SLG Helps Resolve Delaware Mergers and Acquisitions Litigation
Ideally, mergers and acquisitions would be like any other business transaction. A buyer makes an offer, the seller negotiates the best price he can get, the lawyers sort out the details, and everyone walks away happy. Unfortunately, it rarely plays out so smoothly.
When there are millions or billions of dollars on the table, things tend to break down. Buyers might get cold feet at how much they are about to spend, while sellers might think they could have gotten a higher price.
At Shlansky Law Group, our team regularly steps directly into the middle of Delaware mergers and acquisitions disputes. We represent buyers trying to escape broken companies, sellers trying to force a buyer to the closing table, and investors who feel their board sold them out for a low price.
If your transaction is facing imminent litigation, call us today at 347.378.6990 to protect your investments and enforce your rights.
What Actually Causes M&A Litigation?
Busted Deals and the Fight for Specific Performance
When buyers sign a merger agreement, they often get struck with buyer’s remorse. Whether the economy took a sudden hit or the buyer simply starts having doubts, it happens pretty frequently. One of the most common ways buyers attempt to back out is by invoking a Material Adverse Effect (MAE) clause that is usually present in the final deal.
Proving an MAE under Delaware law is incredibly difficult. Businesses thrive on predictability; creating a lot of unpredictability would be harmful if buyers could freely back out. Delaware courts have long held that short-term revenue blips are insufficient to establish an MAE.
Sellers can fight back by asking the court for “specific performance” (i.e., ordering the buyer to close the deal). Whether the judge sides with the buyer or the seller will depend on the language of the original contract and whether the MAE clause’s conditions were met.
The SLG team helps draft MAE clauses that are clear and concise. This helps both sides know exactly what they are getting into and where each party stands. Additionally, our team helps clients draft clauses favorable to their side of the negotiating table. For example, a buyer might want an MAE clause that is less restrictive and be willing to negotiate other terms to reach an agreement.
Post-closing Adjustments and Earn-Out Fights
Just because a deal closes does not mean the fighting stops. Buyers and sellers frequently argue over working capital calculations the day after the ink dries. The buyer might claim the seller manipulated the accounting to make the company look better right before closing.
Then you have earn-out disputes. For example, a larger company buys a startup. Company leadership tells the startup founders they will get a massive bonus if the company hits certain revenue targets over the next two years. The founders agree to take a lower upfront purchase price and sign the deal. Then the buyer immediately slashes the startup’s marketing budget and terminates contracts with outside sales reps. This makes it practically impossible for those targets to be hit.
The founders might then sue, claiming the buyer intentionally sabotaged the earn-out. These cases require aggressive discovery. We have to dig through the buyer’s internal emails to prove he actively tried to tank his own newly-acquired asset just to avoid paying the founders.
On the other hand, it is entirely possible that the large company made those decisions in the best interests of the company. Perhaps the founders were paying the sales reps too much, and the marketing budget would be more effectively spent elsewhere. SLG has many years of experience successfully representing clients from both angles.
Fiduciary Duty Claims from Angry Stockholders
When a company gets sold, the stockholders usually scrutinize the deal. If the sale was for cash, Delaware law imposes Revlon duties on the board of directors. Basically, the board stops being the protector of the corporate entity and becomes an auctioneer. Their only job is to get the absolute highest price for the stockholders.
If the board rushed the process or let the CEO negotiate a cushy post-merger job for himself at the expense of the share price, the stockholders may have a strong Revlon claim. They will argue the directors breached their fiduciary duties of care and loyalty.
The Role of the Special Committee in a Conflicted Transaction
Sometimes a merger is inherently conflicted from the start. Imagine a scenario in which a founder owns 40% of the company and wants to buy out the remaining stockholders to take the company private. The founder cannot negotiate against himself. He has an obvious incentive to pay the lowest price possible, while the minority stockholders want the highest price.
To solve this, companies generally form a special committee. This is a group of independent directors who have no financial interest in the buyout. Their job is to hire their own financial advisors, get their own legal counsel, and negotiate aggressively against the founder on behalf of the minority stockholders.
What You Should Do When the Deal Starts Going South
You should never wait for the lawsuit to hit your desk. The moment the other side starts dragging their feet or making unreasonable demands for extra information, you need to prepare for litigation.
First, you have to document your own compliance. If you are the seller and you suspect the buyer is trying to walk away, you need to create a paper trail showing you are ready, willing, and able to close. You cannot give him any excuse to claim you breached the agreement first.
Next, get trial lawyers involved immediately. Transactional attorneys are great at drafting contracts, but they are not the people you want fighting over them in a courtroom. A trial lawyer looks at an M&A contract differently. He looks for the exits. He looks for the ambiguities that a judge will fixate on. If you bring in the SLG team early, we can often identify litigation risks and advise you on how to handle communications before a breach occurs.
Why You Need an Experienced Delaware Corporate Litigation Team
Unlike most states, Delaware’s law changes fast. This includes both Delaware’s statutes and the body of case law that the Court of Chancery looks to when issuing an opinion.
SLG knows the statutes. We work closely with financial economists to build bulletproof valuation models for our clients. We litigate these exact jurisdictional and corporate conflicts constantly, asserting our clients’ rights under Delaware law regardless of where the parties are physically located.
Frequently Asked Questions About Delaware Mergers and Acquisitions Litigation
Why is Delaware the primary venue for M&A disputes?
Most major corporations are either registered in Delaware or have a subsidiary registered in Delaware. This is because Delaware provides centuries of case law for its courts to draw from. Additionally, Delaware’s statutes and legal rules give corporations powerful rights to protect their privacy. One of these legal rules is the “internal affairs doctrine.”
Essentially, this doctrine requires disputes regarding a company’s internal mechanics to be decided under the law of the state in which it is incorporated. Because Delaware is so attractive to companies, the internal affairs doctrine means that internal disputes will be governed by Delaware law in Delaware courts.
When does “Entire Fairness” apply?
The general rule courts apply is the “Business Judgment” rule. If business leadership makes a decision (1) in good faith, (2) on an informed basis, and (3) for the best interest of the company, then courts will not second-guess the decision. Even if the decision turns out to be a horrible one that costs the company millions, courts are not going to play “Monday morning CEO.” Stockholders must overcome a significant burden to overcome the Business Judgment rule.
Delaware law gives company leadership broad discretion to run the company as they see fit. That discretion has a limit, however. For example, if the board of directors has a conflict of interest regarding a transaction, Delaware courts apply the “Entire Fairness” standard. The burden shifts to the defendant directors to prove that the transaction was fair and that they kept the company’s best interests in mind when they made it.
How do Breach of Fiduciary Duty claims differ from Appraisal claims?
In a fiduciary duty lawsuit, stockholders must allege that the board did something wrong. These suits accuse the board of negligence, conflict of interest, dishonesty, disloyalty, etc.
In an appraisal case, the accusation is not necessarily one of bad behavior. Instead, the stockholders allege that the final deal was priced too low. The stockholders are asking the court to appraise the value of their shares. The judge then reviews both sides’ financial arguments to determine the true fair value of the stock.
SLG Protects Your Interests During M&A Litigation
When your transaction hits a wall or your board is accused of misconduct, the financial exposure can ruin your business. Allowing the wrong lawyers to handle a high-stakes M&A dispute is a mistake you cannot afford to make. You need a litigation strategy that stops the bleeding and forces the dispute into the correct legal framework.
Call the Shlansky Law Group today at 347.378.6990 to schedule a consultation.
