May 2023 in Brief: Mergers & Acquisitions

Private Equity Buyer Allowed to Terminate Merger Agreement Based on Seller’s Breach of Capitalization Representation

By Poiret Coulibaly, NYU School of Law ‘24

The Delaware Court of Chancery ruled on May 29, 2023, in HControl Holdings LLC v. Antin Infrastructure Partners S.A.S., that a French private equity firm had the right to back out of a $230 million merger agreement to buy a group of privately held Florida broadband companies due to the sellers’ breach of the capitalization representation under the merger agreement.

In December 2022, Antin Infrastructure Partners S.A.S and affiliate OTI Parent LLC (“Buyers”) entered into a merger agreement to acquire OpticalTel (“Seller”). The merger agreement included a closing condition that the fundamental representations, including the capitalization representation, were to be true and correct in all respects at closing.

Post-signing, Rafael Marquez, a former OpticalTel employee, brought a claim for ownership interest in an OpticalTel subsidiary, HControl. Marquez’s ownership claim was based on a 2004 software development agreement, which provided that HControl shall pay to Marquez $3,000 per month for his services and a “5% ownership of HControl Corporation to be distributed upon a liquidation event.” The court concluded that the software development agreement created a “phantom equity” right, which is an unsecured contractual right that has the economic characteristics of equity. Chancellor McCormick found that “the Marquez issue rendered the capitalization representations inaccurate” and that “Sellers breached the [m]erger [a]greement on this basis, rendering Buyers’ termination valid”.

Notably, the Buyers conceded that the losses resulting from the breach of the capitalization representation were small compared to the deal value. Furthermore, the Buyers were entitled to full indemnity from Sellers for the capitalization issues. Nonetheless, the court pointed to the negotiating history and noted that the Buyers rejected three attempts from the Seller to impose a materiality qualifier and that the Buyers were entitled to the benefit of its specifically negotiated bargain.

This decision highlights the importance of parties to acquisition agreements to carefully consider the impact of the “flat,” “de minimis,” or “materiality” qualifiers on closing certainty.