CURRENT MONTH (February 2024)

Bespeaks-Caution Doctrine Applied in Dismissed SPAC Lawsuit

By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance

On February 6, 2024, the US District Court for the Southern District of New York dismissed a putative class action asserting claims under Sections 10(b) and 14(a) of the Securities Exchange Act against Trident Acquisitions Corp., a SPAC, and certain of its directors and officers. The SPAC’s merger with, Inc. (the Target) closed in October 2021. Plaintiffs alleged that the defendants misrepresented financial information and regulatory compliance and controls information of the Target before and after the merger. Some of the statements at issue involved financial projections and forward-looking statements, a notoriously controversial topic in the world of SPACs.

The court stated that “[t]wo doctrines – one statutory, the other judge-made – protect certain forward-looking statements from serving as the basis for claims of securities fraud.” The first doctrine derives from the Private Securities Litigation Reform Act of 1995 (the PSLRA), which has been subject of many heated SPAC-related discussions and was featured in the recently finalized SEC SPAC rules. The PSLRA creates a statutory “safe harbor” for certain forward-looking statements.

The second is the judge-made bespeaks-caution doctrine under which the “courts have long protected forward-looking statements, even those made in connection with an IPO.” The court held that only the bespeaks-caution doctrine applied to the proxy statement in this case because the “PSLRA safe harbor does not apply to any forward-looking statement that is ‘included in a financial statement prepared in accordance with generally accepted accounting principles,’” which was the case here.

The court stated that the revenue, EBITDA, and profit projections in the proxy statement were protected by the bespeaks-caution doctrine. Under this doctrine, and taking into account Second Circuit precedent from 2010, the court reasoned that a “forward-looking statement accompanied by sufficient cautionary language is not” an actionable statement “because no reasonable investor could have found the statement materially misleading.” The court then posed the question of whether the proxy statement’s 2021 financial projections were forward-looking statements, and holding that they were, moved on to the question of whether they were accompanied by sufficient cautionary language. Working through the statements in the proxy, the court held that the cautionary language included there sufficiently warned investors about the risks in question.

Delaware Court of Chancery Denies Preliminary Injunction Sought by Minority Warrant Holders to Enjoin Drag-Along Sale as it Puts $1.6 Million Merger and Shareholder Interests at Risk

By Nastassia Merlino, NYU School of Law

On February 26, the Delaware Court of Chancery declined to issue a preliminary injunction sought by QuarterNorthEnergy, Inc.’s minority securityholders to prevent the use of drag-along rights in conjunction with QuarterNorth’s $1.6 billion merger with Talos Energy Inc., as the Court found it could jeopardize the transaction and thus hurt QuarterNorth shareholders.

QuarterNorth is a privately held deepwater oil producer headquartered in Houston, Texas, with oil and gas operations in the Gulf of Mexico. The private corporation was formed in 2021 as a result of the Chapter 11 reorganization plan of its predecessor, Fieldwood Energy LLC. In exchange for Fieldwood’s deepwater assets, QuarterNorth issued common stock to Fieldwood’s first-lien lenders and two tranches of warrants to Fieldwood’s second-lien lenders, as well as subscription rights to both lenders. Fieldwood’s first-lien lenders, which include several funds, are the Drag-Along Defendants, whilst Fieldwood’s second-lien lenders include the plaintiffs and some Drag-Along Defendants.

On January 15, 2024, QuarterNorth announced its acquisition by Talos for $1.6 billion, which will make QuarterNorth an indirect wholly owned subsidiary of Talos. As a result, QuarterNorth common stockholders will receive cash and Talos stock, and each warrant will convert into “the right to receive the same merger consideration payable for Common Shares,” thus significantly increasing QuarterNorth’s market valuation. The stockholder vote on the merger was to be held on February 20.

The plaintiffs are investment management firms and include Mudrick Capital Management L.P., Bardin Hill Investment Partners LP, Ellington Management Group, and over a dozen funds they manage. The warrants they received as second-lien lenders will expire in more than five years. They allege that the drag-along sale is not consistent with the drag-along provision in QuarterNorth’s 2021 Stockholders’ Agreement and that such a provision does not apply to owners of only warrants. In the event of a merger, the Warrant Agreements provide that the Warrants would “roll through” after closing, and QuarterNorth would preserve applicable Warrant holders’ rights.

Vice Chancellor Lori W. Will found that the plaintiffs are not likely to succeed on such claims, as enjoining the drag-along sale could provide Talos with grounds not to close, putting the Talos merger at risk and thus potentially harming QuarterNorth’s investors. The plaintiffs failed to demonstrate “(1) a reasonable probability of success on the merits at a final hearing; (2) an imminent threat of irreparable injury; and (3) a balance of the equities that tips in favor of issuance of the requested relief.” The drag-along sale notice and merger agreement both appear to be consistent with the terms of the stockholder agreement, and applying the drag-along provision exclusively to a narrow subset of investors would be unreasonable. As such, preliminary injunctive relief was denied. However, the plaintiffs may pursue relief following the closing of the merger, which would allow them to seek monetary damages as a remedy should they be improperly subjected to the drag-along sale.

OCC Proposes Changes to Bank Merger Review

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

The mergers and acquisitions space has seen a massive increase in regulatory activity in recent years. In particular, merger regulatory criteria have been the subject of increasing attention. While agencies such as the Federal Trade Commission and the Department of Justice are consistently part of M&A headlines, one less-involved agency has gotten involved recently: the Office of the Comptroller of the Currency (“OCC”). In a press release dated January 29, 2024, the OCC issued a notice of proposed rulemaking regarding its proposed changes to the review criteria for applications received under the Bank Merger Act (BMA). The scope of the proposed changes is limited to mergers for which the OCC is the primary reviewing regulator. In short, these changes would only apply to mergers of banks.

The Bank Merger Act sets out a series of statutory factors for evaluating proposed mergers. The proposed changes involve the manner and framework under which the OCC considers three of the five factors required under the BMA. Those three factors are (1) financial stability, (2) financial and managerial resources and prospects, and (3) convenience and needs of the community.

Among the proposed changes is the elimination of “expedited review” and “streamlined applications.” These procedural tools allowed for more abbreviated applications with set review deadlines. See Office of the Comptroller of Currency, Overview of Notice of Proposed Rulemaking for Business Combinations Under the Bank Merger Act. The proposed changes also include thirteen “indicators” that applications would be accepted and six indicators that they would be denied. The removal of the abbreviated applications for qualifying banks and the evaluation criteria discussed in the proposed changes indicate that the OCC is poised to increase scrutiny and review of all bank mergers moving forward.

The American Bankers Association (“ABA”) released a brief statement regarding the proposed changes, saying that “regulators should ensure that the scope of required application information is tailored to each bank’s specific circumstances.” In addition, the ABA asserted “bank mergers should not be evaluated based on arbitrary asset thresholds—regulators must consider holistically financial, competitive, managerial, and other relevant factors involving banks of any size.”

The proposed changes indicate that the OCC, like the FTC and DOJ, seeks to bolster the merger review process moving forward. In his speech on January 29, Acting Comptroller of the Currency Michael J. Hsu mentioned that the OCC was collaborating with the DOJ to create an updated framework when considering proposals for bank mergers. While the general principles provide some insight into what this new framework for evaluating proposed mergers might look like, the exact approach remains to be seen. The changes, if implemented as they currently read, will likely lead to increased review periods for proposed mergers moving forward. This comes at a time when wait times for merger approval have recently hit record highs.


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