Last year, I blogged about Vice Chancellor Glasscock’s letter ruling in Manti Holdings v. Authentix Acquisition, (Del. Ch.; 10/18) upholding a contractual waiver of appraisal rights. In response to a motion for reargument, the Vice Chancellor issued new opinion in the case fleshing out his position and clarifying the circumstances under which waivers of appraisal rights would be permissible under Delaware law.
VC Glasscock’s prior opinion focused primarily on the language of a contractual “drag right” that obligated the shareholder-parties to refrain from exercising appraisal rights. It did not address the predicate issue of “whether a stockholder can, via contract, validly waive her appraisal rights to begin with.”
The Vice Chancellor addressed that issue head-on in this opinion and reaffirmed his conclusion that shareholders could – at least sometimes – lawfully waive appraisal rights. Here’s an excerpt from Steve Quinlivan’s recent blog on the case outlining the key factors supporting that conclusion:
– The stockholders agreement was not a contract of adhesion. Sophisticated parties were involved and were represented by counsel, and counsel exchanged drafts of the proposed stockholders agreement before agreeing to a final contract.
– There is no record evidence that the petitioners were not fully informed.
– The Delaware General Corporation Law, or the DGCL, does not explicitly prohibit contractual modification or waiver of appraisal rights, nor does it require a party to exercise its statutory appraisal rights. Thus, such modification or waiver serves to supplement the DGCL, and is not inconsistent with, nor contrary to, the DGCL.
– The stockholders agreement clearly and unambiguously waived appraisal rights.
– The Court did not decide whether a waiver of appraisal would be upheld in other circumstances.
Bay Capital was a disappointed suitor that had twice made unsolicited proposals to buy Barnes & Noble Education. So, it decided to submit a slate of director nominees for a potential proxy contest. Under the terms of the company’s advance notice bylaw, director nominations had to be submitted between 120 and 90 days prior to the anniversary of the prior year’s annual meeting, and could only be submitted by holders of record. Bay Capital wasn’t a record holder when it submitted its slate, and the company rejected its nominees.
Bay Capital filed a lawsuit challenging the bylaw provision. Vice Chancellor McCormick shot that down in short order – and this excerpt from the memo suggests that Bay Capital wasn’t exactly a sympathetic plaintiff:
On June 27, 2019, the last day to submit director nominations for the 2019 annual meeting of stockholder, Bay Capital noticed the nomination of a slate of director candidates. Although the notice was timely, as of June 27 Bay Capital was just a beneficial owner of BNED stock and not a record holder. BNED’s Board of Directors therefore rejected the notice as invalid. Two weeks later, Bay Capital filed a complaint in Delaware Court of Chancery seeking injunctive relief to run its slate of directors at the upcoming annual meeting of stockholders.
The Court found that despite being reminded no fewer than four times by its advisor of the record holder requirement set forth in the BNED bylaws, Bay Capital did not acquire shares until three days before the nomination deadline. And when the shares were acquired, it was done through a broker such that there was not sufficient time to get the shares transferred in Bay Capital’s record name.
The Court dismissed various arguments advanced by Bay Capital in seeking an injunction, including a purported ambiguity in the BNED bylaws as to the need for the nominating stockholder to be a holder of record at the time it delivered the notice of nomination.
The facts of the case weren’t great for Bay Capital, but it seems to have made things worse for itself with its conduct during the lawsuit. First, the transcript notes that shortly after requesting expedited proceedings, Bay Capital objected to the hearing date because it interfered with its managing partner’s travel schedule. Then, its managing partner threw gasoline on the fire with his deposition antics. Here’s what the Vice Chancellor had to say about those:
As I stated earlier, the conduct was not optimal. After making defense counsel fly to London to depose him, Mr. Suri showed up a half hour late, left in the middle of the deposition for over two and a half hours to attend personal appointments scheduled that same day, and then unilaterally terminated the deposition when it suited him. He was evasive and obstructive in his responses,ultimately going as far as to say that the deposition was an “accommodation” to the defendants. This, of course, ignores the fact that it was Mr. Suri who instigated this lawsuit and requested expedition in the first place.
VC McCormick went on to note that although she hadn’t been asked to address whether this deposition conduct warrants fee shifting, that remains “an open issue.” It amazes me that people continue to act like this in Chancery Court depositions, particularly since the Delaware Supreme Court has so recently made it clear that not only it isn’t going to tolerate deposition shenanigans, but that it’s going to call out the deponent’s counsel for allowing them to occur.
This Jenner & Block memo discusses a recent comment letter submitted to the FTC by 18 state AGs. The letter argues for greater emphasis on labor and workforce issues in antitrust investigations. In addition to expressing concern about “no-poaching” & non-compete agreements, the letter addresses the merger review process. It argues that antitrust regulators should scrutinize a deal’s potential impact on the labor market as well as on consumers. This excerpt from the memo summarizes the state AGs’ position:
As to mergers, the signatories argue that antitrust scrutiny should be applied to merger activity not only with respect to the effects on the end consumer, but also to the effects on the entities that themselves are consumers in the labor market (i.e., employers).
The signatories note that mergers involving entities that do not compete in downstream product or service markets nevertheless might compete for labor, and their consolidation could drive down competition and demand for workers, not all that unlike the effects of a horizontal no-poaching agreement. While the attorneys general do not purport to identify a clear solution or recommendation for how to address mergers, they make clear that current approaches to evaluating merger activity do not adequately take all relevant factors into consideration.
Nearly a third of U.S. states & half the population are represented by the signatories to the letter, and while its impact on federal antitrust regulation remains to be seen, the memo points out that the letter makes it clear that “many state enforcers are acutely interested in trying to regulate a wide variety of business activities and practices on workers.”
Here’s something that Alan Dye recently posted on his Section16.net Blog:
A judge in the Northern District of California has dismissed a complaint filed against Elon Musk and other Tesla insiders which alleged that their acquisition of Tesla common stock in Tesla’s reverse triangular merger with SolarCity was not a transaction with “the issuer” and therefore was not eligible for exemption under Rule 16b-3(d), making the insiders’ acquisitions matchable with their sales of Tesla stock within less than six months.
The plaintiffs in the case are John Olagues and Ray Wollney, who are part of the group that has been challenging (unsuccessfully, so far) the availability of Rule 16b-3(e) to exempt elective tax withholding transactions under equity compensation plans. The defendants are insiders of Tesla who were stockholders of SolarCity when SolarCity merged with a wholly owned subsidiary of Tesla, with SolarCity surviving the merger. The merger was approved by Tesla’s board of directors and by Tesla’s shareholders following a proxy solicitation. The merger closed four days after the shareholder vote, and the defendants reported their receipt of Tesla stock on Form 4, using transaction code “A” and stating in a footnote that the acquisitions were exempt under Rule 16b-3.
The plaintiffs argued that the defendants’ acquisition didn’t occur at closing, but instead occurred when shareholders approved the merger, giving the defendants a “right to receive” stock in the merger. That acquisition, the plaintiffs’ argued, was a transaction with the subsidiary, not Tesla, and therefore was not eligible for exemption under Rule 16b-3. The plaintiffs also argued that, even if the acquisition occurred at closing, the merger was with a subsidiary and therefore still didn’t involve a transaction with the issuer.
The court rejected both arguments, holding that, regardless of when the acquisitions occurred, they involved a direct issuance of stock by Tesla and therefore were with “the issuer.” The court also said that, even if the transaction were deemed to be with the non-surviving merger subsidiary, the SEC staff said in a 1999 interpretive letter to the American Bar Association that a transaction with a majority owned subsidiary is a transaction with the issuer for purposes of Rule 16b-3. While a staff interpretive letter isn’t binding on a court, the court said it found the staff’s position “persuasive.”
In late June, the FTC blogged some guidance about compliance issues arising under Section 8 of the Clayton Act, which prohibits an individual from serving as an officer or director of two competing companies. This prohibition on interlocking directorates isn’t an antitrust issue that’s usually front & center in the M&A context, but this excerpt from the guidance makes it clear that it sometimes needs to be:
Section 8 is a strict liability provision, meaning violations are per se and do not depend on actual harm to competition. It prohibits not only a person from acting as officer or director of two competitors, but also any one firm from appointing two different people to sit as its agents as officers or directors of competing companies, subject to a few limited de minimis exemptions. Here are two transaction scenarios that require extra mindfulness to ensure compliance with Section 8.
– Mergers or acquisitions can implicate Section 8 when a company is acquiring or merging into a new business line. The new business line may create an interlock if there are members of the acquiring or surviving board that also sit on the boards or serve as officers of a now-competing company. Private equity firms that acquire board seats across a diverse portfolio of companies may be particularly likely to encounter Section 8 issues via a merger or acquisition.
– Spin-offs can pose Section 8 problems where an officer or director retains roles with both the parent and the newly independent firm, if those two companies will compete in a line of business going forward.
The good news is that there is a one year grace period for the individual to resign from one of the positions creating the interlock – but even during this grace period, the individual can’t use the position for anti-competitive ends.
A seller’s management team generally plays a prominent role in the sale process and in the negotiation of the purchase agreement, despite the fact that their interests may conflict with those of the seller’s shareholders. But if they can make out a claim that those conflicts weren’t fully disclosed, then plaintiffs may have something to hang their hats on when challenging the deal.
Towers Watson & Co. and Willis Group Holdings plc, two similar professional services firms, planned merger of equals, with: (i) the Towers CEO, John K. Haley designated as the CEO of the combined entity; (ii) the Willis shareholders owning a slight majority of the combined entity; and (iii) Willis paying a dividend to the Towers shareholders to account for the relative market value of the entities.
Haley led the negotiations for Towers. The merger’s initial structure included a dividend below $5.00 per share to the Towers shareholders, information that was not well received by the market. Following announcement, Haley met with a key Willis executive and discussed his possible compensation scenarios, a discussion he never disclosed to the Towers board. In light of the negative reactions, Towers and Willis eventually renegotiated the merger’s terms. The dividend amount to Towers shareholders was increased to $10 per share, which Haley had allegedly indicated was the “minimum increase necessary” to get the deal done.
The plaintiffs sued the board & the CEO for breach of fiduciary duty. In an effort to rebut the business judgment rule, they pointed to the CEO’s non-disclosure of the post-closing comp negotiations to the Towers’ board. The plaintiffs alleged that the CEO’s potential post-closing compensation improperly incentivized him to seek nothing more than the bare minimum required to get the deal done – and that the undisclosed information about his comp discussions was therefore material to the Towers’ directors. The blog says under the circumstances of this case, the Chancery Court didn’t buy that argument:
While alleged fraud on a board by a conflicted fiduciary can rebut the business judgment rule, the Court cited three facts, alleged or inferred, which foreclosed an inference that the Towers board would have found the undisclosed compensation proposal significant.
First, the board knew Haley would likely receive a larger salary when running the combined entity, and so was fully informed of the conflict and the risk when appointing him as lead negotiator. Second, the board was generally kept apprised of the negotiations. Third, the compensation discussion in question concerned a mere proposal, and the actual compensation was not negotiated until after the merger closed.
Plaintiffs’ allegations therefore did not trigger entire fairness review and otherwise did not state a non-exculpated claim for bad faith in connection with the board’s delegation and oversight of negotiating responsibility to Haley.
Most deal lawyers advise clients to push discussions of post-closing employment and compensation to late in the negotiation process – ideally, after all valuation issues have been resolved. That seems to have happened here, but the re-opening of pricing negotiations made the timing and content of those discussions potentially problematic. Notwithstanding its outcome, one of the takeaways from this case is that no matter when these discussions occur, the most prudent course of action is to make sure that the board is fully apprised of them.
This HBR article addresses a new study that confirms what a lot of people already thought – if you’re going to do well in mergers and acquisitions, you need a visionary, upbeat CEO partnered with a CFO who’s always prepared to throw a bucket of cold water on the CEO’s fever dreams. Here’s an excerpt:
Why optimism and pessimism? Because they are cognitive characteristics that affect how you think and how you act. Optimists tend to focus on positive, goal-facilitating information, and discount unwanted facts. Pessimists are more sensitive to negative, goal-inhibiting information; they are more critical and vigilant in their efforts to avoid potential disasters.
The two traits have been shown to be aligned with the roles of CEO and CFO. CEOs are expected to be more optimistic and open to risks. The upbeat, visionary, public-facing CEO is by now a standard specification across industries. Satya Nadella, Jack Ma, and Mary Barra are just a few of the flag-bearers. Companies can’t engineer or sustain an upward trajectory with a leader who shies away from risks or who can’t see beyond the medium term.
But to parlay optimistic vision into healthy post-M&A return on assets (ROA) also requires a dash of pessimism. And that has to come from the CFO, whose job it is to scrutinize target firms, conduct in-depth due diligence, and pinpoint potential risks of any M&A. They are expected to be cautious and attuned to adverse conditions – basically, a gatekeeper who brings the high-flying CEO down to earth.
The study says that firms in which both the CEO & CFO are gung-ho on M&A do more acquisitions because optimistic CEOs don’t pay as much attention to risks associated with acquisitions in the absence of pessimistic CFOs – and it also says that these acquisitions don’t perform as well as those involving more downbeat CFOs.
The indemnification provisions contained in most acquisition agreements require any notice of a potential indemnity claim to lay out its factual basis in reasonable detail. Smart buyers are pretty meticulous when it comes to the language of any such notice, because they know that sellers are going to flyspeck that notice in an effort to find deficiencies & avoid potential indemnity obligations.
In Horton v. Organogenesis, (Del. Ch.; 7/19), the Delaware Chancery Court was called upon to interpret the requirements of a contractual notice provision. Here’s an except from this Morris James blog describing the notice requirement and the buyer’s approach to it:
In Horton, the seller agreed that indemnification claims would survive if the buyer provided by June 24, 2018 written notice “stating in sufficient detail the nature of, and factual and legal basis for, any such claim for indemnification” and an estimate and calculation of the amount of Losses, if known, resulting therefrom. The buyer timely sent a notice of indemnification with one-paragraph descriptions of the factual and legal basis of each of its five claims, which it said “may involve breaches of representations and warranties in the Merger Agreement.”
The plaintiffs challenged the adequacy of the notice because it failed to reference the specific sections of the merger agreement that were breached. The blog says that the Court rejected that argument:
The Court found the buyer’s one-paragraph descriptions sufficient even though the buyer did not specify the specific sections of the merger agreement it claimed were breached. This was because “sellers are charged with knowledge of their representations and warranties in the Merger Agreement.”
The buyer’s victory wasn’t complete, however – portions of its complaint seeking indemnity for pending litigation were dismissed as unripe, because the buyer did not allege that it had as yet suffered any “Losses” from that litigation as defined in the merger agreement.
Earlier this week, in Tiger v. Boast Apparel, (Del.; 8/19), the Delaware Supreme Court rejected contentions that a presumption of confidentiality should apply to materials produced in response to a Section 220 books & records request. Here’s the intro from this Proskauer blog:
The Delaware Supreme Court yesterday rejected a presumption of confidentiality for documents produced pursuant to books-and-records inspection requests under § 220 of the Delaware General Corporation Law. The decision holds that courts can impose confidentiality restrictions in appropriate cases, but that some justification of confidentiality is necessary – and that an indefinite period of confidentiality should be the exception, not the rule.
In light of the emphasis that the Delaware Supreme Court has placed on § 220 requests particularly in the context of shareholder derivative actions, parties making and receiving those requests might now need to focus more closely on whether and the extent to which confidentiality restrictions can be justified and, if so, how long they should last.
The blog says that indefinite confidentiality agreements for information produced in response to a Section 220 request now appear to be disfavored in Delaware, and that the case will likely result in more attention being paid to both the need for and the duration of any confidentiality agreement. It also says that future cases may address the extent to which parties may be restricted from discussing potential derivative claims based on such information with other shareholders.