A year in Delaware courts

BINDING NEGOTIATIONS

Term sheets, which in market practice are generally considered non-binding, can actually be enforced under certain circumstances, a Delaware court ruled in September.

In SIGA Technologies v. PharmAthene, the two parties signed a binding merger agreement that stipulated SIGA would negotiate a licensing agreement with PharmAthene if the merger fell through. The merger ultimately collapsed. And to escape a licensing agreement it no longer wanted, SIGA played hardball on terms and conditions knowing that PharmAthene would refuse their offer, according to plaintiffs. The court disapproved of SIGA’s actions, saying it should have negotiated in good faith.

Private equity firms should consider their choice of jurisdiction when negotiating acquisition agreements in light of the ruling, warns Jim Burgess, litigation partner at Sheppard Mullin. Burgess added it’s possible the case could have a ripple effect on other jurisdictions, meaning the Delaware decision could lead other judges to also conclude certain term sheets should be considered binding.

MINORITY CONTROL

Private equity firms with minority holdings in publicly listed companies are allowed to have a voice during the sales process, a Delaware court ruled over the summer.

The case involved private equity firm Castle Harlan and the sale of its stake in Morton’s Restaurant Group. Common stockholders challenged the sale, fearing that Castle Harlan, a private equity firm with a 28 percent equity stake, was more interested in cashing out its investment rather than the long-term needs of the company.

Bill Regner, co-head of Debevoise & Plimpton’s M&A practice, says that Delaware courts have been wrestling with this conflict of interest issue for some time. And while this particular case supports the involvement of a large minority stockholder during the sales process, other cases have ruled differently.

QUICKER MOVES

GPs taking public companies private through a “two step” acquisition process, which can shave months off the time it takes to close a deal, have been made easier following amendments to the Delaware General Corporation Law (DGCL).

Under the two-step merger process, GPs first gain 90 percent of a target company’s shareholder control (typically through a cash tender offer), and then complete the deal with a time convenient “short-form” merger.

With the reforms GPs can now use the short-form merger with only 51 percent of shareholder control. Short-form mergers allows a super majority shareholder to buyout minority shareholders without their approval.

FAIR WARNING

GPs must carefully document their distinct legal separation from portfolio companies if they want to protect themselves from compensation claims under the US Worker Adjustment and Retraining Notification (WARN) act, a recent Delaware court case has shown.

Sun Capital Partners was taken to the Delaware bankruptcy court when staff at Jevic Transportation, a carrier and delivery service company, claimed they were owed compensation for violations of the act.

The WARN Act requires companies with 100 or more employees to provide 60 days advance notice of mass layoffs or plant closings. In the Sun Capital case, Jevic’s staff received just one days notice before the company’s bankruptcy filing.

Staff at Jevic argued the company’s parent owner, Sun Capital, should be liable for damages using a “single employer” theory of liability. The court used five factors to test the claim: common ownership, common directors and/or officers, de facto exercise of control, unity of personnel policies emanating from a common source and dependency of operations.

Because Sun Capital was able to specify that the fund itself was not actually directing the business decisions of Jevic, the court determined Sun Capital was not a single employer.