The Ropes Recap: Mergers & Acquisitions Law News – Fourth Quarter 2015

The Demise of Disclosure-Only Settlements? The Court of Chancery Outlines a New Regime. –

In a recent opinion, Chancellor Bouchard of the Delaware Court of Chancery reiterated the Court of Chancery’s belief that settlements of M&A litigation where the target company agrees to issue supplemental public disclosures in exchange for a global release of all claims relating to the transaction “rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with rigor” and that, going forward, the Court will be “vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure they are genuinely fair and reasonable.”

Please see full Newsletter below for more information.

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Fourth Quarter 2015
The Ropes Recap
Mergers & Acquisition Law News
A quarterly recap of mergers and acquisition law news from the M&A team at Ropes & Gray
LLP.
Contents
News from the Courts ……………………………………………………………………………………………………… 2
The Demise of Disclosure-Only Settlements? The Court of Chancery Outlines a New
Regime. ……………………………………………………………………………………………………………………… 2
Delaware Supreme Court Upholds Court of Chancery Rulings in the Rural/Metro Case………. 3
Court of Chancery Reverses Finding of Financial Advisor Aiding and Abetting Liability for
Lack of an Underlying Breach ………………………………………………………………………………………. 5
Hostile Bid Prevented by Confidentiality Agreement ………………………………………………………. 6
Delaware Court of Chancery Invalidates Charter & Bylaw Provisions Allowing Only “For
Cause” Director Removal Where Board Is Unclassified …………………………………………………… 8
Oregon Supreme Court Enforces Delaware Exclusive Forum Selection Bylaw …………………… 9
Delaware Supreme Court Upholds Award of Expectation Damages in Breach of Contract
Claim ……………………………………………………………………………………………………………………….. 10
Delaware Court of Chancery Opinion Provides Guidance on the Interpretation of Contractual
Provisions Relating to Fraud-Based Claims ………………………………………………………………….. 11
Delaware Supreme Court Draws Inference that Controller’s Long-Term Friend Is Not
Independent ………………………………………………………………………………………………………………. 13
Delaware Court of Chancery Binds Investor to Contractually Mandated Fair Value
Assessment Determination………………………………………………………………………………………….. 13
Contributors …………………………………………………………………………………………………………………. 15

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News from the Courts
The Demise of Disclosure-Only Settlements? The Court of Chancery Outlines a New
Regime.
In a recent opinion, Chancellor Bouchard of the Delaware Court of Chancery reiterated the Court
of Chancery’s belief that settlements of M&A litigation where the target company agrees to issue
supplemental public disclosures in exchange for a global release of all claims relating to the
transaction “rarely yield genuine benefits for stockholders and threaten the loss of potentially
valuable claims that have not been investigated with rigor” and that, going forward, the Court
will be “vigilant in scrutinizing the ‘give’ and the ‘get’ of such settlements to ensure they are
genuinely fair and reasonable.”
It is well-recognized that, for many years, nearly all public company M&A transactions
precipitated litigation. Many of those actions were settled when the target company agreed to
supplement its public disclosures concerning the transaction to add technical information that
could potentially be helpful to stockholders in determining how to vote on the transaction. In
exchange for issuing those supplemental disclosures, the stockholder plaintiffs would grant the
defendants broad releases of all claims that were or could have been filed in connection with the
transaction – including claims unrelated to the adequacy of the disclosures at issue in the case.
The plaintiffs’ counsel would then seek a fee for having conferred a benefit to the company’s
stockholders. Academics, practitioners, and even certain courts denounced these “merger tax”
lawsuits.
However, in recent decisions, the Court of Chancery has expressed reluctance to approve
disclosure settlements in transactional litigation. Here, Chancellor Bouchard went further and
rejected a proposed disclosure-only settlement of stockholder litigation challenging the
acquisition of Trulia, Inc. by Zillow, Inc. In so doing, Chancellor Bouchard held that the
proposed settlement terms, which involved immaterial supplemental disclosures concerning the
work performed by Trulia’s financial advisor, did not provide Trulia’s stockholders with
adequate consideration for the released claims. Chancellor Bouchard also held that, going
forward, disclosure claims should be raised either in a preliminary injunction motion or through
a mootness application for attorneys’ fees if a company voluntarily moots a stockholder
plaintiff’s disclosure claim by disclosing the relevant information, each of which procedural
vehicles would result in the parties to litigation advocating in an adversarial context the true
value of the supplemental discloses.
This opinion, particularly following the Court’s prior rulings concerning disclosure settlements,
likely signals the end of “disclosure only” settlements, which may have a material impact on the
number of stockholder lawsuits filed in connection with normal course M&A transactions.
Indeed, it has been publicly reported that in the fourth quarter of 2015 after the Court of
Chancery has become increasingly hostile to unremarkable disclosure-only settlements,

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stockholder lawsuits were filed in connection with only 21.4% of public company transactions –
far lower than the 90% and more that had become the norm.
(In re Trulia, Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016))

Delaware Supreme Court Upholds Court of Chancery Rulings in the Rural/Metro Case
The Ropes Recap for the First Quarter of 2014 reported on the Delaware Court of Chancery’s
March 2014 opinion in In Re Rural Metro Corporation Stockholders Litigation, in which the
Court of Chancery held that Rural/Metro’s financial adviser, RBC, was liable to a class of
Rural/Metro stockholders for aiding and abetting a breach of fiduciary duty by Rural/Metro
board of directors in connection with the acquisition of Rural/Metro by Warburg Pincus.
Additionally, the Ropes Recap for the Third Quarter of 2014 reported that the Court of Chancery
had awarded $75.8 million in damages to the class. RBC appealed these rulings to the Delaware
Supreme Court and, on November 30, 2015, the Supreme Court issued its ruling upholding the
Court of Chancery’s decisions.
The Supreme Court found that the Court of Chancery’s factual findings were adequately
supported by the trial record. Specifically, the Court of Chancery had found that Rural/Metro
had commenced a sales process without authorization from the full board of directors and that
the sales process was shaped by RBC in a manner designed to benefit RBC by creating potential
opportunities for RBC both to participate in the financing of a contemporaneous acquisition of
EMS, a Rural/Metro competitor, and to provide financing to Warburg Pincus, the ultimate
acquirer of Rural/Metro.
The Supreme Court also upheld several key legal rulings made by the Court of Chancery:
• Application of Revlon scrutiny. RBC argued that the Court of Chancery erred in applying
Revlon’s enhanced scrutiny test to the entire Rural/Metro sale process (including the
unauthorized commencement of the sale process). RBC argued such scrutiny should
apply only to the board’s decision to select Warburg Pincus as the winning bidder. The
Supreme Court rejected this argument, finding that a Special Committee had initiated an
active bidding process to sell the Company months before the final board approval, and
the board subsequently ratified the Special Committee’s actions. Moreover, the Supreme
Court noted that delaying the application of Revlon to the endpoint of a sale process –
when the final decision was made to sell the company — would potentially incentivize
boards to avoid active engagement in a transaction until the end of a sale process. Finally,
the Supreme Court noted that the key flaws in the sale process occurred during the period
between the initiation of that process by the Special Committee and board approval of the
transaction, and to find that Revlon was not applicable during this period would
undermine the Revlon inquiry, which required the court to “examine whether a board’s
overall course of action was reasonable.”

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• Reasonableness of Board Conduct. Applying the Revlon standard, the Supreme Court
affirmed the Court of Chancery’s finding that the board’s conduct fell outside of the
range of reasonableness required by Revlon in the context of a sale of the company. The
Supreme Court found that RBC had a conflict of interest arising from designing the sale
process to enable it to seek to finance the acquisition of EMS and then, later, Warburg
Pincus, the ultimate acquirer of Rural/Metro, which the Court of Chancery found were
not fully disclosed to the board. The Supreme Court noted that, although a board can
consent to such conflicts, “directors need to be active and reasonably informed when
overseeing the sale process, including identifying and responding to actual or potential
conflicts of interest”. The failure of the board to manage such conflicts, combined with
their failure to be adequately informed as to the Company’s value (having received a
valuation report from RBC less than two hours before the meeting at which the
transaction was approved) led the Supreme Court to affirm the Court of Chancery’s
finding that the board breached its fiduciary duties.
• Disclosure Failures. The Supreme Court also upheld the Court of Chancery’s findings
that the Rural/Metro board failed to satisfy its duty of disclosure to the Company’s
stockholders. Of particular note was the Court’s finding that the proxy statement failed
to fully disclose how RBC intended to use the Rural/Metro sale process to obtain fees for
financing activities (both in connection with a contemporaneous transaction involving a
competitor of the Company, and by providing financing to Warburg Pincus). The Court
dismissed as inadequate a generic disclosure in the proxy statement that RBC had the
right to offer staple financing in light of, among other things, RBC’s efforts to obtain a
financing role for Warburg Pincus, especially towards the end of the sale process.
• Aider and abettor liability. The Supreme Court also affirmed the Court of Chancery’s
holding that RBC was liable as an aider and abettor of the board’s fiduciary breaches,
emphasizing in particular RBC’s role in intentionally misleading the board and in
creating an “informational vacuum” that caused the board to breach its fiduciary duties.
In so finding, the Court rejected arguments that attaching aider and abettor liability to a
board’s unintentional breach of duty would create an imbalance of responsibilities to the
detriment of the non-fiduciary, noting that aider and abettor liability requires scienter of
the aider and abettor, which makes such liability difficult to prove.
Importantly for financial advisors, the Supreme Court rejected the Court of Chancery’s view that
financial advisors function as “gatekeepers” in M&A transactions. Instead, the Supreme Court
noted that the services provided by a financial advisor are primarily contractual in nature and can
vary from one transaction to another, and that it is for a board to determine, in negotiation with
the financial advisor, the scope and terms of the financial advisor’s engagement. According to
the Supreme Court, “[t]he banker is under an obligation not to act in a manner that is contrary to
the interests of the board of directors, thereby undermining the very advice that it knows the
directors will be relying upon in their decision making processes.” As a result, it is not the case

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that any failure by a financial advisor to prevent directors from breaching their duty of care gives
rise to an aiding and abetting claim against the advisor.
(RBC Capital Markets, LLC v. Joanna Jervis, No. 140, 2015 (Del. 2015))

Court of Chancery Reverses Finding of Financial Advisor Aiding and Abetting Liability
for Lack of an Underlying Breach
On October 1, 2015, in In re Zale Corporation Stockholders Litigation, the Delaware Court of
Chancery refused to dismiss a claim against Zale Corporation’s financial advisor asserting that
the advisor had aided and abetted an alleged breach of the duty of care by Zale board. However,
following the Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings, Inc.,
which we discussed in the third quarter of 2015, and which held that a transaction approved by
uncoerced and fully-informed shareholder results in business judgment rule review, the Court
reversed its earlier decision and dismissed the claim against the advisor, concluding that the
Court had incorrectly applied the Revlon enhanced scrutiny standard of review in the initial
decision, rather than the business judgment rule standard of review mandated by the KKR
Financial decision.

The plaintiffs’ complaint alleged that Zale’s directors breached their duty of care by retaining the
advisor in connection with Zale’s sale to Signet Jewelers without conducting an adequate
investigation into its potential conflicts, and further alleged that the advisor had aided and
abetted those breaches. The Zale board had engaged the advisor after the advisor had represented
that it had no conflicts and a limited relationship with Signet. However, the advisor had received
$2 million in fees from Signet in the prior two years and a managing partner on the Zale
engagement had made a presentation to Signet concerning a possible acquisition of Zale—
including a maximum price that Signet should be willing to pay in such a transaction—shortly
before being engaged by Zale. The Zale board did not learn about that presentation until after the
merger agreement was signed.

The Court of Chancery initially determined that Revlon was the appropriate standard of review
under which to evaluate the plaintiffs’ claims against Zale’s directors. Under a Revlon analysis,
the Court found it reasonably conceivable that the Zale directors’ reliance on the advisor’s
representations about its relationship with Signet without further investigation “could constitute a
breach of their duty of care in this Revlon context.” The Court stated that board members have a
duty to detect a preexisting conflict when engaging a financial advisor, which it could satisfy by
asking probing questions about prior relationships and negotiating for representations and
warranties in the engagement letter. The Court further determined that it was reasonably
conceivable that the advisor’s alleged failure to disclose its presentation to Signet, where it
proposed making a bid to acquire Zale for a purchase price in the range of $17-$21 per Zale
share, adversely impacted the advisor’s and, consequently, the Board’s ability to seek a higher
per share price.

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The Court ultimately determined that the exculpatory provision in Zale’s certificate of
incorporation shielded its directors from monetary liability for any breach of their duty of care;
however, the Court held that the plaintiffs had adequately stated a claim against the advisor for
aiding and abetting those breaches.

Immediately following the Delaware Supreme Court’s ruling in KKR Financial, the advisor
moved for reconsideration of the Court of Chancery’s decision, claiming that, consistent with
KKR Financial, the Court should have applied the business judgment standard of review rather
than Revlon enhanced scrutiny when determining whether the Zale directors had breached their
duty of care.

On reconsideration, the Court determined that, in light of KKR Financial, the business judgment
rule was the appropriate standard of review because a majority of Zale’s disinterested
stockholders had approved the merger in a fully informed vote.

The Court concluded that “when reviewing a board of directors’ actions during a merger process
after the merger has been approved by a majority of disinterested stockholders in a fully
informed vote, the standard for finding a breach of the duty of care under [the business judgment
rule] is gross negligence.” The Court then applied the gross negligence standard to the
allegations presented in the complaint and determined that it was not reasonably conceivable that
the Zale directors breached their duty of care by acting in a grossly negligent manner with
respect to their engagement of advisor. With “no basis for a predicate fiduciary duty breach,” the
court held that the plaintiffs had not adequately pled that the advisor had any breach by the Zale
directors.

(In re Zale Corporation Stockholders Litigation, C.A. No. 9388-VCP (Del. Ch. Oct. 29, 2015)).

Hostile Bid Prevented by Confidentiality Agreement
On November 18, the Superior Court of California in Depomed Inc., v. Horizon Pharma, PLC,
issued a preliminary injunction prohibiting Horizon Pharma, PLC from pursing its hostile bid to
acquire Depomed, Inc.

By way of background, Horizon and Depomed had both participated in an auction process during
2014-2015 to acquire the rights to a pain relief drug called Nucynta, which was at the time
owned by Janssen (a subsidiary of Johnson & Johnson). Depomed emerged from the bidding as
the winner and acquired the rights to Nucynta from Janssen in April 2015. Prior to such auction
process, Horizon and Janssen had entered into a mutual confidentiality agreement regarding “a
contemplated co-promotion of products”, with Janssen to promote Horizon’s drug Duexis and
Horizon to promote Nucynta. The confidentiality agreement protected confidential information
regarding “a potential commercial business arrangement, specifically a co-promotion

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arrangement whereby HORIZON would co-promote JANSSEN’s NUCYNTA® drug product in
the United States.” Janssen ultimately elected not to pursue that co-promotion and notified
Horizon of such decision in early 2014. In connection with the auction process, Horizon and
Janssen did not enter into a new confidentiality agreement. Although Horizon suggested to
Janssen that the terms of the confidentiality agreement be amended to specifically address the
new auction process, no amendment was ever formally made and the parties did not enter into a
separate confidentiality agreement. However, Depomed submitted evidence that subsequent
correspondence between Horizon and Janssen indicated that the two intended that the
confidentiality agreement would nonetheless apply to the auction process.

In July 2015, Horizon launched a hostile bid to acquire Depomed. Depomed sought injunctive
relief and claimed that Horizon was improperly using confidential information it obtained from
Janssen when it participated in the auction for Nucynta. Although Horizon claimed that (i)
Horizon’s obligations of confidentiality were limited to discussions related to the potential co-
promotion transaction, (ii) it never breached the agreement in its pursuit of the hostile bid, and
(iii) Depomed lacked standing because it had never acquired Janssen’s rights under the
confidentiality agreement since the confidentiality was not specifically identified as a transferred
asset under the purchase agreement, the Court found Depomed’s claims were likely to prevail
and it granted the preliminary injunction. Horizon withdrew its $1 billion hostile bid following
the ruling.

This decision bears great resemblance to the 2012 Martin Marietta decision (Martin Marietta Inc.
v. Vulcan Materials Co., 56 A.3d 1072 (Del Ch. 2012)) where the Delaware Court of Chancery
blocked a hostile bid because of a violation of a confidentiality agreement, and provides a couple
of important reminders for a prospective acquiror of a business:

• It is important for a company to carefully monitor the confidentiality agreements
that it enters into in the course of its business, especially those relating to the
evaluation of potential acquisitions and other business ventures. In particular,
a company should keep track of the counterparties to which it owes obligations
regarding confidentiality, as well as the use restrictions for which it may use the
confidential information it receives.

• In anticipation of the potential need to assign rights under confidentiality
agreements to a future acquiror of all or a part of its business, a potential seller
should consider including in the ordinary course a provision in its confidentiality
agreements expressly providing for the assignability, in whole or in part, of such
seller’s rights under the confidentiality agreement to the purchaser of the assets to
which such agreement relates, without the need for obtaining the consent of the
other party to the confidentiality agreement. In doing so, consider the scope of
information to be disclosed as part of the sale process and whether any such

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information relates in whole or in part to retained assets to ensure that rights are
not inadvertently assigned with respect to any retained assets in a sale of only a
portion of the seller’s business.

(Depomed Inc., v. Horizon Pharma, PLC, No. 1:15-cv-283834 (Cal. Super. Ct. Nov. 18, 2015)).

Delaware Court of Chancery Invalidates Charter & Bylaw Provisions Allowing Only “For
Cause” Director Removal Where Board Is Unclassified
In December 2015, the Delaware Court of Chancery invalidated provisions of VAALCO Energy,
Inc.’s corporate charter and bylaws that purported to limit the removal of VAALCO directors to
“for cause” removals even though the VAALCO board was not classified (i.e., the VAALCO
directors are elected on an annual basis). Vice Chancellor Laster held that those provisions
violated Section 141(k) of the Delaware General Corporation Law, which requires that any
director may be removed “with or without cause” by a majority vote of the corporation’s
stockholders, except where the board is classified or the directors are elected by cumulative
voting.
Here, the “for cause” removal provisions in VAALCO’s corporate charter and bylaws were
adopted at a time when its board was classified. When stockholders voted to de-classify the
board in 2009, there was no corresponding amendment to the company’s organizational
documents. Stockholders ultimately challenged the validity of those provisions. VAALCO and
its directors moved to dismiss those claims, arguing that “numerous” (at least 175) other
corporations had similar provisions. Vice Chancellor Laster rejected that argument, noting that
those corporations constituted less than 5 percent of public companies, and stating that an “all the
other kids are doing it” argument did not survive judicial scrutiny. The Court also rejected
VAALCO’s argument that Section 141(d) of the DGCL, which states that a board may “be
divided into 1, 2 or 3 classes,” creates the concept of a single-class classified board. The Court
therefore rejected VAALCO’s arguments, and entered a declaratory judgment holding the
provisions of the corporation’s charter and bylaws which permit only “for cause” removals to be
invalid.
This ruling shows that the directors of Delaware corporations that have declassified their boards
should not rely on any “for cause only” restrictions to the removal of directors as part of its
defensive profile, as the Delaware Courts will not respect such restriction.

(In re VAALCO Energy, Inc. Stockholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21,
2015))

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Oregon Supreme Court Enforces Delaware Exclusive Forum Selection Bylaw
In recent years, many courts across the country—including courts in California, Illinois,
Louisiana, New York, and Texas—have followed the lead of the Delaware Court of Chancery
and held that exclusive forum selection bylaws are valid and enforceable. One notable exception
to that trend was an August 2014 opinion from an Oregon trial court (which was reported on in
the third quarter 2014 edition of the Ropes Recap), which refused to enforce a Delaware
exclusive forum selection bylaw that would have barred an Oregon litigation challenging a
merger between TriQuint Semiconductor, Inc. and RF Micro Devices, Inc. In a recent opinion,
the Oregon Supreme Court reversed that trial court ruling, holding that TriQuint’s exclusive
forum selection bylaw was valid and enforceable, and compelled stockholders challenging that
transaction to pursue their claims in Delaware.
In reversing the trial court’s ruling, the Oregon Supreme Court held that the TriQuint exclusive
forum selection bylaw was valid under both Delaware and Oregon law. The Court first held that,
as stated by the Delaware Court of Chancery in its opinions in Chevron and First Citizens,
Delaware corporations are generally permitted to adopt exclusive forum selection bylaws (as
further memorialized in DGCL 115). The court proceeded to hold that the forum selection bylaw
adopted by TriQuint was enforceable, even though it was adopted two days prior to the public
announcement of the TriQuint/RF merger and the plaintiffs had claimed that it was enacted for
an improper purpose. In so holding, the Supreme Court rejected the trial court’s conclusion that
the bylaw was invalid because the TriQuint stockholders did not have an adequate opportunity to
reverse the bylaw by vote. The court also rejected the trial court’s reliance on the 1971 Delaware
Supreme Court decision in Schnell v. Chris-Craft Industries, Inc., holding that the TriQuint
bylaw did not prevent TriQuint’s stockholders from challenging the merger, but only dictated the
forum in which they could do so. Here, the Supreme Court noted that exclusive forum selection
bylaws benefit corporations and their stockholders by eliminating the costs incurred by “a
multiplicity of suits in various states,” and that the plaintiffs would not be harmed by litigating
their claims in Delaware.
The Supreme Court also held that TriQuint’s forum selection bylaw was valid under Oregon law,
stating that comity and respect for Delaware corporate law mandated deference to Delaware law
absent a compelling public policy to the contrary. There, the Court went on to state that it could
“discern no public policy sufficient to overcome” comity-driven deference to the “internal
relationship” between TriQuint and its stockholders and their concern of subjecting a Delaware
corporation to “inconsistent regulation in different forums.”
This opinion warrants mention because it overturned one of the few cases upon which
stockholder plaintiffs challenging exclusive forum selection bylaws could rely, and provides yet
another case permitting the adoption and enforcement of such bylaws. The opinion also validated
an exclusive forum selection bylaw adopted a mere two days prior to the public announcement of

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a change in control transaction, providing support for the argument that such bylaws do not need
to be enacted on a “clear day” in order to be enforceable.

(Roberts v. TriQuint Semiconductor, Inc., 358 Or. 413 (Or. 2015))

Delaware Supreme Court Upholds Award of Expectation Damages in Breach of Contract
Claim
In SIGA Technologies, Inc. v. PharmAthene, Inc., the Delaware Supreme Court upheld a $113
million judgment against SIGA Technologies Inc. over a failed merger and licensing agreement,
in an opinion that provides useful guidance to practitioners as to the recovery of expectation
damages.

This decision was the second time the Supreme Court reviewed the case, having previously
remanded the case back to the Court of Chancery for further review of the appropriate
damages. The case arose from the failed 2006 merger between SIGA Technologies and
PharmAthene. The merger agreement provided that if the merger failed to close, the parties
would negotiate in good faith a license agreement consistent with a non-binding term sheet
previously agreed upon by the parties for the licensing of ST-246, a drug owned by SIGA
Technologies for the treatment of smallpox. PharmAthene was unable to negotiate a license
agreement with SIGA and sued SIGA for breaching its obligation to negotiate the license
agreement in good faith consistent with the term sheet. The Court of Chancery initially
determined that SIGA did not negotiate in good faith and breached its agreement to do so, but it
was unable to award expectation damages because such an amount was “speculative and too
uncertain, contingent, and conjectural” and it awarded PharmAthene an equitable payment
stream based on SIGA’s future profits. On review the Supreme Court looked to New York law
for guidance and determined that the agreement at issue was a “Type II” agreement (i.e.
“preliminary agreements [where the parties] ‘agree on certain major terms, but leave other terms
open for further negotiation’”) which entitled PharmAthene to recover expectation damages. The
Supreme Court remanded the case back to the Court of Chancery for “reconsideration of the
damages.” On remand the Court of Chancery determined that PharmAthene was entitled to
$113 million in expectation damages, and SIGA appealed the decision.

The Supreme Court upheld the Court of Chancery’s determination of the damages and held that
the Court of Chancery’s de novo review of damages was done in accordance with the Supreme
Court’s instructions from its earlier decision. The Court relied heavily on the fact that SIGA had,
by its breach of the agreement, caused much of the uncertainty as to proper amount of damages.
The Court stated that the standard for evaluating expectation damages is based upon “the
reasonable expectations of the parties ex ante” and is measured by “the amount of money that
would put the promisee in the same position as if the promisor had performed the
contract.” Although the injured party must prove that it was actually damaged with reasonable
certainty, the amount of damages can be estimated. The Court stated that “the injured party need

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not establish the amount of damages with precise certainty ‘where the wrong has been proven
and injury established.’” According to the Second Restatement of Contracts (quoted in the
Court’s opinion), “where the existence of damages is certain, and the only uncertainty relates to
the amount … the burden of uncertainty as to the amount of damages falls upon the wrongdoer.”
The Supreme Court noted that the Court of Chancery was correct in resolving uncertainties about
costs against SIGA when the uncertainties would have been avoided if SIGA had negotiated the
license agreement in good faith. The willfulness of the breaching party “is a relevant factor in
deciding the quantum of proof required to establish the damages amount” and the Court of
Chancery’s use of willfulness in deciding to require a lesser degree of certainty was appropriate.
A court may consider post-breach evidence to confirm its conclusions as to the parties’
reasonable expectations at the time of breach.

It should be noted that the Supreme Court’s decision was a rare non-unanimous decision, and
Justice Karen L. Valihura authored a lengthy dissent in which she disagreed with many of the
majority’s conclusions and pointed out that the majority’s decision would move Delaware out of
alignment with other major commercial jurisdictions such as California and New York by
eroding the requirement that damages be proved with reasonable certainty.

(Siga Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (December 28, 2015)).
Delaware Court of Chancery Opinion Provides Guidance on the Interpretation of
Contractual Provisions Relating to Fraud-Based Claims
On November 24, 2015, Vice Chancellor Laster issued an informative opinion on a motion to
dismiss allegations of fraud under Delaware law in Prairie Capital vs. Incline Equity
Partners. The case involved a sponsor to sponsor sale of Prairie Capital’s portfolio company
Double E Company to Incline Equity Partners. Incline alleged that the CEO and CFO of the
company (with Prairie Capital’s knowledge and approval) committed fraud by fabricating sales
to achieve certain financial targets that Incline required to close the acquisition. Incline also
made an indemnification claim and sought to recover $500,000 held in escrow for
indemnification obligations. Although Vice Chancellor Laster’s opinion was only made on a
motion to dismiss, the opinion provides useful guidance for drafting and negotiating fraud
provisions and serves as an important reminder of the importance for buyers and sellers to
clearly define the scope of potential fraud-based claims.

The key takeaways from the opinion are as follows:

• Extra-contractual Representations. There are no magic words when it comes to clearly
establishing non-reliance. The purchase agreement had an exclusive representations and
warranties clause (stating that the buyer disclaimed any representations and warranties
outside of the agreement) and an integration clause, but did not have a non-reliance
clause (i.e. that the buyer has not relied on any representations outside of the

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agreement). Vice Chancellor Laster found the combination of the exclusivity and
integration clauses created a “clear anti-reliance clause” (even in the absence of a non-
reliance clause) and he noted that “[t]ransaction planners can limit their risk by using
tested formulations, but they do not need to employ magic words.” As a result of
determining that an anti-reliance clause existed, Vice Chancellor Laster dismissed any
extra-contractual claims based on fraudulent misrepresentations.

• Extra-contractual Omissions. Exclusive representation provisions could bar claims for
fraudulent omissions or concealments beyond the four corners of the contract. Incline
argued that the exclusive representation provision should not bar claims for fraudulent
omissions or concealments outside of the contract. Vice Chancellor Laster, however,
noting how a misrepresentation claim can easily be flipped into an omission claim, held
that a valid disclaimer of extra-contractual representations will also bar claims of extra-
contractual omissions. Vice Chancellor Laster noted that this holding may be in
disagreement with TransDigm Inc. v. Alcoa Global Fasteners, Inc. (Del. Ch. May 29,
2013) “[t]o the extent that Transdigm suggests that an agreement must use a magic word
like ‘omissions’.” Given that this may not be settled law, practitioners should consider
still using the word “omissions” or other language that clearly indicates that the seller is
not making “any representation as to the accuracy or completeness” of the information
provided.

• Exclusive Remedies. Courts will likely read provisions relating to fraud taken as a
whole. Incline also argued that the exclusion of fraud in the indemnification provisions
exclusive remedies provision should permit it to make an extra-contractual fraud claim.
However, Vice Chancellor Laster determined that the exclusion of fraud meant only that
the indemnification provisions are not the exclusive remedy in respect of fraud, but did
not expand the universe of claims for fraud that can be made – in other words, he found
that fraud claims were preserved, but could only be based on the representations and
warranties in the agreement, because Incline had waived reliance (an essential element of
a fraud claim) on anything outside the agreement.

• Claims Against Non-Parties (Directors, Officers & Controlling Sponsor). D&O and
secondary liability claims with a basis in fraud are possible. Prairie and the officers of
the company argued that they should not be liable because the representations in the
agreement were made by the company and not by the officers or Prairie, but at the motion
to dismiss stage Vice Chancellor Laster rejected this argument and permitted Incline to
continue to pursue (i) the fraud claims against the officers of the company based upon the
company’s representations and warranties because an “officer actively participating in the
fraud cannot escape personal liability on the ground that the officer was acting for the
corporation” and (ii) the secondary liability claims (e.g. aiding and abetting) against

13

Prairie due to Prairie’s involvement in the sale process and knowledge of the fraudulent
behavior.

As a result of the foregoing, the claims for fraud based on representations and warranties in the
agreement itself and certain contractual claims for indemnification were permitted to proceed
past the motion to dismiss stage of litigation.

(Prairie Capital III, L.P. v. Double E Holding Corp., C.A. No. 10127-VCL (Del. Ch. Nov. 24,
2015)).

Delaware Supreme Court Draws Inference that Controller’s Long-Term Friend Is Not
Independent
In a recent Delaware Supreme Court case, the Court found that, for purposes of demand excusal
in a derivative action, there is a reasonable doubt about the independence of a director who has
been a close personal friend and confidant of the chairman of the board for over 50 years, and
whose job and other sources of income were linked to this friendship. The Supreme Court, in
reversing the Court of Chancery, differentiated this long-standing bond, along with strong
circumstantial evidence that the director’s economic position was based on the friendship, from
the “thin social-circle friendship” found in certain other Delaware cases where directors merely
move in some of the same circles and where courts found that there was no reasonable doubt
about directors’ independence.

This decision shows that the Delaware Courts will continue to contextually analyze
independence – while the fact that a director is an acquaintance of the controller is unlikely to
support an inference that the director is conflicted, a close personal friendship could rebut the
presumption of independence.

(Delaware County Employees Retirement Fund v. Sanchez, C.A. No. 9132-VCG (Del. Ch. Oct. 2,
2015)).

Delaware Court of Chancery Binds Investor to Contractually Mandated Fair Value
Assessment Determination
In a recent opinion, Chancellor Bouchard of the Delaware Court of Chancery held that investors
in an LLC were bound to a valuation made in good faith by a third party that the investors and
the LLC had agreed would determine the value of the investors’ shares.
In this case, two investors acquired shares in PECO Logistics, LLC. The investors acquired those
units subject to an LLC agreement that gave them the right to “put” their shares to PECO after
three years of ownership. The agreement further provided that if the investors exercised that put
right, PECO would retain a nationally recognized valuation firm to assess the fair market value

14

of the investors’ shares, and then repurchase those shares at that determined value. The LLC
agreement also provided that PECO and the investors would be bound by the valuation firm’s
determination. The investors exercised their put right, and PECO retained Duff & Phelps to value
the investors’ shares, with no objection from the investors’ board designee. Applying the
valuation methodologies specified in the LLC agreement, Duff & Phelps assessed the total equity
value of the shares to be approximately $93 million. The investors rejected that valuation as too
low, and refused to put their shares back to PECO at that value. PECO then initiated a
declaratory judgment action to force the investors to put their shares at that value.
The investors complained that the Duff & Phelps valuation was conducted improperly. The court
rejected that argument, holding that the court should “defer to the judgment calls Duff & Phelps
had to make to apply the valuation formula in a sensible manner” because the parties had already
agreed that the firm’s determination would be binding without any mechanism for review. In the
absence of a contractual mechanism for review, the court could only focus on whether the
valuation somehow breached the implied covenant of good faith and fair dealing inherent in
every contract governed by Delaware law or was inconsistent with any prescribed valuation
mechanisms and procedures under the agreement. Since Duff & Phelps’ independence was not in
question, and their other complaints with the valuation were critiques of reasonable judgment
calls not inconsistent with the agreement, the Court found that the valuation did not violate the
covenant of good faith and fair dealing.
Ultimately, the court’s opinion underscores the deference that Delaware courts will give to
valuation assessments and other private determinations of this kind where sophisticated parties
have agreed that such determinations will be final and binding on all parties. Absent some
evidence of manipulation or bad faith, the courts will likely hold the parties to the benefit of their
bargain.

(PECO Logistics, LLC v. Walnut Investment Partners, L.P., C.A. NO. 9978-CB (Del. Ch. Dec.
30, 2015))

15

Contributors

Partners:
C. Thomas Brown (New York)
thomas.brown@ropesgray.com

Jason Freedman (San Francisco)
jason.freedman@ropesgray.com

Jane Goldstein (Boston/New York) (co-head of M&A)
jane.goldstein@ropesgray.com

Howard Glazer (San Francisco)
howard.glazer@ropesgray.com

David Hennes (New York)
david.hennes@ropesgray.com

James Lidbury (Hong Kong) (co-head of M&A)
james.lidbury@ropesgray.com

Carl Marcellino (New York) (co-head of M&A)
carl.marcellino@ropesgray.com

Anne Johnson Palmer (San Francisco)
anne.johnsonpalmer@ropesgray.com

Philip Sanderson (London)
philip.sanderson@ropesgray.com

John Sorkin (New York)
john.sorkin@ropesgray.com

Peter Welsh (Boston)
peter.welsh@ropesgray.com

Marko Zatylny (Boston)
marko.zatylny@ropesgray.com

Counsel:
Martin Crisp (New York)
martin.crisp@ropesgray.com

Chief of Legal Knowledge Management:
Patrick Diaz (Boston)
patrick.diaz@ropesgray.com

Associates:
Zachary Blume (Boston)
zachary.blume@ropesgray.com

James Davis (Chicago)
james.davis@ropesgray.com

Jaclyn Ruch (New York)
jaclyn.ruch@ropesgray.com

Hunter Sharp (Chicago)
hunter.sharp@ropesgray.com

Larissa Smith (New York)
larissa.smith@ropesgray.com

Justin Voeks (Chicago)
justin.voeks@ropesgray.com

Professional Support and KM Lawyers:
Fay Anthony (London)
fay.anthony@ropesgray.com

Marc Feldhamer (New York)
marc.feldhamer@ropesgray.com

Marvin Tagaban (New York)
marvin.tagaban@ropesgray.com

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