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Mitigating Litigation Risk at the
Deal TableM&A Pre-Closing, Part II
Compartmentalizing Liability: Reducing Risk of
Veil-Piercing by Courts and Similar Outcomes
Businesses and individuals call on Brendan McPherson
to solve complex financial problems. Whether it is in
bankruptcy, real estate or general business, Brendan
utilizes his financial background and tenacious
personality to efficiently guide clients through their
dilemmas. When problems require judicial intervention,
clients benefit from Brendan’s significant trial experience
in bankruptcy, federal, and state courts. Brendan L. McPherson
Shareholder
Where Potential Risks Arise
Successor Liability &
Veil-Piercing 101
� Asset v. stock transactions
� General rule still applies:
– Stock acquisitions: liabilities travel
– Asset acquisitions: liabilities remain
Successor Liability 101
� Successor liability – the exception not the
rule
� Exception 1: express/implied agreement
� Exception 2: consolidation/merger – “de
facto”
� Exception 3: mere continuation
� Exception 4: fraud
Veil-Piercing 101
� a/k/a alter ego
� “the rare exception, applied in the case of
fraud or certain other exceptional
circumstances.” Dole Food Co. v. Patrickson,
538 U.S. 468, 474-75 (U.S. 2003)
Veil-Piercing 101
� Jurisdiction by jurisdiction distinction as to factors
� Key Element 1: control/domination by shareholder/member
� Key Element 2: control/domination caused fraud, unjust or inequitable act that should be corrected
� Exception, not the rule. But still fact intensive
Successor Liability &
Veil-Piercing 101
� Choice of law – must be analyzed
� What state’s law applies if seller is
incorporated in one state and buyer in
another?
� Internal affairs doctrine
� Restatement/most significant relationship
test
Compartmentalizing Liability
� Asset purchase agreements still the way to go
� Buy some but not all assets
� Change is a good thing
– Ownership
– Employees
– Customers
– Contracts
– Locations
Compartmentalizing Liability
� Observe corporate formalities
� Operate independently
� Assume liabilities with great caution
� Pay consideration where consideration is
owed
� Limit liability by contract?
Alternative Dispute Resolution:
Mediation and Arbitration
Stacy Carpenter is a resolution-focused trial attorney who understands the importance of identifying and employing a litigation strategy that is outcome driven, effective, and aligned with her clients’ business objectives. As chair of Polsinelli’sCommercial Litigation practice, she combines her strong advocacy skills and her strategic analysis to achieve positive and timely outcomes both in and out of the courtroom. Stacy works closely with clients to understand their business, build relationships, and manage their legal needs. She is active in the Colorado legal community, having served as the president of the Denver Bar Association, a long-time member of the Colorado Bar Association Board of Governors, and Chair of the Board of Directors for the Rocky Mountain Children’s Law Center. Stacy's litigation practice focuses on business disputes and real estate litigation.
Tom is an associate with substantial litigation
experience in the financial services industry. He
resolves disputes by listening to clients and
knowing how litigation affects their business.
Tom’s legal skills, industry knowledge, and
understanding of client goals help him obtain
cost-effective resolutions to complex legal
problems. Tom has successfully resolved: trade-
secret disputes; unfair competition cases;
breach of contract cases; claims arising under
federal and state consumer protection statutes;
and business fraud and business divorce
matters.
Stacy A. Carpenter
Shareholder | Commercial
Litigation Practice Chair
Thomas H. Wagner
Associate
What is Arbitration?
� Arbitration is an alternative form of dispute
resolution.
� Instead of going to court, parties agree in
advance to abide by the decision of one or
more arbitrators who act, in essence, like
private judges or referees.
� An arbitration award is binding, subject to court
review under extremely limited circumstances.
Arbitration Pros:
� Ability to select arbitrator/panel with subject matter expertise.
� Usually more speedy than litigation.
� Usually more flexible.
� Confidentiality.
� Lack of formality.
� Simplified rules of evidence and discovery.
� Can be cheaper than litigation.
Arbitration Cons:
� Not always cheaper than litigation.
� Very difficult to appeal bad decisions.
� Simplified rules of evidence and discovery
can make for unpredictable decisions.
� Lack of transparency.
� Questionable objectivity.
� Lack of precedent and unclear standards of
decision.
What is Mediation?
� Mediation is process in which an impartial
person, the mediator, facilitates negotiations
between disputing parties, helping them find a
mutually acceptable solution.
� What distinguishes mediation from arbitration
(and court litigation) is that the mediator has
no power to impose a solution.
10 THINGS TO CONSIDER WHEN
DRAFTING ARBITRATION CLAUSES
1. Make it mandatory
� “Shall,” not “may”
2. Interim step
� Mediation before arbitration?
3. Arbitrator selection
� Designate a provider
� How many arbitrators
� How are the arbitrators appointed
� Other considerations
10 THINGS TO CONSIDER WHEN
DRAFTING ARBITRATION CLAUSES
4. What rules apply?
� Rules of provider such as AAA, JAMS or CPR
� Federal or state rules as guidelines
� Discovery
� Motion Practice
� Custom rules negotiated by parties
5. Interim relief
� Empower arbitrators to issue injunctions
� Expedited arbitration process for injunctions
� Carve out to allow preliminary injunctions in court
10 THINGS TO CONSIDER WHEN
DRAFTING ARBITRATION CLAUSES
6. Cost and fee shifting
� Effect of arbitration rules
� Harmonize with other provisions of agreement
7. Appeal
8. Venue
9. Choice of law
10. Other considerations
� Language
� Time frame
Choice of Law Provisions in M&A
Agreements
Matt Knoop focuses his practice on preparing and trying a variety of civil litigation matters in state and federal courts throughout the country. The broad nature of Matt's practice reflects his diverse interests. He has experience representing numerous product manufacturers, suppliers, and service providers in catastrophic injury, wrongful death, and breach-of-warranty litigation. Matt also regularly represents clients in commercial, real estate, and intellectual property disputes.Matthew S. Knoop
Shareholder
Use of Choice of Law Provisions
Choice of law does not equal forum selection
Choice of law provisions almost always appear
in M&A agreements
� More often than forum selection clauses
� Vigorously negotiated
Which State’s Law Is Used?
� Delaware law frequently is chosen
� Strong association between acquirer’s
principal place of business and chosen law
� Outflow from Delaware to New York and
California
� Publicly held companies still tend to choose
Delaware in M&A agreements
Important Considerations
Enforceability
� Relationship between transaction and
jurisdiction
� Public policy – chosen law well-developed,
predictable?
� Restrictive covenants
Important Considerations
� Nature of the business – state-specific laws
� Statutes of limitation and survival provisions
� Available remedies – tort claim in addition
to contract claim?
� Tort reform – availability of punitive
damages?
Drafting Considerations
� A provision too narrowly drafted may result
in application only to construction and
interpretation of the contract and not to
extra-contractual claims
� Specify what law applies to both procedural
and substantive issues
Drafting Considerations
� Check conflict of laws provisions
� Venue provisions may impact what law
applies
� Use bold, CAPITALIZED, or underlined text
International Considerations
� Consistency between choices of forum and
law
� Rome Convention requires law of a country
� Differences between governing law and
foreign law
� Technical reasons (availability of certain
corporate vehicles, trusts)
Venue Selection
R. Montgomery Donaldson, Shareholder | Polsinelli
Monty 's practice focuses on business counseling and litigation, with an emphasis on matters involving
complex business transactions, corporate governance, securities, and special proceedings under the
Delaware General Corporation Law and alternative entity laws. Monty's litigation practice also involves a
diverse array of commercial matters, including commercial contract, consumer, and non-compete cases
venued in the District Court for the Federal District of Delaware, the Delaware Court of Chancery and the
Delaware Superior Court. In these and other matters, Monty routinely is called upon to serve as primary
counsel or as Delaware counsel in coordination with reputable firms located throughout the country and
abroad.
VENUE SELECTION
� What is “venue selection”?
– The contractual designation of a forum in which
disputes are to be resolved
– Venue selection can be narrow: e.g., disputes
over interpretation of terms of M&A agreement
– Venue selection can be broad: e.g., all disputes
arising from, concerning or otherwise related in
any way to the subject matter of the transaction
Venue Selection: The Benefits of
Control
– Can be permissive: Parties agree that suit may
be brought in XYZ jurisdiction, and agree further
that if suit brought there, will not challenge
venue or personal jurisdiction
– Can be mandatory: Parties agree that any suit
will be brought exclusively in XYZ jurisdiction,
without regard to considerations of forum non
conveniens etc.
VENUE SELECTION
� Venue selection is not an after-
thought.
� In fact, venue selection potentially is very
important.
� Why?
VENUE SELECTION
� Important because:
– Over 90% of M&A transactions valued over $100 M wind up in litigation, often multi-jurisdiction litigation
– Litigation presents potentially substantial cost that rarely is accretive to transaction or post-merger business
– Venue selection offers some degree of control/cost containment
– Potentially offers substantive benefits as well
Venue Selection: Party vs.
Shareholder Litigation
� In our prior webinar, discussed two
“species” of M&A-related litigation: (1)
litigation between or among the M&A
parties and (2) shareholder litigation
challenging the fairness of the deal or
allocation of consideration
� These litigation scenarios present two
distinct venue selection challenges. Why?
Venue Selection: Party vs.
Shareholder Litigation
� Parties to merger agreement bound by
venue selection provision contained in
agreement
� Not so for shareholders. So is M&A
shareholder litigation beyond control?
– Answer: NO, at least not with respect to
business entities organized under Delaware law
– Control shareholder litigation through charter or
by-law venue provision
Venue Selection: The Benefits of
Control
� Venue selection in merger agreement
� Hypo:
– Merger between Delaware corporation
headquartered in New York and Delaware
corporation headquartered in CA
– Six months after transaction, disputes arise
under indemnity provision
Venue Selection: The Benefits of
Control
– No venue selection provision
• Acquiror preemptively sues in CA seeking indemnity
• Seller preemptively sues in New York seeking
declaratory relief
Venue Selection: The Benefits of
Control
• Under either scenario:
– Home field advantage
– Local counsel
– Unfamiliar legal terrain (procedures, local rules, judges,
political orientation of court, etc.)
– COST: ↑ $ and Rme transporRng witnesses (likely to
include management team) to venue 3,000 miles away for
depositions, hearings
Venue Selection: The Benefits of
Control
� Now assume seller negotiated a venue selection clause choosing Delaware as exclusive venue
– Files suit seeking declaratory relief in DE Court of Chancery, nation’s preeminent business tribunal
– No juries, no punitive damages
– Rocket docket
– Sophisticated members of bench familiar with these disputes
Venue Selection: The Benefits of
Control
– Geographically close
– Counsel in New York fully familiar with DE law
and procedures (since many business disputes
are resolved in DE)
– Cost: ↓ in terms of $ and management Rme
– Decision: Sophistication; predictability
Venue Selection: The Benefits of
Control
� So potential benefits of control:
– Eliminate possible home field advantage
– Mitigate uncertainties: No jury; sophisticated fact-finder (not all courts are equal); politically neutral forum; well-developed case law
– COST: Mitigate time and cash investment associated with transporting witnesses to remote forum
– Already discussed potential benefits of alternative resolution process/venue
Venue Selection: Important
Considerations
� Mandatory v. Non-mandatory: If you desire
certainty, make sure language is former
– “may” versus “will”
� Scope -- Broad v. Narrow: Be mindful of the
difference; don’t want to find that dispute
you thought was covered is not
– “interpretation” versus “all disputes arising
under agreement or relating to” transaction
Venue Selection: Important
Considerations
� Enforceability:
– Most jurisdictions require reasonable nexus
between designated forum and transaction (can
be state of incorporation of one of parties);
agree to personal jurisdiction
– Cannot contractually expand jurisdiction of
court
• E.g., all disputes in Delaware Court of Chancery:
limited jurisdiction (statutory and equitable right or
remedy)
Venue Selection: Important
Considerations
� Multiple Agreements:
– Merger effected through multiple agreements
• Include identical venue selection provision in all of
them
• Potentially expensive to litigate whether subsidiary
transaction covered by venue selection provision in
merger agreement that could have been included in
subsidiary agreement but wasn’t
Venue Selection: Important
Considerations
� Venue Selection v. Choice of Law
– Not the same. By choosing venue, you have NOT likewise chosen applicable law and vice versa.
– Subject to substantive analysis of potentially applicable laws, sometimes a good idea to select law of chosen venue
• reinforces strength of venue selection
• court presumably more familiar with law in which it sits
Venue Selection: Important
Considerations
� Breach of Venue Selection Clause:
– Gives rise to right of enforcement
– Motion to dismiss
– Some jurisdictions will view as breach of an
affirmative covenant under agreement, subject
to any fee shifting provision in contract
Venue Selection:
The Shareholder Quandary
� We mentioned 2 types of M&A litigation: (1)
between or among transacting parties and
(2) shareholder litigation typically
challenging amount or allocation of price
� Also mentioned that venue selection clause
in M&A agreement bound parties to
agreement, but not so shareholders
� What to do?
Venue Selection:
The Shareholder Quandary
� For Delaware corporations: Delaware
Senate Bill 75 (“SB 75”) was approved by the
House of Representatives on June 11, 2015
and signed into law by Delaware Governor
Jack Markell on June 25. The new law
enacted a very significant change to the
Delaware General Corporation Law, effective
August 1, 2015.
Venue Selection:
The Shareholder Quandary
� Amendment to 8 Del. C. § 115:
– Confirms Boilermakers Local 154 Retirement
Fund v. Chevron Corporation, 73 A.2d 934 (Del.
Ch. 2013): charter or bylaws of Delaware corp.
may specify, consistent with applicable
jurisdictional requirements, that claims arising
under the DGCL, including claims of breach of
fiduciary duty (as asserted in M&A litigation),
must be brought only in the courts (including
the federal court) in Delaware.
Venue Selection:
The Shareholder Quandary
� However, amendment invalidates provisions
selecting courts in a different State, or
arbitral forum, if it would preclude litigating
such claims in the Delaware courts.
� Effectively reverses the holding in City of
Providence v. First Citizens Bancshares, Inc.
et al., CA No. 9795-CB (Ch. Ct. Sept. 8,
2014).
Venue Selection: Take-Aways
– Venue selection not an after-thought: Pay
attention
• May help control cost of litigation
• May offer strategic advantages
– Not necessarily limited to M&A agreement(s)
• Consider charter or by-law provision that would
govern litigation filed by shareholders
Mitigating Litigation Risk at the
Deal Table
Thank you, and we hope that you will join us
for our next web cast on February 2, 2016
entitled, Claims by Acquirors, Sellers and
Unsuccessful Bidders.
Polsinelli provides this material for informational purposes only. The material provided in this presentation is general and is not intended to be legal advice. Nothing in this presentation should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.
Polsinelli is very proud of the results we obtain for our clients, but you should know that past results do not guarantee future results; that every case is different and must be judged on its own merits; and that the choice of a lawyer is an important decision and should not be based solely upon advertisements.
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