May 03, 2021

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane, Yelena Dunaevsky

M&A Law

Ninth Circuit Affirms That Omission of Information in Recommendation to Shareholders in Connection with Tender Offer was Not Actionable under Section 14(e) of the Securities and Exchange Act 

By Kolby A. Boyd  

On April 15, 2021, the United States Court of Appeals for the Ninth Circuit (the “Court”) affirmed the prior ruling of the United States District Court for the Central District of California (the “District Court”) relating to a shareholder suit alleging that Emulex Corporation, a networking hardware and software company (“Emulex”), had violated Section 14(e) and 20(a) of the Securities and Exchange Act of 1934, as amended, in connection with the acquisition of Emulex by Avago Technologies Wireless Manufacturing, Inc., a semiconductor and infrastructure software products company now known as Broadcom Inc. (“Avago”).

In 2015, Avago made a tender offer for all of the outstanding stock of Emulex, and Emulex’s financial advisor, Goldman Sachs, opined that the offer was fair. Emulex filed a recommendation advising its shareholders to tender their shares, and the requisite majority of shareholders tendered their shares to consummate the merger. The present lawsuit’s claim of a Section 14(e) violation centered on Emulex’s recommendation to its shareholders. According to the Court, Section 14(e) prohibits only misleading and untrue statements, not incomplete statements, so an omission is only actionable if it affirmatively creates an impression that is materially different than reality.  

Emulex’s recommendation failed to include a chart provided by Goldman Sachs that showed premiums over stock price received by shareholders in connection to tender offers for other semiconductor companies, which indicated that the 26% over-market-value premium offered was within industry standards but below average. However, as the Court noted, the missing chart was consistent with the other information included within the recommendation, including that Emulex had below average performance and that a 26% premium was reasonable for the transaction. The recommendation did not make any claims as to how the premium compared to those offered in other transactions. Therefore, the Court held that while perhaps a shareholder might be interested in the chart, no statements in the recommendation were misleading due to the omission of the chart and thus Section 14(e) was not violated. Section 20(a) requires proof of an independent securities law violation for a finding of control person liability, so it also failed with the Section 14(e) claim. 

 180 Life Sciences Corporation Files Suit against Tyche Capital in Connection with CannBioRex Merger  

By Kolby A. Boyd 

On April 15, 2021, 180 Life Sciences Corp., a pharmaceutical company formerly known as KBL Merger Corp. IV (the “Plaintiff”), filed a complaint in the Supreme Court of the State of New York in the County of New York (the “Court”) against Tyche Capital LLC, a private equity firm (the “Defendant”), for breach of contract in connection with Plaintiff’s merger with CannBioRex Life Sciences Corp., a pharmaceutical company (“CannBioRex”).  

The events surrounding the suit began in April 2019, when Plaintiff entered into a written agreement (the “Term Sheet”) to acquire 100% of the outstanding equity and other securities of CannBioRex for approximately $175 million, to be paid in common stock of the resulting public company. Such Term Sheet provided for the use of a private investment in public equity (a “PIPE” transaction) in order to ensure that the surviving company would have sufficient cash on hand at closing. Among other things, the Term Sheet stated that a certain number of shares would be held in escrow and transferred to Defendant upon closing, and that if Defendant materially breached its obligations under the Term Sheet and failed to timely cure the breach, the escrowed shares would be released to the Plaintiff. One such obligation was that Defendant agreed to participate in the PIPE deal to the extent necessary to ensure that Plaintiff had at least $5 million in net tangible assets at closing. 

In July 2019, Plaintiff entered into a Business Combination Agreement with CannBioRex and other related parties on substantially similar terms to those in the Term Sheet, whereby the $175 million in consideration would be reduced by the liabilities of CannBioRex in excess of $5 million at the closing. In conjunction with that agreement, Plaintiff and Defendant entered into a Guarantee and Commitment Agreement (the “Guarantee”) on substantially similar terms to those in the Term Sheet whereby Defendant would receive shares from Plaintiff in exchange for ensuring that Plaintiff would have $5 million at closing. This was an absolute guarantee that required Defendant to fund the amount or face a 12% interest penalty and costs and expenses of collection.  

In November 2019, the deal closed with the presumption that Plaintiff had the requisite cash on hand. However, numerous financial discrepancies were uncovered in Plaintiff’s financial statements and Plaintiff actually had far less than $5 million. In January 2021, Plaintiff made a request to Defendant to fund the additional amount (Defendant did not respond to such request), and in April 2021 made an additional request in the amount of $6,776,886 (the amount of shortfall below $5 million in net tangible assets). Defendant rejected this second request. 

Plaintiff’s complaint primarily alleges that Defendant breached its obligation under the Term Sheet and Guarantee, and is requesting the full $6,776,886 along with the 12% interest per annum and legal fees. The complaint also alleges causes of action for breach of an implied covenant of good faith and fair dealing, a common count for account stated, and declaratory relief. The case is currently pending before the Court. 

Delaware Court Denies Motion to Dismiss in Acquisition Dispute between CRE Niagara Holdings, LLC and Resorts Group, Inc. 

By Courtney Black 

On April 7, 2021, the Superior Court of the State of Delaware (the “Court”) denied the Motion to Dismiss of Resorts Group, Inc., a resort and timeshare company (“Defendant”), in a lawsuit relating to the purchase of Defendant’s timeshare business by CRE Niagara Holdings, LLC, an investing company (“Plaintiff”). 

In May 2017, the parties entered into a Unit Asset Purchase Agreement (the “UAPA”) and certain ancillary agreements. Under the ancillary agreements, Plaintiff gained an interest in Defendant’s receivables, making Plaintiff’s pre-closing payment stream dependent on Defendant’s performance. As a result, Plaintiff and Defendant agreed that Defendant would perform according to certain procedures, and the UAPA contained representations and warranties provisions with further protections for Plaintiff. Plaintiff filed this lawsuit when, during the pre-closing period, Defendant allegedly relaxed its underwriting standards and sold timeshares to buyers who were less creditworthy than prior buyers. Plaintiff brought three counts: fraudulent inducement, breach of contract and indemnification, and a declaration that it did not breach the UAPA or its ancillary agreements. All three counts were grounded in the argument that Defendant made false representations to induce closing of the sale.   

Defendant responded by filing a Motion to Dismiss, arguing all of Plaintiff’s claims should be dismissed on four different grounds. First, Defendant argued under Rule 12(b)(6) that Plaintiff’s claims were time-barred by provisions in the UAPA. Specifically, Defendant argued that 1) Plaintiff did not provide timely indemnification notice under the UAPA, which would have extended the time to sue, and 2) the counts were barred under the UAPA because Plaintiff had knowledge and access to the facts constituting breach – namely, the FICO scores of new buyers. The Court, citing the UAPA provisions on proper notice of indemnification, concluded that at the pleading stage, Plaintiff satisfied the minimal pleading standards for alleging that notice of indemnification was given. The Court noted that whether sufficient evidence supports the allegation would be an issue post-discovery.  

Second, Defendant argued Plaintiff failed to plead fraud with particularity, as required by Rule 9(b). Specifically, Defendant argued Plaintiff did not plead sufficient facts to infer Defendant permitted the changes in underwriting and buyer credit, which would be required for Plaintiff to show misrepresentation, intent, or knowledge. The Court held Plaintiff’s pleading met the heightened particularity standard, citing eight different allegations in the complaint focused on the timing of Defendant’s practices pre-closing, during closing, and post-closing.   

Third, Defendant argued under Rule 12(b)(3) that the Court was not the correct forum because the UAPA’s ancillary agreements were governed by forum selection clauses with New York as the chosen forum. Lastly, Defendant argued for application of the doctrine of forum non conveniens. The Court rejected both of these arguments by holding this action is about the UAPA, not its ancillary agreements, so the UAPA provisions govern. The UAPA had a waiver of objection to inconvenient forum, which the Court upheld on freedom of contract principles. As a result, the Court held Defendant could not argue for improper venue or forum nonconveniens.

Because the Court rejected each of these grounds for dismissal, the Court ultimately denied Defendant’s Motion to Dismiss in whole. 

Fifth Circuit Finds Purchase of Parent Stock Does Not Interfere With a Pending Sale of Subsidiaries

By Dixon Babb  

On April 1, 2021, the Fifth Circuit Court of Appeals (the “Court”) affirmed a lower court ruling that found the Los Angeles Ram’s owner did not interfere with Nicholas Salomon’s (“Salomon”) negotiations to purchase two subsidiaries of the Outdoor Channel Holdings, Inc., the holding company for Outdoor Channel, an American pay television channel company focused on the outdoors (“Outdoor”). In 2013, Salomon served as the president of two subsidiaries of Outdoor, and Salomon attempted to purchase the two subsidiaries from Outdoor. There was a term sheet outlining the potential sale, but the sale of the subsidiaries fell through following Outdoor’s merger with Kroenke Sports & Entertainment, LLC, an American sports and entertainment holding company based in Denver Colorado (“KSE”). Following the merger, Salomon remained president of the subsidiaries for another year, until he was terminated. After his termination, he brought suit. 

 He alleged breach of contract against Outdoor and tortious interference with existing contract against Kroenke, among other things. The suit against Outdoor was based on Salomon’s belief that Outdoor had breached its contract with him by allowing KSE to purchase all of Outdoor’s stock, which he claimed violated the term sheet’s exclusivity provisions. KSE and Outdoor moved for summary judgment in 2018, arguing that there was no binding agreement and Salomon’s failure to consummate the transaction was due to the fact that he was unable to secure funding and agree on material terms. Further, negotiations did not stop following the merger. The district court granted KSE & Outdoor’s motion for summary judgment.  

A three-judge panel of the Court said that the United States District Judge was correct and explained that “the sale of a parent company’s stock does not necessarily implicate agreements relating to the sale of subsidiaries” and that a “parent corporation and its subsidiaries are distinct legal entities.” Further, while there was an exclusivity provision between Salomon and Outdoor, the exclusivity provision only concerned the subsidiaries and the sale of Outdoor’s stock was not “equivalent to the sale of its subsidiaries.”

International M&A 

Delaware Court Denies Motion to Dismiss as to Fraudulent Inducement Claim in Lawsuit Between Sofregen Medical, Inc. and Allergan Salles, LLC and Its Irish Subsidiaries 

By Courtney Black  

On April 1, 2021, the Superior Court of Delaware (the “Court”) denied the defendants’ Motion to Dismiss as to a claim of fraudulent inducement in a lawsuit between Sofregen Medical Inc. and Sofregen Medical Ireland Limited, a producer of silk-based medical products (collectively, the “Plaintiffs”) and Allergan Sales, LLC and Allergan Pharmaceuticals Holdings, a producer of brand name drugs and medical devices (collectively, the “Defendants”). 

Plaintiffs’ claims originated out of the Asset Purchase Agreement (“APA”) between the parties. The basis of Plaintiffs’ fraudulent inducement claim was two representations made by Defendants during pre-APA meetings: the representation that one of Defendants’ products had minimal adverse reactions and the representation that Defendants presented “unduly optimistic” revenue forecast predictions.  

Defendants’ argued that Plaintiffs failed to state a claim for fraudulent inducement on four grounds. First, the Defendants argued Plaintiffs did not plead fraudulent inducement with sufficient particularity, as required by Rule 9(b). The Court used the standard for the motion to dismiss stage, where the pleadings only require factual allegations making it “reasonably conceivable” that Defendants knew the statements were false. Here, the Court held Plaintiffs sufficiently pled the elements of fraudulent inducement and justifiable reliance on the misrepresentations. The Court focused on Plaintiffs’ allegations on Defendants’ actions pre- and post-closing. Defendants had knowledge of adverse reaction product studies, there were business discussions about de-promoting and discontinuing the product at issue, and an abundance of documents were provided to Plaintiffs post-closing. 

Second, Defendants argued the APA precluded Plaintiffs’ claim for fraudulent inducement because of APA provisions that disclaim reliance on representations by the parties. Under Delaware law, the contract must contain language that amounts to a clear anti-reliance clause in order for the claim to be precluded. Here, the Court held the APA provisions cited by Defendants were anti-reliance clauses for representations outside of the APA. But, Plaintiffs’ claim was different because the essence of the claim was fraudulent concealment. 

Third, Defendants argued the fraudulent inducement claim was a bootstrapped breach of contract claim. Under Delaware law, if a fraud claim is pled contemporaneously with a breach of contract claim, it must be based on conduct that is separate and distinct from the contract claim. If the allegations in the fraud claim are focused on inducement to contract, then the “separate and distinct” test is satisfied. Here, the Court held Plaintiffs’ fraud allegations were focused on inducement to contract (and were thus separate and distinct) based on the allegations that Defendants concealed negative product studies until after closing.

Fourth, Defendants argued Plaintiffs’ damages for fraudulent inducement were not distinct from the damages for its breach of contract claim. Under Delaware law, a fraud claim must plead separate damages from a contract claim. However, if the fraudulent inducement claim is pled in the alternative, the courts do not dismiss the claim because it will not co-exist at final judgment (eliminating duplicative issues). Here, Plaintiffs pled the fraudulent inducement claim in the alternative, so the Court held it would not dismiss the claim.  

Because the Court rejected each of Defendant’s grounds for dismissal, the Court denied Defendant’s Motion to Dismiss as to the fraudulent inducement claim.

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.