We have posted the transcript for our recent webcast: “Merger Filings with the SEC: Nuts & Bolts.”
Here’s a blog by Gibson Dunn’s Jim Moloney & Andrew Fabens:
Last Friday, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. Here is the SEC press release. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.
The respondents included a lottery equipment holding company, the owners of a living trust, and the CEO of a Chinese technical services firm. According to the SEC, the respondents in each of these cases failed to report various plans and activities with respect to the anticipated going private transactions, including when the parties: (i) determined the form of the going private transaction; (ii) obtained waivers from preferred shareholders; (iii) assisted in arriving at shareholder vote projections; (iv) informed management of their plans to take the company private; and (v) recruited shareholders to execute on the proposals. In one case the respondents were charged for failure to report owning securities in the company that was going private. In another case, the respondents reported their transactions months or years later. The proceedings resulted in cease-and-desist orders as well as the imposition of civil monetary penalties ranging from $15,000 to $75,000 per respondent.
Generally, under Section 13(d), any person who acquires beneficial ownership of more than 5% of a registered class of equity securities must disclose certain information about the acquisition within ten calendar days. Item 4 of Schedule 13D requires that filers also “describe any plans or proposals which the reporting person may have which relate to or would result in . . . an extraordinary corporate transaction, such as a merger, reorganization or liquidation” or a going private transaction (emphasis added). Further, under Section13d-2(a), holders must file amendments to their 13D disclosures “promptly” if there are any material changes to the information disclosed in the schedule.
In its press release announcing the settlements, the SEC emphasized that amendments to beneficial ownership reports cannot be evaded by using boilerplate disclosure language. Andrew J. Ceresney, the Director of the Division of Enforcement, noted that, “stale generic disclosures that simply reserve the right to engage in certain corporate transactions do not suffice when there are material changes to those plans, including actions to take the company private.”
It is not uncommon for 13D reports to include under Item 4 a laundry list of activities and conduct that the reporting persons may seek to engage in after the filing is made. Some filers may include such disclosure in the hopes that it will provide support for delayed disclosure of events that might otherwise trigger a 13D amendment obligation later on. But this latest string of settlements sends a strong message to the contrary, marking yet another step in Chair Mary Jo White’s campaign to remedy perceived “broken windows”. Coming quickly on the heels of the SEC’s prior actions that were brought against 34 companies and individuals late last year for various Section 16 and 13(d) reporting violations, this most recent sweep reiterates the risks associated with delayed or incomplete 13D disclosures.
According to the latest SEC enforcement statistics from the first few months of 2015, it is clear that the Commission has no intention of slowing down the pace at which it brings cases to enforce the 13D rules that require disclosure of current beneficial ownership information. Here’s more on SEC Enforcement trends going into 2015.
While some may seek cold comfort in the fact that the respondents involved in these proceedings were of relatively modest size and means, all reporting persons should take notice that the SEC is actively looking to bring cases in this area. Specifically, all 13D reporting persons should come away with the following key points from these cases:
– Schedule 13D not only requires the disclosure of actual historical transactions, but plans or proposals that could reasonably result in future transactions, including going private transactions. The SEC is taking a more aggressive position than it has historically on exactly what type of activities will trigger the “plan or proposal” reporting obligation, so filers must carefully consider the need to disclose their plans as soon as they begin to crystalize and as they begin to implement their plans.
– Generic, boilerplate disclosures seeking to reserve the right to engage in a variety of conduct in the future may not suffice, especially when there are material changes to facts, including plans or proposals previously disclosed or alluded to in a prior 13D report.
– Filing 13D amendments late or after the fact, may not preclude liability for violations as the SEC has demonstrated an equal willingness to pursue both late filers and those that don’t file at all. And given that there is no scienter element to a Section 13(d) violation, a filer may be found liable even absent the intent to commit any fraudulent disclosure.
Accordingly, filers will want to confer with their counsel to ensure that they are timely filing all Schedule 13D reports (including amendments thereto) as soon as the filer takes any noteworthy steps in a direction that could render previous disclosures stale.
Thanks to Lauren Traina (OC corporate associate) for all her insights and efforts in helping to draft this post.
Here’s news from Carla Hine from McDermott Will & Emery:
Although the analysis of whether a transaction may be anti-competitive typically focuses on price, privacy is increasingly regarded as a kind of non-price competition, like quality or innovation. The FTC has indicated that it can challenge mergers it believes will result in a substantial lessening of competition on the basis of privacy – for example, lower quality of privacy for consumers. During a February 26th symposium on the parameters and enforcement reach of the FTC Act, Deborah Feinstein, the director of the FTC’s Bureau of Competition, noted that privacy concerns are becoming more important in the agency’s merger reviews. Specifically she stated, “Privacy could be a form of non-price competition important to customers that could be actionable if two kinds of companies competed on privacy commitments on technologies they came up with.”
While the FTC has not yet challenged a transaction because of privacy, parties can expect it to closely assess the transaction’s impact on consumer privacy. The FTC’s review of mergers between entities with large databases of consumer information may focus on: (1) whether the transaction will result in decreased privacy protections, i.e., lower quality of privacy; and (2) whether the combined parties achieve market power as a result of combining their consumer data. Companies in data-rich industries who are considering merging with or acquiring a competitor should expect privacy to play a prominent role in the antitrust review of their proposed transaction. Companies should undertake due diligence of a target’s privacy practices, talk with key IT and business personnel and consider hiring economic consultants to analyze the competitive impact of the merger on privacy impacts.
We have posted the transcript for our recent webcast: “Private M&A Wake-Up Calls.”
I’ve been posting memos about Delaware’s proposed amendments about fee-shifting & exclusive bylaws. Professor John Coffee recently penned this blog – “Delaware Throws a Curveball” – which bears reading. Here is the intro:
Since the Corporation Law Council of the Delaware State Bar Association announced earlier this month that it was recommending statutory amendments to prohibit “loser pays” fee shifting bylaws and charter provisions (and thus overrule the Delaware Supreme Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund), a predictable reaction has followed. Plaintiff’s attorneys and most academics applauded the decision, fearing that the alternative would be the death knell of private enforcement. In contrast, conservatives have attacked the proposed legislation, seeing it as the end of Delaware’s position as the champion of “enabling” corporate legislation and predicting that Delaware would lose market share to other, more permissive jurisdictions in the market for corporate charters. Although the Corporation Law Council usually dictates corporate law legislation in Delaware, lobbyists are at work on both sides, and the outcome is uncertain.
Yet, even with a battle brewing, no one seems to have read the statute closely. Had these commentators focused on the actual language of the proposed legislation, they would have discovered that the legislation does not quite do what either side in this debate thinks it does. Perhaps it is too late in the day to expect legal academics to actually read legislation before turning to economics or political theory, but this instance is especially symptomatic. Outdated as my “old school” approach may be, I will begin with the proposed statutory language. The Corporation Law Council (a 22 member body) has proposed changes to Sections 102 and 109 of the Delaware General Corporation Law (“DGCL”), which provisions regulate the contents of the certificate of incorporation and the bylaws, respectively. The proposed legislation will provide that neither the certificate of incorporation nor the bylaws may contain a provision that “imposes liability on a stockholder for the attorney’s fees or expenses of the corporation or any other party in connection with an intracorporate claim.” As later stressed, this would represent only a partial repeal of the ATP Tour decision’s broader acceptance of the theory that the bylaws are a contract that can bind shareholders retroactively, and it still leaves open the ability of board-approved bylaws to impose liability on shareholders in other contexts. But, at first glance, the above language may indeed seem to preclude “loser pays” fee-shifting provisions.
Also see this Akin Gump blog…
In a case just decided, Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch. Mar. 16, 2015), the Delaware Chancery Court addressed the issue of whether the timing of adoption affects the enforceability of a unilaterally adopted fee-shifting bylaw against former stockholders. While it appears that, in light of potential action by the Delaware legislature, the continued viability of fee-shifting bylaws in Delaware is somewhat tenuous, the case may also have application to the enforceability of other bylaw provisions to former stockholders.
This March-April issue of the Deal Lawyers print newsletter includes articles on:
– Five Day Tender Offers: What Can Market Participants Expect?
– Five Day Tender Offers: Conditions and Timelines
– Wake-Up Call for Private M&A Deal Structuring
– Courts Increasingly Skeptical of the Value of Disclosure-Only Settlements
– Transaction Costs: Negotiating Their Tax Benefit
– Food for Thought: Conflicting Views on the “Knowing Participation” Element of Aiding & Abetting Claims
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
This proposed legislation – known as the “Delaware Rapid Arbitration Act” – is working its way through the Delaware General Assembly and would enable Delaware entities to engage in a rapid and efficient form of arbitration. It’s expected that the legislation will become law next month (with an effective date 30 days later). Here’s a set of FAQs on the bill – and a blog about it from the Delaware Division of Corporations.
Here’s a blog by Stinson Leonard Street’s Steve Quinlivan:
Occasionally we see interesting uses of social meeting in M&A transactions (See the SEC position here, and prior examples here). Some more recent examples are:
From Zillow’s acquisition of Trulia:
In Mitel’s acquisition of Mavenir, almost 30 tweets and retweets were disclosed in a single 425 filing (scroll to the end), including the following:
– Mitel announces definitive agreement to acquire Mavenir. $MITL $MVNR #Mitel http://ow.ly/3xqJLw
– .@MItel & @Mavenir -Strategic Winning Combination for #Wireless #Cloud #UCOMS Leadership #MWC15 $MITL $MVNR #NewMitel http://bit.ly/1wCrwY3
– RT @JonBrinton: .@Mitel & @Mavenir creates a powerful new value proposition for enterprises & mobile service providers—Rich McBee http://t.co/7NbHN8Bk0r
One would expect to see more uses like the above, but usage seems scant. It’s possible my searches do not find everything. One likely explanation is by the time you get to public announcement, the team is suffering from deal fatigue. It’s complicated enough to explain the usual rules regarding filing of SEC communications without another layer of complexity, and there is all the other important announcement matters going on.
But it really shouldn’t be that hard. A number of tweets can be drafted and approved in advance, just like shareholder and employee FAQs. One problem is a 425 filing can’t be finalized until the hyperlinks are known, but it should easy enough to circle back later in the day and complete the filing.
OMG! This motion to amend the complaint in Chen v Howard-Anderson (“aka Occam”), CA No. 5878-VCL (Del. Ch.) is sure to raise eyebrows as it indicates a willingness to bring aiding & abetting claims against company counsel and not just financial advisors and counterparties – something rarely seen before in the public company M&A context. The oppositions to the motion filed on March 4th were filed confidentially. Argument on the motion to add company counsel is being held on March 17th.
In light of the prisoner dilemma type incentives created by the Delaware Uniform Contribution Among Tort-feasors Law (DUCATL) – as interpreted by the Delaware Chancery Court in Rural/Metro – several commentators have suggested that defendants are increasingly likely to break ranks rather than present a united front in defense of aiding & abetting claims. This likely will contribute to a rise in company counsel appearing as defendants, if not initially included in the complaints filed or in cross-claims filed by co-defendants seeking to preserve and maximize rights of contribution or credit for settlements under DUCATL. This could get real messy.
Like Rural/Metro, the motion to amend the complaint adds new defendants to an action in which discovery is well advanced if not substantially complete, potentially requiring the new defendants – at least Jefferies (like RBC in Rural/Metro) – to go to trial based on a record, particularly discovery – that they may have had little if any role in creating. See paragraph 7 of the motion acknowledging that it is being filed four years after the hearing on a preliminary injunction in the matter.