February 23, 2017

Activism: Wachtell on Hedge Funds & Other Activists

Wachtell Lipton recently published its annual memo on dealing with hedge funds & other activists. Although assets managed by activist hedge funds declined somewhat in 2016, there are still more than 100 hedge funds currently engaged in frequent activism & over 300 others that have launched activism campaigns in recent years – and they continue to attract interest from major institutions. This excerpt addresses how formidable these activist investors are:

The major activist hedge funds are very experienced and sophisticated with professional analysts, traders, bankers and senior partners that rival the leading investment banks. They produce detailed analyses (“white papers”) of a target’s management, operations, capital structure and strategy designed to show that the changes they propose would result in an increase in share price in the near term. These white papers may also contain aggressive critiques of past decisions made by the target and any of the target’s corporate governance practices that are not considered current “best practices”. Many activist attacks are designed to facilitate a takeover or to force a sale of the target, either immediately or over time.

Prominent institutional investors and strategic acquirors have on occasion worked with activists both behind the scenes and by partnering in sponsoring an activist attack, such as CalSTRS with Relational in attacking Timken, Ontario Teachers’ Pension Fund with Pershing Square in attacking Canadian Pacific and Valeant with Pershing Square in attempting a takeover of Allergan. Major investment banks, law firms, proxy solicitors and public relations advisors have represented activist hedge funds and actively solicited their business. These advisors to activist hedge funds have also aggressively sought to advise mutual funds and other investors on how to run their own activist campaign.

The memo offers a wide range of advice on preparing for & responding to activist attacks.  It also points out that credibility with major institutions  – and the ability to persuade them to support management’s long-term strategy – are key to fending off an activist attack.

For the latest insights on activist investors, check out our recent “Activist Profiles & Playbooks” webcast.

John Jenkins


February 22, 2017

Doing the Right Thing: M&A & The Limits of Contract Rights

This article from Prof. Lawrence Cunningham makes a point that most M&A lawyers probably would agree with – there are often very important parts of a business deal that can’t be completely reduced to reps, warranties & covenants. Instead, fulfillment of these obligations depends on a party’s own sense of what integrity requires.

Cunningham contrasts the outcomes of non-binding commitments made by Warren Buffett to Benjamin Moore’s independent distributors with detailed contractual provisions governing Pittsburgh’s status as the post-deal home of Heinz after its acquisition by 3G.  While Buffett’s non-binding commitment has been honored for the past 17 years, the more formal commitment provided by 3G has proven to be less than iron-clad.  Here’s an excerpt:

In Heinz, the merger agreement devoted an entire section to the company’s cultural connection to Pittsburgh. It declared “that after the Closing, the Company’s current headquarters in Pittsburgh, Pennsylvania will be the Surviving Corporation’s headquarters.” A covenant, which survives the closing and is made by the acquisition vehicle Berkshire-3G jointly owned (called the “Parent”), promises: “after the Closing, Parent shall cause the Surviving Corporation to preserve the Company’s heritage and continue to support philanthropic and charitable causes in Pittsburgh.” The contract required the parties to reference these commitments in their press releases about the deal.

But within a year of the Heinz deal, the company, led by managers appointed by 3G, cut 300 jobs at Pittsburgh headquarters. A further Pittsburgh dilution occurred soon thereafter, when Heinz merged with Chicago-based Kraft to form The Kraft Heinz Company. While the company adopted dual headquarters and asserted it was keeping its Pittsburgh covenants, locals perceived a hollowing out and migration to Chicago. Then two years after that, last Friday, Kraft Heinz made an unsolicited bid for Unilever, the global giant dual-headquartered in Amsterdam and London!

Cunningham concedes that 3G’s actions may not have violated its covenants, but ruefully observes the contrast between the two transactions – in the Benjamin Moore deal, an informal promise has been “honored with spirited punctiliousness” while the Heinz deal’s highly formalized one has been “more technically managed.”

Of course, it should be noted Buffett’s Berkshire Hathaway partnered with 3G for the Heinz deal – and in another article, Cunningham suggests that given their contrasting approaches to deal-making, they’re a very odd couple indeed.

John Jenkins

February 21, 2017

Antitrust: FTC Merger Remedy Study

This Arnold & Porter Kaye Scholer memo addresses the findings of the FTC’s Merger Remedy Study.  Here’s the intro:

On February 3, 2017, the US Federal Trade Commission (FTC or Commission) released the findings of its “Merger Remedy Study” (the FTC Study) which examined the effectiveness of Commission-required remedies in transactions from 2006 to 2012. The FTC Study—its first on merger remedies in over 16 years—provides an important window into the FTC’s current thinking about merger remedies that may help businesses plan and position transactions for FTC approval. Moreover, it also provides several key insights that potential divestiture buyers should consider during and after completion of the divestiture to ensure the remedy is successful.

The FTC Study concluded that the current process for designing remedies, as well as the remedies themselves, generally have accomplished what the Commission has sought—to replace the lost competition from the initial transaction. As a result, the FTC confirmed that it will continue to follow many of its practices and policies today.

In terms of specific remedies, the FTC continues to have a strong preference for the divestiture of an ongoing business, & the memo highlights the features that the FTC looks for in divestiture plans.

John Jenkins

February 17, 2017

Forum Selection Bylaws: Yet Another Brick in the Wall

Last year, Broc blogged about California joining the list of states that will enforce Delaware forum selection bylaws.  This Troutman Sanders memo says that we can add Missouri to the list:

In a recent decision, a Missouri state court enforced the forum selection bylaws adopted by the board of directors of Monsanto Company requiring that fiduciary duty litigation against the company or its directors be brought in a Delaware court. The bylaws were adopted by Monsanto in anticipation of its approval of a $66 million merger with Bayer AG. The plaintiff sued Monsanto and its board of directors, amongst others, alleging that Monsanto and its board of directors breached their fiduciary duties to the Monsanto stockholders in the negotiations of the merger with Bayer AG.

Plaintiff argued that the forum selection bylaws infringed upon his constitutional rights since the Delaware Court of Chancery does not provide for a jury trial; however, the court rejected plaintiff’s argument and upheld Monsanto’s forum selection bylaw as valid and enforceable, requiring that a suit regarding the fiduciary duties of Monsanto or its board must be filed in the appropriate Delaware court.

Missouri can now be added to the growing list of courts, which also includes New York, Texas, California, Illinois, Ohio and several others, that have ruled in favor of upholding forum selection bylaws adopted by a company’s board of directors.

John Jenkins

February 15, 2017

Enforcement: SEC Targets Control Contest Disclosures

Yesterday, the SEC’s Division of Enforcement announced two new actions involving disclosure violations that took place in the heat of takeover & activist battles.  Disclosure in this arena seems to be an area of emphasis for the SEC – it recently sanctioned Allergan for failing to disclose merger negotiations with third parties while it was the target of a tender offer from Valeant.

The first proceeding involves inadequate disclosures about “success fees” payable by CVR Energy to two investment banks that it retained to help fight off a tender offer.  The second targets failures by individuals and investment funds to comply with beneficial ownership reporting obligations under Section 13(d) and 16(a) of the Exchange Act in connection with their joint efforts in several activist campaigns.

It’s interesting to note that disclosure of banker success fees was addressed in one of the new tender offer CDIs (159.02) issued in late 2016. Last month on, I flagged a Cooley blog that said market practice on success fee disclosure would need to change as a result of the new CDI. The SEC’s press release notes that CVR’s cooperation and remedial actions resulted in a decision not to impose any monetary sanctions on it – but I suspect the fact that the company’s disclosures may have been consistent with market practice might have played a role in it as well.

Public companies and their advisors can be excused for enjoying the predicament of the targets of the second enforcement action – they’ve long complained about activists playing fast and loose with beneficial ownership disclosure requirements, and undoubtedly are relishing their comeuppance in this instance.

John Jenkins

February 13, 2017

Delaware: Supreme Court Says Corwin Applies to Tenders

Last week, the Delaware Supreme Court affirmed the Chancery Court’s decision in In re Volcano (Del. Ch.; 6/16) – which held that Corwin’s path to business judgment rule review for post-closing merger claims applied to two-step transactions under Section 251(h) as well.  This K&E memo summarizes the effect of the decision. Here’s an excerpt:

The Delaware Supreme Court in a one-sentence decision upholding the Chancery decision in Volcano provided welcome clarity on Delaware’s Corwin doctrine. In Corwin, the Supreme Court decided that the deferential business judgment rule should be the standard of review in post-closing damages cases in mergers (other than those subject to entire fairness review) that have been approved by a fully informed majority of disinterested stockholders.

In Volcano, the Chancery Court for the first time addressed the question of whether the Corwin doctrine applied to transactions completed under Delaware’s 251(h) tender offer structure or whether it was limited to so-called “one-step” mergers involving a stockholder vote. The Chancery Court held that a tender by the majority of Volcano’s stockholders was the equivalent of a majority vote of stockholders for purposes of the cleansing effect embodied by Corwin (a holding repeated in a subsequent Chancery decision in Auspex).

In affirming this ruling, the Supreme Court provides dealmakers with confidence that choosing a tender offer structure, which may be favored by parties because of potential speed advantages, will not deprive the target board of the litigation benefits of a fully informed approval by stockholders.

John Jenkins

February 10, 2017

Golden Parachutes: Check Out What the IRS Wasn’t Looking At!

This Orrick memo discusses the new edition of the IRS’s “Golden Parachute Audit Techniques Guide” – a reference tool for its auditors to use in their review of compliance with the golden parachute rules.  A couple of the “new additions” to the document caught my eye:

The 2017 ATG expands and updates the list of documents for IRS examiners to review in connection with a golden parachute examination. The additional documents include:

– Information Statements (Schedules 14A and 14C). The schedules disclose information regarding golden parachute payments in connection with the solicitation for shareholders’ approval. Additionally, any parachute payments actually made upon a change in control must be reported.

– Registration Statements (Forms S-4 and F-4). The Forms are used to provide information to investors when registering securities, and provide information related to mergers, acquisitions, or when securities are exchanged between companies.

Seriously? You mean IRS auditors weren’t already being told to look at these?  There’s a vast amount of information about change-in-control payments in merger proxies & S-4 registration statements.  It’s kind of astonishing that the IRS doesn’t seem to have told its auditors to look at any of that stuff before now.

In fairness, this guide hasn’t been updated since 2005 – before the SEC adopted its current golden parachute disclosure requirements – so maybe the IRS is just catching its guidance documentation up with actual practice.  I wonder though. . .

For more details on this new Golden Parachute Audit Techniques Guide, check out Mike Melbinger’s blog on

John Jenkins

February 9, 2017

Delaware: Chancery Clarifies “Cleansing Effect” of Shareholder Vote

This K&L Gates blog reviews the Delaware Chancery Court’s recent decision in In re Merge Healthcare Inc. Stockholders Litigation (Del. Ch.; 1/17).  The Court’s decision further clarifies when a fully informed stockholder vote will result in application of the business judgment rule to post-closing claims:

The plaintiffs argued that a well-pled entire fairness case bars cleansing under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304, 313–14 (Del. 2015). The Court reached a different conclusion, relying on the Chancery Court’s exposition of the cleansing doctrine in Larkin v. Shah, 2016 WL 4485447 (Del. Ch. Aug. 25, 2016).

Under Larkin, the trigger for entire fairness is not “the mere presence” of a controlling stockholder “per se,” but when a controlling stockholder engages in a conflicted transaction, by sitting on both sides of the deal or competing with common stockholders for consideration. In such conflicted transactions, the Court writes, coercion is “deemed inherently present” and cannot be cleansed by a stockholder vote. But without a controlling stockholder pursuing personal gain, cleansing remains available and the business judgment rule applies, even if individual directors face conflicts that would ordinarily warrant entire fairness review.

The Court held that the plaintiffs failed to plead facts that showed the target’s alleged controlling stockholder extracted personal benefits from the transaction, & therefore could not rebut the cleansing effect of an un-coerced shareholder vote.

John Jenkins