A well thought-out approach to shareholder engagement on an M&A transaction is essential – particularly if shareholders aren’t expected to support the deal overwhelmingly from the outset. We’ve posted this new checklist from Innisfree’s Scott Winter addressing shareholder engagement following a deal’s announcement in our “Shareholder Approval” Practice Area. Check it out!
According to this Deloitte survey, despite recent headwinds, dealmakers continue to expect a robust M&A environment during 2019. As this excerpt suggests, both strategic & PE buyers are upbeat about prospects for the new year:
Survey respondents are increasingly bullish on expectations for M&A deal activity over the next 12 months. On the corporate side, 76% of respondents say they expect the number of deals to increase, up from the prior year when 69% projected a gain. On the private equity side, 87% of respondents foresee an uptick in deal flow, a considerable increase, up from 76% a year earlier.
Respondents from larger private equity funds are almost unanimous in their anticipation of more deals in 2019, as 94% of respondents at funds larger than $5 billion expect an increase compared with last year. Interestingly, there is not the same correlation among corporations; only 65% of respondents at the biggest companies ($5 billion or more in annual revenue) see accelerating deal flow in the next 12 months.
Corporate respondents from financial services, energy and resources, and telecommunications, media, and technology (TMT) industries were the most optimistic, in sequential order, on the likelihood for more deals in the year ahead.
A significant number of respondents not only think M&A activity will increase during 2019 – but that it will increase significantly. Nearly 1/3rd of corporate respondents anticipate a significant uptick in deal activity, and so do 29% of PE respondents. Last year, only about 25% of corporate respondents said deal activity would grow significantly, and only 19% of PE respondents felt the same way.
I blogged last week about the Chancery’s decision in In re Xura Stockholders Litigation, (Del. Ch.; 12/18) in which the court held that the filing of an appraisal action didn’t preclude the plaintiffs from bringing fiduciary duty claims. As I mentioned in that blog, there’s a lot going on in the Xura case – and I want to circle back to how the court handled aiding & abetting claims brought against the buyer.
Last year, I blogged about an unusual situation in which an activist investor found itself liable for aiding & abetting its designated director’s breach of fiduciary duty. That decision notwithstanding, aiding & abetting claims remain mighty tough to prevail on in Delaware – and Xura illustrates just how high a mountain plaintiffs have to climb to make these claims.
In Xura, Vice Chancellor Slights denied the target CEO’s motion to dismiss breach of fiduciary duty claims premised on allegations that he tilted the playing field in favor of the private equity buyer that promised to retain him after the deal – while at the same time knowing that his head was potentially on the chopping block in the absence of a deal. However, the Vice Chancellor dismissed aiding & abetting claims against the buyer.
As this recent Cleary Gottlieb blog discussing the case points out, VC Slights dismissed the aiding & abetting claim notwithstanding a whole lot of “footsie” between the PE buyer & the target’s CEO:
Vice Chancellor Slights dismissed the plaintiff’s aiding and abetting claim against Siris, finding that the plaintiff failed to adequately allege that the acquiror knowingly participated in the breaches of fiduciary duty by Xura’s CEO. As noted above, the court reached this conclusion even though plaintiff alleged that (1) the acquiror knew the target CEO was favoring it over other potential bidders (because the complaint did not separately allege that the acquiror knew of the target CEO’s conflicted interests given his job situation); (2) the acquiror knew the target CEO was ignoring the target’s banker’s request to be included in communications with the acquiror (because the acquiror did not know that the target CEO’s refusal to include the financial advisor in such communications constituted a breach of fiduciary duty); and (3) the acquiror knew that the target was failing to disclose material information to its stockholders (because the acquiror did not facilitate those omissions).
The Vice Chancellor’s decision on this issue seemed to turn on the fact that while the buyer was aware of the laundry list of shenanigans laid out in the blog, there was no evidence that the CEO told the buyer that “he was in danger of losing his job if the Transaction fell through or that he was motivated to steer Xura into the Transaction for self-interested reasons.” As a result, the plaintiff couldn’t establish that the buyer “knowingly participated” in the breach.
Last year was action-packed when it came to developments relating to national security review of M&A. Several major transactions were scuttled due to national security concerns, and the enactment of FIRRMA and the implementation of a pilot program under the new statute dramatically enhanced CFIUS’ reach & the compliance burden that companies face.
So what’s next on the horizon? This Wilson Sonsini memo reviews CFIUS’ past & present, and provides some insights into coming attractions. This excerpt discusses the Commerce Department’s efforts to identify “emerging technologies” & the implications of that process for CFIUS review:
Most immediately, the Department of Commerce has initiated a process to designate “emerging technologies.” That process is important in the CFIUS context because “emerging technologies” is a subcategory of “critical technologies.” Foreign investments in any technology designated as an “emerging technology” (and therefore a type of “critical technology”) could trigger a mandatory CFIUS filing under the pilot program described above, and presumably under the final rules that will replace the pilot program.
The Commerce Department has requested input from the public on the effects of classifying technologies in 14 different categories, such as:
While this initial request for comments is only the first stage in developing a list of the “emerging technologies,” it is very likely that this process will result in far more transactions triggering mandatory CFIUS filings.
– Cross-Border Carve-Out Transactions
– The Odd Couple: Indemnification and R&W Insurance
– Fairness Opinions: How to Avoid Provider Conflicts
– Standards of Review: When the Controlling Shareholder Isn’t a Buyer
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Filing an appraisal action doesn’t necessarily put the kibosh on a shareholder’s ability to assert a fiduciary duty claim – or at least that’s what the Delaware Chancery Court held in In re Xura Stockholder Litigation(Del. Ch.; 12/18). Here’s an excerpt from this Shearman & Sterling blog summarizing Vice Chancellor Slights’ decision:
Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
Discovery conducted after filing the appraisal action led the plaintiff to assert the breach of fiduciary duty claim against the CEO. In upholding the plaintiff’s ability to make the claim, VC Slights distinguished the case from then Vice Chancellor Strine’s decision in In re Appraisal of Aristotle, (Del. Ch.; 1/12) – in which the Court refused to permit a plaintiff to tack on a disclosure-based fiduciary duty claim late in the appraisal process.
In Aristotle, VC Strine said that the plaintiff sought a quasi-appraisal remedy for its disclosure claim – which would provide it with the same relief as the underlying appraisal action. In contrast, VC Slights noted that the plaintiffs in Xura sought more traditional post-closing remedies for the alleged conflict-based breach, including rescissory damages and disgorgement. He concluded that Delaware law conferred standing on the plaintiff to bring both claims.
There’s a lot going on in this case – and I’ll blog about another aspect of it next week.
Among its many other dubious achievements, the government shutdown has thrown a monkey wrench into a lot of pending deals. Broc’s blogged several times about the shutdown’s impact on the SEC’s operations over on TheCorporateCounsel.net (here’s his most recent). Unfortunately, the SEC isn’t the only game in town – and the limited operations of other federal agencies during the pendency of our annual national dumpster fire are also causing headaches for dealmakers.
This Fried Frank memo addresses how federal agencies are being affected by the shutdown & what that may mean for your transaction. This excerpt deals with the antitrust regulators – and says that you may see more HSR second requests & can forget about early termination of your waiting period for the time being:
The Federal Trade Commission and the Department of Justice are continuing to accept Hart-Scott-Rodino filings during the shutdown. The applicable statutory HSR waiting periods will run, but early termination of the waiting period will not be granted during the shutdown. Second requests will continue to be issued. The agencies will perform certain critical functions with respect to time sensitive investigations and (if timing extensions or suspensions cannot be negotiated) pending litigation or new cases that “must be filed due to [HSR] or statute of limitations deadlines.”
Given the limited agency staff working during the shutdown, parties should expect delays. In particular, there may be additional need to pull and refile HSR filings to allow the agencies additional time to conduct preliminary reviews, with the goal of avoiding or narrowing the scope of in-depth Second Request investigations. In addition, resource constraints may prompt the agencies to issue more Second Requests than otherwise in order to allow additional time to complete their investigations. For transactions that present no substantive antitrust issues, without the possibility of early termination, parties will need to endure the full statutory waiting period (30 days for most transactions)
That’s nice. Anyway, the memo also touches on how the shutdown’s impacted the operations of other regulators you may interact with – including the SEC, FCC, CFIUS & bank regulators – as well as the federal courts.
With the explosive growth in Rep & Warranty insurance, people sometimes overlook the fact that D&O policies often come into play when dealing with claims arising out of a deal. This Woodruff Sawyer blog discusses the role that both types of coverage play in protecting a seller and its directors. This excerpt highlights a situation where the D&O policy provides a critical backstop to an R&W policy:
The predicate of this scenario is a serious breach of a representation given by the seller to the buyer.
It could be argued that some breaches of representations are the result of a lack of board-level oversight or even a pervasive cultural issue perpetrated by the board. Let’s say the board is revealed to have put pressure on managers to find the “cheapest” way to dump toxic waste; and that “cheapest way” was to just throw it in the sea. Could this action by the board also result in a claim under the sellers D&O policy?
First, one should expect the breach of the representation itself will inspire the buyer to sue the seller for the breach if not for actual fraud on the seller’s part. This difficult circumstance is actually fairly common, which is why an RWI policy is so useful. It’s also why the calibration of the limit and scope of the RWI policy is so important. The RWI policy is designed to respond in this situation and in the best case has been structured so that the buyer remains whole notwithstanding the breach. Put differently, up until the RWI policy is exhausted the buyer had not experienced any loss, making a suit against the seller’s directors and officers by the buyer unlikely.
However, let’s say the breach is so terrible that the RWI policy’s limit is exhausted without making the buyer whole. In this case the buyer might decide to sue the seller and the seller’s directors and officers. If the buyer sues the seller’s directors and officers for fraud, typically the seller’s D&O insurance to respond. If the regulators become involved as a result of the fraud and there is risk of fines or criminal prosecution against the seller’s directors and officers, it is likely that the seller’s D&O insurance policy will respond, particularly for the cost of an individual director’s or officer’s legal defense.
The blog points out that this kind of claim might well be brought after the seller’s D&O policy has expired – and illustrates the importance of purchasing tail D&O coverage to protect the seller’s directors from post-closing claims.
Section 14(e) is the Williams Act’s general anti-fraud provision, and prohibits misstatements or omissions in connection with tender offers. Last year, in Varjabedian v. Emulex, the 9th Circuit split with the other circuits that had addressed the issue & held that 14(e) liability may be based on negligence. Last week, the SCOTUS granted cert in the case – and this Wachtell memo says its decision could be an important one for M&A practitioners:
Emulex exemplifies a trend apparent since Delaware’s crackdown on the disclosure settlement racket: Deal disclosure cases have flooded into other states and into federal court. In deals involving tender offers, the legal vehicle of choice has been Section 14(e). If the Ninth Circuit’s decision endorsing a negligence standard is allowed to stand, the ongoing flood of tender-offer disclosure cases in to the federal courts could become a deluge. But if it is reversed, and depending on how, that flood could be slowed—or altogether stemmed.
This Wachtell memo provides an overview of the “state of play” for shareholder activism as of the end of 2018. The memo notes that the threat of activism remains high – and is a global phenomenon. Here are some of the other key takeaways:
– Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad. In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions.
– While the robust M&A environment of much of 2018 has recently subsided, deal-related activism remains prevalent, with activists instigating deal activity, challenging announced transactions (e.g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
– “Short” activists, who seek to profit from a decline in the target’s market value, remain highly aggressive in both the equity and corporate debt markets. In debt markets, we have also recently seen a rise in “default activism,” where investors purchase debt on the theory that a borrower is already in default and then actively seek to enforce that default in a manner by which they stand to profit.
While the memo says that there has been interest among institutional investors in initiatives to develop a governance framework focusing on creating long-term value and fighting short-termism, it also says that until such a framework is widely adopted, a decrease in activism is unlikely.
Speaking of a new governance framework, Wachtell recently updated its “New Paradigm” for corporate governance that the firm originally prepared in 2016 for the World Economic Forum.