Q1 2022 Quarterly Corporate / M&A decisions updates

Below is our Corporate / M&A decisions update covering decisions in the first quarter of 2022. This update is designed to highlight selected important M&A, corporate, and commercial court decisions on a quarterly basis.

2022 is off to a busy start, with Delaware courts issuing several interesting M&A opinions. Notably, the Delaware Court of Chancery issued two opinions in SPAC-related matters, one applying the entire fairness standard to a de-SPAC merger and one addressing stock restrictions after a de-SPAC merger.  The court also considered the impact of COVID-19 on ordinary course covenants and MAEs in an asset purchase agreement between a franchisee and franchisor.  Finally, the court issued opinions on two long-standing Delaware doctrines: “sandbagging” as a defense and the powers of a custodian under the DGCL to revive an abandoned business.

Brief summaries of these key decisions appear below with links to more robust discussions.

Arwood v. AW Site Services: Delaware Chancery Court declares Delaware ‘pro sandbagging’

In Arwood v. AW Site Services LLC, C.A. No. 2019-0904-JRS (Del. Ch. March 9, 2022), the Delaware Court of Chancery held that “Delaware is a ‘pro-sandbagging jurisdiction,’” meaning that, absent a provision to the contrary, an M&A buyer is entitled to seek indemnification for breaches of contractual representations even if it knew or should have known of the breaches at the time of contract. The court further stated that, even where available, sandbagging could not arise as a defense unless the buyer had actual knowledge that a representation was false at the time it was made, and that even reckless disregard for the truth was insufficient. The case clarifies that, under Delaware law, a buyer’s pre-closing knowledge will not bar its ability to bring claims for breached representations and warranties, unless the agreement contains anti-sandbagging provisions. The court also clarified the standards for showing justifiable reliance in connection with fraud claims.

Please click HERE for a more detailed discussion of this case.

In re Forum Mobile: Section 226(a)(3) cannot turn defunct business into blank check company

In In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022), the Delaware Chancery Court held that Section 226(a)(3) of the Delaware General Corporation Law (DGCL) does not authorize the court to appoint a custodian to revive an abandoned business. The court outlined the decades-long public policy against allowing entrepreneurs in the capital markets to use sections of the DGCL to revive defunct entities for use as vehicles to access the public markets, but acknowledged intervening changes in the federal securities laws that might impact that policy. After considering input from the SEC through a court-appointed amicus curiae, the court concluded that the plain language of the statute allows the court to appoint a custodian under Section 226(a)(3) to liquidate, but not revive, an abandoned business.

Please click HERE for a more detailed discussion of this case.

Level 4 Yoga v. CorePower Yoga: COVID-19 shutdown not grounds for asset purchase repudiation

In Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249 (Del. Ch. March 1, 2022), the Delaware Court of Chancery granted Level 4, the owner of franchised yoga studios, an order of specific performance and compelled the buyer, Level 4’s franchisor, to close under an asset purchase agreement after finding that (1) Level 4 had not breached its ordinary course covenant by complying with the franchisor’s directives to temporarily shut down its studios at the outset of the COVID-19 pandemic and (2) no Materially Adverse Effect had occurred. The court found that the parties had intentionally structured their purchase agreement as a “one-way gate” requiring that closing take place, without any conditions to closing, to purposefully account for the fact that Level 4 was not a voluntary seller after the franchisor had invoked a contractual call option. The court therefore awarded Level 4 specific performance, damages, and interest for the franchisor’s unexcused failure to close.

Please click HERE for a more detailed discussion of this case.

Brown v. Matterport: Court of Chancery addresses share transfer restrictions after de-SPAC merger

In Brown v. Matterport, Inc., et al., C.A. No. 2021-0595-LWW (Del. Ch. Jan. 10, 2022), the Delaware Court of Chancery held that transfer restrictions restricting trade of stock “outstanding immediately” after a de-SPAC merger did not apply to an officer who received his stock more than 100 days after the merger. While the issues presented by SPACs and de-SPAC mergers may be new, in this case the court applied traditional principles of contract interpretation to decline to rewrite unambiguous contractual language.

Please click HERE for a more detailed discussion of this case.

In re MultiPlan: De-SPAC transaction warrants entire fairness review

In In re MultiPlan Corp. Stockholders Litigation, C.A. No. 2021-0300-LWW, the Delaware Court of Chancery denied motions to dismiss a shareholder complaint filed against a special purpose acquisition company (SPAC), its sponsor, and directors and officers, among others. The shareholders alleged that the SPAC’s fiduciaries failed to disclose material information regarding the SPAC’s acquisition that induced the shareholders’ decision not to exercise their redemption right. As a matter of first impression, the court held that the entire fairness standard of review applied to the de-SPAC transaction because the transaction was a conflicted controller transaction and because a majority of the board was not disinterested or independent. While the court noted that its decision was largely grounded in the alleged disclosure failures rather than the structural implications of a SPAC transaction, the ruling raises the risk of increased scrutiny for de-SPAC transactions.

Please click HERE for a more detailed discussion of this case.



Authored by David R. Michaeli, Allison M. Wuertz and Elizabeth Cochrane.


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