Earlier this week, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is intended to reduce the regulatory burdens imposed on financial institutions under Dodd-Frank. President Trump is expected to sign the legislation by Memorial Day. Although the legislation makes a number of changes to existing law, its most significant change is the increase in the threshold for designation of an entity as a “systemically important financial institution” (SIFI) from $50 billion to $250 billion in assets.
Financial institutions falling within the SIFI classification face particularly burdensome regulation, and this Wachtell memo says that the change in the SIFI threshold may result in a big upswing in financial institutions M&A. Here’s an excerpt:
The $50 billion threshold has been a powerful deterrent to bank M&A. Since the passage of Dodd-Frank in 2010, only one bank holding company has crossed the $50 billion threshold as a result of an acquisition – CIT through its acquisition of OneWest in 2015. As a practical matter, the $50 billion threshold even deterred mergers where the combined company would exceed $40 billion as the company would then have to demonstrate to its regulators its readiness to cross the $50 billion threshold. For banks above the $50 billion threshold, the complexity and uncertainties of the CCAR stress test also discouraged acquisitions.
The memo notes that the legislation comes at a time when other factors encouraging bank M&A are falling into place. These include a gradual easing of the regulatory environment by new leadership at the regulatory agencies, growing confidence that deals will receive regulatory approval, increasing competition for deposits & millenials’ preference for larger banks. All of these factors point to a significant increase in bank M&A.
This “Pensions & Investments” article says that CalSTRS can’t find any private equity funds that will take its money. This excerpt says the problem is California’s transparency legislation:
New transparency requirements and a seller’s market for private equity investments are putting California public pension funds at a disadvantage when seeking to invest.
CalSTRS and the Los Angeles Fire & Police Pension Plan are just two of the asset owners whose general partners have declined to accept their commitments, citing the state’s new law. The law requires all public pension plans in the state to obtain information about private fund fees and expenses, and to make that information public.
“We’ve lost three opportunities,” said Christopher J. Ailman, chief investment officer of the $222.5 billion California State Teachers’ Retirement System, West Sacramento, in an interview.
The situation is being aggravated by the enormous amount of money chasing the asset class, as investors look to alternative investments to produce returns not expected to be delivered by traditional asset classes.
California enacted legislation in 2016 mandating that California public investment funds disclose detailed information about the fees and expenses associated with investments in private equity, venture & hedge funds. At the time, some expressed concern about the impact the new disclosure requirements would have on California funds’ ability to access alternative investments. It appears that they had good reason to be worried.
This Shearman & Sterling memo notes that the proposed 2018 DGCL amendments would eliminate appraisal rights for 2-step stock-for-stock deals structured in conformity with Section 251(h). This excerpt explains that the amendment would accomplish this by extending Delaware’s “market out” to stock-for-stock exchange offers:
Delaware law does not provide dissenting shareholders with appraisal rights in transactions that are effected pursuant to a “long-form” merger (in which the target company calls a special meeting for purposes of obtaining shareholder approval), so long as the consideration paid to the target’s shareholders consists solely of stock that is listed on a national securities exchange or is held by more than 2,000 holders. This is the “market out” exception.
However, as currently written, Delaware law does not extend the “market out” exception to two-step mergers effected pursuant to §251(h), in which the target company is acquired without the need for a stockholder vote following a tender offer.
A proposed amendment to the DGCL on March 20, 2018 is designed to eliminate this inconsistency. Under the proposed amendments, the same “market out” exception that applies to long-form mergers would apply to short form mergers effected pursuant to §251(h) – i.e., in stock-for-stock deals.
It is very uncommon for stock-for-stock deals to be structured as 2-step transactions, and the memo speculates that the availability of appraisal rights may be one of the reasons. Plenty of impediments would nevertheless remain, including the need to register the shares to be issued & the delays associated with SEC review. Still, the memo suggests that the amendment could increase the utility of Section 251(h) in these transactions.
Last week, Chancellor Bouchard issued a letter ruling in CBS v. National Amusements, (Del. Ch.; 5/18), denying CBS’ efforts to enjoin the Redstone family, its controlling shareholder, from interfering with the board’s consideration of a dividend that would deprive them of voting control over the Company. This Morris James blog summarizes the Chancellor’s ruling. Here’s an excerpt:
In this letter decision, the Court declined to restrain the Redstones at this time. While plaintiffs had shown a colorable claim for breach of fiduciary duty, they failed to show threatened, imminent irreparable injury absent the restraints. Rather, the Court relied on its extensive power to provide redress if the Redstones ultimately decided to take some action inconsistent with a controlling stockholder’s fiduciary obligations with respect to the dividend plan. Also notable is the Court’s balancing of the equities and its discussion of the apparent tension in Delaware law between a controlling stockholder’s right to protect its control position and the right of independent directors to respond to the threats posed by a controller, including through possible dilution.
If you’re looking for a deep dive on the case, check out this blog from Prof. Ann Lipton.
As part of the brawl over the now-abandoned Xerox/Fuji deal, a New York Court enjoined Xerox from using its advance notice bylaw deadline to thwart shareholder Dawin Deason’s efforts to run a competing slate of directors at the company’s annual meeting. Now this Kirkland & Ellis memo says that the Court’s decision may have significant implications for other companies dealing with activist campaigns. Here’s what they’re concerned about:
Relying on a 1991 Delaware Chancery Court decision, the New York court ordered Xerox to waive the advance notice deadline on the basis that a waiver is appropriate “when there is a material change in circumstances” after the nomination window closes. The court concluded that the board’s refusal to waive the nomination deadline “was without justification,” and that the directors “likely breached their fiduciary duty of loyalty” in doing so.
This decision requires attention from boards and transaction planners. Opportunistic activist shareholders or even hostile bidders may start searching for events after a company’s nomination deadline that could be argued to be material as a means to force a re-opening of the nomination window. While the decision in this case was undoubtedly colored by the court’s broader decision relating to the Fuji transaction itself (it also issued a highly unusual preliminary injunction blocking the deal) and the Delaware case that the New York court cited has always been understood to involve extremely narrow situations, companies should consider the intersection of timelines for nomination deadlines, annual meeting dates and significant corporate announcements.
The cased relied upon in the New York decision is Hubbard v. Hollywood Park Realty Enterprises (Del. Ch.; 1/91). However, as the memo notes, the ability to use a change in circumstances to pry open a nomination deadline that had passed was intended to apply in very limited situations. In that regard, Broc blogged a few years ago about a more recent Delaware decision holding that only a “radical shift in position, caused by the directors,” will allow the nomination deadline to be disregarded.
Most companies have the need for an HSR filing on their checklist whenever they have a sizeable M&A transaction on the horizon. But the FTC recently posted guidance on its blog reminding companies that conventional purchase transactions aren’t the only ones that may give rise to an HSR reporting obligation. This excerpt provides some examples of other transactions that may trigger a filing:
Exchange of one type of interest in a company for another – Acquisition of some kinds of interests in companies are reportable, while others are not. If you exchange one type of interest for another, that acquisition may be subject to HSR reporting and waiting requirements even though you’re exchanging one interest for another in the same company. For example, in 2013 Berkshire Hathaway exchanged convertible notes of USG Corporation for voting securities of USG Corporation. Even though both interests were in the same company, the conversion required an HSR filing. But Berkshire Hathaway’s compliance program missed it, and Berkshire Hathaway paid a civil penalty for the violation.
Backside acquisitions – When one corporation buys another, consideration often comes in the form of voting securities of the buyer. For example, Corporation A may buy Corporation B for cash and a certain number of shares in Corporation A. The payment of Company A shares to the target’s shareholders is known as a “backside transaction.” If you hold shares of company B and will end up holding shares of A as part of a backside transaction, you may have to file and observe the waiting period before acquiring these new shares.
Consolidations and acquisition of shares in Newco – In a Consolidation, when Corporation A and Corporation B combine under a Newco that will be its own ultimate parent entity, the shareholders of A and B may receive voting securities of Newco in exchange for their shares in A or B. Similar to backside transactions, if you are going to receive shares of Newco, you may have to file for the acquisition even though no money changed hands and you took no direct action to cause the acquisition or to exchange the shares.
The blog also notes that internal reorganization transactions and compensation awards may trigger HSR filings, and reminds companies to take these situations into account in designing their compliance programs.
Shareholder activism in the U.S. & Europe has been a growth industry for at least a decade – and this Bloomberg article says that in recent years, companies in Asia have attracted increasing attention from activists as well. This excerpt says that Asian companies should be on high alert:
Activists, both homegrown and American, are coming after bloated balance sheets and family-controlled firms, and succeeding more often than hitherto in forcing through higher dividends and board changes.
Whether it’s because the Japanese and South Korean governments want their companies to respect minority investors’ interests, or because the activists themselves have adopted a less abrasive style, Asia is a hunting ground like never before. Last year, 31 percent of total involvement by activists outside the U.S. was in the region, up from just 12 percent in 2011, according to a report by JPMorgan Chase & Co.
In addition to big U.S. names like Elliott Management & Third Point, Asia-based activists such as Japan’s Sparx Group Co. & Hong Kong’s Oasis Management Co. and PAG Asia Capital have gotten into the game in a big way. According to this recent J.P. Morgan report, activist campaigns in Asia accounted for 31% of total non–U.S. activism activity in 2017 – that’s up from only 11% in 2011. Campaign volume has grown at a compound annual growth rate of 48%, & in 2017, 4 of the 10 most targeted non–U.S. countries were in Asia.
Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Cleary Gottlieb’s Glenn McGrory, Sullivan & Cromwell’s Melissa Sawyer and Haynes and Boone’s Kristina Trauger share M&A “war stories” designed to both educate and entertain. The stories include:
1. Let It Go – how sometimes when you can’t seem to repair a deal after a lot of effort, maybe helping the client be disciplined and walk away actually is the right outcome
2. Déjà Vu, All Over Again – the central truth about the high-yield debt market: companies often plan to merely dip their toes in the debt market only to find, over time, that they have plunged deeper than expected
3. Knowing What the Other Side Doesn’t Know – how a seller figured out what an inexperienced buyer didn’t understand about financing and how it almost killed but ultimately saved the deal.
4. Just the Facts – how sometimes issues that seem like major obstacles in a deal can be resolved dispassionately just by taking a deeper dive into the facts and narrowing the field of the unknown
5. End Goal in Mind – for any type of deal, keep in mind the client’s ultimate objective
6. When Timing Matters, So Does Trust– how last minute issues can scupper deal announcements – and how trust between deal teams can facilitate quick solutions to allow the deals to proceed
7. Dealmakers are Architects in Four Dimensions – how solutions to complex issues in deals require non-linear, creative thinking under pressure
8. Expect the Unexpected – it’s common for clients to imagine a transaction playing out in a certain manner, only to have market conditions steer them in a new direction. So it’s vital for deal lawyers to stay nimble and be ready to quickly pivot, as needed
9. They’ll Never Be the Winner – the hazards of trying to figure out (and plan for) who you think will win an auction, only to have an unexpected contender (and its own particular issues) prevail
10. The Secret’s Not Out– the extreme measures parties take to protect the confidentiality of secret formulae in consumer product transactions
This recent Prof. Bainbridge blog points out a new article that asks an intriguing question – “Is Satan a Transactions Attorney?” The article reviews Old Nick’s deal making activities as recounted throughout Western literature. This excerpt claims that he got his start in the deal business tempting Christ in the desert:
Christ’s temptation in the desert is a turning point in the way Satan deals with human beings. In the cases of Saint Theophilus of Adana, Doctor Faustus, and their scions, the individual is no longer Satan’s victim, but party to a contract with him and complicit with the evil he oversees. Indeed, the medieval and early-modern drive to purge European society of witchcraft is but a perverse recognition of the complicity of individuals with evil. No longer a tormenter exclusively, Satan has become a negotiator, a former of contracts, a transactions attorney.
So, is the Devil a deal lawyer? If he was, it probably wouldn’t be a huge surprise. I think most lawyers would agree that they’ve worked on more than a few deals with somebody who reminded them of The Prince of Darkness.
I’m not sure I agree with a New Testament start date for Lucifer’s career as a dealmaker – although my guess is that he started off in the Old Testament as an investment banker. After all, doesn’t telling Eve that if she & Adam eat of the fruit of the tree, “ye shall be as gods,” sounds very similar to the kind of stuff you hear in bankers’ pitches?
This recent Cooley blog offers tips for addressing employment law issues when navigating acquisitions involving European buyers or sellers. This excerpt deals with issues surrounding reductions in force:
If a reduction in force is being contemplated in the EU (where it will often be referred to as “redundancy”), then that will trigger discrete information and consultation requirements. For example, redundancies in Germany require compelling operational reasons and the application of social selection criteria to potentially at-risk employees. If there is a works council in place, then that can potentially make the process slow and difficult.
Also, redundancy consultation processes in the EU often increase in scope and complexity as the number of employees at risk of redundancy increases. For example, if there is a proposal to dismiss as redundant 20 or more employees in the UK, then that will trigger collective redundancy consultation requirements including the election of employee representatives and a consultation period lasting at least 30 days before any dismissals can take place. It is not always possible to avoid redundancy consultation requirements by simply buying-out the risk (i.e., paying employees in lieu of a period of consultation), so preparation and timing is key.
Other topics addressed include the rights of employee representative organizations, implications of the EU’s Acquired Rights Directive for different transaction structures, employment contracts & protections against termination.