The M&A community is abuzz about Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, a recent Delaware Chancery Court opinion in an ongoing breach of contract dispute involving a reverse triangular merger (an “RTM”). In the opinion, Vice Chancellor Parsons denied defendants’ motion to dismiss plaintiffs’ breach of contract claim, because the court determined that an anti-assignment provision in a contract between the parties was ambiguous as to whether consent was required in the context of an RTM. This potentially far-reaching opinion may impact the way parties structure future deals as well as conduct business and legal due diligence during transactions. This case may also encourage parties to seek legal redress for potential breaches of anti-assignment provisions of contracts resulting from RTMs.

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The SEC’s proxy access rule, which would allow stockholders to have their nominees for director positions included in the company’s proxy materials, is under challenge in the U.S. Court of Appeals for the D.C. Circuit.  The challenge was brought by the U.S. Chamber of Commerce and the Business Roundtable, with amicus curiae support from the State of Delaware.  On the opposing side, the Council of Institutional Investors, TIAA-CREF and fourteen other funds have filed a brief supporting the SEC’s position.

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In Olson v. EV3, Inc., the Delaware Chancery Court provides guidance for M&A practitioners in crafting top-up options.  As set out in Vice Chancellor Laster’s recent opinion, the terms of a top-up option must first comply with the procedural requirements of the Delaware General Corporation Law for the issuance of shares of stock.  This means the value of the consideration to be paid in exchange for the top-up shares on exercise of the option must be readily ascertainable, must be greater than or equal to the aggregate par value of the top-up shares, and must be approved by the issuing corporation’s board.  Second, the merger agreement governing the second-step merger should make clear that in any appraisal proceeding to determine the value of a share of target corporation stock, neither the shares issued upon exercise of the top-up option nor the consideration provided in exchange for those shares will be considered. 

A top-up option is an option designed to increase the grantee’s ownership in a corporation to at least 90%, allowing the grantee to acquire the granting corporation through a short-form merger under Section 251 of the DGCL.  A short form-merger is attractive because it can be completed without the approval of the target’s stockholders and because the target’s stockholders’ sole recourse in the transaction is the appraisal of their shares under Delaware’s appraisal statute.  Typically, top-up options are granted to an acquirer in connection with the acquirer’s launch of a tender offer.  Once the acquirer obtains at least a majority of the target’s shares in the tender offer, the top-up option is triggered, and the target corporation issues the acquirer a number of shares sufficient to bring the acquirer’s ownership in the corporation to at least 90%.  The acquirer then completes the acquisition via short-form merger, and those target stockholders that did not tender are entitled to receive in the merger the same consideration per share paid in the tender offer or to seek appraisal of their shares. 

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On February 15, 2011, NYSE Euronext and Deutsche Böerse AG announced that they had entered into a business combination agreement. The combined group will be headquartered in both Frankfurt and New York.

The transaction is structured as a combination of NYSE Euronext and Deutsche Böerse under a newly created Dutch holding company which will be effected through a merger and a public exchange offer. NYSE Euronext will merge with a US subsidiary of the new holding company, and each NYSE Euronext share will be converted into 0.47 of a share of the new holding company. The new holding company will also launch a public exchange offer, and Deutsche Böerse shareholders may tender their Deutsche Böerse stock on a one-to-one basis for shares of the new holding company.

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The Delaware Court of Chancery recently issued a preliminary injunction in In re Del Monte Foods Company Shareholders Litigation (i) blocking the shareholder vote to approve the sale of Del Monte to a group of private equity firms led by KKR for a period of 20 days and (ii) precluding the enforcement of the deal protection measures, including the no-shop, matching-right and break-up fee provisions during that period, pending the shareholder vote to approve the transaction.

The court applied the traditional tests for determining whether an injunction was warranted: whether the plaintiffs have demonstrated (1) a reasonable likelihood of success on the merits; (2) an imminent threat of irreparable injury; and (3) that an injunction would not threaten more harm than good. Based on the preliminary record and not findings of fact after a full trial, the Court found that plaintiffs had satisfied those requirements with respect to their claims that the Del Monte Board had breached its fiduciary duty by failing to provide adequate oversight over its financial advisor, Barclays who, as a result of conflicts of interest arising from contemporaneously providing sell-side advice to the Del Monte Board and seeking to provide financing to the potential acquirors of Del Monte, “secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buyside financing fees” and taking actions that “materially reduced the prospect of price competition for Del Monte.” According to the Court, the Board did not act reasonably in consenting to Barclays participating in the buy-side financing because the board did not inquire as to whether KKR could finance the transaction without Barclays and granted its consent “without some justification reasonably related to advancing shareholder interests.” In addition, the Court was highly critical of KKR and Vestar, two members of the private equity group that agreed to acquire Del Monte, for allegedly making a joint bid in violation of anti-clubbing restrictions in the confidentiality agreements they signed with Del Monte and of Barclays for allegedly facilitating and hiding Vestar’s participation in KKR’s bid from Del Monte.

The Del Monte case highlights the need for a Board of Directors to carefully monitor and supervise the process pursuant to which a company is sold, particularly where its financial or other advisors may be alleged to have a conflict of interest. More active oversight by the Board and the earlier and more substantial involvement of unconflicted advisors can substantially reduce the risk that the adequacy of the Board’s oversight will be brought into question.

Reis v. Hazelett Strip-Casting Corporation, a recent decision involving a reverse stock split, will be added to a distinguished line of authority providing useful case studies of how not to freeze-out a minority. In the decision, the Court conducted an entire fairness review and held that the transaction was not entirely fair. The decision highlights the potential dangers of implementing a reverse stock split in a coercive manner as a means of squeezing out a minority, without the proper procedural protections.

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In the recent case of Steinhardt v. Howard-Anderson, discussed previously on this site with respect to the court’s position regarding certain proxy disclosures, Vice Chancellor Laster offered a new insight into the application of the enhanced Revlon review to a transaction where the consideration was a combination of cash and stock.  The court enjoined the acquisition of Occam Networks, Inc. by Calix, Inc. pending additional disclosures regarding certain actions of Occam’s financial advisor.  However, the plaintiff in the case had also argued for an injunction on process grounds.  The court rejected that argument, but expressed its belief that Revlon applied.

In this deal, the Occam shareholders were to receive approximately 50% cash and 50% stock, with the stock portion perhaps ending up at just over the 50% measure.  Immediately following the merger, the former Occam shareholders would own approximately 15% of the surviving corporation.  Vice Chancellor Laster appeared persuaded that, because the shareholders would only hold a 15% minority stake in the surviving corporation, they would not likely be in a position to negotiate the size of the premium in any subsequent sale of Calix, making the present merger a “final stage transaction.”  He explained: “The reason enhanced scrutiny applies to a change of control is because it’s a constructive final stage transaction.  You’re giving up control to a person who could then cash you out because he’s the new controller.  This is a situation where the target stockholders are in the end stage in terms of their interest in Occam.  This is the only chance they have to have their fiduciaries bargain for a premium for their shares as the holders of equity interests in that entity.”

NYSE Euronext and Germany’s Deutsche Börse, two of the world’s largest stock exchange operators, announced this week that they are in “advanced discussions” regarding a possible merger which would create the largest stock exchange in the world. According to Reuters, the board of NYSE Euronext is expected to meet this weekend to discuss the planned takeover.

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Vice Chancellor Laster of the Delaware Court of Chancery recently enjoined two separate acquisitions, each pending additional disclosures regarding financial advisors.

In In re Art Technology Group, Inc. Shareholders Litigation, the court enjoined Oracle Corporation’s acquisition of Art Technology Group, Inc. (“ATG”).  ATG’s financial advisor in the merger, Morgan Stanley, had also worked for Oracle for a number of years.  The court required the parties to disclose a description of the type of services Morgan Stanley had performed for Oracle, and the aggregate compensation paid by Oracle to the advisor for the four years prior to the merger.  Noting that the disclosures were not related to the merger price, the court permitted the additional disclosures to be made in a public filing with the SEC (rather than a supplemental proxy mailing), per mitted the merger to proceed in only ten days after the disclosures were made, and did not require a bond before issuing the injunction.

However, the enhanced disclosures required by the court exceed the disclosure requirements of the SEC (see Item 1015(b)(4) of Regulation MA under the Securities and Exchange Act of 1934) and FINRA (see FINRA Rule 5150).  To the extent these rules require disclosure of material relationships between financial advisors and the parties, such disclosures are required only for the two previous years, and neither requirement has generally been interpreted to require quantification of the fees paid.

In Steinhardt v. Howard-Anderson, the court enjoined the acquisition of Occam Networks, Inc. by Calix, Inc., pending additional disclosures, including information regarding Occam’s financial advisor, Jefferies & Co., Inc.  The court required Occam to disclose additional information with respect to (i) the role of Jefferies in shopping the company (specifically relating to certain contacts the court thought were “misleadingly described”) and in negotiating the mix of cash and stock consideration (specifically, the effect of the road show on reducing the cash portion), and (ii) the accretion/dilution analysis conducted by Jefferies, which the court concluded was “summarized incompletely and partially in the proxy.”

The court also questioned discrepancies between preliminary books prepared by the advisor for the Occam board of directors and the final board book. Vice Chancellor questioned what he referred to as “longitudinal changes from previous Jefferies’ books that resulted in the final book making the deal look better than it would have had the same metrics been used that were used in prior books.” In that connection, the court ordered that Jefferies make available for a deposition a managing director involved in the transaction, rather than a junior banker who had only been involved in the deal at the end of the process. The court ordered that the transaction could not close until ten days after the required disclosures and deposition.