DealLawyers.com Blog

Here’s the intro from this blog by Davis Polk’s Ning Chiu (also see this Wachtell Lipton memo):

T. Rowe wants to make clear that activists and other investors do not speak for them, in its June ESG Spotlight, as they share their investment philosophy on shareholder activism. Activism is defined as proxy contests, campaigns to influence management and boards on strategy, capital allocation and/or governance and unsolicited hostile bids.

While the investor believes that companies tend to be better informed about their businesses and will afford management a certain amount of deference, they also stress that management and their boards should “exhibit openness, curiosity, and intellectual honesty” regarding serious and sustained ideas from outsiders.

T. Rowe’s internal policies prohibit their investment professionals from initiating activism campaigns indirectly, such as discussing or pitching ideas to activist investors or other third parties. The investor outlined its roles and responsibilities as engaged investors, to the point where they may help facilitate compromise between the parties, which they believe is usually a better outcome than a contested vote.

– Broc Romanek

For years there’s been a debate over universal proxy cards. The SEC hasn’t acted on its 2016 proposal. But according to this press release, we now we have the first US-incorporated company using one – SandRidge Energy. The proxy card names all SandRidge nominees and all Icahn Capital nominees – but Carl Icahn still sent a separate card with only the dissidents listed.

In its latest communication to shareholders, the company stresses that shareholders should use its card to vote for all company nominees and two (of seven) independent Icahn Capital nominees.

Perhaps this shows the strategy & gamesmanship that can be played with universal proxies? Maybe Sandridge knew it wouldn’t win a clean sweep – and wanted to facilitate vote splitting.

– Broc Romanek

Here’s the news from this Wachtell Lipton memo:

In a much-anticipated decision, the U.S. District Court for the District of Columbia today declined to enjoin AT&T’s $108 billion acquisition of Time Warner, rejecting the Department of Justice’s “vertical” theory of competitive harm and allowing the companies to close their merger without conditions.

In November 2017, the Antitrust Division of the Department of Justice sued to prevent AT&T from acquiring Time Warner, alleging the merger would (1) increase AT&T’s leverage and incentive to charge rival distributors more for Time Warner’s programming, (ultimately resulting in consumer price increases) and (2) stifle growth and entry of innovative distribution offerings, in violation of Section 7 of the Clayton Act. The lawsuit notably departed from the Antitrust Division’s prior precedent in “vertical” mergers—transactions involving firms that do not directly compete—including its 2011 decision to clear Comcast’s acquisition of NBC Universal, subject only to behavioral remedies. Principally at issue during trial was whether (1) AT&T and Time Warner have the requisite market power in video distribution and programming, respectively, to support the government’s theories of harm and (2) the defendants’ proposed behavioral fix, an arbitration arrangement very similar to one endorsed by the Antitrust Division in Comcast/NBC Universal, remedied the alleged competitive harm.

In Judge Richard Leon’s 172-page opinion, the Court was much less deferential to the government than in recent challenges of horizontal mergers. In the absence of significant judicial precedent—this was the first court challenge based on a vertical theory of competitive harm in 40 years—the Judge provided an exhaustive factual analysis and noted that the government’s challenge was complicated by “the recognition among academics, courts, and antitrust enforcement authorities alike that many vertical mergers create vertical integration efficiencies.”

The Court’s decision to deny the injunction was unconditional, but it is worth highlighting one of the subsidiary lines of argument as helpful guidance for future transactions. The Court credited AT&T’s letter commitment to arbitrate with rival distributors, even though the Justice Department had rejected the proposed remedy as inadequate. The proposed commitment supported defendants’ conclusion that the transaction would not result in price increases, and Judge Leon found that AT&T’s commitment “will have real-world effects,” and was “extra icing on a cake already frosted.”

Judge Leon’s opinion, while tied closely to the particular facts of the AT&T/Time Warner merger, provides much-needed guidance to transacting parties—and federal antitrust regulators—in vertical mergers, and highlights the evidentiary hurdles to making a successful Section 7 claim. It also serves as a reminder to transacting parties of the importance of monitoring the content of ordinary course and transaction-related documents. The government’s case in this matter included a limited pool of “bad” documents, and the Court’s decision chastised the government for overreaching in its interpretations of those documents. Many recent successful merger challenges, in contrast, featured clear statements about “taking out a competitor,” or otherwise ending, or at least reducing, aggressive competition. Finally, while regulators have historically succeeded in convincing courts to discount efficiency defenses in horizontal merger cases, the Court noted the particular importance of balancing merger efficiencies (conceded, in part, by the government in this case) with asserted harms in vertical mergers, which have traditionally been viewed as procompetitive.

Prior to today’s decision, Assistant Attorney General Makan Delrahim had expressed his desire to “return to the preferred focus on structural relief to remedy mergers that violate the law,” in light of the fact that “[b]ehavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and . . . demand ongoing monitoring and enforcement.” Notwithstanding those statements, there has long been a consensus that vertical mergers are generally procompetitive and, to the extent problematic, can be fixed with conduct remedies. That view is consistent with many merger enforcement decisions, including the FTC’s decision last week not to challenge Northrup Grumman’s acquisition of Orbital ATK, and will be buttressed by the AT&T/Time Warner decision.

Today’s decision demonstrates that while we can expect that the Antitrust Division and the FTC will remain vigilant and formidable, “big is bad” and similar challenges to deals will not succeed unless grounded in demonstrable proof of anti-competitive effects. The decision’s exhaustive factual analysis also reminds all potential transacting parties of the importance of close attention to detail in planning, documenting, executing and defending merger and acquisition transactions, whether horizontal or vertical.

– Broc Romanek

Here’s the intro of this Bloomberg article:

It used to take Goldman Sachs bankers days to analyze a company’s vulnerability to activist investors. Now, the firm is launching an app that lets clients do it themselves in seconds. Goldman Sachs has spent two years quietly developing “Jupiter,” a program that sifts historical data on a company’s shareholders, then combines that with other information to rate its vulnerability to activists. The firm will offer the app in coming weeks to clients that could become targets of corporate raiders.

The software gauges the risk of an activist attack in several ways. It sifts, for example, funds that own a company’s stock, showing how it ranks alongside other holdings. The idea is that a fund manager is more likely to reject an activist’s demands if the company already looks good in the portfolio — say, growing revenue faster or paying a higher dividend than other bets. Executives can use that information to ensure they don’t fall behind, or they can try to court more investors.

– Broc Romanek

Here’s the intro from this blog:

One of the measures taken by federal authorities to manage the financial crisis in the fall of 2008 was a remarkable piece of administrative guidance from the IRS. Issued on September 30th of that year and less than a page long, IRS Notice 2008-83, which was styled as an interpretation of existing law, had a dramatic positive effect on the value of banks’ tax assets. The Notice effectively turned off with respect to banks an aspect of Internal Revenue Code Section 382 that generally restricts the ability of a corporation to use unrecognized tax losses from underperforming loans to offset taxable income from other sources if that corporation undergoes a significant change in equity ownership, including an acquisition.

The direct result of the guidance was that tax assets of a target bank that otherwise would have been impaired following an acquisition could be fully utilized by an acquirer, with the further implication that targets with such tax assets became more attractive to profitable acquirers who could more rapidly deduct those losses than acquirers with less taxable income to offset. This implication played out only a few days after the Notice was issued, when Wells Fargo re-entered negotiations for the acquisition of Wachovia and outbid Citibank after determining that its ability to utilize Wachovia’s tax assets would allow it to acquire Wachovia without FDIC assistance. One estimate placed the value of the Notice in respect of Wachovia’s tax assets to Wells Fargo at roughly $20 billion. Controversy over the Notice, including whether it was a proper exercise of the Treasury Department’s authority and whether it was issued specifically to favor Wells Fargo, followed quickly and the Notice was overruled when the American Recovery and Reinvestment Act was signed into law in early 2009. Thus, there was a small window of roughly 3½ months in which the Notice was in effect and part of Section 382 was disabled with respect to banks.

In a recent paper, “Taxes and Mergers: Evidence from Banks during the Financial Crisis,” we examine the impact of IRS Notice 2008-83 and, by implication, the effects of Section 382, a controversial tax rule designed to discourage tax-motivated acquisitions. The adoption and subsequent repeal of the Notice presents a unique opportunity to explore the significance of taxes in the merger decision with a natural experiment and contribute to a literature with mixed results on the importance of taxes in that context. In general, the evidence suggests the effects of taxes on the frequency of acquisitions are modest but the effects on the price and structure of corporate acquisitions are more robust. Understanding these effects is important, not least because various tax rules, including Section 382, that target tax-motivated acquisitions also impose compliance and monitoring costs as well as create other distortions in merger decisions. If taxes have little effect on merger activity then a reconsideration of these rules may be in order.

– Broc Romanek

Here’s an excerpt from this “Institutional Investor” article:

A paper called “The Value of Activism: A Hedge Fund Investor’s Perspective,” published this month by a trio of U.S. college professors, examines how much return an activist play typically produces, compared to a non-activist bet made by the same hedge fund, based on a sample of 222 hedge funds operating between 1997 and 2011. On average, the activist positions neither outperformed nor underperformed the non-activist investments, according to authors Felix Zhiyu Feng of University of Notre Dame, Chengdong Yin at Purdue University, and Caroline Zhu from the University of Oklahoma. But there were some exceptions.

– Broc Romanek

Hopefully, you’ve been taking advantage of the wonderfully written stories that John has been posting in the “John Tales Blog” on this site over the past few years. Here’s the intro from one of his latest:

I was sad to see that Tom Wolfe passed away last week. If you ever want to get a feel for the Roaring 80s, his “Bonfire of the Vanities” is the obvious place to start – the glamorous life of a Wall Street “Master of the Universe” plays a prominent part in that novel’s story. This story isn’t like that. It’s about a couple of associates from a flyover state law firm who went to New York for a billion-dollar LBO closing in 1987 – and it’s really more of a cross between The Out-of-Towners and Bartleby the Scrivener.

We’d been working on the deal for several months – the company had been sold by its Fortune 50 parent company to a financial sponsor and management team in an LBO at the end of 1986. The deal was a mid-80s classic – it had been done on seller paper and highly confident letters, but had a very short fuse. In 120 days, it all turned into a pumpkin unless the parties were able to get permanent debt and equity financing in place.

There were a couple of major New York investment banks driving the deal, and they were represented by a couple of BigLaw firms. Add in the senior lenders and their lawyers, the company’s in-house staff and us, and it was a good ol’ fashioned feeding frenzy.

We were brought in to represent the management in negotiating for its equity, but because we were Ohio lawyers and this was an Ohio corporation, we also had a lot of involvement when it came to the nuts and bolts surrounding the closing of the mergers and the various financing arrangements involved in the transaction. This was the first billion dollar deal I ever worked on – and it’s still one of the biggest I’ve ever been involved with.

To say the financing arrangements were intricate is an understatement – I don’t remember all of the details, but I remember filing a resale S-1 for the deal after the closing that had so many different securities on it even the Corp Fin Staff was impressed. We called the reviewer one day to check on the status of the filing. We mentioned the name of the company, and the reviewer didn’t initially recall the filing – but then he said, “Oh, wait. . . wow, that’s the S-1 with, like, 20 different securities on it, right?” There weren’t that many, but it was nice to know we made an impression.

– Broc Romanek

Here’s the intro from this blog by Cleary’s Neil Whoriskey (see John’s latest blog for more on the staggered board debate):

Beyond the cacophonous din of voices calling for companies to serve a “social purpose,” adopt a variety of governance proposals, achieve quarterly performance targets, and listen to (and indeed even “think like”) activists, there is now, most promisingly, a call from genuine long-term shareholders for public companies to articulate and pursue a long-term strategy.

This latest shareholder demand directly supports the achievement of traditional corporate purposes, and seems, more than any other shareholder demand of the last decade, the most likely to increase shareholder value. Yet in current circumstances, where all corporate defenses have been stripped in the name of “good governance,” boards and management have been given zero space in which to formulate and implement a long-term strategy. Indeed, the very fact that shareholders must demand corporations focus on long-term strategy demonstrates just how effectively the governance movement has been co-opted by market forces to serve the interests of short-term activists and traders to the detriment of long-term investors.

It is time for long-term investors to recognize that aspects of the good governance movement have in fact come at significant cost to their own investors, to be perhaps a bit more wary of partnerships with activists, and to actively create the conditions that will allow boards and management to focus on the long-term. Exhortations are not enough. The first step should be to bring back staggered boards.

– Broc Romanek

CMS recently published its “10th annual European M&A Study.”  Here are some of the study’s deal trends during 2017:

– Locked box was used in 25% of all deals across Europe and was particularly popular in larger deals;
– Earn-outs remained a popular feature, especially in Benelux, German-speaking countries and Southern Europe with longer earn-out periods and more turnover-based earn-outs than previously;
– Baskets and de minimis provisions were less frequent due to nominal liability caps in deals featuring W & I insurance making them redundant;
– W & I insurance usage is at an all-time high, especially in deals exceeding EUR 25m;
– Liability caps are getting lower, especially in the bigger European jurisdictions, mainly as a result of W & I insurance;
– Limitation periods are not getting any longer, with the majority operating in the one- to two year range;
– Security for warranty claims is less frequent than it was a decade ago, with escrow accounts being very much the favoured alternative when there is security;
– MAC clauses have never been rarer in Europe;
– Arbitration regained some of its popularity with a notable trend emerging in favour of international rather than national rules where applicable.

– John Jenkins

Recently, a member posted this in our “Q&A Forum” (#402):

My client is a CEO of a public company that is being acquired by another public company in an all-stock transaction. The CEO will become a director of the acquiring company and has a desire to sell some of the CEO’s rather sizable equity holdings. The CEO would like to adopt a 10b5-1 plan to sell the shares and is wondering whether the plan can be adopted prior to closing.

I haven’t found any guidance on this issue – from off-the-shelf materials to SEC guidance – one way or another. The CEO’s broker hadn’t encountered this situation before, but the broker is with a small firm (vs. an investment bank), so the sample size is likely small. The legal argument against adopting before closing is that the SEC could view the closing in and of itself as a modification of the plan. I view the “closing as a modification” argument as quite conservative, especially if the trading triggers are straightforward (e.g., sell X shares per month, subject to a floor).

If anyone has encountered this situation before, have you found any sort of guidance on the issue? Or perhaps even have publicly-available examples (e.g., Section 16 notes, etc.)?

John responded with:

I’ve not seen anyone do something like this. The period between signing and closing a merger seems to me to be a very risky time for the CEO of the seller to adopt a 10b5-1 plan. There are simply too many moving pieces in a pending deal and it is easy to second guess whether the insider was in possession of MNPI at the time of the plan’s adoption.

– Broc Romanek