Since the SEC Chair typically sets the agenda for the agency, I was a little surprised to see this WSJ blog stating that SEC Commissioner Gallagher said that we shouldn’t expect changes to the 13D window “this year or next.” Then again, we’ve been hearing that it might be coming down the pike for years. So it probably is an accurate statement…
– Can you describe the level of proxy contest activity in 2014 relative to prior years, and reasons it may be declining or leveling off?
– Based on 2014 takeover activity, what is the BC Securities Commission position on poison pills, and what’s the best guidance for companies?
– What are the current levels & scope of activism in M&A transactions?
– Can you describe the trends in shareholder engagement?
– What activism-related developments & trends do you anticipate going forward, and how should companies prepare?
Here’s news from Davies Ward:
In an update issued last week, the CSA announced that it will not be lowering Canada’s early warning reporting threshold from 10% ownership to 5% as previously proposed. The CSA had proposed lowering the threshold as part of a suite of amendments to Canada’s early warning regime that were proposed in March 2013. In addition to keeping the reporting threshold at 10%, the CSA has decided not to proceed with the proposal to include “equity equivalent derivatives” (such as total return swaps) in determining whether a shareholder has crossed the threshold for early warning reporting disclosure.
The CSA’s announcement will be enthusiastically received by many in the investment community that had broadly opposed several aspects of the proposed amendments, in particular the 5% threshold and the inclusion of equity equivalent derivatives in threshold calculations. In contrast, Canadian issuers had supported the 5% threshold. Among the 70 comment letters that the CSA received, the Managed Funds Association (MFA) and the Alternative Investment Management Association (AIMA) submitted an extensive white paper in response to the CSA proposal opposing these changes. Davies represented MFA and AIMA.
Noting that commenters had generally agreed with the CSA’s objective of enhancing transparency, the CSA stated in its announcement that it will proceed with other elements of the proposed amendments that will enhance transparency by these measures:
– requiring disclosure of 2% decreases in ownership;
– requiring disclosure when a shareholder’s ownership interest falls below the reporting threshold;
– making the alternative monthly reporting system unavailable to eligible institutional investors when there is an intention to engage in proxy solicitation;
– exempting lenders from disclosure requirements if they lend shares pursuant to a specified securities lending arrangement;
– exempting borrowers, in certain circumstances, from disclosure requirements if they borrow shares under a securities lending arrangement;
– providing guidance clarifying the current application of early warning reporting requirements to certain derivatives and requiring disclosure of derivatives in the early warning report;
– enhancing and improving the disclosure requirements in the early warning report; and
– clarifying the time frame to file the early warning report and news release.
The CSA announcement follows a statement last week by a United States Securities and Exchange Commissioner that the SEC is unlikely to tighten Rule 13d, the U.S. early warning regime, by shortening the 10 day disclosure window. Rule 13d requires non-passive investors to disclose ownership of more than 5% in public companies but unlike the Canadian rules allows shareholders a window of 10 days after crossing the 5% threshold to file a report. The 10 day disclosure window allows shareholders to continue purchasing shares after crossing the 5% threshold, in some cases to ownership in excess of 10%.
The CSA intends to publish final rule amendments implementing these changes in the second quarter of 2015.
Here’s news from Richards Layton about the Delaware Court of Chancery awarding $76 million in the Rural/Metro case:
In an opinion assessing damages in In re Rural/Metro Corp. S’holders Litig., C.A. No. 6350-VCL (Del. Ch. Oct. 10, 2014), the Court of Chancery held that a financial advisor, which had been held liable in an earlier opinion for aiding and abetting breaches of fiduciary duty by a board of directors in connection with approving a merger and related disclosures, would be required to pay 83% of the damages to the stockholder class.
Relying on a discounted cash flow analysis, the Court determined that the fair value of Rural/Metro on a quasi-appraisal basis fell short of the merger price by $4.17 per share, and that the damages to the class of stockholders not affiliated with the defendants totaled approximately $91.3 million.
Rural/Metro, its directors and the company’s other financial advisor had settled before trial and obtained “joint tortfeasor” releases, under which the plaintiff class agreed that the damages recoverable against other tortfeasors would be reduced to the extent of the settling defendants’ respective pro rata shares, as permitted by the Delaware Uniform Contribution Among Tortfeasors Law, 10 Del. C. § 6301, et seq.
The Court held that the unclean hands doctrine barred the non-settling financial advisor from claiming a settlement credit as to claims involving that financial advisor’s adjudicated “fraud upon the board,” but that it could claim a settlement credit as to other claims. The Court determined that the record at trial supported a finding that two of Rural/Metro’s directors were joint tortfeasors, but did not support such a finding as to the other directors or the settling financial advisor. Allocating responsibility for the various claims on which liability had been previously found, the Court entered judgment for approximately $75.8 million against the non-settling financial advisor.
Here’s news from Steve Haas of Hunton & Williams: In ev3, Inc. v. Lesh, C.A. No. 515, 2013 (Del. Sept. 30, 2014), the Delaware Supreme Court recently addressed the effect of an integration clause in a merger agreement. The appeal was brought after a Superior Court trial in which a jury awarded $175 million to the former stockholders of a target company who claimed that the buyer breached its contractual obligations relating to post-closing “milestone payments.”
A letter of intent between the parties provided that the buyer “will commit to funding based on the projections prepared by its management to ensure that there is sufficient capital to achieve the performance milestones detailed [in the letter of intent]” (the “Funding Provision”). This portion of the letter of intent was expressly made non-binding. In contrast to the Funding Provision, Section 9.6 of the definitive merger agreement stated that “Notwithstanding any other provision in the Agreement to the contrary… [buyer’s] obligation to provide funding for the Surviving Corporation, including without limitation funding to pursue achievement of any of the Milestones, shall be at [buyer’s] sole discretion, to be exercised in good faith” (emphasis added).
Following closing, the target’s former stockholders sued the buyer after the milestones were not reached and no further payments were made. The stockholders argued that the letter of intent demonstrated the parties’ understanding about the buyer’s obligation to pursue the milestones. In particular, they noted that the letter of intent survived under the merger agreement’s integration clause, which provided, in relevant part, that:
This Agreement contains the entire understanding among the parties hereto with respect to the transactions contemplated hereby and supersede and replace all prior and contemporaneous agreements and understandings, oral or written, with regard to such transactions, other than the Letter of Intent…..
Writing for the Delaware Supreme Court, Chief Justice Leo Strine held that:
The reference to the letter of intent in the integration clause did not convert the non-binding Funding Provision into a binding contractual obligation. Survival is not transformational. Rather, the integration clause’s provision that allowed the letter of intent to survive simply had the effect of ensuring that the expressly binding provisions contained in the letter of intent – which negotiating parties in the merger and acquisition context often expect to survive – would not be extinguished by the integration clause.
As a result, he said the Superior Court erred by allowing the former stockholders to argue to the jury “that the Funding Provision constitutes a contractual promise in itself, or was binding in the sense that it was a condition on [buyer’s] sole discretion” under Section 9.6 of the merger agreement. He noted that the letter of intent might have been relevant to some of the buyer’s potential defenses, but the Superior Court would still have to give the jury “a clear limiting instruction stating that the letter of intent was non-binding and any conflicting provision in the letter of intent could not alter the meaning of § 9.6.”
Here’s a note from Chris Cernich, Head of ISS’ M&A and Proxy Contest Research – it’s derived from a recent M&A Edge research note:
In the five months since Valeant Pharmaceuticals went public with its premium offer for Allergan, and over the three months since Allergan’s largest shareholder began soliciting support to give shareholders a vote on the offer, and during the five weeks since valid consents were delivered from more than a third of outstanding shares requesting a special meeting for that purpose–as well as, apparently, for the remaining three of four additional months before the board is finally required to hold that special meeting and give shareholders a voice–the Allergan board, though refusing to engage with the bidder, has repeatedly reassured Allergan shareholders that it is aligned with shareholders and focused on “enhancing stockholder value.”
We may be about to find out.
Since the Valeant announcement, Allergan has repeatedly indicated it is looking for acquisitions to help create shareholder value. But a large acquisition would also likely kill off the Valeant offer by making Allergan too big–regardless of whether that acquisition actually adds meaningful, let alone greater, value to shareholders. On Sept. 22, media reports began circulating that the board had not only declined an all-cash offer from another potential buyer, but was “in advanced talks to buy Salix Pharmaceuticals” for an all-cash consideration presumably rich enough to persuade the Salix board to call off its planned merger with Cosmo Pharmaceuticals.
Allergan’s largest shareholder, Pershing Square, which has been pushing the Allergan board to engage with Valeant, quickly warned it would sue directors for breach of fiduciary duty if such a transaction were announced. Over the subsequent days, three more of the company’s top 12 shareholders also issued public statements pointedly expressing, as T Rowe Price put it, their “growing concern [at] the corporate governance practices of the Allergan board.”
To point out that the board has authority to approve an all-cash acquisition without shareholder approval is to point out the irrelevant: the question is not what the board can do, but what the board should do.
When more than a third of outstanding shares consent to call a special meeting–particularly amid a thicket of bylaw restrictions so onerous as to nearly frustrate the exercise of that “right”–there’s credible reason to believe that the board should give shareholders a real and binding choice between the buyout offer and the new strategic plan assembled in response.
When nearly a fifth of outstanding shares, increasingly uneasy about the board’s stewardship, feel compelled to publicly reiterate that point, there is a credible argument to be made that the board should give shareholders a deciding vote on any large, buyout-blocking acquisitions if the board is simultaneously rejecting premium offers for the company.
Absent the announcement of a large, irrevocable acquisition, though–absent, that is, an irrevocable breach of faith–shareholders cannot know whether the board’s public professions of alignment were principles or platitudes. They cannot even know, with any certainty, that the board has rejected other compelling offers, or is negotiating a buyout-blocking transaction. They can, instead, only look at the board’s past behaviors, and whether its public statements address or sidestep the significant issues being raised, to gauge whether there is a credibility gap.
That record is not reassuring.
The board’s public response to this highly unusual airing of concern from its major shareholders has been only to reiterate generically its “focus” on “enhancing stockholder value”-with nary a word addressing the more crucial question raised by each of those major shareholders of whether it will enable or frustrate a decisive shareholder vote on the competing strategic alternatives.
Tune in tomorrow for the webcast – “The Art of Negotiation” – during which during which Cooley’s Jennifer Fonner Fitchen, Perkins Coie’s Dave McShea and Sullivan & Cromwell’s Krishna Veeraraghavan will teach you how to negotiate with the best of them in a chock-full of practical guidance program.
This blog from “The Activist Investor Blog” is worth reading. Here’s the opening paragraph as a teaser:
As proxy contest tactics go, this one doesn’t defy belief, or make an investor want to sell everything. But, it does illustrate what companies will do to make one shareholder look bad.
Here’s news from Steven Haas of Hunton & Williams:
The Court of Chancery recently granted an attorneys’ fee award of $8.25 million resulting from the settlement in In re Gardner Denver, Inc. S’holder Litigation, C.A. No. 8505-VCN, transcript (Del. Ch. Sept. 3, 2014). The post-closing settlement provided for a monetary payment of $29 million to the stockholder class in connection with litigation challenging Gardner Denver’s $3.9 million go-private transaction, which closed on July 20, 2013. Prior to the stockholders’ meeting, Gardner Denver also supplemented its proxy statement to provide additional details regarding, among other things, (i) how its former chief executive officer was consulting with the winning bidder and (ii) the status of various potential bidders’ due diligence review when those bidders withdrew from the sale process. In addition, the company granted waivers of standstill agreements with potential bidders.
The settlement was reached after the parties agreed to mediation. $1 million of the attorneys’ fee award was allocated to the “therapeutic” benefits, and the remaining $7.25 million was awarded for the monetary payment. The settlement is noteworthy since most merger litigation settlements only provide for additional disclosure. According to Cornerstone Research, only 2% of merger settlements in 2013 involved a monetary payment. In granting the attorneys’ fee awards in Gardner Denver, Vice Chancellor Noble observed that that “[r]ecoveries of this size don’t just happen.”
As noted in this article, Hemispherx Biopharma has elected not to seek enforcement of its fee-shifting bylaw in an ongoing Delaware Chancery Court case, which could have been the first test of the actual validity of such a provision. Defendants notified the court of their decision in a Sept. 16 letter. During a Sept. 12 conference, Chancellor Bouchard had ordered Hemispherx to clarify how it sought to apply its fee-shifting bylaw. Also see this blog by Cooley’s Cydney Posner.
Meanwhile, see Keith Bishop’s blog entitled “SEC Advisory Committee to Consider Fee-Shifting Bylaws, But Why?“…