According to Delaware counsel SRS Acquiom interviewed, most merger agreements improperly draft the language appointing the shareholder representative. The typical merger agreement will essentially provide that the representative is appointed the agent and attorney in fact of the shareholders to take a list of actions on their behalf under the merger agreement. In Aveta Inc. v. Cavallieri,1 however, the court stated that agency is not necessarily the reason the actions of a representative would be enforced against shareholders who are not a party to the merger agreement.
According to the Aveta opinion, agency principles do apply against shareholders who are a party to the merger agreement. With respect to other shareholders, however, the court applied the applicable corporate statutory law rather than agency principles. While agency principles might not apply because those shareholders did not sign the agreement appointing the shareholder representative as their agent, the court said that under Delaware statutory law, the terms of a merger agreement may be made dependent upon facts ascertainable outside of the agreement. For instance, a purchase price or interest rate used in a merger agreement can be determined by a market price or rate determined outside the merger agreement, so long as such provisions have been adopted in conformance with applicable obligations. Similarly, the agreement may provide that certain determinations or actions of a representative are facts ascertainable outside the agreement, and the contract can bind the shareholders to such facts.
To address this issue, practitioners might wish to change the language of merger agreements appointing the representative. SRS Acquiom would suggest considering a provision such as the following:
The representative is hereby appointed the agent and attorney in fact of the stockholders to take the actions set forth herein. All such actions shall be deemed to be facts ascertainable outside the merger agreement and shall be binding on the stockholders.
SRS Acquiom suggests keeping the language regarding agency because it might still have some effect, especially on any signing shareholders, while adding the language above to ensure the agreement falls within the reasoning of Aveta. Of course, other changes to the merger agreement might be advisable to ensure that it conforms with the concept of “facts ascertainable” as contemplated by the Delaware statute.
Ensuring that the concept of “facts ascertainable” is clear in the merger agreement is especially important when there are option holders who will have the options cashed out in connection with the merger with a portion of the proceeds being subject to an escrow or future earnouts. They generally do not sign a joinder agreement, letter of transmittal, or other documents, so an agency analysis is even tougher with respect to their deemed appointment of the representative2. In such circumstances, the statutorily recognized principle of “facts ascertainable” may be critical to ensuring their portion of the escrow or earnout is subject to the merger agreement terms.
1 23 A.3d 157 (Del. Ch. 2010).
2 Even signing a letter of transmittal may not be enough to create an agency relationship given the fact that the corporation is obligated to pay the merger consideration by statute. See Cigna Health & Life Ins. Co. v. Audax Health Solutions, Inc., 107 A.3d 1082, 1091 (Del. Ch. 2014); Roam-Tel Partners v. AT&T Mobility Wireless, No. 5745-VCS, 2010 WL 5276991, at *6 (Del. Ch. Dec. 17, 2010).