Several decisions in 2014 provided important guidelines on structuring transactions.

For transactional lawyers, many cases from 2014 provide guidance on planning, structuring and negotiating deals. These cases may also assist in either avoiding litigation or at least ensuring that the company and management are best positioned if the transaction is challenged.

BUSINESS JUDGMENT RULE GOVERNS RESPONSE TO BREACH OF NON-DISCLOSURE AGREEMENT

The Court of Chancery, in In re Comverge, Inc. Shareholders Litigation, 2014 WL 6686570 (Del. Ch. Nov. 25, 2014), issued guidance on dealing with, among other things, a breach of a non-disclosure agreement. The transaction at issue was relatively small (US$48 million) and involved a struggling target company, Comverge, facing a descending share price and a lack of available capital. Comverge and the acquiror, H.I.G. Capital, L.L.C., entered into a non-disclosure agreement, which contained a two-year standstill provision, whereby HIG agreed that it would not "acquire, agree to acquire, propose, seek or offer to acquire, or facilitate the acquisition or ownership of, any securities or assets of Comverge, any warrant or option to purchase such securities or assets, any security convertible into any such securities, or any other right to acquire such securities." Notwithstanding the foregoing provision, however, the NDA permitted HIG, as a public investor, to acquire Comverge securities in the public markets.

The Merger Agreement also provided for a 30-day go-shop, with a ten-day extension if Comverge benefited from a potentially superior proposal. Subsequent to the close of the go-shop period, the termination fee increased from US$1.026 million to US$1.93 million plus US$1.5 million in expenses. Finally, Comverge and an affiliate of HIG entered into a forbearance agreement, whereby the affiliate agreed not to exercise its rights under US$15 million of convertible notes it acquired from a third-party lender, Partners for Growth III, L.P., for a limited time. Pursuant to the Partners for Growth notes, HIG had the ability to block transactions alternative to the proposed Comverge-HIG deal.

In addition to alleging that the Comverge directors breached their fiduciary duties by failing to maximize the value of company, the plaintiffs contended that HIG aided and abetted alleged fiduciary violations at Comverge by "knowingly participat[ing]" in the breaches through its acquisition of the Partners for Growth Note in violation of the NDA, and then subsequently utilizing the blocking rights incorporated in the convertible notes.

The court dismissed claims regarding the board's decision not to sue HIG for breach of the NDA, observing that the NDA was ambiguous as to whether HIG's acquisition of Comverge's debt constituted a violation and the board acted reasonably and within its business judgment in deciding to focus on negotiating a go-shop period rather than risk a lawsuit. While the court took no issue with the go-shop period and the granting of a top-up option in the transaction, it refused to dismiss claims that the two-tiered termination fee structure was preclusive. In reaching that decision, the court intimated that if the lower of the termination fees were used, the total payable to HIG would be 5.55 percent of the equity value of the deal and 5.2 percent of the enterprise value. If, however, the higher of the termination fees were used, the percentages were 7 percent of the equity value and 6.6 percent of the enterprise value. The court concluded that, even if it were to apply the 5.55 percent metric, such a percentage "tests the limits of what this court has found to within a reasonable range for termination fees."

DISPARATE TREATMENT OF BIDDERS PERMITTED

In In re Novell, Inc. Shareholder Litigation, 2014 WL 6686785 (Del. Ch. Nov. 25, 2014), the Court of Chancery approached the issue of target board preferences for bidders in sell-side auctions. Post-closing, the plaintiffs alleged that the board of directors of Novell "acted in bad faith by treating bidders differently for reasons other than pursuit of the best interests of the corporation and its stockholders."

Specifically, in 2010, Novell...