CURRENT MONTH (November 2021)
Domestic M&A
Delaware Chancery Court Awards Investors $690 Million over “Sham” Trigger of Partnership Buy-Back Provision
By Noah Lewis, Bass, Berry & Sims PLC
On November 12, 2021, the Court of Chancery of the State of Delaware (the “Court”) ordered Loews Corporation, a holding company that engages in the oil and gas business (“Loews”), to pay $689.8 million plus interest in favor of former unit holders of Boardwalk Pipeline Partners LP, a limited partnership that transports and stores natural gas (“Boardwalk”).
The former unit holders of Boardwalk commenced a class action lawsuit against Loews following Loews’s 2018 buyout of Boardwalk, claiming that Loews intentionally breached Boardwalk’s partnership and artificially drove down the unit price of Boardwalk. Under Boardwalk’s partnership agreement, the general partner’s call-right could be triggered by an “opinion of counsel” that Boardwalk’s tax and regulatory status would have a material adverse effect on customer rates.
In the post-trial decision, the Court ruled that Loews’s in-house and outside legal counsel collaborated to create a sham legal opinion to trigger the buyback provision. Specifically, the Court found that Loews leveraged tax policy guidance issued by the Federal Energy Regulatory Commission to decrease the unit price of Boardwalk and falsely cause Loews’s legal opinion to issue the sham legal opinion. Because Loews’s in-house and outside counsel did not render the legal opinion in good faith, the Court held that the legal opinion did not meet the other buyback requirements under Boardwalk’s partnership agreement.
Furthermore, the Court found that in addition to the false buyback trigger under Boardwalk’s partnership agreement, Loews also deliberately undervalued the unit price of Boardwalk to create a favorable price during the buyout. The Court stated that Loews strategically issued public disclosures to drive down the unit price of Boardwalk prior to the triggering of the buyback provision. As a result, the general partner exercised its call option at $12.06 per unit. The Court, however, held that the unit share price should have been $17.60, or 31% more than the former unit holders of Boardwalk received.
Delaware Supreme Court Affirms $45 Million Judgment in Shire Merger Suit
By Noah Lewis, Bass, Berry & Sims PLC
On November 17, 2021, the Delaware Supreme Court (the “Court”) affirmed the 2020 decision by the Delaware Chancery Court (the “Lower Court”) ruling that Shire Pharmaceuticals LLC, a specialty biopharmaceutical company (“Shire”), violated a 2012 merger pact between Shire and FerroKin BioSciences Inc., a developer of medical devices (“FerroKin”), by failing to make a required milestone payment. As a result, Shire must pay FerroKin $45 million.
The decision from the Court stems from the 2012 merger agreement between Shire and FerroKin for Shire to buy FerroKin for $100 million, with the possibility of an additional $225 million in milestone payments. Shire, however, failed to make a $45 million milestone payment related to the production of a blood transfusion drug that Shire later discontinued. Shire argued that the milestone payment was exempted under the merger agreement because the drug was discontinued.
In 2017, however, Shareholder Representative Services LLC, a provider of investment advisory services (“SRS”), filed a suit on behalf of the shareholders of FerroKin. SRS argued that under the merger agreement, Shire still owed FerroKin the $45 million milestone payment despite the discontinuance of the drug. In response, Shire argued that payment of the $45 million milestone payment would result in a windfall for FerroKin.
The Court, however, sided with FerroKin, ordering Shire to make the $45 million milestone payment. In affirming the decision of the Lower Court, the Court agreed that the discontinuance of the drug was financially motivated and not the result of a contractual circumstance. Because the milestone payments were a bargained-for term, the Court affirmed the Lower Court’s order.
Senator Warren Urges SEC to Investigate Trump’s SPAC Merger
By Patton Webb, Bass, Berry & Sims PLC
On November 17, 2021, Senator Elizabeth Warren (“Warren”) wrote a letter to SEC Chairman Gary Gensler, alleging that Digital World Acquisition Corp., a special purpose acquisition company or “SPAC” (“DWAC”), which announced in October 2021 its plan to merge with former President Donald Trump’s Trump Media and Technology Group (“TMTG”), had committed securities law violations by engaging in private discussions about the potential merger as early as May 2021, while failing to disclose such discussions in its SEC filings.
In the letter, Senator Warren expressed significant concern regarding the patchwork regulation of SPACs, which she alleges are “often structured to exploit retail investors to the benefit of large institutional investors such as hedge funds, venture capital insiders, and investment banks.” She admonished the SEC, stating that it had yet to act on its prior statements indicating it would take a “more aggressive posture” toward investigating SPACs that may have run afoul of SEC rules.
Senator Warren claimed that the situation surrounding the potential merger between DWAC and TMTG “appear[s] to be a textbook example” of a SPAC misleading stockholders and the general public about material information. Warren claimed that the disclosures by the parties surrounding the merger appeared to violate the Securities Act of 1933 (the “Securities Act”), which bars individuals and companies from making “untrue statement[s] of material fact” about the sale of securities. Under the Securities Act, SPACs are required to disclose any direct or indirect conversations relating to potential mergers with target companies, protecting investors.
Warren claimed that DWAC and TMTG had “brazenly flouted” the requirements of the Securities Act, stating that DWAC had filed numerous disclosure documents with the SEC during the time between the beginning of negotiations and present, and that none of these documents had mentioned the potential combination. Of concern, on September 8, 2021, DWAC stated that it “ha[d] not selected any specific business combination target” and “ha[d] not, nor ha[d] anyone on [its] behalf, initiated any substantive discussions, directly or indirectly, with any business combination target.” Cutting against this claim, said Warren, is the fact that Patrick Orlando, DWAC’s sponsor, had engaged in detailed discussions with President Trump regarding the potential deal as early as March 2021—far before the SPAC’s initial filing in May 2021 and the public offering in September 2021. According to reporting by the New York Times cited by Warren, these appeared to have been detailed discussions, in which the “investor presentation about the planned deal envisioned the combined company, which would offer a social media app, films, events and eventually a variety of technology services, being worth $15 billion and rivaling tech giants like Netflix and the cloud divisions of Amazon and Google.”
Warren maintained that these discussions should have been disclosed, and that their omission, in light of the claim that the company had “not selected any specific business combination target” or engaged in “any substantive discussions,” were materially misleading and should be investigated to determine if the SPAC should face liability under the Securities Act. Warren claimed that, as a result of the foregoing, it was the SEC’s responsibility to act. She cited the fact that SPACs had been on the SEC’s regulatory agenda in June 2021, and that the SEC Advisory Panel had released recommendations for SEC regulation of SPACs in August 2021—one such recommendation being that the agency “regulate SPACs more intensively by exercising enhanced focus and stricter enforcement of existing disclosure rules under the Securities Exchange Act of 1934.”
Delaware Supreme Court Upholds Chancery Court’s Dismissal of Breach of Fiduciary Duty Claims Stemming from USG−Knauf Merger
By Patton Webb, Bass, Berry & Sims PLC
On November 10, 2021, the Supreme Court of Delaware (the “Supreme Court”) affirmed the dismissal of a breach of fiduciary duty claim brought by former shareholders of USG Corporation (“Plaintiffs”), an American manufacturer of gypsum products best known for manufacturing Sheetrock, against several of USG’s former board members.
The claims arose from the 2019 acquisition of USG by Gebr. Knauf KG (“Knauf”), a German gypsum products manufacturer. Knauf, which held a 10.6 percent stake in USG prior to the acquisition, sought to acquire USG and establish a foothold in the U.S. gypsum products market, further solidifying itself as a global leader in drywall manufacturing. Knauf’s prospective acquisition of USG was supported by Berkshire Hathaway, which held a 30.4 percent stake in USG.
From the start, USG pushed against the prospective acquisition. In 2018, Knauf submitted a bid to acquire USG’s outstanding stock at $42.00 per share, and indicated that if USG was not receptive to the bid, Berkshire Hathaway and Knauf might attempt a hostile takeover of USG. USG rejected this initial bid as “wholly inadequate.” Following the rejection, Knauf engaged in a proxy withhold contest (supported publicly by Berkshire Hathaway), which was successful. Shareholders withheld their votes for four of USG’s director nominees. USG then had little choice but to meet Knauf at the bargaining table, and the parties eventually agreed to a sale at a price of $44.00 per share. The terms of the acquisition were then approved by a majority of USG’s shareholders.
In their complaint, Plaintiffs alleged a single breach of fiduciary claim against each of USG’s nine directors, claiming the directors failed to obtain the “highest value available for USG in the marketplace.” The Plaintiffs claimed that USG’s process was “infected” by both a conflicted controlling shareholder (Knauf) and the bad faith approval by an interested board of directors. Defendants claimed that the decision was cleansed under the Delaware Supreme Court case Corwin v. KKR Financial Holdings, as it was approved by a majority of fully informed shareholders through a non-coercive process, and thus was subject to the business judgment rule.
The Chancery Court first found that Knauf did not constitute a controlling shareholder for Corwin purposes. The Chancery Court noted that, to be a controlling shareholder, the shareholder must either (1) own over 50 percent of the outstanding stock of the company, or (2) “exercise [] sufficient influence [that they are] . . . as a practical matter . . . no differently situated than if they had majority voting control.” The Chancery Court rejected the argument that Knauf and Berkshire Hathaway combined to exert such control, instead finding that, at most, the two companies had only the “shared goal” that Knauf acquire USG. The Chancery Court also rejected the argument that Knauf alone constituted a controlling shareholder.
Next, the Chancery Court found that the shareholder vote approving the transaction did not cleanse the transaction under Corwin because the shareholder vote was not fully informed. The Chancery Court noted that, though the proxy disclosure materials mentioned that the “intrinsic value” offered was insufficient, the materials failed to mention what value would be fair for the transaction. As a result, the vote of the shareholders was not fully informed and thus could not cleanse the transaction under Corwin.
Finally, the Chancery Court noted that though the transaction was not cleansed under Corwin, the nondisclosure was not sufficient to constitute a bad faith breach of fiduciary duty, which, according to the court, was a separate inquiry. The Chancery Court found that though the shareholder vote was not fully informed and thus could not support Corwin cleansing, the nondisclosure did not rise to the level of a “conscious disregard of duty” and thus could not support a claim for breach of fiduciary duty. Accordingly, the Chancery Court dismissed the claim. The Supreme Court summarily affirmed the Chancery Court’s ruling, establishing this distinction between Corwin cleansing and bad faith behavior as binding authority in Delaware.
Supreme Court of Delaware Affirms Ruling Marking Final Conclusion of Regency Energy Partners Investors’ Putative Class Action
By Parker Davis, Bass, Berry & Sims PLC
On November 3, 2021, the Supreme Court of the State of Delaware (the “Court”) affirmed the judgment of the Court of Chancery of the State of Delaware (the “Court of Chancery”) that the investors of Regency Energy Partners LP, an energy company (“Regency Energy Partners”), with Adrian Dieckman as the named plaintiff, should not be granted damages based on a claim related to the merger of Regency Energy Partners with Energy Transfer Partners LP, an energy infrastructure company (“Energy Transfer Partners”).
Regency Energy Partners and Energy Transfer Partners completed their $10.1 billion merger in 2015. Investors in Regency Energy Partners have argued for $1.6 billion in contract damages related to a partnership agreement that the investors claim was breached in the course of the merger’s completion. The investors first made their claims for damages in June 2015 in the Court of Chancery, which dismissed their case. In 2017, the Court then reversed the decision of the Court of Chancery and remanded two counts, after which the Court of Chancery allowed a claim for breach of partnership agreement to proceed in 2018. The decision by the Court on November 3, 2021, marks the second time the Court has denied the investors’ petition and the conclusion of the investors’ putative class action.
