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Bonus! “Broc Tales” is coming to TheCorporateCounsel.net in January!
– Broc Romanek
This Norton Rose Fulbright blog discusses the findings of a recent study by Harvard Law professor – & former Wachtell partner – John Coates about the ever growing length of merger agreements. Coates’ study notes that merger agreements have more than doubled in length over the past 20 years. Here’s an excerpt from the blog summarizing Coates’ conclusions about the reasons for the supersizing of deal documents:
Coates argues that the changes stem mainly from an increased appreciation of both relevant legal risks and changes in deal and financing markets and not from parties seeking to “grandstand” by adding provisions without significant content. Such provisions include sections addressing, for instance, financing conditions, reverse termination fees, specific performance, dilution, unlawful payments, and forum selection. As Coates writes, these kinds of provisions “represent rational responses by deal participants to a changed deal environment.”
In other words, documents have become lengthier because the M&A process continues to evolve and become more complex, and because dealmakers have improved their understanding of the risks associated with that process.
– John Jenkins
This Gibson Dunn memo takes a deep dive into issues surrounding the negotiation & drafting of drag-along rights. Here’s an excerpt from the intro:
Drag-along rights, or drag rights, which give the majority owner of a company the right to force minority owners to participate in a sale of the company, can be a fiercely negotiated provision in a company’s governing documents. These provisions implicate the rights a majority owner and minority owner will have in a future sale transaction, which could be years down the road and to an unknown buyer.
Many may view these provisions simply as a measure to get the parties to the negotiating table later in the event of a sale rather than as a measure to actually effect a sale, which means they are not troubled by the details or mechanics of drag-along provisions. While this view may have merit, the relative leverage of the parties at that subsequent negotiating table may hinge on the relative strength of each party’s rights under the drag provisions. As a result, it is important to pay careful attention to these provisions.
The memo reviews potential pitfalls, as well as best practices, that should be considered when negotiating drag rights.
– John Jenkins
As this Sheppard Mullin blog notes, the FTC & DOJ recently issued guidance warning companies about entering into agreements not to solicit employees and about sharing employment-related data with competitors. This Cooley M&A blog discusses the implications of this guidance on employee non-solicitation language customarily included in confidentiality agreements, and provides tips for handling employment & compensation matters in due diligence. Here’s an excerpt suggesting some precautions for the due diligence process:
The guidelines acknowledge that a buyer in an M&A deal may need to obtain access to limited competitively sensitive information during the course of the negotiations but state that “appropriate precautions” should be taken. The guidelines do not, however, specify what those precautions should be. For practical purposes, it is appropriate to treat compensation information of highly-trained or specialized employees in a competitively-sensitive deal in the same way one would treat a trade secret or pricing.
Data room access can be restricted to only those who really need to view the information, & using a “clean team” to view the data – as is often done for intellectual property or any other sensitive information – can help protect against claims that information was inappropriately shared between competitors.
– John Jenkins
This NY Times’ “Deal Professor” column notes the rise of shareholder engagement strategies & the consultants who advise on them. As institutions become more assertive about governance, companies are turning to consultants – including a new firm co-founded by Chris Cernich, formerly ISS’ M&A Chief – to help them engage effectively with institutional investors:
This is where Mr. Cernich’s firm will come in, competing with CamberView and others trying to mediate the new dialogue between a company and its shareholders.
This is the future. Big institutional shareholders are working to define their relationships with public companies, and those companies are being forced to engage directly without intermediaries like I.S.S. In the midst of this, shareholders are still figuring out what they really want and whether they can change companies for good.
Have corporate engagement efforts been an effective response to activism? This excerpt from Sullivan & Cromwell’s comprehensive memo reviewing 2016 activist campaigns suggests that the answer is “yes”:
The time and effort that companies and institutional investors have spent developing a mutual understanding of each other’s concerns have narrowed the opportunities for activists at high-profile companies, and the returns of activist funds overall are down in 2016.
Sophisticated engagement strategies seem to be mostly the province of large cap companies. The total number of activist campaigns remains high, due in large part to activism targeting small and mid-size companies.
– John Jenkins
This Skadden memo discusses several recent Delaware Chancery Court cases interpreting Corwin’s path to business judgment rule review for post-closing damage claims. Here are some of the key takeaways:
In Larkin, Vice Chancellor Slights interpreted Corwin to hold that “[i]n the absence of a controlling stockholder that extracted personal benefits, the effect of disinterested stockholder approval of the merger is review under the irrebuttable business judgment rule, even if the transaction might otherwise have been subject to the entire fairness standard due to conflicts faced by individual directors”.
In reaching that conclusion, the court read Corwin to hold that “the only transactions that are subject to entire fairness that cannot be cleansed by proper stockholder approval are those involving a controlling stockholder.” The Larkin court’s formulation of Corwin seems to place a higher barrier to plaintiffs in post-closing merger litigation than in other recent cases such as Comstock. Because the case law is still evolving, it remains worthwhile to monitor closely how the Court of Chancery applies Corwin to noncontroller transactions going forward.
While Comstock suggests that disclosure claims may be considered post-closing as part of the Corwin analysis, other recent decisions from the Court of Chancery strongly indicate that disclosure claims should be brought before the stockholder vote when the purported harm of an uninformed vote may still be remedied. Accordingly, stockholder plaintiffs may not be able to seek tactical gain by deferring disclosure claims until after stockholders vote and the disclosures can no longer be supplemented.
– John Jenkins
As Broc blogged yesterday on TheCorporateCounsel.net, National Fuel Gas responded to GAMCO’s attempt to use its proxy access bylaw by rejecting its nominee. This Cleary blog asks the larger question – is this situation really what proxy access advocates had in mind? GAMCO is hardly the proxy access prototype:
GAMCO is indeed a long-term and significant holder of NFG stock – currently holding with its affiliates over 7% of NFG’s common stock. But keep in mind that GAMCO is not necessarily your typical long-term passive investor of legend. In fact, GAMCO has launched more than 20 proxy fights, and, in the case of NFG, made a stockholder proposal in support of the spin-off of NFG’s utility business. The twist is the GAMCO stockholder proposal received the support of only 18% of NFG’s shareholders. So NFG was handily winning the battle with GAMCO as activist. Now they need to win the battle with GAMCO as long-term shareholder.
GAMCO’s gambit raised the possibility that proxy access could provide a “halo” around the nominee of an activist whose prior efforts were rejected by shareholders. Is that what this is supposed to be about?
For now, it looks like this is an academic issue. Cydney Posner notes that GAMCO filed a 13D/A yesterday in which it said that its nominee had decided to withdraw, and that GAMCO would no longer pursue proxy access.
– John Jenkins
On Friday, as noted in this Bryan Pitko blog & Cydney Posner blog, Corp Fin published seven new Tender Offers & Schedules CDIs. The first two (new CDIs 159.01 & 159.02) address disclosures about the retention & compensation of a target board’s financial advisors. The remaining CDIs address interpretive issues relating to abbreviated debt tenders (new CDIs 162.01 – 162.05), which Broc blogged about last year when the Staff issued a no-action letter permitting them.
This Gibson Dunn blog summarizes the new CDIs – & also discusses remarks made by Ted Yu, head of Corp Fin’s Office of Mergers & Acquisitions, during Friday’s ABA meeting in Washington. Here’s an excerpt:
Later in the day on November 18, the Chief of OM&A, Ted Yu, speaking at an ABA meeting in Washington, D.C., noted that Senior Special Counsel Nicholas Panos in OM&A recently completed an extensive review of all Schedule 14D-9s filed over the past 15 years. The results of the survey revealed that although more than two-thirds of the 14D-9 filings had very detailed disclosures, there was still a significant number of filings containing the objectionable “customary compensation” language, prompting issuance of the interpretations.
Separately, the Staff addressed certain timing and structural issues that have come up since the 2015 no-action letter was granted. The C&DIs clarify that foreign issuers may commence their abbreviated debt tender offers by furnishing a press release on Form 6-K before noon (Eastern) – similar to the Form 8-K requirement for domestic issuers commencing such tender offers. In addition, the Staff clarified that issuers making abbreviated debt tender offers may:
– include a “minimum tender” condition in such offers;
– calculate the amount of cash offered to non-QIBs (in an exchange offer limited to QIBs and non-U.S. persons) by reference to a fixed spread to a benchmark, provided the calculation is the same as the calculation for QIBs and non-U.S. persons;
– rely on Section 3(a)(9) for an exemption from Section 5 when offering “qualified debt securities” in an exchange offer; and
– announce their offer at any time, provided that they delay commencement until ten business days following the first public announcement or consummation of any purchase, sale, or transfer of a material business or amount of assets that would otherwise require disclosure of pro forma financials under Article 11 of Regulation S-X.
– John Jenkins
This Schulte Roth study reports the results of a survey of activist investors about their experience with shareholder activism & their expectations for activity in the next 12 months. The survey asked a number of provocative questions – including “Is the age of the settlement over?” “Who’s vulnerable?” and “What defenses work?”
One conclusion seems clear – activism no longer has an off-season:
Fading are the days of the “activist season” – the predictable six-month stretch between the time when activists build their stakes and submit notice of their proposals to companies and when annual meetings are held in May and June. A significant number of activists have turned to post-annual meeting tactics, such as the use of special meetings, consent solicitations and simple public campaigns, to exact corporate change. Thus, not only should we expect activism to continue to thrive, we should expect it to become an ever-present activity in the marketplace seeking to unlock value and hold managements accountable.
– John Jenkins
This Andrews Kurth Kenyon memo discusses cybersecurity due diligence in energy sector M&A. This excerpt explains how the oil & gas industry’s investments in digital technologies have raised the profile of cybersecurity issues for dealmakers:
To weather the plunge in prices, many oil companies have sought out new innovations to reduce the cost of extraction and exploration. Investments in digital technologies will likely only increase—a 2015 Microsoft and Accenture survey of oil and gas industry professionals found that “Big Data” and the “Industrial Internet of Things” (IIoT) are targets for greater spend in the next three to five years. Cybersecurity threats were perceived in the survey as one of the top two barriers to realizing value from these technologies.
Companies considering a sale would be well advised to consider a buyer’s likely cybersecurity concerns:
On the target side, energy companies should prepare (in turn) for more scrutiny over their data security and privacy practices. Among other benefits to “knowing thyself,” getting ahead of this process should offer targeted companies a better negotiating position. It would also allow them to take a more proactive role in defining the policies of the combined company post-merger. At the very least, these efforts could help avoid the kind of hiccups and uncertainties that lead to undervaluation. In any event, poor cybersecurity practices can give an impression that a target lacks risk management in other areas—not an ideal pose to strike in any bargain.