CURRENT MONTH (August 2021)

Business Litigation

Private Company Mergers: Delaware Court Holds Non-Signatories Bound by Escrow

By Jeff Wolters and Sarah Zomaya of Morris Nichols Arsht & Tunnell LLP

A typical provision in private company merger agreements provides for setting aside in escrow a certain amount of merger proceeds to be used to fund specified post-closing claims.  The escrow is typically administered by a stockholders’ representative appointed in the merger agreement.  

Over the years, Delaware courts have considered various claims by stockholders who opposed a merger — and therefore did not execute the merger agreement or a consent approving it — that they should not be bound by post-closing decisions of the stockholders’ representative.  A recent decision by the Delaware Court of Chancery, Houseman v. Sagerman, C.A. No. 8897-VCG (Del. Ch. July 20, 2021), confirms that they are in fact bound.   

To understand Houseman, it helps to recall a Chancery Court decision from some years ago, Aveta, Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch. 2010).  In Aveta, the Court held that although individual stockholders who did not consent to the appointment of the stockholders’ representative generally were not bound as a matter of agency law, they were bound as a matter of merger law.  In other words, they were bound by the decisions of the stockholders’ representative as part of the terms and procedures required by the merger agreement for making final adjustments to the merger consideration.

Objecting stockholders recently took another crack at this rule in Houseman.  This time they argued that the Chancery Court’s 2014 decision in Cigna Health & Life Ins. Co v. Audax Health Sols., Inc., 107 A.3d 1082 (Del. Ch. 2014), should be read as establishing a broad rule that non-consenting stockholders could not be bound by post-closing deductions to a merger price.  The Court of Chancery again rejected such claims, holding that non-party, non-consenting stockholders were bound by post-closing adjustments — such as deductions due to specified post-closing obligations and purchase price adjustments — where the adjustments were made in accordance with the terms of the merger agreement and were limited in amount (capped at the escrow amount) and duration (the survival period specified by the merger agreement).

Houseman is good news for private company deal lawyers who have relied for years on the validity and workability of post-closing indemnification and escrow structures administered by a stockholders’ representative. 


Dispute Resolution

Ninth Circuit Holds That Uber’s Mandatory Arbitration Provisions Govern Claims of Their Drivers, Finding the Drivers Are Not Engaged in Interstate Commerce

By Leslie Berkoff, Partner, Moritt Hock & Hamroff LLP

The Federal Arbitration Act (“FAA”) exempts workers engaged in interstate commerce from the enforcement of mandatory arbitration agreements.  Over the past several years many drivers working for Uber and similar companies have commenced various class actions and sought to avoid arbitration of claims that they have been misclassified as independent contractorsIn the case of John Capriole, Martin El Koussa, and Vladimir Leonidas, Individually and On Behalf of Others Similarly Situated, v. Uber Technologies, Inc.; Dara Khosrowshahi, No. 20-16030 (9th Cir. Aug. 2, 2021), the Ninth Circuit Court of Appeals joins a growing number of Courts around the country finding that the drivers are not interstate workers because Uber (or similar) services are primarily local and intrastate in nature.   (On August 20, 2021, the Southern District of New York rendered a similar ruling in Davarci v. Uber Technologies Inc., case number 1:20-cv-09224).

The case began as a putative class action in the United States District Court for the District of Massachusetts, seeking to represent a class of Uber drivers who worked in Massachusetts to prohibit Uber from continuing to classify its drivers as independent contractors, and to force Uber to reclassify drivers as employees and comply with Massachusetts wage laws.  Uber sought to transfer the case to the Northern District of California and compel arbitration based on the mandatory arbitration agreement the drivers signed, which included a class action waiver.  The drivers opposed arbitration, claiming that they were exempt from mandatory arbitration under Section 1 of the FAA because, in plaintiffs’ view, such drivers are a class of workers engaged in interstate commerce as they often crossed state lines or picked up passengers at airports.

The district Court rejected those arguments, finding that national data showed that the drivers spent the vast majority of their time in a single state.  Plaintiffs then appealed to the Ninth Circuit after the district court compelled arbitration.  The key question on appeal was whether Uber drivers are engaged in interstate commerce within the meaning of the FAA, as they would then be exempt from the mandatory arbitration provisions of the FAA and could advance the classification claims in federal court.  In reviewing the data, the Court found that national data was important versus singling out data from one state in particular given that the FAA was created to espouse a national policy favoring arbitration.  The Court found the national data showed a very small percentage (less than 3 percent) of all rides in the U.S. crossed state lines.  The Ninth Circuit rejected the minority courts’ view that a de minimis amount of time spent engaged in interstate commerce would be sufficient to satisfy the FAA’s exemption and avoid arbitration.

The ruling recognizes the strong public policy behind the FAA promoting arbitration of matters and is consistent with the overall trend in the U.S. towards enforcing arbitration clauses in general.  While this decision could be subject to a rehearing en banc by the full Ninth Circuit, that remains to be seen.


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