CURRENT MONTH (September 2021)
Domestic M&A
Delaware Chancery Court Orders Stockholders’ Derivative Claim Challenging 2017 Merger to Proceed
By Dixon Babb
On September 21, 2021, the Delaware Court of Chancery (the “Court”) ordered that a stockholder suit accusing the defendants of setting up an overpriced, $875 million deal would proceed to trial. The claim arose out of the 2017 acquisition of Berkeley Point Financial LLC, a designated underwriting and servicing lender for multi-family and commercial mortgages (“Berkeley”), by BGC Partners, Inc., a provider of brokerage and financial services (“BGC”). BGC paid $875 million to purchase Berkeley from Cantor Commercial Real Estate Company, L.P. (“CCRE”). Howard Lutnick, BGC’s chairman and CEO, was the controlling stockholder of both BGC and CCRE (the latter through his control of Cantor Fitzgerald, L.P., a financial services firm). The plaintiffs claimed Lutnick, who was on both sides of the transaction, caused BGC to overpay for Berkeley, which resulted in massive gains for Lutnick because his economic interest in Berkeley was greater than his interest in BGC.
The defendants alleged that that the plaintiffs did not provide any evidence that they acted in bad faith or advanced Lutnick’s self-interest. A special committee had been formed to review the proposed transaction. The Court found that because minority stockholders of BGC had no opportunity to vote on the transaction, the special committee was required to be independent. One of the members of the special committee admitted that he was “mindful of Lutnick’s opinion on selection of a committee legal adviser” and the vice chancellor wrote that “certain evidence suggests that he may have viewed BGC’s timetable for the transaction as at least partially driven by Lutnick.” The Court determined that there was a genuine dispute as to whether one of the directors acted to advance Lutnick’s interests during negotiations and that the claims could not be dismissed.
Supreme Court of Delaware Overturns 2006 Ruling in Decision that Could Have Lasting Impact
By Dixon Babb
On September 20, 2021, the Supreme Court of Delaware (the “Court”) issued a major decision that could have a lasting impact on mergers and acquisitions law. Brookfield Asset Management, Inc., an alternative asset manager (“Brookfield”), was the controlling stockholder in Terraform Power, Inc., an operator of solar and wind assets in North America and Western Europe (“Terraform”). In 2018, Brookfield approached Terraform regarding a potential $1.2 billion acquisition of Saeta Yield, S.A., a Spanish company that was an operator of wind and solar energy assets (“Saeta”). In connection with funding the acquisition, Terraform wished to raise approximately $600–$700 million of equity in the public markets. Instead, John Stinebaugh, Terraform’s CEO, proposed that Terraform raise $650 million in private placement of Terraform stock with Brookfield. This transaction was consummated, and Terraform acquired 95% of Saeta’s shares. In 2019, Terraform conducted a $250 million public offering at a price 60% higher than Brookfield paid in the private placement.
As a result of the public offering, former stockholders of Terraform claimed that the stock in the private placement was priced too low, which diluted their shares and gave Brookfield more control. The plaintiffs filed a derivative and class action complaint against Brookfield for breach of fiduciary duty. Following the filing of the suit, all Terraform stock was acquired by BR Partners, an affiliate of Brookfield, which took Terraform private. Brookfield asked the Court to toss the suit, arguing that well-known precedent in Gentile v. Rossette that allowed for “dual standing” should be rejected.
The Delaware Chancery Court found that, under Gentile, dual-natured claims—those requesting recovery under both direct and derivative causes of action—were allowed, and that while the going private transaction stubbed out the derivative claims since there were no more public stockholders, the direct claims still remained. Upon review, the Court overturned the Delaware Chancery Court and found that due to the difficulties in applying Gentile, it was overruled.
Delaware Court Grants Plaintiffs’ Motion for Partial Summary Judgment and Denies Defendants’ Motion for Summary Judgment in Nine West Merger Lawsuit
On September 10, 2021, the Superior Court of the State of Delaware (the “Court”) issued a Memorandum Opinion in a lawsuit arising out of a leveraged buyout of Nine West, a retail fashion holding company, by a group of investment funds under the Sycamore brand name, a private equity firm focusing on retail. Before the leveraged buyout closed, the holding company’s shareholders brought derivative actions for breaches of various fiduciary duties. The derivative suits settled, and the deal closed. The investment funds then proceeded to restructure the holding company in order to resell its assets. After the restructuring, a group of the holding company’s bondholders sent a letter seeking information on whether the merger and restructures violated an indenture agreement between the holding company and bondholders. The holding company refused the requests, and the bondholders failed to take any other actions. Following the indenture letter, the holding company filed for bankruptcy due to an inability to service its existing debt. During the bankruptcy proceedings, the holding company’s creditors concluded the investment funds executed the restructuring transactions when the holding company was insolvent. As a result, the holding company’s estate sued the investment funds for fraudulent transfer, self-dealing, breach of contract, and business torts. The investment funds settled with the holding company’s estate for $100 million and sought insurance coverage under their policies that insure certain settlement costs. When the insurance companies denied coverage, the investment funds brought this breach of contract lawsuit.
Both the investment funds and insurance companies moved for summary judgment. The Court concluded there were four main issues requiring resolution to interpret the insurance policies’ language and ultimately rule on both parties’ motions. The first issue was whether the estate’s bankruptcy litigation and the stockholders’ derivative suits were interrelated claims. Under the investment funds’ policies, interrelated claims were barred from coverage. The Court held that these claims were not interrelated by using a plain language approach to interpreting the definition of “interrelated.” It looked at prior Delaware insurance cases to conclude “interrelated” meant there was a meaningful linkage. Here, the claims involved different allegations and wrongful acts, so they were not interrelated.
The second issue was whether the letter from the bondholders constituted a “demand for non-monetary relief” from the investment funds. The Court identified examples of non-monetary relief in the insurance policies to conclude the non-monetary relief term referred to non-monetary legal or equitable redress. The Court held the letter did not demand non-monetary relief because its purpose was to verify whether the indenture agreement was breached. Further, as a private party, the bondholders could not enforce a denied information request, meaning there was no right to relief as a result of the investment funds’ denial.
The third issue was whether the investment funds were “absolved from the loss” because they sought other third-party funding to pay for the estate settlement. Here, the Court again took a plain language approach to the definition of a “pay on behalf of” insurance policy. This policy type does not require insureds to pay for the loss and then seek reimbursement. Instead, insureds are covered as soon as they are legally obligated to pay. The Court therefore held that the investment funds’ use of third-party funding did not “absolve [them] from the loss” and terminate the insurance companies’ obligations to pay.
The fourth issue was whether the insurance companies could avoid coverage on grounds the investment funds misrepresented their knowledge of claim-producing wrongdoings. The investment funds made a representation in a warranty letter that they had “no actual knowledge or information of any act, error, or omission that could reasonably be expected to create a claim under the policies.” The Court rejected the insurance companies’ interpretations. First, the Court held that reading paragraphs of the warranty letter in isolation would violate principles of contract law that support reading the contract as a whole. Second, the Court held there were no representations that struck the “could reasonably be expected” language. The issue of whether the investment funds had actual knowledge of any acts that reasonably could be expected to create a claim was conceded to be a jury issue.
As a result of each of these holdings, the Court granted the investment funds’ motion for summary judgment and denied the insurance companies’ motion.
Florida District Court Issues Order on Plaintiffs’ and Defendants’ Motions for Summary Judgment in Biomedical Industry Lawsuit
On September 17, 2021, the District Court for the Southern District of Florida (the “Court”) issued an order in response to the parties’ partial motions for summary judgment in a biomedical industry lawsuit. The case involved Gene Saltsman, the founder of three companies that sold machine parts and services in the biomedical industry (“Saltsman”), and North American Biomedical Services, LLC, a company in the biomedical research industry (“NABS”). In 2018, Saltsman and NABS entered into a stock purchase agreement (the “SPA”), where NABS received the stock of Saltsman’s three companies in exchange for consideration of three million dollars and a 19.99% membership interest in NABS. Later in 2018, NABS assigned its rights and obligations under the SPA to Partners Biomedical Solutions, LLC, a biomedical company formed for the previously mentioned assignment (“PBS” and, collectively with one of its members, “Plaintiffs”).
Both parties’ Motions for Summary Judgment were centered on the following alleged facts: 1) Saltsman sold two biomedical devices to PBS customers after the SPA, and 2) Evan Saltsman, Gene Saltsman’s son and a member of Alfatwo Holdings, Inc. (“Alfatwo”), which had been a member of PBS, solicited PBS customers following Alfatwo’s resignation as PBS member.
Count I alleged Saltsman breached the SPA’s non-solicitation provision. The Court held that summary judgment was improper because two factual disputes existed: whether the company Saltsman sold to was a “customer” because it was a newly formed subsidiary, and whether Saltsman “solicited” the business. Count II alleged Saltsman, Evan Saltsman, and Alfatwo breached PBS’s operating agreement (the “Operating Agreement”)—specifically, its solicitation and competition provisions and a restrictive covenant. Here, the Court held that Evan Saltsman was not an “Affiliate” of PBS and therefore not bound by the Operating Agreement. The Court also held that the factual dispute regarding whether Saltsman “solicited” the business made summary judgment improper for Saltsman and Alfatwo. The same rationale applied to Count IV, breach of members’ duties of loyalty, and Count VIII, tortious interference with customer relations. Count IX was tortious interference with employee and contractor contractual relations. The Count held summary judgment was proper for the defendants on grounds of waiver (for Plaintiffs’ failure to allege solicitation) and the previous holding that Evan Saltsman was not bound by the PBS Operating Agreement.
Count X alleged conspiracy to interfere with contract, conspiracy to interfere with other relations and conspiracy to prevent competition. Here, the Court denied summary judgment for defendants Evan Saltsman and Gene Saltsman on grounds the jury could reasonably conclude from an affidavit that there was an agreement to interfere. Here, the fact Evan Saltsman was not bound to the PBS Operating Agreement was inapplicable because Saltsman, who was a party to the PBS Operating Agreement, was his alleged co-conspirator.
Count XI alleged a violation of the Florida Deceptive and Unfair Trade Practices Act for deceptive acts or unfair practices. The Court granted summary judgment for certain defendants on grounds of waiver and failure to show breach of contract by Saltsman. However, the Court allowed Count XI to proceed to trial for Saltsman and Alfatwo. Counts XII and XIII involved trade secret violations (the Defend Trade Secrets Act and Florida Uniform Trade Secrets Act, respectively). Here, the Court denied Plaintiffs’ Motion for Summary Judgment on grounds of waiver for failure to own the alleged trade secrets and the previous conclusion that Evan Saltsman was not bound to PBS’s agreements.
Lastly, Count XIV was unjust enrichment and disgorgement. The Court denied summary judgment for Plaintiffs for failure to prove the benefit element of these claims. The Court also denied summary judgment for the applicable defendants for failure to meet their burden with respect to their arguments that bad faith and breaches were on Plaintiffs’ part.
