CURRENT MONTH (July 2020)
M&A Law
Delaware Supreme Court Affirms November Viacom Judgment Based on Different Rationale
By John Adgent
As discussed in November, the Delaware Superior Court (the “Superior Court”) denied an indemnification claim brought by the former stockholders of Harmonix Music Systems, Inc., a video game company (“Harmonix”), for attorneys’ fees, costs and tax losses incurred from the alleged breach of a 2006 merger agreement, pursuant to which Viacom International, Inc., a media holding company (“Viacom”), acquired Harmonix. In that judgment, the Superior Court determined that the indemnification clause at issue applied only to indemnification for third-party claims, not direct claims between the parties to the merger agreement.
On July 6, 2020, the Delaware Supreme Court (the “Court”) affirmed the Superior Court’s decision, although based on a different rational than the Superior Court. On appeal, the Court found Viacom’s argument that the stockholders’ claim for attorneys’ fees, costs and tax losses was barred by a limitation on indemnification contained in the merger agreement dispositive.
The relevant indemnification provision in the merger agreement obligated Viacom to indemnify the former Harmonix stockholders for losses arising out of or by reason of the breach of any representation, warranty, or covenant it made in connection with the agreement. However, Viacom’s indemnification obligation was also subject to “Certain Limitations” set forth in Section 8.6(b), which stated:
“Certain Limitations. [Viacom] shall not be obligated to indemnify [the former Harmonix stockholders] pursuant to Section 8.6(a) to the extent the aggregate amount of all indemnifiable Losses exceeds the aggregate unpaid amount of the Merger Consideration then payable.”
Pursuant to the merger agreement, the “Merger Consideration” payable to the Harmonix stockholders consisted of $175 million at closing and two post-closing earn-out payments. The Harmonix stockholders prevailed in post-closing litigation regarding the earn-out payments and were awarded two additional payments, all of which Viacom paid in full.
The Court reasoned that when Viacom paid those earn-out payments, it completed payment of the merger consideration in full. According to the Court, after making those payments, there was not, and afterwards could not be, “an unpaid amount of the Merger Consideration then payable.” Thus, the Court stated that the effect of this unambiguous limitation on Viacom’s indemnification obligation was to reduce that obligation to zero once the merger consideration was paid in full. Therefore, because the merger consideration was paid in full before the Harmonix stockholders brought this action for indemnification, the claim for indemnification failed. Clearly, according to the Court, Viacom’s indemnification obligation ended when it paid the merger consideration in full.
Delaware Supreme Court Affirms Jarden’s Unaffected Market Price as Fair Value
By John Adgent
On July 9, 2020, the Delaware Supreme Court (the “Court”) affirmed the Delaware Court of Chancery’s (“Chancery Court”) judgment that found $48.31 as the fair value of each share of Jarden Corporation, a consumer products company (“Jarden”), as of the date of its sale to Newell Rubbermaid, Inc., a consumer products company, to form Newell Brands, Inc. in 2016. Several large Jarden stockholders rejected the $59.21 per share merger price and sought judicial appraisal by the Chancery Court of the fair value of their Jarden shares as of the merger date.
The Chancery Court determined that, out of all of the valuation methods presented by the parties’ experts, only the $48.31 unaffected market price of Jarden’s stock was reliable to determine the fair value. The Chancery Court disregarded the other valuation methods presented for several reasons. Notably, the CEO and co-founder of Jarden dominated the sale process by acting with “little to no oversight by the Board” and by volunteering “a price range the Board would accept to sell the Company before negotiations began in earnest.” Additionally, Jarden had no reliable comparable companies because the stockholders’ expert failed to support his selection of peer group companies, which made that analysis weightless. Further, the parties’ experts presented “wildly divergent” discounted cash flow models so the Chancery Court refused to adopt either party’s fair value model conclusions.
On appeal, the stockholders argued that the Chancery Court erred as a matter of law by adopting Jarden’s unaffected market price as fair value because it ignored a “long-recognized principle” of Delaware law that a corporation’s stock price does not equal its fair value. The stockholders also claimed that the Chancery Court abused its discretion by refusing to give greater weight to a discounted cash flow analysis populated with data, ignoring market-based evidence of a higher value and refusing to use the deal price as a “floor” for fair value due to the flawed negotiation process.
In affirming the Chancery Court, the Court first rejected the claim of any “long-recognized principle” that a corporation’s unaffected stock price cannot equate to its fair value. Granted, the Court acknowledged the infrequency of using a corporation’s unaffected market price alone to establish its fair value. In this instance, however, the Chancery Court considered alternative measures of fair value as well—a comparable companies analysis, market-based evidence and discounted cash flow models—and explained its reasons for not relying on that evidence. Finally, the Court reasoned that the Chancery Court did not err by failing to treat the deal price as a floor for fair value because there was evidence that the merger price exceeded fair value and that the stockholders received the value of the synergies that were created by the deal.
CoreLogic Board Forcefully Fights Back Against Unsolicited Takeover Bid
By Mary Lindsey Hannahan
On July 7, 2020, CoreLogic, Inc., a publicly traded real estate analytics company (“CoreLogic”), vehemently rejected an unsolicited offer from Cannae Holdings, Inc., a holding company with investments in restaurants, technology enabled healthcare services, financial services and more (“Cannae”), and Senator Investment Group, LP, a hedge fund (“Senator”), to take CoreLogic private by acquiring all outstanding shares of CoreLogic for $65.00 per share in cash. In a letter to shareholders, CoreLogic’s board of directors (the “Board”) explained that the Board unanimously rejected the offer “based on its belief that the proposal significantly undervalues CoreLogic, is opportunistically timed, fails to address serious regulatory concerns, and is not in the best interests of shareholders other than Senator and Cannae.”
According to the Board, Cannae and Senator’s “proposal is opportunistic and timed to acquire CoreLogic at a low valuation and then take all the upside that is rightfully [the shareholders].” As evidence of this, the Board highlights a specific sequence of events. First, on the evening of June 25, CoreLogic released its second quarter guidance, predicting higher-than-expected revenue for the quarter, and its stock price shot up about 9% in after-hours trading. Then, on the next day, Cannae and Senator “scrambled to get their announcement out before the market opened on June 26 and before the impact of CoreLogic’s announcement was reflected in the stock price, so they could claim it provided a large premium.” Cannae and Senator did make their public offer to take the company private on June 26 and claimed that the share price was a 37% premium and represented a 34% gain based on CoreLogic’s June 15 closing stock price. The Board contested that their proposal in fact represents only a 12.5% premium to where CoreLogic traded the previous evening, after release of their second quarter guidance.
Further, in their initial offer, Cannae and Senator added that because they jointly owned 15% of CoreLogic’s shares, if the Board refused to negotiate, then they would take their offer straight to the shareholders. However, the Board points out that Cannae and Senator had not yet completed their purchase of a 15% stake in the company. Instead, filings with the Securities and Exchange Commission show that Cannae and Senator bought a 3% stake on June 26 after publicly announcing their takeover bid. “Tellingly, they bought some shares at prices above $68.00 per share, revealing they know the shares are worth more than $65.00 per share,” said the Board.
Moreover, on July 6, CoreLogic’s board adopted a shareholder rights plan—or as it is more commonly called, a “poison pill”—in response to the unsolicited bid. CoreLogic’s short-term shareholder rights plan will be triggered if a person or group acquires a 10% stake in its business, or 20% for a passive investor. CoreLogic thus joins the number of public companies that have adopted poison pills in the wake of the coronavirus pandemic and associated drops in stock price, and the foregoing saga goes to show that such takeover defense measures may prove necessary.
Forescout and Advent Settle Deal Dispute Arising from Coronavirus-Related Delay with $1.6 Billion Amended Merger Agreement
By Mary Lindsey Hannahan
On July 15, 2020, Advent International, a private equity firm (“Advent”), and Forescout Technologies, Inc., a publicly traded cybersecurity company and leader in device visibility and control software (“Forescout”), jointly announced that they had agreed on terms revising their previously announced merger and settled their legal dispute over the deal. Under the amended merger agreement, Advent and its new co-investor Crosspoint Capital Partners will acquire all outstanding shares of Forescout at $29.00 per share, for a total value $1.6 billion. The revised deal also requires Forescout shareholders to tender at least one share more than 50% of Forescout’s issued and outstanding shares. The initial agreement, announced in February 2020, had Advent picking up Forescout for $33.00 per share, or about $1.9 billion.
This revised deal and settlement arises from Advent’s decision in May 2020, three days prior to the closing date, to put the deal on hold due to uncertainties surrounding the global coronavirus pandemic. Forescout followed by filing suit in the Delaware Chancery Court to compel the merger, pushing back on Advent’s claim that a “material adverse effect” had occurred. Forescout stated: “Forescout believes that no material adverse effect has occurred, that all closing conditions are satisfied, and that Advent is obligated to close the transaction. Forescout believes that Advent has relied on meritless excuses to support its position.”
In conjunction with the revised merger terms, the companies reached a settlement agreement that provides for dismissal of the Chancery Court suit, and the companies’ statement emphasizes that both are confident in their newfound common ground. “We continue to believe that Advent and Crosspoint Capital Partners are the right partners for Forescout, and we are pleased to have reached this agreement,” said Forescout’s president. Forescout’s board of directors has also unanimously approved the amended merger agreement. The companies expect to finalize the merger during the third quarter of 2020.
Jefferies-HomeFed Merger Suit Could be Subject to Entire Fairness Review, after Motions to Dismiss Denied
By Whitney Robinson
On July 13, 2020, the Delaware Chancery Court (the “Court”) denied the defendants’ motions to dismiss a breach of fiduciary duty claim against the board of directors of HomeFed Corporation, a residential and mixed-use real estate development company (“HomeFed”), and a breach of fiduciary duty claim against Jefferies Financial Group Inc., a diversified financial services company (“Jefferies”), as HomeFed’s controlling stockholder for developing an “unfair and self-deal Transaction.”
In 2017, Jefferies held 70% of the stock in HomeFed and ultimately, in July 2019, Jefferies acquired the remaining outstanding HomeFed shares in a two-for-one exchange of its shares for HomeFed shares held by minority stockholders.
In 2017, HomeFed formed a special committee consisting of its independent directors, Considine and Lobatz, to evaluate a potential transaction with Jefferies proposed by Considine. This led Jefferies to discuss the transaction process with HomeFed’s largest minority stockholder. But, by March 2018, Jefferies stated it was no longer pursing the deal and the special committee paused its evaluation of the proposed transaction. Approximately one year later, Jefferies proposed the deal again for a two-for-one share exchange that required the approval of a majority of HomeFed’s minority stockholders and the HomeFed special committee. Despite pausing its pursuit of the deal, Jefferies had been discussing the transaction with HomeFed’s largest minority stockholder and had garnered its support for the deal.
Here, the issue was whether the two-for-one share exchange complied with Kahn v. M & F Worldwide Corp. (“MFW”), which provides that a squeeze-out merger by a controlling stockholder is subject to business judgment review and not entire fairness if the requirements of MFW are met. Specifically, the less-plaintiff friendly business judgment standard applies in a merger involving a controlling stockholder when “the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of minority stockholders.”
The Court denied the motion to dismiss because the plaintiffs pled facts that Jefferies did not utilize the MFW protections ab initio as it began discussions with HomeFed’s minority stockholders prior to its offer in 2019. The plaintiffs alleged that the MFW protections should have been in place beginning in 2017, because substantive negotiations with both the special committee and minority stockholders began prior to Jefferies implementing the MFW protections. Thus, the defendants lost at the pleading stage and, if after discovery, triable issue of fact remain, the transaction will be analyzed using the entire fairness standard.
Synapse Wireless Stockholder Loses Appraisal Action in Delaware Chancery Court
By Whitney Robinson
On July 14, 2020, the Delaware Chancery Court (the “Court”), weighed competing valuation methods to determine the fair value of Synapse Wireless, Inc., a company specializing in intelligent lighting and industrial Internet of Things solutions (“Synapse”), in the appraisal action brought by plaintiff and stockholder, William Richard Kruse. This appraisal action arose from the 2016 merger of McWane Inc., a privately owned manufacturing company (“McWane”), and Synapse (the “2016 Merger”).
In 2012, McWane gained a controlling interest in Synapse through a merger (the “2012 Merger”), and also entered into a Stockholders Agreement giving McWane the option to buy Synapse’s newly issued shares at the 2012 Merger per-share price and existing shares at a contractually pre-determined price. Following the 2012 Merger, Synapse consistently underperformed and missed revenue targets, often by significant amounts. McWane bought over ten million additional shares of Synapse’s stock after the 2012 Merger to finance Synapse’s operations. McWane filed suit against Synapse after the 2012 Merger, but the parties were able to reach a settlement agreement in 2015 (the “2015 Settlement”). Only one stockholder, Kruse, opted not to sell his respective shares under the 2015 Settlement. Kruse held 582,216 shares of Synapse individually and through two trusts.
The 2016 Merger was a squeeze-out merger, and Kruse was offered $0.42899 per share for his stock, the same price per share from the 2015 Settlement. However, Kruse refused the offer and instead filed this appraisal action, where the parties disputed the fair value of Synapse. Both parties offered expert testimony to evaluate the fair value of the Synapse stock at the time of the 2016 Merger.
Kruse’s expert, Athen Sweet, found Synapse’s per-share fair value price of $4.1876, while defendant’s expert, Christopher Noe, offered a per-share fair value price of $0.06 or $0.11. The Court noted it was hard to find “any wholly reliable indicators of Synapse’s fair value [because] [t]here is not reliable market evidence, the comparable transactions analyses both experts utilized—a dicey valuation method in the best of circumstances—have significant flaws and the management projections relied upon by both experts in their DCF valuations are difficult to reconcile with Synapse’s operative reality.” But, the Court stated that a fair valuation must be given in appraisal litigation, and concluded that Noe offered the more “reliable conclusion” based on “less than perfect data.”
After concluding that both expert’s prior company transaction analyses and comparable transaction valuations were unreliable, the Court found that Noe had the more credible discounted cash flow valuation. First, Noe had a more credible, facially reasonable profit margin projection because it was based on the median profit margin of other companies in Synapse’s industry. Additionally, the Court accepted Noe’s estimate of weighted average cost of capital based on industry estimates because it was an accepted method of valuation when it is difficult to otherwise calculate a company-specific number. Next, Noe’s calculation of Synapse’s terminal value utilizing the perpetual growth model, his illustration that Sweet’s terminal value calculation suffered serious flaws, and Sweet’s inability to argue otherwise, led the Court to find Noe’s more credible. Accordingly, utilizing Noe’s discounted cash flows valuations, the Court found that Synapse’s value was $0.228 per share or $20,347,822.
