Author: stark

Chancery Court Confirms Delaware’s Merger Statutes Inapplicable to Options

By Lisa Stark and Eric Jay

In Kurt Fox v. CDX Holdings, Inc. (f/k/a Caris Life Sciences, Inc.), C.A. No. 8031-VCL (Del. Ch. July 28, 2015), the Delaware Court of Chancery confirmed that Delaware’s merger statutes do not effect a statutory conversion of options at the effective time of a merger. Rather, the treatment of stock options in a merger is governed by the underlying stock option plan, which must be amended in connection with a merger if the treatment of options in the merger differs from the treatment contemplated by the plan. The Court also confirmed that a standard qualification in stock option plans, requiring a corporation’s board of directors to determine the fair market value of the option for purposes of cashing out the options, could not be satisfied by informal board action or a delegation to management or a third party.

This class action arose from a 2011 spin-off/merger transaction pursuant to which Miraca Holdings, Inc. (“Miraca”) acquired CDX Holdings, Inc. (formerly known as Caris Life Sciences, Inc.) (“Caris”) for $725 million (the “Merger”). Immediately prior to the Merger, Caris spun off two of its three subsidiaries to its stockholders (the “Spin-Off”). In the Merger, each share of Caris stock was converted into the right to receive $4.46 in cash. Each option was terminated with the right to receive the difference between $5.07 per share and the exercise price of the option, minus 8% of the total option proceeds, which were held back to fund an escrow account from which Miraca could satisfy indemnification claims brought post-closing.

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Chancery Court Affirms Former Executive’s Right to Advancement in Connection with Federal Indictment

By Lisa Stark and Lauren Garraux

In a post-trial memorandum opinion, Chancellor Andre Bouchard determined that Donald L. Blankenship, the former CEO and Chairman of Massey Energy Company (“Massey”), now known as Alpha Appalachia Holdings, Inc. (“Alpha”), was entitled to advancement of unpaid legal expenses incurred in connection with his indictment following an April 2010 mine explosion in West Virginia. According to Chancellor Bouchard, Blankenship’s right to advancement stemmed both from Massey’s October 2010 Amended and Restated Certificate of Incorporation (the “Charter”) and an Agreement and Plan of Merger between Massey and Alpha, pursuant to which Alpha acquired Massey.

Blankenship served as Massey’s CEO and Chairman until his retirement in December 2010. During his tenure at Massey, in April 2010, an explosion occurred at a West Virginia coal mine operated by a Massey subsidiary. The explosion killed 29 miners and led to both civil proceedings and a federal criminal investigation into the incident launched by the United States Attorney’s Office for the Southern District of West Virginia. For several years after the explosion, Massey and Alpha, which acquired Massey in January 2011, honored Blankenship’s right to advancement of his legal expenses and paid such expenses incurred in connection with the civil proceedings and federal criminal investigation. In November 2014, Blankenship was indicted on charges arising from the explosion. Following the indictment, Alpha stopped paying Blankenship’s legal fees.

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Chancery Court Resolves Dispute over Competing Exclusive Remedy Clauses in a SPA

By Lisa Stark and Andrew Lloyd

In Alliant Techsystems, Inc. v. MidOcean Bushnell Holdings, L.P., C.A. No.9813-CB (Del. Ch. Apr. 24, 2015, rev. Apr. 27, 2015), the Delaware Court of Chancery held that an exclusive remedy clause in a stock purchase agreement did not require the parties to submit their dispute over the accounting methodology used to calculate the net working capital of the seller at closing to a court for resolution under the indemnification provisions in the SPA. Rather, the Court held that an accounting firm must resolve the parties’ dispute under a separate exclusive remedy provision. The Court’s decision meant that the buyer had recourse to a larger pool of funds from which it could potentially satisfy its purchase price adjustment claim following closing.

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Delaware Supreme Court Reverse Chancery Court Decision on Revlon Obligations

By Lisa Stark and Lauren Garraux

In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, C.A. No. 655/657, 2014 (Del. Dec. 19, 2014) (Strine, C.J.), the Delaware Supreme Court reversed the Delaware Court of Chancery’s decision to (1) enjoin the stockholder vote on a merger between C&J Energy Services, Inc. (“C&J”) and a division (Nabors CPS) of Nabors Industries Ltd. (“Nabors”) for 30 days, and (2) require C&J to shop the company during the injunction period. The Chancery Court determined that the C&J board’s decision to forego actively shopping the company in favor of a passive, post-signing market check constituted a plausible breach of its Revlon obligations.  On appeal, the Delaware Supreme Court found that the Chancery Court erred by: (1) applying an improper standard for a preliminary injunction, (2) holding that a company must affirmatively shop itself under Revlon absent possessing “impeccable knowledge” of the market, and (3) issuing a mandatory injunction on a preliminary record.

This action arose from the proposed acquisition by C&J of a subsidiary of Nabors, which contained the assets of Nabors’ CPS division, for $2.86 billion.  To gain favorable tax treatment, Nabors will retain a majority interest (53%) in the entity surviving the merger (“New C&J”), and New C&J will be domiciled in Bermuda.  C&J’s stockholders will own the minority interest.  To mitigate the loss of control, a supermajority vote of New C&J’s stockholders will be required to effect major corporate actions.  In addition, C&J stockholders will have the right to (1) designate a majority of the members of New C&J’s board, and (2) receive the same pro rata consideration as Nabors in any subsequent sale of New C&J.  C&J’s current Chairman, CEO and chief negotiator, Joshua Comstock, also negotiated for the right to be New C&J’s CEO at a higher compensation level.

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Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., et al., C.A. No. 9405-VCP (November 26, 2014) (Parsons, V.C.)

By Lisa Stark

In Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., the Delaware Court of Chancery held unenforceable provisions in a merger agreement and letter of transmittal requiring, as a condition to receiving the merger consideration, the target’s stockholders to: (1) indemnify the acquirer, up to their pro rata share of the merger consideration, for the target’s breaches of its representations and warranties, and (2) release the acquirer and its affiliates from any and all claims relating to the merger.

In this case, plaintiff, Cigna Health and Life Insurance Co. (“Cigna”), a former stockholder of defendant Audax Health Solutions, Inc. (“Audax”), sought some $46 million in merger consideration arising from the acquisition of Audax by Optum Services, Inc.  Defendants refused to pay Cigna the merger consideration for failure to sign a letter of transmittal (or LoT).  The LoT provided that the undersigned stockholder agreed to be bound by the indemnification provisions in the merger agreement and released the acquirer for any and all claims relating to the merger.  Some of the target’s representations and warranties, which were the subject of the indemnification obligations, survived indefinitely.  Cigna argued that the indemnification obligations and the LoT violated the Delaware General Corporation Law (the “DGCL”) for several reasons, including that they rendered the amount of merger consideration indefinite in violation of Section 251 of the DGCL and rendered the stockholders liable for the target corporation’s debts in violation of Section 102(b)(6) of the DGCL.  Cigna argued that the release contained in the LoT was unenforceable for lack of consideration.  Finally, Cigna argued that the stockholder representative appointment provisions in the merger agreement were unenforceable.  In this decision, the Court addressed Cigna’s motion for judgment on the pleadings.

The Court found Cigna’s claims relating to the stockholder representative appointment provisions not properly presented, but agreed with Cigna that the indemnification and release obligations were unenforceable.  Specifically, the Court held that the indemnification provisions violated Section 251 of the DGCL by putting at risk all of the merger consideration for an indefinite period of time and rendering the amount of merger consideration to be received by the stockholders undeterminable.  As to the release, the Court held it unenforceable for lack of consideration–the right to receive the merger consideration vested at the effective time of the merger and the stockholders could not be required to release claims absent additional consideration.  The Court expressly limited its holding to cases where a stockholder was required to indemnify a party as a condition to receiving the merger consideration and all of such stockholder’s merger consideration was subject to clawback.   The Court also expressly stated that it was not addressing the validity of escrow holdbacks as a purchase price adjustment even though its reasoning could be applied to invalidate such arrangements.  Finally, the Court stated that its opinion did not prohibit corporations from entering into separate agreements with stockholders to indemnify the acquirer prior to the time that the stockholders’ right to receive the merger consideration vested, but that “a post-closing price adjustment cannot be foisted on non-consenting stockholders.”

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