Business Law

Selected Developments in Business Law — Sales and Mergers of California Businesses

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Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the September 2021 update to Sales and Mergers of California Businesses. References are to the book’s section numbers.  The most significant legal developments since the last update include developments in such important topic areas as COVID-19, antitrust, noncompetition agreements, securities, and taxation.

September 2021 Update

COVID-19 Issues

In AB Stable VIII LLC v Maps Hotels & Resorts One LLC (Nov. 30, 2020, No. 2020-0310-JTL) 2020 Del Ch Lexis 353, a buyer of luxury hotels refused to close its purchase in April 2020, as scheduled, claiming that the seller had failed to comply with its covenant to operate its business in the ordinary course given that it had made “extraordinary changes” to its business in light of the COVID-19 pandemic (e.g., closing hotels, reducing staffing, minimizing expenses). The court noted that although the changes were reasonable in light of the circumstances, Delaware law required that the seller continue the “normal and ordinary routine of the business,” not “what was ordinary during the pandemic” in order to meet its requirements under the covenant. See §1.61.

Antitrust, Noncompetition Agreements

In Ixchel Pharma, LLC v Biogen, Inc. (2020) 9 C5th 1130, the California Supreme Court reconsidered Bus & P C §16600 and clarified that, outside the employment context, a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business. See also Quidel Corp. v Superior Court (2020) 57 CA5th 155 (application of rule-of-reason principles to exclusivity arrangement between biotechnology companies). See §2.12.

In December 2017, the Federal Trade Commission (FTC) issued a press release clarifying that side agreements, such as noncompete agreements negotiated between parties to an acquisition, must be filed with the FTC as part of its Hart-Scott-Rodino (HSR) filing. See Following that clarification, the FTC filed two complaints (in September of 2019 and January of 2020) challenging noncompete and nonpoach provisions in acquisition agreements on the basis that they were anti-competitive. See In re Axon Enterprise, Inc. and Safariland, LLC, FTC File No. 181-0162 (Jan. 3, 2020); In re NEXUS Gas Transmission LLC, FTC File No. 191-0068 (Dec. 13, 2019). See §2.12.

In Hooked Media Group, Inc. v Apple Inc. (2020) 55 CA5th 323, 334, the court noted that “the law generally permits an officer to pursue [employment with a competitor] even though it may be detrimental to the current employer” and that finding otherwise “would unduly constrain the ability of employees to make preparations to compete with their current employer.” The court held that a Hooked Media officer did not breach his duty of undivided loyalty by pursuing a job at Apple outside the negotiations between the two companies. See §2A.2.

Effective March 4, 2021, the FTC premerger notification requirements apply when the total size of the transaction exceeds $368 million; for smaller transactions, the notification requirements apply if one party’s annual net sales or total assets amount to at least $184 million, the other party’s annual net sales or total assets amount to at least $18.4 million (only the test of assets applies if this party is a nonmanufacturing enterprise), and as a result of the transaction, the buyer will hold more than $92 million of the seller’s voting securities or assets that are transferred. These amounts are revised annually. 15 USC §18a. See §5.2.

On February 4, 2021, the FTC announced that it was suspending grants of early termination of the 30-day waiting period for all transactions during a review period in which the FTC and the DOJ will assess the policies and procedures used to grant early termination. During the suspension, the agencies will not grant early termination, but the waiting period can expire in due course. See See §5.2.

On June 30, 2020, the DOJ and the FTC released the final version of their Vertical Merger Guidelines. The Guidelines represent the first time that the DOJ and the FTC issued joint guidelines on vertical mergers, and they serve as the first major revision to DOJ guidelines on vertical mergers since 1984. The Guidelines are intended to be read with the Horizontal Merger Guidelines because certain items (such as the principles and frameworks used in horizontal merger assessments) are also applicable to vertical mergers. Although vertical mergers do not reduce the number of companies vying for market share in a given segment as horizontal mergers do, the Guidelines note that a vertical merger may nonetheless lessen competition. The Guidelines can be found on the FTC’s website at See §5.5.

Business Judgment Rule

In Coley v Eskaton (2020) 51 CA5th 943, 955, the court stated that under California law, directors who act under a conflict of interest cannot obtain the benefit of the business judgment rule, but rather bear the burden of establishing that the transaction was “fair and reasonable,” meaning that it was not only made in good faith but also that the transaction is fair “from the viewpoint of the corporation and those interested therein”. See §2A.14.


California’s AB 91 (Stats 2019, ch 39) conforms California law concerning like-kind exchanges to the federal Tax Cuts and Jobs Act changes, although it applies only to exchanges completed after January 10, 2019. AB 91 revised California law to limit eligibility for IRC §1031 treatment to real property exchanges, except for personal income taxpayers whose adjusted gross income is less than certain thresholds ($250,000 for single filers and $500,000 for joint filers). See §3.41 See also Rev & T C §18031.5. See §3.20.

Before the passage of AB 91 (Stats 2019, ch 39), in July of 2019, many corporations had been permitted to make IRC §338 elections separately at the federal and state levels (i.e., to make an IRC §338 election at the federal level without doing so at the state level, or vice versa). AB 91 eliminated that possibility in nearly all cases because it requires harmonization between the state and federal levels; a federal IRC §338 election (or the failure to make such an election) is now binding at the state level. See §3.41. See also Rev & T C §24451.1. See §3.24.

As part of its response to the federal Tax Cuts and Jobs Act in AB 91 (Stats 2019, ch 39), California generally eliminated the 2-year carryback also (with a few exceptions). As a result, carrybacks are allowed for NOLs in California only for tax years starting on or after January 1, 2013, and before January 1, 2019. See §3.41; Rev & T C §§17276, 17276.21, 17276.22, 19131.5, 24416, 24416.21, 24416.22. See §3.47.


In 2020, the definition of accredited investor was expanded to include certain entities owning “investments” (as defined in Investment Company Act Rule 2a51-1(b) (17 CFR §270.2a51-1(b)) exceeding $5 million (SEC Rule 501(a)(9)); persons holding in good standing certain certifications, designations, or credentials recognized by the SEC (and to be published on the SEC website) as qualifying that person for accredited investor status ((SEC Rule 501(a)(10)); “knowledgeable employees” (as defined in 17 CFR §270.3c-5(a)(4)) of a private fund with respect to investments in such fund ((Rule 501(a)(11)); and “family offices” having assets under management exceeding $5 million (and their “family clients”) ((SEC Rule 501(a)(12)–(13)). See §4.14.

Regulation S-X (17 CFR Part 210) generally prescribes the form and content of financial statements of public companies. On May 20, 2020, the SEC amended the requirements for financial statements relating to acquisitions and dispositions of businesses. Under Rule 3-05 of Regulation S-X (17 CFR §210.3-05), acquiring companies must provide separate audited annual and unaudited interim pre-acquisition financial statements of a “significant” acquired business, with the number of years required determined on the basis of the relative significance of the acquisition. Article 11 of Regulation S-X (17 CFR §210.11) requires the company to file unaudited pro forma financial information with regard to the acquisition or disposition, including adjustments that show how the acquisition or disposition might have affected the historic financial statements. The amendments modify the rules for determining whether an acquisition or disposition is significant and require the financial statements of acquired businesses for only up to the two most recent fiscal years, instead of the previously required three fiscal years. Securities Act Release No. 33-10786 (May 20, 2020). In recent years, the SEC has also begun to grant waivers more liberally for target company financial statements that are difficult or impossible to obtain. See §4.33.

Market adjustable securities are ones issued with a discounted exchange or conversion rate provision allowing “protection against investment losses that would occur due to declines in the market value of the underlying securities prior to conversion or exchange” such that “holders are not exposed to the market risk associated with holding the underlying security prior to conversion or exchange; they are only exposed to that market risk during the time that they hold the underlying security after the conversion or exchange.” 86 FR 5063, 5066 (Jan. 19, 2021). In January of 2021, the SEC proposed amendments to Rule 144 that would revise the holding period start date for these types of securities, if they are not listed on a national securities exchange, to begin on the date the underlying securities are acquired upon conversion or exchange. 86 FR 5063 (Jan. 19, 2021). See §4.45.

Successor Liability

Labor Code §200.3 provides that a successor to a judgment debtor shall be liable for any wages, damages, and penalties owed to any of the judgment debtor’s former workforce under a final judgment, after the time for appeal from the judgment has expired and for which no appeal is pending. The statute also describes how to establish successorship. Under the statute, a successor is deemed to be a person or entity that meets any of the criteria listed in Lab C §200.3(a). See §6.11A.

Material Adverse Effect

In Snow Phipps Grp., LLC v KCAKE Acquisition, Inc. (Del. Ch. Apr. 30, 2021, No. 2020-0282-KSJM) 2021 Del. Ch. Lexis 84, the court held that the buyers failed to show that the seller’s precipitous drop in sales had or was reasonably expected to have an effect sufficiently material and adverse to qualify as a material adverse effect; the seller experienced a steep sales decline but rebounded immediately before the buyer’s termination and was projected to continue recovering; the seller was not projected to face a sustained drop in business performance. See §7A.13.

California Secretary of State

All documents submitted with a file date of January 1, 2021, or later require the California Secretary of State entity number. If when filing a certified copy of a merger agreement in accordance with Corp C §1108(d), the certified copy does not contain the California entity number for the California corporation or a foreign qualified corporation, an additional page listing the entity name and entity number must be included with the filing. See §12.105.

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