CURRENT MONTH (January 2020)
M&A Law
Delaware Supreme Court Holds Plaintiff Failed to Establish Its Recoverable Costs
By John Adgent
On January 6, 2020, the Delaware Supreme Court (the “Court”) reversed the Delaware Chancery Court’s award of $440,149 in costs to Brace Industrial Contracting, Inc., a provider of industrial services (“Brace”). The appeal arose from Brace’s 2014 acquisition of Peterson Industrial Scaffolding Inc., a scaffold subcontracting company (“PIS”), from Peterson Enterprises, Inc. (“PEI”).
In 2015, Brace filed a complaint against PEI for breaching the parties’ Security Purchase Agreement (“SPA”). Brace sought indemnification due to PEI allegedly misrepresenting the amount of scaffolding equipment owned by PIS in the SPA’s asset disclosure schedules (the “Inventory Claim”). Additionally, Brace alleged that PEI breached a restrictive covenant not to compete with Brace through a subsidiary (the “Restrictive Covenant Claim”). The Delaware Chancery Court awarded Brace $703,975 on the Inventory Claim, but ruled in favor of PEI on the Restrictive Covenant Claim. The Delaware Chancery Court also awarded Brace $440,149, representing all of its costs for both claims, under the SPA’s indemnification provision.
On appeal, PEI claimed that the Delaware Chancery Court erred in awarding Brace $440,149 as its total costs incurred because the SPA entitled Brace to recover costs only for claims upon which it prevailed. For that reason, PEI contended that Brace could recover only for the Inventory Claim and not for the Restrictive Covenant Claim. Brace countered that Section 6.2 of the SPA gave Brace a right of indemnification for any “[l]osses incurred or sustained by, or imposed upon, the Buyer Indemnitees based upon, arising out of, with respect to or by reason of . . . any inaccuracy in or breach of any of the representations or warranties of Seller.” Thus, Brace argued that Section 6.2 entitled it to the entire amount because all of its costs flowed from PEI’s breach of the representations and warranties under the SPA.
The Court held that Brace was not entitled to recover costs associated with the Restrictive Covenant Claim because the Delaware Chancery Court found PEI did not breach the SPA’s restrictive covenant. The Court then explained that “[w]here a party asserts more than one claim and is entitled to recover costs for one or more but not others, the party must make a good faith effort to segregate costs between those claims for which it is entitled to recover and those it is not.” However, Brace made no effort to segregate its costs between the Inventory Claim and the Restrictive Covenant Claim. Therefore, the Court reversed the Delaware Chancery Court’s award of $440,149 because Brace failed to establish the amount of costs it was entitled to recover for the claims upon which it was successful.
Delaware Court Confirms Majority of Uber’s Board Disinterested and Independent
By John Adgent
On January 13, 2020, the Delaware Supreme Court (the “Court”) confirmed the dismissal of a derivative action brought against Uber Technologies, Inc. (“Uber”), a multinational ride-hailing company, for failure to make a demand on the board.
Plaintiff, an Uber stockholder and former employee, sued Uber’s directors who approved its 2016 acquisition of Ottomotto LLC (“Otto”) after the transaction led to a $245 million settlement with Google for misappropriation of proprietary information. The plaintiff claimed that Uber’s directors ignored the alleged theft of Google’s intellectual property and failed to investigate pre-closing diligence that would have revealed problems with the transaction. According to the plaintiff, the board should not have relied on representations by Otto’s CEO that the transaction had the necessary protections because he and Uber had a history of misusing the intellectual property of others.
To begin, the Court noted that Delaware law requires that a stockholder first make a demand on the board to pursue derivative litigation unless a stockholder shows that demand is futile. In evaluating demand futility, the Court explained it first considers if any directors were interested and, if so, if any directors depended on an interested director. If a majority of the board in place when the complaint was filed was disinterested and independent, then a stockholder must make a demand on the board.
Applying that standard, the Court confirmed dismissal of the complaint for failure to make a demand on the board because a majority of the board was disinterested and independent. The Court first determined that a majority of the board was disinterested because there was no real threat of personal liability to the directors. Instead, Uber’s charter contained an exculpatory provision for its directors from monetary liability for fiduciary duty breaches. Thus, given this protection from due care violations, the directors only faced liability for “subjective bad faith,” and gross negligence alone was insufficient. Based on this difficult pleading requirement, the Court agreed that the plaintiff failed to show that the board acted in bad faith. The Court noted the “vast difference” between inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.
Next, the Court determined that a majority of the board was independent because their ability to act impartially was not subject to an interested party’s dominion or beholden to an interested party. The Court emphasized that being nominated or elected by a director who controls the outcome is insufficient alone to reasonably doubt a director’s independence. Accordingly, appointment to the board without a personal or financial connection to an interested party was insufficient to demonstrate a lack of independence.
Finally, because a majority of the directors were disinterested and independent at the time of filing the complaint, the plaintiff was required to demand that the board pursue the claim. Therefore, because the plaintiff did not make a demand before filing the suit, the Court confirmed the decision to dismiss the complaint.
Trucking Company Cannot Escape $5.7 Million in Reliance Damages Based on Unfulfilled Promise to Merge, Says Fifth Circuit
By Mary Lindsey Hannahan
On January 3, 2020, the Fifth Circuit Court of Appeals (the “Court”) affirmed an award of $5.7 million in damages on a promissory estoppel claim against Universal Truckload, Inc., a truckload transporter (“Universal”), related to its unfulfilled promise to acquire Dalton Logistics, Inc., a shipping broker (“Dalton”). The case arose from a breach of contract claim by Universal against Dalton; Universal provided $1.9 million in shipping services to Dalton, and Dalton never paid Universal for those services. However, Dalton counterclaimed—and the Court agreed—that Dalton provided those services in reliance on Universal’s repeated promise to acquire Dalton.
Universal’s promise, and the story of the resulting failed merger, began when Dalton was struggling financially and its executives decided to close down the business. As part of that process, Dalton contacted Universal, with whom it worked with regularly, to inform Universal that it was closing shop and would no longer need Universal’s services. At that point, Universal’s president expressed an interest in buying Dalton. Dalton was open to negotiating, but consistently said the deal needed to happen quickly as it was strapped for cash and could not continue operations on its own. Dalton, which had “already shut [the] company down,” then revved it back up at Universal’s request. Universal sent Dalton an Indication of Interest letter, and the companies’ officers meet soon after to discuss the deal. The president of Universal’s parent company repeatedly assured Dalton that the deal would “be finalized soon” as the parties negotiated. He continued to reassure Dalton even after a new merger and change of officers at Universal led to “internal political upheaval” and “left the old officers—who had promised to purchase Dalton—at odds with the new officers—who allegedly did not want the deal.” Universal went so far as to increase Dalton’s credit limit and provide trucks on credit because Dalton lacked the cash to do so, and “old” Universal officers had urged Dalton to increase its revenues to push the deal forward. After eighteen months of back-and-forth, the old Universal officers lost out to the new ones; Universal killed the idea of the Dalton acquisition and demanded Dalton pay the $1.9 million bill for Universal’s services. After paying to keep itself afloat for that eighteen month period, Dalton had no money to repay Universal, and Universal brought this action.
The jury, district court, and Fifth Circuit sided with Dalton, finding that Universal could not escape its repeated promise to merger. The Court upheld the jury’s award of $5.7 million in reliance damages based on promissory estoppel, an amount representing Dalton’s value at the time Universal promised to acquire it. The Court also affirmed the district court’s offset of the $1.9 million breach of contract damages in Universal’s favor because that debt was the result of Dalton’s reliance on Universal’s promise, which turned out to be nothing more than stringing Dalton along.
Delaware Chancery Court Grants In Part a Partial Motion to Dismiss Following Tender Offer, But Allows One Claim to Move Forward
By Whitney Robinson
On January 13, 2020, The Delaware Chancery Court (the “Court”) granted in part and denied in part a stockholders’ claims alleging breaches of fiduciary duties by Twin River Worldwide Holdings, Inc.’s, a holding company that owns casinos (“Twin River”), directors and officers (collectively, the “Defendants”) following a 2016 tender offer for the purchase of up to 250,000 shares of its common stock. Prior to the offering, Twin River sent an Offer to Purchase (the “OTP”) to its stockholders, detailing the tender offer.
Because its principal place of business is in Rhode Island, Twin River is subject to state regulations by the Rhode Island Department of Business Regulation (the “DBR”) that impose limits on the ownership of its stock. Twin River’s largest stockholder, Standard General, L.P., did not participate in the tender offer because it received approval from the DBR that its nonparticipation would not violate its regulatory limits. Twin River disclosed this fact in the OTP. Prior to the tender offer, the plaintiff, Chatham Fund, LP, Chatham Asset High Yield Master Fund, Ltd, and their investment advisor, Chatham Asset Management, LLC (collectively, the “Plaintiff”), owned its regulatory limit in Twin River’s stock.
Under Delaware law, an omitted fact is material if, had it been disclosed, it “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Count IV’s allegation of a breach of fiduciary duty for failure to disclose preferential treatment given to Standard General in the OTP failed because the Plaintiff did not show that the OTP omitted material facts regarding Standard General. Further, the Court stated that these disclosures would allow a reasonable stockholder to determine the impact of Standard General not participating in the tender offer.
Count V alleged a breach of fiduciary duty arising from the Defendants failure to disclose “Make-Whole-Payments” to certain Twin River’s officers and directors in the OTP. This claim failed because the disclosure “would violate the rule against ‘self-flagellation,’” and a reasonable stockholder would not find the omitted fact material to his decision to participate in the tender offer since it did not alter the “total mix” of information.
Count IX alleged a breach of fiduciary duty because the Defendants made decisions about the tender offer for their personal benefit and the benefit of one stockholder over the others. The Plaintiff alleged the tender offer was “a scheme to force other stockholders who were close to their regulatory limits of ownership to decrease their holdings in Twin River so that the Company would be able to purchase shares that some of them had ‘put’ to the Company.” Five of the Defendants had Put Agreements with Twin River. Although the company did not end up purchasing any of the shares through these agreements and it is not yet clear the scheme could have worked, the Court found the Plaintiff did allege a sufficient claim against the directors and one officer; the other officer’s motion was granted as he was not a party to a Put Agreement and there were no further allegations of personal benefit.
