We are pleased to share the new form of the Emerging Business Credit Agreement (EBCA), which is the product of a collaborative project of the Commercial Finance Committee of the American Bar Association (ABA) Business Law Section and the Primary Market Committee of the Loan Syndications and Trading Association (LSTA).
The new EBCA includes three supplements that have been prepared with the agreement: the Security Supplement, the Financial Covenants Supplement, and the Agency Supplement. We worked under the expert guidance of our external counsel, Thomas Mellor and Sean Zoltek of Morgan, Lewis & Bockius LLP, who drafted the EBCA form. They have led us in the production of an excellent form with numerous guideposts and in-depth drafting notes, some of which are highlighted below.
The EBCA is intended to be used for a borrower that is an “emerging business.” For the purposes of this form, the term “emerging business” refers to a borrower that is no longer a new venture but is not yet an established middle market company. The current form is designed to bridge the gap between the “off the shelf” form for new venture companies and the more highly negotiated and tailored agreements of the larger, more established middle market companies. Borrowers using these forms will likely be generating regular and consistent revenue but will often not have consistently positive EBITDA. They will likely desire more flexibility when it comes to running their businesses and making decisions about, for example, investments and distributions. Our goal with this form is to take into account, on the one hand, the interests of the borrowers and their growing businesses, and on the other hand, those of the lenders who are willing to put their money at risk, to create a more balanced form that the parties can use as they start their negotiations.
We anticipate that our form could be useful for loans between $25 million to $100 million; however, parties should note that the size of the loan should not be the sole factor when deciding the form with which to start. When determining where to begin, parties will always need to assess the borrower, the stage of its life cycle, and the parties’ willingness to spend time and money negotiating a credit agreement.
Our form also assumes the borrower is formed in the US with US-based operations and limited, if any, foreign operations or assets located outside the US. If significant activity takes place or material assets are located outside the US, then parties will need to adapt the form and include foreign borrower and/or foreign assets language, as well as considering, among other issues, the local law requirements (especially if there are foreign guarantors) and the taxes clause.
The form of the agreement is governed by New York law. However, because of comments submitted by the ABA’s Commercial Finance Committee shortly before the penultimate turn of the document, we have included provisions specific to credit agreements that are governed by the laws of California, Illinois. or Texas. For example, drafting notes in Annex I highlight language that should be included if the agreement is governed by the laws of California or if the entity has assets (in particular real estate assets) located there. For that state, language has been provided whereby each loan party waives all rights and defenses that they may have if their obligations are secured by real property there.
We have also drafted a security supplement, a financial covenants supplement, and an agency supplement for the EBCA. The terms of a security agreement have been incorporated into the credit agreement itself; this reflects common practice in the venture debt space where the loan is to be secured. This form assumes that subsidiaries of the borrower will become guarantors of the facility irrespective of whether or not the facility is secured. This approach should streamline the process and save the parties both time and expense of negotiating another document. Additionally, because the borrower’s own collateral and structure is typically more straightforward than companies further along in their life cycle, the incorporation of security terms in the credit agreement itself can more easily be achieved. The separate Security Supplement serves this purpose, but, of course, if the parties prefer to use a separate security agreement, the form can easily be adapted for that as well. Parties should note that the security supplement is not exhaustive of all applicable security interest provisions that parties may need for their deal; only the typical ones have been flagged for the draftsperson’s consideration.
Loans extended to emerging businesses often will not include financial or performance covenants. As noted in the covering memo of the Financial Covenants Supplement, because the borrower’s future growth trajectory is uncertain, it may be practically difficult to come up with meaningful metrics at closing that can accurately predict the company’s growth prospects and its ability to comply with financial or maintenance covenants while the loan is outstanding. As such, the parties may agree to include more deal-specific reporting mechanisms for such performance metrics rather than more traditional leverage and fixed charge maintenance covenants. If financial and performance covenants are included, they are expected to be heavily negotiated and well-tailored to the borrower, its business, and the relevant industry.
Because EBCA loans typically have only one lender, we drafted this form as a bilateral credit agreement, thus enabling us to streamline the form further by not including the typical LSTA agency provisions. However, if the deal is being made on a club basis, agency provisions can be included, particularly if the deal is secured or includes more than a small number of non-affiliated lenders. A sample Agency Supplement has been included for cases where the deal requires an agent.
In this market, lenders will often want the borrower to use its or an affiliates’ banking services. This form requires as a closing condition that the borrower shall have arranged for its bank services to be with the lender. Lenders should consider tailoring these services, but they must also bear in mind any applicable anti-tying regulations.
As with all forms of agreements, we have attempted to flag issues and provide a starting point for parties to consider and adapt to the borrower’s business. This is particularly true for the representations and covenants. The parties must of course consider the nature of the representations and covenants that are suitable for the borrower and its business as they determine which ones to include.
Finally, before we were due to publish the EBCA, the Office of the Comptroller of the Currency (OCC) issued detailed guidance on November 1, 2023 (the “Guidance”), to address risk management standards and safe and sound lending practices for venture lending. We reviewed that guidance and added a new note 12 to the cover memo of the form to highlight it to members. Venture lending is defined by the Guidance to include certain characteristics and provides exclusions for certain types of loan products (for example, asset-based lending that meets certain criteria is excluded from the definition of “venture lending”). The OCC seems to be responding to concerns following the recent failures of certain banks active in venture lending, and the Guidance signals that the OCC is more closely considering banks’ standards for evaluating venture lending. The impact of the Guidance on current venture lending structuring and documentation practices remains to be seen. For transactions that fall within the definition of venture lending (as defined by the Guidance), a careful review of the Guidance is advisable.
We would like to thank Thomas Mellor and Sean Zoltek of Morgan, Lewis & Bockius LLP for their excellent drafting and advice on this project. Their extensive knowledge of this market is reflected in the final form.
Handling the sale of a company in financial distress presents a multitude of challenges: preserving the value of the assets; maintaining some level of operations; treating creditors, stakeholders, and employees fairly and legally; and contracting for and effectuating the sale of the business in an orderly fashion. These issues are common to the sale of assets of any distressed company, regardless of where it may be located. However, there are additional complications when the entity or its assets are located outside the United States.
The American Bar Association (ABA) Business Law Section publication Using Legal Project Management in Merger and Acquisition and Joint Venture Transactions included a checklist showcasing important items to consider in connection with the sale of assets of a distressed company pursuant to Section 363 of the U.S. Bankruptcy Code. The Mergers and Acquisitions Committee of the ABA Business Law Section (“M&A Committee”) has undertaken a project to provide country-specific commentary to the original checklist for items to consider in the sale of assets by an international distressed company (collectively, the “Reports”). The authors of these Reports are senior lawyers practicing throughout the world who specialize in mergers and acquisitions and insolvency.
The initial tranche of the Reports provides commentary from multiple regions, including Europe (Germany, Italy, Luxembourg, Netherlands, Spain, and the United Kingdom), North America (Canada, Mexico, and the United States), South America (Brazil), and Asia (India, Japan, and Singapore). It is anticipated that additional Reports spanning other regions will be published in the future. The publication of these Reports is an important addition to the legal literature on mergers and acquisitions. In this global economy, it is important that practitioners have a resource that compares, in outline form, the laws of many countries with respect to asset acquisitions.
Each of these Reports seeks to provide such a resource to readers who come across international acquisitions in §363-type scenarios. Section 363 asset acquisitions are a mix of fields between insolvency and M&A. They also present challenges in other areas of the law, which lawyers involved should be prepared to deal with. The jurisdiction where the company is located and its applicable laws and legal system can have a profound impact on how the sale of the distressed company and its assets is structured and managed. In this regard, each of these Reports is an exercise in comparative law, which requires intellectual rigor and an open mind to be able to conciliate U.S. legal concepts with those of other nations.
The Reports provide a preliminary overview of issues arising under each country’s law and should not serve as a substitute for detailed legal research and advice based upon the facts and circumstances of particular transactions. The material is based upon the laws of each country as of November 2023. It is noteworthy that each author is admitted to the practice of law in his/her respective jurisdiction.
This work product was conceived and coordinated by Agustín Berdeja-Prieto initially under the auspices of the M&A Legal Project Management Task Force and its co-chairs at the time, Dennis J. White and Byron S. Kalogerou. Our gratitude to them for their receptiveness and support. Subsequent efforts were completed with the effective and proactive assistance of current M&A Committee chair Michael G. O’Bryan, M&A Committee Legal Project Management Initiative chair Sachin V. Java, and members of the International M&A Subcommittee. Finally, we acknowledge the very able and timely editing assistance provided by Professor Don De Amicis and Schylar Jacobs of Georgetown Law’s Center on Transnational Business and the Law. We sincerely thank them all.
The United States Supreme Court has granted a petition for certiorari in Coinbase v. Suski to review the question of whether the court or the arbitrator should determine whether an arbitration agreement containing a delegation clause can be narrowed by a subsequent agreement that does not contain clauses addressing arbitration or delegation. There is currently a circuit split as to the enforceability of delegation clauses, which are clauses that dictate the arbitrator is authorized to determine threshold issues regarding the arbitration agreement. Currently the First and Fifth Circuits recognize the enforceability of delegation clauses and would allow an arbitrator to decide whether a subsequent agreement narrows the arbitration agreement in a prior agreement, while the Third and Ninth Circuits refuse to enforce delegation clauses where a second agreement narrows an earlier arbitration agreement.
In this case, users of Coinbase, a cryptocurrency exchange, filed a class action in California claiming that Coinbase had misled them regarding the entry requirements for a sweepstakes in violation of state law. Suski v. Coinbase, Inc., 55 F.4th 1227, 1228 (9th Cir. 2022), cert. granted, Coinbase, Inc. v. Suski, No. 23-3, 2023 WL 7266998 (U.S. Nov. 3, 2023). The suit was filed under California’s False Advertising Law, Unfair Competition Law, and Consumer Legal Remedies Act against Coinbase and Marden-Kane Inc., a company hired by Coinbase to design, market, and execute a sweepstakes that the plaintiffs claimed used deceptive practices. Id. at 1229. When creating their accounts with Coinbase, the plaintiffs had signed Coinbase’s User Agreement, which contains an arbitration provision that specifically provided the arbitrator would decide issues relating to the “scope” of the arbitration provision—i.e., the types of claims it covered, not whether it was superseded by a later agreement between the parties. Id. at 1229. Thereafter, the plaintiffs had opted into a second contract, the Coinbase Sweepstakes’ Official Rules, which included a forum selection clause providing that California courts have exclusive jurisdiction over any controversies regarding the sweepstakes. Id. at 1228–29.
Coinbase moved to compel arbitration in reliance upon the arbitration clauses set forth in the underlying user agreements, and the class plaintiffs opposed arbitration, pointing to provisions contained in the sweepstakes’ rules that were issued subsequent thereto containing contrary forum selection clauses. Id. at 1229. The district court denied the motion to compel arbitration, and the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s holding. Id. In affirming the district court, the Ninth Circuit made distinctions between the arbitration delegation clause in Coinbase’s User Agreement and the forum selection clause contained in the Sweepstakes’ Official Rules. Id. at 1229–31.
Regarding the delegation clause, which stated that an arbitrator shall decide “disputes arising out of or related to the interpretation or application of the Arbitration Agreement,” Coinbase argued that the issue of any superseding effect of the Sweepstakes’ Official Rules concerned the scope of the arbitration clause and therefore fell within the User Agreement’s delegation clause. Id. at 1229. In denying the motion to compel arbitration, both the district court and the Ninth Circuit determined that the question concerning the “scope of the arbitration agreement” referred to how widely it could be applied, and as such this was an issue for the court to decide. Id. The Ninth Circuit found that “[w]hether the court or the arbitrator decides arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id. (quoting Oracle Am. Inc. v.Myriad Grp. A.G.,724 F.3d1069, 1072 (9th Cir. 2013)). In the Ninth Circuit’s view, the issue of whether the forum selection clause in the Sweepstakes’ Official Rules superseded the arbitration clause in the User Agreement was not delegated to the arbitrator, but rather was for the court to decide. Id.
The Court next looked to whether the forum selection clause in the Sweepstakes’ Official Rules superseded the arbitration clause in the User Agreement. Id. at 1230. The forum selection clause in the Sweepstakes’ Official Rules had provided that the California courts had exclusive jurisdiction over any controversies regarding the sweepstakes. Id. Coinbase argued that the User Agreement contained an integration clause and procedures for amendment of the User Agreement, and therefore the User Agreement could not have been superseded by the Official Rules, which Plaintiff argued exempted the claims from arbitration. Id. at 1231. Coinbase further argued that the Official Rules were focused on a different subject matter from the User Agreement and as such could not be utilized as evidence of the parties’ intent to amend, revise, revoke, or supersede any prior agreement, including the arbitration provision in the User Agreement. Id.
The Ninth Circuit did not agree with Coinbase. Id. Rather, the Court found that under California law, “[t]he general rule is that when parties enter into a second contract dealing with the same subject matter as their first contract without stating whether the second contract operates to discharge or substitute for the first contract, the two contracts must be interpreted together and the latter contract prevails to the extent they are inconsistent.” Id. at 1230 (quoting Capili v. Finish Line, Inc.,116 F. Supp. 3d 1000, 1004 n.1 (N.D. Cal 2015) (quoting 17A C.J.S. Contracts § 574), aff’d, 699 F. Appx. 620 (9th Cir.2017)). The Court acknowledged that Coinbase was correct in stating that the Official Rules contained no language specifically revoking the arbitration agreement contained within the User Agreement, but it found that by including the forum selection clause with the Official Rules, those Rules provided evidence of the parties’ intent not to be governed by the User Agreement’s arbitration clause when addressing controversies concerning the sweepstakes. Id. at 1230–31. As a result, the Ninth Circuit affirmed the district court’s holding that denied Coinbase’s request to compel arbitration. Id. at 1231.
In its petition for a writ of certiorari, Coinbase pointed to Supreme Court precedent requiring the enforcement of delegation clauses in arbitration agreements and argued that absent a meritorious challenge to these provisions, they must be enforced if the subsequent agreement does not alter that provision. Brief for Petitioner at 20–21, Suski v. Coinbase, Inc., 55 F.4th 1227, 1228 (9th Cir. 2022) (No. 22-105), 2022 WL 3107708. Coinbase has also argued that since the subsequent rules did not alter or challenge the prior agreement’s delegation provision, it is for the arbitrator to determine this issue. Id. at 9. On November 3, 2023, the Supreme Court granted the petition for writ of certiorari, and the case is scheduled for argument during the Court’s current term. Coinbase, Inc. v. Suski, No. 23-3, 2023 WL 7266998 (U.S. Nov. 3, 2023).
This will be the second time that a decision rendered concerning this dispute involving Coinbase has appeared on the Supreme Court’s docket; the Court previously determined that an appeal from a denial of a petition to compel arbitration automatically stays the proceedings below. Coinbase, Inc. v. Bielski, 599 U.S. 736, 747 (2023). Further, this is the second arbitration case that the Supreme Court has agreed to hear this term, along with Bissonnette v. LePage Bakeries Park St. LLC, 49 F.4th 655 (2d Cir. 2022), cert. granted, No. 23-51, 2023 WL 6319660 (U.S. Sept. 29, 2023). Once again, issues concerning arbitration appear to remain hot topics before the Supreme Court.
Surprisingly, some loan market participants continue to think that the term “open market purchases” included in many syndicated credit agreements today is intended to require the borrower to buy all the loans of a particular tranche on a pro rata basis, or at least make the offer to all lenders of the associated class. As Serta[1] and other liability management cases take their twists and turns through the courts, lenders are taking note of how an “open market purchase” provision can be utilized by a dominant class of lenders to subordinate a minority class. Much has been written on the need for “Serta protections” and on liability management transactions, but there has been no attempt to ink a definition for the term “open market purchases” in the credit agreements being drafted today, and there have been few, if any, successful attempts to amend the existing concept to protect against future problems. As recently as the Loan Syndications and Trading Association/Loan Market Association (LSTA/LMA) conference last quarter, when asked whether lawyers were seeing a defined term for “open market purchases,” experts drew a blank. They were not aware of any credit agreements that contained a definition, nor of any real attempts at a definition in the amendment process—shocking.
As lenders open their documents for amendments in the new year for any variety of reasons—e.g., loosening covenants, extensions of payment schedules, and enhancements to the collateral and reporting packages—they should consider amending the documents to delete the “open market purchase” option entirely, or define it as the following:
a purchase of loans that is (i) offered to all lenders on a pro rata basis, (ii) conducted on an arm’s-length basis, (iii) made in cash and at the current trading prices, (iv) subject to no default or event of default, and (iv) structured so that that the purchased debt be canceled.
The definition of “open market purchase” must also be included in the list of sacred voting rights that requires an all affected lender consent, together with the release or subordination of collateral. Otherwise, a dominant class of lenders would be able to amend the definition to delete these conditions in the process of structuring a liability management transaction. This should sufficiently neuter the ability of the borrower to utilize this mechanism to subordinate a group of lenders within the same class and strip covenants as was done in Serta and other transactions. By keeping this mechanic in the document undefined as is the status quo, the risk remains high that a portion of the debt will be subordinated in a liability management transaction. The last thing anyone should have to explain to their credit committee in the new year is why there was an “open market purchase” concept in the document that was not defined.
How Did This Concept Arise?
During the Great Financial Crisis of 2007–2008, “open market purchases” came into vogue to permit the borrower to repurchase loans on a one-off, non–pro rata basis. The concept is typically confined to the syndicated term loan B market. “Open market purchases” differed from “Dutch auctions” (where the borrower specifies a ceiling or a range to lenders and then gives the lenders a period of time to offer the debt for sale) in that they permitted a borrower to purchase loans quickly from any one of its lenders without making the offer to other lenders. This was key. During the Great Financial Crisis, financial sponsors and their borrowers saw this mechanism as an easier and more efficient way to buy back distressed debt without having to go through often lengthy and time-consuming auction procedures. Credit agreements originally permitted these “open market purchases” to be made subject to certain conditions, the most common of which were the following: the absence of a default or event of default, proceeds from the revolver could not be utilized to make these purchases, the borrower had to represent that it was not in possession of any material nonpublic information, and finally, the debt had to be canceled. The cancellation of the debt was critical. The borrower and its affiliates were not entitled to hold those loans and exercise voting rights once the debt was purchased.
A fundamental principle in syndicated credit agreements, however, is that all similarly positioned lenders should be treated equally, or, with respect to distributions, on a “prorata” basis. This makes a lot of sense; in broadly syndicated loans, and even smaller club loans, lenders extending the credit and agreeing to be part of the syndicate (or the club) do so based on the assumption that they are going to be treated the same as the other lenders in the tranche. It is hard to imagine how a lender group could be put together on any other basis. “Sure, I will lend you money for the secured loan, but you can pay someone else back first, and without telling me,” said no senior secured lender ever. Prior to the Great Financial Crisis, most credit agreements did not even permit the borrower or its affiliates to buy back loans, and the borrower and its affiliates were not permitted assignees of the loans. If anything, the purchase was capped, and there were limitations on voting and information rights, as well as waivers of certain rights in bankruptcy. Even the rights of the borrowers’ “debt fund affiliates” were capped.
There are a number of provisions that give comfort to the fundamental principle that equally positioned lenders should be treated equally. Most credit agreements include a provision that requires any voluntary or mandatory prepayments be made on a pro rata basis to all lenders. Most credit agreements also include some kind of pro rata sharing clause that requires any lender who receives a payment in excess of its proportion to share the excess with the other lenders (either by way of a purchase of an assignment or participation in each of the other lenders’ loans).
A Call to Action
The lack of a definition to the term “open market purchase,” including any detail on the process by which the borrower repurchases the loans through this method, is directly at odds with the other provisions in the credit agreement, so it is not surprising that this mechanic ended up being the gateway to an often-used liability management transaction structure. Now is the time to build in a definition of “open market purchase” that will include appropriate parameters to protect lenders from “lender-on-lender violence” and restore the syndicated lending market to more predictable restructuring outcomes.
In re Serta Simmons Bedding, LLC, No. 23-90020, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023). ↑
As chairs of the American Bar Association’s Private Target Mergers & Acquisitions Deal Points Study (the Private Target Deal Points Study), we are pleased to announce that we published the latest iteration of the study to the ABA’s website on December 18, 2023.
Congratulations! But Wait. What Exactly Is This Private Target Deal Points Study, Anyway?
The Private Target Deal Points Study is a publication of the Market Trends Subcommittee of the ABA Business Law Section’s M&A Committee. It examines the prevalence of certain provisions in publicly available private target mergers and acquisitions transactions during a specified time period. The Private Target Deal Points Study is the preeminent study of M&A transactions, widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.
The 2023 iteration of the Private Target Deal Points Study analyzes publicly available definitive acquisition agreements for transactions executed and/or completed either during calendar year 2022 or during the first quarter of calendar year 2023. In each case, the transaction involved a private target acquired by a public buyer, with the acquisition material enough to that public buyer for the Securities and Exchange Commission to require public disclosure of the applicable definitive acquisition agreement.
The final sample examined by the 2023 Private Target Deal Points Study is made up of 108 definitive acquisition agreements and excludes agreements for transactions in which the target was in bankruptcy, reverse mergers, and transactions otherwise deemed inappropriate for inclusion.
Although the deals in the 2023 Private Target Deal Points Study reflect a broad array of industries, the health care and technology sectors together made up nearly one-third of the deals. Asset deals comprised 18% of the study sample, with the remainder either equity purchases or mergers.
Of the 2023 Private Target Deal Points Study sample, 26 deals signed and closed simultaneously, whereas the remaining 82 deals had a deferred closing some time after execution of the definitive acquisition agreement.
The transactions analyzed in the 2023 Private Target Deal Points Study were in the “middle market,” with purchase prices ranging between $30 million and $750 million; purchase prices for most deals in the data pool were below $200 million.
The Private Target Deal Points Study Sounds Great! How Can I Get a Copy?
All members of the M&A Committee of the Business Law Section received an email alert from Jessica Pearlman with a link when the study was published. If you are not currently a member of the M&A Committee but don’t want to miss future email alerts, committee membership is free to Business Law Section members, and you can sign up on the M&A Committee’s homepage.
ABA members who are not currently members of the Business Law Section can sign up to join on the Section’s membership webpage.
The published 2023 Private Target Deal Points Study is available for download by M&A Committee members from the Market Trends Subcommittee’s Deal Points Studies page on the ABA’s website. Also available at that link are the most recently published versions of the other studies published by the Market Trends Subcommittee, including the Canadian Public and Private Target M&A Deal Points Studies, European Private Target M&A Deal Points Study, US Public Target Deal Points Study, and Strategic Buyer/Public Target M&A Deal Points Study.
How Does the 2023 Private Target Deal Points Study Differ from the Prior Version?
The 2023 version of the Private Target Deal Points Study has a number of features that differentiate it from prior iterations.
A new elegant look and feel. We thought it was time for a refresh on fonts and color scheme, and we utilized gray for prior study data to help current-year data stand out more.
New data pointsand correlations. We didn’t think we had enough work on our plates, so we added new data points and correlations throughout. Look for the “new data” flags (see samples below) to make them easy to spot.
New Representations and Warranties Insurance (RWI) correlations. We’ve taken a large number of existing data points throughout the study and correlated those points by deals that reference use of reps and warranties insurance, so you can see how that changes things.
#MeToo nuances. Based on input from Ally Coll of The Purple Campaign, we have included a more nuanced look at #MeToo representations. 57% of all transactions analyzed in the 2023 Study included a stand-alone #MeToo representation, as compared to 37% of deals in the 2021 Study pool. The new nuanced data points that we added measure whether the representation includes language regarding corrective action (5% of #MeToo representations in our data set do), settlement agreements (74% of #MeToo representations in our data set do, with 11% qualified by the knowledge of the party making the representation), or allegations of sexual harassment (all #MeToo representations in our data set do, with 37% so knowledge-qualified).
Closer looks at fraud carve-outs. We wanted to see how often a deal that had an express fraud carve-out to the non-reliance provision also had such a carve-out to the exclusive remedy provision, so we added a new slide exploring just that. Likewise we added a new data point for how often the fraud carve-out to the exclusive remedy provision is limited to fraud as to the reps/transaction documents.
Breach of covenants as stand-alone indemnity. We have added to this year’s Study a data point on how often breach of covenants appears as a stand-alone basis for indemnification. Interestingly, not all deals included breach of covenants as a stand-alone indemnity—only 94% had this formulation.
RWI: The use of RWI decreased for the first time since we have been measuring this data point but maintained a majority position. During the period covered by the 2023 Study, 55% of deals referenced RWI (our proxy for whether a transaction utilized RWI), as compared to 65% of the deals during the period covered by the 2021 Study.
Earnouts: Earnouts became more prevalent and displayed some buyer-friendly features. Use of earnouts increased significantly—by 30% (i.e., from 20% during the period covered by the 2021 Study to 26% during the period covered by the 2023 Study). Earnouts are often used to address valuation gaps, and this data point suggests growing valuation gaps during the period covered by the 2023 Study (2022 and Q1 2023).
Anti-Sandbagging: Express anti-sandbagging provisions decreased. The percentage of deals that were silent with respect to sandbagging continued to increase, to 76% in the 2023 study as compared to 68% in the 2021 Study and 59% in the 2019 Study. As a reminder, silence may have a different effect under the laws of different states, so the parties need to consider the effect of being silent under applicable law.
Please join us in extending a huge thank-you to everyone who worked so hard on this study, from leadership to advisors to issue group leaders to the working groups, all of whom are listed in the credits pages.
For more information, there will be an In the Know webinar with the Chairs and Issue Group Leaders providing analysis and key takeaways from the results of the Private Target M&A Deal Points Study—details on time/date to follow.
In the intricate world of legal proceedings, courts globally depend heavily on evidence and testimonies to render fair and informed decisions. A critical component of this process is the role of expert witnesses, whose specialized knowledge and insights are invaluable in helping courts understand complex issues that lie beyond the purview of lay understanding. However, the criteria for determining the credibility of an expert’s opinion and the standards for who qualifies as an expert witness vary significantly across different countries. In this article, we embark on a comparative analysis of how nations like the United States, Australia, Brazil, Canada, Israel, Japan, South Africa, and the United Kingdom approach these pivotal questions.
Our exploration of expert witness standards comes at a particularly pivotal moment, as legal systems around the world are actively updating their frameworks to address new challenges and complexities. A prime example of this evolution is the recent modification to the Federal Rules of Evidence, specifically Rule 702, in the United States.[1] These changes, which officially took effect on December 1, 2023, have sparked significant debate and discussion within the legal community.[2] The amendments to Rule 702 are aimed at refining the criteria for admissibility of expert testimony, with the goal of ensuring that such testimonies are not only relevant but also reliably grounded in sound scientific and technical principles.[3] This development underscores the ongoing efforts to balance the need for reliable and credible expert testimonies with the principles of fairness and justice that are foundational to the legal system.
By examining the practices employed in various countries, we aim to uncover common trends and distinctive approaches that each nation adopts. This exploration reviews the underlying reasons for these diverse rules, considering each country’s unique cultural, historical, and legal contexts. Our objective is to paint a comprehensive global picture of expert witness regulations, extracting valuable insights that could potentially inform and enhance these systems universally. Through this study, we hope to contribute to the ongoing discourse on refining the standards and practices surrounding expert witness testimonies, ensuring that they continue to serve the cause of justice effectively in different legal landscapes.
Comparison
United States: The Judge as Gatekeeper
In the United States, Rule 702 of the Federal Rules of Evidence places the judge in the role of a gatekeeper, responsible for assessing expert witnesses’ qualifications and the reliability of their methodology. Judges must ensure that the testimony meets four criteria: relevance to the case, sufficiency of facts and data, reliability of principles and methods, and the application of methods to the facts of the case.[4]
While this approach aims to standardize expert testimony, it has its limitations. Judges are not always familiar with the methodologies employed in specialized fields, which may result in errors in judgment.[5]
Furthermore, amended Rule 702 expressly places the burden of proving admissibility on the proponent of the testimony. Previously, many courts in the United States presumed admissibility of expert opinion, leaving it to juries to weigh the merits of the witness testimony. Under the amended rule, admissibility must be determined prior to the presentation to the jury. To rebut challenges by the opposition, a litigator must be sufficiently comfortable with the methodologies and technical aspects of the expert evidence.[6]
Australia: The ‘Hot Tubbing’ Technique
Australia is renowned for its “hot tubbing” method, officially known as concurrent expert evidence.[7] This unique approach brings expert witnesses from opposing sides together in the courtroom to discuss their methodologies and answer questions simultaneously.[8] This interactive setting allows for direct comparison and a dynamic dialogue, highlighting the strengths and weaknesses of each expert’s approach.[9] It’s a less formal yet effective method that facilitates robust discussions, aiding judges in making well-informed decisions.[10]
Brazil: An Inquisitorial Model
Brazil employs an inquisitorial model that persists despite reform efforts that sought to make it more adversarial.[11] In this setup, judges have a proactive role and can request expert examinations.[12] Parties may not cross-examine directly; instead, the judge has authority to filter questions in pursuit of truth.[13] While judges do not solely decide on the admissibility of expert testimony, they play an influential role in weighing the credibility and methodology of the evidence presented.
Canada: A Balanced Approach
Canadian courts follow a somewhat flexible approach regarding expert witnesses.[14] Known as the Mohan criteria, the Canadian system examines relevance, necessity, absence of an exclusionary rule, and the qualifications of the expert.[15] In particular, Canadian courts emphasize the importance of objectivity and absence of bias in experts, but these courts tend to be more accommodating than their American counterparts.[16]
Under the Canadian system, the initial question of admissibility requires the expert to testify under oath or to attest that his or her primary duty is to the court—not the party retaining the expert.[17] Once this threshold is met, the Canadian model relies on the adversarial system and cross-examination to challenge the expert’s ability to fulfill this duty, as well as to uncover any flaws in methodology or qualifications that would indicate that the risk of allowing the evidence to be admitted outweighs the benefits of admission.[18]
Israel: An Adversarial Approach
Israel adopts an adversarial system like that of the United States, but with less emphasis on the judge as a “gatekeeper.” All judicial proceedings in Israel are bench trials.[19] Thus, there is less need to vet expert witness testimony prior to presentation to the fact finders. The court has full discretion concerning whether or not to accept the expert’s conclusions.[20]
Parties are largely free to introduce expert witnesses, who are then subjected to cross-examination during trial.[21] The focus here is on the in-trial adversarial process to vet the reliability of the expert’s methodology rather than pretrial judicial assessment. In addition, the court has authority to appoint its own experts.[22]
Japan: Judges and Advisory Experts
Japan uses a combination of judge-centered and expert-guided approaches. District courts are often divided into multiple divisions, with disputes being assigned to a particular division where the judge has relevant expertise.[23] If the topic is complex and beyond a judge’s understanding, advisory experts may be appointed to clarify technical aspects.[24]
Experts are appointed by the court at the request of a party but can be challenged by any opposing party.[25] These advisers provide independent advice to the court, subject to cross-examination.[26] The goal is to help the judge to comprehend the methodology, albeit leaving the ultimate decision to the judge.[27]
South Africa: Adversarial with a Twist
South Africa follows an adversarial system, where the admissibility of expert testimony largely depends on the qualifications of the witness and the relevance of the testimony to the case at hand.[28] What makes South Africa distinct is the lack of reliance on expert testimony.[29] Rather, South African courts see expert testimony as one bit of evidence in a narrative of events.[30] Thus, litigants should take care to emphasize the expert’s professional integrity to convince the fact finders of the value of the testimony.[31] Likewise, clarity of the expert’s presentation is also important in helping craft the narrative most helpful to the party’s interests.[32]
United Kingdom: A Less Stringent Approach
The UK takes a less stringent approach than the United States. The courts generally allow expert witness testimony unless there is a clear reason to doubt the expert’s qualifications or methodology.[33] However, the legal teams on both sides usually subject the expert’s testimony to intense scrutiny through cross-examination. If an expert is found to lack credibility or their methodology is questionable, it can be challenged and discredited in court.[34] This system places more faith in the adversarial process than in the judge’s discretion to ensure reliable expert testimony.
Merits and Limitations
Different countries have adopted varied approaches based on their legal traditions, cultural norms, and particular needs. It is not possible to determine which country most effectively vets expert witness testimony. Each method has its merits and limitations. Below are some aspects to consider.
Standardization
The US system aims for a high degree of standardization through Rule 702 of the Federal Rules of Evidence. This approach seeks to filter out unreliable methodologies before they can be presented in court. However, this system places a heavy burden on judges and litigators, who may not be experts in specialized fields.
Adversarial Scrutiny
The UK and Israel rely heavily on the adversarial system and believe that rigorous cross-examination will expose any weaknesses in an expert’s testimony. While this allows for a broader range of expert input, it may also permit less reliable testimony to enter into evidence if not adequately challenged.
Collaborative Scrutiny
Australia’s “hot tubbing” technique provides a unique platform for collaborative scrutiny. It enables judges to compare methodologies directly and question experts in real time. This system, however, requires experts who can think on their feet and engage in academic debate, which is not a skill that every expert possesses.
Flexibility
Canada’s Mohan criteria offer a flexible framework for assessing expert testimony, balancing both judge-driven and adversarial elements. However, this flexibility might also lead to inconsistencies in how expert testimony is evaluated.
Pursuit of Truth
Brazil’s inquisitorial model leaves questioning of experts to the judge, in an independent pursuit of truth. While this approach may reduce partisan spin, it also leaves open the real risk of judicial bias and possible corruption.
Ethical Responsibility
South Africa’s system places a high premium on the ethical responsibility of the expert, adding an additional layer of vetting that focuses on integrity rather than just qualifications or methodology.
Specialized Assistance
Japan’s use of advisory experts can be seen as a way to bridge the knowledge gap for judges, though it adds another layer of complexity.
Cultural and Legal Factors
It’s important to note that what works well in one country may not necessarily be effective in another due to various factors, including legal traditions, the role of the judiciary, and cultural attitudes toward authority and expertise.
Closing
Expert witness testimonies are a cornerstone of justice systems globally, providing critical insights that can sway judicial outcomes.
Our exploration reveals how various countries have tailored their approaches to expert witness testimonies, each reflecting a unique blend of cultural, legal, and historical contexts. From the structured approach of the US system to Australia’s interactive “hot tubbing” method to South Africa’s focus on ethical integrity, these diverse methodologies are custom designed to suit the specific needs of each jurisdiction.
However, one constant in this varied landscape is the ongoing evolution of these systems. As we navigate through an ever-changing world marked by advancements in knowledge, technology, and shifting societal values, the rules and practices governing expert witnesses are also adapting. This adaptability reflects the dynamic nature of justice and the relentless effort to strike a balance between reliability and fairness in legal proceedings.
This comparative study highlights the importance of international collaboration and the exchange of best practices. By gaining insights into the varied approaches adopted by judiciaries around the world, we can continually refine and enhance our own systems. This is particularly vital in today’s fast-paced era, where the accuracy and credibility of expert testimonies are more critical than ever. As we move forward, ensuring that expert witnesses remain a dependable and integral part of the legal process will be key to upholding the principles of justice and fairness in an increasingly complex and interconnected world.
Hon. Patrick J. Schlitz, Jud. Conf. of the U.S., Committee on Rules of Practice and Procedure: Report of the Advisory Committee on Evidence Rules 5–8 (2022). ↑
See, e.g., Kristen M. Bush & Kayla M. Kuhn, Proposed Amendments to Federal Discovery Rule of Evidence 702 and Their Impact on Expert Discovery, Brief, Winter 2023, at 54. ↑
Lirieka Meintjes-Van Der Walt, The Proof of the Pudding: The Presentation and Proof of Expert Evidence in South Africa, 47 J. Afr. L. 88, 94–99 (2003). ↑
Sustainability and corporate social responsibility (“CSR”) have become mainstays of business activities, and the percentage of companies of all sizes professing to practice some form of sustainability and CSR has been steadily increasing. Sustainability reporting is gradually becoming the norm, particularly for large global businesses. Traditionally, companies practiced CSR through philanthropic activities; however, today’s definition of CSR has expanded to include strategizing to identify and exploit internal and external activities that can deliver value to the company, all its stakeholders (not just shareholders), and society at large.
The first step in bringing a CSR strategy to life is the development and formal adoption of CSR commitments, which are the policies or instruments of a company that indicate what it intends to do to address its social and environmental impacts. CSR commitments ensure that the company’s organizational culture is consistent with CSR values; help align and integrate the company’s business strategy, objectives, and goals; provide guidance to employees about how they should conduct themselves, which is particularly important for companies whose employees are widely dispersed in locations all around the world; and communicate the company’s approach to addressing its societal and environmental impacts to business partners, suppliers, communities, governments, the general public, and others. Commitments also provide a basis that senior management and stakeholders can use to benchmark and assess the company’s CSR performance.
CSR commitments have been broken out into two types, which are closely related. The first type, aspirational commitments, typically focus on articulating the long-term goals of the company. They are usually written in general language that is disseminated through vision, mission, values, and ethics statements. Examples of aspirational commitments include moving to “zero emissions,” “eliminating any negative impacts our company has on the environment,” and celebrating balanced emphasis on “people, process, product, place, and profits.” Aspirational commitments offer a basis for a shared view of what the company stands for and where it is heading that can be referenced by people throughout the organization as a guide when they implement the tactics of the CSR initiative. However, the real tactical nitty-gritty appears in the second type of commitment, “prescriptive commitments” such as codes of conduct and standards that lay out more specific behaviors to which the company explicitly agrees to comply. Some companies choose to develop their own set of prescriptive commitments tailored to their own specific circumstances; however, this can be a time-consuming process. Other companies have found it easier to incorporate and publicly sign on to an existing CSR code or standard for their sector (i.e., codes and standards developed for a particular issue, such as human rights or climate change, or a specific industry, such as mining or agriculture) or another CSR instrument such as the United Nations Global Compact. Prescriptive commitments can be quite extensive and cover a range of legal and CSR-related topics, including the following:
regulatory compliance
financial responsibility
fair competition
prohibitions on bribery and corruption
conflicts of interest
customer relationships
supply chain relationships
workplace conditions and employee well-being
environmental responsibility and community relations
environmental policies
human resources policies
principles of responsible purchasing
Since the development and dissemination of CSR commitments is pivotal to the launch and success of a company’s CSR initiative, companies should follow a deliberative process that includes the following steps.
Scanning CSR commitments already in use: This step involves researching and analyzing existing CSR commitments that other companies have made. This can help identify best practices and areas where the company can improve.
Understanding existing organizational norms, values, and strategies: This step involves identifying the company’s existing norms and values and understanding how they relate to CSR. This can help ensure that the company’s CSR commitments are aligned with its overall mission and values. The development of commitments should also deploy traditional strategic planning techniques such as SWOT (strengths, weaknesses, opportunities, and threats) analysis.
Discussions with major stakeholders: This step involves engaging with key stakeholders, such as employees, customers, suppliers, and investors, to understand their expectations and concerns regarding CSR. This can help ensure that the company’s CSR commitments are relevant and meaningful to its stakeholders. Engagement with customers is important because research shows that they are more likely to support and buy from companies that share their values and address the environmental and social issues that they care about. Developing CSR commitments that employees can be proud of, and which have been adopted with their participation, builds loyalty in the workforce, and it ensures that employees will be engaged ambassadors for the causes selected by the company.
Identifying the company’s key CSR perspectives (i.e., material CSR topics and issues): This step involves identifying the most important CSR topics and issues for the company, based on factors such as stakeholder expectations, industry standards, and regulatory requirements. This can help ensure that the company’s CSR commitments are focused on the most relevant and impactful areas. Be sure to choose commitments that are aligned with the company’s business model, expertise, and values so that the strengths and resources of the company can be effectively leveraged to create maximum positive impact and value for all stakeholders, including shareholders, employees, and customers.
Creation of a working group to develop the list of commitments: This step involves assembling a team of individuals from across the organization to develop the company’s CSR commitments. This can help ensure that the commitments are comprehensive and representative of the company’s various functions and perspectives.
Preparation of a preliminary draft of the commitments: This step involves drafting the company’s CSR commitments based on the input and feedback received from stakeholders and the working group. This can help ensure that the commitments are specific, measurable, and achievable.
Identifying performance targets for the commitments, followed by consultation with affected stakeholders: This step involves setting specific performance targets for each of the company’s CSR commitments, and consulting with stakeholders to ensure that the targets are relevant and meaningful. This can help ensure that the company’s CSR commitments are aligned with its overall goals and objectives. This is the point where the company should assess current performance and impact for each of its commitments to establish a baseline against which future performance can be measured. Target goals should be SMART (specific, measurable, achievable, relevant, and time-bound).
Revision and publication of the commitments: This step involves finalizing the company’s CSR commitments, based on the feedback received from stakeholders and the working group, and publishing them publicly. This can help ensure that the company’s CSR commitments are transparent and accountable.
Continuous monitoring of the external environment: This step involves monitoring the external environment, such as changes in regulations, stakeholder expectations, and industry standards, to ensure that the company’s CSR commitments remain relevant and up to date.
Identifying and pursuing business opportunities aligned with the commitments: The CSR program should not be separated or isolated from core business activities, and commitments should be made in areas where there will be reasonable and attractive opportunities for creation of shared value for the business and society, such as developing products or services that solve social or environmental problems, partnering with NGOs or social enterprises, or investing in social innovation.
Implementation of the commitments and reporting progress: This step involves implementing the company’s CSR commitments and tracking and reporting progress against the performance targets. This can help ensure that the company’s CSR commitments are integrated into its overall operations and culture, and that it is making meaningful progress toward its CSR goals. Reporting—using transparent and credible standards and frameworks—ensures that the company continuously communicates its achievements and challenges to its stakeholders and sets an agenda for reiteration of the entire process to ensure that commitments remain relevant and achievable.
It often seems easier to merely adopt, without customization, the standards laid out in recognized third-party CSR instruments. However, doing so misses opportunities to expand organizational understanding of CSR and engage stakeholders in the process in a way that leads to an end product that is focused on their specific needs and expectations, and that is feasible given the company’s available resources. For example, a smaller company is best served by adopting a relatively short list of commitments that can be realistically implemented and achieved rather than creating a voluminous collection of policies and procedures that are not taken seriously.
The fiduciary duties of directors of a Delaware corporation are frequently summarized as follows: “[T]he fiduciary relationship requires that the directors act prudently, loyally, and in good faith to maximize the value of the corporation over the long-term.”[1] Embedded within that formulation is a temporal element: the duty is tied to the deliberately amorphous “long term” rather than any target sooner in time.
This core tenet of Delaware corporate law—often called the “standard of conduct” because it conveys what is expected of directors—is often invoked glancingly without further explanation. But in 2013, in In re Trados Inc. Shareholder Litigation,[2] the Delaware Court of Chancery explained in detail the underpinnings of the temporal element—namely, that both the corporation and its equity capital are presumptively perpetual pursuant to the structure of the Delaware General Corporation Law (“DGCL”), which provides by default that corporations have unlimited life and that equity investments (which, unlike debt, do not have a fixed maturity) in the corporation constitute permanent capital. Due to this structure, the court reasoned, fiduciary duties oblige directors to act to maximize long-term value so that the corporation’s common stockholders (or “residual claimants”) will benefit from profits and earnings, in the form of dividends, if declared, during the life of the corporation and will be paid a theoretical maximum value upon an end-of-life scenario, such as a cash-out merger or dissolution (which involves winding up the business, liquidating, and distributing assets).
This article explores whether there is, or should be, a shift in the directors’ standard of conduct when a critical premise of Trados—presumptive perpetual existence—is missing by virtue of a provision of the corporation’s certificate of incorporation (or “charter”) that effectively imposes a deadline on the corporation’s existence, thereby creating what we refer to as a “limited-life” corporation. We first explain the logic of Trados and then apply that logic to limited-life corporations—including, for example, special purpose acquisition companies, or “SPACs,”[3] whose directors have become frequent targets of fiduciary litigation.[4] We conclude that directors of limited-life corporations, like SPACs, owe the same fiduciary duties of care and loyalty as directors of traditional corporations. But, as the Delaware courts have noted, the proper discharge of fiduciary duties is context-specific.[5] In the context of a limited-life corporation, the directors’ context-specific duties require them to maximize value not over the long term but instead within the corporation’s known life span. For that reason, if Trados is to be followed, directors of a limited-life corporation should bear in mind the shorter horizon for value maximization when determining the best interests of the corporation and its stockholders generally.
The Logic of Trados
In Trados, a venture-backed company issued preferred stock with a liquidation preference to members of management and its venture capital investors. When the company was ultimately sold, 100 percent of the merger consideration was paid to preferred stockholders in satisfaction of their contractual preference, leaving nothing for the company’s common stockholders, who challenged the merger as a breach of fiduciary duty that enriched preferred holders at the common stockholders’ expense. The Trados plaintiffs initially defeated a motion to dismiss by arguing that four of the seven directors were affiliated with funds that believed their investment in the company was heading sideways and approved the merger for the sole purpose of securing the return of their liquidation preferences (despite the fact that the common stockholders would receive no consideration) rather than continuing to operate the company (and keeping their capital at risk) in an effort to maximize value for all stockholders, including the common stockholders.[6]
In its post-trial opinion, the Trados court explained that fiduciary duties run to stockholders in their capacity as residual claimants of corporate assets, not in their capacity as holders of special contract rights (under, for example, a preferred stock instrument).[7] The court noted that this principle flows from two foundational premises of Delaware law: (1) fiduciary duties oblige directors to maximize long-term corporate value for the benefit of the corporation’s residual claimants,[8] and (2) directors are not obligated to cater to the particular preferences of any single stockholder or group of stockholders, but rather to the stockholders as a collective by maximizing the value of the corporation as a whole.[9] In light of these two premises, the court explained, “the standard of conduct for directors requires that they strive in good faith and on an informed basis to maximize the value of the corporation for the benefit of its residual claimants, the ultimate beneficiaries of the firm’s value, not for the benefit of its contractual claimants.”[10]
The first premise listed above, addressing why the standard of conduct obliges directors to maximize value over the long term, is the focus of this article. On this particular point, the court explained:
A Delaware corporation, by default, has a perpetual existence. 8 Del. C. §§ 102(b)(5), 122(1). Equity capital, by default, is permanent capital. In terms of the standard of conduct, the duty of loyalty therefore mandates that directors maximize the value of the corporation over the long-term for the benefit of the providers of equity capital, as warranted for an entity with perpetual life in which the residual claimants have locked in their investment.[11]
In a sense, this logic keys the temporal aspect of the standard of conduct to a single question: When will the corporation “cash out”[12] (so to speak) all of its stockholders? The Trados court reasoned that, by statutory default, the answer is “never” due to the structure of the DGCL, which provides by default that corporations have perpetual existence and will never face a midstream obligation to redeem or repurchase all of their capital stock.[13] Accordingly, reasoned the court, directors are obliged by default to manage the corporation in a way that strives to achieve the corporation’s maximum value asymptotically forever. With that said, the court has made clear that this is not an obligation to maintain the corporation’s existence for eternity, as directors can, and often do, conclude that the entity can grow no more and, at that point, opt to sell or dissolve the company consistent with their fiduciary duties.[14]
This is an eminently sensible way to define directors’ standard of conduct. Delaware conceives of the purpose of the corporation as maximizing firm value.[15] Firm value is tied to the amount that stockholders must receive in an end-of-life scenario because the shares of a target’s stockholders are typically converted into the right to receive consideration in mergers and Delaware’s dissolution statute requires stockholders to receive any assets remaining after the satisfaction of the corporation’s debts and other liabilities.[16] For that reason, firm value and the amount due to residual claimants are linked such that increasing the latter will generally increase the former.[17] In short, tying fiduciary duties to the value owed to residual claimants harmonizes the standard of conduct with the purpose of the corporation itself.
Applying the Logic of Trados to Limited-Life Corporations
General Theory
The foregoing discussion raises the following question: What happens to the temporal element of the standard of conduct if the premise of perpetual life is no longer present? As a practical matter, that premise routinely falls away because corporate existence can and does end in various ways, including by merger, dissolution, or expiration of an end-of-life date in a corporation’s charter.[18] How does the temporal element of the standard of conduct change (if at all) in these circumstances, and in particular for limited-life corporations?
Under the logic of Trados, directors should focus on the moment in time at which residual claimants must be paid the corporation’s residual value. The temporal target therefore shifts from value maximization “over the long term” to “as of the corporation’s known end date.” Although the core duty to maximize value remains the same, the standard of conduct obliges directors to strive to do so before the proverbial bell tolls. Why? Because that is the course that will maximize value for residual claimants at the fixed deadline.
This conclusion finds support in the merger context under legal principles set forth in both Trados itself and in the so-called Revlon context, where the directors’ duties shift, in a sale of control, to maximizing value in the short term. The Trados court observed: “When deciding whether to pursue a strategic alternative that would end or fundamentally alter the stockholders’ ongoing investment in the corporation, the loyalty-based standard of conduct requires that the alternative yield value exceeding what the corporation otherwise would generate for stockholders over the long-term.”[19] Relatedly, past cases provide that “it is clear that under Delaware law, directors are under no obligation to act so as to maximize the immediate value of the corporation or its shares, except in the special case in which the corporation is in a ‘Revlon mode.’”[20] Considered together, these two principles of law suggest that the temporal element of the standard of conduct is in some sense bifurcated, providing, respectively, that (1) directors must always seek to maximize the long-term (i.e., terminal) value of the corporation regardless of the circumstance, but (2) while directors have eternity to do so by default, they must do so on a more urgent basis in an end-of-life scenario. The first factor asks “what” (value that directors must strive to achieve) and the second asks “when” (directors must achieve it). The “what” is invariable, but the “when” (which is the focus of this article) changes in merger scenarios.
The “when” should change in other end-of-life scenarios aside from mergers.[21] Under the foregoing precedents, the directors of limited-life corporations arguably owe fiduciary duties to maximize the terminal value of the corporation for the benefit of its residual claimants during the corporation’s known life span. Again, the “what” remains the same, but the “when” changes: while directors of limited-life corporations must strive to deliver what they believe to be the corporation’s terminal value, they must strive to do so before the termination date arrives rather than under the freedom of a perpetual time horizon.
The court’s opinion in New Enterprise Associates 14, L.P. v. Rich[22] provides additional support for this conclusion. In that case, the court explained that parties can “tailor” the fiduciary standard of conduct applicable to directors by appropriate provision in the corporation’s certificate of incorporation.[23] The court began by observing that general corporation laws like the DGCL delegate (at least in a sense) sovereign power to the citizenry:
The creation of a body corporate through the issuance of a charter constitutes an exercise of state authority, equivalent in its efficacy to the enactment of a statute (notwithstanding the now longstanding practice of the state approving charters under a general incorporation law). Through the issuance of a charter, the state creates an otherwise impossible being—an artificial person—capable of exercising the powers conferred by the state and with the limitations that the state wishes to impose. To use the charter to modify the duties attendant to that state-created relationship, parties should need express authority from the state.[24]
The court reasoned that the Delaware General Assembly has in fact exercised such “express authority” in multiple DGCL provisions[25]—including, perhaps most relevant here, section 102(a)(3) of the DGCL, which requires the certificate of incorporation to set forth “[t]he nature of the business or purposes to be conducted or promoted.”[26] Purpose clauses can be drafted in broad and general terms, authorizing, for example, the corporation to conduct any lawful act or activity,[27] or they may be drafted narrowly, in a manner that circumscribes the corporation’s objects and purposes, directing it, for example, to pursue specific lines of business or objectives (and, by implication, imposing the risk that acts outside those specific lines or not in furtherance of those objectives will be ultra vires). Along those lines, in New Enterprise Associates, while directors of corporations with general purpose clauses and perpetual existence owe fiduciary duties to maximize the entity’s long-term value,[28] directors managing an entity with a limited purpose and duration are duty bound not to pursue profit maximization over the long term if doing so subverts the purpose identified. This is but one example of a DGCL provision held to enable corporate planners to reorient fiduciary focus.[29]
The DGCL’s limited-life provision (section 102(b)(5))[30] operates in a similar fashion, constraining the corporation in a way that necessarily affects the contextual duties of its fiduciaries. While the New Enterprise Associates court did not specifically identify section 102(b)(5) as a means of fiduciary tailoring, any limitation on duration, like a limitation on the corporation’s objects and purposes, will alter the default standard of conduct pursuant to which directors are guided to pursue profit maximization in the long-term best interests of the stockholders. Accordingly, limited-duration provisions necessarily (and permissibly) have the effect of tailoring the fiduciary standard of conduct in the manner described above.
Practical Application: SPACs
This precept has important implications for directors of limited-life corporations, including SPACs, which typically must dissolve within eighteen to twenty-four months after the corporation’s initial public offering.[31] Because the SPAC itself generally has no business operations and exists for the limited purpose of identifying acquisition targets and effecting a business combination, typically as an alternate means of taking a private company public, directors’ overarching value-maximization duty obliges them to seek out a business combination that will yield greater value to the SPAC’s stockholders than the fixed amount they would otherwise receive in a redemption scenario, as (if a target whose value exceeds per-share redemption value exists) that is the course that will deliver the most value to residual claimants at the time at which they otherwise must be paid in a mass cash-out upon the occurrence of the charter-imposed termination date.[32]
For that reason, although “rushing” is often used as a pejorative by stockholder plaintiffs challenging directors’ consideration of a merger,[33] acting with appropriate speed may often be precisely what SPAC directors’ fiduciary duties require of them. As established above, proper discharge of fiduciary duties depends on context such that different value-maximizing steps may be appropriate depending on what the situation requires. Thus, in the SPAC context, there is neither a general “duty to rush” nor a general duty to turn over every stone by expending the SPAC’s entire eighteen- to twenty-four-month life span searching for a suitable target. Rather, variable factual circumstances can and should influence directors’ approach to, and degree of alacrity in, locating a target such that proper adherence to the standard of conduct will depend on the unique factual nuances at play.
With that said, SPAC directors oftentimes must act with deliberate speed due to the nature of the entity they helm. SPACs are formed with the specific purpose of acquiring a private company that meets the criteria set forth in its charter (which commonly requires the target’s fair value to meet or exceed 80 percent of the cash held in the SPAC’s trust account) within eighteen to twenty-four months, and locating and consummating a transaction can take a long time. SPAC directors must, among other things, retain advisors, collect information on potential targets, conduct diligence on targets’ business models and operations, conduct diligence on targets’ financials (a project often complicated by private targets’ lack of public company financial reporting conventions), negotiate a term sheet, negotiate a merger agreement, negotiate ancillary agreements, approve and adopt the transaction documents, convene a stockholder meeting to approve the transaction, allow any necessary government approval processes to conclude, and close the transaction. Each of these steps takes time, which in turn imposes an important practical constraint on SPAC boards: they cannot, within eighteen to twenty-four months, conduct an exhaustive review of an essentially limitless group of potential targets. Rather, both SPAC boards and SPAC stockholders understand that the board’s practical charge is to make rational judgments to narrow the field of potential targets to an actionable number that in turn enables a transaction to close within the SPAC’s life span.
Because SPAC investors understand these practical realities, challenges to SPAC mergers on grounds that the board acted quickly reflect internal logical tension: stockholders who seemingly signed up for a fast acquisition process by investing in the SPAC in the first instance challenge a transaction on grounds that it proceeded at precisely the pace they expected. For example, in Richards v. QuantumScape Corp.,[34] a stockholder challenged a SPAC merger in part on grounds that the SPAC’s board was “highly motivated to acquire a company on a quick timeframe.” Similarly, a stockholder-plaintiff in Polisher v. Lottery.com, Inc. impugned a SPAC board for “push[ing] through the [transaction] at lightning-fast speed.”[35] It is not reasonable to infer from these sorts of bald rushing allegations that directors acted carelessly in violation of the standard of conduct. Not only do foundational precepts of Delaware law suggest that moving with alacrity is appropriate in this context, but rushing allegations ignore that the plaintiffs, by investing in a limited-life corporation, signed up for a twenty-four-month race to maximize the value of their shares the moment that they bought them. The better inference, based on both the SPAC’s certificate of incorporation and the practical realities of mergers and acquisitions (M&A) practice, is that acting with suitable speed evidences proper discharge of directors’ fiduciary duties.
This intuition has an important implication in M&A litigation: courts deciding pleading-stage dispositive motions generally should not infer fiduciary misconduct from a bald allegation that directors rushed to complete a transaction. Although the procedural standard applicable to resolving motions to dismiss is plaintiff-friendly under Delaware law, it only requires the court to give the plaintiff the benefit of reasonable inferences.[36] For reasons described above, it is not reasonable to infer fiduciary misconduct from fast action per se.
Three recent decisions from the Delaware Court of Chancery provide a useful template to illustrate how this precept might operate in M&A litigation. In each of In re MultiPlan Corp. Stockholders Litigation, Delman v. GigAcquisitions3, LLC,[37] and Laidlaw v. GigAcquisitions2, LLC,[38] a stockholder-plaintiff sued SPAC directors for approving an acquisition that, according to the plaintiff, overvalued the target company. In each case, the Court of Chancery held at the pleading stage that the entire fairness standard of review applied,[39] thereby requiring the court to assess (1) whether the complaint stated a claim that the transaction was not entirely fair by virtue of the price that each SPAC paid and the process that each SPAC’s board employed before consummating it[40] and (2) whether the complaint pled nonexculpated fiduciary misconduct by each director-defendant sufficient to keep them in the lawsuit.[41] To support these two points, the plaintiffs in these three cases did not argue that the board rushed—but plaintiffs in cases like QuantumScape and Lottery.com did, and plaintiffs in similar future suits might. So, the argument goes, rushing supports point (1) on grounds that it evidences an unfair process and point (2) on grounds that it suggests directors breached their fiduciary duties. But, as we have explained, neither inference is reasonable without more because the standard of conduct obliges SPAC directors to maximize value as of the SPAC’s known termination date, which oftentimes may require fast action to find and acquire a suitable target in time.
Conclusion
The logic of Trados creates substantial arguments that the fiduciary standard of conduct required of directors of limited-life corporations differs from that of directors managing perpetual ones. Trados ties the temporal element of fiduciary duties to the moment in time at which residual claimants must be paid. By default, that moment will never arrive, and thus the temporal element will be the unreachable “long term” in most cases. But for corporations with a known termination date, like SPACs, the temporal element should advance in kind both by logical extension and under the New Enterprise Associates precept that certain charter provisions necessarily (and permissibly) reorient fiduciary focus. In our view, bald allegations that directors of a limited-life corporation “rushed” through a sale process, in and of itself, should not give rise to a reasonable inference that the process was flawed. Rather, because the duty is to maximize value within a specified time horizon, the reasonable inference from fast action should be that directors observed the context-specific duties imposed on them. Reframing of the standard of conduct in this manner should help to eliminate noise in cases involving limited-life corporations where plaintiffs attempt to assert process-based challenges that might arguably apply in the default setting but do not operate similarly in limited-life contexts.
John Mark Zeberkiewicz is a director and Brian T.M. Mammarella is an associate of Richards, Layton & Finger, P.A. Their practice focuses on transactional matters involving Delaware corporations, including mergers and acquisitions, corporate governance, and corporate finance. The views expressed in this article are those of the authors and not necessarily those of Richards, Layton & Finger, P.A., or its clients.
Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *18 (Del. Ch. Apr. 14, 2017). ↑
The Delaware Court of Chancery has summarized the nature and organizing purpose of SPACs as follows:
A SPAC—also called a blank check company—is a publicly traded company that raises capital through an initial public offering to realize a single goal: merge with a private company and take it public. Unlike most companies that go public, a SPAC has no operations and its assets are effectively limited to its IPO proceeds. SPACs are often formed and controlled by an individual or management group, referred to as the SPAC’s “sponsor.” The sponsor’s primary job is to identify a target for a “de-SPAC” merger.
In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 793 (Del. Ch. 2022) (footnotes omitted). ↑
E.g., Laidlaw v. GigAcquisitions2, LLC, 2023 WL 2292488 (Del. Ch. Mar. 1, 2023) (opinion addressing plenary action against SPAC directors for breach of fiduciary duty); Delman v. GigAcquisitions3, LLC, 288 A.3d 692 (Del. Ch. 2023) (same); In re MultiPlan Corp. S’holders Litig., 268 A.3d 784 (same); Complaint, Farzad v. Gores Sponsor IV LLC, No. 2023-0386 (Del. Ch. Mar. 31, 2023) (complaint asserting plenary claims for breach of fiduciary duties against SPAC directors); Complaint, Delman v. Gores Sponsor IV LLC, No. 2023-0284-LWW (Del. Ch. Mar. 10, 2023) (same); Complaint, Delman v. Riley, No. 2023-0293-LWW (Del. Ch. Mar. 13, 2023) (same); Complaint, McKnight v. All. Ent. Holdings Corp., No. 2023-0383-LWW (Del. Ch. Mar. 31, 2023) (same); Complaint, Weisheipl v. Rosenberg, No. 2023-0395-MTZ (Del. Ch. Apr. 3, 2023) (same); Complaint, Solak v. Mountain Crest Cap. LLC, No. 2023-0469-SG (Del. Ch. Apr. 28, 2023) (same); Complaint, Kilari v. TS Innovation Acquisitions Sponsor LLC, No. 2023-0509-LWW (Del. Ch. May 9, 2023) (same); Complaint, Subramanian v. TS Innovation Acquisitions Sponsor LLC, No. 2023-0514-LWW (Del. Ch. May 10, 2023) (same); Complaint, Newman v. Sports Ent. Acquisition Holdings LLC, No. 2023-00538-LWW (Del. Ch. May 18, 2023) (same); Complaint, Lindsey v. Quiroga, No. 2023-0674-PAF (Del. Ch. June 30, 2023) (same); Complaint, Bushansky v. GigAcquisitions4 LLC, No. 2023-0685-LWW (Del. Ch. July 5, 2023) (same); Complaint, Murray v. Moglia, No. 2023-0737-PAF (Del. Ch. July 20, 2023) (same); Complaint, Ihle v. Brombach, No. 2023-0759-LWW (Del. Ch. July 25, 2023) (same); Complaint, Offringa v. dMY Sponsor II LLC, No. 2023-0929 (Del. Ch. Sept. 12, 2023) (same); Complaint, Gatto v. Volta Inc., No. 2023-0378 (Del. Ch. Mar. 30, 2023) (seeking to inspect a former SPAC’s books and records to investigate wrongdoing in connection with the SPAC’s business combination transaction); Complaint, Richards v. QuantumScape Corp., No. 2022-0394-JTL (Del. Ch. May 5, 2022) (same); Complaint, Polisher v. Lottery.com, Inc., No. 2023-0242 (Del. Ch. Feb. 24, 2023) (same); Complaint, Gomez v. Berkshire Grey Inc., No. 2023-0724 (Del. Ch. July 18, 2023) (same); Complaint, Serven v. Greenlight Bioscis. Holdings PBC, No. 2023-0728 (July 18, 2023) (same); Complaint, Bryant v. MoneyLion Inc., No. 2023-0739-BWD (Del. Ch. July 20, 2023) (same). ↑
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998) (“Although the fiduciary duty of a Delaware director is unremitting, the exact course of conduct that must be charted to properly discharge that responsibility will change in the specific context of the action the director is taking with regard to either the corporation or its shareholders.”); accord In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343, 369 (Del. Ch. 2023) (same). ↑
In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *1 (Del. Ch. July 24, 2009) (“[P]laintiff has alleged facts sufficient, at this preliminary stage, to demonstrate that at least a majority of the members of Trados’ seven member board were unable to exercise independent and disinterested business judgment in deciding whether to approve the merger.”). Notably, the plaintiffs also challenged the board’s adoption of a management carve-out plan that effectively allocated proceeds of the merger to management, thus providing them an incentive to complete the transaction favored by the preferred stockholders. Id.↑
LC Cap. Master Fund, Ltd. v. James, 990 A.2d 435, 448–49 (Del. Ch. 2010) (“When, by contract, the rights of the preferred in a particular transactional context are articulated, it is those rights that the board must honor. To the extent that the board does so, it need not go further and extend some unspecified fiduciary beneficence on the preferred at the expense of the common. When, however, . . . there is no objective contractual basis for treatment of the preferred, then the board must act as a gap-filling agency and do its best to fairly reconcile the competing interests of the common and preferred.”). ↑
In re Trados Inc. S’holder Litig., 73 A.3d 17, 37 (Del. Ch. 2013). ↑
See Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *17 (Del. Ch. Apr. 14, 2017) (“[U]nder Delaware law, for directors to act loyally to advance the best interests of the corporation means that they must seek ‘to promote the value of the corporation for the benefit of its stockholders.’ In a world with many types of stock . . . the question naturally arises: which stockholders? The answer is the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.” (footnotes omitted)); J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70 Bus. Law. 33, 49 (2015) (“At their core, a director’s fiduciary duties require that the director act prudently and in good faith ‘to promote the value of the corporation for the benefit of its stockholders.’ The reference to ‘stockholders’ means all of the corporation’s stockholders as a collective. It means the stockholders as a whole, without reference to any of their special contractual rights, which is what academics refer to as the ‘single owner standard.’” (footnotes omitted)). ↑
Trados, 73 A.3d at 40–41. The court went on to reason that preferred holders are only owed fiduciary duties in their capacity as holders of undifferentiated equity, not in their capacity as holders of special, unique contract rights set forth in a preferred instrument not shared generally with stockholders. Id.; see supra note 7 and accompanying text. ↑
Trados, 73 A.3d at 37–38 (emphasis added). This reasoning has been both endorsed by the Delaware Supreme Court and applied to Delaware limited liability companies. United Food & Com. Workers Union v. Zuckerberg, 2021 WL 4344361, at *19 n.193 (Del. Sept. 23, 2021) (citing with approval the notion that “the fiduciary relationship requires that the directors act prudently, loyally, and in good faith to maximize the value of the corporation over the long-term for the benefit of the providers of presumptively permanent equity capital, as warranted for an entity with a presumptively perpetual life in which the residual claimants have locked in their investment”); Glidepath Ltd. v. Beumer Corp., 2019 WL 855660, at *19 (Del. Ch. Feb. 21, 2019) (“By default, a Delaware LLC exists perpetually—from formation until cancellation. Consequently, unless their fiduciary duties are eliminated or modified, the fiduciaries who control a Delaware LLC must strive to maximize the value of the LLC over a long-term horizon, as warranted for an entity with a presumptively perpetual life.”). ↑
We use the phrase cash out for convenience, but it is intended to capture a wider array of liquidity events that deliver value in various forms, as the Trados court explicitly acknowledged: “Value, of course, does not just mean cash. It could mean an ownership interest in an entity, a package of other securities, or some combination, with or without cash, that will deliver greater value over the anticipated investment horizon.” Trados, 73 A.3d at 38–39. ↑
Indeed, section 151(b) of the DGCL forbids corporations from completing redemptions that would wipe out all voting stock (subject to exceptions). Del. Code Ann. tit. 8, § 151(b). But see 2 David A. Drexler et al., Delaware Corporation Law and Practice § 17.01[2] (2022) (observing that “transfer restrictions authorized by [Del. Code Ann. tit. 8, § 202] may be, in effect, indistinguishable from the grant of a right of redemption to the holders of the common stock”). ↑
ODN, 2017 WL 1437308, at *19 (“[A] duty to maximize long-term value does not always mean acting to ensure the corporation’s perpetual existence.”). ↑
E.g., id. at *17 (“Delaware case law is clear that the board of directors of a for-profit corporation . . . must, within the limits of its legal discretion, treat stockholder welfare as the only end, considering other interests only to the extent that doing so is rationally related to stockholder welfare.” (quoting Leo E. Strine Jr., A Job Is Not a Hobby: The Judicial Revival of Corporate Paternalism and Its Problematic Implications, 41 J. Corp. L. 71, 107 (2015))). ↑
SeeDel. Code Ann. tit. 8, §§ 251(b)(5), 281. Delaware law provides that the only other conceivable end-of-life event, conversion, neither requires payment to stockholders nor ends the company’s existence. Id. § 266(h). Other end-of-life events, such as revocation of a delinquent corporation’s charter by the secretary of state and subsequent termination proceedings, are not relevant for present purposes because they do not involve director action. Id. §§ 509, 511. ↑
ODN, 2017 WL 1437308, at *17 (“Decisions [that produce greater profits over the long term] benefit the corporation as a whole, and by increasing the value of the corporation, the directors increase the quantum of value available for the residual claimants.”). We acknowledge that increasing firm value may not increase amounts paid to stockholders in some dissolution scenarios, including where amounts due to creditors would swallow the amount of the increase. ↑
See supra note 16. Note that corporate existence does not end upon dissolution or expiration of an end-of-life date, both of which instead trigger a period of at least three years during which the corporation continues to exist for the purpose of winding up its affairs and liquidating and distributing its assets. Only after the windup expires does the corporation cease to exist (subject to limited exceptions). SeeDel. Code Ann. tit. 8, §§ 278, 280, 281; cf. In re Krafft-Murphy Co., Inc., 82 A.3d 696, 705–07 (Del. 2013) (holding that “the expiration of [the windup period] does not extinguish the dissolved corporation’s liability” to claimants who sue after the corporation has ceased to exist because although the DGCL’s safe-harbor provisions protect directors and stockholders from certain claims and time-bar other types of claims, the DGCL does not purport to eliminate liability of the corporation itself). ↑
In re Trados Inc. S’holder Litig., 73 A.3d 17, 37 (Del. Ch. 2013) (emphasis added). ↑
Paramount Commc’ns Inc. v. Time Inc., 1989 WL 79880, at *19 (Del. Ch. July 14, 1989) (Allen, C.), aff’d, 571 A.2d 1140 (Del. 1989) (emphasis added). “[A]bsent a limited set of circumstances as defined under Revlon, a board of directors, while always required to act in an informed manner, is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover.” Paramount Commc’ns Inc., 571 A.2d at 1150. ↑
The fact that Revlon does not apply to a board’s decision to dissolve does not change this analysis because Revlon is a standard of review, not a standard of conduct. Energy Fund v. Gershen, 2016 WL 5462958 (Del. Ch. Sept. 29, 2016) (holding that Revlon does not apply to a board’s decision to dissolve); In re USG Corp. S’holder Litig., 2020 WL 5126671, at *28 (Del. Ch. Aug. 31, 2020) (“Describing the duties of directors in way of a control transaction as ‘Revlon duties,’ to my mind, is something of a misnomer; the fiduciary duties are loyalty and care, in any situation—the specific situation, however, dictates the actions required for fulfilment of those duties.”). See generally J. Travis Laster, Revlon Is a Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin. L. 5 (2013). That is because directors must always strive to maximize the corporation’s value, and Revlon only asks whether directors acted reasonably in striving to do so in change-of-control scenarios. Simply put, Revlon does not dictate the standard of conduct. ↑
Id. at 553–54; see also id. at 542 (“[I]f the General Assembly has authorized provisions in the constitutive documents of an entity that eliminate or modify the fiduciary duty regime, then a court will enforce them. Otherwise, practitioners cannot use the constitutive documents of an entity for that purpose.”). ↑
Id. at 554 (“[A] limited purpose clause effectively modifies the orientation of the directors’ fiduciary duties.”). ↑
Section 102(a)(3) expressly authorizes the charter to provide a provision of this sort:
It shall be sufficient to state, either alone or with other businesses or purposes, that the purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and by such statement all lawful acts and activities shall be within the purposes of the corporation, except for express limitations, if any.
295 A.3d at 544 (“Absent a narrow purpose clause, corporate directors have an obligation to seek to maximize the long-term value of the corporation for the benefit of its stockholders.”). ↑
See id. at 549–61 (discussing six other DGCL provisions that permit fiduciary tailoring); cf. In re McDonald’s Corp. S’holder Derivative Litig., 289 A.3d 343, 369 (Del. Ch. 2023) (observing that fiduciary duties are flexible and responsive to the specific context surrounding each decision that fiduciaries make). ↑
A sample limited-life provision in a SPAC charter reads as follows:
In the event that the Corporation has not consummated an [sic] Business Combination within the Completion Window, the Corporation shall (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter subject to lawfully available funds therefor, redeem 100% of the Offering Shares in consideration of a per share price, payable in cash, equal to [consideration formula], and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining stockholders and the Board in accordance with applicable law, dissolve and liquidate, subject in each case to the Corporation’s obligations under the DGCL to provide for claims of creditors and other requirements of applicable law.
Section 102(b)(5) of the DGCL provides that the charter may contain “[a] provision limiting the duration of the corporation’s existence to a specified date.” Del. Code Ann. tit. 8, § 102(b)(5). We acknowledge that SPAC charters do not purport to limit the corporation’s existence to a “specific date” but rather oblige the corporation to dissolve as promptly as reasonably possible after expiration of the above-referenced completion window and the mandatory redemption of public shares occurs. E.g., supra note 31 and accompanying text. We further acknowledge that the charter can be amended to extend the completion window at any time as long as both the directors and the stockholders consent. SeeDel. Code Ann. tit. 8, § 242. Nonetheless, mandatory, time-triggered dissolution provisions in SPAC charters should animate the same standard-of-conduct analysis as traditional limited-life provisions because both alter the default of perpetual existence by providing a target beyond which the corporation may no longer conduct the business that the corporation was formed to pursue. Further, the possibility of charter amendments should not alter the analysis for several reasons. First, the standard of conduct focuses on director action, and directors cannot unilaterally amend the charter (subject to exceptions not relevant here). Id. § 242(b). Moreover, Trados keyed the temporal element of the standard of conduct to the corporation’s contemporaneously prevailing (there, the DGCL default) life span, not hypothetical alternative life spans. As we have argued, the temporal element of the standard of conduct should be responsive to any new condition affecting corporate life—be it an imminent merger, imminent dissolution, or a known termination date—when it manifests and not before. ↑
See infra notes 34–35 and accompanying text; see also Complaint ¶ 74, Ihle v. Brombach, No. 2023-0759-LWW (Del. Ch. July 25, 2023) (“Upon information and belief, Plaintiff alleges that the Proxy overstates the extent of the Company’s evaluation of potential targets other than Legacy Core Scientific, as Defendants quickly identified Core Scientific as the Company’s preferred target.”); Complaint ¶¶ 39–41, Murray v. Moglia, No. 2023-0737-PAF (Del. Ch. July 20, 2023) (alleging that “defendants quickly approv[ed] the merger” at issue and highlighting that “[d]efendants were ready to move quickly”); Complaint ¶ 51, Bushansky v. GigAcquisitions4 LLC, No. 2023-0685-LWW (Del. Ch. July 5, 2023) (“Following the IPO, the Board had to complete a business combination within 24 months, or Gig4 would be forced to liquidate the trust account and return the trust funds to Gig4’s public stockholders. Unsurprisingly, Gig4 moved swiftly to negotiations with a target that the Controller Defendants’ had preselected.”); Complaint ¶ 50, Lindsey v. Quiroga, No. 2023-0674-PAF (Del. Ch. June 30, 2023) (“Due to the SRAC Individual Defendants’ ownership interests in SRAC and the terms and financial structure of SRAC as a SPAC, the SRAC Individual Defendants possessed strong financial incentives to complete a qualifying transaction by the May 13, 2021 deadline. The SRAC Individual Defendants faced pressure to complete a transaction irrespective of the merits of that transaction for SRAC’s public stockholders.”). ↑
E.g., In re Zale Corp. S’holders Litig., 2015 WL 5853693, at *16 (Del. Ch. Oct. 1, 2015) (“Although I must draw all inferences in favor of Plaintiffs on Defendants’ motion to dismiss, those inferences still must be reasonable.”). ↑
In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 809 (Del. Ch. 2022); GigAcquisitions3, 288 A.3d at 713–22; GigAcquisitions2, 2023 WL 2292488, at *7–9. ↑
E.g., Multiplan, 268 A.3d at 815 (“When entire fairness applies, the defendant fiduciaries have the burden ‘to demonstrate that the challenged act or transaction was entirely fair to the corporation and its stockholders.’ The two aspects of that test—fair price and fair dealing—‘must be examined as a whole since the question is one of entire fairness.’” (footnotes omitted)). ↑
In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1175–76 (Del. 2015) (“A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.” (footnotes omitted)). ↑
The January 6, 2021, sacking of the U.S. Capitol was a warning shot across America’s proverbial bow, telling even the most optimistic amongst us that our beloved democracy is at great risk. Many of those involved in denying the outcome of the 2020 elections have continued their assault on our democracy, and the 2024 presidential election may very well end up determining whether our 247-year-old form of government can survive.
The causes of our current crisis are undoubtedly complex but must be determined and quickly addressed if we are to uphold the legacy more than twelve generations of Americans fought for and passed down to us. The efforts to overturn the 2020 election could very well have succeeded but for our tripartite system of government and the intervention by the judicial branch, including, importantly, its lawyers. Among all Americans, the legal profession has a unique fiduciary duty under its contract with society to defend the Constitution and uphold its principles of democracy. That duty continues to this day to be under intense pressure, as can be seen by reading any newspaper or listening to any newscast.
Our current situation and the unique role that lawyers play in a democracy is what led me to form the American Bar Association (ABA) Task Force for American Democracy—bringing together thirty leading Americans from across the political spectrum, ranging from retired judges to election law experts and law school deans, experts on national security to former presidential candidates from both parties. The Task Force is focused on the two critical objectives that are essential to protecting, and hopefully enhancing, our democracy: (i) assuring elections are conducted under principles of democracy, including being administered in a safe and apolitical manner; and (ii) creating a national culture that is educated on the basics of civics and has not only an understanding of but also a passion for democracy and the rule of law.
Global surveys have shown that there is an alarming trend not only in the United States but also abroad of increasing pressures to replace traditional notions of the rule of law and democratic processes with autocratic forms of government. A growing number of adults and young Americans do not believe that a democratic form of government is necessary or even crucial to their lives and wellbeing, placing our democracy in great peril. Such alarming shifts are confirmed by a 2023 survey by the Associated Press-NORC Center for Public Affairs Research that found that just 10 percent of American adults view the health of our nation’s democracy positively. A staggering 50 percent believe our democracy is not functioning effectively, underscoring a bipartisan disillusionment that cuts across the American political landscape. About half of the respondents expressed disapproval towards key democratic institutions like the Presidency, Congress, and the Supreme Court in their roles of upholding democratic values.
As a country, we don’t fare any better on the world stage. The World Justice Project’s 2023 Rule of Law Index, which ranks nations based on factors such as constraints on government powers, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, and criminal justice, showed that our ranking—twenty-sixth out of 142 countries and jurisdictions—reflects a drop from 2020, with our recent declines on par with nations like Hungary and Myanmar.
Clearly, our American democracy is not as strong as we once thought. The time for answers and engagement is now, and our nation’s lawyers need to be at the front of the action.
Just as lawyers played a special role in the founding of our nation, American lawyers have an equally special role to play today in ensuring our democracy not only survives but thrives for generations to come. Every lawyer in America takes an oath to uphold and support our Constitution and the rule of law. Indeed, it was lawyers and the judicial system that arguably saved our democracy when more than sixty different judicial decisions, after reviewing all the evidence presented, held that there was “no steal” of the 2020 presidential election.
As the nation’s leading organization of American lawyers, the ABA is uniquely positioned to be a national leader on preserving and enhancing our democracy, with its ability to engage local communities not only through its lawyer members but also through the ABA’s partnerships with law schools, state and local bar associations, the judiciary, and other democracy NGOs. Lawyers of all stripes—retired general counsels, private practitioners, law school professors, and others—have reached out to the Task Force to ask how they can help, heeding our call to action. They intuitively know the stakes are high and that the endeavor to preserve and enhance our democracy will require many hearts, minds, and hands to be successful.
Co-chaired by former Federal Judge J. Michael Luttig and ex-Homeland Security Secretary Jeh Charles Johnson, the Task Force’s overarching goal is to ensure “an enduring American democracy.” It will drive a better understanding of and a sense of ownership of American democracy into everyday life, as well as promote the rule of law and the sanctity of elections to ensure American democracy thrives for generations to come. From August 2023 through January 2025, the Task Force—in cooperation with local bar associations, law schools, volunteer lawyers, civic and business leaders, and democracy-focused NGOs—will work to:
Inspire and mobilize America’s uniquely positioned legal profession to fulfill its fiduciary duty to actively support and defend American democracy, the Constitution, and the rule of law.
Ensure that lawyers are educated and accountable to their professional obligations to support and defend the Constitution, the rule of law, and our democracy.
Leverage the legal profession to educate the public on the reasons for, and the need to, actively support democracy and the rule of law.
Restore voter confidence in the integrity of our elections.
Assure the nonpartisan administration of elections.
Ensure the safety of election workers and officials and others responsible for the administration of elections.
Promote civil political discourse and debate, denounce and disincentivize extremist and violent political rhetoric in American politics, and seek to prevent the use of violence to replace democratic practices or to influence or overturn elections.
Assure citizen participation in democracy and the democratic process.
Identify and recommend democratic solutions to the antidemocratic weaknesses in our election processes.
Identify and promote the positive role cyberspace can play in the American democratic process while protecting against misuse of technology and the internet to corrupt the democratic process.
To accomplish its objectives, the Task Force will undertake the following actions:
Working Papers. Created in cooperation with leading national experts, these documents will seek to analyze the key challenges facing our democracy as well as propose possible solutions to be considered by the American people. Topics to be addressed include decreasing political polarization in the U.S., addressing the use of deepfakes and misinformation in connection with elections, depoliticizing the administration of elections, assuring an independent justice system and a continued separation of powers, and improving civics education in all levels of American society.
Listening Tours. In collaboration with local partners, the Task Force will host community listening forums in Arizona, Georgia, Michigan, North Carolina, Pennsylvania, Wisconsin, and perhaps other states focused on addressing the key issues facing our democracy, such as trust in elections, election worker safety, improving public dialogue, and reducing polarization. We will intentionally limit the size of our convenings to encourage meaningful dialogue amongst community leaders committed to democracy. We are nonpartisan and seek collaboration across the political spectrum. Based on these initial Listening Tours, the Task Force will also create “Listening Tour Toolkits” to be provided to bar associations, institutions of higher education, and community groups around the United States such that they can host similar events in their communities and then report back to the Task Force on the outcomes of those sessions.
Rapid Response Teams. The Task Force will create two types of Rapid Response Teams: (a) a national team comprised of Task Force members; and (b) local teams potentially in all fifty states comprised of lawyers, retired judges, retired district attorneys, law school deans, and community leaders. The Rapid Response Teams will provide real-time public responses to emerging or potential threats to American democracy, to concerns related to free and fair elections, and to issues related to the rule of law as they arise on both national and local levels during the lead-up to the counting of electoral college votes on January 6, 2025.
Strategic Communications. Leveraging the prominence and bipartisan credentials of the Co-Chairs and Task Force Members and working in collaboration with third-party democracy NGOs, the Task Force will seek to inform and educate the public on (a) the importance of American democracy, (b) the centrality of elections to the successful exercise of democratic principles, (c) the imperative of the rule of law in a democracy, and (d) the corrosive effects of extreme rhetoric and misinformation on political discourse.
Report and Recommendations. In August 2024, the Task Force will convene a Democracy Summit at the ABA Annual Meeting in Chicago. The summit will be based on the findings of a published Interim Task Force Report setting forth its activities, learnings, findings, conclusions, and recommendations regarding key issues such as failures to embrace and support democratic principles, threats to the rule of law, election integrity, election worker safety, extreme and violent political rhetoric, political polarization, the urgency for return to civil political discourse, and the need for civics education at all levels of public and private education.
While a great deal of work lies in front of us, we can collectively rekindle our national faith in the foundational principles that have long defined our democracy. By championing transparency, judicial independence, and steadfast adherence to the rule of law, we can forge the foundation for a restored national trust, and rebuild the public’s belief in our democratic institutions, ensuring that the principles of our republic again resonate with the voices of its people.
“Working to Ensure an Enduring American Democracy” by Mary L. Smith, President of the American Bar Association, is part of a series on the rule of law and its importance for business lawyers, created by the American Bar Association Business Law Section’s Rule of Law Working Group. Read more articles in the series.
This is a summary of the Hotshot course “Indemnifiable Losses: Market Trends,” which features ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman discussing market trends in how loss is defined in private M&A deals, drawing on data from the ABA M&A Committee’s Private Target M&A Deal Points Study. View the course here.
The treatment of indemnifiable losses in publicly filed acquisition agreements was looked at in the 2023 ABA M&A Committee’s Private Target Deal Points Study.
The study reviewed how loss is defined and looked at the types of damages included.
The data shows that losses are rarely limited to out-of-pocket damages—only 11% of the time in 2022 to 2023.
Most deals were silent on diminution in value—74% in the 2023 study.
There was a slight increase in the number of deals that expressly excluded diminution in value. It was expressly excluded from:
15% of deals in the 2021 study; and
17% of deals in the 2023 study.
80% of deals in 2022 and 2023 were also silent on incidental damages.
This was an increase of 19 percentage points from the 2021 study.
17% of deals expressly excluded incidental damages.
Punitive damages are routinely excluded.
73% of the deals in the 2023 study expressly excluded punitive damages, with 24% silent.
With consequential damages, there was a slight decrease in the number of deals that were silent, from 58% in the 2021 study to 57% in 2023.
39% expressly excluded consequential damages, a figure that was up to over 50% at the beginning of the 2010s.
The 2019 study was the first time that the deal points study analyzed the number of agreements that included recovery for lost profits and the number of agreements that allowed damages to be calculated based on a multiple.
Since then, the study has shown that the majority of deals were silent on both these issues.
One note about the percentages of deals that exclude consequential, incidental and punitive damages, and lost profits:
The Deal Points studies do not analyze the number of deals that contain a common exception to that exclusion, which is that those types of damages are recoverable if they’re included in a third-party claim that’s covered by the indemnification provisions of the agreement.
The rest of the course includes interviews with ABA M&A Committee members Leigh Walton from Bass, Berry & Sims and Scott Whittaker from Stone Pigman Walther Wittmann.
