February 03, 2021

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane, Yelena Dunaevsky

M&A Law

Appraisal Value Calculation Upheld by Delaware Supreme Court

By Dixon Babb

On January 22, 2021, the Delaware Supreme Court (the “Court”) upheld the Delaware Court of Chancery’s (the “Chancery Court”) decision regarding the post-merger share appraisal of SourceHOV Holdings, a process outsourcing and technology services company (“SourceHOV”). In 2017, SourceHOV completed a series of transactions, the result of which caused SourceHOV to merge into Quinpario Acquisition Corp. 2, a special purpose acquisition company (“Quinpario”), forming a new publicly-traded company, Exela Technologies, Inc., a global business process automation leader (“Exela”).

In 2017, five SourceHOV investors filed for appraisal under Section 262 of the Delaware General Corporation Law. At trial, SourceHOV presented an expert who argued that the five investors’ shares were worth $2,817 per share, totaling about $29 million. However, despite its own expert’s findings, SourceHOV argued that the shares were only worth $1,633 per share, or about $16.8 million. On January 30, 2020, the Chancery Court valued the investors’ combined shares at $47.3 million, and also added approximately $11 million for costs and prejudgment interest.

On appeal, SourceHOV stated that it was facing over $1 billion of debt, and attempted to point to its increased loan expenses and its stagnant revenue as reasons that it disagreed with its own experts’ valuation. Going further, the Company said that the Chancery Court’s decision was inconsistent with the Company’s actual operative capacity.

In the Court’s ruling, Vice Chancellor Joseph R. Slights III stated that he was “struck by the fact that [SourceHOV] has disagreed with its own valuation expert, relied on witnesses whose credibility was impeached and employed a novel approach to calculate SourceHOV’s equity beta that is not supported by the record evidence.”

Despite the SourceHOV’s arguments, the Court found that the Chancery Court’s reasoning was sufficient to support the higher valuation price.

International M&A

Dismissal of Bemis Shareholder Suit by Southern District of New York

By Dixon Babb

On January 12, 2021, the Southern District of New York (the “Court”) dismissed a proposed class action claim against Bemis Company Inc., a supplier of packaging products (“Bemis”), and members of its board of directors, in connection with a $6.8 billion dollar merger between Amcor Ltd., a global leader in responsible packaging solutions (“Amocr”), and Bemis. In 2018, Amcor began merger negotiations with Bemis, and in 2019, Bemis filed a proxy statement that contained four sets of projected financial information, including net synergies expected to be realized from the combination. The projections were developed by the management of Amcor and Bemis. Bemis stockholders approved the transaction on May 2, 2019, and the transaction closed on June 11, 2019. The plaintiffs filed suit on April 15, 2019, alleging that they were misled by the proxy statement, and specifically, the proxy statement’s lack of important details involving the merger and the companies’ net synergies. The complaint asserts violations alleging misrepresentations and omissions in the proxy statement under Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Additionally, the plaintiffs claimed that Bemis board members were liable under Section 20(a) of the Exchange Act as controlling persons of Bemis.

The Court dismissed the claim in its entirety with prejudice and found that the proxy statement was not misleading. The Section 14(a) claims were dismissed for two reasons. First, the Court found that Bemis’ statements regarding the expected net synergies were forward-looking and were supported by a large amount of cautionary language. Accordingly, those statements were protected from liability by the Private Securities Litigation Reform Act (“PSLRA”). The Court noted that Bemis was reluctant to disclose financial forecasts due to the uncertainty of those projections.

The second reason the Court dismissed the claim was that the plaintiffs failed to point to material facts that Bemis omitted from the proxy statement. The plaintiffs contended that the proxy statement was “silent” as to the “assumptions and methodologies underlying the net synergies.” The Court noted that even though the proxy statement included more detail with certain forecasts than it did with the net synergies, there was no mandate that the net synergies forecast contain the same detail as the other forecasts. As to the Section 20(a) claim, the court dismissed it because it was a derivative claim and the court found no primary violation of Section 14(a).

M&A Law

Acacia Communications and Cisco Systems End Dispute with Higher Purchase Price

By Kolby A. Boyd

On January 14, 2021, Acacia Communications, Inc., an optical networking strategy and technology company (“Acacia”), and Cisco Systems, Inc., a multinational technology conglomerate (“Cisco”), entered into an Amended and Restated Agreement and Plan of Merger (“Merger Agreement”), increasing Cisco’s purchase price of Acacia from $70 to $115 per share, or from $2.6 billion to $4.5 billion total. The two companies originally agreed on a deal in July 2019, but the deal had soured by January 8, 2021, when Cisco and Acacia found themselves in litigation with one another in the Delaware Court of Chancery.

The initial merger agreement included a provision requiring Cisco to make a $120 million payment to Acacia if the agreement was terminated for failure to obtain regulatory approvals, assuming Cisco had not waived the requirement to obtain the approvals. Cisco did waive such requirement prior to termination of the merger agreement, cutting off the $120 million payment to Acacia. But Acacia responded by not waiving its requirement for receipt of the regulatory approvals, claiming that they were not required to close the merger without the approvals, and terminated the merger agreement.

In response, Cisco filed suit against Acacia, seeking a temporary restraining order enjoining Acacia from terminating the merger, a declaratory judgment that Acacia’s termination of the merger was invalid and Acacia had breached its obligations under the merger agreement, and an order requiring Acacia to close the merger. The motion for a temporary restraining order was granted, preventing Acacia from terminating the merger.

On January 11, 2021, Acacia filed counterclaims against Cisco, seeking a declaration that Acacia had validly terminated the merger agreement because the required regulatory approval was not obtained, and the merger had failed to close before the agreed-upon termination date under the merger agreement.

Ultimately, the two sides brokered a deal, agreeing to the new Merger Agreement and moving to dismiss the action and all claims and counterclaims with prejudice. As a result of the merger, Acacia will become a wholly-owned subsidiary of Cisco. Cisco will acquire all of Acacia’s outstanding common stock at $115 per share in cash, and all stock options and restricted stock units will be converted into the right to receive that amount. At the time of the Merger Agreement, completion of the merger between the two companies was still subject to customary closing conditions, including adoption of the Merger Agreement by Acacia’s stockholders, obtaining foreign antitrust approvals (including one of the approvals that had prompted the litigation), and the absence of Material Adverse Effects and other legal restraints.

Delaware Supreme Court Finds Plaintiff Has Standing to Challenge Merger as Unfair for Failure to Reflect the Material Value of Pre-Merger Derivative Claims 

By Courtney Black

On January 22, 2021, the Supreme Court of the State of Delaware (“the Court”) reversed the Court of Chancery’s (the “Chancery Court”) holding that Morris (“Plaintiff”) lacked standing to pursue his post-merger complaint against Spectra Energy Partners GP, LP, a partnership that owns interests in natural gas and crude oil pipeline and storage facilities (“SEP GP”). Plaintiff alleged breach of SEP GP’s limited partnership agreement and the implied covenant of good faith and fair dealing. Plaintiff was a minority unit holder for Spectra Energy Partners L.P. (“SEP”). SEP GP is SEP’s general partner.

Prior to this lawsuit, Plaintiff filed a derivative action (“the Pre-Merger Lawsuit”) against SEP GP and SE Corp regarding a joint venture with a third party. While the Pre-Merger Lawsuit was pending, Enbridge Inc., a natural gas and crude oil delivery company (“Enbridge”), acquired SE Corp in a stock-for-stock merger, making Enbridge the parent of SEP GP and controller of SEP. In this action, Plaintiff alleged that during the merger with SEP Corp, SEP GP’s conflicts committee and board of directors failed to assign an appropriate value to his pre-merger derivative claims. Although Plaintiff sent the committee a letter informing them that the pre-merger claims were worth more than $500 million, the conflicts committee determined the value of the claim, net of defense costs, was less than $0.

Under Delaware law, a merger generally terminates an equity owner’s standing to pursue a derivative claim against the target entity’s controller. However, under El Paso Pipeline GP Co., LLC v. Brinckerhoff, an equity owner has standing to pursue a post-merger suit if the claim challenges the merger itself as unfair because the controller failed to secure the value of a material asset, like the value of a pre-merger derivative claims that passes to the buyer in the merger. To determine if plaintiffs have standing in these post-merger cases, Delaware courts use a three-part test as put forth in In re Primedia Inc. Shareholders Litigation. A plaintiff must allege: 1) a viable derivative claim, 2) that is material to the overall transaction, and 3) will not be pursued by the buyer nor be reflected in the merger consideration.

In this case, the parties agreed Plaintiff’s claim was viable because it survived a motion to dismiss, the claim would not be pursued by the buyer, Enbridge, and that SEP GP secured no value for the derivative claim. The materiality prong was thus the sole issue in this case. The Chancery Court discounted the pre-merger claim to reflect the unit holders’ interest in the damages award and a 1:4 chance in successful litigation. The Chancery Court concluded that instead of the alleged $661 million valuation, the derivative claims were worth $112 million, which was immaterial compared to the merger’s consideration of $3.3 billion. The Court reversed and held the discounting approach was inconsistent with the standard of review for a motion to dismiss, which is to accept Plaintiff’s factual allegations as true and draw all reasonable inferences in his favor. The Chancery Court had already found a “facially unreasonable gap in consideration…to infer bad faith,” and the Court instead compared the $660 million damages award to the $3.3 billion merger price to satisfy the materiality prong. Rather than decide the motion to dismiss on appeal, the Court remanded the case back to the Chancery Court for further proceedings.

Eighth Circuit Holds Aspen Holdings, Inc. Lacks Standing to Sue for Declaratory Judgment Regarding Additional Compensation after Markel Corporation Merger

By Courtney Black

On January 4, 2021, the Eighth Circuit Court of Appeals (“the Court”) reviewed a Rule 59(e) motion to alter or amend the district court judgment for manifest error of law in the lawsuit between Aspen Holdings, Inc., a holding company with subsidiaries that provide workers’ compensation insurance coverage (“Aspen”), and B. Riley FBR, Inc., a middle-markets focused investment banking firm (“FBR”). The Court reviewed the United States District Court for the District of Nebraska’s (the “District Court”) factual findings for clear error and the District Court’s holding that Aspen lacked standing de novo. The Court affirmed the District Court on Article III standing and Declaratory Judgment Act grounds.

This suit originated in the July 2010 acquisition of Aspen by Markel Corporation, a holding company for insurance, reinsurance, and investment operations (“Markel”). Following the acquisition, FBR received 1.25% of the aggregate consideration pursuant to an Engagement Letter between Aspen and FBR. The merger negotiations also included paying Aspen shareholders additional compensation based on the future value of Aspen’s business, and a Contingent Rights Agreement was executed, which gave Aspen shareholders contingent value rights (“CVRs”) to the additional compensation (making the shareholders “CVR Holders”).

In 2016, the CVR Holders brought suit in the District Court for the District of Delaware to challenge Markel’s valuation of the CVRs. As of present, the Court has not issued a valuation opinion, and no additional compensation has been paid. This lawsuit was initiated in 2018 when FBR sent the CVR Holders a letter stating its intent to claim 1.25% of the additional compensation. This letter thus created competing claims between CVR Holders and FBR to the additional compensation. Aspen then filed this suit, seeking declaratory judgment that FBR is not entitled to further payment. The District Court granted FBR’s motion, a factual challenge under 12(b)(1), citing there was on injury-in-fact to satisfy Article III standing. The District Court also denied Aspen’s 59(e) motion to alter or amend for manifest error of law.

The Court began its analysis by summarizing the law of Article III standing, focusing on the requirements that plaintiff must suffer an injury in fact, the injury must be fairly traceable to the challenged action, and the injury is likely to be redressed by a favorable judicial decision. The Court acknowledged that the CVR Holder’s rights to additional compensation may be legally protected interests, but there was no injury in fact to satisfy the first prong of the standing analysis. The Court cited Spokeo Inc. v. Robins and its emphasis on injury being concrete and particularized and actual or imminent rather than conjectural or hypothetical. Here, the Court found the injury too speculative because the final amount of the additional compensation has not been decided in the Delaware litigation, and Markel has not made any decisions regarding which party it will pay. The Court also analyzed Aspen’s claims under the Declaratory Judgment Act, noting that injury must still be of a conclusive nature in declaratory judgment cases. Ultimately, the Court found Aspen prematurely asserted its contract rights and that the Delaware litigation needed to be further along before Aspen could bring a declaratory judgment claim of this type in federal court.

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.