January 06, 2021

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane, Yelena Dunaevsky

M&A Law

Third Circuit Affirms Lionbridge and HIG Win in Investor’s Class Action Alleging Misleading Statements

By Mary Lindsey Hannahan

On December 2, 2020, the United States Court of Appeals for the Third Circuit (the “Court”) affirmed the lower court’s holdings in favor of Lionbridge Technologies, Inc., a provider of localization and artificial intelligence training data services (“Lionbridge”), and H.I.G. Capital, a Florida-based private equity firm (“HIG”), related to HIG’s acquisition of Lionbridge in a $360 million go-private transaction. The suit was brought by a former Lionbridge shareholder against Lionbridge’s chief executive officer and other entities and individuals involved in the sale of Lionbridge, alleging that such defendants made false and misleading statements in the acquisition proxy statement (the “Proxy”) in violation of Section 14(a) of the Securities Exchange Act of 1934, as amended, and Securities Exchange Commission Rule 14a-9.

The Proxy included the full text of a fairness opinion by Lionbridge’s financial advisor as to the sale, and a statement that the Lionbridge board of directors (the “Board”) believed the fairness opinion was one of several positive reasons to support approval of the sale. The Proxy further disclosed that, in creating the fairness opinion, the financial advisor relied on financial projections provided by Lionbridge and included such projections “solely to give Lionbridge stockholders access to certain financial projects that were made available” to the Board, special committee and financial advisor. The Proxy stated that these financial projections were revised shortly before the financial advisor provided its fairness opinion to the Board and the revised projections resulted in a 17% higher Adjusted EBITDA than the prior projections. The plaintiffs claimed, in part, that these revisions made the Proxy false and misleading “because it caused shareholders to believe the buyout was more attractive than it was.”

The Court, however, disagreed—it found that the Proxy adequately warned that the revised financial projections were included only to give Lionbridge shareholders access to information presented to the Board, special committee and financial advisor. The Proxy stated that such projections were not included “to influence a Lionbridge stockholder’s decision whether to vote for the merger agreement or for any other purpose,” among other similar disclaimers. The Court pointed out that the projections were expressly not included as an estimate of Lionbridge’s future performance, but only to provide shareholders with the same information as the Board, special committee and financial advisor, and so the statements were not false and misleading. Because the projections were accompanied by a lengthy and specific disclaimer and not included as statements of fact, the plaintiff could not show such statements were false and misleading absent alleging that the defendants relied on another set of projections (which the plaintiff did not allege). The Court therefore affirmed the lower court’s order and held that “Plaintiff’s intended amendment was futile because even if allowed, it could not affect our result.”

In the plaintiff’s second argument against summary judgment in favor of the defendants, the plaintiff claimed that the Proxy’s statement that the Board considered the fairness opinion a “positive reason” to approve of the sale was misleading because it did not disclose a material fact underlying the fairness opinions—specifically, the fact that projections relied on by the financial advisor in its fairness opinion did not take into account Lionbridge’s growth through future acquisitions. The Court, however, again agreed with the lower court, finding that the following sentence in the Proxy clarifies that the projections did not take future acquisitions into consideration: “[T]he forecasts do not take into account any circumstances, transactions or events occurring after the dates on which the forecasts were prepared.” Even if other statements were ambiguous as to that point, the foregoing sentence sufficiently clarifies that the forecasts did not include the impact of any future acquisitions by Lionbridge. Thus, without ambiguity, the Court found no need for the plaintiff’s argument to go to a jury and affirmed summary judgment in favor of the defendants.

An Avalanche of SPAC M&A Deals Predicted for Q1 of 2021: Lawsuits Certain to Follow

By Yelena Dunaevsky, Esq., Vice President, Transactional Insurance at Woodruff Sawyer

As of December 21, 2020, 15 SPAC business combinations were announced and eight closed in December of 2020, including Trine Acquisition Corp.’s $580 million merger with Desktop Metal, Inc., a technology company that designs and markets 3D printing systems. Considering the record-breaking number of SPACs that have gone public via an IPO in the second half of 2020, with 53 completing an IPO in October alone, the pipeline for SPAC mergers is bound to break records in the first and second quarters of 2021.

According to SPACInsider.com SPAC teams that completed their IPOs in 2020 took a much shorter time to announce a deal (4.8 months on average) than teams that completed IPOs in previous years.

Time from IPO to closing the deal has gone down dramatically as well. It is now averaging about six months, down from about two years in the previous years.

But what is even more interesting is that a new, more sophisticated, nimbler and faster breed of SPACs seems to have emerged in the second half of 2020. SPACs that completed an IPO in the second half of 2020 are taking about three months to announce deals. This considerably faster timeline, coupled with lightning-fast closing times, has led some, including the plaintiffs’ bar, to start questioning the thoroughness of the diligence being conducted by the SPAC teams and the extend of the disclosure in their SEC filings.

The Trine/DeskMetal announcement, for example, prompted two lawsuits to be filed in the United States District Court for the Southern District of New York following Desktop Metal’s filing of the proxy statement/consent solicitation statement/prospectus with the SEC. Both cases, Waqqad v. Trine Acquisition Corp., et al., No. 1:20-cv-10056, filed on December 1, 2020; and Peay v. Trine Acquisition Corp. et al., No. 1:20-cv-10137, filed on December 2, 2020 made similar allegations of insufficient information disclosed to the shareholders. Desktop Metal’s 8-K states that the company believes these actions to be without merit and that no supplemental disclosures were required. However, in an attempt to declaw the litigation, Trine and Desktop Metal made additional disclosures in the 8-K to supplement the disclosure in their proxy statement and to address information called for in the lawsuits.

Notably, other lawsuits brought against SPAC-driven business combinations involved allegations of SPACs rushing to close deals days ahead of their quickly expiring deadlines in an effort to avoid having to liquidate the SPAC and return SPAC capital to investors. Those lawsuits contented that the SPAC sponsor team’s incentive to close on any business combination rather than having to liquidate the SPAC, and the resulting lack of proper or rushed due diligence process, led to failed or wildly disadvantageous transactions and losses for investors.

With the latest trend of shortened search periods for SPACs, quick deal announcements and equally quick closings, the argument that SPAC sponsor teams were pressured to close on a bad deal falls away, but the claim that insufficient diligence was conducted and that there were holes in public disclosure, which could have led to investor losses, may continue to stick. One thing is almost certain, with the sheer numbers of SPACs aiming to announce and close deals in Q1 and Q2 of 2021, we will be seeing more lawsuits, meritless or not, being brought against SPACs in 2021.

International M&A

Delaware Chancery Court, in Issue of First Impression, Finds WeWork’s Special Committee Can Bring Suit

By Whitney Robinson 

On December 14, 2020, the Delaware Court of Chancery (the “Court”) denied the Rule 41(a) motion for leave to voluntarily dismiss a suit brought by a temporary committee of the board of directors (“Board”) of The We Company, a company providing office space solutions and services (“WeWork”). The suit arose from the failed tender offer of WeWork by SoftBank Group Corp., a Japanese conglomerate holding corporation (“SBG”), and SoftBank Vision Fund (AIV MI) L.P., a venture capital fund led by Masayoshi Son, the SBG CEO (“Vision Fund,” and together with SBG, “SoftBank”). The tender offer commenced in December 2019, but by early 2020, the deal started to fall apart, and on April 1, 2020, SoftBank terminated the tender offer because certain closing conditions had not be satisfied. 

In late 2019, WeWork’s Board authorized a special committee of two directors, Bruce Dunlevie and Lewis Frankfort (the “Special Committee”), to explore strategic alternatives and potential transactions. The Board was aware that the two Special Committee members held over 34 million combined WeWork shares and might benefit in a potential tender offer, but nonetheless gave the Special Committee broad authority. After the tender offer terminated, the Special Committee brought suit against SoftBank (the allegations of which are discussed below). The WeWork Board then formed a new committee of two independent directors (the “New Committee”) to investigate whether the Special Committee could bring suit against SoftBank, whether it could continue to pursue the suit, and whether it was in WeWork’s best interests to continue the suit. Finding the Special Committee couldn’t do any of the foregoing, the Rule 41(a) motion was filed. 

The issue at hand presented a case of first impression for the Court: “should a temporary committee of a board of directors created in response to the filing of a lawsuit against the corporation’s new controlling stockholders (SBG and Vision Fund) be permitted to terminate the lawsuit, which an earlier committee of the board filed on behalf of the corporation with the support of the Company’s management and its outside counsel to enforce the corporation’s contractual rights against them?”

After considering the Special Committee’s argument that the entire fairness standard applies and the New Committee’s assertion the business judgment controls, the Court determined that Zapata Corp. v. Maldonado provided the best analogy to the case at hand, specifically because both cases involved a board committee with full authorization deciding if viable claims against the company should be dismissed. Zapata provides for a two-prong test to determine if the claim should continue: under the first prong the company must prove independence, good faith and reasonable investigation, and under the second prong, the court may in its discretion apply its own independent business judgment as to granting the motion.

The Court found under the first prong that the New Committee was independent and used good faith but there were questions as to the reasonableness of its investigation. The Court noted that the New Committee failed to consider and investigate certain facts around the Special Committee’s authority and SoftBank’s response to the litigation and had flawed reasoning. This led the Court to proceed to the second prong of Zapata. Further, the Court found it was appropriate under the second prong to deny the motion, particularly because the claims against SoftBank were not frivolous, dismissing the suit now strained the tendering stockholders ability to obtain relief, and the New Committee was formed by the request of SoftBank to hinder the litigation.

Breach of Contract Claim Survives Softbank’s Motion to Dismiss in WeWork Suit

By Whitney Robinson 

On December 14, 2020, the Delaware Court of Chancery (the “Court”) granted a motion to dismiss a claim brought by The We Company, a company providing office space solutions and services (“WeWork”), for a breach of fiduciary duty, but allowed a breach of contract claim to survive against defendant SoftBank Group Corp., a Japanese conglomerate holding corporation (“SBG”), and SoftBank Vision Fund (AIV MI) L.P., a venture capital fund led by Masayoshi Son, the SBG CEO (“Vision Fund,” and together with SBG, “SoftBank”).  

WeWork brought this action at the direction of its special committees (“Special Committee”) of the board of directors, asserting that SoftBank failed “to use reasonable best efforts to consummate the transactions” and breached the fiduciary duties owed to WeWork and minority shareholders. A separate action filed by Adam Neumann, a WeWork co-founder, was consolidated into this action. The parties to this litigation were parties to a Master Transaction Agreement (“MTA”) that contemplated three transactions: (i) provide WeWork with $1.5 billion of equity financing (the “Equity Financing”); (ii) purchase up to $3 billion of WeWork’s stock from Neumann and other stockholders of WeWork in a tender offer at a per share price no less than $19.19 (the “Tender Offer”); and (iii) provide WeWork with up to $5.05 billion of debt financing (the “Debt Financing”). However, SoftBank terminated the Tender Offer, leading the Special Committee to file suit on behalf of WeWork.   

SoftBank first tried to argue that WeWork and the Special Committee did not have standing to sue, but the Court disagreed. The Court found WeWork had standing for three reasons. First, WeWork and Neumann are defined as parties to the MTA, and thus have rights to enforce the agreement. Next, “injury-in-fact” is not limited to economic harm only, and WeWork would benefit from the Tender Offer, even if a “‘relatively small’ benefit.”  Lastly, WeWork could enforce the “reasonable best efforts” provisions but tendering stockholders could not given the disclaimer of their-party beneficiary rights in the MTA. 

The Court allowed the breach of contract claim to survive the motion to dismiss. Under Delaware law, a court will evaluate reasonable best efforts by examining “whether the party subject to the clause (i) had reasonable grounds to take the action it did and (ii) sought to address problems with its counter-party.”  The Court found that the complaint sufficiently alleged breach, particularly because SoftBank tried to take actions inconsistent with the MTA and could not rely on a single exculpatory allegation in the complaint.

WeWork alleged that SoftBank exercised control over it as controlling stockholders and should be liable for a breach of fiduciary duty in the time leading up to the MTA. But, the Court disagreed, finding the complaint failed to state how SoftBank had control prior to the MTA. Documents stated that Neumann held roughly 75% of the voting interest in WeWork at that time. The Court also found the post-MTA breach of fiduciary duty failed because the complaint did not differentiate it from the breach of contract claim.

M&A Law

Second Circuit Rejects XpresSpa Shareholder’s Fraudulent Inducement Claim

By John Adgent

On December 21, 2020, the United States Court of Appeals for the Second Circuit (the “Court”) affirmed the dismissal of a fraudulent inducement claim brought by a minority shareholder (“Kainz”) of XpresSpa Group, Inc., a spa services business formerly known as Form Holdings Corp. (“New XpresSpa”). Kainz claimed that he was misled into signing a joinder agreement in connection with New XpresSpa’s 2016 merger with XpresSpa Holdings, LLC, an airport spa business (“XpresSpa”). As a condition of closing, the merger agreement required that unitholders representing at least 95 percent of XpresSpa’s outstanding units sign a joinder agreement to the merger agreement. As an owner of less than 5 percent of XpresSpa’s outstanding units at the time, the 95 percent threshold was met without Kainz signing a joinder, and the merger closed on December 23, 2016. Nevertheless, a member of XpresSpa’s board of directors sought to convince Kainz to sign a joinder by informing Kainz that he would not receive the new securities in New XpresSpa in exchange for his units in XpresSpa without signing a joinder to the merger agreement. Kainz ultimately signed a joinder, but subsequently claimed that this statement fraudulently induced him to sign. The district court dismissed Kainz’s complaint on the grounds that he failed to plausibly allege justifiable reliance and injury causation.

On appeal, Kainz argued that the district court erred because it focused on the closing of the merger rather than on the distribution of the merger consideration, which failed to address Kainz’s operative theory of the case—that his damages did not arise from the approval of the merger, but instead from the fact that the joinder bound him to onerous escrow provisions and included a release of claims against management. As summarized by the Court, Kainz claimed that he was induced to give up control of his shares (via the escrow provisions) and give up certain legal rights (via the releases) by the false statement that Kainz would not get his New XpresSpa shares without signing a joinder.

The Court found this argument unavailing. First, Kainz did not assert the arguments regarding the escrow and release before the district court. Even if he did, Kainz failed to allege that he was actually injured by signing the joinder agreement. The Court rejected Kainz’s assertion that by signing the joinder he unintentionally caused his shares to be escrowed when they otherwise would not have been based on §1.10(c) of the merger agreement, which stated that his shares would have been escrowed even if he did not sign a joinder. Kainz also argued that, notwithstanding the terms of the merger agreement, the companies did not have authority to escrow his merger consideration unless he signed a joinder agreement because of XpresSpa’s operating agreement, which provided that in the event of a merger, no unitholder “shall be required to execute and deliver any [other] agreements unless all [unith]olders are so required.” However, the Court noted that Kainz’s position was unsupported by precedent and the Delaware Court of Chancery has implicitly rejected his position by blessing post-closing escrow provisions without conditioning their use on the selling shareholders becoming parties to the merger agreement. Finally, Kainz failed to identify specific claims he would have asserted had he not signed a joinder or the value of those claims. Without such allegations, Kainz’s assertion that he was harmed by the loss of these unidentified legal rights was merely speculative.

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.