Great Hill Equity Partners v. SIG Growth Equity Fund
(Del. Ch. November 15, 2013) (addressing post-closing ownership of attorney-client communications and right to assert privilege between target and attorney).
In Great Hill, the court held that the right to assert the privilege over attorney-client communications and ownership of such communications passes to the acquirer in acquisitions structured as mergers under Delaware law. This case clarifies the law in Delaware mergers by expressly refusing to follow prior New York case law and raises issues that adversely impact selling stockholders.
As a result of this case, in acquisitions structured as mergers under Delaware law, a stockholder representative charged with handling post-closing disputes on behalf of the seller's former stockholders would be prohibited from accessing pre-closing, attorney-client privileged communications between seller and its counsel. Such information could be important to the success of the stockholder representative's position in a post-closing dispute. The case acknowledges, however, that the parties may take pre-closing steps to obtain a different result, including through addressing the matter in the acquisition agreement.
Because of the difficulties this case presents for selling stockholders, we anticipate an increase in the negotiation of contractual provisions addressing these issues in applicable transactions going forward. These provisions would be in addition to commonly-included provisions specifically allowing a seller's pre-closing counsel to represent the stockholder representative post-closing. Sellers need to be aware of these issues and be prepared to negotiate for appropriate terms governing these rights. Buyers, on the other hand, need to understand the law and know what rights and information they are willing to permit to be retained by the selling stockholders and their representatives. All M&A practitioners should expect to be dealing with these issues going forward.
Read the full opinion.
Developments Under Delaware Law in the Enforceability of Non-Reliance Provisions Against Fraud Claims
A series of cases in 2013 refined the law in Delaware relating to the enforceability of non-reliance clauses. Non-Reliance clauses are generally intended to limit a buyer's ability to make fraud claims based upon representations made outside of the acquisition agreement (e.g., in diligence materials in the data room, spoken in meetings). Based upon previous case law, a properly drafted non-reliance clause would be enforced in Delaware to bar fraud claims that were based upon representations made outside of the four corners of the acquisition agreement. Three cases in 2013 challenged existing case law and we expect will impact the drafting and negotiation of non-reliance provisions.
Anvil Holding v. Iron held that a non-reliance provision that includes only a statement by the seller that they are making no other representations is not sufficient to bar an extra-contractual fraud claim under Delaware law. The court held that a buyer must, in the applicable agreement, affirmatively disclaim reliance upon extra-contractual representations for the language to bar fraud claims (clarifying the 2012 contrary holding in RAA Management v. Savage Sports Holdings). Pyott-Boone Electronics Inc. v. IRR Trust discussed the inherent tension between a broadly written full-disclosure rep (the so-called "10b-5 rep") and a non-reliance provision and is a warning to drafters to ensure that these two provisions are consistent and clear. Finally, Transdigm v. Alcoa Global Fasteners held that a non-reliance provision will not bar extra-contractual fraud claims that are based upon active concealment of material information if the non-reliance provision does not expressly disclaim reliance on extracontractual omissions.
Recent studies show that the majority of private-target acquisitions include some form of non-reliance clause (72% of deals in the 2011 ABA Private Target Deal Points Survey and 52% of deals in the 2012 SRS M&A Deal Terms Study included some form of non-reliance or no other representation clause). Regardless of which side of the table you sit, this issue will be frequently negotiated. Staying on top of the current state of the law in this area is crucial to avoiding significant unintended consequences. We encourage all M&A professionals to be aware of the holdings from these cases and to ensure that their non-reliance provisions are drafted appropriately.
Read the full opinions for Anvil Holding, Pyott-Boone and Transdigm.
FTC/DOJ MERGER ENFORCEMENT DEVELOPMENTS
No Deal Too Small: FTC and DOJ Target Non-HSR Reportable Tech Deals in 2013
The FTC recently announced a settlement with a specialty software developer, requiring it to divest a business that it had acquired more than a year earlier for $8.7 million. The challenge to an acquisition that was so small that it did not have to be reported under the Hart-Scott-Rodino Act is the most recent in a growing number of government challenges to consummated non-reportable deals. It is a reminder that mergers, no matter how small, may be subject to antitrust scrutiny and may not fly under the enforcement radar. Year to date, the DOJ and FTC have challenged five non-HSR reportable deals, which is as many as the agencies have challenged collectively in any previous year, and the DOJ is currently investigating at least one other non-reportable transaction that recently closed.
Focus on High-Tech Mergers and Acquisitions
Two of the five challenges to non-reportable deals this year are in the tech industry: Solera Holdings, Inc.'s acquisition of Actual Systems of America, Inc. and Bazaarvoice, Inc.'s acquisition of PowerReviews, Inc.
Antitrust enforcement in the tech sector has been a priority of the Obama Administration. Obama's first Assistant Attorney General for Antitrust identified antitrust issues "arising in high-tech and Internet-based markets" as an area of focus in her first speech. And in March 2013 when President Obama named Edith Ramirez to head the FTC, a White House official emphasized that "[o]ver the past few years, Ramirez has been instrumental in ensuring there is robust competition and innovation in the high-tech marketplace."
Solera/Actual Systems: FTC Challenges $8.7 Million Acquisition
On October 24, the FTC announced approval of a Final Order settling charges that Solera's 2012 acquisition of Actual Systems was anticompetitive. The settlement requires Solera, a provider of software and services to the automobile insurance claims processing industry, to divest assets to resolve FTC charges that the acquisition of rival Actual Systems violated antitrust law.
Bazaarvoice/PowerReviews: DOJ Goes to Court Attempting to Unwind Non-Reportable Acquisition
In Baazarvoice/PowerReviews, the DOJ alleged in its suit that Bazaarvoice's acquisition is likely to lessen competition for product rating and review platforms used to collect and display consumer-generated online product feedback. The DOJ supported its complaint with evidence, presented at trial, from company documents, including quotes from a company co-founder stating that the acquisition would "[e]liminat[e] [Bazaarvoice's] primary competitor" and provide "relief from price erosion." Bazaarvoice has taken issue with the quotes, which it alleges are "taken out of context," and what it asserts is an "overly narrow" product market. On October 15, 2013, the parties presented their closing statements and are now awaiting the judge's ruling.