This Cleary memo discusses the outlook for shareholder activism in 2023. In addition to highlighting the potential implications of universal proxy, the growth of pass-through voting & the tug of war between ESG and anti-ESG activism, this excerpt from the memo points out that the DOJ’s renewed interest in the Clayton Act’s prohibition on director interlocks may also have a significant impact:
Activists may also find their directors under the microscope as a result of the DOJ’s stated intention to ramp up enforcement of the Clayton Act’s prohibition on interlocking directorates. This long-standing statutory provision, which bans competitive companies from having overlapping directors and officers in an effort to prevent collusion, has not been a primary focus of the U.S. antitrust agencies in the past.
This appears to be changing. In October 2022, seven directors from five companies resigned in response to an interlocking directorate probe from the DOJ, which also announced that its Antitrust Division would be “undertaking an extensive review of interlocking directorates across the entire economy and will enforce the law.”
The memo says that activist-nominated directors will need to be more closely assessed for antitrust and interlocking directorate concerns. These concerns will be particularly elevated when the nominee is an insider of the activist. The DOJ’s use of an agency or deputization theory of liability may present the greatest risk, because as the memo points out, even if one individual doesn’t sit on the boards of competing companies, the DOJ may find an interlocking directorate if different individuals representing the interests of the activist sit on the boards of competitors.
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Alexandra Higgins, Spotlight Advisors’ Damien Park and H/Advisors Abernathy’s Dan Scorpio discuss lessons from 2022’s activist campaigns & expectations for what the dawn of the universal proxy era may have in store!
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Over on the Delaware Corporate & Commercial Litigation Blog, Francis Pileggi and Sean Brennecke have posted a review of last year’s key Delaware corporate & commercial law decisions. The authors note that their focus is on the “unsung heroes” among these decisions – important cases that haven’t received a lot of attention from the media or trade publications. This excerpt provides an example of what they mean:
In the Chancery decision of Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. April 4, 2022), the court found that an irrevocable proxy was ambiguous and it did not state that it would “run with the shares” based on the “special principles of contract interpretation” applicable to proxy agreements. This 85-page opinion needs to be read by anyone who wants to know the latest Delaware law on enforceability of proxies.
There is a lot here – the article originally appeared in two installments in the Delaware Business Court Insider and ran a total of 34 pages.
In early January, the Vice Chancellor Zurn’s issued her decision in Ainslie v. Cantor Fitzgerald, (Del. Ch. 1/24), which addressed the limitations on enforceability of non-compete covenants in partnership agreements. That decision followed on the heels of her decision in Kodiak Building Partners v. Adams, (Del. Ch.; 10/22), which invalidated a non-compete agreement entered into in connection with the sale of a business.
With all the attention being paid to the FTC’s proposed ban on non-competes, I thought these cases merited a blog. However, I also sincerely hoped somebody else would spare me the task of writing it, since now that I’m managing TheCorporateCounsel.net site in addition to this one, people expect me to do actual work – and that leaves me less time to blog. Fortunately, Weil’s Glenn West recently came to my rescue with this blog, which reviews these two recent decisions and makes the point that the Delaware Chancery Court can be a very demanding place when it comes to enforcing non-competes:
Delaware courts are regarded as reliably contractarian in their interpretation and enforcement of written agreements. That means that Delaware courts do not re-write agreements that parties make, and will enforce both good deals and bad deals in accordance with the written terms. But Delaware’s contractarianism is mediated through long-standing common-law rules that sometimes do refuse to enforce the terms of an otherwise voluntary agreement, even one entered into by sophisticated parties.
Two recent Delaware Court of Chancery decisions, both by Vice Chancellor Zurn, illustrate the effect of a common-law override to strict contractarianism respecting the enforcement of non-compete agreements and forfeiture-for-competition provisions, both in the sale of business and in the employment context.
After reviewing the two decisions, the blog closes by observing that parties who want Delaware courts to enforce non-competes should follow Vice Chancellor Zurn’s advice in Ainslie and ensure “that they ‘(1) [are] reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) [will] survive a balancing of the equities.’”
Dechert recently published its annual “Dechert Antitrust Merger Investigation Timing Tracker” (DAMITT) report on the timing of significant merger investigations, and its bottom line is that deals subject to significant merger investigations continue to face an elevated risk of being blocked or abandoned in both the US & the EU – even if a relatively small number deals receive that level of scrutiny. Here are some of the key takeaways:
United States
– 60% of significant investigations concluded with a complaint or abandoned transaction in 2022. This shatters last year’s record of 37%. The 10 complaints filed in 2022 are also a DAMITT record. Those are strong headwinds for dealmakers heading into 2023.
– Only two significant merger investigations concluded in Q4 2022, making the 20 concluded in 2022 the lowest in DAMITT history. DOJ did not conclude any investigations in Q4.
– The overall intervention rate remains low. Just around 0.5% of transactions notified in 2021 had resulted in a concluded investigation as of the end of 2022.
– The average duration of significant investigations ticked up to 11.8 months, just shy of the 11.9-month DAMITT record set in 2019. The Q4 average was 15.4 months but it is based on just two concluded FTC investigations. Still, the risk of a prolonged investigation has grown, especially over the last year.
European Union
– 33% of all significant investigations were blocked by the EC or abandoned by the parties in 2022, with only 25% of deals obtaining clearance after a Phase II investigation.
– The number of significant investigations concluded by the EC is slowly picking up, but the number of Phase I remedy cases remains 30 percent below the 2016-2021 average.
– Intervention rates increased in the EU, with 4.9% of notified transactions resulting in a significant investigation in 2022. They are not yet back to pre-pandemic levels, though.
– The average duration of Phase II investigations concluded in 2022 was 18.4 months, nearly one month shorter than in 2021, while average duration of Phase I remedy cases dropped by two months to 8.3 months. New DAMITT data however show that nearly 30% of Phase I remedy and Phase II cases have lasted more than 10 and 18 months, respectively.
The report concludes that parties to significant deals in the US & EU should prepare for a long slog with antitrust regulators. In the US, they should plan on at least 12 months for the agencies’ investigation of their proposed deal and another nine to 10 months to litigate an adverse decision. In the EU, parties should be prepared for an even longer siege – at least 20 months – if their deals proceed to Phase II investigations.
Katten’s recent “2023 Middle Market Private Equity Report” provides plenty of insights into how PE firms view the challenges and opportunities middle-market deals will face this year. Here’s an excerpt from the intro:
Middle-market private equity (PE) firms have mixed expectations for the U.S. mergers and acquisitions (M&A) market in 2023, citing high inflation and concern that interest rates will keep climbing—but dealmakers are maintaining cautious optimism in key sectors. Though many investors expect to make additional acquisitions, some are bracing for a challenging regulatory environment, while others are prioritizing alternative deal types to mitigate impacts from macroeconomic volatility.
That split outlook is reflected in this report, which is based on a survey of 100 U.S. middle-market PE dealmakers engaged in a diverse array of industries, including financial services, education, health care, insurance, manufacturing and industrial, media and entertainment, real estate and technology. Nearly three-quarters of investors expect deal activity in 2023 to either remain at the same level as last year or increase (40 percent and 33 percent, respectively), while over a quarter (26 percent) expect a slowdown.
The amount of dry powder that PE firms have on hand could be driving this disconnect—especially as an overheated economy, domestic policymaking and geopolitical tensions come to a boil. With debt markets tightening and financing harder to procure, liquidity has become crucial to snapping up deals. Though some dealmakers have struggled, others have taken advantage of lower valuations to expand on investments in technology and finance.
With the darkening clouds of a potential recession on the horizon—and a clearer picture of what a post-COVID-19 economy will look like—it should come as no surprise that while the majority of market players don’t anticipate a deal slowdown in 2023, they are not overwhelmingly bullish either.
The report also addresses dealmakers’ assessment of M&A opportunities in various industry sectors and notes how deal practices, such as due diligence and financing structures, are evolving to address current market conditions.
Last month, in SMART Local Unions and Councils Pension Fund v. BridgeBio Pharma, (Del. Ch.; 12/22) the Chancery Court dismissed breach of fiduciary duty allegations against a controlling stockholder and certain directors of the target in connection with a take-private transaction, despite the target’s receipt of higher competing offers from an unaffiliated third party. Instead, Vice Chancellor Fioravanti held that the transaction satisfied the MFW standard and dismissed the plaintiffs’ complaint.
The case arose out of a 2021 merger in which BridgeBio Pharma, which owned 63% of the stock of Eidos Therapeutics, acquired the remaining 37% of Eidos’s common stock in a merger. Under the terms of the merger agreement, Eidos stockholders had the right to elect to receive either 1.85 shares of BridgeBio common stock or $73.26 in cash for each share of their Eidos common stock. The definitive merger agreement was entered into in October 2020 was the result of a process which saw Eidos’s special committee successfully negotiate significant increases in the consideration to be paid by BridgeBio.
Subsequently, GlaxoSmithKline made a proposal to acquire Eidos for $120 per share in cash. The Eidos board concluded that this could lead to a “superior proposal,” and exercised its right under the agreement to negotiate with Glaxo. However, BridgeBio had previously indicated that it was not interested in selling its stake in the company and reiterated this in response to this proposal. Ultimately, Glaxo withdrew from the process and the take-private transaction with BridgeBio was approved by 80% of the minority stockholders.
Prior to entering into the transaction, BridgeBio made an aborted attempt to acquire Eidos in August 2019, and renewed that effort in August 2020. Each of BridgeBio’s acquisition proposals was conditioned upon approval of a deal by a majority of the minority stockholders, and Eidos formed a special committee to evaluate the 2020 proposal. The plaintiffs did not challenge the deal’s compliance with these MFW conditions. Instead, they contended that MFW should not apply where the target has received a clearly superior proposal from an unaffiliated third party. Vice Chancellor Fioravanti rejected those arguments, and this excerpt from Dechert’s memo on the decision summarizes his reasoning:
The Court rejected plaintiff’s threshold argument that the Merger was not subject to MFW protection because GSK made an offer for the minority shares that was substantially higher than the consideration offered by BridgeBio and BridgeBio rejected it. The Court reasoned that, under Delaware law, a controlling stockholder is not required to accept a third-party sale or to give up its control, and MFW itself approved a transaction where the controller was explicit that it would not sell its shares to a third party.
The Vice Chancellor also rejected the plaintiff’s arguments that the special committee wasn’t properly empowered and that the vote of the minority stockholders was coerced. He also rejected challenges to several proxy disclosures. Interestingly, one of these was the common practice of not identifying a competing bidder by name in the proxy statement.
In BridgeBio’s Form S-4, Glaxo was identified as “Company C.” The Vice Chancellor noted that Company C was described as being a “large international pharmaceuticals company” and that the special committee concluded that its proposals were superior to BridgeBio’s, and concluded that this was sufficient for stockholders to conclude that Glaxo’s offers were bona fide.
What’s going to drive M&A activity in 2023? Willis Towers Watson thinks the answer lies in four macroeconomic trends – the quest for digital transformation, rising interest rates & economic instability, opportunities created by supply chain disruption, and the “mainstreaming” of ESG in M&A. This excerpt from WTW’s recent report on these trends addresses supply chain opportunities:
Supply chain chaos became acute in 2020 as many industries were hamstrung by a need for more access to parts and products from other regions, namely China. The disruption caused to manufacturing and technology has been a game-changer. The need to get products closer, faster and cheaper to market makes potential sellers “in country” far more attractive.
These disruptions to supply chains are likely to be long-term issues continuing well into 2023, and companies will look to M&A transactions to boost their operational resilience. To maintain efficient, cost-effective operations and to equip themselves for disruptions due to unexpected external forces, businesses will focus on reinventing their supply chain networks with onshoring and sourcing suppliers closer to production facilities.
The report offers an upbeat conclusion – while M&A flourishes in confident markets, there are also opportunities during downturns. As the markets adjust to continuing instability, potentially higher interest rates and inflation, M&A will remain a priority on the boardroom agenda and dealmakers with technology needs and a sound deal justification will find plenty of opportunity.
Earlier this week, the FTC announced the new thresholds for HSR filings. This excerpt from Fenwick’s memo on the new thresholds has the details:
Size of Transaction Threshold. Under the new thresholds, the parties to a merger, consolidation, or acquisition of voting securities or substantial assets will, in most cases, need to file pre-acquisition notifications with the FTC and the DOJ and observe the HSR Act’s waiting periods before closing if the transaction will result in either of the following:
– The acquiring person will hold more than $111.4 million worth of voting securities and assets of the acquired person and the parties meet the “size of person” requirements below; or
– Regardless of the parties’ sizes, the acquiring person will hold more than $445.5 million worth of voting securities and assets of the acquired person (size of person test is not applicable).
Size of Person Threshold. Meeting any one of the following three subtests satisfies the size of person test:
– A person with $222.7 million or more of total assets (on its most recent regularly prepared balance sheet) or annual net sales (from its most recently completed fiscal year) proposes to acquire voting securities or assets of a person engaged in manufacturing (note that software is not considered manufacturing) with $22.3 million or more of annual net sales or total assets; or
– A person with $222.7 million or more of total assets or annual net sales proposes to acquire voting securities or assets of a person not engaged in manufacturing with $22.3 million or more of total assets (net sales test does not apply); or
– A person with $22.3 million or more of total assets or annual net sales proposes to acquire voting securities or assets of a person with $222.7 million or more of annual net sales or total assets.
The new thresholds and filing fees will take effect on February 24, 2023 (30 days after publication in the Federal Register).
Just about a year ago, the FTC & DOJ announced that they were considering ways to modernize the federal merger guidelines “to better detect and prevent illegal, anticompetitive deals in today’s modern markets. This McDermott memo says that we should expect to see the new guidelines issued soon:
On January 18, 2022, The FTC and the DOJ launched a joint public inquiry soliciting input on ways to modernize the federal merger guidelines. The federal enforcement agencies voiced concerns over increased market concentration across many industries. The issues of interest involve reevaluating the agencies’ positions on the types of transactions that should be viewed as presumptively anticompetitive, market definition, so-called “nascent” competition, buyer-side monopsony power (with an acute focus on labor markets) and digital (i.e., “tech”) markets. The new merger guidelines, expected to be released in Q1 of 2023, will likely be a major overhaul of the prior guidelines and empower the agencies to bring enforcement actions in line with theories applied in recent investigations and merger challenges.
So, the FTC & DOJ plan to bake new enforcement theories that have largely received a cold shoulder from the federal courts into their revamped merger guidelines? Well, in the immortal words of Pepper Brooks, “it’s a bold strategy Cotton, let’s see if it pays off for them.”