Corporate Alert June 2013June 2013
The Herrick Advantage
It has been a busy and productive month for Herrick's Sports lawyers! Our team recently represented an affiliate of our longtime clients Yankee Global Enterprises, LLC and the New York Yankees in their joint venture effort with the English Premier League's Manchester City to bring a new Major League Soccer team to New York City. The new team, called New York City Football Club, will begin play in 2015 and will be Major League Soccer's 20th franchise.
We also recently welcomed more than 100 members of the sports business and digital media communities to our offices for Herrick's Digital Media and Sports Conference. In a discussion moderated by Daniel A. Etna, Co-Chair of Herrick's Sports Business Practice, Jayne Bussman-Wise (Brooklyn Nets & Barclays Center), Chris Schlosser (Major League Soccer), Michael Spirito (YES Network), Holt Hackney (Hackney Publications) and Herrick Corporate Department Co-Chair Irwin A. Kishner explored the transformative forces at play in the digital sports-media landscape.
What Constitutes a Breach of an Agreement to Negotiate in Good Faith?
The Delaware Supreme Court upheld a Delaware Court of Chancery ruling that SIGA Technologies, Inc. breached its obligation to negotiate a term sheet in good faith, notwithstanding the non-binding nature of the term sheet and the fact that it was never executed. The Delaware Court of Chancery ruling was reported on in our November 2011 Corporate Alert.
In the case, Pharmathene, Inc. and SIGA negotiated, but failed to execute, a non-binding termsheet outlining specific terms for a pharmaceutical licensing transaction between the parties. They subsequently negotiated and executed a merger agreement in lieu of the licensing transaction, but expressly agreed in the merger transaction documents to resume negotiating the licensing transaction in good faith pursuant to the termsheet (which was attached as an exhibit to the merger agreement) if the merger fell through. SIGA subsequently terminated the merger agreement and, although the parties resumed negotiating the licensing transaction, by that time, SIGA's overall financial picture and business outlook had dramatically improved. SIGA proposed licensing terms materially different than those in the original termsheet (for example, upfront payments were increased from $6 million to $100 million, milestone payments were raised from $10 million to $235 million and royalty rates were doubled). Pharmathene subsequently sued SIGA asserting, among other things, a breach of SIGA's duty to negotiate in good faith.
The Delaware Supreme Court held that SIGA had breached the covenant to negotiate in good faith by demanding terms that were not "substantially similar" to those contained in the term sheet. The Delaware Court of Chancery awarded Pharmathene certain expectation damages, as well as attorneys' fees and expenses. The Delaware Supreme Court, finding Pharmathene's evidence of expectation damages to be too speculative and uncertain, remanded the case back to the Delaware Court of Chancery for reconsideration of such damages. In remanding the case, the Delaware Supreme Court ruled that expectation damages may be awarded only for losses that can be proven with reasonable certainty.
SIGA Technologies, Inc. v. Pharmathene, Inc., No. 314, 2012, Delaware Sup. Ct. (May 24, 2013).
Delaware Court of Chancery Applies Business Judgment Rule to Controlling Stockholder Merger
The Delaware Court of Chancery applied the business judgment rule, rather than the more onerous entire fairness review, to a going-private transaction with a controlling stockholder after finding that such transaction was conditioned upon approval by both a special committee of directors and a majority-of-the-minority vote. After applying the less onerous business judgment rule standard, the court granted summary judgment dismissing all claims against the controlling stockholder.
The claim arose out of a merger which resulted in the controlling stockholder acquiring the 57% of the company it did not already own. The court granted summary judgment after finding that the (i) special committee of directors was independent, properly empowered and acted with due care and (ii) stockholder vote was fully informed and uncoerced. In granting summary judgment, the court stated that it was cognizant of prior Delaware case law decisions spanning almost two decades in which the more onerous entire fairness review was applied to transactions involving controlling stockholders. The prior decisions involved the use of either a special committee of directors or a majority-of-the-minority vote. The use of one of the foregoing procedural devices while shifting the burden of proof away from the controlling stockholder under the prior decisions did not change the standard of review. The Delaware Court of Chancery elected not to follow the prior decisions given that the controlling stockholder transaction under review was conditioned upon the use of both a special committee of directors and a majority-of-the-minority vote.
In re MFW S'holders Litig., C.A. No. 6566-CS (Del. Ch. Ct. May 29, 2013).
Delaware Court of Chancery Finds Board Likely Breached Duty of Care in Conducting Sale Process
The Delaware Court of Chancery declined to enjoin a merger despite finding that the board of directors likely failed to satisfy their "Revlon" duties in connection with a sale of the company. In sale of company transactions, the "Revlon" duties require the directors to seek to attain the highest value reasonably available for the stockholders. The court determined not to enjoin after finding that the merger transaction at issue represented the only opportunity for the stockholders to receive a premium for their shares.
The court nevertheless criticized the board's sales process as unreasonable. In effecting the merger transaction, the board pursued a single-bidder strategy for selling the company. The court criticized this strategy based on the board's lack of knowledge as to the company's value and failure to conduct a market check for the purpose of determining whether there were other potentially interested bidders. The court took particular note of the fact that two private equity firms that had previously considered investing in the company had signed standstill agreements barring them from requesting a waiver of the standstill provision without the consent of the issuer and the other company party to the merger.
Koehler v. NetSpend Holdings Inc., C.A. No. 8373-VCG (Del. Ch. Ct. May 21, 2013).
Delaware Chancery Court Finds Disclaimer Insufficient to Bar Fraud Claim Under Stock Purchase Agreement
The Delaware Court of Chancery refused to dismiss a purchaser's claim for fraudulent concealment of material information in connection with a stock purchase agreement. Under the stock purchase agreement, the purchaser acquired all of the stock of two companies. The stock purchase agreement contained a provision providing for the purchaser's disclaimer of any reliance on any representations and warranties not set forth in the agreement. The purchaser based its claim on not having been made aware that (i) one of the purchased company's key customers had expressed to the seller that it intended to decrease its purchases by 50% and (ii) the seller and such key customer had agreed to a 5% price discount effective after the closing date. The court ruled that the purchaser's disclaimer was insufficient to bar a claim based on fraud.
Transdigm Inc. v. Alcoa Global Fasteners, Inc., C.A. No. 7135 - VCP (Del. Ch. Ct. May 29, 2013).
Delaware Supreme Court Upholds Dismissal of Breach of Fiduciary Claim Against General Partner
The Delaware Supreme Court upheld the dismissal of a claim for breach of fiduciary duty filed against the general partner of a limited partnership in connection with a merger transaction. The merger provided for a per-share payment to the common unitholders and a separate payment to the general partner for its incentive distribution rights. The incentive distribution rights entitled the general partner to receive certain distributions after distributions to the common unitholders exceeded certain levels. The merger was approved by a special committee of the limited partnership's independent directors after obtaining fairness opinion from a financial advisory firm.
The claimants unsuccessfully argued that the payment on account of the incentive distribution rights was excessive. The court ruled in favor of the general partner based on its review of the limited partnership agreement (the "LPA"). The court found that under the LPA, the general partner was required to consider only whether the merger as a whole was in the best interests of the limited partnership. The LPA did not require the general partner to assess separately whether the payment to be made on account of the incentive distribution rights was reasonable.
Norton v. K-Sea Transportation Partners LP, No. 238, 2012 (Del. Sup. Ct. May 28, 2013).
Delaware Chancery Court Criticizes, But Declines to Enjoin Stock Exchange Merger
The Delaware Court of Chancery declined to preliminarily enjoin a stockholder vote on the proposed merger between NYSE Euronext ("NYSE") and IntercontinentalExchange, Inc. ("ICE"). The court nonetheless criticized a provision in the merger agreement restricting the ability of NYSE's board of directors to change its recommendation if a competing bid arose for a portion of NYSE's operations. The court stated that if a partial bid had been made, the NYSE board of directors would have been restricted from changing its recommendation in favor of the ICE merger under a provision contained in the merger agreement. The provision at issue only allowed the NYSE Board of directors to change its recommendation where an alternative proposal emerged that was (i) unsolicited, (ii) determined to be a superior and (iii) involved a sale of 100% of NYSE's assets or stock. The provision, however, could not support an injunction because no competing bid was made that the NYSE board of directors would have been precluded from considering.
In re NYSE Euronext S'holders Litig., C.A. No. 8136-CS (Del. Ch. May 10, 2013).
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