Acquisition agreements in M&A transactions frequently include provision for payment to be made at closing based on estimates of certain financial metrics that are later subject to a purchase price adjustment based on a final determination (referred to as a “true-up”) within a few months following closing. These metrics may include a target’s cash, debt, unpaid transaction expenses and working capital (excluding cash), and sometimes others. The definitions that correspond to these items, and what particular items are included or excluded from each, are often the product of significant negotiation, as the final purchase price can move materially up or down based on their final determination. The process of finally determining the adjustment amount following the closing can also reveal differences in the buyer’s and seller’s interpretation of accounting principles applicable to the purchase price adjustment calculation, or how those principles apply to the target’s financial statements. These differences can become a source of post-closing conflict between buyer and seller, at a time when the parties are working through transitional issues, and when the sellers may have ongoing involvement in the business. Parties will want to resolve these disputes quickly and in a cost-effective manner. To accomplish these objectives, often the purchase agreement will require that the parties submit unresolved issues to an independent accountant for final resolution. A key consideration in such referral will be the role that the accountant will play in resolving the dispute. Will the accountant act as an arbitrator or as an expert? This is an important distinction that deserves careful consideration by both sides. By engaging an accountant to act as an expert and not an arbitrator, the parties limit the scope of the accountant’s review and avoid the formalities of an arbitration.
On May 25, 2023, the Texas Legislature enacted the biggest structural change to the Texas court system in recent memory. House Bill 19 (“HB 19”)—signed by Governor Greg Abbott in June—creates a new “Business Court” system for the Lone Star State. HB 19’s passage comes after four previous legislative efforts to enact a business court system in Texas failed. Texas’s Business Courts will activate on September 1, 2024, and will handle complex commercial disputes with significant amounts in controversy. The purpose is to create an efficient, specialized court for complex, high-value commercial disputes needing timely resolutions—matters that could otherwise languish in overworked district courts with broad dockets that include, among other things, criminal, personal injury, and family law cases. Ideally, specialized business courts also promote consistent interpretations of commercial laws and contracts, thereby leading to more predictable outcomes. Texas is now the 31st state to adopt a business court system of this kind.…
In Securities & Exchange Comm’n v. Fowler, No. 20-1081, 2021 WL 3083655 (2d Cir. July 22, 2021), the United States Court of Appeals for the Second Circuit upheld a lower court judgment awarding the Securities and Exchange Commission (“SEC”) civil penalties, disgorgement, and injunctive relief in a securities fraud action against a broker engaged in unsuitable and unauthorized high-frequency trading. The district court entered its judgment following a jury trial finding the defendant guilty of violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933. On appeal, defendant asserted that the action was subject to a five-year statute of limitations imposed by 28 U.S.C. § 2462 despite the parties having entered into tolling agreements. Defendant also argued that the civil penalties assessed against him were excessive, and the disgorgement award failed to properly account for legitimate business expenses as required by Liu v. Securities & Exchange Comm’n, 140 S. Ct. 1936 (2020). After reviewing its text and legislative history, the Second Circuit concluded in this matter of first impression that § 2462 is non-jurisdictional and, therefore, the district court had the power to hear the case in light of the parties’ tolling agreements. The decision is important because it reaffirms the enforceability of tolling agreements between the SEC and its investigative quarries. The court also rejected defendant’s arguments alleging improper civil penalty and disgorgement calculations.
Continue Reading Second Circuit Upholds Enforceability of SEC Tolling Agreements
In Coster v. UIP Companies, Inc., No. 49-2020, 2021 WL 2644094 (Del. June 28, 2021), the Delaware Supreme Court reversed a Court of Chancery ruling, No. 2018-0440-KSJM, 2020 WL 429906 (Del. Ch. Jan. 28, 2020) (McCormick, V.C.), that members of a board of directors did not breach their fiduciary duties when they approved a transaction with an “inequitable purpose” because the process and substance of the transaction were “entirely fair” to the aggrieved stockholder. The Court held that even though the board’s action passed Delaware’s rigorous “entire fairness” review, the Court of Chancery should have further considered whether the board acted for inequitable reasons or for the primary purpose of interfering with the stockholder’s statutory or voting rights. As the Supreme Court explained, “inequitable action does not become permissible simply because it is legally possible.” Coster provides an important reminder to board members that ensuring a transaction is “entirely fair” does not necessarily shield directors from liability if the directors acted in bad faith or for the “primary purpose of thwarting” a stockholder’s franchise rights.
Continue Reading Delaware Supreme Court Holds That Surviving “Entire Fairness” Review is Not Conclusive of a Breach of Fiduciary Duty Claim Where Directors Acted Inequitably
In In re WeWork Litigation, 2020 Del. Ch. LEXIS 270 (Del. Ch. Aug. 21, 2020) (Bouchard, C.), the Delaware Court of Chancery considered an issue of first impression: Does the management of a Delaware corporation have the unilateral authority to preclude a director from obtaining the corporation’s privileged information? The Court held it cannot. The directors of Delaware corporations are entitled to share in legal advice the corporation receives and, subject to limited exceptions not at issue in WeWork, cannot be prevented from accessing the corporation’s privileged information.
Continue Reading Delaware Court of Chancery Clarifies that Management Cannot Unilaterally Curtail a Director’s Access to Corporation’s Privileged Information
In Sciabacucchi v. Salzberg, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court reversed a Delaware Court of Chancery (Laster, V.C.) decision declaring invalid a federal forum selection provision in a Delaware corporation’s charter or bylaws. The federal forum selection provision was intended to require claims by investors under the Securities Act of 1933 (“1933 Act”) to be brought solely in federal court, thereby avoiding the likelihood of defending duplicate, concurrent state and federal court 1933 Act claims. The Delaware Supreme Court’s decision provides clear guidance to companies preparing for securities offerings for implementing a tool to limit the cost of defending duplicative 1933 Act litigation.
Continue Reading Delaware Supreme Court Confirms That Federal Forum Provision Is Facially Valid, Reversing Court of Chancery
In Drulias v. 1st Century Bancshares, Inc., No. H045049, 2018 WL 6735137 (Cal. App. Dec. 21, 2018), the California Court of Appeal, Sixth Appellate District, affirmed an order staying a stockholder lawsuit brought in the Superior Court of California, Santa Clara County, on forum non conveniens grounds based upon enforcement of an exclusive Delaware forum selection bylaw. This decision confirms that California courts will enforce forum selection bylaws designating Delaware as the exclusive venue for intra-corporate claims. …
Continue Reading California Court of Appeal Enforces Delaware Forum Selection Bylaw
In two recent decisions, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB, 2016 Del. Ch. LEXIS 133 (Del. Ch. Aug. 24, 2016) (Bouchard, C.) (“Comstock”), and Larkin v. Shah, C.A. No. 10918-VCS, 2016 Del. Ch. LEXIS 134 (Del. Ch. Aug. 25, 2016) (Slights, V.C.), the Delaware Court of Chancery addressed the salutary effect of stockholder approval on the standard of review to be applied when evaluating damages claims in post-closing merger litigation. The Delaware Supreme Court first recognized this effect in Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304, 309 (Del. 2015), holding that “[w]hen a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” But, since Corwin, the precise meaning of the phrase “not subject to the entire fairness standard” — and thus the scope of Corwin’s holding — had not been addressed. Comstock and Larkin do so, with Larkin extending Corwin’s holding the furthest. Larkin declares that fully informed, uncoerced stockholder approval changes the standard of review in post-closing litigation to the more deferential business judgment rule in all instances save one: when the presence of a controlling stockholder triggers entire fairness review, in which case the entire fairness standard remains applicable.
Continue Reading Delaware Court of Chancery Addresses the “Cleansing Effect” of Stockholder Approval In Post-Closing M&A Damages Actions