Big Deal: What’s New in Tech M&A?

Recent amendments to the Delaware General Corporation Law (the DGCL) notably shift how appraisal rights are approached in M&A, clarifying previously ambiguous provisions and attempting to make appraisal rights more efficient and available by (1) allowing beneficial stock owners to exercise appraisal rights, (2) shifting to electronic appraisal notifications, and (3) broadening the scope of covered transactions.

Effective August 1, 2022, Section 262(d)(3) of the DGCL was amended to permit beneficial owners of stock to exercise appraisal rights directly. Previously, only the record holder could make the demand on behalf of the beneficial owner. The beneficial owner would have to comply with the relevant provisions of Section 262 of the DGCL, including continuously maintaining beneficial ownership of the stock. Also effective August 1, 2022, Section 262(d) of the DGCL was amended to state that a physical copy of the appraisal rights in Section 262 of the DGCL did not have to be provided to relevant stockholders. Instead, a corporation can satisfy the appraisal notice requirements by directing relevant persons to a publicly available electronic resource, which includes the official website of the State of Delaware, on which the DGCL statutes are posted. This reduces the extra step of including a full copy of Section 262 of the DGCL to appraisal notices for relevant transactions by referring to Section 262 via website link. However, caution should be taken to ensure links are properly working prior to such appraisal notices being sent.

Effective August 1, 2023, Section 228(e) of the DGCL was revised to clarify which stockholders would be entitled to notice of a non-unanimous action of stockholders taken in lieu of a meeting. The stockholders who are entitled to such notice are those who (1) are stockholders as of the record date of the action, (2) would have been entitled to notice of the meeting if the action had been taken at the meeting and the record for the notice of such meeting were the record date for the action by consent, and (3) did not consent to the action. When preparing Section 228(e) notices in connection with mergers or other acquisition consents, it is important to properly determine who is required to receive such notice because the record date could precede the date that an action by written consent is effective.

Also effective August 1, 2023, Section 262 of the DGCL was expanded to provide appraisal rights to stockholders with respect to a corporation’s transfers, domestications, and continuances.

On June 27, 2023, the US Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) announced proposed changes to the premerger notification form and associated instructions, as well as the premerger notification rules implementing the Hart-Scott-Rodino (HSR) Act, which would place the HSR form closer to merger control filings required in other jurisdictions, such as the European Union.¹ The proposed rulemaking changes, if implemented, would significantly revise the information required for an HSR filing. Such changes include the following requirements to merger parties’ HSR filings:

• Details about the transaction rationale and information on investment vehicles, including on the structure of private equity investors or other corporate relationships, as well as previous acquisitions
• Information on the relevant overlapping products or services and other non-horizontal business relationships, such as supply agreements
• Data on projected revenue streams as well as any transactional analyses or other internal documents addressing market conditions
• Information relating to the proposed transaction’s impact on labor markets
• Information on foreign subsidies from certain foreign governments or entities, as mandated by the Merger Filing Fee Modernization Act of 2022

Such changes would materially broaden the scope of information required with the HSR form. They could be expected to create a substantial additional burden on the process of gathering and maintaining the information required for HSR filings, thereby increasing the preparation time necessary for HSR filers and prolonging transaction timelines.

Final revisions of the proposed rulemaking are expected soon because the public comment period ended on September 27, 2023. New disclosure requirements may come into force by the end of this year.

Learn more about this in our recent client alert: FTC and DOJ Propose Major Changes to HSR Form and Disclosure (goodwinlaw.com)

In a decision issued on May 2, 2023,² the Superior Court of Delaware found Corvium Inc. liable for fraud on one claim on the basis of misrepresentations made without proper written disclaimers in connection with the sale of its assets to Phage Diagnostics Inc. On a second claim, the court found that Corvium was shielded from fraud liability since Phage could not prove reliance as a required element of fraud on diligence materials that contained written disclaimers by Corvium.

Corvium, a company in the business of designing systems for the testing of food products and food processing environments, sold its business to Phage, which partners with food companies to implement proactive approaches to manage food safety risks, in 2017. In a complaint filed in 2019, Phage alleged that (1) Corvium knowingly made certain inaccurate statements in various management presentations and other materials regarding the business that were designed to induce Phage into entering into the purchase agreement and (2) Corvium’s broker fraudulently informed Phage that Corvium received a written offer from another interested buyer to purchase the business for $12 million, leading Phage to increase its offer from $10 million to $12 million, when no such competing interested party existed. 

With respect to the statements made in the diligence materials provided to Phage, the court found that Corvium made false representations, knew they were false, and made those representations intending to induce Phage to enter into the purchase agreement; however, the court determined that Phage failed to prove a required element of fraud, that Phage acted in justifiable reliance on the misrepresentation, because the representations made in the management presentations were limited by a written disclaimer.

As to the representation made in the negotiation process regarding the competing bidder, the court found that Phage had successfully proved each element of fraud when the broker knowingly made the false statement that Corvium received at least one other offer in excess of $10 million and Phage justifiably relied on the misrepresentation; therefore, the court awarded resulting damages in the amount of $2 million. Notably, the purchase agreement did not contain a disclaimer by Corvium of any representations made outside of the purchase agreement, nor did it include a statement of non-reliance by Phage as to representations made outside the purchase agreement. Therefore, without the proper written disclaimers in the purchase agreement, the court found that Phage justifiably relied on the misrepresentation, a key element in proving fraud.

The lesson to learn from this case is that carefully drafting disclaimers in M&A agreements and being aware of any disclosure language in diligence materials are of paramount importance. As shown by this case, disclosure can have a profound impact on potential legal disputes and outcomes. Properly structured disclaimers can protect sellers from potential fraud claims, but they can also alert buyers to the specific representations they are relying upon when entering into a transaction.

Florida’s Senate Bill 264 (SB 264), made effective July 1, 2023, prohibits certain foreign persons from owning, or acquiring interests in, land in Florida. Among other restrictions, the law restricts members of the Chinese government or the Chinese Communist Party, persons residing in China who are not US citizens or lawful permanent residents, and any entities or collection of such persons from directly or indirectly owning or having a controlling interest in any real property (including land, building, and fixtures) in Florida. SB 264 also prohibits the direct or indirect ownership of land within 10 miles of critical infrastructure or military installations in Florida by foreign principals of China, Cuba, Iran, North Korea, Russia, Syria, and Venezuela. There are some exceptions to the law — e.g., for real property owned acquired before July 1, 2023; indirect de minimis ownership; and residential real property.

The constitutionality of the law is being challenged in federal court. However, for now, the current implication can be wide-ranging on M&A transactions. The law effectively restricts Chinese buyers from purchasing companies that may own real property in Florida, but the statute is so broadly written that it can be triggered if a buyer has Chinese investors, whether director or indirect, and a target company owns any real property in Florida.

Learn more about this in our recent client alert: Far Beyond Real Estate: The Real Impact of Florida’s SB 264 (goodwinlaw.com)

Webinar CLE: Special Committees in Conflicted M&A Transactions (November 1, 2023)

Goodwin M&A partner Kirkie Maswoswe and Goodwin Litigation partner Caroline Bullerjahn will be leading a webinar CLE course that will discuss the latest practice issues and litigation developments regarding special committees in conflicted M&A transactions where directors or significant shareholders have a potential conflict of interest. To learn more about the session and to register, visit the Strafford CLE website.