On January 24th, the Federal Trade Commission announced the annual adjustment of the thresholds that trigger reporting obligations (and the mandatory waiting period) under the Hart-Scott Rodino (HSR) Act. The new thresholds become effective in late February or early March (30 days from publication in the Federal Register, which had not occurred as of January 25) and will remain in effect until next year’s announcement.
Under the new thresholds, acquisitions that result in the buyer’s holding -
- less than $68.2 million in voting securities and/or assets of the seller will not be reportable (subject to the rules on aggregation).
- more than $68.2 million but less than $272.8 million are reportable if the “size of persons” test is satisfied.1
- more than $272.8 million are reportable regardless of the size of persons.
Exemptions from reporting are available for certain acquisitions, and these increases also affect some of the exemptions (most particularly the exemptions for certain acquisitions of foreign issuers or foreign assets).
The HSR filing fees have not increased, but the levels that trigger larger filing fees have increased.
- The basic filing fee remains $45,000 and is payable on transactions valued at more than $68.2 million but less than $136.4 million.
- For transactions valued at more than $136.4 million but less than $682.1 million, the filing fee is $125,000.
- For transactions valued at more than $682.1 million, the filing fee is $280,000.
The new thresholds for the Act’s prohibition on interlocking directorates are $27,784,000 for Section 8(a)(1) and $2,778,400 for Section 8(a)(2)(A).
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
- M&A in 2012: Out with the Old, in with the New?
- Forward-Looking Statements: Deal Market Trends for 2012
- Joint Development Agreements: A Primer
- Tax Diligence and Tax-Related Provisions in Acquisition Agreements
- Delaware Court of Chancery Seeks To Narrow VeriFone With Potential Unintended Consequences
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.
Kevin LaCroix has blogged a follow-up to his earlier blog about the dramatic growth in the frequency of lawsuits relating to M&A by analyzing a recent paper that concludes, among other things, that M&A-related lawsuit filings now outnumber federal securities class action lawsuit filings, and M&A-related litigation has “replaced traditional stock drop cases as the lawsuit of choice for plaintiffs’ securities lawyers.”
I’m excited to note that we have posted new sample forms of seller-friendly and buyer-friendly confidentiality agreements, courtesy of Igor Kirman of Wachtell Lipton. Not only that, but Igor has generously offered to provide free copies of his book – “M&A and Private Equity Confidentiality Agreements Line by Line: A Detailed Look at Confidentiality Agreements in M&A and Private Equity and How to Change Them to Meet Your Needs” – to the first 50 folks that email him now. In the alternative, it is available in paperback or Kindle from Amazon. Igor’s book is a “must” for those who do deals…
Tune in tomorrow for the webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Dan Katcher of Joele Frank Wilkinson Brimmer Katcher, Damien Park of Hedge Fund Solutions LLC and Darren Wallis of Alara Capital identify who the activists are – want what makes them tick. Over 20 activists will be dissected!
On December 20th, the Court of Chancery issued a temporary restraining order in Sherwood v. Chan barring a company from holding its annual stockholders meeting in Beijing later that day. The court found that the plaintiff/dissident had sufficiently alleged colorable disclosure claims and irreparable harm with respect to the company’s proxy materials and the dissident’s proxy contest.
By way of background, the dissident, who was an incumbent director, initially had been included in management’s slate for reelection as a director. After the company mailed its definitive proxy statement and approximately 12 days before the stockholders meeting, the board removed the dissident from its slate. The company cited, among other things, the dissident’s alleged disruptive behavior and certain trading activity that had been reported to the SEC. In response, the dissident initiated a proxy contest but was unable to solicit proxies under Rule 14a-6 until after the date scheduled for the annual meeting. The company also argued that the dissident did not comply with the company’s advance notice bylaw.
Here are a few key points from the court’s decision granting the dissident’s request for a TRO:
- The court found that the plaintiff had sufficiently alleged two colorable disclosure claims for purposes of obtaining a TRO. The first related to whether the dissident was removed from management’s slate due to his alleged disruptive behavior or over “sincere policy disputes.” “A reasonable shareholder,” the court stated, “likely would perceive a material difference between, on the one hand, an unscrupulous, stubborn, and belligerent director as implied by the Proxy Supplement and, on the other hand, a zealous advocate of a policy position who may go to tactless extremes on occasion.” The second claim related to the company’s description of the status of an SEC review into the dissident’s stock trades, which disclosure may have been misleading in light of the dissident’s claim that the SEC had informed him it was not pursuing the matter.
- The court found that there would be irreparable harm even if the dissident was unable to wage a proxy contest. The company argued that, in the absence of a proxy contest, there was no irreparable harm because directors were elected under a plurality standard. Thus, according to the company, the alleged disclosure violations would not affect the legal outcome of the election. The court disagreed on the issue of irreparable harm, finding that the ability to “withhold” a vote was an important decision that should be fully and fairly informed.
- The court also found the defendants’ argument that the company’s advance notice bylaw precluded the dissident was waging a proxy contest to be “less than compelling.” The advance notice bylaw required the dissident to, among other things, provide notice of his intent to nominate a person for election as director no later than the close of business on the tenth day after the meeting date was announced. Although the dissident failed to give notice within the ten-day period following the initial announcement of the annual meeting date, the company had postponed the annual meeting.
The company argued that compliance with the advance notice requirement was based on the announcement of the initial meeting date, while the dissident argued that he only had to provide notice within ten days after the announcement of the meeting as postponed. While not providing any definitive ruling, the court found a “fair possibility that Plaintiffs can nominate an opposing slate.” The court also noted that the advance notice bylaw did not contain a clause found in other companies’ bylaws expressly stating that an adjournment or postponement does not commence a new time period for providing notice.
- The court emphasized that its role was not to judge which candidate was preferable over another, which Delaware law leaves to the “shareholder franchise.” Rather, the court’s role was to provide stockholders with “a fair opportunity to vote their preference on the future direction of the Company.”
The contingency fee practice in corporate litigation is alive and well in Delaware. Last month, Chancellor Strine awarded a much-publicized $285 million fee award to the plaintiffs’ attorneys in In re Southern Peru Copper Corp. S’holder Deriv. Litig. The fee relates to the court’s $1.2 billion damages award announced in October in which the court found that a controlling stockholder’s sale of an asset to its partially-owned subsidiary was not entirely fair.
Also in December, Vice Chancellor Laster awarded $22.3 million to the plaintiffs’ attorneys in the Del Monte litigation. The fee award was based on the court’s February 14, 2011, decision that enjoined a stockholders meeting and the operation of certain deal protections in a merger agreement. The decision was followed by an $89.4 million settlement payable to the stockholder class. The $22.3 million fee award is in addition to the $2.75 million previously awarded by the court to the plaintiffs’ attorneys as a result of Del Monte’s voluntary disclosures about the sale process, which were made after the litigation was commenced but prior to the court’s injunction decision.
Vice Chancellor Laster also recently awarded $2.4 million in attorneys’ fees in the Compellent litigation. There, he found that the plaintiffs had conferred a “benefit” on the target company’s stockholders by “relaxing” certain deal protections in a merger agreement, even though no topping bid emerged.
The issue of fee awards has received significant attention lately, particularly in the context of disclosure-based settlements — the most common form of settlements in M&A litigation. Delaware courts seem to have increased their scrutiny of these settlements, partly to make sure that “good cases” are not settled “on the cheap” and partly to police the filing of “bad cases.” As an example of the latter category, Vice Chancellor Laster issued a length opinion in April 2011 in In re Sauer-Danfoss. There, he awarded $75,000 to the plaintiffs’ attorneys for a “kitchen sink” list of disclosures that he generally termed as “not helpful.” In that case, he also assembled a list of prior fee awards granted by Delaware courts, categorizing them into three “buckets” ranging from small fee awards for marginally helpful disclosures to large fee awards for “significant” disclosures.
Disclosure-based settlements and attorneys’ fee awards remain important areas for deal lawyers and litigators, especially for purposes of obtaining deal certainty through pre-closing settlements and for valuation purposes (i.e., buyers taking into account the cost of litigation and any potential settlement payments). It’s also worth noting that Delaware arguably continues to walk a fine line with attorneys’ fees. M&A litigation has risen significantly over the years, with some commentators suggesting that 85% of M&A transactions are now challenged. In addition, a particular transaction may be challenged in multiple venues.
If Delaware cracks down too much on what many in the defense bar perceive as “knee-jerk reaction” lawsuits, it risks losing market share as plaintiffs could file elsewhere. There is evidence that this migration to other states has occurred in recent years, perhaps due to a perception that Delaware courts are not “generous” with fee awards. Recent cases should show, however, that Delaware courts will award significant fees where its judges believe the plaintiffs have strong claims. To that end, Ronald Barusch recently wrote this in Deal Journal piece that the Southern Peru award is an invitation for good cases.
According to Dykema’s 2011 M&A Outlook Survey, after slowly increasing the last two years, confidence in the U.S. M&A market has dropped slightly. 26% of industry leaders believe the market will be strong during the next 12 months, down from 38% last year, while 57% are neutral on the outlook for the coming year. Looking at the overall U.S. economy, nearly half of respondents are neutral on the prospects for 2011, but for the second consecutive year, respondents have a more pessimistic outlook compared to the previous year.
Respondents believe that availability of capital (39%) is the biggest driver for current M&A activity, due in large part to strategic buyers and private equity firms with greater access to financing. However, an uncertain economy has been the most frequent obstacle to successful deals during the past year, and as a result, over half of the respondents think the coming year will bring an increase in the number of distressed transactions.
The economy is also affecting deal structures and dealmakers saw even more alternative financing in 2011 than in past years. Purchase price adjustments, which were not included as an option on last year’s survey, are the number one provision of increased negotiation in purchase agreements according to respondents. A third of respondents identified earnouts as a major discussion point, a figure down sharply from 2010 when 66% of industry leaders selected that option. Financing contingencies continue to be a hot button issue but are also down from last year with an improving financing market (41% in 2011; 54% in 2010).
According to Dykema, the survey yielded a number of other interesting conclusions, including:
- Respondents believe strategic buyers are most likely to increase their presence in the M&A market over the next 12 months (51%), a figure that has remarkably stood for the last four years. Financial buyers are most likely to decrease their presence (43%), which flip-flopped with foreign buyers this year.
- For the third consecutive year, strategic buyers (44%) were seen as the group most influencing deal valuations over the previous year. Financial buyers are not seen as driving valuations any more than they were a year ago.
- China, Europe, India and Canada are named the most likely regions for foreign buyers in the U.S. M&A market over the next year. Respondents continue to look at China as the principal source for investors in U.S. companies, far outranking any other region. Interestingly, Europe is named the second most likely region for U.S. investment despite the current economic turmoil.
Recently, as noted in this Sullivan & Cromwell memo (other memos are posted in our “Antitrust” Practice Area), the DOJ and FTC extracted their first publicized penalty for a corporate executive’s failure to make a Hart-Scott-Rodino Act filing before receiving stock of his employer as part of his compensation. Although the historical background of the enforcement proceeding is somewhat unusual, the proceeding makes clear that the DOJ and FTC will, in appropriate cases, seek penalties against executives who fail to comply with the HSR Act’s filing requirements when they receive stock as part of their executive compensation.