Important Decisions of 2021 Regarding Mergers and Acquisitions of Private Companies – Corporate Law/Commercial Law

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Express Scripts, Inc. c. Bracket Holdings Corp., 248 A.3d 824 (Del. Feb. 23, 2021)

Summary

The Delaware Supreme Court held that Abry’s prohibition on the sellers excluding the seller’s liability for fraud under the acquisition agreement applies only to intentional fraud; under Delaware law, fraud based on recklessness can be excluded.

context

Express Scripts involved an appeal of an $82.1 million jury award to a private equity fund subsidiary (buyer) against vendors of businesses acquired by the buyer for fraudulently inflating revenue and fund working capital of one of the acquired businesses. The fraud claim was based on representations and warranties in the financial statements under the Securities Purchase Agreement (the SPA). The issue on appeal was whether the jury in the Delaware Superior Court action had been properly instructed to consider both willful fraud and recklessness. In reversing the judgment of the Superior Court and remanding for a new trial, the Supreme Court held that the relevant provisions of the SPA only authorized recovery for intentional fraud, and that limiting recovery for fraud under the SPA in this manner was permitted under Delaware law.

ABRY Partners

The court noted the tension expressed in ABRY Partners V, LP, v. F&W Acquisition LLC, 1 between the “strong tradition of American law that contracts cannot protect a party from damages or termination resulting from the party’s fraudulent conduct” and the “strong American tradition of freedom of contract”.2 The Express Scripts court noted that the Abry court resolved the tension by holding that a contracted party cannot limit its own liability for a fraud in which it knowingly participated, but can limit its own liability for a fraud when it has simply acted “in a reckless and grossly negligent manner”. , or negligently”.

The spa

The court found that the compensation framework provided by the SPA was consistent with the approach approved in Abry. Section 9.6(D) of the SPA provided (text in bold by the tribunal):

“NOTWITHSTANDING ANY OTHER PROVISIONS HEREIN TO THE CONTRARY, EACH BUYER AND RELATIVE ACKNOWLEDGE AND AGREE THAT SINCE AND AFTER CLOSING, EXCEPT IN CASE OF FRAUD, PARENT SHALL HAVE NO DIRECT OR INDIRECT LIABILITY (CONSEQUENTIAL OR OTHERWISE) FOR ANY BREACH OF ANY REPRESENTATIONS OR WARRANTIES (OTHER THAN FUNDAMENTAL REPRESENTATIONS) MADE BY PARENT IN THIS AGREEMENT. FURTHER TO THE ABOVE, BUYER AND PARENT ACKNOWLEDGE AND AGREE THAT EXCEPT IN CASE OF DELIBERANT [sic] (I) FRAUDULENT ACT, (II) STATEMENT OR (III) OMISSION (1) THE SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO ANY BREACH BY A PARENT OF ANY REPRESENTATIONS OR WARRANTIES (OTHER THAN FUNDAMENTAL STATEMENTS) CONTAINED IN THIS AGREEMENT SHALL BE SATISFIED SOLELY FROM THE R&W INSURANCE POLICY. .”

The court held that this provided unambiguously that, except in cases of willful fraud, the buyer’s exclusive remedy for breach of the general representations and warranties was the Representation and Warranty Insurance Policy (the R&W Policy) . The court found that this interpretation was supported by the wording of the buyer’s representations and warranties relating to the R&W Policy, which contained exceptions to a statement that the R&W Policy would not create liability for sellers, and the requirement to include a waiver of subrogation rights, in connection with willful fraudulent acts, statements or omissions

The court rejected the buyer’s arguments that various references in Section 9 and elsewhere in the SPA to fraud, without referring to willful fraud, reflected a consistent drafting approach that allowed the buyer to to obtain redress for common law fraud, including fraud based on recklessness. The court noted that Section 9.6(D) expressly superseded other provisions of the SPA, and that while the first sentence of Section 9.6(D) referred to fraud generally, the second sentence, which referred to deliberate fraud, followed and refined the first sentence. The court also rejected buyer’s grammatical arguments that the word “deliberate” in Section 9.6(D) qualified the words “act”, “declaration” and “omission”, and not the word fraudulent”, and that “deliberate” fraud may include recklessness.

Carry

The ruling provides helpful confirmation of Abry’s scope, which is the seminal ruling on the admissibility of limitation of liability for fraud in M&A transactions. Express Scripts confirms that the approach taken in many transactions of limiting the exclusion of fraud from exclusive remedies under the acquisition agreement to only intentional fraud is permitted by Delaware law. Express Scripts also serves to remind parties of the importance of having a clear definition of fraud in acquisition agreements and ensuring that it is used consistently.

Manichaean Cap., LLC vs. Exela Techs., Inc.251 A.3d 694 (Del. Ch. May 25, 2021)

Summary

As a first impression, the Delaware Chancery Court has adopted the “reverse veil piercing” theory to allow plaintiffs to pierce the corporate veil to enforce an award against the judgment debtor’s subsidiaries.

context

Plaintiffs were former shareholders of SourceHOV Holding, Inc. (the Company), a company that was acquired by Defendant Exela Technologies, Inc. in a merger in which the company’s common stock was converted entitled to receive an equity interest from a subsidiary of Exela. The merger and related subsequent merger made the Company an indirect subsidiary of Exela.3 The plaintiffs exercised dissent rights and filed an assessment action in the Delaware Court of Chancery. The court assessed the fair value of the common stock at $4,591 per share, giving the plaintiffs’ shares a value of $57,684,471. The decision was confirmed on appeal by the Company.

Footnotes

1891 A.2d 1032 (Del. Ch. 14 Feb. 2006).

2 Express Scripts, 248 A.3d at 830 (citing ABRY, 891 A.2d at 1059).

3 The court ruling refers to the company becoming an indirect subsidiary of Exela, but a chart in the ruling indicates that the company may have transformed into an LLC as part of the mergers. Whether the company ends up becoming a corporation or an LLC as a result of the mergers doesn’t seem to be determinative of the decision.

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