The Mergers & Acquisitions Litigation Review: USA

Overview

M&A litigation in the United States continues to be pursued in high volumes. From 2007 to 2018, the percentage of public company transactions valued over US$100mm that were subject to shareholder litigation rose from approximately 44 to 82 per cent.2 Most of those cases were filed in Delaware Chancery Court, and although some were actually litigated, a large majority were quickly settled by the target company agreeing to make additional disclosures, often of dubious value, and to pay plaintiffs' attorneys' fees, without any payment to the class, a resolution that many plaintiffs' lawyers were eager to accept. While commentators anticipated that this type of strike suit might come to an end following the Delaware Chancery Court's landmark ruling in In re Trulia, Inc Stockholder Litigation in 2016,3 which signalled that Delaware courts would no longer approve settlements (and particularly attorneys' fees) in such cases, much of the litigation instead simply migrated to federal courts. While the number of federal filings had remained high year over year,4 the trend for 1H 2021 appears to be a substantial decline in filing volumes. According to Cornerstone Research, these filings were down 66 per cent compared to the second half of 2020, and down 83 per cent compared to the five-year average.5 In any event, these cases continue to comprise the bulk of M&A cases filed. However, they tend to be brought by plaintiffs and firms amenable to quick settlements and ultimately present few risks for the transactions they challenge. Meanwhile, and in contrast, the smaller number of cases that continue to be filed in Delaware Chancery Court (and less often in other state courts) are often brought by more motivated plaintiffs, and more often involve attempts to enjoin a transaction or to seek substantial damages on a class-wide basis after a transaction has closed.

Public company shareholder litigation is only one part of the litigation landscape affecting M&A in the United States. For example, federal and state regulators have the authority to bring litigation to enjoin transactions that would violate federal or state antitrust or securities laws, and the parties to a transaction themselves may end up litigating pre or post-closing any number of issues arising out of the transaction agreement. The covid-19 pandemic triggered a number of such lawsuits, as parties to deals that were signed in late 2019 or early 2020 but that had yet to close when the economy shut down in March 2020 engaged in disputes over their rights and obligations in light of the pandemic, with many seeking relief in the courts. While most of those cases ultimately settled, typically with the parties agreeing to modify the deal terms, two notable cases went to trial and resulted in significant decisions from the Delaware Chancery Court.

Legal and regulatory background

In the United States, M&A transactions are governed by both federal and state laws. The federal legal landscape is comprised of securities and antitrust laws under which both government regulators and agencies as well as private parties may bring claims. Merger and acquisition transactions also implicate fiduciary duties owed by directors and officers to shareholders under state corporation laws (under the internal affairs doctrine, the law of the state where the company is incorporated will govern such issues regardless of where litigation is brought). The most common jurisdiction for incorporation of US companies is the state of Delaware (consequently, Delaware has traditionally been the site for the majority of shareholder lawsuits).

The Securities and Exchange Commission (SEC) is the regulatory agency responsible for enforcing US securities laws, including in the context of M&A transactions. The SEC has promulgated rules governing, among other things, disclosure requirements, solicitation of shareholders and registration requirements. The SEC may bring suits in federal district courts for violations of any of these laws or rules, and district court decisions can be appealed to the US court of appeals in the relevant jurisdiction.6

Shareholders of public companies may also bring suit for the violation of certain federal securities laws and SEC rules provided, among other things, there is a private right of action to do so. In addition to these private claims under federal securities laws, shareholders also commonly assert claims under state corporate law in the M&A context.

Regarding antitrust law, Section 7A of the Clayton Act (also known as the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act)) requires parties to a proposed M&A transaction to notify the Federal Trade Commission (FTC) if certain thresholds are met. The FTC and Department of Justice (DoJ) are then the two agencies that have authority to review proposed M&A transactions under the HSR Act. The FTC or DoJ may challenge a proposed M&A transaction, including through litigation, if they conclude that the transaction will substantially lessen competition in the relevant market. To block a transaction, the reviewing agency must file suit to enjoin the transaction. The DoJ may seek preliminary and permanent injunctive relief in a federal district court, and the DoJ or the parties to the merger can appeal the district court decision to the US court of appeals for the relevant jurisdiction. The FTC is also authorised to seek a preliminary injunction in federal district court, but more commonly will seek a permanent injunction in a trial-like proceeding before an administrative law judge (ALJ). The ALJ's decision can be appealed to a full panel of FTC commissioners. Their decision, in turn, can be appealed to a US court of appeals where the merging party resides or carries on business. Any US court of appeals decision can be appealed to the US Supreme Court, although the Court chooses to review only a limited number of cases each year.

State attorneys general may also bring suit to enforce federal antitrust laws. For example, multiple state attorneys general recently sued to block the T-Mobile and Sprint merger even after the merger had received clearance from the DoJ and the Federal Communications Commission. Such a lawsuit following federal clearance was unprecedented due to the size and national scope of the merger;7 the relief sought was ultimately denied by the federal district court following a full trial on the merits.

Shareholder claims

i Common types of claims

Shareholders may bring claims under both federal and state law relating to M&A transactions. Shareholder claims are typically premised on the adequacy of the disclosures concerning the transaction, the process followed by the target company and its board in negotiating and approving the transaction, and the deal price.

Under federal law, shareholder litigation is typically brought under the Securities Exchange Act of 1934 (Exchange Act), although a claim under the Securities Act of 1933 would also be available in connection with a transaction involving some new issuance of securities. Under the Exchange Act, shareholders frequently bring claims in connection with M&A transactions under Section 14(a) for inadequate disclosures in the proxy statement regarding the merger provided to shareholders of the company being acquired. To succeed in bringing such a claim, a shareholder must show that the proxy statement failed to disclose information required to be disclosed by SEC regulations, or made a materially false or misleading statement in the proxy statement.8 Actions pursuant to Section 14 are generally brought before the close of the merger, and often seek injunctive relief (typically based on a claim that shareholders will be irreparably harmed if forced to decide whether or not to vote in favour of the merger in the absence of additional disclosures). Where the transaction is structured as a tender offer, shareholders may also bring a claim under Section 14(e) of the Exchange Act. As with Section 14(a) claims, tender offer claims also typically focus on the adequacy of the disclosures in the target company's Schedule 14D-9 filing with the SEC, and also will ordinarily seek injunctive relief (and additional disclosures).

Under state law, shareholders can bring claims for breaches of the fiduciary duties of care or loyalty – duties that the company's officers and directors (and, in some circumstances, controlling stockholders) owe to the company and its stockholders. The duty of care requires the fiduciaries to inform themselves of and make use of all material information reasonably available to make an informed and deliberative decision regarding the merger. The separate duty of loyalty requires the fiduciaries to act based on a belief that the action is in the best interests of the company and its shareholders, and to refrain from taking action that harms the company or its shareholders.

To succeed on a claim for breach of the duty of care, a shareholder must show that a director was grossly negligent in failing to consider all relevant and material information in making a decision.9 To succeed on a duty of loyalty claim requires a shareholder to show that the decision-making process for a transaction was improperly affected by a conflict of interest, such as in a transaction where a controlling stockholder improperly acted at the expense of the minority stockholders, or where a director acted in bad faith or with conscious disregard of her or his corporate responsibilities.10 Where the transaction requires some shareholder action, the board also has a duty of disclosure. Delaware courts have recognised this not as a separate independent duty, but as deriving from the duties of care and loyalty. A plaintiff alleging that the directors violated their disclosure duty must demonstrate that the directors omitted reasonably available and material information from the company's proxy materials. A fact is material if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote on the proposed transaction.11

There are several different standards of review under Delaware law for evaluating whether a fiduciary has breached her or his duties. The applicable standard will also often determine whether a defendant is able to succeed on an early motion to dismiss.

Business judgement rule

The Delaware General Corporation Law (DGCL) Section 144(a) provides that the business and affairs of every Delaware corporation are managed by or under the direction of the corporation's board of directors. So long as a majority of the directors have no conflicting interest in a transaction, a Delaware court reviewing a shareholder challenge to that transaction will apply the permissive business judgement rule and generally will not second-guess the board's decision-making if it is undertaken with due care and in good faith. The business judgement rule applies even if the business decision later turns out to have been unwise. When the business judgement rule applies, the court will typically dismiss stockholder claims at the pleading stage unless the stockholder plaintiff pleads specific facts rebutting the presumption that the board reasonably exercised its business judgement in good faith.

Enhanced scrutiny

In the event of a change-of-control transaction or where the company is for sale, the board of directors of a Delaware company owes a fiduciary duty to the shareholders to take reasonable efforts to sell for the highest price possible. These are Revlon duties. The purpose of this rule is to ensure that the board of directors maximises shareholder value in those specific circumstances.12 To succeed on a Revlon claim, a shareholder must prove that the

sale of the company was inevitable and that the directors failed to obtain the best price reasonably available.13 Judicial review of the board's conduct in such circumstance applies an intermediate standard of enhanced scrutiny. It shifts the burden from the plaintiff – where it lies under the business judgement rule – to the board, and requires the board to prove that it acted with proper care under the circumstances to pursue a reasonable strategy to maximise price for the shareholders, including that it was able to obtain the best price available.14 The same standard governs the actions of controlling stockholders in the event that they undertake the change-of-control transaction, provided they do not receive any non-rateable benefit.15 Nonetheless, so long as the board or controlling stockholders acted reasonably, the court will not second-guess their decision-making even when reviewing a transaction under enhanced scrutiny.

Entire fairness

A Delaware court will review a transaction where a majority of the directors are interested or that involves a conflicted controlling shareholder under the strictest entire fairness standard. This standard shifts to the defendants the burden of proving that the transaction was fair, both with respect to process and price.16

MFW exception for conflicted transactions

In a series of cases, the Delaware Supreme Court has established an exception to the standard of review applicable to conflicted transactions involving a controlling stockholder where the transaction is conditioned ab initio on the approval of a special committee of independent directors and the majority approval of disinterested, uncoerced and fully informed shareholders.17 For conflicted transactions that satisfy all those conditions, the Delaware court will treat the transaction as though it were at arm's length and apply the more deferential business judgement rule instead of entire fairness.

Appraisal

DGCL Section 262 gives shareholders the right to a judicial appraisal of the fair value of their shares in the context of certain acquisitions (e.g., where the shareholders receive cash for their shares). An appraisal action enables a shareholder to receive the fair value for its shares as of the merger date as opposed to the consideration provided in the merger. To bring an appraisal action, a shareholder must:

  1. deliver a written demand prior to the vote;
  2. not have voted in favour of the transaction;
  3. continuously hold the stock through closing; and
  4. perfect appraisal rights after closing.

In an appraisal action, following full discovery and a trial, the Delaware court will provide 'an independent judicial determination of the fair value of their shares'.18 Recent appraisal decisions finding that the fair value was lower than the deal consideration (and awarding the appraisal petitioner the lower fair value) have made exercising this right increasingly less attractive for shareholders, particularly for public company mergers, and there has been a significant decline in the volume of appraisal petitions filed.19 Moreover, in 2016, Delaware amended its appraisal statute to allow companies to prepay appraisal petitioners, thereby halting the accrual of interest. This amendment has made appraisal arbitrage less attractive to certain activist investors, who had built a business model on the practice, and has thereby further contributed to the decline in appraisal petitions being filed. However, a company that prepays is not entitled to a refund if the court determines the deal price exceeds fair value.

Procedures for bringing claims

Actions are commenced by filing a complaint that must contain 'a short and plain statement of the claim showing that the pleader is entitled to relief' in Delaware state court,20 or, in federal court, 'enough facts to state a claim to relief that is plausible on its face.'21 Defendants often challenge the sufficiency of the complaint through a motion to dismiss, and discovery is typically stayed pending resolution of the motion to dismiss. If a plaintiff's case survives a motion to dismiss, then the case proceeds to fact discovery (which includes the exchange of documents, depositions of relevant fact witnesses, and exchange of expert reports and depositions of experts), and afterwards either party may move for summary judgment. A party moving for summary judgment must demonstrate that there are no genuine disputes of material fact requiring resolution at trial and that it is therefore entitled to judgment as a matter of law. If summary judgment does not resolve the case, it then proceeds to trial for resolution of disputed factual issues. All trials in the Delaware Chancery Court are bench trials. The parties may choose to settle the case at any point, and often if a complaint survives a motion to dismiss the parties will consider settlement before proceeding into discovery because of the significant expense and time associated with the discovery process, and the potentially significant risks of trial.

To aid shareholders in determining whether to bring a lawsuit and to help them better plead facts to make out a plausible claim (to the extent such facts exist), DGCL Section 220 grants shareholders a qualified right to inspect a company's books and records, including to investigate whether there have been any breaches of fiduciary duties or a basis to challenge valuation in an appraisal action. Other states generally have their own book and record inspection statutes for companies incorporated in those states, which generally mirror the Delaware statute, or a right of inspection derived from the state's common law. A Section 220 request must first be made directly on the company and must be made for a proper purpose, including identifying a credible basis for any investigation of potential wrongdoing. Further, the scope of the request must be limited to information that is necessary and essential to accomplish the proper purpose.22 If a stockholder believes the company's response to its Section 220 request is inadequate, it may then bring a Section 220 action in the Delaware Chancery Court seeking an order requiring the production of all such documents by the company. Such matters are usually litigated on an expedited basis and culminate in a one-day trial. Recent developments in Delaware law have in effect expanded the scope of what shareholders can inspect under Section 220(c). Under more recent case law, shareholders may be able to inspect more than minutes and other formal board materials where those formal materials are insufficient to satisfy plaintiffs' proper inspection purpose. For example, if a corporation does not conduct corporate business exclusively through resolutions and board minutes (which is often the case), other informal electronic communications may become discoverable.23 In a controversial 2020 decision, the Chancery Court held that the Section 220 plaintiffs were entitled to conduct a Rule 30(b)(6) deposition of the company to explore what relevant information exists to satisfy the 220 demand (and where the information is held), and that 220 plaintiffs are generally not required to identify an 'end' for their inspection request, or to establish a basis for actionable wrongdoing.24 The Delaware Supreme Court accepted interlocutory review of this decision and affirmed, explaining that 'when a Section 220 inspection demand states a proper investigatory purpose, it need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder's suspicion of wrongdoing'.25

ii Remedies

Shareholder plaintiffs typically seek injunctive relief after a merger agreement is signed (and announced) but before it is voted on by the shareholders and closes. For claims under Section 14 of the Exchange Act, and state law fiduciary duty claims based on purported breaches of the duty of disclosure, plaintiffs will typically move to enjoin the shareholder vote on a transaction unless and until additional disclosures are made (and, if they are made, until the shareholders have adequate time to process the new information).26 In a case for breach of the duty of loyalty, or where the complaint alleges that the board of directors failed to obtain the best possible price, plaintiffs may seek an injunction to prevent not only the vote but also the transaction from closing, and even to require the board to take certain actions to satisfy its obligations to take reasonable steps to obtain the best price available.27 Once the transaction has closed, plaintiffs' only real remedy in deals involving a public target is to pursue monetary damages. Seeking to unwind such a transaction is virtually impossible. One form of monetary relief is rescissory damages, which may be available in circumstances involving breaches of loyalty, with the aim of restoring the plaintiffs to their financial position before the breach. Another more common form of remedy is quasi-appraisal, which aims to make the shareholders whole by providing them with the value of consideration they would have received had the defendants not breached their duties as alleged. As its name suggests, the quasi-appraisal remedy is similar to the statutory remedy in appraisal actions. Most post-closing damages cases, however, are litigated on a class-wide basis, and therefore seek relief on behalf of all affected shareholders.28

iii Defences

As in any litigation, defences vary based on the claim asserted. The standard of review that the court applies will also shape the defences available, at least at different stages of the case. Some common defences (in addition to arguing that the plaintiffs have failed to satisfy the elements of their claim) are summarised below.

Where a transaction (that does not involve a conflicted controlling stockholder) is approved by the fully informed, uncoerced vote of disinterested stockholders, it is governed by an irrebuttable version of the business judgement rule, meaning any stockholder challenge to such transaction will be dismissed unless the stockholders can plead and prove the transaction constituted corporate waste.29 This is a powerful defence accepted by the Delaware courts in recent years, but it puts a premium on pre-closing disclosures by the board concerning the transaction.

Under DGCL Section 102(b)(7), a corporate charter may exculpate directors from personal liability for any violations of the duty of care, and most Delaware companies have adopted such exculpation provisions. In practice, this means that covered directors can only be held personally liable for breaches of the duty of loyalty; in the presence of an exculpation provision, claims that merely allege breaches of the duty of care must be dismissed.

Finally, in appraisal actions, in which Delaware courts take into account all relevant factors in determining value, companies often argue that the court should place considerable weight on the agreed-upon deal price as evidencing the fair price of the company in the transaction.30 The value of any synergies that would be realised from the transaction, however, are not to be included in measuring the fair value of the company, which is to be measured on a stand-alone basis.31 This can create serious challenges for petitioners in certain circumstances to prove that the fair value exceeds the merger consideration.32 In addition, overall, the default to deal price minus synergies makes it difficult for petitioners to prove a higher valuation if they intend to rely on some alternative expert valuation, like a discounted cash flow.33 Petitioners also take the risk that the court will conclude that the fair value they are entitled to is actually less than the merger consideration.34

iv Advisers and third parties

It is somewhat common for shareholder plaintiffs to bring claims against advisers (particularly financial advisers) and other third parties for aiding and abetting a breach of fiduciary duty. To bring an aiding and abetting claim, plaintiff must plead and prove:

  1. the existence of a fiduciary relationship;
  2. a breach of the fiduciary's duty; and
  3. the knowing participation of the non-fiduciary in the breach.35

Such aiding and abetting claims are often based on alleged conflicts of interest by a financial adviser, especially if that conflict was not fully disclosed to the board. However, advisers and other third parties are under no duty to prevent directors from breaching their duty of care.36 The greatest risk for third parties alleged to have aided and abetted a board's breaches of its duties arises when the board itself is not liable on exculpation grounds, potentially leaving the third party alone in the case as the only defendant with potential liability.37

v Class and collective actions

In the United States, shareholder litigation can be brought as either a direct or derivative claim. Direct actions are for harm directly suffered by the shareholder, and can be brought either individually by one or more shareholders or on a class-wide basis. Derivative actions, in contrast, are for harm suffered by the corporation. They involve a stockholder suing on behalf of the corporation, for example against certain directors for losses they allegedly caused the company. Although there are many issues courts examine when determining whether a suit is direct or derivative, the overall inquiry is whether the corporation itself, or the plaintiffs individually, suffered the alleged harm and would receive the benefit of any remedy.38 Before a shareholder can bring a claim derivatively, she or he must have first made a demand of the board to pursue the litigation (in which case the shareholder will likely be stuck with the board's decision) or plead that the board was conflicted and, as such, a demand would have been futile. In the event the shareholder tries to plead demand futility, the shareholder must satisfy the heightened pleading standard of Chancery Court Rule 23.1(a).

Most M&A lawsuits brought by the shareholders (or, in the post-closing phase, former shareholders) of a selling company are brought as direct actions (often as class actions). Certain procedural requirements must be met for a class action to proceed in either state or federal court. Each state has its own requirements, but Rule 23 is generally stricter than state requirements, which tend to be modelled on the federal rule. Rule 23 requires:

  1. a proper class definition;
  2. an ascertainable class;
  3. a class sufficiently numerous;
  4. questions of law or fact common to the class;
  5. that the claims or defences of the representative parties be typical to the claims or defences of the class as a whole; and
  6. representative parties fairly and adequately represent the claims of the class; and at least one of the following:
    • separate adjudication of the class claims would create the risk of decisions inconsistent with or dispositive of other class members' claims;
    • declaratory or injunctive relief would be appropriate to address the defendant's acts; or
    • common questions predominate over individual questions, and a class action is superior to individual actions.39

vi Insurance and indemnification

Delaware law codifies the permissible boundaries of indemnification of directors and officers, providing that the cost of any successful defence must be indemnified, and that directors who are found to have acted in bad faith cannot be indemnified.40 Within these boundaries of success and bad faith, corporations may agree to indemnify directors as they wish.41 Usually, a corporation's indemnification obligations are defined in either the corporation's governing documents or by contract. One notable exception to indemnification under Delaware law is that directors cannot be indemnified for payments made to the corporation in a derivative suit, as the indemnification would be circular with the corporation essentially returning the payments it makes on the directors' behalf back to the corporation as nominal defendant.42

Insurance can fill gaps to protect corporate directors where they are not indemnified, as well as insure the company both for amounts it pays for indemnification and for the company's own costs and liability. Shareholder litigation arising from M&A transactions thus typically involves claims that fall within the scope of standard directors' and officers' (D&O) insurance, which usually covers claims brought for breaches of fiduciary duty as well as disclosure claims brought under federal law. Such insurance may also cover judgments or settlement payments for any alleged bad faith conduct or derivative liability, where Delaware law does not permit indemnification from the company.43 Such coverage is typically subject to an initial retention to be paid by the company, and in recent years (with the high volume of such litigation) the sizes of the retention have increased. Appraisal actions are generally not covered by D&O insurance.44 Similarly, while settlement of claims should be covered by insurance, provided the insured gets the authorisation and consent to the settlement by the insurer, a settlement that effectively provides an increase in the deal consideration paid to the stockholders is typically excluded under the policy. Section 220 books and records demands and related litigation typically are covered where the purpose is investigating potential wrongdoing by directors or officers.

vii Settlement

Settlement of both shareholder derivative and class action claims typically requires court approval. Generally, the shareholder plaintiff will file a motion seeking preliminary approval of the proposed settlement, which will include, among other items, the method for providing notice to other shareholders, the content of the notice and the deadline for any shareholder to object or opt out. Plaintiffs' attorneys will also seek payment of attorneys' fees through the settlement fund. At a final approval hearing, the court will determine whether the settlement is fair and reasonable, subject to any objections, and determine the amount of fees to be awarded to plaintiffs' counsel based on, among other things, the results they obtained for the class and the number of hours worked on the matter.

In the past, as noted above, shareholder claims were resolved with regularity through disclosure-only settlements, whereby the company agreed to make additional disclosures prior to a vote or tender and to pay attorneys' fees. In exchange, it generally received a release of all class member claims (including those of absent class members who did not participate in the settlement) concerning the merger. Recently, US courts have become increasingly sceptical of such disclosure-only settlements because shareholders receive little benefit from such agreements. Following the watershed In re Trulia decision in 2016, which allowed disclosure-only settlements only where such disclosures were plainly material,45 the practice largely stopped in Delaware Chancery Court, but continues with disclosure-based claims now filed in federal court. In nearly all federal cases today, however, the defendants do not receive a full class-wide release and instead settle only the individual named plaintiff's claim. This is because a class-wide release would require the court's approval of the settlements, which plaintiffs' counsel often have no interest in trying to secure (and it is doubtful a federal court would approve them as fair and reasonable, for the same reasons the Delaware Chancery Court has identified).46 Further, these federal court settlements tend to come about early in a case (often before the shareholder vote), that is, before the court selects a lead plaintiff (as is required in federal securities class actions under the Private Securities Litigation Reform Act of 1995, and which usually takes at least 90 days after the complaint is filed). It is therefore unclear whether the named plaintiff who filed the claim (but is not the lead plaintiff) would be able to obtain court approval to settle for the class at that early stage. Consequently, the court almost never gets involved in settlements of such federal actions, and the cases are voluntarily dismissed by the plaintiff. A new trend may be underway, however. With federal M&A-related filings down, some defendants also now appear to be declining to settle cases early, and some plaintiffs appear to be just walking away.

viii Other issues

Another significant recent development in M&A litigation relates to forum selection clauses in a corporation's by-laws. Corporations often choose Delaware as the forum for such disputes, and the Delaware Chancery Court generally enforces forum selection clauses to the extent they cover the fiduciary duty and other claims concerning the internal affairs of a corporation.47 Corporations have attempted to amend their by-laws to expand these forum selection clauses also to cover where federal securities claims may be brought, and in 2020 the Delaware Supreme Court held that such clauses are facially valid but may not be valid in every circumstance.48 As a result, corporate directors may be able to force shareholders to bring securities suits in federal rather than state court, but it remains to be seen how and in what context these clauses will be enforced outside of Delaware.49

Counterparty claims

The other principal area in which disputes arise in connection with M&A transactions is in litigation between the parties themselves. This section sets forth the main types of such disputes and identifies the key issues and recent significant decisions.

i Common claims and procedures

Pre-closing, where the buyer terminates or refuses to close, the seller may seek to enforce the merger or sale agreement by requesting specific performance or damages. In contrast, buyers may seek a declaratory judgment permitting them to terminate or revise the merger or sale agreement on the basis of, among other things, alleged material adverse events or breaches of covenants by the seller.

Most agreements provide a cure period during which the breaching party may attempt to remedy any alleged breach of the agreement. However, a plaintiff need not wait until the cure period expires before bringing a claim if the breach is of the type that could not be cured or if the other party has stated unequivocally that it will not remedy the alleged breach.

Material adverse effects and material adverse changes

Most merger agreements include as a condition to closing that the target company has not suffered a material adverse effect (MAE) or material adverse change (MAC)50 as of the closing date. An MAE is commonly defined as an effect, event, development or change that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the business, operations, results of operations and financial condition of the target company and its subsidiaries, taken as a whole. The purpose of such clauses is to allocate between the buyer and seller the risks related to the target business during the period between signing and closing. Thus, parties may choose to exclude certain specific events or developments from the definition of an MAE, thereby allocating the risk to the buyer. Exogenous business risks typically borne by the buyer include macro-changes affecting the target company that result from economic, financial or political conditions more generally, as well as changes affecting the target company's industry as a whole.

If an MAE has occurred before closing, the buyer typically has no obligation to close and may be able to terminate the agreement.

Whether an MAE clause is triggered depends on the language of the merger or sale agreement and the specific facts of the transaction. To successfully invoke an MAE, a buyer must typically show that the event had a durationally and economically significant impact on the target. A significant impact is not precisely defined under Delaware law. However, in general, courts have considered an event significant if it resulted in a dramatic loss of value that persists, or is expected to persist, for more than a year.51 Events that generally affect the target's industry are insufficient unless the target company was disproportionally impacted by the event compared to other companies in its industry.

In a litigation arising from an alleged MAE, the burden to prove that an MAE has occurred will typically be on the buyer, who seeks to avoid closing or has terminated. This is no easy burden to satisfy. At the time of writing, there has been only one case in Delaware in which the court concluded that an MAE had occurred, and that case involved extreme facts including 'overwhelming evidence of widespread regulatory violations and pervasive compliance problems' as well as the fact that the target's financial performance 'dropped off a cliff'.52

Interim operating covenants

Most merger or sale agreements include interim operating covenants that define the seller's responsibilities between signing and closing. Similar to MAE provisions, interim operating covenants are another tool for protecting the deal value during the period between signing and closing. Sellers typically covenant and agree to continue operating the business in the ordinary course and in compliance with applicable law. Such clauses may also expressly include specific limitations on what the seller may do, such as purchasing and selling assets, incurring new debt and capital expenditures, and restricting employee compensation. Depending on the agreement, the seller may be permitted to deviate from ordinary course practices only with the consent of the seller, which (typically) may not be unreasonably withheld. Compliance with covenants is usually a condition of closing, unless this is waived by the other party. Such condition is usually subject to a materiality qualifier.

If a seller has breached an interim operating covenant that is material and that has not or cannot be cured, the buyer generally has the right to terminate the agreement and refuse to close the transaction.53 To state a claim for breach of an interim operating covenant, however, it is insufficient to allege merely that the seller made business decisions that were different than what the buyer would have preferred. Rather, the buyer must show that the target's actions were inconsistent with ordinary course practices in the industry.54

Purchase price adjustment disputes

Post-closing purchase price adjustment provisions are common in M&A transactions. There are two main types of post-closing purchase price adjustments: closing balance sheet adjustments, which account for any changes in the value of the business being sold between the signing of the purchase agreement and closing; and earn-out adjustments, which require the buyer to compensate the seller if the acquired business meets certain specified targets.

Closing balance sheet adjustment provisions typically compare a final closing balance sheet amount to a reference balance sheet amount and correct the purchase price accordingly. If the parties cannot agree on a final closing balance sheet, an independent expert is often retained to resolve the matter, based on the terms of the purchase agreement. The final closing balance sheet is then used to determine whether a post-closing purchase price adjustment is necessary.55

The most common post-closing purchase price adjustment disputes concern a party's choice of specific accounting principles and the application of those principles,56 and disagreements about whether claims arise under the purchase agreement's indemnification provision or are covered by the post-closing purchase price adjustment provision.57 Such disputes are often resolved by confidential arbitration.

Other obligations and closing conditions

Other closing conditions may include making certain information available to the seller between signing and closing, or permitting the buyer to inspect physical assets and real estate. If such information is not made available or if the buyer is not granted the access necessary to complete inspection, the buyer may be able to terminate the agreement.58

Disputes may also arise over compliance with a hell-or-high-water provision. Such a provision shifts the risk of a performance-preventing event to one of the parties to the contract, usually the buyer. A typical hell-or-high-water provision in a purchase agreement will assign the buyer an absolute and unconditional obligation to undertake any and all actions necessary to gain antitrust clearance. Courts have routinely found these types of provisions to be enforceable in contracts negotiated by sophisticated parties,59 even when a party claims impossibility of performance or frustration of purpose.

Finally, a merger or sale agreement may include covenants regarding the mechanics of the closing and preparations for the integration of the target into the acquirer's business. These provisions too can be breached, and lead to disputes and litigation between the parties.

General disputes about breaches of representations and warranties

In a typical M&A purchase agreement, each party makes certain representations and warranties concerning key issues affecting the deal. Typically, a seller makes representations and warranties to the buyer as to the business being acquired, its operations and its financial position. These representations and warranties allocate risk between the parties and provide a basis for post-closing indemnification obligations. To succeed on a claim for indemnity, the claimant will have to prove both that a representation or warranty was breached and that the breach caused damage.60 Typically, the claimant has a right to indemnity only if the representations and warranties were untrue when they were made.61 Further, some agreements may provide that the representations and warranties do not survive the closing, which precludes any claim for the breach post-closing.62 Additionally, while public policy prohibits a party from contractually insulating itself from liability for deliberate inaccuracies in representations and warranties within the contract, provisions precluding fraud claims based on extra-contractual statements may be enforceable.63

ii Remedies

When buyers decline to close a transaction, sellers may seek specific performance. Specific performance is an equitable remedy whereby a court can order a recalcitrant party to perform the terms of a valid and binding agreement. To succeed in getting an order for specific performance, a party must demonstrate that there is both a valid agreement and that it is capable of being performed by the parties. Thus, one issue that may arise in the context of leveraged transactions is the closing condition that external financing remains available. Debt commitments by lenders have expiration dates, however, and if a court is unable to decide the matter before the commitment expires, the parties may not be able to perform under the contract, and equitable relief may no longer be available.64

Alternatively, either buyers or sellers may seek a declaration from the court that a sale or merger agreement either has or has not been validly terminated. Such declaratory relief may then provide a basis for a party to walk away from the transaction or to force the other party to perform and close. In the latter case, declaratory relief may be sought in conjunction with specific performance.

Finally, the parties may also seek damages, particularly if the dispute follows termination and is for breach of the agreement. One of the parties may also be entitled to a termination fee or liquidated damages under the agreement.65 One issue that parties need to consider with respect to seeking damages, however, is that injunctive relief like specific performance is only available where an adequate remedy at law is not, meaning that the plaintiff cannot be made whole with an award of money damages. The risk of seeking damages in an action for injunctive relief (even in the alternative) is that a court will conclude that the pleadings show that damages are adequate, and deny the request for injunctive relief on that basis.

iii Defences

Contractual risk allocation

In a dispute between the parties, a defendant will look to argue that it has not breached the agreement and that the terms of the contract either expressly or implicitly allocated a certain risk to the other party. As discussed above, the specific terms and conditions circumscribing an MAE is one such example of the parties' allocation of risk.66 Another such provision is a force majeure clause, which is also commonly included in merger agreements, and may provide defendants with a potential defence. Such a clause relieves a party from its contractual duties when its performance has been prevented by a force beyond its control and despite its best efforts. Force majeure clauses, however, are construed narrowly and are often limited to expressly identified events. Still, if a party successfully invokes a force majeure clause, the party's liability will be excused in accordance with the terms of the agreement.

Unclean hands (or the prevention doctrine)

A party generally cannot rely on failures of closing conditions or covenants to terminate an agreement where that party itself was responsible for causing the failure of that condition. In the M&A context, a defendant may argue that the other party should not be entitled to a remedy because it was responsible for causing the breach of the sale agreement in the first instance, or has otherwise breached the agreement itself.67 This doctrine, however, is narrow. Courts only apply it where the other party's inequitable act directly relates to the cause of action at issue: bad conduct that is unrelated to the matter in controversy will not be considered.

Impossibility

The doctrine of impossibility may excuse performance under a contract where performance is rendered objectively impossible either by operation of law or because the subject matter of the contract is destroyed.68 The impossibility must be the result of an unanticipated event, and the party seeking to avoid performance must have made all reasonable efforts to overcome obstacles to performance. Though the specific terms of the contract and circumstances preventing performance will be key, events such as natural disasters, acts of God, war and government regulations may relieve a party of its duty to perform.69 Circumstances that make performance merely unprofitable or inconvenient, however, are insufficient.

Cross-border issues

The percentage of M&A that are in some respect cross-border continues to rise. Litigation arising out of these cross-border transactions raises its own set of procedural issues. Two key threshold issues with respect to foreign defendants are service of process and personal jurisdiction. For disputes arising between the parties for breach of the merger agreement, the merger agreement may include provisions obligating foreign parties to accept service of any complaint to enforce the agreement, and to submit to the jurisdiction of a US court. This is particularly true for agreements governed by the law of Delaware or another US state. Where the foreign defendant has not consented either to service or jurisdiction, the plaintiff will need to satisfy the applicable international service rules and bring the action in a court with jurisdiction over the foreign defendant. That may make expedited proceedings extremely difficult to pursue, and the parties will need to consider this as part of their respective litigation strategies.

The same issues arise in shareholder actions, but the recourse available is often different. First, directors of a Delaware company, regardless of where those individuals are physically located, by statute may be served through the registered Delaware agent for the company. Those directors are also deemed to have consented to the jurisdiction of the Delaware courts in cases concerning acts taken as directors.70 Foreign buyers, too, may end up subjecting themselves to the jurisdiction of the Delaware courts if, for example, the transaction utilises a Delaware incorporated merger entity to facilitate the merger or acquisition.71

Other issues that may arise in litigations involving cross-border transactions include discovery challenges where the documents are located abroad and in a foreign language, navigating applicable data privacy issues, determining where depositions may legally take place – which is particularly challenging in the context of expedited proceedings – as well as considering the enforceability of a judgment abroad and the process and timing for litigating its enforcement, if that becomes necessary.

Year in review

The covid-19 pandemic was a catalyst for several recent lawsuits in the context of M&A. In 2020, buyers attempted to terminate merger or purchase agreements for deals signed before the pandemic but not yet closed by March 2020, when widespread lockdowns occurred and the economy entered a recession. While the pandemic had a severely adverse impact across the economy, several industries were particularly hard hit, including retail, travel and entertainment. Many buyers refused to close, alleging that the pandemic constitutes an MAE or that the seller's response to it constituted breaches of interim operating covenants. Sellers responded by bringing actions, primarily in the Delaware Chancery Court, to enforce the sales. Most of these cases ultimately settled, as the parties renegotiated or walked away from deals struck prior to the pandemic, but in a few cases the Delaware Chancery Court made fact-specific determinations as to whether the transactions at issue should be closed.

Some buyers have argued that the covid-19 pandemic or its effects constitute an MAE, permitting the buyer to terminate the agreement and refuse to close. In Snow Phipps v. KCAKE Acquisition, the owner of DecoPac holdings, the world's largest supplier of cake decorations, agreed to sell the company to a private equity buyer.72 In April 2020, the buyer refused to close, arguing that the covid-19 pandemic had resulted in an MAE and that the target had been disproportionally affected. The seller sued in the Delaware Chancery Court, seeking specific performance compelling the buyer to close and requesting an expedited proceeding to allow the seller to obtain the specific performance remedy before the termination of a previously arranged acquisition financing. The Court held that no MAE had occurred, because the seller's sales rebounded quickly, an exception for events 'related to government orders' applied and the seller complied with the ordinary course covenant despite taking, among other things, cost-cutting measures in light of the pandemic.73

In Forescout v. Ferrari Holdings,74 the buyer alleged that the pandemic constituted an MAE disproportionately affecting the target, and that the buyer would no longer be able to obtain the necessary debt financing. The seller offered to finance the debt portion of the deal itself, but the buyer refused. The seller subsequently sued for specific performance. A week before trial, the parties agreed to complete the transaction at a reduced purchase price.

Some buyers have also alleged that sellers have breached interim operating covenants by taking certain actions in response to the pandemic, raising the question of whether ordinary course covenants require a target to continue operating in the same way that it did in the past, or take potentially extraordinary steps to reasonably manage the business in extraordinary times, particularly where others in the industry are taking those kinds of steps. In April 2020, in AB Stable v. MAPS Hotels, a seller sought to enforce the agreed sale of a portfolio of hotels in the Delaware Chancery Court.75 The buyer refused to close, alleging (among other things) that the seller had failed to continue operating the hotels in the ordinary course because it 'allowed material business relationships to deteriorate' during government-mandated quarantine orders in connection with the covid-19 pandemic. While the court ruled that the pandemic fell within the 'natural disasters and calamities' exception to the MAE, the buyer was not obligated to close because the seller failed to comply with the ordinary course provision.76 The Court rejected the seller's argument that it engaged in 'ordinary course of business based on what is ordinary during a pandemic', in part because the parties' contract required that the ordinary course be evaluated only with respect to the seller's own 'past practice' and not how other companies responded to the pandemic under similar circumstances.77 The Court noted, however, that in the event of government-mandated shutdowns, a party's obligation to operate in the ordinary course 'would be discharged', because '[n]o one is required to comply with an illegal contract, and no one receives damages based on a breach of an unenforceable obligation'.78

SP VS Buyer v. L Brands raised the same issue. The buyer of a group of retail brands alleged that the seller had failed to continue operating in the ordinary course, including because it had 'voluntarily furloughed' a substantial percentage of its employees, failed to sell last season's merchandise due to the pandemic and stopped paying rent on its US stores – actions that were not consistent with the company's past practice.79 The seller countered that these actions were consistent with steps almost every other company in its industry was taking. The case settled shortly after it was filed, with the parties agreeing to walk away from the deal without either side paying any break-up fee.

Finally, several other recent cases have involved disputes over other closing conditions. In Khan v. Cinemex, the seller brought suit seeking to compel the sale of a chain of film theatres where the buyer argued it could not close because it could not exercise its right to inspect the theatres due to travel restrictions imposed by local governments in response to the pandemic.80 Shortly after the lawsuit was filed, the buyer filed for bankruptcy and the case remains stayed. In another case, Bed Bath & Beyond v. 1-800-Flowers.com, the seller sued the buyer for specific performance when the buyer postponed closing due to uncertainty surrounding the pandemic.81 The buyer argued, among other things, that it was unsure it could fulfil the remaining closing conditions as a result of the pandemic, which included an in-person closing. The companies settled the dispute, agreeing that the deal would go ahead at a reduced purchase price.

Footnotes

1 Roger Cooper and Mark E McDonald are partners and Pascale Bibi is an associate at Cleary Gottlieb Steen & Hamilton LLP.

2 See Cornerstone Research, Shareholder Litigation Involving Acquisitions of Public Companies: Review of 2018 M&A Litigation, at 1 (2018), available at https://www.cornerstone.com/Publications/Reports/Shareholder- Litigation-Involving-Acquisitions-of-Public-Companies-Review-of-2018-M-and-A-Litigation-pdf.

3 In re Trulia, Inc S'holder Litig, 129 A.3d 884, 898-99 (Del. Ch. 2016).

4 In 2015 – the year before In re Trulia – just 34 M&A-related cases were filed in federal courts. In 2016, that number more than doubled to 85; in 2017, it more than doubled again to 198; and in 2018 and 2019, it remained relatively high at 182 and 160, respectively. See Cornerstone Research, Securities Class Action Filings: 2019 Year in Review at 5 (2020), available at https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2019-Year-in-Review.

5 See Cornerstone Research, Securities Class Actions Filings 2021 Midyear Assessment (2021), at 4, available at https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2021-Midyear-Assessment.

6 See, e.g., in connection with Walgreens' merger with Alliance Boots GmbH in 2012, SEC release, SEC Charges Walgreens and Two Former Executives With Misleading Investors About Forecasted Earnings Goal (Sept. 28, 2018), available at https://www.sec.gov/news/press-release/2018-220.

7 Drew FitzGerald and Brent Kendall, 'T-Mobile, Sprint Head to Court to Defend Merger', Wall St J (Dec. 9, 2019), https://www.wsj.com/articles/t-mobile-sprint-head-to-court-to-defend-merger-11575820835.

8 Resnik v. Swartz, 303 F.3d 147, 151 (2d Cir. 2002).

9 In re Walt Disney Co Derivative Litig, 906 A.2d 27, 64-65 (Del. 2006).

10 Andarko Petroleum Corp v. Panhandle E Corp, 545 A.2d 1171, 1174 (Del. 1988).

11 Loudon v. Archer-Daniels-Midland Co, 700 A.2d 135, 143 (Del. 1997).

12 Revlon, Inc v. MacAndrews & Forbes Holdings, Inc, 506 A.2d 173, 182 (Del. 1986).

13 Paramount Commc'ns Inc v. QVC Network Inc, 637 A.2d 34, 48 (Del. 1994).

14 Chen v. Howard-Anderson, 87 A.3d 648, 672-73 (Del. Ch. 2014).

15 Firefighters' Pensions Sys. Of City of Kansas v. Presidio, Inc, 251 A.3d 212, 266 (Del. Ch. 2021).

16 Weinberger v. UOP, Inc, 457 A.2d 701, 710-11 (Del. 1983).

17 Kahn v. M&F Worldwide Corp, 88 A.3d 635, 643 (Del. 2014); Flood v. Synutra Int'l, Inc, 195 A.3d 754, 756 (Del. 2018) (the Delaware Supreme Court explained that ab initio means before any 'economic horse trading' took place.); Olenik v. Lodzinski, 208 A.3d 704, 717 (Del. 2019) (joint valuation exercise constituted substantive economic negotiation as opposed to preliminary discussions that can take place outside of MFW conditions); In re Dell Techs Inc Class v. Stockholders Litig, No. CV 2018-0816-JTL, 2020 WL 3096748, at *15 (Del. Ch. June 11, 2020) (at the pleading stage, plaintiffs established that the transaction did not meet MFW conditions where it excluded forced conversion from MFW conditions, and the company bypassed the special committee in certain negotiations); Berteau v. Glazek, No. CV 2020-0873, 2021 WL 2711678, at *14-15 (Del. Ch. June 30, 2021) (emphasising that 'MFW was designed as a narrow safe harbor' and noting that providing 'business judgment review to a controlling stockholder transaction merely because it can be structured to avoid a statutory stockholder vote' would 'undermine the entire rationale for the doctrine').

18 Dell, Inc v. Magnetar Glob Event Driven Master Fund Ltd, 177 A.3d 1, 19 (Del. 2017). The court may consider 'all relevant factors' to determine fair value. Fir Tree Value Master Fund, LP v. Jarden Corp, 236 A.3d 313, 325, 328 (Del. 2020) (rejecting the argument that Dell, among other cases, 'require[d] that the court give heavy weight to the deal price').

19 See Cornerstone Research, Appraisal Litigation in Delaware: Trends in Petitions and Opinions, at 1 (2019), available at https://www.cornerstone.com/publications/reports/appraisal-litigation-delaware-2006-2018.

20 Del. Ch. Ct. R. 8(a).

21 Bell Atl Corp v. Twombly, 550 U.S. 544, 569 (2007).

22 Saito v. McKesson HBOC, Inc, 806 A.2d 113, 114-15 (Del. 2002).

23 KT4 Partners LLC v. Palantir Techs Inc, No. 281, 2018, 2019 WL 347934, at *2 (Del. Jan. 29, 2019).

24 Lebanon Cty Employees' Ret Fund v. Amerisourcebergen Corp, No. CV 2019-0527-JTL, 2020 WL 132752, at *14-19, 26-27 (Del. Ch. Jan. 13, 2020), aff'd, 243 A.3d 417 (Del. 2020).

25 AmerisourceBergen Corp v. Lebanon Cty Employees' Ret Fund, 243 A.3d 417, 440 (Del. 2020). However, see Gross v. Biogen, Inc, No. CV-2020-0096, 2021 WL 1399282, at *1 (Del. Ch. Apr. 14, 2021) (granting the plaintiff stockholder access to books and records, but limiting inspection in key respects).

26 In re Lear Corp S'holder Litig, 926 A.2d 94, 114-15 (Del. Ch. 2007); Assad v. DigitalGlobe, Inc, No. 17-CV-01097-PAB-NYW, 2017 WL 3129700, at *3 (D. Colo. July 21, 2017).

27 In re Del Monte Foods Co S'holders Litig, 25 A.3d 813, 818-19 (Del. Ch. 2011) (shareholders alleged that the board failed to reasonably pursue the best transaction available, and the court temporarily enjoined the transaction from proceeding and stayed certain non-solicitation clauses to allow for additional bids to be received).

28 In re Orchard Enters, Inc S'holder Litig, 88 A.3d 1, 50 (Del. Ch. 2014).

29 Corwin v. KKR Fin Holdings, 125 A.3d 304, 305-06 (Del. 2015).

30 Fir Tree Value Master Fund, 236 A.3d at 325.

31 Dell, 177 A.3d at 21 ('[T]he court should exclude “any synergies or other value expected from the merger giving rise to the appraisal proceeding itself”' (quoting Global GT LP v. Golden Telecom Inc, 993 A.2d 497, 507 (Del. Ch. 2010), aff'd, 11 A.3d 214 (Del. 2010))).

32 ACP Master, Ltd v. Sprint Corp, C.A. No. 8508-VCL, 2017 WL 3421142, at *30 (Del. Ch. July 21, 2017), aff'd, 184 A.3d 1291 (Del. 2018).

33 Dell, 177 A.3d at 6 (holding that the lower court failed to properly consider the deal price, and overly relied on a discounted cash flow analysis in calculating the appraisal value).

34 Fir Tree Value Master Fund, 236 A.3d at 313 (the fair value of the company was the unaffected market price, which was less than the deal price agreed to).

35 In re Santa Fe Pac Corp S'holder Litig, 669 A.2d 59, 72 (Del. 1995).

36 RBC Cap Mkts, LLC v. Jervis, 129 A.3d 816, 865-66 (Del. 2015) (noting that 'the requirement that the aider and abettor act with scienter makes an aiding and abetting claim among the most difficult to prove').

37 Id. at 873-74; Presidio, 251 A.3d at 286 (noting that the 'Delaware Supreme Court has declined to extend exculpation to aiders and abettors, even when the aider and abettor facilitated otherwise exculpated breaches of duty by directors').

38 Tooley v. Donaldson, Lufkin & Jenrette, Inc, 845 A.2d 1031, 1033, 1035 (Del. 2004).

39 Fed. R. Civ. P. 23.

40 8 Del. C. § 145(c).

41 Hermelin v. K-V Pharm Co, 54 A.3d 1093, 1094 (Del. Ch. 2012).

42 Arnold v. Soc'y for Sav Bancorp, 678 A.2d 533, 540 n.18 (Del. 1996) (citation omitted).

43 8 Del. C. § 145(g).

44 See In re Solera Insurance Coverage Appeals, C.A. No. N18C-08-315 (Del. 2020).

45 In re Trulia, 129 A.3d at 898-99.

46 House v. Akorn, Inc, 385 F. Supp. 3d 616, 622-23 (N.D. Ill. 2019).

47 Boilermakers Local 154 Ret Fund v. Chevron Corp, 73 A.3d 934 (Del. Ch. 2013).

48 Salzberg v. Sciabacucchi, 227 A.3d 102, 137-38 (Del. 2020).

49 See, e.g., Shen v. Casa Sys, Inc, No. SUCV2019-3204-BLS2, 2020 WL 8839637, at *4 (Mass. Super. Jan. 11, 2020) (declining to decide whether Massachusetts or Delaware law applies to a federal forum provision in the context of a shareholders' suit); Seafarers Pension Plan v. Bradway, No. 19 C 8095, 2020 WL 3246326, at *1 (N.D. Ill. June 8, 2020) (declining to apply Salzberg because it 'involved the 1933 Act which, unlike the 1934 Act, grants jurisdiction to both state and federal courts' and noting that 'a plaintiff may maintain a suit pursuant to the 1933 Act in both a federal and a state court, but only in Delaware' (internal citations omitted)).

50 For the purposes of this chapter, we will use MAE to refer to either an MAE or MAC.

51 See Akorn, Inc v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL , 2018 WL 4719347 (Del. Ch. Oct. 1, 2018) (finding that an MAE occurred where significant regulatory shortcomings came to light, 21 per cent of shareholder equity value was lost, earnings fell off a cliff and, as of trial, the situation showed no signs of improving); In re IBP, Inc S'holders Litig, 789 A.2d 14 (Del. Ch. 2001) (finding that no MAE occurred where there was a 'hiccup' in profitability and the buyer was aware of the cyclical nature of the target company's business); Channel Medsystems, Inc v. Boston Scientific Corp, No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019) (finding that no MAE occurred where the buyer discovered Food and Drug Administration compliance issues between signing and closing, because the seller was successfully implementing a remediation plan without significant ongoing costs or other effects on the target).

52 Akorn, 2018 WL 4719347, at *55, 66.

53 See id. (finding that the ordinary course covenant requires a seller to use sufficient effort to remedy emerging issues that a reasonable company in the same industry would do under the circumstances).

54 See, e.g., Cooper Tire & Rubber Co v. Apollo (Mauritius) Holdings Pvt Ltd, No. 8980-VCG, WL 2013 5787958 (Del. Ch. Oct. 25, 2013) (finding that the buyer was entitled not to close where the minority owner of the target caused the target's union workers to go on strike).

55 See HDS Inv Holding, Inc v. Home Depot, Inc, 2008 WL 4606262, at *2 (Del. Ch. Oct. 17, 2008) (describing the process for determining the closing adjustment).

56 Given that the generally accepted accounting principles (GAAP) are a set of principles rather than strict rules, the buyer's and seller's methodologies may be materially different. Courts therefore look to the language of the purchase agreement to resolve such disputes. See, e.g., Chicago Bridge & Iron Co NV v. Westinghouse Elec Co LLC, 166 A.3d 912 (Del. 2017) (finding that consistency with past practice was all that the language of the agreement required and prohibiting the buyer from asserting that the financial statements were not in compliance with the GAAP); Alliant Techsystems, Inc v. MidOcean Bushnell Holdings, LP, C.A. No. 9813–CB, 2015 WL 1897659, at *8 (Del. Ch. Apr. 24, 2015) (allowing claims of inconsistency with the GAAP because the agreement contained a net working capital definition that discussed consistency as well as compliance with the GAAP).

57 When financial statements underlying a purchase price adjustment are challenged, and the purchase agreement contains representations about those financial statements, courts have found that the claim is for a breach of representation under the indemnification provision, rather than under the purchase price adjustment provision. See, e.g., Chicago Bridge, 166 A.3d 912 (Del. 2017) (preventing the buyer from recovering for a purchase price adjustment based on a net working capital calculation that did not comply with the GAAP).

58 Cf Khan v. Cinemex Holdings USA, Inc, No. 4:20-CV-1178, 2020 WL 2047645 (S.D. Tex. Apr. 27, 2020).

59 See, e.g., Akorn, 2018 WL 4719347 (finding that the buyer did not materially breach the agreement's hell-or-high water provision and therefore did not forfeit its termination right, which it properly exercised in light of the seller's conduct).

60 See, e.g., id. (finding that the seller's breach of its regulatory compliance representations gave rise to an MAE).

61 See, e.g., Winshall v. Viacom Int'l, Inc, C.A. No. 39, 2013 (Del. Oct 7, 2013) (finding that the buyer was not entitled to indemnity because the seller's IP representations and warranties only covered infringement existing at the time of closing).

62 See GRT, Inc v. Marathon GTF Tech, Ltd, No. 5571–CS, 2011 WL 2682898, at *13 (Del. Ch. 2011) (explaining 'that there are at least four distinct possible ways to draft a contract addressing the life span of the contract's representations and warranties, with each possibility having the potential to affect the extent and nature of the representing and warranting party's post-closing liability for alleged misrepresentations').

63 See Abry Partners V, LP v. F & W Acquisition, LLC, 891 A.2d 1032 (Del. Ch. 2006).

64 See Snow Phipps v. KCAKE Acquisition, C.A. No. 2020-0282, 2021 WL 1714202 (Del. Ch. Apr. 20, 2020).

65 In some cases, neither party recovers. See In re Anthem-Cigna Merger Litig, No. CV 2017-0114-JTL, 2020 WL 5106556, at *6 (Del. Ch. Aug. 31, 2020), aff'd sub nom. Cigna Corp v. Anthem, Inc, 251 A.3d 1015 (Del. 2021) ('This outcome leaves the parties where they stand. Neither side can recover from the other. Each must deal independently with the consequences of their costly and ill-fated attempt to merge.').

66 See, e.g., Snow Phipps, 2021 WL 1714202, at *7 (where a 'draft purchase agreement contained an MAE provision that made no reference to pandemics or epidemics but included other broad carveouts for effects related to “general economic conditions,” “terrorism or similar calamities,” and “government orders”').

67 See Keystone Driller Co v. Gen Excavator Co, 290 U.S. 240, 244-45 (1933). More recently, the doctrine was invoked in Realogy Holdings v. Sirva Worldwide where the court held that the plaintiff was not entitled to specific performance because it had caused the termination of the financing by violating the terms of the financing agreement. C.A. No. 2020-0311, 2020 WL 4559519 (Del. Ch. Aug. 7, 2020); see Realogy Holdings v. SIRVA Worldwide, No. 2020-0311, 2020 WL 4057553 (Del. Ch. July 17, 2020); cf complaint, Sycamore Partners III LP v. L Brands Inc, No. 2020-0306 (Del. Ch. April 24, 2020) (alleging that the buyer caused equity financing to fail when it asserted claims against guarantors).

68 See Restatement (Second) of Contracts § 261 (1981).

69 See, e.g., Khan, 2020 WL 2047645, complaint (buyer alleging it could not close because it could not exercise its right to inspect the theatres due to government travel restrictions). The court has not ruled on this defence. The case was stayed when the buyer filed for bankruptcy.

70 See 10 Del. Code §3114; see also, Eric A Chiappinelli, Jurisdiction Over Directors and Officers in Delaware, Harvard Law School Forum on Corporate Governance (Dec. 13, 2016).

71 See 10 Del. Code §3104.

72 Snow Phipps, 2021 WL 1714202, at *1.

73 id.

74 Forescout Technologies Inc, v. Ferrari Grp Holdings LP, C.A. No. 2020-0385 (Del. Ch. May 19, 2020).

75 AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, No. CV 2020-0310-ITL, 2020 WL 7024929, at *1 (Del. Ch. Nov. 30, 2020).

76 id.

77 id. at *71.

78 id. at *80.

79 SP VS Buyer v. L Brands, C.A. No. 2020-0297 (Del. Ch. Apr. 22, 2020).

80 Khan, 2020 WL 2047645.

81 Bed Bath & Beyond v. 1-800-Flowers.com, No. 2020-0245 (Del. Ch. Aug. 4, 2020).

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