Last week, in Roberta Ann K.W. Wong Leung Revocable Trust U/A Dated 03/09/2018 v. Amazon.com,Inc. (Del. Ch.; 10/24), the Delaware Court of Chancery addressed a broad stockholder 220 demand seeking to inspect wide-ranging corporate and business records of Amazon following government allegations of antitrust violations. The opinion notes that “scrutiny over Amazon’s purported anticompetitive practices has twice prompted books and records suits in this court.”
After trial, the court determined, consistent with the referenced prior decision, that the stockholder failed to meet its burden to show, “by a preponderance of the evidence, a proper purpose entitling the stockholder to an inspection of every item sought.”
The desire to investigate potential wrongdoing or mismanagement has long been recognized as a proper purpose. Still, “more than a general statement is required for the [c]ourt to determine the propriety of a demand.” The stockholder must identify the matter it seeks to investigate, supported by “specific and credible allegations sufficient to warrant a suspicion of waste and mismanagement.”
The Trust’s demand runs afoul of this basic requirement because its stated purpose is astoundingly broad. The Trust wishes to investigate whether “Amazon’s fiduciaries have authorized or allowed the Company [to] take unlawful advantage of [its] dominant position to engage in anticompetitive practices, leading to U.S. and international regulatory scrutiny, lawsuits, and fines.” That is, its purpose concerns any possible anticompetitive conduct by a global conglomerate at any time anywhere in the world.
This Wachtell article argues that this is an important decision confirming limits on 220 demands, as the plaintiffs’ bar has “worked hard to expand the scope of Section 220, insisting on ever more intrusive inspection on the basis of even the thinnest allegations of corporate misconduct.” While “Section 220 remains a prominent feature of Delaware law and litigation, the decision “shows that there are limits to permissible inspection and corporations are not powerless to resist overbroad and abusive demands.”
In 2023, President Biden issued an executive order directing the Treasury & Commerce Departments to adopt outbound investment screening regulations. The Treasury Department issued a proposed rule to implement the screening regime, seeking public comment, in June of this year. Earlier this week, Treasury announced the final rules and issued this “Additional Information and FAQs” document. The fact sheet has this summary:
The Final Rule prohibits U.S. persons from engaging in certain transactions involving a defined set of technologies and products that pose a particularly acute national security threat to the United States. The Final Rule also requires U.S. persons to notify the Department of the Treasury of certain other transactions involving a defined set of technologies and products that may contribute to a threat to the national security of the United States.
Covered technologies fall into three categories: semiconductors and microelectronics, quantum information technologies, and artificial intelligence. This narrow set of technologies is core to the next generation of military, cybersecurity, surveillance, and intelligence applications.
The screening regime will be housed in the Office of Investment Security’s newly formed Office of Global Transactions. The final regulations take effect on January 2, 2025.
This Simpson Thacher alert gives key takeaways and discusses changes from the notice of proposed rulemaking. For example, the final rule contains some additional exceptions for covered transactions not included in the proposed rule:
– Employee Stock or Stock Options: The final rule includes a new exception for “employment compensation by an individual in the form of an award of equity or the grant of an option to purchase equity in a covered foreign person, or the exercise of such option” (§ 850.501(f)). Treasury indicates that it considered the impact on U.S. persons’ employment prospects and personal finances in adding this exception.
– Derivatives: The final rule contains a new exception for investments by U.S. persons in derivatives “so long as such derivative does not confer the right to acquire equity, any rights associated with equity, or any assets in or of a covered foreign person.” (§ 850.501(a)(1) (iv)).
– Certain Transactions Between a U.S. Person and Its Controlled Foreign Entities: The final rule also clarifies that the exception for intracompany transactions excepts transactions in connection with “covered activities that the controlled foreign entity was engaged in prior to January 2, 2025.” (§ 850.501(c)).
– Transactions Pursuant to Binding, Uncalled Capital Commitments: The final rule adjusts this exception to exclude transactions made pursuant to binding, uncalled capital commitments prior to the effective date of January 2, 2025. The previous iteration of this exception only applied to such commitments made prior to the issuance of the August 2023 Order. Treasury adjusted this exception “given certain fairness considerations raised by the commenters” on the NPRM.
As reported by the New York Times, a New York federal court granted a preliminary injunction last week preventing the $8.5 billion acquisition of Capri Holdings (owner of Versace and Michael Kors) by Tapestry (the parent company of Coach and Kate Spade) from moving forward while the FTC investigates the deal in its administrative court. This Troutman Pepper alert says that the decision shows that some courts will accept “the more pro-enforcement and interventionist guidance” in the 2023 Merger Guidelines.
The FTC’s complaint cited multiple theories from the 2023 Merger Guidelines, including:
– Serial acquisitions, alleging that Tapestry is engaged in an anticompetitive pattern, which it intends to continue, having acquired two other handbag brands in 2015 and 2017.
– Focus on a narrow/niche product market since the complaint alleged that the companies compete “most fiercely” in the “accessible luxury” handbags market.
– That the merger will limit employees’ wages and benefits because the companies will not be competing in the labor market.
The decision largely turned on the court’s acceptance of the FTC’s argument that the product market be defined as “accessible luxury” handbags — separate and distinct from “mass market” and “true luxury” handbags based on materials and craftsmanship, manufacturing location, and price and pricing methodology. Judge Rochon swiftly rejected the suggestion that the price of handbags isn’t a suitable subject for an antitrust case.
The alert has these conclusions for deal-makers:
– The current nature of the competition between the parties should not be underestimated. Even if other competitors are also important, if the parties’ internal documents and external statements arguably focus on each other, the potential for loss of competition and the parties’ risks will likely be amplified.
– At least some courts will embrace the 2023 Merger Guidelines’ more aggressive approach to merger analysis.
– Niche submarkets within broad markets, including those with many competitors, will not get a pass from the agencies. Parties should consider a more in-depth review into their products’ characteristics and how they might be used to narrow the relevant product market.
– The merging parties’ statements to the investment community and in internal documents should be taken into account in any review of potential market definitions.
– The FTC’s focus is not limited to transactions involving kitchen table items and hot-button industries, such as health care, agriculture, or tech, and the 2023 Merger Guidelines apply equally to all industries.
– Even where parties already separately operate brands or divisions, the parties’ assurances that the brands will continue to compete post-closing are not likely to save a transaction otherwise seen as problematic.
– The agencies will likely continue to file cases in jurisdictions they believe are willing to embrace the 2023 Merger Guidelines and go beyond the majority of existing precedent.
In August, Vice Chancellor Lori Will issued a post-trial memorandum opinion in TS Falcon I, LLC v. Golden Mountain Financial Holdings Corp.(Del. Ch.; 8/24). The case involves a board’s decision to set a retroactive record date for an annual stockholder meeting, which the defendants sought to validate under Section 205 of the DCGL. This Sidley blog explains the circumstances of the retroactive record date, which was evidently not, based on the facts, accidental.
This act was undertaken after a 35% stockholder provided notice of its intent to exercise a contractual option to increase its stake from 35% to 44.9%. The defendants did so to sidestep the plaintiff stockholder’s notice and, ultimately, to shortchange the plaintiff’s voting rights regarding board nominees. This effort was effective: at the annual meeting, the defendants’ preferred nominees won the vote.
I suspect nearly every reader of this blog is aware that this is not permitted by the DGCL. But, just in case, the blog has this reminder:
Section 213 of the Delaware General Corporation Law addresses the fixing of dates for determination of stockholders of record for annual meetings. Part (a) thereof states expressly that “the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors.” In other words, if the board meets on June 15 and passes a resolution on that same day to set a record date, the record date cannot precede June 15.
Plaintiff, the disenfranchised stockholder, filed suit challenging the annual meeting and seeking invalidation of the election results and restoration of the prior directors. Defendants petitioned for validation under Section 205, asking the court to overlook the deliberate violation of Section 213(a).
The court weighed [the five non-exhaustive factors under Section 215(d)], and held that due to the lack of “ambiguity or potential uncertainty” in Section 213(a), “I cannot conclude that the Director Defendants set the record date believing that they were following Section 213(a)” because defendants “purposefully” violated the DGCL with the goal of “set[ting] a record date of one day before Falcon sent notice of its intent to exercise” its option. The court also concluded that the remaining factors weighed against the defendants, including that granting validation of the record date would harm the plaintiff and other shareholders because “the record date was purposefully fixed in contravention of the DGCL to frustrate a large stockholder.”
Vice Chancellor Will stated that “Section 205 is not an equitable eraser for purposeful violations of clear statutes” and ordered that the prior directors be reinstated.
As this Cooley M&A blog notes, earnouts are a much more common — and high-stakes — feature of life sciences M&A deals than non-life sciences deals, which only included an earnout 21% of the time according to SRS Acquiom’s 2023 Life Sciences M&A Study. They also lend themselves to interpretive disagreements. Vice Chancellor Laster once observed in Airborne Health Inc. v. Squid Soap, that “an earn-out often converts today’s disagreement over price into tomorrow’s litigation over the outcome.” Inevitably, this is especially true in life sciences M&A, where the earnout is more likely to comprise a very significant portion of the total deal consideration.
Not surprisingly, then, life sciences earnouts have been keeping the Delaware Chancery Court very busy in recent months. The blog walks through some recent decisions, including Fortis Advisors v. Medtronic Minimed (Del. Ch.; 7/24), Fortis Advisors v. Johnson & Johnson (Del. Ch.; 9/24) and Shareholder Representative Services v. Alexion Pharmaceuticals, (Del. Ch. 9/24), and then shares key takeaways, with some practical steps practitioners can take to avoid unnecessary heartburn with a negotiated earnout down the road. Here are a few:
– Consider specifying post-closing plans – If the parties are contemplating an inward-facing commercially reasonable efforts standard, the parties may want to consider whether to include more specific requirements, rather than relying on a typical reference to how the buyer develops, launches and commercializes products with similar market potential and all of the factors the buyer can take into account in making those decisions. Further, the parties should consider whether the economic impact of the potential milestone payments can be taken into account by the buyer in making decisions.
– Access to earnout information – Sellers should keep in mind that following a closing, the stockholder representatives’ insights into the buyer’s actions or omissions may be limited to the buyer’s sanitized periodic reports on their efforts to achieve the milestones. The plaintiffs in the J&J case had the advantage of a carryover workforce that had knowledge of the actions taken by J&J, but often the buyer does not retain the target’s employees to complete the product development or commercialization of products.
– Impact of acquisition on earnout obligations – Buyers that acquire targets that have outstanding earnout obligations from prior acquisitions need to consider how to conduct due diligence on the target’s compliance (or lack thereof) with commercially reasonable efforts obligations and should not assume that, post-closing, they can eliminate the target’s encumbered programs based on their own standard decision-making process.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by David Farkas, Head of Shareholder Intelligence in the US for Georgeson, to discuss Schedule 13F filings & stock surveillance services. Topics covered during this 18-minute podcast include:
– Overview of Schedule 13F and why 13F filings aren’t reliable indicators of activity in a company’s stock
– Strategies activists use to avoid tipping their hands through a 13F filing
– The role 13F filings can play in a company’s efforts to identify an activist building a position in its stock
– Additional actions a company can take to determine if an activist is building a position
– The role of stock surveillance services
– Implications of rulemaking petition to amend 13F rules
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
According to Dykema’s “20th Annual M&A Outlook Survey”, the big stories for 2025 are the burgeoning use of AI in the deal process and an expectation that private equity will lead a resurgence in deals next year. Here are some of the survey’s significant findings:
– Nearly seven in 10 dealmakers believe PE investors will drive M&A growth in 2025, as firms look to deploy $2.5 trillion in available capital, despite recent challenges such as lower valuations and reduced deal activity.
– AI is transforming industries and rapidly becoming a key deal driver. Nearly three-quarters find that companies are seeking to integrate AI capabilities, acquire businesses leveraging the technology, and use it to streamline M&A processes.
– 77% of dealmakers feel that regulators have increased their scrutiny of M&A deals. As a result, 80% have increased their emphasis on due diligence in the past 12 months.
– Over half of respondents believe the automotive M&A market will strengthen in the next 12 months, driven by a shift to hybrid engines, the need to increase supply chain resiliency, and collaboration between automakers/suppliers and technology providers.
– ESG’s influence on dealmaking is fading, with only 55% of respondents prioritizing it in target selection—down from last year—and one-third now saying they are unlikely to screen for ESG risks, compared to 19% in 2023.
– Similar to results from the 2023 report, respondents anticipate the healthcare, energy, and financial services industries to see the most M&A activity in 2025.
A recent Cooley blog reviews Delaware case law addressing specific performance and draws some conclusions from those decisions about the circumstances under which a Delaware court is – and is not – likely to order specific performance of a merger agreement. Here’s an excerpt with the key takeaways:
– Control what is in your hands. A party is more likely to get an award of specific performance when most of the conditions to closing the transaction have already been satisfied. If completion of a financing is required, the plaintiffs should specify what actions the court needs to order the buyer to take to complete the financing.
– Keep your side of the street clean. Any party seeking specific performance should make sure that it does not have “unclean hands” that could give the court a basis for denying relief.
– Protect your ability to pursue an array of damages. Make sure the merger agreement includes a very clear specific performance provision where the parties agree that monetary damages are not an adequate remedy, and breach would (not could) result in an irreparable harm. Parties also may want to consider specifying in the provision that the target may seek alternative remedies, including lost premium damages, and an order of specific performance.
– Dissuade delay tactics. Along the same lines, the merger agreement should make clear that the ability to terminate it is suspended while a party is seeking specific performance, thus prohibiting a delaying party from pushing proceedings past the outside date for an easy “out.”
– Consider the best dispute options. When dealing with non-US counterparties, consider which jurisdiction is best for obtaining an order of specific performance against the non-US counterparty, especially when there is no international treaty for mutual recognition of judgments.
Earlier this year, the Chancery Court held that a standard contractual integration clause was insufficient to bar claims premised on a buyer’s alleged assurances to assist in growing the target’s business post-closing. Last week, in Cytotheryx, Inc. v. Castle Creek Biosciences, (Del. Ch.; 10/24), the Chancery Court reached the same conclusion in the context of a buyer CEO’s oral assurances that it had removed any obstacles to obtaining lender approval required to permit the seller to exercise a contractual redemption right.
The case arose out of Cytotheryx’s sale of its majority stake in a biotech startup to Castle Creek in exchange for cash and preferred shares in the buyer. The terms of those preferred shares included in Castle Creek’s charter provided for a redemption right, but that right was subject to the condition that its exercise did not violate Castle Creek’s charter or “other then existing governance documents or debt financing documents.” During the course of the merger negotiations, Castle Creek’s CEO allegedly represented that any obstacles to obtaining lender approval for Cythotheryx to exercise its redemption right had been removed.
When Cytotheryx subsequently tried to exercise that right, Castle Creek pointed to language in its credit agreement prohibiting such a transaction and advised Cytotheryx that its lenders had refused to consent to the redemption. Cytotheryx sued, alleging fraud and promissory estoppel. Castle Creek pointed to the language of the charter and the merger agreement’s integration clause, which provided that the merger agreement “contains the entire understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior agreements and understandings, oral and written, with respect hereto.”
As in this year’s prior case on integration clauses, the defendants pointed to the Chancery Court’s 2014 decision in Black Horse Capital v. Xstelos Holdings, which enforced an integration clause to bar reliance on extra-contractual representations. Superior Court Judge Vivian Medinilla, sitting in Chancery by designation, distinguished this case from Black Horse Capital and held that the integration clause – when read together with the agreement’s fraud reservation – wasn’t enough to defeat the seller’s fraud claim:
Unlike Black Horse, where the alleged misrepresentations directly contradicted the terms of the agreement, here, the alleged misrepresentations about lender approval for redemption are not expressly contradicted by the Agreement. The Charter’s provision on which Defendants rely does not necessarily contradict representations that lender approval had been obtained or would not be an issue. Further distinguishing Black Horse, the alleged misrepresentations here occurred before and after closing of the Merger Agreement to include statements made by Castle Creek’s CEO over a year after closing that Castle Creek would honor its obligation to redeem the shares.
Moreover, the Merger Agreement preserves Cytotheryx’s right to bring an action for fraud, “relating to the representations, warranties, and covenants contained in this Agreement.” Defendants do not dispute this. The fraud reservation is “explicit and unambiguous.” Delaware law does “not protect a defendant from liability for a plaintiff’s reliance on fraudulent statements made outside of an agreement absent a clear statement by that counterparty—that is, the one who is seeking to rely on extra-contractual statements—disclaiming such reliance.”
Judge Medinilla observed that Cytotheryx not only didn’t give a clear statement of non-reliance, but that the merger agreement clearly and explicitly reserved its right to bring fraud actions arising from the Merger Agreement and related documents. As a result, she concluded that the integration clause did not bar Cytotheryx from bringing fraud claims, and rejected the defendants’ efforts to dismiss its promissory estoppel claims on similar grounds.
In our latest “Understanding Activism with John & J.T.” podcast, my co-host J.T. Ho and I were joined by Jim McRitchie, one of the leading voices in retail investor activism. Topics covered during this 37-minute podcast include:
– Collaboration among investors to influence corporate governance
– Top retail investor priorities for next year’s proxy season
– Deciding which companies receive shareholder proposals
– Measuring a proposal’s success
– Important factors in deciding whether to settle a proposal
– How companies can respond constructively to shareholder proposals
– How investors can maximize their ability to influence corporate governance
– Impact of election and changes at the SEC
Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!