Acacia/Cisco Delaware case hinges on legal status of approval – analysis

  • Parties before SAMR typically await stamped approval document
 
  • Judge wants to determine parties’ understanding of ‘approval’
 
  • Delaware typically takes literal approach to interpreting contracts
 

Acacia Communications’ [NASDAQ:ACIA] dispute with Cisco Systems [NASDAQ:CSCO] over whether Acacia can terminate their deal will revolve around whether a notice from China’s antitrust authority constitutes legal approval, said three attorneys and a corporate law professor.
 
On Friday, 8 January, Acacia announced that it had moved to terminate its long-pending agreement to be acquired by Cisco for UD 70 per share in cash, since approval from China’s State Administration for Market Regulation was still outstanding at the end date of the merger agreement. 
 
Acacia shares have been trading higher than Cisco’s bid since December on market expectations that SAMR would not clear the transaction by the termination date and that the developer of optical networking technology is worth more now than when the companies agreed to a deal in 2019. Shares traded over USD 82 on Monday afternoon.
 
Cisco said in response to Acacia’s statement it would dispute Acacia’s move to terminate the transaction. The networking technology giant said the deal has received approval from SAMR in the form of a notification on 7 January that the parties’ remedy submission is “sufficient to address the relevant competition concerns.” 
 
Two independent attorneys who have handled major transactions involving US technology companies before SAMR said that, typically, the agency’s review ends and approval becomes effective only after a formal approval document is produced with a ministerial-level stamp. 
“Approval is only effective when it is officially stamped,” one of the attorneys said. “Without an official stamp, the decision cannot be deemed as an approval.”
 
Both parties in a transaction will usually go to meet with SAMR, check the decision text and then sign SAMR’s decision, this attorney explained. There would subsequently be a procedure to get SAMR’s ministerial-level stamp on the decision, the attorney added. 
 
The second attorney said that, in their experience of handling transactions requiring SAMR approval, they have not counseled clients to close before receiving the final approval document. Typically, after it has become clear that a remedy package is acceptable to SAMR, there is a waiting period of up to a few weeks waiting for this final document, this attorney added.
 
This attorney compared this process to the gap between reaching an agreement with staff reviewing a deal at the US Department of Justice or the Federal Trade Commission and the moment when the front office of the agency signs off on that deal. 
 
Further complicating the situation, if SAMR has not yet handed down final approval, the fact that one party is attempting to withdraw from the deal could mean that SAMR will pause its review process, the first attorney said. This means that SAMR may potentially not issue final conditional approval until Cisco and Acacia resolve their dispute, this attorney said.
 
In a hearing before Judge J. Travis Laster at the Delaware Court of Chancery on Friday, Cisco won a temporary restraining order preventing Acacia from executing its termination of the agreement. The court agreed to hear the case on an expedited schedule. During the hearing, counsel for Cisco said that it has “received notification, orally and in writing” from SAMR that the parties had addressed competition concerns, and that “the receipt of that notification […] constituted exactly that approval that we needed.”
 
Cisco’s counsel nonetheless acknowledged that SAMR “goes on to say that such determination will be published later,” but added that “we don’t believe that is what drives the approval.”
 
Acacia emailed Cisco on 7 January that the notification “does not appear to represent formal approval,” per a transcript of the hearing. Cisco disputes this, saying that the merger agreement does not include any explicit requirement for the format, written or otherwise, of SAMR’s approval. 
 
“A key question is: would it violate Chinese law if the parties close today?” said a third attorney, specializing in transaction law. “If there’s a technical violation, then Acacia would have a pretty good argument that the condition is not satisfied.” On the other hand, if the parties have met the burden of Chinese law, Cisco would likely be favored, this attorney added. 
 
Language in merger agreements and their various disclosure schedules regarding regulatory approvals can sometimes be ambiguous, the third attorney said. As an example, this attorney pointed to transactions accounting for reviews by the Committee on Foreign Investment in the United States, which typically word their condition as requiring that the committee “has failed” to act within a certain specified period. 
 
“Delaware believes in freedom of contract in an especially strong form, so it’s going to really matter what the contract says and the specific wording is,” said Professor Robert Miller, whose work has been quoted by Delaware judges in published decisions. The third attorney also echoed the importance of contractual language to Delaware’s analysis of the situation.
 
Miller pointed to the Vintage v. Rent-A-Center case, in which a buyer sued to prevent a seller from terminating. In that case, the buyer had neglected to email the seller to formally request an extension of the deal’s termination date allowed under the merger agreement. An extremely literal reading of the merger agreement won out. “The court enforced the contract in accordance with its terms,” Professor Miller said.
 
“The fact that Vintage sent the email late, despite everybody knowing that Vintage wanted to send it, despite Vintage and the seller dealing with regulators in a way consistent with and on the assumption that the email would be sent, none of that mattered,” Miller said. “What mattered was that the contract said that the seller could terminate if the buyer did not send a notice extending. The buyer didn’t send the notice, and so the seller could terminate.”
 
In the hearing on Friday, counsel for Cisco analogized the current case to Rent-A-Center when arguing for a restraining order. 
 
In the Acacia case, this means that Judge Laster may attempt to make a literal interpretation of what exactly is meant by “approval” in the merger agreement. If Cisco is forced to argue that SAMR approval is “substantively but not formally” in place, it will likely struggle in court, Miller said.
 
Judge Laster, who also presided over the landmark Akorn v. Fresenius case, said during the hearing that this case seems to be “a relatively targeted dispute. […] the question of SAMR sufficiency seems to me to have two dimensions. One dimension would be what people thought was going to be sufficient in realtime because if, in fact, [Acacia] thought [SAMR’s notification] was going to be sufficient in realtime, that seems to be the end of it.”
 
However, if sufficient ambiguity persists after interrogating this point, the next step would be to bring in experts to testify as to the nature of antitrust approval in China. Both sides during the hearing acknowledged that expert testimony would likely be necessary. 
 
Miller said that looking at precedent in comparable deal reviews before SAMR will likely be key. If “everyone who has deals before SAMR takes, say, a certain kind of notification as being the important thing, and after they get that they close without waiting for for some other kind of action by the agency, then I think ‘approval’ would mean the notification, not any further action.” If, on the other hand, parties typically wait for the further step before closing, then the definition of “approval” would likely be closer to Acacia’s argument, he added.
 
Cisco, Acacia and representatives for SAMR did not respond to requests for comment. 
 
by Jonathan Guilford and Yiqin Shen in New York and Lisha Zhou in Shanghai