November 2023 in Brief: Mergers & Acquisitions

Delaware Court of Chancery Addresses Claims of Breach of Contractual and Fiduciary Duties Following Alleged Diverting of New Deals Depriving Rollover Equity Holders of Their Economic Rights

By Nastassia Merlino, NYU School of Law

The Delaware Court of Chancery recently refused to dismiss a rollover equity seller’s claim for breach of contract on the basis that the defendant’s act of operating a competing business may have constituted a breach of the implied covenant of good faith and fair dealing even though there was technically no breach of the underlying agreement. In MALT Family Trust v. 777 Partners LLC (Del. Ch. Nov. 13, 2023), the Court addressed several claims regarding a buyer’s alleged breach of contractual and fiduciary duties following its failure to provide rollover equity holders with the agreed-upon equity that was to be granted upon the achievement of specific milestones. According to the rollover equity holders, the buyer’s improper operation of a competing business impeded seller’s performance, which prevented seller from earning additional rollover equity.

The principal plaintiff is MALT, a discretionary trust, and the principal defendant is 777 Partners, a private investment firm. After ten months of negotiations, the parties entered into a stock purchase agreement (SPA) whereby the plaintiff was to sell all of its outstanding equity from two entities in the aviation industry to an affiliate of the defendant. In exchange, the plaintiff would receive cash and a 3% vested equity interest in a newly formed company named Phoenicia. The parties also entered into an operating agreement for Phoenicia and an employment agreement, under which MALT would forfeit 1% of its vested interest in Phoenicia if the employment agreement was terminated within four years. The remaining 2% vested interest was given as restricted warrants that MALT could convert into 0.5% interest for each of four milestones met within four years, under the Employment Agreement.

The plaintiff claims that during the ten-month negotiation, the defendant represented that its aviation-related businesses would operate through Phoenicia exclusively. A few years later, the plaintiff discovered that the defendant was operating an aircraft-leasing business separate from Phoenicia, despite the defendant’s representation that such business would be conducted through Phoenicia exclusively. The plaintiff argued that the third and fourth milestones would have been met if the aircraft-leasing business had been operated through Phoenicia exclusively, and thus the plaintiff would have reached its 2% vested interest.

The Court concluded that the Phoenicia operating agreement did not require the defendant to operate the aircraft-leasing business through Phoenicia exclusively. The Court further concluded that Plaintiffs failed to identify any provision in the stock purchase agreement that was breached by the defendant. However, the Court stopped short short of dismissing the plaintiff’s claim that the defendant breached the SPA by failing to provide MALT with its interest in Phoenicia on the basis that the plaintiff may be successful in its claim that the defendant breached the operating agreement’s implied covenant and its fiduciary duties by operating the aircraft-leasing business outside of Phoenicia, which may in turn lead the plaintiff to a successful claim for the defendant’s failure to provide MALT with its remaining interest in Phoenicia.

2023 Sees an Increase in FTC Regulatory Activity in Mergers & Acquisitions

By Malcolm Deisz, University of St. Thomas – School of Law

In November of last year, the Federal Trade Commission (FTC) issued a policy statement centered around Section 5 of the Federal Trade Commission Act. Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce.” More than a year later, the FTC has demonstrated an increasing willingness to enforce Section 5 through litigation, particularly as it applies to mergers and acquisitions.

The FTC’s approach has involved litigation on several particularly large deals, such as Meta and Within Unlimited, as well as the highly publicized Microsoft-Activision merger. While the FTC failed to block either of these deals from eventually going through, the FTC has shown little sign of backing off its push for Section 5 enforcement.

In “An Update on FTC Merger Enforcement,” public remarks that were given on June 15, 2022, U.S. Federal Trade Commissioner Christine S. Wilson remarked that while the substantive nature of FTC analysis of mergers remains largely unchanged, the current FTC leadership has expanded the scope of merger investigations, departing from what the FTC described as an “unduly narrow approach” used in years past. According to Wilson, this broader scope of analysis is meant to investigate “a broader range of market realities,” as well as analyze merger impact on labor markets.

How FTC will approach future mergers remains to be seen, but if the past year is any indication, increased FTC regulatory activity may extend into 2024 and beyond.

Court Denies Motion to Dismiss Plaintiff’s Request for Reformation Following Alleged Breach of Post-Merger Employment Terms Caused by Merger Closing Delay

By Nastassia Merlino, NYU School of Law

On November 20, the Delaware Court of Chancery denied defendant BCV Social’s motion to dismiss the request of Plaintiff for contract reformation following a delayed merger closing date that led to Plaintiff’s termination prior to his one thousand stock options vesting. However, the Court granted the motion to dismiss Plaintiff’s related claim regarding a breach of contract due to Plaintiff’s failure to meet the statute of limitations. Greenberg v. BCV Social, LLC, No. 2023-0388-BWD (Del. Ch. Nov. 20, 2023). Founder and former executive of BCV Social Ari Greenberg negotiated the reformation of his employment agreement with RateGain’s CFO in relation to RateGain’s acquisition of BCV Social. During the merger closing, Plaintiff executed two agreements. The first was an employment agreement with BCV that allowed Greenberg’s effective termination for “non-performance” after May 31, 2020. The second was a stock option agreement with RateGain allowing Plaintiff’s stock options to vest on the first anniversary of the grant date, under the condition that Greenberg remain employed by BCV through that date. The merger was expected to close on June 1, 2019, which would have led to Greenberg’s stock options vesting one year later, on June 1, 2020, Greenberg’s earliest potential termination date. However, the merger closed ten days later, and the grant date was pushed to June 11, 2019. In March 2020, BCV notified Greenberg it would terminate him effective June 1, 2020, despite his options vesting on June 11, 2020, due to the delayed merger closing the year prior. BCV’s motion to dismiss Greenberg’s complaint for failure to state a claim was denied by the Court regarding Greenberg’s request for reformation, as Greenberg’s complaint appropriately pled entitlement to reformation. However, the motion to dismiss was granted regarding Greenberg’s claim for breach of contract due to his claim being time-barred.