CSG Corporate & Securities Insights Q2 | 2017
CSG's Corporate & Securities Group is pleased to provide the latest installment of Insights, which highlights recent news, activities, judicial decisions, legislative actions and regulatory announcements of interest.
Jonathan Keller has joined the firm as an associate in both the Corporate & Securities and Health Care & Hospital groups. Prior to joining the firm, Jonathan served as Corporate Counsel at East Orange General Hospital.
CSG is pleased to announce that 36 attorneys have been selected for inclusion in the 2017 edition of New Jersey Super Lawyers, including corporate attorneys Sean Aylward, David Hyman, Daniel Schwartz and Edward Stevenson. Additionally, 15 CSG attorneys were selected for inclusion in this year's edition of New Jersey Super Lawyers - Rising Stars. Click here for a full list of CSG honorees.
CSG has been recognized by BTI Consulting Group as a BTI Brand Elite 2017 law firm. BTI Brand Elite 2017 ranks law firms based on interviews with corporate counsel and decision-makers at some of the world's largest organizations.
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Judicial Decisions, Legislative Actions and Regulatory Announcements
Delaware Supreme Court Establishes "Reasonable Best Efforts" In Chancery Court Ruling
The Delaware Supreme Court recently affirmed the Delaware Chancery Court’s ruling in The Williams Companies, Inc. v. Energy Transfer Equity, L.P., 2016 WL 3576682 (Del. Ch. June 24, 2016), despite finding that the Chancery Court erred in holding that the acquirer, Energy Transfer Equity, L.P. (“ETE”), did not breach its covenant to exert commercially reasonable efforts to obtain an opinion from its tax counsel (The Williams Companies, Inc. v. Energy Transfer Equity, L.P., 2017 WL 1090912 (Del. Mar. 23, 2017)). In a 4-1 split decision, the Supreme Court deferred to the Chancery Court’s findings of fact that any alleged breach of the efforts covenant did not materially contribute to the failure of ETE’s tax counsel to deliver its opinion (and thereby the failure of the tax condition contained in the merger agreement).
In September 2015, The Williams Companies, Inc. (“Williams”), ETE and several affiliates of ETE entered into a merger agreement pursuant to which ETE would acquire Williams in a complex transaction that was intended to provide a significant cash payment to Williams’ stockholders while preserving the tax-free treatment of the transaction. Shortly after the merger agreement was signed, the value of ETE’s publicly traded partnership units declined to between one-third and one-half of their value at signing, which made the transaction financially unpalatable to ETE. At this time, ETE realized that the transaction might be treated in part as a taxable exchange and its tax counsel concluded that it could no longer deliver its opinion that the transaction should qualify as tax-free under IRC Section 721. Delivery of such opinion was a condition to closing of the merger and ETE asserted that it was contractually free to terminate the transaction. Williams filed suit in Delaware seeking a declaratory judgment to compel ETE to complete the merger. Williams contended that ETE should be enjoined from terminating the merger agreement because it breached its covenant to exert commercially reasonable efforts to obtain the tax opinion and its representation that it knew of no facts that would reasonably prevent the tax-free treatment of the transaction. In response, ETE counterclaimed, seeking a declaratory judgment that, if its tax counsel was unable to deliver the Section 721 opinion, ETE would be entitled to terminate the merger agreement due to the failure of a closing condition.
The Chancery Court found that ETE did not breach either the efforts covenant or the representation and ruled in favor of ETE, holding that ETE’s tax counsel had determined in good faith that it could not deliver the tax opinion and ETE had a contractual right to enforce the closing condition. Williams appealed the Chancery Court’s decision to the Delaware Supreme Court.
While the Delaware Supreme Court affirmed the Chancery Court’s ruling that allowed ETE to terminate the merger agreement, contrary to the Chancery Court, the Delaware Supreme Court found that ETE breached its covenant to exert commercially reasonable efforts to obtain the tax opinion. The Supreme Court held that both a “commercially reasonable efforts” covenant and a “reasonable best efforts” covenant to close the transaction placed an “affirmative obligation on the parties to take all reasonable steps to obtain the tax opinion and otherwise complete the transaction.” The court additionally described this standard as requiring the buyer to take “all reasonable steps to solve problems” and found that there was sufficient evidence from which the Chancery Court could have concluded that ETE breached these covenants. This contrasted with the Chancery Court’s decision that ETE satisfied its obligations by merely not actively seeking to thwart the transaction when its tax counsel determined that it could not deliver the necessary opinion. The Supreme Court, nevertheless, found that any such breach by ETE could not have materially contributed to the failure of ETE’s tax counsel to deliver its opinion.
The Supreme Court’s decision clarifies the approach Delaware courts will take when reviewing parties’ obligations to use “commercially reasonable efforts” or “reasonable best efforts”. In determining what efforts are required by such covenants, the Delaware Supreme Court specifically identified the following factors as potentially demonstrating evidence of breach: (i) a party not directing its counsel “to engage earlier or more fully with” opposing counsel, (ii) a party failing to negotiate the issue directly with the other party, (iii) a party failing to coordinate a response among the various players, (iv) a party releasing to the public that its counsel had refused to issue the tax opinion and (v) a party generally not acting like an enthusiastic partner in pursuit of consummation of the merger agreement. However, it should be noted that, once a breach of a reasonable best efforts covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of the transaction.
The Williams Companies, Inc. v. Energy Transfer Equity, L.P., 2017 WL 1090912 (Del. Mar. 23, 2017)
New Jersey Angel Investor Tax Credit Amendment
On May 1, 2017, Governor Christie signed Senate Bill S-158 into law as P.L. 2017, c.40. The statute amends the “New Jersey Angel Investor Tax Credit Act” (the “Act”). The Act allows a tax credit against the New Jersey income tax for certain qualified investments in technology. Prior to the amendment to the statute, the Act allowed the credit to be used by corporations or by partners of a partnership (in proportion to their respective shares of income). However, the Act did not contain provisions to address the use of the tax credit by shareholders of a corporation that elects to be taxed as an “S corporation.” The Act, as amended, now provides that shareholders of a corporation that has made a valid New Jersey S corporation election, will benefit from the credit in accordance with their proportionate share of S corporation income. S corporations that wish to avail themselves of the recent amendment will need to have a valid New Jersey S corporation election in place. Unlike some other states, which automatically recognize a valid Federal S election for state purposes, New Jersey requires a separate election to be filed regardless of whether the corporation is a domestic or foreign corporation.
Other amendments to the Act allow for holding companies that own interests in qualifying businesses to take advantage of the tax credit and expands the types of investments that qualify for the tax credit to include “carbon footprint reduction technology.”
Investors wishing to take advantage of the tax credit must satisfy various requirements, including receiving approval from the New Jersey Economic Development Authority.
SPOTLIGHT: HEDGE FUNDS
CSG announces the launch of its Hedge Funds Group, with extensive experience in representing hedge funds and investment managers, ranging in size from small emerging managers to some of the largest investment management firms in the industry with over $10 billion in assets under management. For more information, please visit the Hedge Funds Group's page on CSG's website.
Delaware Chancery Court Looks to Extrinsic Evidence to Resolve Ambiguity in a Merger Agreement
The Delaware Chancery Court recently resolved a dispute amongst parties to a merger agreement over the meaning of an ambiguous term to trigger a milestone payment by relying on extrinsic evidence in Shareholder Representative Services LLC v. Gilead Sciences Inc. et al., No. CV 10537-CB, 2017 WL 1015621, at *2 (Del. Ch. Mar. 15, 2017).
In 2011, Gilead Sciences, Inc. (Gilead), a biopharmaceutical company, entered into a merger agreement with Calistoga Pharmaceuticals, Inc., (Calistoga), a biotechnology company, pursuant to which Gilead acquired Calistoga. As part of the merger consideration, Gilead agreed to make three milestone payments to the former shareholders of Calistoga if one of Calistoga’s main drug compounds achieved certain regulatory approvals. Gilead paid $175 million in satisfaction of the first two milestones, but refused to pay $50 million for the third milestone, claiming the compound did not obtain the necessary approval to trigger the third milestone payment.
The milestone at issue was triggered if the compound received regulatory approval in the United States or European Union “as a first-line drug treatment (i.e., a treatment for patients that have not previously undergone systemic drug therapy therefor) for a Hematologic Cancer Indication.” While the compound was approved by the European Commission for a specific type of hematologic cancer, which Calistoga believed triggered the third milestone payment, Gilead disputed that the approval satisfied the definition of “hematologic cancer indication.” The parties agreed that the term “indication” has multiple meanings in the oncology industry that are context specific, but disagreed on the context in which it was used in the merger agreement.
Generally, “a contract’s express terms provide the starting point in approaching a contract dispute.” If a “contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity.” However, if a contract is ambiguous, a court “may consider extrinsic evidence, including ‘evidence of prior agreements and communications of the parties as well as trade usage or course of dealing.’” Under Delaware law, “a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.”
Here, the court was satisfied that the word “indication” was ambiguous when construed within the four corners of the merger agreement, and thus had to consider extrinsic evidence. In resolving the dispute over the meaning of “indication,” the court focused on the parties’ negotiation history including drafts of the merger agreement and correspondence amongst the parties before and after the closing of the transaction. The court found that the overwhelming weight of the evidence demonstrated that the parties mutually understood when they entered into the merger agreement that “indication” had the meaning ascribed to that term by Gilead. As a result, the shareholders of Calistoga were not entitled to the $50 million third milestone payment.
The court’s ruling serves as a reminder of the importance of drafting agreements with clear and unambiguous terms. As the court demonstrated, failing to clearly define terms, especially terms that have context specific meanings, could lead to significant and unintended results.
Shareholder Representative Services LLC v. Gilead Sciences Inc. et al., No. CV 10537-CB, 2017 WL 1015621, at *2 (Del. Ch. Mar. 15, 2017).
Delaware Supreme Court Upholds Irrebuttable Business Judgment Rule
In a recent opinion, the Delaware Supreme Court affirmed the judgment of the Court of Chancery which dismissed claims by stockholders of a corporation that the board of directors breached its fiduciary duties in approving a merger. In dismissing the action, the Court of Chancery confirmed that “the approval of a merger by a majority of a corporation’s outstanding shares pursuant to a statutorily required vote of the corporation’s fully informed, uncoerced, disinterested stockholders renders the business judgment rule irrebuttable.”
While in the instant case the approval was accomplished by accepting a tender offer, the Court found that approval “has the same cleansing effect as a vote in favor of that merger.” Upon finding that fully informed, uncoerced, disinterested stockholders holding a majority of the shares approved the merger, the business judgment rule “irrebutably applies” and the merger “only can be challenged on the basis that it constituted waste.”
The court’s decision is noteworthy because it held that (i) tender offers are to be analyzed under the same standards as applied to stockholder votes and (ii) once an action is approved by a majority of fully informed, uncoerced, disinterested stockholders, the decision renders the business judgment rule irrebuttable.
In re Volcano Corp. Stockholder Litigation, C.A. No. 10485-VCM (Del. Feb. 9, 2017)
Proposed Amendments to the Delaware General Corporation Law
The Council of the Corporation Law Section of the Delaware State Bar Association (the “Council”) has proposed amendments to the Delaware General Corporation Law (“DGCL”) and related statutory provisions. Most of the amendments, if approved by the Delaware legislature, would become effective on August 1, 2017. A principal purpose of the amendments is the implementation of shared electronic database recordkeeping (such as blockchain or distributed ledger technology). This type of record keeping is maintained by many organizations at the same time with no master copy. It is also self-proving, meaning that by looking at the blockchain, any user can determine whether there has been any tampering with the records. The implementation of blockchain record keeping for the maintenance of a corporation’s stock ledger would have the potential of replacing the financial industry's third-party settlement and clearing. This initiative has been in the works for some time, with Delaware’s Governor Jack Markell last year announcing the “Delaware Blockchain Initiative”, which had asked the Council to explore amendments to the DGCL for this purpose.
The majority of the amendments are revisions which clarify current law. An example is the proposed change to the DGCL which eliminates the requirement that individuals must date a written consent when signing (rather than relying on a pre-printed date). Further, new changes aim to facilitate mergers and consolidations by expressly allowing mergers and consolidations of Delaware corporations with non-U.S. entities such as joint-stock or other associations, partnerships, and limited liability companies. Currently the law permits such mergers and consolidations if the foreign jurisdiction “permits” the merger or consolidation. By replacing the word with the passive words of “not prohibit”, doubt is removed as to whether the foreign jurisdiction needed to take an affirmative action to “permit” such action.
For more information on this issue of Insights, please contact your CSG attorney or one of the members of the Corporate & Securities Group listed below:
Laurence M. Smith | Co-Chair, Corporate & Securities | (973) 530-2021 | firstname.lastname@example.org
Edward B. Stevenson | Co-Chair, Corporate & Securities | (973) 530-2173 | email@example.com
Sean M. Aylward | Vice Chair, Corporate & Securities | (973) 530-2105 | firstname.lastname@example.org