In short, the coverage between the signing and closing of a deal is what would be referred to as interim breach coverage. Although some carriers have offered full interim breach coverage in the last year or so, the additional premium associated with such coverage typically drives RWI buyers to accept the more standard partial interim breach coverage, which encompasses the following:
- If a breach occurs prior to signing and is discovered during the interim period (i.e., the period between signing and closing), the breach will be covered.
- If a breach occurs during the interim period and is discovered after the closing, it will be covered.
- If a breach both occurs and is discovered during the interim period, it will not be covered.
The length of the interim period the carriers are willing to include as part of the base insurance premium has settled to somewhere between 120 and 180 days. For longer periods, carriers typically charge additional premium, usually on a per month basis.
We have seen interim periods ranging from two weeks to over a year. For those longer periods, while coverage does continue, in addition to extra premium, carriers often request a refresh of the due diligence, or, at the very least, a more robust bring-down call ahead of closing.
Some carriers do have an absolute cut-off for the length of the interim period, so if parties anticipate an especially long stretch between signing and closing, it is a good idea to negotiate that with the carrier prior to engaging the carrier. A good insurance broker, with good carrier relationships, can often achieve better results (longer period, lower additional premium) and will often be able to facilitate the exchange and update of information so that it is satisfactory to the carrier while not being burdensome to the deal parties.
Delaware Chancery Court Determines a SPAC Public Stockholder Alleged Reasonably Conceivable Claims for Breach of Fiduciary Duty against SPAC Directors and Sponsor
By Gabin Park, Associate, Holland & Knight LLP
On October 18, 2024, the Delaware Court of Chancery issued a memorandum opinion in John Solak v. Mountain Crest Capital LLC, et al., a suit concerning the de-SPAC merger between Mountain Crest Acquisition Corp. II (“MCAD”)—a special purpose acquisition company (“SPAC”)—and Better Therapeutics, a prescription digital therapeutics company. MCAD combined with Better Therapeutics in October 2021, but the newly created company’s stock price plummeted from $10.97 per share immediately after the merger to $3.68 per share three months after the merger, and it had further declined to $1.28 per share when the plaintiff filed a complaint in April 2023. The plaintiff alleged that MCAD’s directors and sponsor (the “Defendants”) breached their fiduciary duties by consummating the transaction for their own financial interests at the expense of MCAD’s public stockholders.
The Chancery Court denied the Defendants’ subsequent dismissal motion, determining that the plaintiff had properly alleged direct claims for breach of fiduciary duty against the Defendants. The Court inferred that the Defendants engaged in a conflicted controller transaction, which triggered an entire fairness standard of review. The Defendants had a “financial interest in effectuating any merger, regardless of its value,” because their investment would be worthless if it did not merge with Better Therapeutics (the Defendants had waived their right to redeem their founder shares, which is customary for SPAC sponsors). In contrast, if no merger occurred, public stockholders could redeem their investment plus interest.
The Court found the case akin to In re MultiPlan Corp. Stockholders Litigation, in which “the public stockholders’ forgoing the redemption offer itself provided a unique benefit to the Controller Defendants because it ‘brought [them] one step closer to consummating a transaction that allegedly benefitted [them] to the detriment of [public] stockholders.’” The Court noted that such conflict of interest was especially true here because the Defendants could not effectuate a merger unless at least 8.7 percent of public stockholders chose not to redeem their shares.
Under the entire fairness standard, the Court found it reasonably conceivable that the defendants breached their fiduciary duties because it could be inferred that the Defendants deprived public stockholders of a fair chance to exercise their redemption rights by making deficient disclosures that impaired the stockholders’ ability to make an informed decision.
The Court determined that it was reasonably conceivable that MCAD’s proxy statement failed to disclose a material fact by omitting the actual amount of cash being placed into the merger, which was 25 percent less than what was disclosed in the proxy statement. The proxy statement valued MCAD’s shares at $10 per share, but the net cash per share was only $7.50. Although failure to disclose net cash per share is not a per se breach of duty, the Court found it reasonably conceivable that “a rational . . . investor would simply look to the $10 per s[h]are consideration and assume that the net cash per share roughly matched this figure.” The Court noted it was reasonably conceivable that “a delta of 25% between implied value and cash per share [was] material.”
Notably, this case is the first of its kind to survive a dismissal motion “solely on an affirmative statement of investment value in conflict with a failure to also disclose net cash.”
Hefty Revisions: The FTC and DOJ Announce New Premerger Notification Rules
By Patrick V. Johnson II, Howard University School of Law
On October 10, 2024, the FTC, with concurrence from the Department of Justice, issued a final rule amending the premerger notification form and associated instructions and the premerger notification rules implementing the Hart-Scott-Rodino (HSR) Act. Many experts have found the rule expansion to be the most significant change to the reporting rules since the enactment of the HSR Act forty-eight years ago. As for the FTC, the rule changes represent a response to corporate structure and deal-making changes that have created information gaps for the agency.
Although the FTC’s final rule does not change the scope of transactions subject to reporting under the HSR Act, it does expand the mandatory disclosure requirements. For example, the FTC now requires the acquiring company and the target company to submit a transaction rationale briefly explaining the primary strategic rationale for the contemplated transaction, which should be supported and identified by transaction-related documents submitted with the HSR filing. Furthermore, the final rule requires filing parties to disclose any subsidies they have received from any “foreign entity or government of concern” within the past two years of the HSR filing. Acquiring companies and target companies must also submit a competition description disclosure. The new and modified rules demonstrate the FTC and DOJ’s commitment to remaining adept in the accelerated M&A market.
Conversely, for law firms, the FTC’s final rule will likely force M&A attorneys to allocate additional time to ensure that HSR filings are accurate and conform with the new requirements. Indeed, the FTC estimates that the changes will add sixty-eight hours to the typical time it takes M&A attorneys to prepare such paperwork. The additional time spent on due diligence and detailed filings will likely be passed on to clients by law firms. Nonetheless, there are two sides to every coin, and while the new requirements might seem even more onerous for M&A attorneys and law firms, the new requirements may result in fewer blocked mergers in the future. In any event, the FTC’s final rule reinforces how critical a well-considered strategy is when contemplating or pursuing transactions.
The FTC’s final rule will take effect ninety days after being published in the Federal Register, likely in January 2025.
