DealLawyers.com Blog

July 25, 2014

Sample Reps & Warranties: Conflict Minerals

Recently, we got the question from a member who was marking up a definitive agreement for the purchase of target company – a manufacturer of metal products – whom they believed to be utilizing conflict minerals. The member asked “Has anyone seen and reps and warranties being given for the use/non-use of conflict minerals in stock purchase agreements and, if so, what is being represented/warranted?”

My response was: These reps are pretty boilerplate. In the first example below, note that Oracle/Micros has a covenant that the seller has undertaken commercially reasonable efforts to eliminate conflict minerals from its supply chain:

- Oracle/Micros (covenant Section 5.23)
- Allergan/MAP Pharmaceuticals (see Section 3.29)
- Valeant/OBAGI Medical (see Section 4.5)
- Met-Pro/CECO Environmental (see Section 4.7(e))
- Citrix Systems/Bytemobile (see Section 2.32)
- Salix Pharmaceuticals/Santarus (see Section 5.26)

July 23, 2014

Exclusive Forum Bylaws: California State Court Follows Delaware

Here’s news excerpted from this Ropes & Gray newsletter:

State and federal courts in California have gone different directions on whether to follow Delaware’s lead in enforcing forum selection provisions in bylaws. In 2011, the Northern District of California had ruled in Galaviz v. Berg that a forum selection provision in Oracle’s bylaws was not enforceable. However, in a recent case, the Superior Court of California followed the Delaware Court of Chancery’s 2013 decision in Boilermakers v. Chevron, in which the Court of Chancery upheld the enforceability of a forum selection bylaw. The California Superior Court dismissed shareholder class actions against Safeway arising from its announced merger on account of a provision in Safeway’s bylaws designating Delaware as the exclusive forum for such cases. In its decision, the Court noted that Galaviz had been decided before Chevron, and that (in contrast to Galaviz) there was no evidence that the alleged wrongdoing had occurred before Safeway adopted its exclusive forum bylaw.

However, in a less favorable development for enforcement of exclusive forum bylaws, the Northern District of California declined to certify the enforceability of such bylaws to the Delaware Supreme Court. This ruling denies the defendant corporation the chance to argue this issue in front of what would likely be a sympathetic tribunal, given the Delaware Supreme Court’s decision in ATP (see Delaware Legislative Update above) regarding fee-shifting provisions in bylaws, and given that Chief Justice Strine authored Chevron while on the Court of Chancery. (Groen v. Safeway, No. RG14716641 (Cal. Super. Ct. May 24, 2014); Bushansky v. Armacost, 3:12-cv-01597 (N.D. Cal. June 25, 2014)).

July 18, 2014

Court Finds CFIUS Violated Company’s Due Process Rights

As noted in this Skadden memo: “On July 15, 2014, the U.S. Court of Appeals for the District of Columbia ruled that President Obama and CFIUS unconstitutionally deprived Ralls Corporation of its property rights by forcing it to divest that property for national security reasons without first providing adequate due process. The court’s precedent-setting decision may add a new layer of uncertainty to CFIUS processes, impact both applicants’ rights and committee procedures, and increase the number of tactical decisions involved in preparing for a CFIUS review.”

July 16, 2014

July-August Issue: Deal Lawyers Print Newsletter

This July-August Issue of the Deal Lawyers print newsletter includes:

- Materiality Scrapes Trending Upward in Private Deals
- Hushmail: Are Activist Hedge Funds Breaking Bad?
- Recent Trends: Antitrust & Regulatory Risk-Shifting in M&A Agreements
- Respecting Boilerplate: Preamble

If you’re not yet a subscriber, try a “Half-Price for Rest of ’14″ no-risk trial to get a non-blurred version of this issue on a complimentary basis.

July 15, 2014

Study: Career Consequences of Proxy Contests

This study examines the relationship between proxy contests and how they impact the careers of incumbent directors – and finds that the battles cost nominated directors is 60% greater than non-nominated ones. Here is an excerpt:

We show that proxy contests are associated with significant adverse effects on the careers of incumbent directors. First, following a proxy contest, incumbents lose seats from targeted boards. Three years after the proxy contest, more than 39% of the directors will not be on the board of the targeted company. Furthermore, following a proxy contest, directors experience a significant decline in the number of seats on other boards. The total number of other directorships falls by more than 17% over the three years after the proxy contest.

Overall, facing a direct threat of removal is associated with $1.3-$2.9 million in foregone income until retirement for the median incumbent director. The authors also conclude that there is a causal effect of proxy contests on director careers by studying the difference in career effects between nominated and non-nominated directors on staggered boards that are the target of a proxy contest.

July 10, 2014

Out of This World! A Unique Tender Offer Disclosure

This WSJ article led me to this disclosure you’re unlikely to see in a Schedule 14D-9 filed by an independent director of a Delaware company in response to a tender offer by a controlling stockholder – as highlighted below, it includes disclosure that the financial advisor declined further participation in the process! Here is an excerpt:

As described in more detail below, Mr. Spachman believes that the Tender Offer is a brazen attempt by a majority shareholder to force minority shareholders of the Company to sell their Shares at a price that is unfairly low, pursuant to a flawed process orchestrated by the majority shareholder, on terms which are designed to be extremely coercive and with inadequate disclosure to the public holders of Shares.

The Tender Offer is being made by Purchaser, which is a wholly owned subsidiary of Parent. Purchaser currently owns approximately 51.7% of the outstanding Shares of the Company, and Purchaser and Parent have averred that the Tender Offer is being made as a first step in acquiring all of the Shares of the Company. Pursuant to Ohio corporation law, the vote of two-thirds of the outstanding Shares is required for major corporate matters such as shareholder approval of a merger or a sale of substantially all assets, amendment of the articles of incorporation and amendment of regulations relating to the calling and conduct of shareholder meetings and the size, composition and classification of the board of directors of the Company (the “Board”). Therefore, the Purchaser seeks by the Tender Offer to acquire Shares which would ultimately result in its obtaining control of the Company, a position which, in Mr. Spachman’s view, it has not heretofore achieved.

Purchaser currently owns a sufficient number of Shares to ensure that a majority of the members of the Board are directors chosen by Purchaser. Although Purchaser’s shareholdings are sufficient to elect a majority of the Board, Ohio corporation law provides for mandatory cumulative voting unless the contrary is specifically provided for in the articles of incorporation. Therefore, absent an amendment of the articles of incorporation (which amendment would require a two-thirds vote of the outstanding Shares), Purchaser cannot be assured of controlling the election of all the directors on the Board, notwithstanding Purchaser’s current majority ownership of the Company. However, Purchaser has used its majority voting power to ensure that a majority of the ten-person Board consists of persons who are or were recently executive officers of Parent or Purchaser and the Company’s Chief Executive Officer (these six directors, the “Conflicted Directors”). The six Conflicted Directors have refused to recuse themselves from the Board’s deliberations concerning the Tender Offer, have prevented the Board from forming a special committee of the four independent directors for purposes of evaluating and negotiating the Tender Offer on behalf of the Company’s public shareholders and of making a recommendation to such public shareholders, and have denied the repeated requests of the independent directors to authorize the independent directors to retain, at the Company’s expense, their own independent counsel and financial advisors. In addition, Mr. Spachman believes that the Conflicted Directors have provided to Purchaser confidential information prepared by the Board’s financial advisor, thus using that information directly against the interests of the public shareholders.

The Conflicted Directors selected a nationally-recognized financial advisor (the “Financial Advisor”) to provide an opinion with respect to the fairness of the Original Offer Price of $28 per Share in connection with the Tender Offer. On the evening of February 15, 2014, the Financial Advisor expressed its intention to opine that the Original Offer Price was not fair, from a financial point of view, to the public shareholders of the Company. The Financial Advisor’s executive summary, as provided to the Board, included a conclusion regarding a per-Share value range, and the Original Offer Price was below the bottom end of this range. In the course of a Board meeting on February 17, 2014 purportedly called to determine the recommendation the Board should make to the Company’s shareholders concerning the Tender Offer, Joseph Consolino, the Chairman of the Company’s Board and the Chief Financial Officer of Parent, after reviewing that executive summary, indicated to the independent directors, on behalf of Parent and Purchaser, that Purchaser would increase its offer from $28 to $30, contingent upon a vote of neutrality by the Board with respect to the Tender Offer (as opposed to a vote to recommend that shareholders not tender into the Tender Offer). Shortly thereafter the contingency was removed. The independent directors did not agree to support or remain neutral on an increased offer price of $30 per share.

Following adjournment of the Board meeting on February 17th, David Michelson, the Company’s Chief Executive Officer, and Arthur Gonzales, the Company’s Vice President, General Counsel and Secretary, asked whether the Financial Advisor could provide an opinion with respect to the fairness of the Tender Offer at the Increased Offer Price of $30 per Share.

    The Financial Advisor declined any further participation in the process, noting that it had conducted an internal review of the possibility of further participation in advance of that request. (emphasis added)

Notwithstanding these circumstances, at a meeting on February 18th, the Conflicted Directors caused the Board to vote six to four (with the independent directors voting against) to remain neutral on the Tender Offer. Mr. Consolino adjourned the meeting abruptly based on the votes of the Conflicted Directors approximately four minutes after the meeting had begun, before the independent directors could make any proposal or even vote on the adjournment, and denied a request for further discussion.

The Tender Offer has been designed to be extremely coercive. Specifically, the announcement of the Increased Offer Price by Purchaser stated that the Increased Offer Price is its “best and final price” and that “no further increase to the offer price will be made,” and Purchaser specifically noted in such brief announcement the fact that Purchaser’s “minimum tender” condition of 90% of the outstanding Shares is waivable by Purchaser. Purchaser has made clear that if it waives the minimum tender condition and acquires two-thirds of the Shares, it will have complete control of the Company, including the power to approve a squeeze-out merger without any further approvals from any other shareholder. Further, the Tender Offer is scheduled to expire on March 6, 2014, a mere eleven business days from now.

July 9, 2014

Recent Trends in Antitrust and Regulatory Risk-Shifting in M&A Agreements

Here’s analysis from Cooley:

The recent drumbeat of aggressive antitrust and regulatory merger enforcement has put a spotlight on the importance of understanding the antitrust and regulatory risks raised by a potential deal, and efficiently allocating that risk in the transaction agreement. While transactions in dynamic technology, healthcare/life sciences, new media and telecom industries remain at the very top of the antitrust and regulatory enforcement agenda, the agencies will not hesitate to investigate matters in mature industries—for example, the FTC’s recent 9 month investigation of Tesoro Corporation’s $1.1 billion acquisition of petroleum assets from BP, which ultimately closed without a challenge in 2013. Several recent transactions also underscore the substantial antitrust risk that parties may face even in smaller, non-reportable matters.

There is no “one size fits all” approach, but there is often a premium on structuring the transaction to achieve the benefits of clear risk allocation and certainty that are commensurate with the amount of risk that the transaction presents, rather than relying on a broadly and generically worded “efforts” provision. In some instances where the target is being sold in a competitive process, a buyer may be compelled to take more antitrust/regulatory risk in order to win the bid, making it critical for the buyer to have confidence in its underlying antitrust/regulatory analysis. Market dynamics and regulatory landscapes also can change from deal-to-deal or even between signing and closing of a pending transaction; raising questions of how the parties should allocate the regulatory risks that are, in a contractual sense, unknowable at the time of signing. Whatever the facts may be, in transactions that present potential antitrust and regulatory risk, it is essential to establish close coordination between transaction counsel and antitrust and regulatory counsel to effectively negotiate the contractual risk shifting provisions.

The recently announced Comcast/Time Warner transaction, which is pending DOJ and FCC review, is illustrative of a trend towards efficient allocation of antitrust/regulatory risk in the negotiated transaction agreement. Industry observers generally expect this transaction will get intense DOJ and FCC review but is likely to be approved with conditions. The parties did not negotiate a reverse break-up fee or even an obligation to litigate with the agencies. Rather, the parties negotiated a customized and limited “divestiture” covenant—a sort of anticipatory “fix-it-first” approach. Specifically, Comcast agreed to (1) divest up to three million of the company’s combined subscribers, (2) accept other conditions that are consistent in scope and size to those imposed on other U.S. domestic cable system deals valued at $500 million or more within the past twelve years, and (3) implement undertakings set out on a schedule to the merger agreement (not publicly disclosed). If the DOJ and FCC do not clear the deal by the upset date or impose “burdensome conditions” (defined as divestitures or other undertakings beyond those Comcast has expressly agreed to make or take), Comcast may terminate the merger agreement without liability.

Comcast’s covenant to divest three million subscribers would hold Comcast’s total national market share under 30% of video subscribers (based on an FCC cable ownership cap that applied in previous cable deals but has since been vacated by the courts). The second commitment would encompass conditions imposed in Comcast’s acquisitions of AT&T in 2002 and Adelphia in 2006 (the 1st and 5th largest cable operators at the time) (e.g, anti-discrimination protections for rival multi-channel video distributors and independent network owners, especially regional sports networks). Finally, Comcast has already publicly announced its intention to abide by certain behavioral conditions imposed on Comcast when it acquired NBC in 2011 across the Time Warner Cable systems (e.g., this could include net neutrality conditions from the NBC deal even though the FCC needs to rewrite the rules based on a recent court ruling).

What about concerns that these types of provisions may raise, rather than mitigate regulatory risks, because such provisions provide a “roadmap” to the agencies, or even worse, provide the agencies with negotiating leverage to demand overbroad divestitures/remedies? The outcomes in numerous recent merger investigations reveal that these types of provisions do not necessarily create a path to a self-fulfilling prophecy, particularly when the contractual terms are well-crafted and the process is managed effectively. For example, in the Tesoro/BP matter, despite the fact that the acquisition agreement expressly provided for the divestiture of a specific refinery by Tesoro (as well as a reverse break-up fee and a ticking fee), the FTC closed its investigation after nine months without taking action, concluding that the transaction would not “lessen competition substantially” in the relevant market in California.

Of course, antitrust and regulatory risk allocation is not negotiated in isolation—parties bargain over many price and non-price terms. For instance, just as Comcast is not required to pay a reverse break-up fee if the parties are not able to obtain regulatory clearance, Time Warner Cable is not required to pay a break-up fee if its stockholders vote against the deal.

All M&A lawyers involved in industries or transactions with competitive, FCC or other regulatory issues should become familiar with market approaches to contractual risk-shifting and have knowledgeable and experienced antitrust and regulatory counsel on their deal teams.

June 25, 2014

Activist Funds Dust Off ‘Greenmail’ Playbook

Here’s news from this WSJ article:

More companies are resorting to an old tactic to get rid of activist investors: Pay them to go away.
The practice, which involves buying back shares from activist hedge funds, has raised concerns among some investors because it bears similarities to “greenmail,” a controversial strategy popular in the 1980s. Back then, aggressive investors such as Carl Icahn and the late Saul Steinberg bought company shares and threatened a hostile takeover. Eager to avoid a battle, companies including Walt Disney Co. and Goodyear Tire & Rubber Co. bought back their stakes above market price, giving the activists a quick profit. The practice, widely criticized as corporate blackmail, largely died out by the early 1990s as companies beefed up defenses and lawmakers took steps to discourage it.

But in the past 12 months, at least 10 companies have repurchased blocks of shares from activist investors, including Daniel Loeb and William Ackman, according to FactSet SharkWatch. That is more than in the previous six years combined. The practice differs from greenmail in two crucial aspects. The share buybacks aren’t at a premium to the market but typically at or slightly below the last trading price. They also don’t follow threats of hostile takeovers. Advisers say these deals are likely to continue as activist hedge funds, which have targeted more companies in recent years, look to sell out of holdings.

Since the current wave of activism started in 2010, these investors have launched 1,115 campaigns, according to FactSet, and many are ripe for exits. The buybacks have fueled a common criticism of activist investors: They chase short-term profits at the expense of other shareholders. “You can call it greenish mail,” said Spencer Klein, a lawyer with Morrison & Foerster LLP who advises companies facing activist investors. “These investors are getting an opportunity that others aren’t, and that’s not a terribly popular notion.”