Domestic M&A

SEC Hands Out More than $8 Million in Fines as a Result of a Proposed Merger Between a Space Transportation Company and a SPAC

By Dixon Babb

On July 13, 2021, the Securities and Exchange Commission (the “SEC”) handed out more than $8 million in settlement penalties arising from the proposed merger of Momentus, Inc., an early-stage space transportation company (“Momentus”), and Stable Road Acquisition Corp., a special purpose acquisition company that had raised $150 million in November 2019 in its initial public offering (“Stable Road”). The SEC fines arose out of the proposed merger in which Momentus made materially false statements, omissions and engaged in other deceptive conduct. Stable Road also engaged in negligent conduct by repeating and disseminating Momentus’s misrepresentations in SEC filings without a reasonable basis in fact.

The SEC found that Momentus, and its former CEO, Mikhail Kokorich (“Kokorich”), misled Stable Road Investors in two key respects. First, Momentus and Stable Roade claimed that Momentus had successfully tested a microwave electro-thermal water plasma thruster in space, when in fact that was not the case. Second, Kokorich and Momentus concealed and made false statements made regarding national security and foreign ownership risks posed by Kokorich. The parties disclosed that Kokorich could face restrictions by the Committee of Foreign Investment in the United States but did not disclose the full extent of that risk.

Due to this conduct, the SEC found that Momentus violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities. Due to Stable Road’s negligence in reporting this misinformation, they violated Section 17(a)(2) and (3) of the Securities Act, Section 14(a) of the Exchange Act and Rule 14a-9, which prohibit the solicitation of a proxy by means of a proxy statement containing a material false statement. As a result of these violations, the parties were fined over $8 million.


Delaware Court of Chancery Denies Incentive Award for Lead Plaintiff in Shareholder Lawsuit over Fresh Market Sale after $27.5 Million Settlement

By Kolby A. Boyd

On July 12, 2021, the Court of Chancery of the State of Delaware (the “Chancery Court”) denied an application for an incentive award for Elizabeth Morrison, the lead plaintiff in a stockholder lawsuit related to the $1.4 billion take-private sale of The Fresh Market, a grocery store chain (“Fresh Market”), to Apollo Global Management, a private equity firm (“Apollo”). The Chancery Court had previously approved a $27.5 million settlement to end the stockholder suit, of which attorneys were entitled to $6.88 million.

The dispute regarding the transaction stems from former Fresh Market CEO and chairman Ray Berry allegedly lying or concealing his private communications with Apollo about the terms of the acquisition agreement and his equity rollover agreement. Furthermore, Richard Anicetti, former president and Mr. Berry’s successor as CEO of Fresh Market, and Scott Duggan, former Chief Legal Officer and senior vice president of Fresh Market, allegedly breached their fiduciary duties owed to Fresh Market in connection with the transaction. Previously, the Chancery Court had dismissed the lawsuit, finding that the fully informed shareholder vote approving the transaction had cleansed the transaction under the Corwin doctrine. The Delaware Supreme Court subsequently reversed that decision and sent the case back down to the Chancery Court on the basis that there were material omissions of information that weakened Fresh Market’s arguments under Corwin. The settlement and approval of attorney’s fees followed.

Presently, the denial of the mere $5,000 incentive fee was based on the idea that the Chancery Court did not want to set a precedent for giving all class representatives an award in the future, which might set perverse incentives. While Mrs. Morrison had devoted time to the case over the course of several years, she had not engaged in actions beyond those expected of all litigants in the court and had not engaged in any actions that rose to the levels of those that had previously warranted an incentive award, such as spending 2,000 hours on the case or utilizing her particular skillset in assisting the litigation.


Delaware Court of Chancery Allows Stockholder Vote to Proceed for Proposed Merger between Madison Square Garden Entertainment Corp. and MSG Networks, Inc.

By Kolby A. Boyd

On July 2, 2021, the Court of Chancery of the State of Delaware (the “Court”) declined to issue a preliminary injunction against a stockholder vote to approve the proposed merger of Madison Square Garden Entertainment Corp., a sports and entertainment company (“MSGE”), and MSG Networks, Inc., also a sports and entertainment company (“MSGN”). MSGE and MSGN each had been previously spun-off from Madison Square Garden Sports Corp. (formerly known as The Madison Square Garden Company).

The plaintiffs in the suit (stockholders from both MSGE and MSGN) alleged violations of Section 203 of the Delaware General Corporation Law, arguing that because both companies were controlled by James Dolan and related parties, the merger required a supermajority vote of unaffiliated stockholders and the ending of a 3-year moratorium of actions taken after a party becomes an interested stockholder of more than 15% of shares.

The Court found that MSGE did not violate the Section 203 protections of its stockholders because it satisfied an exception under the law by approving the transaction that resulted in MSGN becoming an interested stockholder via unanimous written consent in 2019. Additionally, the Court found that MSGN did not violate the Section 203 protections of its stockholders because the 3-year moratorium imposed on 15% or greater stockholders expired in 2013, three years after the Dolan Family Group had become an interested stockholder. MSGE only became an interested stockholder in 2019 as a result of its relationship with the Dolan Family Group, and the purpose of the statutory language was not to prevent situations like this from occurring and thus the restrictions placed on MSGE must track those placed on the Dolan Family Group.

As a result of this decision the stockholder vote may continue on without judicial intervention, but there are still outstanding issues in this case that may be resolved in future litigation.


Delaware Chancery Court Finds Breach of Contract in Litigation Between Medical Device Companies Arising from Reduced Medicare Reimbursement Rates

By Courtney Black

On July 9, 2021, the Court of Chancery of the State of Delaware (the “Court”) issued a Memorandum Opinion in a breach of contract lawsuit. In this litigation, the plaintiff was Bardy Diagnostics, Inc., a start-up medical device company (“Bardy”). They produce one product: a patch worn for cardiac diagnoses, which sends its data to the cloud for technicians to interpret (the “Bardy Patch”). The defendant was Hill-Rom, Inc., a medical technology company (“Hillrom”). In January 2021, the parties signed a merger agreement (the “Agreement”). While negotiating, the parties expected the Medicare reimbursement rate for the Bardy Patch (the “Rate”) would soon be set at a national, higher rate. However, between signing and closing, the Rate dropped significantly. It first dropped 86%, from $365 per patch to approximately $40-$50 per path, depending on the region. In April 2021, the Rate was reset to $133, still under half its original. As a result, Hillrom gave notice that it would not close the merger. Bardy then sued for breach of the Agreement. Hillrom counterclaimed for a declaratory judgment that (1) the reduced Rate was a Material Adverse Effect (“MAE”), (2) the reduced Rate was not a MAE carve-out, and (3) Hillrom was excused from its obligation to close under the frustration of purpose doctrine.

The Agreement defines a MAE as, “any fact…that…has had, or would reasonably be expected to have, a material adverse effect on…the Business of the Acquired Companies…” Hillrom had the burden on the issue of whether the reduced Rate is a MAE, which the Court distilled down to three elements: the reduced Rate is an event, which affects Bardy’s business, and is material and adverse. The Court held the reduced Rate is an event for this test. It rejected the argument that “events” are limited to “unanticipated events” because the Agreement was silent on such a limit. The Court then held the reduced Rate affects Bardy’s business because it affects its financial condition. The Court held the definition of “business” included both operations and financial conditions due to supporting language in the MAE provision. Lastly, the Court held the reduced Rate was not a material and adverse event. Here, the Court looked for whether the effect on earnings potential was (1) reasonably expected to be a MAE, and (2) reasonably expected to endure for a significant duration of time. The Court reviewed the parties’ testimony regarding Medicare rate adjustments and concluded, for the second prong, that it was reasonable to expect the Rate to be revised within the next two years. As a result of failing the material and adverse element, the reduced Rate was not a MAE.

The Court further found support for holding the reduced Rate is not a MAE by looking at the Agreement’s carve-out provision. Specifically, the Agreement states any change in Law or any interpretation thereof is not a MAE. “Law” is defined as any rule or regulation issued by any government body. The Court held the Rate falls within this definition because setting the Rate is under the purview of the Centers for Medicare & Medicaid Services and their valuation firm-contractors. The Court then held the Rate is not a carve-out exception under a disproportionate impact test. Here, Hillrom had the burden to (1) define the universe of similarly-situated companies operating in the same industries or locations as Bardy, and (2) show Bardy suffered a materially disproportionate impact relative to the similarly-situated companies. First, the Court held iRhythm Technologies, Inc., a medical device company (“iRhythm”), was the only similarly-situated company. It emphasized that iRhythm also derives a majority of its income from one product, meaning it is likewise dependent on the Rate. Additionally, iRhythm is also in a growth stage, not a profitability stage. The Court then compared Bardy and iRhythm to hold Bardy was not disproportionately impacted by the reduced Rate. Notably, the Court did not resolve which financial metric(s) to compare because there was no disproportionate impact for any metric. Bardy and iRhythm’s revenues, gross profits, and various valuation metrics were similar during the reduced Rate period.

The Court then turned to Hillrom’s frustration of purpose counterclaim. Under the frustration of purpose doctrine, there must be an event, the non-occurrence of which was a basic assumption of the parties. The Court defined the threshold as greater than “less profits” or “sustaining a loss.” It needs to amount to a “catastrophe.” Here, the Court flatly rejected Hillrom’s argument that the reduced Rate renders Bardy invaluable. Hillrom entered into the Agreement to buy a growing company with superior medical technology, and Bardy retains that status after the reduced Rate. Further, as previously examined, the record did not support a finding that the reduced Rate would remain as the status quo. Lastly, the Agreement had an earn-out provision, which allocated the risk of short-term Rate reductions onto Bardy, making reduced rates a contemplated risk. The Court therefore rejected Hillrom’s frustration of purpose counterclaim.

Because the reduced Rate was not a MAE, fell into the carve-out, and was not a frustration of purpose, the Court held that Hillrom’s failure to close the merger was a breach of the Agreement. There was no contest on Bardy’s claim for a specific performance remedy, but Hillrom argued that compensatory damages were inappropriate. The Court agreed. While Bardy used the Agreement’s indemnification clause to argue for remedies that make it whole, Hillrom countered that the indemnification clause was limited by its terms for harm to equityholders. Here, because Bardy argued it was harmed (and it is not an equityholder), the Court held Bardy is not entitled to the compensatory damages.



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