September 18, 2014

Delaware: Outside Directors’ Motion to Dismiss in Entire Fairness Transaction Denied

Here’s news from Steven Haas of Hunton & Williams:

In In re Cornerstone Therapeutics Inc. S’holders Litig., Consol. C.A. No. 8922-VCG (Del. Ch. Sept. 10, 2014), Vice Chancellor Glasscock denied a motion to dismiss filed by outside directors who served on a special committee that approved a freeze-out merger of a public company. The merger did not comply with the Delaware Supreme Court’s recent ruling in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), because, among other things, it was not conditioned from the outset on approval from a majority of the outstanding minority shares. As a result, the transaction was subject to entire fairness review.

The outside and allegedly “disinterested” directors served on a special committee that met over 37 times over a seven-month period to negotiate the freeze-out merger. During the negotiations, the controller increased the merger price to $9.50 per share from its initial proposal of $6.40 per share. In their motion to dismiss, the outside directors conceded that the freeze-out was subject to entire fairness and that the controlling stockholder may have strict liability if the merger is not found to be entirely fair. They argued, however, that they were “disinterested” with respect to the transaction and the plaintiff had failed to plead a non-exculpable breach of fiduciary duty against them.

Vice Chancellor Glasscock observed that the directors’ argument had some appeal. Nevertheless, he concluded that, under Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001), he was required to determine whether the transaction was entirely fair before assessing the directors’ culpability. He also distinguished In re Southern Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 787 (Del. Ch. 2011), noting that the disinterested directors in that case were dismissed at summary judgment rather than on a motion to dismiss.

September 17, 2014

House Judiciary Committee Acts to Harmonize Antitrust Review Standards & Processes

As noted in this Akin Gump memo, on September 10, the House Judiciary Committee passed, by voice vote, legislation to eliminate certain disparities to antitrust review by the DOJ and FTC. The Standard Merger and Acquisition Reviews Through Equal Rules Act (SMARTER Act), H.R. 5402, introduced by Rep. Blake Farenthold (R-TX), would codify certain recommendations included in a 2007 report by the Antitrust Modernization Commission.

September 16, 2014

Private Company Freeze-Out Merger Litigation Dismissed at Pleading Stage

Here’s news from Steven Haas of Hunton & Williams:

In a recent bench ruling in Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014), the Court of Chancery reached two key holdings applicable to freeze-out mergers. First, Vice Chancellor Laster held that the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), which allows for business judgment review of freeze-out mergers under certain conditions, applies to privately-held companies. “Historically,” he said, “we haven’t made any distinctions between public companies and private companies.” He continued that “the non-public company overlap might be taken into account as a factor, but I don’t think that it prevents the application of the Kahn-MFW test.”

Second, in applying Kahn v. M&F Worldwide, Vice Chancellor Laster granted the defendants’ motion to dismiss. He concluded that the plaintiff had failed to adequately plead that any of the six elements set forth in Kahn v. M&F Worldwide had not been met. Among other things, the freeze-out merger was negotiated by two independent directors serving on a special committee; the special committee had its own legal and financial advisors; and the merger was subjected to a non-waivable majority-of-the-minority stockholder approval condition. He also said the minority stockholders received a “public-company-style proxy statement” (which included a “fair summary” of the financial advisor’s analysis).

The ruling is notable for practitioners considering how to structure private company M&A transactions. Its greater significance, however, is the court’s dismissal of a challenge to a freeze-out merger on a motion to dismiss. Although Kahn v. M&F Worldwide charted a course for business judgment review of freeze-outs, the decision (namely, the somewhat infamous footnote 14) suggested that it will be hard to dispense with these cases before summary judgment. For that reason, many practitioners have questioned the value of that decision. But if more Delaware courts follow Swomley v. Schlecht and dismiss these challenges at the pleading stage, then more freeze-outs are likely to be structured to comply with Kahn v. M&F Worldwide.

September 12, 2014

Canada: Hostile Bids to Go from Sprints to Marathons

Here’s news from Davies Ward:

The Canadian Securities Administrators (CSA) issued a major announcement that all 13 of Canada’s securities regulators have agreed they will not pursue two previously announced competing proposals on the regulation of shareholder rights plans. Instead they intend to propose amendments to their take-over bid rules that will maintain a harmonized take-over bid regime across Canada, but will significantly change the way in which hostile take-over bids are conducted in Canada. The amendments are aimed at “rebalancing the current dynamics between hostile bidders and target boards”, and, in effect, will give target boards more time to respond and seek alternatives to a hostile bid, and will make bids materially more challenging for hostile bidders than they are under current Canadian take-over bid rules.

The proposed new harmonized take-over bid rules would require all formal take-over bids to have the following features:

- Mandatory Minimum Tender Condition: The bid must be subject to a mandatory tender condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered before the bidder can take up any securities under the bid.
- 10-Day Extension: The bidder must extend the bid for an additional 10 days after the bidder achieves the mandatory minimum tender condition and the bidder announces its intention to take up and pay for the securities deposited under the bid.
- 120-Day Bid Period: The bid must remain open for a minimum of 120 days, subject to the ability of the target board to waive, in a non-discriminatory manner when there are multiple bids, the minimum period to no less than 35 days.
In the CSA’s view, the proposed amendments to the bid rules seek to “facilitate the ability of shareholders to make voluntary, informed and co-ordinated tender decisions and provide target boards with additional time to respond to hostile bids, each with the objective of rebalancing the current dynamics between hostile bidders and target boards.”

In addition to lengthening the amount of time that a hostile bid would have to remain outstanding, the proposed amendments would essentially eliminate the ability of a bidder to acquire a small but nevertheless material percentage of shares through a bid that is not widely accepted by target shareholders.

The proposed amendments are the culmination of 18 months of consultation by Canadian securities regulators following the publication in March 2013 of two different defensive tactics policy proposals by the CSA and Québec’s Autorité des marchés financiers (AMF), which are now no longer being pursued. Those proposals presented divergent approaches to regulation of defensive tactics with the AMF advocating the elimination of the CSA’s current policy on defensive tactics (National Policy 62-202 – Defensive Tactics) in favour of deference by regulators to the decisions of boards that were made in a manner consistent with their fiduciary duties.

The CSA is not currently contemplating any changes to the CSA’s existing Defensive Tactics Policy. While the proposed amendments will give target boards more time to seek alternatives to a hostile bid than boards have had through using shareholder rights plans, rights plans will continue to be relevant to regulate the ability of shareholders to accumulate large positions in a company through transactions that are exempt from the take-over bid rules. We are interested to see whether rights plans could be used to afford a target board even more time after the new 120-day bid period has elapsed, or to hold off a bidder indefinitely. At a minimum, we would expect that there will be a heavy burden on issuers to demonstrate that it is not “time for a rights plan to go” where a bidder has complied with the new rules.

The CSA intends to publish the proposed amendments to the take-over bid rules in the first quarter of 2015. Given the long period of consultation and the fact that the AMF has determined not to pursue its prior proposal, we believe there is a strong likelihood that the proposed amendments announced today will become effective. Learn more in the chart in this memo.

September 10, 2014

Senator Schumer Releases Draft Anti-Inversion Bill

As noted in this Davis Polk memo, a draft of the bill that is being considered by Senator Schumer (D-NY) to reduce some of the economic incentives for corporate inversions was made publicly available yesterday. Senator Schumer has indicated that, while the proposed bill is still the subject of discussion and is subject to change, he intends to introduce the bill into the Senate this week. Also see this article from Orrick…

September 9, 2014

Attorney-Client Privilege In M&A Transactions

From this blog by Keith Bishop:

The title of this recent law review article frames the problem well, At the Whim of Your Adversaries: California’s Hazards in Sell-Side Representation and Waiver of Attorney-Client Privilege, 54 Santa Clara L. Rev. 651 (2014). In this article, the authors, practicing attorneys Mattia V. Murawski and Brian R. Wilson, argue for an amendment to the California Evidence Code because under present law “sell-side corporations and their attorneys must assume that upon merger or acquisition the substance of their privileged communications will become known, controlled, and possibly used to their detriment by their adversaries.” This is a problem that I wrote about last December after then Chancellor Leo Strine’s ruling in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013) (Surprisingly, the authors fail to mention this case). See Is The Attorney-Client Privilege An Asset? and More On Asset Sales And The Attorney-Client Privilege.

The authors unabashedly favor the approach of the New York Court of Appeals in Tekni- Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), which bisected the attorney-client privilege into communications relating to general business matters and communications relating to merger negotiations. The New York Court allowed the former, but not the latter, to pass to the buyer. The authors therefore propose an amendment to Evidence Code Section 953 to achieve that result when the attorney for the seller jointly represents the directors, officers, or controlling shareholders. However, attorneys representing a corporation in a sale transaction do not inevitably represent the directors, officers or controlling shareholders. Thus, the authors’ solution would seem to apply only in those cases in which joint representation is found.

September 3, 2014

Coming Soon? A Shortened “Search Period” Before Record Dates

Here is an article by Ron Orol of The Deal:

An influential business lobby group may soon press the nation’s securities regulator to speed up the “proxy plumbing” process that occurs in advance of a vote on a major deal, a prospect that has sparked outrage among activist hedge fund managers who argue that the same change will hurt their ability to mobilize support for their dissident campaigns and director candidates.

At issue is the amount of time the Securities and Exchange Commission gives corporations to establish who their shareholders are in advance of an annual meeting or a special meeting, such as when investors vote on a merger or acquisition. Specifically, the agency requires that corporations begin their inquiry with various banks and brokers to determine how many beneficial owners they have 20 business days — four weeks — prior to a “record date” that the company sets in advance of the meeting. Investors who purchase stock prior to this scheduled record date are entitled to vote those shares at the upcoming scheduled annual or special meeting and those who buy shares after that day are not. (The inquiry is made so that companies can determine how many proxy statements to provide to its shareholder base).

Brian Breheny, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington, said that an American Bar Association committee he chairs is debating whether the time has come for the SEC to shorten the mandatory search period. Breheny, a former chief of the SEC’s M&A unit, argued that recent technological advancements have made it easier to collect a list of shareholders, adding that a shorter period would speed up the process of preparing for a vote on a deal or other transaction and allow it to be completed with fewer headaches.

The subcommittee may soon vote to submit a petition asking that the SEC shorten the inquiry period to five days, significantly less than the current four-week investigation period, according to people familiar with the situation. The SEC is not required to follow up on the petition, but the ABA is a major and influential pro-corporate SEC constituent (made up of numerous ex-SEC officials) and agency staffers typically pay close attention to the group’s suggestions.

Backers of a compressed inquiry period insist that it would be helpful in situations where shareholders are voting on transactions, because it would provide more deal certainty and less time for external issues to arise that can lower valuations or dismantle deals — such as third-party bids, poor earnings reports, employee departures or macro-economic problems.

“In a merger transaction speed is important because the parties want to consummate their deal as quickly as possible to avoid any unforeseen, intervening circumstances,” said Sanjay Shirodkar, an attorney at DLA Piper in Washington. “Factors such as the global economic situation … can change between the time a deal is announced and when it closes. People want deal certainty. Shortening this period would serve to increase deal certainty.”

However, activists involved in proxy campaigns to seat dissident directors argue that, depending on when they launch their contests, a shorter broker-banker inquiry period could significantly reduce the amount of time available for other activists or institutional investors sympathetic to their campaign to invest in the stock before the record date hits (thereby removing many passive or pro-management shareholders). Investors who buy securities after the record date aren’t permitted to vote their shares at the meeting and those that sold stock immediately prior to the record date typically have little incentive to vote shares they no longer own. They also raise concerns about the shorter period, arguing that the extra time could be useful if it gives third-party rival corporations a chance to issue their own more shareholder-friendly offer.

“With a shorter inquiry period, a company could try to speed up the record date and the annual meeting to help ensure that pro-activist shareholders don’t rotate into the stock in any size,” said a general counsel at a major dissident investor who launches multiple campaigns a year.

Regulatory observers point out that, in the current 20-business-day system, a corporation’s inquiry to banks and brokers is supposed to be private but word often reaches the activist about when the record date will take place before it is publicly disclosed.

Activists and corporations involved in a proxy contest can only officially solicit votes in favor of their director candidates after the record date passes. As a result, activists are also eager to find out when the record date is set for because they want to be the first one to solicit the investor base to get their votes. Alternatively, the corporation would like to delay that information as much as possible, so they can have a first-strike advantage.

“Activists would have less time to campaign and convince existing investors to back their dissidents,” the general counsel added.

Activist fund manager Phil Goldstein of Bulldog Investors LLC, which has $570 million in assets, said he would prefer that the SEC required corporations to publicly disclose the record date and meeting date when they make their inquiry to identify their investors. That information, he added, would help Bulldog immediately solicit investors to support his dissident candidates after the record date passes. “They [corporations] should publicly disclose the record date and meeting date when they are sending out their search cards,” Goldstein said. “There are times when we don’t know when the record date is until after it passes.”

A managing director at a major proxy solicitor agreed that a shorter inquiry period would be distinctly pro-corporate, adding that corporations faced with proxy contests typically want to have the record date come sooner rather than later so that less stock turns over in advance of the meeting. New investors to the security after a proxy contest is launched typically back the dissident, he added.

People familiar with the SEC’s views say agency officials acknowledge technology has made it easier to establish shareholder lists but are taking dissident investors’ concerns into account as well.

In some cases institutional investors want to vote their securities at an annual meeting or a special meeting called to approve a deal but they have a huge bulk of their shares loaned out. According to an activist manager, these investors prefer the longer 20-business-day period because it gives them enough time to call back loaned shares in time to vote their stake. In other cases, hedge fund managers who have derivatives positions in a target company want sufficient time to acquire stock in the company, as part of an effort to protect their swaps stake, he added.

Nevertheless, corporate lawyers argue that activist concerns are spurious, arguing that insurgent investors can announce that they will nominate dissident directors months in advance of an annual meeting, giving sympathetic investors sufficient time to buy shares before the record date hits, regardless of whether it is expedited or not.

This would not be the first time the SEC changed its inquiry time-period. The SEC first set up a 10-calendar day inquiry period in 1977 but, after hearing from an advisory committee that recommended a longer inquiry period the agency in 1983 changed it to 20-calendar days. In 1986, the commission again extended the required time, this time to 20-business days before the record date. This change was designed to address reported delays and compliance issues. However, corporate lawyers insist that in addition to speeding up deals, a shorter inquiry period would have another benefit: to help expedite plain vanilla annual meetings.

Shirodkar noted that a rapid inquiry process would simplify and speed up the proxy system and reduce complications around SEC reporting deadlines and board schedules. In some cases, he points out, three or four months pass between when an inquiry is made and when a routine annual meeting and vote takes place. “A lot of things can happen in that time,” he said. “Compressing the inquiry timeframe would help the company get to its annual meeting faster.”

August 26, 2014

HSR: FTC Levies $900k Fine for File Failure Over Incremental Note Conversions

Last week, the FTC fined Berkshire Hathaway in the amount of $896,000 to settle allegations for HSR file failures in connection with acquisitions of USG Corporation shares when it converted notes over time. The FTC alleged that Berkshire Hathaway’s incremental acquisition resulted in the company’s aggregate holdings exceeding the $200 million size-of-transaction threshold – with no exemption for filing available. See related memos posted in our “Antitrust” Practice Area.