CURRENT MONTH (November 2021)
In Rare Decision, Delaware Court Enjoins Merger Vote
In a rare decision, the Delaware Court of Chancery recently enjoined a stockholder vote on a merger until disclosure violations were remedied. In Nantahala Capital Partners II Ltd. Partnership v. QAD Inc., Vice Chancellor Paul Fioravanti reasoned that no vote could occur until the company corrected the deficient disclosures. He rejected, however, the plaintiff’s argument that the vote should be enjoined on the separate basis that the merger violated the company’s charter.
The action challenged QAD’s proposed acquisition by Thoma Bravo, whereby the Class A minority stockholders would receive $87.50 per share in cash. In addition, QAD’s founder and controlling stockholder Pamela Lopker would roll over $300 million of Class B stock. Because QAD’s charter contained a provision requiring Class A stockholders to receive in any merger consideration no less favorable in amount and form than that received by Class B stockholders, the plaintiff filed suit for breach of contract, on the basis that the rollover of Lopker’s stock violated QAD’s charter, and breach of fiduciary duty. The plaintiff later moved to preliminarily enjoin the stockholder vote on the merger, alleging various disclosure violations in QAD’s proxy and proxy supplement relating to the plaintiff’s theory that the special committee tasked with negotiating on QAD’s behalf had favored Lopker’s interests.
In a bench ruling, the Court concluded that QAD’s disclosures were materially misleading for two reasons: First, QAD disclosed that one of its directors had communications with Thoma Bravo in February 2021 but that material deal terms were not discussed, and also disclosed Lopker’s goal to realize $1 billion for her stake in QAD before reaching age 70—but it did not disclose that the director had informed Thoma Bravo of Lopker’s goal during those February 2021 communications. Second, QAD disclosed that it submitted a counteroffer of $92 per share to Thoma Bravo on June 18, 2021, and also disclosed that it proposed that Lopker roll over $300 million in stock and retain her board seat—but the separate placement of the disclosures in the proxy supplement made it appear as though the benefits for Lopker were separately negotiated when, in fact, they were proposed as part of the June 18 counteroffer.
The Court rejected the plaintiff’s other disclosure claims, noting that “the crux of all these issues is that Lopker’s interests loomed over the process.” Therefore, correcting the two disclosure violations identified would moot any remaining disclosure claims because it would be clear to stockholders that “the board was negotiating with Lopker’s interests in mind as early as February 2021.”
The Court also rejected the plaintiff’s primary basis for seeking an injunction—that the vote should be enjoined due to alleged violations of QAD’s charter. The Court reasoned that any violations could be remedied with monetary damages, while an injunction would risk stockholders losing out on a premium deal. The injunction entered was therefore “limited,” enjoining the stockholder vote only until QAD made the two corrective disclosures.
Chancery Dismisses Derivative Claims that Private Equity Sponsors Comprised a Control Group
Another perspective on a case also highlighted in October’s Mergers & Acquisitions Month-in-Brief.
For stockholders to comprise a control group, the alleged group members must be connected in some “legally significant way — such as by contract, common ownership, agreement or another arrangement — to work together toward a shared goal.” Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251-52 (Del. 2019). There must be “an indication of an actual agreement, although it need not be formal or written.” Id. In Patel v. Duncan, C.A. No. 2020-0418-MTZ (Del. Ch. Sept. 30, 2021), the court dismissed a claim alleging that two private equity funds comprised a control group that agreed to cause the corporation to engage in two unfair, self-interested transactions as a quid pro quo arrangement between them. Specifically, the plaintiff alleged they agreed to cause the corporation to overpay in two successive transactions in which the counterparties who benefitted unfairly were affiliates of the respective private equity funds.
The court found the allegations that they comprised a control group to be insufficient. While public disclosures indicated the corporation was a “controlled company” for purposes of New York Stock Exchange listing requirements, they did not concede the existence of a “control group” under Delaware law. Similarly, the stockholders’ voting agreement concerned the election of directors, not the transactions at issue. The court also reasoned that allegations concerning the funds’ cooperation in a prior investment did not reasonably support the existence of an agreement in fact here. At bottom, the court reasoned, the stockholder-plaintiff really contended that its allegations of unfair transactions supported that there must be an agreement in fact for a quid pro quo. The court regarded such allegations as conclusory and insufficient, however.
The court also reasoned that the plaintiff failed to allege sufficiently that a demand upon the board of directors would be futile under Rule 23.1. Even assuming arguendo that the plaintiff sufficiently alleged a control group, which it had not, that would not mean that the alleged controlling stockholders’ director-designees were per se disabled from considering a demand. And the plaintiff otherwise failed to show that a majority of the directors faced a substantial risk of personal liability in considering a demand.
The court accordingly granted the defendants’ motions to dismiss.
Puerto Rico Upholds Implicit Consent for Arbitration Agreements in the Employment Context
By Leslie Berkoff, Chair, Dispute Resolution Department, Moritt Hock & Hamroff LLP
The Puerto Rico Supreme Court reinforced Puerto Rico’s strong public policy favoring arbitration agreements in Aponte Valentín v. Pfizer Pharmaceuticals, CC-2018-748, finding continued employment served as implicit consent for such agreements under Puerto Rican law.
Pfizer Pharmaceuticals (“Pfizer”) had implemented a compulsory arbitration program for its employees pursuant to the Federal Arbitration Act (FAA) and sent notice of the program by email to its employees. Embedded in the email were links to a Mutual Arbitration Agreement and Class Action Waiver (“Agreement”), a training module, a list of questions and answers, and an electronic acknowledgment of receipt. The Agreement included a provision stating that, as a condition of continued employment, all work-related claims (with a few limited exceptions) had to be resolved through arbitration. The Agreement also included a provision that if an employee commenced work, or continued to work for a period of 60 days, after receiving the Agreement, then that job acceptance or continued employment, as applicable, would be deemed consent to the Agreement.
The plaintiffs were employees of Pfizer, and received the above email. After receiving these emails, the plaintiffs continued to work for the company for an additional 60 days. They were later terminated and commenced suit in court, alleging that they were terminated without just cause in violation of PR Act No. 80-1976. Pfizer moved to dismiss the action and compel arbitration pursuant to the Agreement.
The trial court granted the Motion to dismiss over the plaintiffs’ opposition that they never consented to arbitrate their claims. The court held that while the Agreement to arbitrate must be in writing, the parties’ physical signatures were not required, and the continuation of employment evidenced the plaintiffs’ tacit consent to such Agreement. The court of appeals reversed and remanded the matter back to the trial court, finding that there was a controversy about whether the plaintiffs had in fact consented to the Agreement.
Pfizer filed a writ of certiorari before the Puerto Rico Supreme Court, and in a 5-3 decision, the Supreme Court reversed the appeals court’s decision and reinstated the lower court’s dismissal of the case. In so holding, the Court emphasized Puerto Rico’s strong public policy favoring arbitration as an alternate dispute resolution method, as long as there is a valid arbitration agreement. The Supreme Court held that the FAA requires only that arbitration agreements be in writing, that sending the agreement through electronic means satisfies this requirement, and that the parties’ physical signatures are not required to validate the Agreement.
The Court then recognized that state law would govern in determining whether a valid arbitration agreement exists. Puerto Rican law recognized implicit or tacit consent for contracts and provided that implied consent may be expressed by a party’s conduct.
Applying the facts to the law, the Court held that, given the Agreement was clear in that it was deemed accepted if the employee continued to work for the company for 60 days after receiving the Agreement, written approval by the Plaintiffs was not required. The Court further found that continued employment was a valid way to implicitly consent to the Agreement based upon the explicit language of the Agreement, making the Agreement valid.
This case provides a framework for creating a binding agreement to arbitrate employment claims through implied consent.