Quarterly Corporate / M&A Decisions Update Series - Q2 2021

Manichaean Capital v. Exela Tech: DE courts rule on “reverse veil piercing” claims

In Manichaean Capital, LLC v. Exela Tech., Inc. (C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021)), the Court of Chancery ruled as a matter of first impression in Delaware that plaintiffs could pursue “reverse veil piercing” claims against the subsidiaries of a corporate defendant accused of abusing the corporate form to avoid paying an appraisal judgment from the Delaware courts. The court acknowledged that reverse veil piercing claims, which seek to hold subsidiaries liable for conduct by corporate parents, would not be appropriate in all cases, and established a multi-part test for considering whether a case rose to the level required to permit reverse veil piercing claims to proceed. The court did not rule on whether controllers, rather than third parties, could also bring reverse veil piercing claims, leaving that issue for another day.

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LDC Parent v. Essential Utilities: DE court on who should resolve purchase price adjustment dispute

In LDC Parent, LLC v. Essential Utilities, Inc. (C.A. No. N20C-08-127-MMJ-CCLD (Del. Super. Apr. 28, 2021)), the Delaware Superior Court held that a post-closing purchase price adjustment dispute had to be resolved by an accounting firm rather than a court under the parties’ purchase agreement. The case is an important reminder that Delaware courts may preclude litigation of post-closing disputes where the parties state in their agreement that such disputes are to be resolved by an accountant, even without determining whether the accountant would be acting as an expert or an arbitrator.

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In re Appraisal of Regal: deal-price-less-synergies valuation method is “first among equals”

The court’s decision in In re Appraisal of Regal Entertainment Group (C.A. No. 2018-0266-JTL (Del. Ch. May 13, 2021)) is the most recent in a line of cases confirming that the deal-price-less-synergies valuation method is the current “first among equals.” The court doubled down on its preference for market-based indicators over discounted cash flow (DCF) valuations, which it said are inherently subjective where they are developed by partisan experts. It held that the process leading to the acquisition of Regal Entertainment Group (Regal) by Cineworld Group plc (Cineworld) was reliable and arms-length because it involved a third-party buyer, an unconflicted board, robust price negotiations, an active post-signing market check, and no preclusive deal protection measures. The court also showed a growing willingness to rely on non-deal-specific and even non-industry-specific studies for the “imprecise task” of allocating synergies.

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Snow Phipps Group v. KCAKE Acquisition: DE addresses MAE based on COVID-19 impact

In Snow Phipps Group, LLC v. KCAKE Acquisition, Inc. (C.A. No. 2020-0282-KSJM), the Delaware Court of Chancery ordered specific performance of a US$550 million acquisition, rejecting the buyer’s argument that the impact of COVID-19 was reasonably expected to constitute a materially adverse event (MAE). The court found specific performance appropriate because the plaintiff failed to use reasonable best efforts to obtain appropriate financing, including making unreasonable demands of the potential lenders. Ultimately, the court characterized its decision as a “victory for deal certainty,” reaffirming that Delaware courts set a high bar for purchasers seeking to terminate an acquisition agreement on the basis of an MAE. The holding demonstrates that while other deal parties recently were able to demonstrate MAEs, including AB Stable VIII LLC and Akorn, the burden to do so remains high and requires a “persistent and sustained” failure in an acquisition target’s business.

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In re Tilray, Inc. Reorg. Litigation: DE court finds founding members to be control group

In In re Tilray, Inc. Reorganization Litigation (C.A. No. 2020-137-KSJM (Del. Ch. June 1, 2021)), the minority shareholders of Tilray, Inc. alleged that the defendants breached their fiduciary duties by entering a self-dealing transaction to gain a tax benefit not available to the minority shareholders. The court denied the defendants’ motions to dismiss for demand futility and for failure to state a claim, finding that the plaintiffs adequately alleged that a control group existed and engaged in a self-dealing transaction, and that the plaintiffs alleged with particularity that demand was excused. The court also rejected two defendants’ personal jurisdiction challenges, finding that the plaintiffs adequately pleaded conspiracy jurisdiction. This decision highlights the factors that identify a control group and the scope of the application of the entire fairness standard, which the court emphasized applies to self-dealing transactions whenever a controller extracts a unique benefit.

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In re Pattern Energy Group Inc: risks to directors and officers in not maximizing stockholder value

In a 200+ page decision, the Court of Chancery in In re Pattern Energy Group Inc. Stockholders Litigation, (C.A. No. 2020-0357-MTZ (Del. Ch. May 6, 2021)) declined to dismiss putative shareholder class claims for breach of fiduciary duty against the officers and directors of Pattern Energy Group Inc. stemming from the US$6.1 billion sale of the company, even though the sale process “was run by an undisputedly disinterested and independent special committee that recognized and nominally managed conflicts, proceeded with advice from an unconflicted banker and counsel, and conducted a lengthy process attracting tens of suitors that the special committee pressed for value.” The case stands as a reminder of the risks to directors and officers where they consider goals other than the maximization of stockholder value, particularly where a bidder is selected that offers less than other bidders.

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