Winter’s been so miserable that Las Vegas needs snow plows & there are flurries in LA – but I promise you that spring is coming. How do I know? The FTC just announced its new HSR thresholds, which means that our favorite harbinger of spring – the annual inundation of law firm memos – has commenced. Davis Polk once again won the prize for “first to my inbox” this year, so here’s an excerpt from their memo with the details:
Today, the Federal Trade Commission (FTC) announced revised Hart-Scott-Rodino Act (HSR) reporting thresholds under which transactions will be reportable only if, as a result of such transaction, the acquiring person will hold voting securities, assets, or non-corporate interests valued above $90 million, compared to $84.4 million in 2018. The newly-adjusted HSR thresholds will apply to all transactions that close on or after the effective date, which is expected to be in mid-March (the exact date will depend on when the changes are published in the Federal Register). The annual revision was delayed this year due to the recent federal government shutdown.
The FTC also announced revised thresholds above which companies are prohibited from having interlocking memberships on their boards of directors under Section 8 of the Clayton Act. The new Interlocking Directors thresholds are $36,564,000 for Section 8(a)(1) and $3,656,400 for Section 8(a)(2)(A). The new Section 8 thresholds become effective upon publication in the Federal Register.
Last summer, I blogged about a Delaware case addressing the distinction between a dispute resolution provision that requires a third party to act as an “arbitrator” & one that merely calls for that party to make an “expert determination” with respect to an issue. To make a long story short, if your agreement calls for “arbitration” you’re giving that third party powers equivalent to those of a judge; but if your agreement calls for an “expert determination,” that third party’s powers will be much more limited.
At that time, I cited a blog by Weil’s Glenn West cautioning deal professionals that because of these differences, they needed contractual language “clearly describing the third-party dispute resolution process they are contemplating for any post-closing purchase price adjustments.” Two recent Delaware Chancery cases – Agiliance v. Resolver SOAR (Del. Ch.; 1/19) & Ray Beyond v. Trimaran Fund Management (Del. Ch.; 1/19) suggest that people still aren’t getting Glenn’s message.
In the Agiliance case, the Court refused to countenance arguments that the agreement called for an “expert determination” given the unambiguous use of word “arbitration” in the agreement. Accordingly, the court ordered that a disputed matter be resolved solely by the accounting firm as an arbitration. In contrast, the Ray Beyond case involved a clear designation that the third party would as an “expert,” not an arbitrator – so the court gave effect to that language.
Glenn West is back again with another blog addressing these two cases. His conclusion isn’t surprising:
The distinction between Agiliance and Ray Beyond, then, is the existence, vel non, of a clear designation of the accounting firm as an expert, not an arbitrator, in the agreement. If you call your designated accounting firm a zebra, it will be a zebra (with potentially uncontrollable authority), and if you call your designated accounting firm a horse, even a striped one, it will be a horse (with controllable and limited authority). Say what you mean.
So, are we gonna listen this time or is Glenn going to have to come back again and beat a dead horse – or maybe a dead zebra?
Most corporate lawyers know that if you want to confer voting powers on one or more directors that are greater than those provided to other directors, Section 141(d) of the DGCL requires you to do that in your certificate of incorporation. But lawyers tend to view this narrowly, and often think that it only comes into play if you attempt to provide certain directors with more or less than 1 vote on board matters.
This Mintz Levin memo says that isn’t the case – and this excerpt points out that many of the contractual director veto rights typically found in VC investor agreements also involve disproportionate voting:
When VC funds, their portfolio companies and VC lawyers read or think about DGCL 141(d) and this disproportionate voting, they usually, and narrowly, have in mind only the question of whether certain directors may have more than or less than one vote per Director on matters voted on by the Board, or a committee of the Board.
However, what such funds, companies and practitioners less often recognize and give consideration to is that the financing documents commonly used in venture financings also often contain provisions that confer disproportionate voting rights among Directors, and that this disproportionate voting is not conferred in the COI as required by DGCL 141(d).
For example, the customary “Matters Requiring Director Approval” or “Matters Requiring Investor Director Approval” provisions found in investor rights agreements (IRAs) typically require that the majority of the Board, which majority includes one or more directors representing the holders of preferred stock (Investor Directors) approve certain corporate actions, such as incurring debt, hiring or firing executive officers, entering new lines of business or selling material technology or intellectual property.
The memo says that these and similar provisions requiring affirmative votes by the investor directors also constitute “disproportionate voting”, because they give those directors “veto rights” that are not shared by all directors. That means these rights need to be in the certificate of incorporation – and if they’re not, you’ve got a problem.
The memo points out that the good news for VC investors is that if you’re using the latest NVCA form certificate of incorporation, there’s language in there stipulating that ‘matters listed in ‘Matters Requiring Director Approval’ or ‘Matters Requiring Investor Director Approval’ provisions of the IRA require the affirmative votes by Investor Directors.”
This Bloomberg Law article says that dealmakers have made privacy issues a high priority in M&A due diligence and in negotiations. Here’s an excerpt about how privacy concerns are finding their way into deal terms:
Buyers will often assume the liabilities, including pending lawsuits and enforcement actions stemming from privacy laws, attorneys said. Data-driven companies could be a risky purchase because EU and U.S. regulatory authorities are focusing on businesses being transparent in their data collection practices, they said.
How well an acquisition target follows the GDPR and other privacy laws plays an increasingly important role in deal negotiations, attorneys said. Buyers are incorporating privacy issues in contract language, including representations and warranties, and changing deal prices to account for possible enforcement actions or lawsuits.
The article says that privacy concerns are particularly acute for data-driven businesses, and that buyers are digging into how well prepared those companies are not only to comply with existing regulations, but with those – such as California’s consumer privacy legislation – that will be coming online in the near future. Companies that haven’t taken steps to establish their right to the customer information essential to their businesses can expect to pay a steep price in terms of valuation.
PE funds and activists have had a mutually beneficial relationship for years – activists with event-based strategies have pushed companies to do a deal, and PE funds have been more than happy to provide one. But in recent years, some major activists have looked to sponsor their own deals, and according to this recent report from Axios, that strategy is growing in popularity:
Both private equity and activist investor funds are considered alternative asset classes, but the latter is becoming an increasingly popular alternative to the former.
Starboard Value today agreed to invest $200 million into Papa John’s, after the troubled pizza chain failed to secure attractive enough private equity offers during a four-month auction process. The deal also includes another $50 million infusion by the end of March, with Starboard’s Jeffrey Smith being named chairman. Company namesake John Schnatter reportedly voted against the deal, thus extending his recent losing streak.
Elliott Associates, after failing to successfully work with Apollo Global Management on an Arconic takeover, is seeking to raise $2 billion for an actual takeover fund — not so much evolving into private equity but seeking to co-opt it.
The bottom line: Activists for years have helped to create private equity opportunities, by agitating for sales. Now they are beginning to take some of those opportunities themselves.
Our old pal the earnout – everybody’s favorite way to bridge valuation gaps – found itself back in the Delaware Chancery Court again late last year. In Himawan v. Cephalon, (Del. Ch.; 12/18), the Court refused to dismiss claims premised on allegations that the buyer breached its obligations under an earnout provision in a merger agreement.
The seller was a biotech company & the earnout payments were tied to the buyer’s commercialization of two antibody-based disease treatments in development at the time of the deal. The buyer was obligated to use “commercially reasonable efforts” to develop the treatments – which the agreement defined to mean “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon], with due regard to the nature of efforts and cost required for the undertaking at stake.”
While the buyer made milestone payments of $200 million for one of the treatments, it ultimately abandoned the other. The plaintiffs sued, and the defendant moved to dismiss their breach of contract claim. This K&L Gates blog summarizes the Court’s decision to deny that motion. Here’s an excerpt:
Vice Chancellor Glasscock denied Cephalon’s motion to dismiss the breach of contract claim, recognizing in the decision that the merger agreement’s “commercially reasonable efforts” provision created an objective standard for evaluating Cephalon’s conduct. While indicating that potential alternative reasonable interpretations may be considered in construing Cephalon’s specific obligations under this standard, the court determined that this provision should not be held to be meaningless for purposes of ruling on a motion to dismiss for failure to state a claim.
The Court found that Ception’s former shareholders had sufficiently pled that Cephalon failed to comply with its obligations under this provision by alleging that similarly situated companies were pursuing treatments for the other identified condition. On the basis of this finding, the Court held that dismissing the breach of contract claim would be inappropriate.
The Vice Chancellor dismissed the plaintiffs allegations of breach of the implied covenant of good faith – reasoning that since the implied covenant was essentially a “gap filler,” its use was inappropriate when a contract contained an objective standard defining the nature of the obligations at issue.
Delaware’s hard line on disclosure-only settlements adopted in In re Trulia has been slow to catch on in other jurisdictions, with only a few adopting the standard so far. But now this Gibbons blog says that we may be able to add New Jersey to the list – sort of:
In the first published New Jersey state court opinion addressing the Trulia standard, the Chancery Division in Strougo v. Ocean Shore Holding Co. followed Trulia in holding that disclosure-only settlements are to be subject to “more exacting scrutiny,” but it is doubtful that the Chancery Division scrutinized the settlement to the degree envisioned by Chancellor Bouchard in Trulia.
According to the Chancery Division in Strougo, when a court is asked to approve a disclosure-only settlement, the court should determine whether the supplemental disclosure was “material,” meaning that “there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote.” Trulia requires more: it requires that the supplemental disclosure be “plainly material,” meaning that “it should not be a close call that the supplemental information is material.”
Consistent with its Trulia-lite approach, the Court said that supplemental disclosures about the deal’s fairness opinions were material enough to support a settlement – even though the Trulia court concluded that supplemental disclosures like these rarely add value for shareholders.
Tune in tomorrow for the webcast – “Earnouts: Nuts & Bolts” – to hear Pepper Hamilton’s Michael Friedman, Cravath’s Aaron Gruber, Fredrikson & Byron’s Sean Kearney and K&L Gates’ Jessica Pearlman – discuss the nuts & bolts of earnouts, and how to prevent this popular tool for bridging valuation gaps from becoming a post-closing albatross for your deal.
Here’s MergerMarket’s “2018 Global M&A Roundup,” which includes the latest set of league tables listing the law firms that most often represent companies in deals, broken out on a global and regional basis. . .
This Activist Insight article says that corporate reimbursements of expenses incurred by activists in proxy contests were way up last year. Here’s an excerpt:
The average reimbursement paid by companies to activist investors for proxy solicitation costs increased dramatically last year. U.S. companies disbursed an average $431,831 to cover activists’ campaigning costs in 2018, nearly three times the average in 2017, according to data compiled by Activist Insight Online.
The growing bill comes as the number of settlements has swelled; as many as 142 settlements were reached in 2018 versus 119 in the prior year. In part, 2018’s increase in costs could be explained by the fact that there were more reimbursements at mid- and large-cap companies, which totaled $10.4 million in 2018 compared to $1.5 million in 2017.
Most reimbursements involve small cap companies, but the article speculates that more reimbursements by mid and large-cap companies may account for the spike. Longer campaigns may also be a factor, with campaigns taking an average of 82 days to reach a settlement in 2018, compared with 79 days in 2017. The article also says that the increased reimbursement may reflect more advance preparation by small cap activists – including retaining counsel before launching a campaign.
The article reviews notable large-cap campaigns where activists obtained reimbursements, and addresses how institutional investors may react to reimbursement requests.