A recent Grant Thornton survey asked dealmakers about how the US presidential election was affecting their M&A activity. While most expect to see an uptick in deal volume over the next six months, this excerpt notes that a substantial minority are postponing deals until after the election:
Although 67% of M&A professionals say deal volume will increase in the next six months, slightly less than half are hitting the pause button on deals until after the U.S. election in November, according to a Grant Thornton survey.
Forty percent of the 255 M&A professionals surveyed said they’re holding back on their M&A plans until after the election. The respondents included corporate development team members, investment bankers, in-house legal professionals, private equity investment professionals, M&A attorneys and CFOs.
About half of the respondents said the election will have no effect on their deal activities, and 10% said they are speeding up their M&A processes to close before the election. Grant Thornton Transaction Advisory Services Managing Director Vic Sandhu said buy-side and sell-side professionals whose businesses are especially sensitive to regulation and market uncertainty tend to be the ones who are pausing deal activity.
Almost 50% of survey respondents identified the election’s effects on the overall economy as having the largest impact on M&A, while 25% cited its effects on regulatory policy and 22% its implications for tax policy.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by Dan Scorpio, head of M&A and Activism for H/Advisors Abernathy, to discuss what to do – and not do – when an activist comes knocking. Topics covered during this 22-minute podcast include:
– Why companies need more than good results to respond effectively to activism
– Why management teams shouldn’t assume an activist’s message won’t resonate with shareholders
– Common mistakes companies make in responding to activism and what they should do instead
– How universal proxy has changed proxy fights and overall strategies
– The role of social and digital media in making the case to retail investors
– Strategies for engaging index funds and other “passive” investors
– What makes an effective internal and external team for responding to activism
– The importance of offering solutions instead of attacking activists
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Section 220 of the DGCL gives stockholders the right to inspect “the corporations’ stock ledger, a list of its stockholders, and its other books and records” upon showing a proper purpose. If you’re like me, you may well have used the terms “stockholder list” and “stock ledger” interchangeably – and if you did that, you’d be wrong. This excerpt from a recent Duane Morris blog explains:
A short, letter decision by Chancellor McCormick ruling on motions for summary judgment in the matter of Mitchell Partners, L.P. v. AMFI Corp., et al., C.A. No. 2020-0985-KSJM (July 3, 2024) provides a crisp reminder–both to me and to other professionals advising Delaware corporations–that they are not the same thing given the clear language of Section 219(c) of the DGCL.
The letter decision is a quick-read at eight pages, so I commend it to the reader in its entirety. That said, three lessons emerge from this decision.
First, Section 219(c) is specific in its command that a Delaware corporation keep a stock ledger and enumerates the small list of information required to be including on the ledger. The Chancellor quotes from a 1956 decision of the Delaware Supreme Court noting that a stock ledger is “a continuing record of stockholdings, reflecting entries drawn from the transfer books, and including (in modern times) nonvoting as well as voting stock.”
That leads directly to the second lesson: the Chancellor notes that the stock ledger must record “all issuances and transfers of stock of the corporation” (emphasis in original). This includes non-voting shares of stock. The stock ledger in the matter being decided was found deficient because it excluded a class of stock that had been issued but was nonvoting in nature.
The blog says that the third lesson – the information that a company must include in a compliant stock ledger – was addressed in this footnote to the Chancellor’s opinion:
8 Del. C. § 219(c) defines “stock ledger” as “1 or more records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with § 224 of this title.” 8 Del. C. § 219(c).
The footnote goes on to point out that Section 224 of the DGCL provides that the stock ledger must be kept so it “(i) can be used to prepare the list of stockholders specified in §§ 219 and 220 of this title, (ii) record the information specified in §§ 156, 159, 217(a) and 218 of this title, and (iii) record transfers of stock as governed by Article 8 of subtitle I of Title 6.”
This may seem like a highly technical issue, and I guess it is – but the directors’ alleged failure to maintain a stock ledger with all the information required by the statute served as a basis for a breach of fiduciary duty claim that Chancellor McCormick refused to dismiss. So, this is another area of Delaware law where it’s important to keep the “t’s crossed & the i’s dotted”.
In December 2022, I blogged about the Delaware Supreme Court’s decision in Boardwalk Pipeline Partners v. Bandera Master Fund, (Del. 12/22). In that case, the Court reversed a 2021 Chancery Court decision which found that the general partner of a Master Limited Partnership (“MLP”) was liable for nearly $700 million in damages as a result of a breach of the partnership agreement involving willful misconduct.
In his 2021 post-trial decision, Vice Chancellor Laster sharply criticized the general partner’s conduct and the process by which its outside counsel rendered a legal opinion required in order to complete the challenged transaction. The Delaware Supreme Court took a much more deferential approach to the general partner’s actions based upon its reading of the operative language of the MLP’s partnership agreement, and in a concurring opinion, Justice Valihura extended that deferential approach to the legal opinion.
The Supreme Court remanded the case to the Chancery Court for further proceedings consistent with its ruling. Yesterday, Vice Chancellor Laster dismissed the case. Under the circumstances, that result isn’t surprising, but the opinion in the case is a bit unusual. The Vice Chancellor’s 117-page opinion offers a spirited apologia for his prior decision and pushes back against the way that Loews Corporation, which controlled Bandera’s general partner, characterized certain aspects of that decision in briefing before the Delaware Supreme Court.
This excerpt from a section of the Vice Chancellor’s opinion responding to Loews’s claim that, in his earlier decision, he “discerned a nefarious conspiracy of top-flight lawyers, somehow bullied into professional malfeasance to the point of delivering ‘whitewash[ed]’ ‘contrivances’ instead of reasoned legal opinions rendered in good faith” gives you a sense of its combative tone:
Loews seems to believe that no one should ever consider that an attorney at a big firm might engage in motivated reasoning or otherwise act improperly. On behalf of elite, big-firm lawyers everywhere, Loews objects to the possibility that elite lawyers could rationalize as right what is personally beneficial. Those claims equate to assertions that big firm lawyers are inhuman. The scholarship on these points goes back over three decades and is no longer subject to meaningful dispute.
Big firm lawyers are subject to the same pressures and cognitive biases as other humans, and perhaps especially so. Professor Donald Langevoort, a leading scholar in this area, explains “that various cognitive (and cultural) biases lead many lawyers—including, and maybe even especially, elite ones—to deflect, normalize, and rationalize actions that are either illegal or unethical without compromising their internal self-image as good, responsible people and good, responsible lawyers.
This is just one of several issues that Vice Chancellor Laster had with arguments raised by Loews on appeal – but why bother addressing them you’re going to dismiss the case? The Vice Chancellor’s answer to that lies in the reasoning behind the Supreme Court’s decision and the possibility of further appeals.
The defendants argued that the legal opinion condition set forth in the partnership agreement had been satisfied, but the Supreme Court’s decision didn’t resolve that issue. Instead, it held that the general partner properly relied on another law firm’s advice that it could reasonably rely on the legal opinion at issue. This meant that, under the partnership agreement, the general partner was entitled to a conclusive presumption of good faith, which effectively exculpated it from damage claims.
The arguments made by Loews with which Vice Chancellor Laster took issue relate to the satisfaction of the legal opinion condition, and he argued that his responses to them could be helpful to the Delaware Supreme Court if the plaintiffs appeal, because Loews likely will argue that the justices should determine that the opinion condition was satisfied and affirm on that alternative ground.
There must be some kind of end of summer clearance sale for earnout litigation going on in Delaware, because over the past month or so, the Chancery Court has addressed earnout issues on no fewer than four occasions. The Court’s latest earnout decision is Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch. 9/24), which arose out of Alexion’s 2018 acquisition of a company called Syntimmune. The merger agreement in that deal provided for a purchase price of $1.2 billion, of which only $400 million was paid at closing. The remaining $800 million would be paid in installments contingent upon the completion of each of eight milestones relating to the development and commercialization of a monoclonal antibody known as “ALXN1830”.
With a sexy product name like that, what could go wrong? Well, as Vice Chancellor Zurn lays out in her 139-page opinion, the answer to that is “plenty.” During the course of its efforts to develop the antibody, Alexion encountered all sorts of hurdles, including contamination of its clinical drug supply that resulted in delays of its Phase 1 trials, further delays associated the onset of the COVID 19 pandemic, and the death of a primate in a toxicology study that called into question the drug’s safety in humans. What’s more, in the midst of all this, Alexion was acquired by Astra-Zeneca, which further complicated decisions surrounding the development process.
Ultimately, Alexion terminated the development program, citing the results of the Phase 1 study. SRS, on behalf of the former Syntimmune stockholders, sued Alexion, claiming that it had failed to pay an initial $130 million milestone payment that had become payable under the terms of the merger agreement upon the completion of the Phase 1 study. It also claimed that Alexion had breached its obligation to use commercially reasonable efforts to achieve each milestone for a period of seven years following the closing.
In order to assess SRS’s claim that the first milestone had been satisfied, Vice Chancellor Zurn had to wade her way through the labyrinthine facts surrounding the development effort and interpret the ambiguous language of the contract using extrinsic evidence. She ultimately concluded that the first milestone had been achieved. With respect to the issue of whether Alexion had breached its obligations to use commercially reasonable efforts to achieve each of the milestones, the Vice Chancellor began her analysis with the agreement’s definition of that term, which obligated Alexion to:
[Use] such efforts and resources typically used by biopharmaceutical companies similar in size and scope to [Alexion] for the development and commercialization of similar products at similar developmental stages taking into account, as applicable, the Product’s advantages and disadvantages, efficacy, safety, regulatory authority-approved labeling and pricing, the competitiveness in the marketplace, the status as an orphan product, the patent coverage and proprietary position of the Product, the likelihood of development success or Regulatory Approval, the regulatory structure involved, the anticipated profitability of the Product, and other relevant scientific, technical and commercial factors typically considered by biopharmaceutical companies similar in size and scope to [Alexion] in connection with such similar products.
VC Zurn characterized this standard as “outward facing,” in that it did not require an assessment of Alexion’s subjective intent in determining whether it exercised commercially reasonable efforts. Instead, it focused on what efforts other similarly situated biopharma companies would typically use, taking into account the various factors enumerated in the definition.
Unfortunately, she concluded that there weren’t any real-world examples of similarly situated companies, so the Vice Chancellor cited Himawan v. Celphalon (Del. Ch.; 12/18) and determined that Alexion’s efforts should be evaluated by reference to a hypothetical similarly situated company. She proceeded to do that over the course of the final 30 or so pages of her opinion, and ultimately concluded that Alexion had breached its obligations under the commercially reasonable efforts clause.
If this case sounds familiar, that’s probably because this isn’t the first time the Chancery Court has addressed issues surrounding this deal’s earnout provisions. In 2021, Vice Chancellor Zurn denied Alexion’s motion to dismiss the plaintiffs’ claims surrounding the commercially reasonable efforts clause.
As Liz shared on CompensationStandards.com in August, a federal judge in the Northern District of Texas struck down the non-compete ban that the FTC adopted earlier this year in Ryan v. Federal Trade Commission, saying that the agency exceeded its authority and that the rule was arbitrary and capricious. The ban would have had significant implications for M&A transactions, despite the sale of business carve-out. Bloomberg recently reported on the tight spot the FTC is in in deciding how to proceed:
The ruling leaves the FTC with some difficult questions on strategy, Justin Wise reports.
– To potentially salvage its ban, the FTC must appeal US District Judge Ada Brown’s ruling that it lacks powers granted by Congress to enact substantive rules targeting unfair methods of competition.
– But doing so risks a circuit court opinion saying it “lacks substantive rulemaking authority regarding unfair competition,” said James Tysse, a partner in Akin Gump’s appellate practice. “It could make things worse.”
The article also says that while businesses can keep enforcing non-competes and aren’t required to send the notices voiding non-competes that would have otherwise been required, “attorneys have been warning businesses to think more strategically about which employees they ask to sign [non-competes] and how broadly the contracts are drafted.” The NLRB is “moving ahead with an enforcement strategy to effectively make restrictive covenants illegal under federal labor law.” Labor issues are clearly front and center for nearly the entire alphabet of agencies these days — and, as I shared earlier this week, merger investigations are no exception!
Yesterday, the Delaware Chancery Court issued its post-trial memorandum opinion in Fortis Advisors v. Johnson & Johnson (Del. Ch.; 9/24) finding that J&J violated its earnout obligations in the merger agreement to acquire Auris Health. As John blogged at the motion to dismiss stage, the Chancery Court hears a lot of earnout cases, but very few have financial stakes as large as this. The facts may remind readers of Robot Wars (corporate America’s version):
Auris Health, Inc. was a venture-backed startup … Auris had developed two novel surgical robots in record time: Monarch and iPlatform. … Johnson & Johnson was attempting to develop its own surgical robot called Verb. … Verb was falling increasingly behind the schedule [and] J&J looked to Auris as a solution.
[Auris] was wary of an acquisition, especially by J&J since Verb was a potential competitor of iPlatform. J&J understood Auris’s hesitations and put together a proposal it would not refuse. J&J offered to pay $3.4 billion up front and another $2.35 billion upon the achievement of two commercial and eight regulatory milestones … The regulatory milestones were ambitious, but corresponded to approvals for procedures that the Auris robots were on track to complete. Auris agreed to an earnout component after securing J&J’s commitment to devote commercially reasonable efforts befitting a “priority medical device” in furtherance of the milestones.
But things did not go as Auris had hoped (and negotiated for):
Instead of providing efforts and resources to achieve the regulatory milestones, J&J thrust iPlatform into a head-to-head faceoff against Verb called “Project Manhattan.” Verb and iPlatform were forced to complete a series of procedures to be ranked against one another. Both robots successfully completed the assigned procedures. J&J decided that iPlatform was the better bet. But for iPlatform, winning Project Manhattan was losing. To salvage its years of investment in Verb, J&J directed that Verb’s hardware and team be added to iPlatform. The iPlatform robot effectively became a parts shop for Verb.
J&J knew Project Manhattan would hinder, rather than promote, iPlatform’s achievement of the regulatory milestones. It also knew that combining iPlatform and Verb would cause further complications. But J&J viewed the resulting delays as beneficial since it could avoid making the earnout payment. When J&J’s actions put the first iPlatform milestone out of reach, the other milestones fell like dominos.
Auris’s former stockholders sued for breach of contract, breach of the implied covenant of good faith and fair dealing and fraud. J&J argued that it had discretion under the merger agreement to use the Auris products to advance its overall robotics strategy without regard to the milestones and that the missed milestones were due to iPlatform’s technical problems. VC Will disagreed on both counts:
After weighing an abundance of evidence, I find that J&J breached its contractual obligations. The bespoke earnout provision negotiated by the parties required J&J to treat iPlatform as a priority device, to provide efforts in support of the regulatory milestones, and to avoid making decisions based on the contingent payment. J&J violated each obligation—most blatantly when iPlatform was made to compete against and combine with Verb. J&J also breached the implied covenant of good faith and fair dealing when it failed to devote efforts to achieve the revised regulatory pathway.
VC Will noted: “Damages with interest exceed $1 billion, which compensates Auris’s former stockholders for the earnout payment they would have received absent J&J’s failed efforts and fraud. What remains irretrievably lost is the transformative potential of Auris’s robots.”
The earnout language at issue here is in stark contrast to another recent Chancery Court decision John blogged about in early August. Fortis Advisors v. Medtronic Minimed, (Del. Ch.; 7/24) involved unusually buyer-friendly language concerning the buyer’s obligations with respect to the achievement of the milestone. Together, the decisions reinforce that the Delaware Chancery Court will enforce bespoke earnout provisions as written.
In late August, the Chancery Court declined to dismiss claims a buyer breached an SPA by failing to make certain earnout payments. At issue in Medal v. Beckett Collectibles (Del.Ch.; 8/24) was whether the earnout payments had been accelerated under the terms of the SPA. Here’s the background from this Fried Frank memo:
Section 2.05(b) of the SPA provided that, if, during the Milestone Period, (i) Beckett terminated Medal’s employment without Cause (as defined in Medal’s Employment Agreement), or (ii) Beckett determined not to continue pursuing the development of the intellectual property and technology contemplated by the Milestones, then “[Beckett] shall pay to the Stakeholders the full amount of any unpaid Milestone Payments in accordance with Section 2.05(d).” The Plaintiff asserted that (i) had occurred, as Beckett terminated Medal’s employment on August 15, 2023. The Plaintiff contended that, since Beckett did not provide any notice of any material nonperformance or other deficiency by Medal, and provided no viable Cause for termination even after pressed twice by Medal’s counsel for an explanation for the termination, the termination was without Cause. …
The Plaintiff interpreted this language as meaning that, upon the occurrence of the enumerated events, all unpaid Milestone Payments would be accelerated and become due. Beckett interpreted this language as not providing for an acceleration of payments, but “only clarif[ying] that Milestones could continue to be earned after one of the three enumerated circumstances.”
The court denied the motion to dismiss because it determined the plaintiff’s interpretation was one reasonable interpretation of the provision:
The court found the Plaintiff’s interpretation reasonable—i.e., “that the parties intended Section 2.05(b) to reference Section 2.05(d)’s payment mechanics without embracing a requirement that the Milestone Payments be ‘earned’ by achieving said Milestones….” The court stated that, at the pleading stage, it need not consider whether Beckett’s interpretation was reasonable, given that it found the Plaintiff’s interpretation conceivably was reasonable. In other words, because Beckett’s interpretation was not the only possible reasonable interpretation, the claim could not be dismissed at the pleading stage.
The memo suggests these types of accelerations should be carefully considered and clearly drafted to avoid this situation:
– The parties should consider carefully whether termination of employment of a rollover employee (such as a founder) should trigger acceleration of earnout payments. It is one thing for a buyer to agree to pay out an employment agreement if the buyer decides to terminate the employee without cause. Tying the termination to acceleration of earnout payments is, generally, a much more significant (i.e., expensive) thing, however. Where an employee is going to be critical to achieving the earnout, there is a rationale for tying a termination of employment to acceleration of the earnout. A buyer’s view of whether the employee is critical to achieving the earnout may change over time, however. The buyer may not want termination of employment to trigger acceleration, or may want termination of employment to trigger acceleration only if it is established that the termination was related to the earnout not being achieved. – Language calling for payment of all unpaid earnout amounts under specified circumstances must state clearly whether acceleration of all of the earnout payments is intended—or, alternatively, whether only payment of already earned but unpaid amounts is intended. Where a provision (Section X) sets forth the mechanics for payment of earned amounts, and another section provides for payment under specified circumstances of amounts “pursuant to Section X,” the language should clarify whether the reference is only to the mechanics for payment set forth in Section X or also to the substantive provisions of Section X (such as its being applicable only to earned payments). Drafters should consider providing general statements of the parties’ intentions and/or illustrative examples to further clarify the language.
As the memo notes, the decision also addressed whether the plaintiff was entitled to bring suit since the SPA first required good faith negotiation but failed to explain what the parties had to do to satisfy the requirement. The memo suggests these provisions should have some more “meat on the bones,” including by addressing whether negotiation is a prerequisite when the party believes it would be futile.
The MOU outlines the following terms, among others:
– The DOL will train appropriate personnel from the antitrust agencies on the issues under their jurisdiction.
– The NLRB will train appropriate personnel from the antitrust agencies on the duty to bargain in good faith, successor bargaining obligations, and unfair labor practices, among other topics.
– The antitrust agencies and the labor agencies will endeavor to meet biannually to discuss implementation and coordination of the activities described in the MOU.
– The MOU makes clear that it supplements, and does not supersede, the previously identified bilateral agreements between the labor agencies and antitrust agencies.
This Sheppard Mullin blog has this to say about the impact of this MOU on merger review:
[T]his MOU … makes clear that the Antitrust Agencies have committed to using not just their resources, but also leveraging the resources and expertise of other federal agencies in closely examining the impact of mergers under their review on labor markets.
The agency cooperation and information sharing contemplated under these MOUs likely will put more government eyes on employers and potentially more documents in the hands of the Antitrust Agencies, which could slow merger review and lead to additional civil and criminal antitrust investigations. Merging parties before the Antitrust Agencies and those engaging with the NLRB should be aware of this inter-agency cooperation and beware that their documents and information could spawn antitrust investigations.
A new WTW article provides an in-depth analysis of the cybersecurity issues that should be addressed during the due diligence process for an acquisition. Topics covered include potential liability risks, costs required to upgrade the target’s systems, the target’s cyber insurance coverages, and the differences in cyber risk profiles between strategics and private equity buyers. This excerpt suggests some best practices for addressing cybersecurity issues in an acquisition:
1. Assess past cybersecurity incidents
– Evaluate if the target company has completed necessary system updates and due diligence.
– Consider lingering third-party claims from past incidents in the risk assessment.
2. Evaluate data storage practices
– Assess if data storage systems need updates to meet current cybersecurity standards.
– Ensure third-party data stored in the target’s systems is adequately protected.
3. Review vendor agreements
– Verify that necessary safeguards are in place, including audit requirements, continuous monitoring, and incident response plans for vendors.
– Ensure privacy disclaimers are clear to third-party clients.
– Clarify data ownership and the purpose for which it is collected.
4. Update incident response plan
– Review and update the target’s incident response plan to align with the acquiring company’s standards and practices.
The article also includes a seven-point due diligence checklist for buyers to use in assessing the cyber risks associated with the target’s business. Enjoy the Labor Day weekend. Our blogs will be back on Tuesday.