Recently, a new Cornerstone Research report – entitled “Shareholder Litigation Involving Acquisitions of Public Companies” – was released. Perhaps the most significant finding was a significant increase in the percentage of transactions challenged in only one jurisdiction. The report attributed this shift away from multi-forum litigation to the increasingly widespread adoption of exclusive venue bylaws. According to the report, more than 300 companies adopted such provisions in 2013 and 2014. Other key trends include:
– Plaintiff attorneys filed more than 600 lawsuits challenging M&A deals announced in 2014 and valued over $100 million.
– The percentage of deals challenged in litigation remained high at 96% for deals valued over $1 billion, but declined for deals valued under $1 billion, from 94% in 2013 to 89% in 2014.
– The average number of lawsuits per deal declined from 5.2 in 2013 to 4.5 in 2014, the lowest annual rate since 2009.
– The number of deals with more than 10 filings decreased, from 14 in 2013 to nine in 2014.
– The percentage of lawsuits resolved before M&A deals closed in 2014 slid to the lowest level since 2008. In 2014, only 59% of litigation was resolved before the deals were concluded, compared with 74% in 2013.
– Only one M&A case in the data went to trial in 2014; it resulted in a $76 million damages award.
– Lawsuits challenging M&A deals were filed more slowly in 2014. The first lawsuit was filed an average of 14 days after the deal announcement, compared with 11 days in both 2012 and 2013.
– Similar to prior years, almost 80% of settlements reached in 2014 provided only additional disclosures. Just six settlements involved payments to shareholders.
Here are a few pieces with notes from the recent M&A conference at Tulane:
– WSJ’s “Two Pieces of Good News for Activists from Tulane M&A Confab”
– Fortune’s “As deals rise, bankers warn of ‘bumpitrage'”
– Cleary’s “Appraisal arbitrage”
– Cleary’s “Forum selection bylaws”
– Cleary’s “Fee-shifting bylaws”
As noted in this memo, a few months ago, NASAA requested comments on a proposed uniform state model rule regarding the exemption of certain M&A Brokers from state registration requirements. This proposal has key differences from a Corp Fin no-action letter issued on the same topic last year. Here’s an excerpt from the memo:
There are some important differences between the Model Rule and the SEC No-Action Letter. First, as noted above, the Model Rule would impose limitations on the size of the acquired privately held company (either $25 million in earnings or $250 million in gross revenues), whereas the SEC No-Action Letter allows M&A Brokers to effect securities transactions without regard to the size of the privately held company. Second, the Model Rule would only require that the M&A Broker have a reasonable belief that the buyer of the privately held company will control and be actively involved in its management. By contrast, the SEC No-Action Letter requires that the buyer must actually control and actively operate the privately held company. Third, the requisite “control” of a privately held company under the Model Rule means at least a 20% voting interest in the company, whereas the SEC No-Action Letter raises the “control” threshold to at least a 25% voting interest.
Here’s a blog by Stinson Leonard Street’s Steve Quinlivan:
The Board of Governors of the Federal Reserve Board has modified its Small Bank Holding Company Policy Statement to facilitate the sale of smaller community banks.
Under the final rule, a holding company with less than $1 billion in total consolidated assets may qualify under the policy statement, provided it also complies with the qualitative requirements. This new asset limit is set by statute.
Previously, only bank holding companies with less than $500 million in total consolidated assets that complied with the qualitative requirements could qualify under the policy statement.
The quantitative requirements are the bank holding company:
– was not engaged in significant nonbanking activities either directly or through a nonbank subsidiary;
– did not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and
– did not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.
Under the policy statement, holding companies that meet the qualitative requirements may use debt to finance up to 75 percent of the purchase price of an acquisition (that is, they may have a debt-to-equity ratio of up to 3.0:1), but are subject to a number of ongoing requirements. The principal ongoing requirements are that a qualifying holding company:
– reduce its parent company debt in such a manner that all debt is retired within 25 years of being incurred;
– reduce its debt-to equity ratio to .30:1 or less within 12 years of the debt being incurred;
– ensure that each of its subsidiary insured depository institutions is well capitalized; and
– refrain from paying dividends until such time as it reduces its debt-to-equity ratio to 1.0:1 or less.
The policy statement also specifically provides that a qualifying bank holding company may not use the expedited procedures for obtaining approval of acquisition proposals or obtaining a waiver of the stock redemption filing requirements applicable to bank holding companies under the Regulation Y unless the bank holding company has a pro forma debt-to-equity ratio of 1.0:1 or less.
The Fed has generally discouraged the use of debt by bank holding companies to finance the acquisition of banks or other companies because high levels of debt can impair the ability of the holding company to serve as a source of strength to its subsidiary banks. The Fed has recognized, however, that small bank holding companies have less access to equity financing than larger bank holding companies and that the transfer of ownership of small banks often requires the use of acquisition debt. Accordingly, the Fed adopted the policy statement to permit the formation and expansion of small bank holding companies with debt levels that are higher than typically permitted for larger bank holding companies.
Consistent with the proposed rule, the final rule applies the revised policy statement to savings and loan holding companies.
With the proposed amendments from the Delaware Corporation Law Council in the news, I thought it was good to highlight how the Council works in practice. Here’s an excerpt from one of the Council’s documents:
The Delaware Corporation Law Council, which is a committee of the Delaware State Bar Association (the “DSBA”) has reproposed legislation similar to the legislation it proposed last year that would prohibit fee shifting charter and bylaw provisions. That proposed legislation was put on hold by the Delaware legislature following vocal objections from segments of the legal and business community, including the US Chamber of Commerce.
The Council drafts recommendations to the Delaware legislature for amendments to the Delaware General Corporation Law (the “DGCL”) every year. The group includes 22 lawyers with significant representation from law firms that regularly represent corporations and their directors and officers in transactions and litigation, as well as lawyers who generally represent investor plaintiffs. Any legislation the Council drafts must be approved by the DSBA Corporation Law Section, which consists of almost 500 Delaware attorneys, and must then be approved by the Executive Committee of the DSBA. In addition, the head of the Division of Corporations participates in Council deliberations as a non-voting member, so that there is administration input on legislation the Council drafts.
Here’s an excerpt from this blog by Cooley’s Cydney Posner:
The Corporation Law Section of the Delaware Bar has approved, substantially as proposed, the amendments to the Delaware General Corporation Law proposed by the Delaware Bar’s Corporation Law Council regarding fee-shifting and forum selection provisions in Delaware governing documents. (See this post.) Accordingly, it is anticipated that the proposals would be introduced for consideration by the Delaware General Assembly.
More specifically, the proposed amendments would invalidate, in Delaware charters and bylaws, fee-shifting provisions in connection with internal corporate claims. “Internal corporate claims” are claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder in such capacity or as to which the corporation law confers jurisdiction on the Court of Chancery. These claims would include claims arising under the DGCL and claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation, or persons who aid and abet those breaches. However, as discussed in this post, federal securities class actions would not be included. The proposed amendments also expressly authorize the adoption of exclusive forum provisions for internal corporate claims, as long as the exclusive forum is in Delaware. Although the proposed amendment does not address the validity of a provision that selects, as an additional forum, a forum other than Delaware, the synopsis indicates that it would invalidate “a forum selection provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.” Accordingly, the legislation would not allow Delaware corporations to select another state as the exclusive forum.
While not exactly topics roiling the Delaware Bar, a few other matters are addressed in the proposed legislation. For example, with regard to public benefit corporations (see these news briefs and these posts), the proposed amendments would reduce the voting requirement for a corporation to become a public benefit corporation from 90% of the outstanding shares to 2/3 of the outstanding shares (still a rather high hurdle, especially if the company is already public) and provides a market out (applicable to listed companies and companies with over 2,000 record holders) to the provisions allowing appraisal for stockholders that did not vote in favor of the transaction.
Other proposed amendments relate to issuance of stock and options. These proposed amendments clarify that the board may authorize stock to be issued in “at the market” programs without having to separately authorize each individual stock issuance and that the amount of consideration to be received for stock or options may be determined by a formula that references or depends on the operation of extrinsic facts, such as market prices or averages of market prices on one or more dates.
The proposed amendments would also clarify a number of issues in connection with the new Delaware statutes, Sections 204 and 205, that authorize ratification of defective corporate acts by the corporation and the Delaware courts, respectively. Among other things, these amendments would address the situation in which the initial board was not named in the original certificate or properly appointed, allow listed companies to provide certain notices by making public filings, clarify the requirements for certificates of validation, clarify the term “validation effective time” (including allowing the board to designate a future time in some circumstances), clarify that the board may adopt a single set of resolutions ratifying multiple defective corporate acts, and clarify that holders of shares of putative stock would not be considered stockholders entitled to vote or to be counted for purposes of a quorum in any ratification vote and that the only stockholders entitled to vote on ratification are the holders of record of valid stock as of the record date (i.e., ratification of a defective corporate act will not result in putative shares being retroactively validated so that they become entitled to vote).
Meanwhile, the “Delaware Rapid Arbitration Act” has been enacted – see this memo…
Last week, as noted in these memos posted in our “Canadian M&A” Practice Area, the Canadian Securities Administrators released draft amendments to Canada’s take-over bid regulatory regime. As previously announced by the CSA in September, the amendments will increase the minimum period that a take-over bid must remain open from 35 days to 120 days—unless the target board consents to a shorter period of not less than 35 days or the target enters into a board-supported change of control transaction—and make other changes designed to rebalance the current dynamics between bidders, target boards and target securityholders.
As noted in this Proskauer memo:
Some taxpayers have taken the position that an acquiring corporation and a target corporation, when the target corporation is joining the acquiring corporation’s consolidated corporate group, can choose between taking certain acquisition-related expenses into account in the target’s pre-acquisition taxable year or the post-acquisition consolidated taxable year. If included in the post-acquisition consolidated taxable year, this has the effect of permitting the use of these deductions to offset the income of other group members without limitation under section 382 of the Code. On March 5, 2015, Treasury issued proposed regulations that would reverse this result.
Last week, seven NY law firms sent this letter to the Delaware Corporate Law Council criticizing the proposed appraisal law modifications recommended by the Council. Here’s a related blog by Wachtell Lipton’s Trevor Norwitz – and a WSJ article…
This recent article from Deloitte is noteworthy because it addresses a scarcely resourced, but virtually always encountered, merger challenge – post-merger cultural integration issues.
The article soundly advises implementing a formal integration program with concrete steps linked to measurable business results, as follows:
1. Make culture a major component of the change management work stream.
2. Identify who “owns” corporate culture and have them report to senior management.
3. Insist that the cultural work focuses on the tangible and the measurable.
4. Consider the strengths of both existing cultures, not just the weaknesses.
5. Implement a decision-making process that is not hampered by cultural differences.
6. Build the employee brand with a view toward how it will be understood by employees.
7. Put people with knowledge of, and experience in, culture change on the teams that define the important interfaces in the new organizational model.
Each suggested step is supported by further explanation and sensible guidance.
Access additional resources in our “Integration” Practice Area.