April 02, 2021

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane, Yelena Dunaevsky

M&A Law

Court Holds Acquisition of GetGo Did Not Rise to the Level of Securities Fraud  

By Dixon Babb  

On March 18, 2021, the United States District Court for the District of Massachusetts (the “Court”) dismissed a lawsuit brought against LogMeIn, Inc., a subscription-based provider of services to mobile professionals and IT service providers (“LogMeIn”), that was filed in 2018 in connection with LogMeIn’s acquisition of GetGo, Inc., a food-ordering technology platform (“GetGo”). Plaintiffs alleged that LogMeIn made fraudulent statements regarding its status and financial projections following its acquisition of GetGo. Following the merger, LogMeIn attempted to convince former GetGo users to convert to LogMeIn’s preferred annual subscription plan, but were unable to do so. Several of the customers began leaving LogMeIn, which caused its share price and financial projections to decrease. However, according to the plaintiffs, LogMeIn continued to report that the transition was going smoothly, despite LogMeIn’s alleged realization that the synergies were not amounting to what it had forecasted.   

In its order, the Court said that the statements made by the LogMeIn executives regarding its attempts to convert former GetGo users to its preferred subscription plan told “a story of mismanagement and poor customer service but do not make out a viable claim for securities fraud.” The lawsuit also failed to show that LogMeIn executives acted intentionally or recklessly.  

International M&A 

Investors Bring Suit Against Lordstown Motor Corps. For Violation of Securities Law in Connection with its Merger with Diamond Peak Holdings Corp.  

By Dixon Babb 

On March 17, 2021, Lordstown Motor Corp., an electric vehicle manufacturer (“Lordstown”), disclosed that it had received an inquiry from the U.S. Securities and Exchange Commission regarding possible misleading statements that it had made regarding its demands and production capabilities. On August 3, 2020, Lordstown and DiamondPeak Holdings Corp, a special purpose acquisition company, announced that they had entered into a definitive merger agreement, with the combined company to be listed on the Nasdaq stock exchange under the symbol “RIDE.” Lordstown and certain of its executives are charged with failing to disclose material information during the class period (August 3, 2020 – March 17, 2021).  

On March 12, 2021, Hindenburg Research reported that Lordstown had no revenue and no real sellable product. Hindenburg also reported that a former employee of Lordstown explained that Lordstown is experiencing delays and that they are a full three to four years away from production of a vehicle, despite telling investors that they would be ready for production by September 2021. Since going public via a de-SPAC transaction in October 2020, executives and directors have sold approximately 28 million in stock. Following these revelations, the investors have alleged that during the class period, Lordstown misled investors by, among other things, making false and misleading statements and that any pre-orders placed were non-binding on Lordstown. Following the report, Lordstown’s stock price has plummeted.  

The action is currently pending in the United States District Court for the Northern District of Ohio under the name Rico v. Lordstown Motors Corp.  

 M&A Law

Second Circuit Affirms District Court for the Southern District of New York in an Acquisition Advisor Contract Dispute  

By Courtney Black  

On March 16, 2021, the United States Court of Appeals for the Second Circuit (“the Court”) affirmed the holdings of the District Court for the Southern District of New York (“the District Court”) in a breach of contract case between International Technologies Marketing, Inc., a marketing and sales services company (“Plaintiff”), and Verint Systems, Ltd., an analytics company that operates in the business intelligence space (“Defendant”).  

This case arose out of the contractual relationship between Plaintiff and Defendant. Plaintiff and Defendant initially entered into a contract where, for a commission, Plaintiff would help Defendant expand its sales footprint in Brazil. In this role, Plaintiff identified the company Suntech SA, an intelligence company operating in the security, fraud, and risk spaces (“Suntech”). Instead of partnering with Suntech, Defendant desired to acquire it. As a result, Plaintiff shifted its role to “acquisition advisor” to facilitate negotiations. Plaintiff and Defendant amended their agreement to formalize this new role. However, twice during negotiations, Defendant put the deal on hold. During the hold period, the contract between Plaintiff and Defendant expired. Four years later, Defendant ultimately acquired Suntech without Plaintiff’s help. Plaintiff filed this suit when it sought to recover its contractual success fee (“Success Fee”) and Defendant refused to pay. 

The Court affirmed the District Court’s decision to dismiss Plaintiff’s breach of contract claim. The Court used a de novo standard of review for the threshold issue of whether Plaintiff was entitled to its Success Fee for the Suntech acquisition. First, the Court decided whether Plaintiff was a “broker” or a “finder.” New York law defines finders as parties who earn fees by introducing contractual counterparties and brokers as parties who, “bring the parties together at mutually acceptable terms within the period of employment.” The Court found the contract unambiguously established a broker relationship. By assisting Defendant through the acquisition, Plaintiff did more than merely identify possible targets. Second, the Court decided whether the parties’ contractual relationship expired on the date in the contract or continued until the Suntech acquisition. The Court rejected Plaintiff’s argument that the amendment set Plaintiff’s time of performance, payment of the Success Fee, as the date whenever Defendant acquired Suntech. Plaintiff’s reading was faulty because it would extend the relationship term and eviscerate the amendment’s provision that all terms of the original agreement (including the expiration date) would continue. The Court’s interpretation was that Plaintiff was entitled to its Success Fee only if a deal was struck before the contract’s stated expiration date. 

The Court also affirmed the District Court’s denial of Plaintiff’s request to file a fourth amended complaint. The Court applied the more deferential abuse of discretion standard of review. When a motion to amend alters a court’s scheduling order, the movant must satisfy Federal Rules of Civil Procedure 15 and 16. Rule 15 states, “a court should freely give leave to amend when justice so requires.” Rule 16 requires “good cause” to alter a court’s scheduling order, which is shown by the movant acting diligently. Here, the Court affirmed the District Court’s findings of no diligence and thus no good cause. Plaintiff’s new claims were based on information that was publicly available since 2007 and could have been accessed through a diligent search.  

Lastly, the Court denied Defendant’s motion for Rule 11 sanctions against Plaintiff. The Court again applied the abuse of discretion standard of review. The Court used the test for Rule 11 sanctions, whether there is no reasonable belief that the pleading is well-grounded in fact, warranted by existing law, or a good faith argument to extend, modify, or reverse existing law. The Court must resolve all doubts in favor of the party against whom sanctions are sought. First, the Court rejected Defendant’s argument that Plaintiff’s new claims were time barred because they accrued when the contract expired. Plaintiff’s conduct was not frivolous because the performance deadline could be excused by breach - here, by Defendant putting the Suntech acquisition on hold. Second, the Court rejected Defendant’s argument that Plaintiff lied about recently discovering the information supporting its amended complaint. Here, Defendant’s evidence was comprised of emails where it was unclear what documents were referenced, which made it inconclusive to determine what the sender knew at the time. Therefore, there was not enough for the Court to find an abuse of discretion by the District Court. However, the Court also ruled on Defendant’s cross-appeal regarding Rule 11 sanctions in a separate opinion, where it ultimately vacated the District Court’s denial of sanctions.  

Delaware Chancery Court Appoints Amicus Curiae to Assist with Resolution of Petition to Revive a Defunct Corporation as a Blank Check Company 

By Kolby A. Boyd 

On March 18, 2021, the Court of Chancery of the State of Delaware (the “Court”) appointed an amicus curiae to consult with the United States Securities and Exchange Commission (the “SEC”) regarding a petition by Synergy Management Group LLC, a management and consulting services company (“Synergy”), and to provide an independent view regarding whether Synergy’s petition should be granted. 

Synergy brought the petition under Section 226(a)(3) of the Delaware General Corporation Law, seeking the appointment of its President, Benjamin Berry, as the custodian of Forum Mobile, Inc., a defunct corporation that had no means of opposing the petition (“Forum”). Forum’s only value was in the CUSIP number that allows its shares to trade over the counter. Synergy seeks to revive Forum as a blank check company to take a business of its choice public through a reverse merger. Synergy has made unsuccessful attempts to contact Forum’s officers and directors, and currently owns approximately 500,000 shares of its stock, which it purchased based on the value of the CUSIP number.  

The petition, one of multiple like it that have been filed by Synergy and others in connection with defunct companies, raises important questions of public policy regarding Delaware’s interest in preventing the use of Delaware entities to circumvent federal securities laws. The Court has denied similar petitions in the past on the basis that it would be an abuse of discretion to allow a company to use the powers of the Court as a means of regulatory avoidance, stating that “using a defunct Delaware corporation that happens to retain a public listing to evade the regulatory regime established by federal securities laws is contrary to Delaware public policy.”  

Here, Synergy brought evidence of three similar petitions that had been approved by the Court, arguing that the SEC does not prohibit reverse mergers and has even issued guidance on the associated risks of investing in reverse merger companies, and attempted to distinguish itself from one precedent case of a similar petition being denied. However, the Court did not appreciate Synergy’s failure to cite three more recent and more similar cases where the Court had denied such petitions. For this reason and in light of the influx of similar petitions, the Court decided an adversarial briefing would benefit the settling of the petition and appointed a Delaware corporate practitioner as amicus curiae

Delaware Court of Chancery Interprets Forum Selection Clause in Merger Agreement and Dividend Rate Provision in Certificate of Designations to Decide Dividend Dispute in Favor of Plaintiff  

By Courtney Black 

On March 16, 2021, the Court of Chancery of the State of Delaware (“the Court”) decided a case involving the right to dividends for a preferred class of stock. At issue was the interpretation of a prior Merger Agreement and the Certificate of Designations for the preferred stock.  

Giesecke+Devrient Mobile Security America, Inc., a digital payment solution company (“Plaintiff”) was a shareholder of Fit Pay, Inc., a tech company for contactless payment solutions (“Fit Pay”). In 2017, Fit Pay merged with a subsidiary of NXT-ID, Inc., a manufacturer and distributor of personal emergency response systems (“Defendant”). The Merger Agreement included terms that exchanged Plaintiff’s preferred stock in Fit Pay for preferred stock in Defendant. Plaintiff filed suit pursuant to language in the Certificate of Designations, which stated the dividend rate was 5% and would increase to 15% if the corporation’s market capitalization was $50 million for more than 30 consecutive days. The parties disagreed on whether the increased dividend rate was perpetual once triggered. Plaintiff filed suit when Defendant declined to pay the increased rate beyond the quarter in which it was triggered. 

The Court first denied Defendant’s motion for lack of proper venue. Defendant cited the Merger Agreement’s forum selection clause, which stated the parties would not bring actions relating to the Merger Agreement “or any transaction contemplated hereby” in courts other than federal and New York state courts. The Court used New York law because Delaware courts interpret forum selection clauses in accordance with the law chosen to govern the contract. Here, the Merger Agreement expressly defined New York law as governing.  

The Court rejected each of Defendant’s arguments. First, the Court rejected that payment of dividends was a transaction “contemplated by the Merger Agreement.” The Court relied on Bonanno v. VTB Holdings, Inc., which held forum selection clauses can apply to disputes outside the contract in which they appear, but a party cannot leap to a conceptually distinct transaction. Here, Plaintiff’s dividend claim was too far removed from the Merger Agreement due to two steps: (1) the Certificate of Designations and (2) the changed dividend rate provision. The Court also declined to apply the New York rule that multiple agreements may be read as one contract if the court finds the parties so intended. It was not enough that the Merger Agreement and Certificate of Designations were contemporaneous. It was more significant that they were different documents, served different purposes, and had different parties. Lastly, the Court interpreted the forum selection clause’s “transactions contemplated thereby” language to hold it was not enough that the Merger Agreement is the “factual predicate” or “but for cause” of Plaintiff’s claim. 

The Court then granted Plaintiff’s motion for summary judgment. The Court resolved two issues in the Dividend Rate Provision: whether “30 consecutive days” referred to trading or calendar days, and whether the 15% rate, once triggered, extended into perpetuity. The Court interpreted the former as 30 calendar days and the latter as extending into perpetuity. Rules of contract interpretation were central to these holdings. For example, the Court emphasized the lack of qualifiers surrounding the words “days” and “15% rate.” It was unwilling to insert new terms, which it saw as violating the freedom of contract. Because there was no ambiguity, the Court deferred to a plain meaning reading. As a result, Defendant’s failure to pay the increased rate beyond the triggering quarter was a breach of the Certificate of Designations.

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.