MONTH-IN-BRIEF (Aug 2021)
Private Company Mergers: Delaware Court Holds Non-Signatories Bound by Escrow
By Jeff Wolters and Sarah Zomaya of Morris Nichols Arsht & Tunnell LLP
A typical provision in private company merger agreements provides for setting aside in escrow a certain amount of merger proceeds to be used to fund specified post-closing claims. The escrow is typically administered by a stockholders’ representative appointed in the merger agreement.
Over the years, Delaware courts have considered various claims by stockholders who opposed a merger — and therefore did not execute the merger agreement or a consent approving it — that they should not be bound by post-closing decisions of the stockholders’ representative. A recent decision by the Delaware Court of Chancery, Houseman v. Sagerman, C.A. No. 8897-VCG (Del. Ch. July 20, 2021), confirms that they are in fact bound.
To understand Houseman, it helps to recall a Chancery Court decision from some years ago, Aveta, Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch. 2010). In Aveta, the Court held that although individual stockholders who did not consent to the appointment of the stockholders’ representative generally were not bound as a matter of agency law, they were bound as a matter of merger law. In other words, they were bound by the decisions of the stockholders’ representative as part of the terms and procedures required by the merger agreement for making final adjustments to the merger consideration.