Bass, Berry & Sims attorneys Davis Mello, Margaret Dodson, Britt Latham and Emily Connally authored an article published by Today's General Counsel highlighting important takeaways from the Delaware Court of Chancery's ruling in Chordia v. Lee earlier this year.
The Chordia ruling serves as a cautionary tale for M&A dealmakers both in drafting go-forward shareholders' agreements and thoughtfully navigating potentially challenging post-closing dynamics. Chordia involved a transaction in which the sellers retained a minority ownership position in the target company and limited minority governance rights in the form of board representation tied to, among other things, the continuing employment of at least one "key holder." After tensions arose, the buyer ultimately caused the termination of all of the key holders in an attempt to eliminate the minority's board rights. The minority holders sued, and the Delaware Court of Chancery reinstated the minority's board rights based on the "efforts clause" of the shareholders' agreement.
To avoid a similar situation, the attorneys cautioned that efforts clauses should be drafted as narrowly as possible. Perhaps even more importantly, parties should take care that their post-closing conduct and communications in exercising rights under shareholders' agreements are thoughtful and defensible. "Essentially, artful drafting will not save parties from their own conduct that the court finds to be inequitable or contrary to the purposes of the underlying agreements," advised the attorneys in the article.
The full article, "Rethinking Shareholders' Agreements in M&A After Chordia v. Lee," was published by Today's General Counsel on June 17 and is available online.
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