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Business Law Today

June 2023

June 2023 in Brief: Mergers & Acquisitions

Chauncey Lane and Yelena Dunaevsky

June 2023 in Brief: Mergers & Acquisitions

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JPMorgan Fails with Frank but Wins with RWI

By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance, Woodruff Sawyer

In a June 21, 2023, article, Financial Times reported that JPMorgan is leaning on a representations and warranties insurance (RWI) policy to recoup at least some of its losses from its disastrous acquisition of financial aid start-up Frank. JPMorgan acquired Frank in September of 2021 and realized a few months later that Frank’s founder, Charlie Javice, fabricated a list of over 4.25 million customers to entice JPMorgan into paying $175 million for the acquisition. JPMorgan sued Javice in 2022; in April 2023 the U.S. Securities and Exchange Commission (SEC) charged her with fraud, and she was arrested on criminal charges brought by the U.S. Department of Justice (DOJ). 

While JPMorgan’s losses amount to at least $175 million as a result of the botched acquisition and the legal fees it is expending on the lawsuit, it will likely be successful in securing a payment from its RWI policy. Typically, a purchaser looking to acquire stock or assets of a target buys this type of insurance during the acquisition to protect itself against the seller’s breaches of representations and warranties in the purchase agreement. An additional important benefit of an RWI policy for a purchaser is the protection against seller’s fraud. If fraud exists, and in this case, the SEC and DOJ charges seem to point in that direction, the RWI policy would pay for losses associated with it.

It is likely that JPMorgan did not insure its $175 million transaction for the entire purchase amount. Typically, the insured purchases a policy with a limit of around 10% of the enterprise value of the deal. So, in this situation, JPMorgan will likely be seeking around $17.5 million from the insurance carrier. It could take a few months for the carrier to process the claim, but JPMorgan’s “huge mistake” in acquiring Frank could be somewhat cushioned by a well-bought RWI policy.

The insurance carrier does have subrogation rights under the policy to seek recourse against the seller for fraud, which means that Frank will not be entirely off the hook here. Whether there will be any assets to seek recourse from is another question, but at least for JPMorgan, the decision to buy this RWI insurance policy should prove to be a much wiser move than the decision to acquire Frank.

Elon Musk’s Victory in Tesla-SolarCity Deal Lawsuit Affirmed by Delaware Top Court

By Yijia Du, George Washington University Law School

On June 6, 2023, the Delaware Supreme Court upheld the Delaware Chancery’s dismissal of investors’ lawsuit regarding Tesla’s 2016 acquisition of SolarCity, a solar panel company founded by Tesla founder Elon Musk’s cousins. In reaching its conclusion, the Supreme Court rejected arguments from a group of Tesla stockholders that the Chancery Court erred in finding that Tesla’s deal to acquire SolarCity in 2016 was “entirely fair.”

Plaintiff stockholders alleged the buyout of struggling SolarCity was a thinly veiled bailout championed by Musk, who pressured the carmaker’s board and misled its stockholders. At the time of the acquisition, Musk owned about 22% of Tesla’s common stock and was the largest stockholder of SolarCity, as well as chairman of its board of directors. Finding the acquisition process satisfied the entire fairness test, then–Vice Chancellor Slights ruled that the billionaire didn’t improperly force directors to accept an overpriced buyout.

Acknowledging flaws in Slights’s fair price analysis, Justice Valihura wrote in the 106-page unanimous opinion that the lower court “committed no reversible error in applying the entire fairness test.” The Court found that deal negotiations “were conducted at arm’s-length, in good faith, with the advice of independent financial and legal advisors, led by an indisputably independent director, and, thus, constituted a fair process that led to a fair price.”

Delaware Court of Chancery Rules that Corporations Seeking Written Consent of Stockholders to Mergers Must Give Notice of Appraisal Rights Twice, with the Second Notice Triggering the 20-Day Period to Demand Appraisal

By James G. McMillan, III, Esq.

Visit Business Law Today’s June 2023 in Brief: Business Litigation & Dispute Resolution to read the full entry on this ruling.