To mark the forty-year anniversary of the Business Law Section’s Mergers & Acquisitions Committee, Nate Cartmell and Nick Mozal, cochairs of the Committee’s M&A Jurisprudence Subcommittee, reflect on developments in M&A jurisprudence over the last forty years.
Like the other sections of the M&A Committee, the state of the practice area covered by the M&A Jurisprudence Subcommittee in 1986 could only be described as nascent. M&A itself was undergoing significant change and evolution, and it was only natural that the jurisprudence arising from those transactions would change and evolve as well. The most recurring topics covered in the cases presented at our subcommittee meetings in recent years—fiduciary duties of directors in evaluating mergers and disputes between parties about their deal agreements—looked very different forty years ago, if they existed at all. Because jurisprudence sits at the intersection of so many of the other subcommittees, the following summary is necessarily generic and high-level to avoid stepping on their toes.
Fiduciary Duty Litigation of the 1980s
Transporting back to the 1980s would find one in the maelstrom of deal litigation the outcomes of which created the cornerstone of guidance practitioners have used to guide fiduciaries and companies ever since. The Delaware Court of Chancery and Delaware Supreme Court were busy writing the opinions that remain the starting points for the M&A textbooks that students study in law school.
1986 was particularly transformative. Of the many notable developments that year, two stand out. The first came from the Delaware Supreme Court handing down its Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. decision on March 13,1986, which built on the court’s Unocal Corp. v. Mesa Petroleum Co. decision from June 1985. The second was the Delaware legislature springing into action to adopt exculpation through section 102(b)(7), essentially overturning parts of the Delaware Supreme Court’s March 1985 decision in Smith v. Van Gorkom.
So much more was to come in the following years: the “barbarians” were not yet at RJR Nabisco’s gates, and in a sign that the more things change, the more they stay the same, Paramount had not yet injected itself into the merger between Time Incorporated and Warner Communications.
Committee Beginnings
The fiduciary developments in the law into the 1990s provided such usable guidance and standards that hostile takeovers became less common. M&A generally, of course, was only picking up steam. As M&A grew and became more varied, so did the jurisprudence concerning it.
By 2002, a small group of attorneys from what was then called the ABA’s “Negotiated Acquisitions Committee” came together and, in their first Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions, described the founding of this subcommittee as follows:
The Subcommittee on Recent Judicial Developments was formed at the 2002 Annual Meeting of the American Bar Association in Washington, D.C. The primary charge of the Subcommittee on Recent Judicial Developments is to summarize, on an annual basis, significant judicial decisions in the area of mergers and acquisitions (“M&A”), and to publish that summary as a service to ABA members who practice in the M&A area.[1]
The cochairs were Scott Whittaker (New Orleans, LA) and Jon Hirschoff (Stamford, CT), with contributors listed as Patrick Leddy (Cleveland, OH), Robert Ouellette (Columbus, OH), Mike Pittenger (Wilmington, DE), Tricia Vella (Wilmington, DE), and Arthur Wright (Dallas, TX).
The categories of cases summarized included interpretation of agreements, successor liability, and fiduciary duties.
Current Issues
Our recent Annual Surveys and meetings still cover these topics, though the most recurring issues have changed. For fiduciary challenges, mostly gone are the days of hostile acquirers asserting fiduciary challenges as a basis to enjoin target boards from taking a different deal. Instead, the fiduciary cases predominantly originate from non-acquirer stockholders seeking relief, which is increasingly either a pre-closing injunction related to governance disputes (such as compliance with a charter, bylaws, or other organizational document) or post-closing damages. The key decisions of the last decade—Corwin v. KKR Financial Holdings LLC, In re MFW Shareholders Litigation, C&J Energy Services, Inc. v. City of Miami General Employees’ Retirement Trust—arose in that context.
The topic of interpreting agreements is the one where we spend most of our ink in the annual survey and time in our meetings. This category involves disputes between parties, leading to court decisions, about the terms of the parties’ agreements. They tend to be private companies, and often private equity firms are the ones buying or selling. It seems there is no limit to contracting parties’ abilities to find something to fight about in the merger agreements, stock purchase agreements, asset purchase agreements, side letters (and on and on) to which they agreed. It gives us plenty to fill our agenda!
Our subcommittee deals with both pre-closing and post-closing cases. The pre-closing cases are usually “busted deal” cases. These cases involve one of the parties regretting their agreement and trying to get out before closing. Sometimes they arise in the context of one of the parties trying to force closing by seeking specific performance. Although material adverse effect (“MAE”) or material adverse change (“MAC”) clauses existed for many years, it was not until the In re IBP, Inc. Shareholder’s Litigation decision in 2001 that the Delaware courts started parsing them finely at the request of disputing parties. As is well known, this type of dispute exploded during the coronavirus pandemic and expanded to not just disputes over MAC clauses but interim operating covenants as well. We’ve been lucky to have plenty of jurisprudence to discuss in this area in recent years. And all M&A practitioners are lucky for the guidance set out in those decisions.
The post-closing contractual disputes between deal parties arise in a variety of contexts. These disputes primarily arise in private company sales. They include claims for contractual indemnification related to breaches of reps and warranties, fraud claims, and (increasingly) disputes over earnout provisions. Again, looking back forty years in this area, one would struggle to find much specific M&A jurisprudence on these topics until recently. But as deals of all types and sizes have become more common, so have these disputes. Just as the disputes keep coming and leading to decisions, they also lead to lessons. Each meeting we are lucky enough to have presenters discussing a decision that involves a fact pattern or contractual language worthy of lessons and consideration. We would be remiss not to mention Glenn West (Dallas, TX) and his contributions, both in his public writings and in his presentations and contributions in our meetings, in this area. And the same is true for the many jurists from Delaware who have graced us with their time and patience in answering questions at our meetings.
Navigating Issues
Our subcommittee is grateful for the continued opportunity to discuss the lessons from M&A disputes when they make their way to court. Though we do not always have the answer about what the next party should do in a similar situation, we hope that attendees feel better equipped at navigating those issues in their practices when they face them.
Available on Westlaw at Subcommittee on Recent Judicial Developments, Negotiated Acquisitions Committee, Annual Survey of Judicial Developments Pertaining to Mergers and Acquisitions, 58 Bus. Law. 1521 (2003). The subsequent edition in 2004 is available on the ABA website. ↑
