S everal recent developments in the law governing

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1 Mergers & Acquisitions Law Report Reproduced with permission from Mergers & Acquisitions Law Report, 17 MALR 1791, 12/08/2014. Copyright 2014 by The Bureau of National Affairs, Inc. ( ) MERGER AGREEMENTS A Practitioners Guide to Recent Developments in M&A Transactions conditions, such transactions will be reviewed under the business judgment standard, rather than the more rigorous entire fairness. 1 BY MICHAEL B. GRAY AND JOHN MARK ZEBERKIEWICZ S everal recent developments in the law governing mergers and acquisitions have changed the public and private company mergers and acquisitions landscape. In the public company arena: s After years of uncertainty over the standard of review applicable to a controlling-stockholder s buyout that is conditioned upon both approval by a special committee and a majority of the minority vote, the Delaware Supreme Court confirmed that, subject to certain Michael B. Gray is a partner at Neal Gerber Eisenberg LLP, and John Mark Zeberkiewicz is a director Richards, Layton & Finger, P.A. The opinions expressed in this article are those of the authors and not necessarily those of Neal, Gerber Eisenberg LLP or Richards, Layton & Finger or their respective clients. The statements and views expressed in this article and the Annexes to this article are not intended as, and should not be construed to constitute, legal advice. Moreover, the Annexes are provided solely for illustrative purposes. If legal advice or other expert assistance is required, the services of a competent professional should be sought. 1 See In re MFW S holders Litig., 67 A.3d 496 (Del. Ch. 2013), aff d Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014). The Delaware courts generally use three tiers of review for evaluating decisions made by directors of a Delaware corporation: the business judgment rule, enhanced scrutiny, and entire fairness. See Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011). The first standard of review is the business judgment rule, which is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Unocal v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985). Where the presumption of the business judgment rule applies, a court will not substitute its judgment for that of the board; instead, it will sustain the decision if it can be attributed to a rational business purpose. Id.; In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006). The second standard of review, enhanced scrutiny, generally requires that the director defendants bear the burden of persuasion to show that their motivations were proper and not selfish and that their actions were reasonable in relation to their legitimate objective. See Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del. Ch. 2007). In the context of a cash-out merger, this standard of review takes the form of so-called Revlon scrutiny. As is well known, Revlon does not require that a board, in determining the value-maximizing transaction, follow any specific plan or roadmap in meeting its duty to take reasonable steps to secure i.e., actually attain the best immediate value. Instead, Revlon is a standard of review in which the reviewing court has leeway to examine the reasonableness of the board s actions under a standard that is more stringent than business judgment review and yet less severe than the entire fairness standard. Chen v. Howard-Anderson, 2014 BL 98354, at *28 (Del. Ch. Apr. 8, 2014) (footnotes omitted). The third standard of review, entire fairness, is the most onerous. The entire fairness inquiry requires the directors to demonstrate both fair price and fair dealing. [Fair price] relates to the economic and financial considerations of the proposed [transaction], including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company s stock. Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). [Fair dealing] embraces questions of when the transaction was timed, how it was initi- COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

2 2 s The new intermediate form merger now enacted as Section 251(h) of the General Corporation Law of the State of Delaware (the DGCL ) has reduced the time and administrative burden of consummating a takeover transaction that is structured in two steps i.e., a tender offer to purchase a majority of the shares of a public company followed by a back-end merger to acquire the remaining shares not tendered in the offer by eliminating the need to obtain the vote on the back-end merger. 2 s Judicial recognition of forum selection bylaws and charter provisions has engendered an increase in the adoption of those provisions, helping to alleviate some of the complex issues that arise from multi-forum M&A litigation. 3 s Other developments, like fee shifting bylaws or charter provisions, have been introduced into the discussion, although their validity in the stock corporation context, as well as their application in any particular context, remains untested. 4 Other than Section 251(h), which applies by its terms only to public companies, these developments apply in theory to public and private corporations alike, but they are more apt to concern public company practitioners, given that private company transactions, in our experience, remain less likely to generate the type of lawsuits that invariably follow the announcement of a public company merger of any meaningful size. In the past two years, several developments have had a dramatic impact on the negotiation of privatecompany mergers and acquisitions transactions: s A recent case in Delaware made clear that unless the attorney-client privilege is expressly carved out of the assets that pass to the acquirer in a merger, the premerger target s directors and officers may find that the acquirer now possesses and controls all of their otherwise privileged communications. 5 s Following a recent amendment to Delaware s contractual statute of limitations, parties may now contract for a statute of limitations period of up to twenty years, without the need to put the contract under seal. 6 s Practitioners in private-company M&A transactions continue to grapple with the so-called Trados problem 7 that arises when a board is controlled by directors who are either not disinterested or not independent. These issues are becoming more pressing in light of other developments addressed in this article. ated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. Id. 2 8 Del. C. 251(h). 3 See Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). 4 See ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 55 (Del. 2014). 5 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013). 6 See 10 Del. C In re Trados Inc. S holder Litig., 2013 BL (Del. Ch. July 24, 2009), 73 A.3d 17 (Del. Ch. 2013). MFW A New Standard for Controller Buyouts For years, the Delaware courts had held that controlling stockholder buyouts would be subject to review under the rigorous entire fairness standard, regardless of whether the transaction was negotiated and recommended by a committee of independent directors or approved by a majority of the minority stockholders. 8 In In re MFW Shareholders Litigation, 9 the Delaware Court of Chancery applied business judgment review to a transaction that was conditioned from the outset on the approval of both negotiation and recommendation by a fully functioning special committee 10 and a vote of a majority of the minority stockholders. 11 In Kahn v. 8 The Delaware Supreme Court s opinion in Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110, 1117 (Del. 1994), held that the exclusive standard of judicial review in examining the propriety of an interested cash-out merger transaction by a controlling or dominating shareholder is entire fairness. Id. at The Court stated that the burden may be shifted in two circumstances. First, approval of a merger... by an informed vote of a majority of the minority stockholders, while not a legal prerequisite, shifts the burden of proving the unfairness of the merger entirely to the plaintiffs. Id. at Second, an approval of the transaction by an independent committee of directors will shift the burden where: (1) the majority shareholder does not dictate the terms of the merger and (2) the special committee has real bargaining power that it can exercise on an arms-length basis. Id. at MFW, 67 A.3d In addition to the independence and disinterestedness of its members, the hallmarks of a duly empowered and properly functioning special committee include the power to veto any transaction, see Kohls v. Duthie, 765 A.2d 1274, 1285 (Del. Ch. 2000), a clear understanding of its mandate and its power to explore options on behalf of the company, see In re Southern Peru Copper Corp. S holder Deriv. Litig., 30 A.3d 60, (Del. Ch. 2011), active engagement by its members, see S. Muoio & Co. v. Hallmark Entertainment Investments Co., 2011 BL 83649, at *14-15 (Del. Ch. 2011), and the power to select its own competent and independent legal and financial advisors, see generally In re Loral Space and Commc ns Inc., 2008 BL (Del. Ch. Sept. 19, 2008). 11 While the invocation of the business judgment rule under MFW is stated, in short-hand, to be contingent upon negotiation and recommendation by a special committee and a majority-of-the-minority vote, the Court of Chancery listed the following factors that would be considered in the analysis: (i) the controller conditions the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders; (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say no definitively; (iv) the special committee meets its duty of care; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority. MFW, 67 A.3d at 535. In addition, it is worth noting that, although the Court of Chancery stated that the transaction would be subject to business judgment review, the case likely would not be dismissed at an early pleading stage: A plaintiff that can plead facts supporting a rational inference that any of those conditions did not exist could state a claim and go on to receive discovery. If, after discovery, triable issues of fact remain about any of those conditions, the plaintiff can go to trial and if those conditions are not found to exist by the court, the court will conduct a substantive fairness review. And any minority stockholder who voted no on a going private merger where appraisal is available, which is frequently the case, may also exercise her appraisal rights. Although appraisal is not a costfree remedy, institutional ownership concentration has made it COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. MALR ISSN

3 3 M&F Worldwide Corp., 12 the Delaware Supreme Court affirmed the lower court s decision, stating: [I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority. Although satisfaction of the MFW factors will ultimately result in a court not second-guessing the transaction, unlike an ordinary business decision that is subject to business judgment review, a challenge to an MFW-style transaction may not be dispensed with at an early pleading stage. If a plaintiff that can plead a reasonably conceivable set of facts showing that any or all of those enumerated conditions did not exist, that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery. 13 If, following such discovery, there remain triable issues of fact about whether the cleansing mechanisms were established, or were ineffective, the case would proceed to trial for entire fairness. 14 Since the Supreme Court s decision, the Delaware courts have not had many occasions to apply the test. In a recent bench ruling, the Court of Chancery applied the business judgment rule to a private-company transaction that was conditioned on the MFW protections. 15 The Court made several important observations regarding underlying basis for the standard, noting that it designed to create a situation where defendants could effectively structure a transaction so that [defendants] could obtain a pleading-stage dismissal against breach of fiduciary duty claims. 16 The Chancery Court also observed the manner in which the case would be reviewed at the pleading stage, noting that its objective was to consider the six elements of the Delaware Supreme Court s test... and whether the plaintiffs have pled facts sufficient to call into question the existence of those elements. 17 In light of the private company nature of the transaction, the Court reviewed those elements where they had been described in a public way suitable for judicial notice, such as board resolutions and a proxy statement. The Court stated that the plaintiff s burden is to establish why one or more of the elements has not been met. 18 an increasingly effective one, and there are obvious examples of where it has been used effectively. Id. (footnotes omitted). 12 Kahn v. M&FWorldwide Corp., 88 A.3d 635 (Del. 2014). 13 Id. at Id. at Swomley v. Schlecht, C.A. No VCL (Sept. 10, 2014) (TRANSCRIPT). The Court stated: Historically, [the Delaware courts] haven t made any distinctions between public companies and private companies and noted that Nixon v. Blackwell, [626 A.2d 1366 (Del., 1993),] holds that the same rules apply to Delaware corporations regardless of whether they re public or private. Id. at 66. While the Court suggested that it might take the private company overlay into account, the mere fact that the company invoking the MFW standard is not public would not prevent the application of the test. Id. 16 Id. 17 Id. at Id. Intermediate Form Mergers Originally enacted in 2013, Section 251(h) of the DGCL essentially eliminated the need for a back-end merger vote in a public tender offer transaction, thereby allowing public company transactions to move more quickly to closing. 19 Prior to Section 251(h), many two-step tender offer transactions were structured such that the target company would grant to the acquirer a so-called top-up option, pursuant to which the acquirer, following the tender, could exercise an option to purchase that number of additional shares of the target that would result in the acquirer owning at least 90% of the outstanding shares of each class of voting stock, such that the acquirer could then effect a short-form merger under Section 253 of the DGCL, forgoing the need for a stockholder vote. 20 While that structure had been approved by the courts, it was not available in all cases principally where the target did not have a sufficient number of shares to push the acquirer past the 90% threshold. 21 While Section 251(h) contains various conditions, 22 and target corporations may adopt provisions in their certificates of incorporation that restrict its application, 23 the statute has seen significant use, which is only expected to rise over time Del. C. 251(h). 20 See William J. Haubert, John Mark Zeberkiewicz & Brigette V. Fresco, Significant Proposed Amendments to the General Corporation Law of the State of Delaware, IN- SIGHTS, June See, e.g., Olson v. EV3, Inc., 2011 BL (Del. Ch. Feb. 21, 2011). 22 See 8 Del. C. 251(h). First, the statute is only available to corporations that have not opted out of it through their certificate of incorporation. Second, it is available only to target corporations whose shares are listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the merger agreement. Third, the merger agreement must expressly (i) permit or require the merger to be effected under Section 251(h), and (ii) provide that the merger will be effected as soon as practicable following the consummation of the offer. Fourth, the offeror must consummate the offer for any and all of the outstanding stock of the target on the terms provided in such agreement of merger that, absent Section 251(h), would be entitled to vote on the adoption of the merger agreement (excluding stock of the target that is owned at the commencement of such offer by the target, the offeror, any person that owns, directly or indirectly, all of the outstanding stock of the offeror, or any direct or indirect wholly-owned subsidiary of any of the foregoing). Fifth, following the consummation of the offer, the stock irrevocably accepted for purchase or exchange and received by the depository prior to expiration of such offer, plus the stock otherwise owned by the offeror, must equal at least such percentage of the stock, and of each class or series thereof, of the target that, absent Section 251(h), would be required to adopt the merger agreement under the DGCL and the target s certificate of incorporation. Sixth, the offeror must merge with the target pursuant to the merger agreement. Seventh, each outstanding share of each class or series of target stock that is the subject of and not irrevocably accepted for purchase or exchange in the offer must be converted in the merger into, or into the right to receive, the same amount and kind of cash, property, rights or securities to be paid for shares of such class or series of stock of such constituent corporation irrevocably accepted for purchase or exchange in the offer. 23 Id. 24 Data from MergerMetrics.com shows that, between June 30, 2013 and August 28, 2014, 35 transactions using Section 251(h) have been announced. MERGERS & ACQUISITIONS LAW REPORT ISSN BNA

4 4 Forum Selection Bylaws For years, the issue of multi-forum litigation has plagued the M&A market. When litigation is filed in the jurisdiction of the target s incorporation and in another jurisdiction (typically the jurisdiction in which the target s principal place of business is located), parties on both sides are faced with thorny procedural issues that needlessly complicate the litigation and any potential settlement discussions. In response to a statement in In re Revlon Shareholders Litigation, 25 M&A practitioners began adopting bylaws and charter provisions that dictated a particular forum for disputes over intracorporate disputes. In Boilermakers Local 154 Retirement Fund v. Chevron Corp., 26 the Delaware Court of Chancery held that a bylaw provision selecting the Delaware courts as the exclusive forum for such disputes was valid on its face. 27 These provisions, however, have not been limited to Delaware. In City of Providence v. First Citizens Bancshares, Inc., 28 the Delaware Chancery Court found that a Delaware corporation s bylaw selecting the United States District Court for the Eastern District of North Carolina (or, if that court lacked jurisdiction, any North Carolina state court with jurisdiction) as the exclusive forum was facially valid. 29 The Court also held that the plaintiff had failed to state a claim for breach of fiduciary duty in connection with the corporation s adoption of the forum selection bylaw, and found that plaintiff failed to demonstrate that it would be unreasonable, unjust, or inequitable to enforce it in Delaware. 30 The reaction to forum selection bylaws outside of Delaware has been somewhat mixed, although the general trend seems to be in favor of enforcement. 31 In our view, these bylaws may be useful in ensuring that disputes are resolved efficiently and with greater certainty. An example of a forum selection bylaw is attached as Annex I. Fee Shifting Bylaws One of the more interesting developments in Delaware law over the past year stems from a case decided outside of the M&A context and outside of the stock corporation context. In ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that a nonstock corporation s fee-shifting bylaw (i.e., the English loser pays rule as opposed to the American rule that each party generally pays its own fees) was valid on its face. 32 Notably, the Court emphasized that it was not addressing the adoption or application of the bylaw under specified facts or circumstances, and indicated that, even though valid on its face, it could still be unenforceable in equity. 33 Despite the fact that the case involved a nonstock corporation whose members had specifically agreed to be bound by the bylaws, and in spite of the Court s cautionary notes regarding equitable matters, the decision triggered a discussion among practitioners regarding the adoption of feeshifting bylaw and charter provisions in the stock corporation context. Following the opinion s release, the Council of the Corporation Law Section of the Delaware State Bar Association proposed amendments to Sections 102(b)(6) and 114 of the DGCL, as well as the adoption of a new Section 331 of the DGCL, to effectively limit the ATP ruling to nonstock corporations. Legislation to enact those amendments, in the form of Senate Bill 236, was subsequently introduced to the Delaware General Assembly, but it was not brought to a vote. 34 Instead, the Delaware General Assembly approved a non-binding resolution calling for the examination of whether legislation similar or in addition to or in modification, limitation or expansion of proposed Senate Bill 236 of the 147th General Assembly would be appropriate, and for the submission to the 148th General Assembly for consideration any legislative proposals deemed meritorious in continuing and promoting the adoption and use of the State s business entity laws by corporations and their investors. 35 In the wake of ATP, some Delaware stock corporations have adopted fee-shifting bylaw provisions. An ex A.2d 940, (Del. Ch. 2010) (footnotes and internal citations omitted) ( Perhaps greater judicial oversight of frequent filers will accelerate their efforts to populate their portfolios by filing in other jurisdictions. If they do, and if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intraentity disputes. ) A.3d 934 (Del. Ch. 2013). 27 Id. 28 A.3d, 2014 BL (Del. Ch. Sept. 8, 2014). 29 Id. at *1. The Court noted that its decision was compelled by the logic and reasoning of the Chevron decision. Id. at *2. 30 Id. 31 See e.g., Miller v. Beam, Inc., No CH 00932, (Ill. Ch. Ct. Mar. 5, 2014) (dismissing derivative claims as barred by exclusive forum selection bylaw); HEMG Inc. v. Aspen Univ., Index No /2013 (N.Y. Sup. Ct., N.Y. Cty. Nov. 4, 2013) (relying on Chevron to dismiss derivative claims as barred by a forum selection bylaw); Daugherty v. Ahn, Cause No. CC C (Tex. Cnty. Ct. at Law No.3, Dallas Cnty., Feb. 15, 2013) (ORDER) (granting a motion to dismiss on the basis of forum selection bylaw); In re MetroPCS Communications, Inc., No CV (Tex. Ct. App. Jan. 18, 2013) (granting a conditional writ of mandamus due to trial court s failure to consider motion to dismiss on the basis of forum selection bylaw), rev d sub nom. Golovoy v. Deutsche Telekom, Cause No. CC A (Tex. Cnty. Ct. at Law No.1, Dallas Cnty., Oct. 10, 2012). But see Roberts v. TriQuint Semiconductor, Inc., C.A. No (Cir. Ct. Or. Aug. 14, 2014) (declining to grant the defendants motion to dismiss for lack of subject matter jurisdiction pursuant to a forum selection bylaw); Galaviz v. Berg, 763 F. Supp. 2d 1170, 1174 (N.D. Cal. 2011). 32 ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013 (Del. May 8, 2014). The bylaw at issue provided in the event that (i) any [current or prior member]... initiates or asserts any [claim]... against the [corporation]... and (ii) the [c]laiming [p]arty... does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each [c]laiming [p]arty shall be obligated jointly and severally to reimburse the [corporation]... for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys fees and other litigation expenses)... that the parties may incur in connection with such [c]laim. 33 Id., slip op. at 8 ( Whether the specific ATP fee-shifting bylaw is enforceable, however, depends on the manner in which it was adopted and the circumstances under which it was invoked. Bylaws that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose. ). 34 Del. S.B. 236, 147th Gen. Assem. (2014). 35 See Del. S.J.R th Gen. Assem. (2014) COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. MALR ISSN

5 5 ample of a public company fee-shifting provision is attached to this article as Annex II. Litigation over at least two stock corporation fee-shifting bylaws has been commenced, but at the time of this writing the Delaware courts have not definitively ruled on the validity of such bylaws, either as a facial matter or as applied to particular facts and circumstances. 36 As a result of the foregoing, many practitioners are continuing to advise a wait-and-see approach with respect to fee-shifting bylaws. Although the validity of fee-shifting bylaws remains uncertain in the stock corporation context, such provisions generally should be upheld in stockholders agreements and other agreements between or among the corporation and its stockholders. Thus, companies may seek to include fee-shifting provisions in such agreements with its stockholders. In the public company context, it likely would be impractical or impossible to secure such agreements from stockholders, but private companies, particularly newly-formed companies, may consider including such provisions in stockholders agreements or other agreements. Attorney-Client Privilege in the M&A Context Unlike public company transactions, the representations and warranties in private company deals tend to survive closing, and the merger agreement frequently calls for some type of escrow or holdback of merger consideration. In post-transaction litigation over the escrow or holdback, tremendous attention is placed on whether a particular representation or warranty has been breached or, in some cases, whether the officers and directors of the pre-merger target engaged in bad faith conduct or fraud. In defending these allegations, those former directors and officers likely will want to assert attorney-client or other privileges over their otherwise privileged communications and materials. In one of the more significant developments in the private-company M&A context, the Court of Chancery held in Great Hill Equity Partners v. SIG Growth Equity Fund 37 that, as a statutory matter, the attorney-client privilege, including the target s pre-merger communications relating to the merger itself, vests in the surviving corporation of a merger. 38 Despite this holding, the 36 See e.g., Pignatelli v. Biolase Inc., C.A. No VCN (filed July 21, 2014) (voluntarily dismissed without consideration of the fee-shifting bylaw provision); Kastis v. Carter, C.A. No CB (filed June 18, 2013) A.3d 155 (Del. Ch. 2013). 38 In addressing the question of who controlled the privilege, the Court noted that the matter, in the first instance, was one of statutory interpretation. Id. at 156. Under Section 259 of the DGCL, the property, rights, privileges, powers and franchises of the constituent entities are vested in the surviving corporation. Id. at 157. The sellers argued that the term privileges, as used in the statute, does not include the attorneyclient privilege. They claimed that the term privileges was intended to capture property rights, such as the privilege that inheres in a copyright, and was specifically not intended to pick up privileges arising from the rules of evidence, such as the attorney-client privilege. Id. The Court disagreed, noting that the sellers were unable to adduce any evidence supporting their interpretation of the statute. Id. The Court found that the sellers construction, which would have limited privileges to property rights, ignored the fact that Section 259 already uses the terms property and rights. Id. The sellers Court, in light of the policy implications, indicated that the parties could by contract allocate control of the privilege post-merger. The holding has put target s counsel on notice for the need to not only address the privilege in the merger agreement itself, but also to take steps to ensure that privileged materials are appropriately segregated and that procedures are in place to control the materials post-merger. In addressing these matters, target s counsel should consider implementing pre-merger procedures to segregate privileged materials, including those relating to the transaction. This may involve, among other things, setting up new accounts for key parties for correspondence relating to the transaction, conducting a preconsummation review of documents for privilege, and appointing an agent, such as the stockholders representative, to take custody of the privileged materials following the consummation of the transaction. Parties should also address issues relating to target counsel s rights to continue to represent parties associated with the target following the transaction. An example of a provision seeking to allocate control of privileged materials and address related matters is attached to this article as Annex III. Statute of Limitations Given that the representations and warranties in private company transactions often survive closing, and that parties frequently provide for holdbacks and escrows, the survival period for breaches of representations and warranties is frequently the subject of negotiation in such transactions. While many representations and warranties will survive for a limited period of three years or less, other fundamental representations relating to existence and capitalization, or representations relating to tax and environmental matters, tend to continue for ten years or more after the closing. In 2014, Section 8106 of Title 10 of the Delaware Code was amended to provide that the statute of limitations for contracts involving at least $100,000 could be extended for up to twenty years without executing the contract under seal. 39 Prior to the amendment, and in the absence of executing the contract under seal 40 interpretation, in other words, would have rendered those terms mere surplusage, and the Court will not construe a statute in a manner that renders language surplusage if another interpretation is reasonably available. Id. at 158. The Court found that the term privilege is commonly defined as a right or immunity granted as a peculiar benefit, advantage, or favor, and that the attorney-client privilege is one of the most obvious examples. Id. 39 The synopsis to the legislation amending Section 8106 stated: Subsection (c) [of 10 Del. C. 8106] gives clear statutory authorization to the parties freedom to contract beyond the three or four year statutory period without resorting to the use of a sealed instrument, as long as the contract involves at least $100,000 and is in writing. Examples of a period that may be specified in a written contract, agreement or undertaking would include, without limitation, (i) a specific period of time, (ii) a period of time defined by reference to the occurrence of some other event or action, another document or agreement or another statutory period and (iii) an indefinite period of time. Del. H.B. 363, 147th Gen. Assem. (2014). 40 The Delaware Supreme Court has not given specific steps companies must take to execute a contract under seal; however, the following formalities are recommended: (i) the governing body of each contracting party should authorize the MERGERS & ACQUISITIONS LAW REPORT ISSN BNA

6 6 (which would extend the period to twenty years), Delaware s statute of limitations for ordinary contract claims was three years. While the Delaware courts had held that the three-year statute of limitations period could be shortened by contract, there was substantial doubt whether it could be extended without the contract being executed under seal. 41 The amendment to Section 8106 enables parties to contractually extend the three-year statute of limitations for a period of up to twenty years, provided that the contract involves at least $100,000, without the necessity of executing the contract under seal. Thus, parties may agree that the remedies under a merger agreement or other agreement with a value over $100,000 could be up to twenty years. Parties should be mindful of this development to ensure that they do not inadvertently agree to a statute of limitations period beyond the horizon they had envisioned. Venture-Backed Exits in the Wake of Trados The Delaware Court of Chancery s post-trial opinion in In re Trados Inc. Shareholder Litigation 42 brought a renewed focus to the potential conflicts of interest that may arise in exit transactions involving venture-backed companies. The Trados opinion arose of SDL plc. s acquisition, in 2005, of Trados Incorporated for approximately $60 million, of which approximately $52 million was distributed to the preferred stockholders in satisfaction of their deemed liquidation preferences, approximately $8 million was distributed pursuant to the management incentive plan adopted not long before the merger, and none was distributed to the common stockholders. 43 In 2009, a former common stockholder brought suit, alleging breach of fiduciary duty. At the preliminary stage of the case, the Court found that the plaintiff had alleged facts supporting a reasonable inference that four of the seven members of Trados board were interested in the decision to sell the Company, principally as a result of their relationships with the funds that held the preferred. 44 The funds, it was alleged, were interested in exiting the investment and recouping their investment, without regard to the interests of the common stockholders, who would have stood to benefit from Trados continuing to operate to attempt to create value for the common stock. The Court stated: It would not stretch reason to say that [the merger that yielded no consideration for the common stockholders] is the worst possible outcome for the common stockholders. 45 As a result of plaintiff s rebuttal of the presumption of the business judgment rule, the defendants bore the burden of demonstrating entire fairness that is, they were required to show that the merger had been approved through a fair process and had resulted in a fair price. 46 Although the Court found that the defendants were unable to satisfy the fair process prong of the entire fairness test, it found that the price received by the common stockholders namely, nothing was nonetheless fair, since the common stock, being subordinate to series of preferred stock with accruing dividends, had no economic value. 47 In its post-trial opinion, the Court made several observations that, while not critical to the outcome, may nevertheless serve as guideposts for practitioners. The Court indicated that the use of a special committee a feature not present in Trados might have resulted in the merger being subject to a more favorable standard of review. The decision not to form a special committee had significant implications for this litigation. The Merger was not a transaction where a controller stood on both sides, and the plaintiff did not challenge [one of the seven directors ] independence or disinterestedness. If a duly empowered and properly advised committee had approved the Merger, it could well have resulted in business judgment deference. 48 In our experience, many venture-backed private companies continue to have boards controlled by directors who are either members of management or are affiliated with one of the venture capital funds promoting the transaction. Often there are no members of the board who would be purely independent, 49 as (i) the independence of management directors is often challenged on the grounds that their interests are not aligned with those of the stockholders, generally, due to their position and, frequently, their receipt of benefits through management incentive plans and offers from the acquirer, and (ii) the independence and disinterestedness of directors who have relationships with venture funds is often challenged on the grounds that the fund s time horizon and position in the preferred stock motivate them toward a quick exit, rather than maximizing value for all stockholders. In many of these cases, it is difficult to establish a fully functioning special committee, either because the deal values do not justify the costs of hiring another set of bankers and lawyers or because there are not enough (or any) directors whose independence and disinterestedness are beyond question. It is likewise difficult to condition the transaction on a majority of the minority vote without introducing unacceptable levels of consummation risk, given that the liquidation waterfalls frequently operate such that junior classes of stock will receive little or no consideration, or founders that have little or no continuing incontract to be delivered under seal, (ii) the contract should include clear language that the parties intend the contract to be under seal and a choice of law provision designating Delaware law (including with respect to statute of limitations), and (iii) the signature page should include a testimonium clause that the parties are signing under seal and the parties should include their respective seals next to their signatures. 41 See generally GRT, Inc. v. Marathon GTF Technology, Ltd., 2011 BL , at *16-17 nn (Del. Ch. July 11, 2011) A.3d 17 (Del. Ch. 2013). 43 In re Trados Inc. S holder Litig., 2009 BL (Del. Ch. July 24, 2009). 44 Id. at *1. 45 Id. at *7. 46 Trados, 2013 BL at **1. 47 Id. at ** Id. at **39, n The independence of directors who would ordinarily appear independent and disinterested may yet be subject to attack. Because of the web of interrelationships that characterizes the Silicon Valley startup community, scholars have argued that so-called independent directors on VC-backed startup boards are often not truly independent of the VCs. Many of these directors are chosen by the VCs, who tend to have much larger professional networks than the entrepreneurs or other common shareholders. If there is a conflict of interest between the VCs and common stockholders, the independent directors have incentives to side with the VCs. Id. at 54 (internal citations omitted) COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. MALR ISSN

7 7 volvement with the company (but continue to have control of or a significant stake in the common stock) may want to extract additional value for the common stock to approve the transaction. However, in certain circumstances, corporations and their counsel should consider, if feasible, adding independent directors to the board to serve as the special committee. In selecting any such members, consideration should be given to seeking input from significant common stockholders. Annex I: Example of Forum Selection Bylaw 50 Forum for Adjudication of Disputes Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state of Delaware, in all cases subject to the court s having personal jurisdiction over the indispensible parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article VII. Annex II: Example of Fee-Shifting Bylaw. 51 (b) To the fullest extent permitted by law, in the event that (i) any current or prior stockholder or anyone on their behalf ( Claiming Party ) initiates or asserts any claim or counterclaim ( Claim ) or joins, offers substantial assistance to, or has a direct financial interest in any Claim against the Corporation and/or any Director, Officer, Employee or Affiliate (as such term is defined under the Exchange Act) and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Corporation and any such Director, Officer, Employee or Affiliate, the greatest amount permitted by law of all fees, costs and expenses of every kind and description (including but not limited to, all reasonable attorney s fees and other litigation expenses) (collectively, Litigation Costs ) that the parties may incur in connection with such Claim. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XI Section 5(b). (c) If any action the subject matter of which is within the scope of Article XI Section 5(a) is filed in a court other than a court located within the State of Delaware (a Foreign Action ) in the name of any stockholder, such stockholder shall be deemed to have consented to 50 The following example is extracted from the Amended and Restated Bylaws of Chevron Corp as filed on Form 8-K (Jan. 29, 2014). 51 The following example is extracted from the Amendment to the Amended and Restated Bylaws of Gamco Investors, Inc., as filed on Form 8-K (Sept. 23, 2014). (i) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce Article XI Section 5(a) (an FSC Enforcement Action ) and (ii) having service of process made upon such stockholder in any such FSC Enforcement Action by service upon such stockholder s counsel in the Foreign Action as agent for such stockholder. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XI Section 5(c). (d) If any provision or provisions of this Article XI Section 5 shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article XI Section 5 (including, without limitation, each portion of any sentence of this Article XI Section 5 containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XI Section 5(d). Annex III: Waiver of Conflicts; Privilege. (a) The parties hereto (collectively, the Consenting Parties ) acknowledge that at all times relevant hereto up to the Closing, [ABC] ( Company Counsel ) has represented only the Company. If subsequent to the Closing any dispute were to arise relating in any manner to this Agreement between Seller, on the one hand, and another Consenting Party, on the other hand (each a Dispute ), the Consenting Parties consent to Company Counsel s representation of Seller in the Dispute(s). The Consenting Parties acknowledge that Company Counsel has been and will be providing legal advice to the Company in connection with the Merger and the other transactions contemplated in this Agreement and the Transaction Documents and in such capacity will have obtained confidential information of the Company (the Company Confidential Information ). The Company Confidential Information includes all communications, whether written or electronic, including any communications between Company Counsel, the directors, officers, managers, members, stockholders, accounting firm, and/or employees of the Company, all files, attorney notes, drafts or other documents directly relating to this Agreement or the Transaction Documents, which predate the Closing (collectively, the Company Counsel Work Product ). In any Dispute, to the extent that any Company Confidential Information is in Company Counsel s possession at the Effective Time, such Company Confidential Information may be used on behalf of Seller in connection with such Dispute at the sole discretion of Seller. In any Dispute, the Consenting Parties waive the right to present any Company Counsel Work Product as evidence in any legal proceeding arising out of such Dispute. The Consenting Parties waive their right to access any Company Counsel Work Product, except as reasonably necessary in connection with a Legal Proceeding that is not a Dispute. The Consenting MERGERS & ACQUISITIONS LAW REPORT ISSN BNA

8 8 Parties hereby consent to the disclosure and use by Company Counsel, in each case solely for the benefit of Seller with respect to a Dispute, of any information (confidential or otherwise) disclosed to it by the Company (including its directors, officers, managers, members, accounting firm, and/or employees) prior to the Effective Time. Except as expressly set forth above, this Section [ ] shall not grant any rights to Seller with respect to the Company Confidential Information except as described herein. (b) Company Counsel has acted as counsel for Seller and the Company in connection with this Agreement and the transactions contemplated hereby (the Acquisition Engagement ) and, in that respect, not as counsel for any other Person, including, without limitation, Parent. Only Seller and the Company shall be considered clients of Company Counsel in the Acquisition Engagement. To the extent that communications between Seller or the Company, on the one hand, and Company Counsel, on the other, relate to the Acquisition Engagement, such communications shall be deemed to be attorney-client confidences that belong solely to Seller and the Company, and not to Parent or the Surviving Entity. Accordingly, Parent and the Surviving Entity shall not have access to any such communication or to the files of Company Counsel, in each case to the extent that they relate to the Acquisition Engagement, whether or not the Closing occurs. Without limiting the foregoing, upon and after the Closing: (i) Seller, as successor to the Company, shall be the sole holder of the attorneyclient privilege with respect to the Acquisition Engagement, and none of Parent or the Surviving Entity shall be a holder thereof; (ii) to the extent that files of Company Counsel with respect to the Acquisition Engagement constitute property of the client, only Seller shall hold such property rights; and (iii) Company Counsel shall have no duty whatsoever to reveal or disclose any such attorney-client communications or files to Parent or the Surviving Entity by reason of any attorney-client relationship between Company Counsel and the Company; provided, that, to the extent any communication is both related and unrelated to the Acquisition Engagement, Company Counsel shall provide appropriately redacted versions of such communications to the Surviving Entity upon request COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. MALR ISSN