January 2022 in Brief: Mergers & Acquisitions

Domestic M&A

Delaware Chancery Court Allows Investors to Proceed in Suit against SPAC

By Parker Davis, Bass, Berry & Sims PLC

On January 3, 2022, the Delaware Court of Chancery (the “Court”) denied the motions to dismiss by Churchill Capital Corp. III, a special purpose acquisition company (the “SPAC”) in the suit brought by its investors related to the decline in the value of their shares after the SPAC’s acquisition of MultiPlan, Inc., a healthcare payor services provider (“MultiPlan”).

Michael Klein directed the sponsor of the SPAC and led its $1.1 billion IPO and acquisition of MultiPlan. In return for his services, Klein nominally paid for and received 20% of the equity in the SPAC. Klein’s founder shares in the SPAC became common shares upon completion of the MultiPlan acquisition since the acquisition was completed within the specified two-year time period. Had no acquisition occurred, Klein’s shares would have lost all value.

Investors in the IPO paid $10 per unit of interest in the SPAC and were able to choose to withdraw their $10 per unit or to allow the SPAC to invest the money in its chosen target, but if no acquisition opportunity arose during the two years, the investors would be refunded their $10 per unit investment plus interest. The majority of investors voted for the acquisition of MultiPlan, but once they became shareholders of the SPAC-controlled entity, their shares were worth less than the original $10 per unit plus interest they would have been worth had no transaction taken place. Klein’s founder shares, however, were of greater value post-acquisition than had no transaction occurred because had the SPAC liquidated, all value of his shares would have been destroyed.

The IPO investors in the SPAC sued, alleging that this divergence in incentives between common and founder shares in completing the acquisition led the SPAC’s fiduciaries to fail to fairly inform the investors’ decision-making process as to whether or not to redeem their shares by, for example, not sharing with the investors that the major customer of MultiPlan, UnitedHealth Group Inc., a healthcare and insurance company (“UnitedHealth”), was developing its own internal capabilities to replace its use of MultiPlan’s services. The SPAC party filed motions to dismiss these claims.

In the opinion denying the motions to dismiss except as to two named defendants, the Court “emphasiz[ed] that [its] conclusions stem from the fact that a reasonably conceivable impairment of public stockholders’ redemption rights—in the form of materially misleading disclosures—has been pleaded in this case.” The Court found that “[t]he mismatched incentives relevant here were known to public stockholders who chose to invest in the SPAC. But those stockholders were allegedly robbed of their right to make a fully informed decision about whether to redeem their shares.”

Past CEO Free to Trade Shares under Amended Bylaws after De-SPAC Merger

By Parker Davis, Bass, Berry & Sims PLC

On January 10, 2022, Vice Chancellor Will of the Court of Chancery of the State of Delaware (the “Court”) found that William J. Brown, previously the Chief Executive Officer (“CEO”) of Matterport Operating, LLC, a virtual tour software platform company (“Matterport Operating”), “may freely trade his Matterport shares…without restriction.”

Matterport Operating was acquired by Gores Holding VI, Inc., a special purpose acquisition company (the “SPAC”). A de-SPAC transaction resulted in the entity Matterport, Inc. (“Matterport”) surviving and incorporating Matterport Operating as its subsidiary. In the course of finalizing the deal and prior to its closing, the SPAC amended and restated its bylaws to include restrictions through the 180 days post-closing on “shares of Class A common stock held by the Lockup Holders immediately following the Business Combination Transaction.” Brown brought this suit, in part, to ask the Court to determine that these restrictions could not be enforced against shares he held. Specifically, Brown sought a declaration that these restrictions could not be enforced against the exercise of stock options granted to him as partial compensation for his employment as CEO and the purchase of restricted shares while in that role.

Vice Chancellor Will completed a contract interpretation analysis of the relevant section of the SPAC’s bylaws quoted above. The Court concluded that it “will not rewrite” the bylaws here and the restrictions do not apply to Brown’s shares as they are not “Lockup Shares.” Vice Chancellor Will’s opinion states, “The evidence demonstrates that Brown did not hold Matterport Class A shares ‘immediately following’ the transaction under any commonly accepted meaning of that phrase” since “[r]oughly three and a half months elapsed between the business combination closing and the date Brown possessed any Matterport shares.” The Court thus concluded that Brown could freely trade his shares and enter into derivative transactions with respect to those shares.

Delaware Chancery Court Tosses $1bn Investor Suit Over Sale of Roan Resources

By Noah Lewis, Bass, Berry & Sims PLC

On January 3, 2022, the Delaware Court of Chancery (the “Court”) denied all claims in a suit brought by a former shareholder (the “Shareholder”) of Roan Resources, Inc., an energy company focused on the development and exploration of oil and natural gas reserves (“Roan”). The Shareholder’s suit was brought in connection with Roan’s $1.0 billion sale in 2019 to Citizen Energy Operating LLC, an oil and natural gas exploration company (“Citizen”).

Following the sale in 2019, the Shareholder alleged that former directors and officers of Roan, in addition to former stockholders, breached fiduciary duties by engaging in a conflicted sale of Roan. As a result, the Shareholder alleged that Roan was sold at an undervalued price. In particular, the Shareholder alleged that John Lovoi, a former shareholder of Roan (“Lovoi”), exerted control of the sale for his own benefit. At the time of the merger, Lovoi controlled both JVL Advisors, LLC, an investment advising company based in Texas (“JVL”), and Roan Holdings, LLC, a holding company that owned 49.7% of Roan’s outstanding common stock (“Holdings”). Taken together, the Shareholder alleged that Lovoi effectively controlled Roan through his combined control over JVL and Holdings.

In 2019, Citizen took Roan private at a share price of $1.85. After the sale, the Shareholder alleged that JVL and Holdings stood on both sides of the transaction due to financial interests of JVL and Holdings in Citizen. As a result of this conflict, the Shareholder alleged that Citizen bought Roan at an inadequate share price that instead benefited JVL, Holdings, and Lovoi due to their financial interests in Citizen.

The Court, however, disagreed with the Shareholder on all counts. In particular, the Court ruled that the Shareholder failed to show that JVL and Holdings were controlling investors of Roan, therefore negating the Shareholder’s allegation that JVL and Holdings forced Roan to sell at an undervalued price. Furthermore, although the Court found that Lovoi controlled more than 50% of Roan’s stock, the Court held that the Shareholder failed to prove that Lovoi exerted his control to create an unfair transaction. Lastly, the Court also found that the Shareholder failed to show that JVL, Holdings, and Lovoi had any financial interest in Citizen. As a result, the Court denied all of the Shareholder’s claims.

Delaware Chancery Court Upholds Arbitration Fee Following $270mm Sale of Agspring LLC

By Noah Lewis, Bass, Berry & Sims PLC

On January 19, 2022, the Delaware Chancery Court (the “Court”) upheld an arbitration award to advance legal fees—estimated to be $7 million—for NGP X US Holdings LP, an investment management services company (“NGP”), and the two founders (the “Founders,” and together with NGP, the “Defendants”) of Agspring LLC, a holding company focused on grain and specialty crop operations (“Agspring”). Collectively, NGP and the Founders owned Agspring up until 2015. The arbitration dispute stems from the 2015 sale of Agspring to a holding company owned by American Infrastructure MLP Funds, a private equity firm focused on infrastructure (“MLP”).

Following the 2015 sale, investors of Agspring accused the Defendants of conspiring to conceal negative financial information related to Agspring before the sale, including failing to report that a subsidiary’s earnings were nearly $20 million lower than reported. Following the sale, MLP and related parties sued NGP and the Founders for claims related to fraud and breach of fiduciary duty.

The Defendants, however, demanded that Agspring advance the Defendant’s legal fees and expenses pursuant to the terms of a Services Agreement (the “Agreement”) previously agreed to by the Defendants and Agspring. Agspring, however, refused to advance the Defendant’s legal fees. Pursuant to an arbitration clause in the Agreement, the enforceability of the Agreement went to an arbitration panel (the “Arbitration Panel”). The Arbitrator ruled that the Agreement was enforceable, thereby requiring that Agspring advance the Defendant’s legal fees. Agspring, however, refused to pay the legal fees due to financial concerns that advancement of the legal fees would trigger defaults with Agspring’s creditors. The Defendants then sued to enforce the arbitration ruling and advancement of the legal fees.

The Court sided with the Defendants, confirming the Arbitration’s Panel decision. The Court noted that the Arbitration Panel’s decision was consistent with the Agreement and other contracts entered into by the Defendants and Agspring. Furthermore, the Court noted that further denial of bargained-for advancement rights would render the advancement rights illusory. As a result, the Court upheld the advancement of legal fees to the Defendants.

International M&A

Chancery Court Applies New Zuckerberg Three-Prong Test to Dismiss Derivative Suit Alleging Unfair Price in Share Repurchase

By Patton Webb, Bass, Berry & Sims PLC

On January 21, 2022, the Delaware Court of Chancery (the “Court”) dismissed a suit brought by Steven Simons (the “Plaintiff”), a stockholder of GrafTech, an American manufacturer of graphite electrode products utilized in steel production (the “Company”), against the Company’s board of directors (the “Board”). In his complaint, Plaintiff asserted, among other things, that the Company paid an unfair price for the repurchase of nearly 19 million shares (the “Repurchase”) from its controlling stockholder, Brookfield Asset Management, a Canadian alternative investment management company (“Brookfield”). The repurchase price for the aforementioned shares was set to track the price received by Brookfield for the sale of up to 11 million shares of Company stock to Morgan Stanley, an American investment bank and Brookfield’s longtime broker (the “Block Trade” and, together with the Repurchase, the “Challenged Transactions”).

In 2018, Brookfield took the Company public at a price of $15.00 per share. In connection with the IPO, the Company amended its certificate of incorporation (the “Certificate Amendment”), and Brookfield executed a Stockholder Rights Agreement (the “SRA”). The Certificate Amendment set the maximum number of directors at 11 and permitted Brookfield to remove directors, with or without cause, so long as Brookfield remained the holder of more than 50% of the Company’s stock. The Certificate Amendment permitted the Board to adjust the exact number of directors “from time to time” and “subject to” the provisions of the SRA. The SRA granted Brookfield the right to designate three directors (each a “Designated Director”). At the time of the IPO, the Board consisted of three Designated Directors (Denis Turcotte, Jeffrey Dutton, and Ron Bloom), three independent directors (Anthony Taccone, Michel Dumas, and Brian Acton), and David Rintoul, the Company’s CEO. Bloom was later replaced by David Gregory and, in accordance with the SRA, Catherine Clegg was added as an eighth director within a year of the IPO, on the recommendation of Bloom, Brookfield’s managing partner.

Following the IPO, Brookfield began to offload significant amounts of its holdings in the Company. In 2018, Brookfield sold 20 million of its Company shares, of which 11.7 million were repurchased by the Company and which lowered the Company’s stock price nearly 11.4%. Brookfield attempted to offload roughly 20 million additional shares in early 2019, but the Company’s stock price decreased significantly upon filing the associated Form S-1 with the SEC, prompting the Company to withdraw the registration statement “due to market conditions.” Because Brookfield’s attempts to offload its Company shares depressed the stock price, the Board approved a share repurchase plan in mid-2019 (the “Public Repurchase Plan”) to boost the Company’s stock price. Under the Public Repurchase Plan, however, Brookfield only offloaded roughly 1 million of its Company shares.

In a November 2019 meeting, the Board was informed of below-average revenue and earnings projections. Brookfield became aware of the disappointing financial results from its representatives on the Board, and Turcotte proposed the Repurchase and Block Trade. The Board granted authority for implementing and approving the Repurchase to the Audit Committee, which consisted of Dumas, Acton, and Taccone. Dumas and Taccone later approved the Repurchase, with the price paid by the Company set by reference to the Block Trade. As a result of the Challenged Transactions, Brookfield sold 11.2 million shares of Company stock to Morgan Stanley, and the Company repurchased 19.05 million shares of its stock from Brookfield, each at a price of $13.125 per share. Company stock, which on December 4, 2019, and prior to the announcement traded at $13.93 per share, dropped to $12.63 per share by market close on December 5, 2019. Plaintiff filed a Section 220 demand in February 2020, and in August 2020 the Board added a ninth director, Leslie Dunn.

Plaintiff brought this action on September 30, 2020, alleging breach of fiduciary duty by the Board in approving the Repurchase at an unfair price. The Court, noting that the claim was derivative rather than direct, applied the three-prong demand futility analysis delineated in the Court’s 2020 Zuckerberg decision. That test asks: (1) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (2) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and (3) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand. This test is applied on a director-by-director basis, and a demand will be deemed futile when the above questions are answered affirmatively for more than half of the directors at issue.

The Court noted that Rintoul and the three Designated Directors were clearly compromised. Despite this, the Court stated, Plaintiff still must “plead particularized facts supporting a reason to doubt” that at least one of the five outside directors was “incapable of exercising disinterested and independent judgment regarding a demand.” The Court found that prong (1) was not satisfied for any of the five directors, as Plaintiff failed to plead any of the outside directors stood to gain a material personal benefit from the Challenged Transactions.

The Court dismissed the notion that prong (2) could be satisfied with respect to Acton, Dunn, or Clegg. Dunn was not a director at the time the Challenged Transactions were approved, Clegg was not a member of the Audit Committee, and Acton was not present to vote on the Audit Committee’s decision regarding the Challenged Transactions. The Court then considered whether prong (2) was satisfied for Dumas or Taccone, both of whom served on the Audit Committee and approved the Challenged Transactions. Plaintiff argued that the approval process was defective because (i) no special committee was formed, (ii) no legal or financial advisors were hired, and (iii) the price paid by the Company was set to match the price of the Block Trade. However, the Court dismissed these arguments, stating that they failed to amount to the bad faith required to subject any individual director to liability given each director was protected by a § 102(b)(7) waiver in the Certificate Amendment.

Finally, regarding the independence inquiry in prong (3), the Court found that none of the five directors were conflicted with regard to the Challenged Transactions. Plaintiff waived the conflict argument for all but Dumas and Taccone by failing to brief the issue. Plaintiff argued Dumas was conflicted due to a prior business relationship with Turcotte, a Designated Director with whom Dumas worked previously. The Court noted Dumas’s overlap with Turcotte ended nearly two decades prior to the Challenged Transactions, further clarifying that “[t]he naked assertion of a previous business relationship is not enough to overcome the presumption of a director’s independence.” Plaintiff argued that Taccone’s independence was neutralized by his co-ownership of a consulting firm that Brookfield and the Company had done certain business with previously. However, the Court, looking to the amounts paid by the Company and Brookfield to Taccone’s business, dismissed these claims as immaterial.

As such, the Court found that none of the three prongs of the Zuckerberg test were met with regard to any of the five independent directors. Accordingly, because Plaintiff failed to prove that a potential demand would have been futile, the Court dismissed the claims.