CURRENT MONTH (May 2021)
M&A Law
Louisiana Appellate Court Decides Breach of Fiduciary Duty Lawsuit for Defendants
By Courtney Black
On May 5, 2021, the State of Louisiana Court of Appeal, Fourth Circuit (the “Court”) affirmed a 2017 judgment granting summary judgment to Stewart Enterprises, Inc., a national funeral service provider (the “Company”) and its Board of Directors (collectively with the Company, the “Defendants”). The lawsuit, brought by the Company’s shareholders (the “Plaintiffs”), sought to prevent an equity merger with Service Corporation International, Inc., another national funeral services provider (“SCI”). Here, Plaintiffs appealed, arguing summary judgment was improper because (1) they rebutted the business judgment rule, so Defendants were required to show the merger was inherently fair, and (2) they provided substantial evidence of disloyalty and bad faith.
For Plaintiffs’ first assignment of error, the Court found invocation of the business judgment rule was proper. The Company’s chairman was not an officer or director on both sides, lacked a financial interest in the deal, and failed to receive additional or different benefits relative to other shareholders. The Court also rejected Plaintiffs’ argument that the chairman’s post-merger investment in a third party was problematic. There was no precedent to hold post-merger investments in third parties are unlawful transactions.
The Court then turned to Plaintiffs’ second assignment of error: the duty of loyalty claim. First, the Court held there was no conflict of interest with respect to the Company’s chairman. The Plaintiffs argued the chairman pursued self-dealing by seeking to purchase assets that SCI might have been required to divest for Federal Trade Commission approval of the merger. However, the Court differentiated this case from precedent because here, the chairman did not negotiate the merger and did not end up bidding on divested assets. Instead, a third party bid on the assets and the chairman, post-merger, invested in the third party.
Second, the Court rejected Plaintiffs’ argument that the Board lacked independence from the chairman. The Court used Delaware’s independence test: there must be material ties to a controlling party, defined as 50% voting power or control over business affairs. Here, the chairman was not a controlling shareholder. He owned enough shares to block actions via a negative vote, but not enough to direct actions via an affirmative vote. Further, there was no evidence that he participated in the merger negotiations.
Lastly, the Court rejected Plaintiffs’ claim that Defendants withheld material information in the merger’s proxy statement. Specifically, Plaintiffs claimed Defendants withheld the chairman’s alleged conflict of interest and the alleged lack of independence between the Board and chairman. Here, the Court held that because Plaintiffs did not prove the conflict of interest or lack of independence, the omitted information was not material and thus there was no breach of the duty of loyalty.
Supreme Court of Delaware Rejects Attempt to Block Merger between Dyal Capital Partners and Owl Rock Capital Corp.
By Kolby A. Boyd
On May 14, 2021, the Supreme Court of the State of Delaware (the “Court”) issued a final decision on the basis of its previous Order Denying Plaintiffs’ Motion for a Preliminary Injunction from April 20, 2021, in regards to a matter brought by Sixth Street Partners Management Company, L.P, Sixth Street Partners, L.P., and Special Situations GP, LLC, a private investment firm with over $50 billion in assets under management (collectively, “Sixth Street” or “Plaintiffs”), against Dyal Capital Partners, a division of Neuberger Berman Group LLC, an investment management company with over $400 billion of assets under management (“Dyal” and “Neuberger,” respectively, or collectively, the “Defendants”), in connection with a $12.5 billion merger between a Dyal affiliate and Owl Rock Capital Corp., an alternative asset manager (“Owl Rock”), as well as Altimar Acquisition Corporation, a special purpose acquisition company (“Altimar”), which would result in a new publicly traded company, Blue Owl Capital Inc. (“Blue Owl”).
Dyal manages multiple funds (the “Dyal Funds”) that acquire minority equity stakes in other private investment firms, referred to as “partner managers,” raising money primarily from outside investors. Dyal has established five of these funds that have made passive minority equity investments in fifty partner managers. Neuberger possesses complete control over the management and conduct of the Dyal Funds. Sixth Street is one of Dyal III’s ten partner managers, whereby Dyal III is a passive minority investor in Sixth Street and has access to certain financial information to monitor and value its investment, such as balance sheets, income statements, statements of cash flows, annual and quarterly investor reports, and Sixth Street’s principals’ compensation, which Sixth Street has acknowledged is not competitively sensitive. Sixth Street’s agreement with Dyal III also provides that Dyal III must obtain Sixth Street’s consent for any transfer of its interests, where transfer is defined broadly and Sixth Street may withhold consent for any or no reason. The agreement does not name any upstream entities as being bound by the agreement, and Dyal III did not hold itself to be capable of binding upstream entities, nor did Sixth Street request that any other entities be bound by the agreement.
The merger between Dyal and Owl Rock will not affect the legal and economic relationships between Sixth Street and Dyal III. Owl Rock’s business does compete with some of Sixth Street’s business, but Sixth Street’s senior executives acknowledged on multiple occasions that the transaction would have little impact on its business and that the information being shared was not sensitive and would be subject to informational firewalls. Nonetheless, Sixth Street attempted to leverage the transfer restriction provision to force a buyback of the equity Dyal III owned in them on favorable terms (the same sale price that Dyal III had paid three years earlier, paid over five years with no interest). Dyal III rejected this offer as grossly undervaluing the stake and after Sixth Street declined to negotiate, it instead lobbied through several channels to have the deal blocked.
In this matter, Sixth Street was asserting a breach of the transfer restriction provision in the agreement and tortious interference with the contract, seeking a preliminary injunction against the merger (which they later reduced to just against the transfer of Dyal Funds’ interests in Sixth Street, and in the alternative against exercising the informational rights). The Court denied Sixth Street’s requests both on the basis that Sixth Street failed to demonstrate entitlement to extraordinary relief and on the basis that the transfer restriction would not be triggered by the merger, as Dyal III was not transferring any rights and the upstream entities were not parties to that agreement. The Court ultimately saw Sixth Street’s attempts to stop the merger as an attempt to “muck up” the deal in an effort to force a “lowball” buyback of Dyal III’s investment. The Court issued its final judgment on these same grounds.
SPAC Litigation Has Arrived
We all knew it was coming. With 248 SPAC IPOs in 2020 and 324 SPACs already gone through their IPOs in 2021, it was inevitable that the plaintiffs’ bar would take notice and launch at least a few lawsuits. As of mid-May 13 SPAC-related securities lawsuits have been brought against SPACs in 2021. One of the latest was filed on May 14, 2021 against Danimer Scientific, Inc., a biodegradable plastics company which merged with Live Oak Acquisition Company, a SPAC, on December 29, 2020. The complaint is available here and an in-depth discussion about the case is here.
Some interesting trends are starting to emerge from the SPAC lawsuits. For example, seven of the securities lawsuits have come about following a publication of a short seller’s report. Most of these lawsuits are filed in connection with the SPAC’s business combination or de-SPAC. The defendant roster is broad and can include not only the post-merger going forward entity, but also the original SPAC, the pre-merger private company and the directors and officers of all three. The plaintiffs can be pre-merger SPAC stockholders, stockholders of the private company to be acquired by the SPAC, stockholders of the merged entity or a combination of these. Lawsuits are brought in state and federal courts and in some cases in several state and federal courts against the same entities based on a similar set of circumstances. Majority of the lawsuits are filed shortly after the merger but at least one, the acquisition of Lucid Motors by Churchill Capital Acquisition Corporation IV, was filed before the merger was even completed.
In addition to the securities class actions suits, some of which are very likely to result in large settlements, the garden variety merger objection suits are very common. In fact, these kinds of suits are almost a given and come shortly after almost every SPAC merger announcement. They typically allege insufficient disclosure, are followed by an 8-K filing that responds to the insufficient disclosure allegations, and go away relatively quickly for, according to some market participants, a behind-the-scenes fee of around $50,000.
The heftier securities lawsuits are not as ubiquitous but have not yet gone far enough in their process to yield enough settlement data. One lawsuit, involving a streaming media company Akazoo that merged with a SPAC called Modern Media in September of 2019, recently reached a partial $35 million settlement. The circumstances in that lawsuit involved the acquired company defrauding the SPAC and a consequent SEC enforcement action. The fraud in that lawsuit, however, is not a common element in the more recent lawsuits brought against SPACs.
The allegations in the majority of these suits typically focus on misstatements or omissions in the pre-merger disclosure and on the breach of the directors’ and officers’ fiduciary duty in sourcing and acquiring the private company. Improper or insufficient diligence is a frequent area of concern and post-merger integration issues have also been cited. For some of the pre-revenue or new technology companies, like the recent wave of electric vehicle companies merging with SPACs, allegations frequently revolve around those companies overstating the qualities or characteristics of their unproven technologies. Overly optimistic projections have also become an issue, one that SEC specifically called it out in its recent statements.
With all of these varying elements, SPAC litigation will continue to evolve and eventually we will get a sense of how serious and costly a typical SPAC lawsuit is likely to be. For now, there is no question that lawsuits will continue to be brought and that they are worth watching.
Delaware Court of Chancery Rules in Favor of Carl Icahn et al. in connection with Voltari Corporation Go-Private Deal Litigation
By Kolby A. Boyd
On May 10, 2021, the Court of Chancery of the State of Delaware (the “Court”) granted a Motion to Dismiss in favor of the defendants in a shareholder case involving former minority shareholders (the “Plaintiffs”) of Voltari Corporation, a commercial real estate company (“Voltari” or the “Company”), against Voltari’s Board of Directors (the “Board”), Carl Icahn, High River Limited Partnership and Koala Holding LP, both Voltari shareholders contributing to Icahn’s 52.69% ownership of Voltari’s shares (“High River” and “Koala” respectively, and collectively, the “Affiliated Entities”), Starfire Holding Corporation, the acquiring entity 99.4% owned by Icahn (“Starfire”), and Voltari Merger Sub LLC, a entity related to the merger (“Merger Sub”). The action challenged a go-private deal through which Icahn and the Affiliated Entities acquired the minority shareholders’ interests in Voltari.
The Plaintiffs alleged that Icahn acquired Voltari to take advantage of its $78.7 million in net operating loss carryforwards (“NOLs”), thus making the $0.86 per share, or $7.7 million in total consideration, an undervaluation of Voltari’s assets. The Plaintiffs claimed the Board, Icahn, and the Affiliated Entities breached their fiduciary duties to the minority shareholders by approving the merger. However, the Court found that because (i) Icahn conditioned his initial offer on approval by an independent special committee (ii) an informed, uncoerced vote by a majority of the minority stockholders, and (iii) the special committee met its duty of care in negotiating a fair price and was empowered to enlist its own advisors and definitively say no to the deal, that he had successfully invoked business judgment rule protection under Kahn v. M & F Worldwide Corp.
The independent special committee had employed its own legal counsel and financial advisors, and found that while Icahn would yield a substantial benefit from the NOLs and other tax benefits, the company and third parties would not and thus it would not be the best use of resources or in the best interests of Voltari to seek an alternative buyer. The special committee did counter with a higher price, successfully negotiating the purchase price up from the initial offer of $0.58 per share to the actual purchase price of $0.86 per share, which the special committee and the Board unanimously approved. After filing a proxy describing the terms of the proposed merger and a few shareholder vote attempts, a slight majority of the minority shareholders approved the merger on September 24, 2019 and the deal closed that same day.
Pattern Energy Group Stockholder Suit Kept Alive by Delaware Chancery Court Despite Dismissal Efforts
By Dixon Babb
On May 6, 2021, the Delaware Chancery Court (the “Court”) ruled that multiple claims in a stockholder suit that alleged unfair conduct and conflicts around the $6.1 billion go-private sale of Pattern Energy Group Inc., a renewable power venture (“Pattern”), beat a motion to dismiss. The initial complaint arose out of the March 16, 2020 acquisition of Pattern by Canada Pension Plan Investment Board, a pension fund (“CPP”). Pattern was formed by the private equity fund Riverstone, a fund that invests primarily in energy, power and infrastructure, to operate energy projects developed by another Riverstone entity. CPP had previously invested over $700 million in Riverstone funds. The plaintiffs, former stockholders of Pattern, alleged that CPP was successful in its bid to acquire Pattern because of its previous relationship with Riverstone and failed to adequately disclose material conflicts and process flaws to Pattern stockholders.
At the forefront of the plaintiff’s complaint is that the board of Pattern “breached its duties to stockholders by agreeing to the Merger, prioritizing Riverstone over Pattern stockholders, and issuing a supposedly false and misleading proxy statement.” According to the suit Brookfield Asset Management Inc., a strategic acquirer, had offered $33 per share for Pattern, whereas the deal with CPP was for $26.75 per share. The Court found that, at a minimum, the plaintiff pled the special committee and board failed to properly manage conflicts and prioritized the investors’ goals over stockholder value in bad faith. Because of this, the enhanced scrutiny standard would be more likely to apply. The Court, however, did state that it still needed to determine whether the parties that stood on both sides of the transaction were able to control its outcome. Further, the plaintiff had not yet pled facts to support a “fraud-on-the-board theory,” but the merger warrants review under enhanced scrutiny, not entire fairness.
Regal Shareholders Awarded Additional 2.6% per Share in Connection with 2018 Acquisition by Cineworld
By Dixon Babb
On May 13, 2021, the Delaware Chancery Court (the “Court”) awarded stockholders of Regal Entertainment Group, a movie theater chain and Delaware corporation headquartered in Knoxville, Tennessee (“Regal”), an extra 2.6% per-share in connection with Regal’s 2018 acquisition by Cineworld Group PLC, a cinema company based in London, England (“Cineworld”). On February 28, 2018, Cineworld acquired Regal through a reverse triangular merger, with each share of Regal common stock being converted into the right to receive $23.00 per share in cash.
The Regal stockholders argued that the valuation should be based on a discounted cash flow methodology, which would provide for $33.83 per share. Cineworld argued that Regal’s trading price and the deal price minus synergies should be the indicators of the proper valuation, which would have resulted in a fair value of $18.02 per share. The Court relied on the Delaware Supreme Court’s (the “Supreme Court”) decision in Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., to determine the proper valuation. In Dell, the Supreme Court found that the deal price had heavy probative value in determining the share price. Applying such reasoning, the Court found that the merger produced $6.99 of excludable synergies, $3.77 of which were captured by Regal stockholders. The court then took out the $3.77 from the $23 deal price and added in the effects of the 2017 Tax Cuts and Jobs Act, which was valued at $4.37, to get a fair value of $23.60 per share. The court rejected the stockholders argument that the 2017 tax cuts yielded a benefit of $7.32 per share.
The Court’s finding indicates that the fair value of the Regal stockholder’s shares was the deal price minus the synergies plus the change in value between signing and closing.
