CURRENT MONTH (September 2024)
Delaware Chancery Court Issues Ruling on Earnout Dispute: Did Alexion’s Efforts Meet ‘Commercially Reasonable’ Standard in Syntimmune Merger?
By Shawn Garrett, Garrett, PLLC
On September 5, 2024, the Delaware Court of Chancery issued a memorandum opinion and judgment on a case relating to a disputed earnout in a post-merger entity based on milestones contemplated in the merger agreement. In Shareholder Representative Services, LLC., v. Alexion Pharmaceuticals, Inc. (C.A. No. 2020-1069-MTZ (Del. Ch. Sept. 5, 2024)), the securityholders of the pre-merger entity known as Syntimmune, Inc. (“Syntimmune”), brought suit against the post-merger entity, Alexion Pharmaceuticals, Inc. (“Alexion”), to recover $130 million in damages, contending that the first milestone of the project had been achieved, triggering Syntimmune’s first of seven earnout payments.
In 2013, Syntimmune began developing a monoclonal antibody that was the target of a merger agreement by Alexion. Alexion acquired Syntimmune in 2018 with the progress of the antibody project at the forefront of merger discussions. The merger agreement contained a purchase price of $1.2 billion. The purchase price was to be distributed as $400 million paid at closing, with $800 million to be paid in earnout installments. The merger agreement required Alexion to use commercially reasonable efforts to continue the project’s research and development, with specified milestones to be achieved prior to further disbursement of the remaining earnout funds.
Alexion hit multiple roadblocks in its efforts to continue development of the antibody, including contamination of its initial antibody batch and the COVID-19 pandemic. Of note, simultaneously, at least four competitors were working on similar projects and were able to continue their projects notwithstanding the pandemic. Alexion eventually continued development, yet hit more roadblocks along the way, including further outbreaks of COVID-19 and the death of a primate during animal testing. In 2021 Alexion was itself acquired by AstraZeneca, and in December of that year, due to additional scrutiny post-acquisition, it terminated the antibody project.
The Court wrestled with whether or not Alexion used commercially reasonable efforts in the furtherance of the project as required in the merger agreement, a deciding factor in this case. The Court began its analysis by stating that “[c]ommercially reasonable efforts clauses ‘define the level of effort that the party must deploy to attempt to achieve the outcome.’ ” Id. at 108. The Court also noted that the analysis of whether efforts were commercially reasonable is an outward facing, objective analysis rather than a question of past events or custom of the parties. At trial, the parties struggled to find comparable companies with hurdles and a history similar to Alexion with which to apply this objective standard. The Court concluded that it must review the facts by comparing what a company in Alexion’s situation might have done at the time of the breach, and not what Alexion had done in the past. The Court employed a hypothetical company in its analysis. Not persuaded by defense counsel who contended that the previous hurdles led to the termination of the antibody project, the Court determined that the final merger with AstraZeneca, and Alexion’s pursuits in furtherance of this new synergy, was the primary factor in Alexion’s decision to terminate the project.
It’s imperative that, in merger negotiations, the parties give significant consideration to the outstanding liabilities of the parties during the drafting of the letter of intent, due diligence, and post-closing. Liabilities can take many different forms, as seen in the Alexion case. Here, commercially reasonable efforts in furtherance of the antibody project consisted of a liability owed by Alexion to the Syntimmune shareholders. In this decision, the Court relied heavily on the intent of the parties and the agreed-to definition of commercially reasonable from the initial merger agreement. This reminds us that our drafting today will have impacts on business decisions years down the road.
Fed Rate Cut Could Increase M&A Volume in Q4 and Beyond
By Patrick V. Johnson II, Howard University School of Law
It is well established in the basic economic process that lower lending rates allow individuals and companies to borrow more and subsequently stimulate economic growth. On Wednesday, September 18, Federal Reserve (Fed) Chairman Jerome Powell surprised many when he announced that interest rates were being cut by 50 basis points or half a percentage point. While many commentators and experts speculated that the Fed would cut rates, few could have anticipated that the Fed would cut rates by that much. After all, it had been four years since the interest rates were last cut.
Therefore, the ensuing market reaction to Chairman Powell’s announcement was predictable. At market close on Thursday, September 19, the Dow and S&P 500 saw record highs, while the NASDAQ neared a record high as well. Such positive momentum is particularly good news for the broader business environment but especially exciting news for the M&A sector.
Deals that were once too risky or unable to happen because of the high cost of debt may now come to fruition. It is no understatement to say that businesses across the globe are seeing the Federal Reserve rate cut as an opportunity to consummate more deals. While this single round of Fed rate cuts will probably not return M&A deals to their 2021 levels, and other regulatory obstacles loom, law firms can sense an M&A bounce-back on the horizon, even if it is not rapid.
Before the Fed’s announcement, the global M&A market had seen a 20 percent increase in disclosed deal value, encouraging middle-market growth. Additionally, data analysis from Baird shows that expected Federal Reserve rate cuts through 2025 will reduce loan pricing, increase leverage ratios, and raise valuation multiples. For example, Baird’s data shows that for Q3 of 2009 and 2020—each the first quarter of sustained economic growth following an initial rate reduction—M&A deal counts increased an average of nearly 25 percent during the subsequent year. Furthermore, today’s backdrop is viewed favorably relative to the rate-cut phases of previous cycles; the global financial crisis and COVID-19 are less likely to be challenges, and with private equity funds being a major driver of M&A deals, improved leveraged buyout (LBO) financing should contribute to increased M&A volume. While 2021 saw record heights for M&A deal volume and value across the globe, Fed rate cuts going into 2025 can provide the optimism to make purchasers feel at ease.
Kroger and Albertsons Merger Completes Three-Week Hearing
By Patrick V. Johnson II, Howard University School of Law
On August 26, 2024, attorneys for Kroger and the Federal Trade Commission (FTC) finally had their day in court. Judge Adrienne Nelson, of the United States District Court for the District of Oregon, will decide whether to grant the FTC a preliminary injunction to block the Kroger and Albertsons merger until the FTC’s October 1 in-house hearings before a federal magistrate judge. The saga is a culmination of events after Kroger announced in October 2022 that it would acquire Albertsons at a record price of $24.6 billion. Since then, the FTC has brought this challenge, Kroger has revised parts of its deal, and commentators have speculated about how everything would pan out. Closing arguments in the preliminary injunction hearing were presented on September 17, and the parties’ post-hearing filings were submitted on September 27.
In its February 2024 lawsuit, the FTC asserted that a potential merger between Kroger and Albertsons would substantially lessen competition, increase already inflated grocery prices for consumers, and reduce the ability of workers to secure better wages and benefits. Further, the FTC noted that the divestiture offering to C&S Whole Grocers (C&S) was too inadequate to pass muster. The FTC’s suit has seen the attorneys general of Arizona, California, the District of Columbia, Illinois, Maryland, Nevada, New Mexico, Oregon, and Wyoming join its side. Meanwhile, Washington and Colorado have filed separate cases in state courts to block the monumental deal.
Across the aisle, Kroger is ready to ease regulatory concerns on numerous fronts. Kroger has consistently said that a merger with Albertsons would improve its leverage with suppliers and make it more competitive against nonunionized retailers such as Walmart, Costco, and Amazon. To address the concern of increased grocery prices, Kroger notes that the merger will allow it to operate more efficiently and pass savings on to consumers. Furthermore, Kroger updated and expanded its divestiture agreement in April 2024 to better enable C&S to operate competitively. Additionally, Kroger has committed to investing $1 billion in raising employee wages and providing comprehensive benefits to assure regulators that workers’ compensation is a priority.
As the FTC is known for successfully challenging many mergers and acquisitions in its administrative proceedings, Judge Nelson’s forthcoming decision might be the tip of the iceberg in this novel antitrust challenge.
