwater board instructed its CEO, Michael McMullen, to explore strategic opportunities.  McMullen, however, spoke with Sibanye about a potential deal without the approval of the Stillwater board.  Stillwater began a bid process in mid-2016, yet McMullen continued to push for a deal with Sibanye, and in December 2016, Stillwater signed with Sibanye, which offered deal consideration of $18 per share.  After signing but prior to closing the reverse triangle merger, the price of palladium, mined by Stillwater, increased. 

Former Stillwater stockholders (the “Petitioners”) filed suit, seeking appraisal rights and arguing to the Chancery Court that “the flawed deal process made the deal price an unreliable indicator of fair value and that increased commodity prices raised Stillwater’s fair value substantially between the signing and closing of the merger.”  The Chancery Court found that $18 per share “was the most persuasive indicator” of fair value and did not adjust that price to reflect the increase in the commodity price pre-closing.  This appeal followed.

On appeal, the Petitioners argued that the court abused its discretion by not adjusting the price to reflect the increase in the commodity price and by relying on a flawed sale process and deferring to the deal price to determine the fair value of Stillwater’s shares.  The Court, however, held that the Chancery Court did not abuse its discretion.

The Court held that the deal price was a fair indicator of Stillwater’s fair value because the Chancery Court thoroughly examined the sale process, finding objective measures of reliability. Specifically, those indicators were (1) the deal was conducted at arm’s length; (2) there was no conflict of interest with the Stillwater board; (3) Sibanye conducted due diligence prior to the deal; (4) there were several negotiated price increases before the final offer of $18 per share; and (5) no additional companies made bids.  Also, the Chancery Court considered the role McMullen played in securing Sibanye as the buyer and found that his actions did not undercut the sales process or the sale price.  Likewise, the Court found the Chancery Court did not abuse its discretion in declining to adjust the price upward.  While the Petitioners argued that the Chancery Court did not “adjust the deal price on its erroneous conclusion” that the Petitioners did not present such an argument for adjustment, the Court found that while the wording was “inartful” the Chancery Court analysis shows it did consider this argument but declined to make such an adjustment.

M&A Law

Breach of Contract and Indemnification Claims Survive in Suit Over 2016 Inland Waste and Bobcat North America Merger

By Whitney Robinson

The Delaware Superior Court (the “Court”) granted in part and denied in part, a motion for partial summary judgment in its October 1, 2020, Letter Opinion.  The case arose from the 2016 sale of waste-management companies by Inland Waste Holdings, LLC (collectively, “Inland”) and several individuals (collectively, with Inland, the “Defendants”) to Bobcat North America, LLC, a waste and recycling services company (the “Plaintiff”).  In this suit, Plaintiff alleges the following claims against Defendants: breach of contract, fraudulent inducement, negligence misrepresentation, indemnification and declaratory relief.  The Court granted the Defendants’ motion for the fraudulent inducement claim, but denied the motion for the breach of contract and indemnification claims. Because the Chancery Court has exclusive jurisdiction over negligent misrepresentation claims, the Court denied the claim but noted that Plaintiff may within 10 days transfer the claim to the Chancery Court or request that the Court enter an order of dismissal. 

One issue regarding the breach of contract and indemnification claims dealt with the treatment of payments the Plaintiff received from its representation and warranty insurance.  The parties obtained representation and warranties insurance from QBE Specialty Insurance Company (“QBE”) as part of the transaction, which would compensate Plaintiff for Defendants’ breaches under the Unit Purchase Agreement (the “UPA”). Following the execution of the UPA, Plaintiff submitted a claim under the policy to QBE for Defendants’ breaches of certain representation and warranties, resulting in a payment of $7.1 million. 

Defendants’ argued that recovering under the breach of contract and indemnification claims when QBE had already made a payment under the representation and warranty insurance would constitute a double recovery.  Plaintiff, however, argued that the payments by QBE shouldn’t be offset against recovering in this litigation because “(1) the UPA excludes the QBE Payment from Defendants’ potentially available setoff rights; (2) there is a genuine issue of material fact regarding the allocation of the QBE Payment; and (3) even if the UPA did not prohibit setoff, the collateral source rule requires, at most, a 50% setoff.” 

The Court found that there were genuine disputes of material facts over “if and how the QBE settlement payment should be allocated across [Plaintiff’s] insurance claims and its effect on any potential award here.”  Thus, these two claims survived the motion for summary judgment.  Additionally, the Court granted the motion as to the fraudulent inducement claim because Plaintiff failed to plead separate damages from those pled under the contract claim and “the ‘mere addition of punitive damages to [a plaintiff’s] fraudulent inducement charge is not enough to distinguish it from the contract damages.’”

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.