Exchange Act Rule 13d-1 gives an acquirer 10 days from the date it acquires a 5% stake in a public company to get its Schedule 13D on file. This recent podcast from Jones Day’s Lizanne Thomas discusses activist investor strategies & how activists use this 10-day filing window to their advantage. She also lays out the case for why the window needs to be reformed. The discussion of issues surrounding the filing window begins around the 13:00 minute mark of the podcast.
When it comes time to exit their investments, PE funds sometimes adopt a dual track strategy under which they simultaneously pursue a sale process & an IPO of the portfolio company. This Cooley blog addresses the key factors that should be considered in deciding whether to pursue this type of strategy. Here’s the intro:
Relative to choosing a single exit strategy, a dual-track process tends to be more complicated and resource-intensive, while also posing some specific risks. However, if the right dynamic is created, a dual-track process can provide visibility of relative valuation and the benefit of optionality, maximizing the chance of securing the most favorable terms.
Whether there’s a looming threat of a government shutdown or a sudden stock market sell-off, or the auction bids come in below expectations, the alternative track may present a superior exit option. A dual-track process reduces the possibility that the vagaries of the stock market and industry-specific dynamics will have a detrimental effect on the overall exit by opening the investment opportunity to public markets as well as financial and strategic investors, with each influenced by the others.
The blog points out that there’s no “one size fits all” approach to a dual track process. It also notes that while maintaining confidentiality concerning competing valuations, timing, drivers, etc. is essential, the knowledge that the portfolio company may be pursuing an IPO exit could drive the M&A valuation higher, particularly with strategic buyers.
Late last week, Vice Chancellor Glasscock issued his much anticipated post-trial ruling in Vintage Rodeo Parent v. Rent-A-Center (Del. Ch.; 3/19). The case involved the validity of Rent-A-Center’s exercise of a contractual right to terminate a merger agreement under which it would have been acquired by Vintage Capital, and was one of the more closely watched pieces of “busted deal” litigation in recent years.
Both parties participated in the rent-to-own market, and they anticipated a potentially lengthy antitrust review. As a result, the merger agreement gave either party the right to unilaterally extend the agreement’s “drop dead” date if the FTC ‘s review was still ongoing. In order to exercise that right, the party desiring to extend had to provide notice to the other by the original drop dead date. Over time, the deal became less compelling to Rent-A-Center, and its board decided that if Vintage didn’t exercise its right to extend, Rent-A-Center would terminate it once the drop dead date passed.
Sure enough, Vintage didn’t send the notice, and Rent-A-Center promptly terminated the agreement. Vintage freaked out, and sued to compel Rent-A-Center to move forward. Rent-A-Center poured a healthy dose of salt into the wound by filing a counterclaim alleging that Vintage owed it a $126.5 million reverse termination fee. Last month, the case went to trial. The trial produced some heated testimony, with one Vintage representative referring to Rent-a-Center’s management as “a bunch of crooks.”
Vitriol aside, Vintage’s case boiled down to two allegations. First, it said that the parties’ course of conduct served as either Vintage’s notice of its intent to extend or as a waiver of notice by Rent-A-Center. Second, it contended that by continuing to work to move the deal forward while “concealing” its board’s decision to terminate the deal if the opportunity arose, Rent-A-Center behaved in a fraudulent manner. Vice Chancellor Glasscock’s opinion made it clear that he wasn’t buying any of this:
Vintage’s arguments are after-the-fact rationalizations as to why failure to give written notice of election to extend is excused. I am left to the startling conclusion that, having vigorously negotiated a provision under which Vintage was entitled to extend the End Date simply by sending Rent-A-Center notice of election to do so by a date certain, Vintage and B. Riley personnel, in the context of this $1 billion-plus merger, simply forgot to give such notice.
VC Glasscock found that the drop dead date and the methods by which it could be extended were heavily negotiated deal terms, and he was not inclined to rewrite the parties’ deal. In other words, when it came to Vintage’s missing the deadline for the notice requirement, his answer was: “you snooze, you lose.”
Rent-a-Center’s reverse termination fee claim remains unresolved. The Vice Chancellor’s opinion expressed some discomfort with the idea that payment could be triggered under the circumstances & asked the parties to brief the issue of whether the implied covenant of good faith & fair dealing applied – so stay tuned.
– Two Recent Delaware Decisions Provide Practical Transaction Guidance
– Antitrust Merger Review: The Worst Case is Worse Than You Think
– Cross-Border Carve-Out Transactions: Due Diligence and Purchase & Sale
– Shareholder Activism: Nine Lessons Learned
– The Couple in the Conference Room
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It’s hard to imagine a concept that’s gotten more traction in corporate law in recent years than the magical power of a fully informed shareholder vote to cure all a deal’s flaws. But a new study says that – when it comes to M&A at least – the shareholder vote is more sacred cow than sacred right. Here’s an excerpt from the abstract:
We provide strong empirical support based on a sample of 852 merger deals from 2000 to 2015 that there is a very large thumb on the scale that pushes all deals toward approval, regardless of any allegations of wrongdoing. We observe substantial ownership changes at target corporations, sometimes as high as 40 to 50% of their stock, from long-term investors to hedge funds upon the announcement of a deal and before the consummation of the transaction with a shareholder vote. This change reflects the merger arbitrageurs’ actions. We further show that this change in ownership has a positive and statistically significant impact on the likelihood of merger deals garnering the required shareholder approval.
We conclude that the Delaware courts need to rethink their obsession with the shareholder vote, renounce the current doctrinal trends that are taking them in the wrong direction, and return to their historic role of evaluating whether directors have satisfied their fiduciary duties in M&A transactions.
I’ll make a bold prediction that although there may be a lot of merit to this critique, it’s going to go nowhere. Sure, it might increase board accountability in M&A, but it has broader implications that a lot of people aren’t going to like.
That’s because the study’s recognition of the implications of the real-world fluidity of a shareholder base undermines today’s prevailing theory of good corporate governance – the idea that shareholders should be regarded as the true “owners” of the corporation, and that anything that enhances their power in comparison to the board’s is the embodiment of virtuous conduct. Too many people have too much invested in that paradigm to let it be eroded.
Here’s an interesting new study that compares the valuations of deals initiated by sellers to those initiated by buyers. It turns out that who makes the approach matters a lot when it comes to the value that the target’s shareholders receive. Here’s the abstract:
We investigate the effects of target initiation in mergers and acquisitions. We find target-initiated deals are common and that important motives for these deals are target economic weakness, financial constraints, and negative economy-wide shocks. We determine that average takeover premia, target abnormal returns around merger announcements, and deal value to EBITDA multiples are significantly lower in target-initiated deals.
This gap is not explained by weak target financial conditions. Adjusting for self-selection, we conclude that target managers’ private information is a major driver of lower premia in target-initiated deals. This gap widens as information asymmetry between merger partners rises.
The authors contend that when a target initiates a deal, potential buyers become more skeptical about valuation, because companies with stocks that are undervalued prefer to remain independent – while overvalued targets are happy to pursue a sale before the roof caves in.
We’ve previously blogged about Emulex v. Varjabedian – one of this term’s most watched SCOTUS securities cases. The case was prompted by a split among the circuits as to whether negligence or scienter was required to impose liability under Section 14(e) of the 1934 Act. That’s the Williams Act’s general antifraud provision, and it prohibits misstatements or omissions in connection with tender offers.
Shortly after cert was granted, the U.S. Chamber of Commerce upped the ante by filing an amicus brief arguing that the Court should hold that no private right of action exists under Section 14(e). Recently, the Solicitor General weighed in with an amicus brief on behalf of the U.S. government, which endorsed the conclusion that there is no private right of action under Section 14(e).
The Solicitor General’s brief acknowledged that the SEC argued in favor of an implied right of action in Piper v. Chris-Craft Industries – the last case in which the SCOTUS considered implied rights of action under 14(e). But it noted that Court’s approach to implied rights of action since then has changed, and that its “current approach to private rights of action forecloses inferring such a right under Section 14(e).” Here’s an excerpt from the brief:
Beginning with Piper, however, where this Court rejected an implied private right of action for unsuccessful tender offerors, 430 U.S. at 24-42 & n.28, the Court has substantially altered its approach. It has declined to infer new causes of action unless the statute at issue demonstrates an intent to create both a right and a remedy. For example, the Court refused to infer a private right of action under Section 17(a) of the Exchange Act, 15 U.S.C. 78q(a), because the statute “does not, by its terms, purport to create a private cause of action in favor of anyone.” Touche Ross & Co. v. Redington, 442 U.S. 560, 568-570 (1979). The Court likewise refused to infer a private right of action under Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. 80b-6, because that statute does not “mention an intended private action.” Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 19-24 (1979) (citation omitted).
In a variety of contexts, the Court has since treated the absence of affirmative textual support as a bar to inferring new private rights of action. See Johnson v. Interstate Mgmt. Co., 849 F.3d 1093, 1097 (D.C. Cir.2017) (Kavanaugh, J.) (collecting cases). And in 2001, the Court acknowledged that it had “abandoned” its previous approach. Sandoval, 532 U.S. at 286-289. The Court now requires that, “[l]ike substantive federal law itself, private rights of action to enforce federal law must be created by Congress.” Id. at 286. In the absence of apparent “[s]tatutory intent” to create a cause of action, “courts may not create one, no matter how desirable that might be as a policy matter, or how compatible with the statute.” Id. at 286-287.
The absence of an implied private right of action under Section 14(e) would leave the government as the only party that could enforce the statute. Since that’s the case, it’s not surprising that the Solicitor General argues that negligence, not scienter, should be the standard for imposing liability under it. Check out this Alison Frankel blog for more details on this and other briefs filed in the case.
A decision by the Court that there’s no private right of action under 14(e) won’t necessarily leave investors without a federal remedy to address tender offer shenanigans. As the Solicitor General’s brief notes, investors still could potentially recover damages in private suits under Section 10(b) and Rule 10b-5, and Section 11 and other 1933 Act remedies would be available in the event of an exchange offer involving the issuance of securities as consideration.
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Anne Chapman of Joele Frank, Bruce Goldfarb of Okapi Partners, Tom Johnson of Abernathy MacGregor and Damien Park of Spotlight Advisors identify who the activists are – and what makes them tick.
This recent blog from Steve Quinlivan says that FASB has issued a proposed ASU addressing the treatment of post-acquisition deferred revenue:
The proposed ASU clarifies when acquiring organizations should recognize a contract liability in a business combination. In the proposal, an organization should recognize deferred revenue from acquiring another organization if there is an unsatisfied performance obligation for which the acquired organization has been paid by the customer.
Deferred revenue represents prepayments received for goods or services. GAAP requires the revenue related to these prepayments not to be recognized until the goods are shipped or the services are rendered. Deferred revenue can be kind of a hot mess in an M&A transaction because, as this Skoda Minotti blog points out, it has a disturbing tendency to disappear:
In an acquisition, deferred revenue is typically adjusted down from its originally recorded amount to its “fair value,” which is based on the cost to deliver the related product or service (not the amount of cash collected prior to the related revenue being recognized). Because of the reduction in the deferred revenue balance to “fair value,” there is a portion of revenue (for which cash has been received) that never gets recorded on the company’s pre- or post-transaction books. Poof!
That revenue basically disappears and never gets recognized. For companies that receive meaningful prepayments, this can have a material impact on the amount of revenue that is recorded post-acquisition when the deferred revenue is reversed and recognized as revenue.
The FASB proposal doesn’t propose to change the fair value approach – but it does suggest the possibility that there may be some tinkering with the costs to be included in a fair value measurement.
According to this “Institutional Investor” article, the largest group of PE fund investors wants more oversight from the SEC when it comes to fund sponsors:
Sure, they have billions of dollars invested and spend millions in consulting and advisory fees. But now, some of the world’s largest private equity investors, along with an industry group, are demanding oversight over the industry they’re largely funding.
On Tuesday, the Institutional Limited Partners Association and 35 of its member institutions sent a letter to the Securities and Exchange Commission pushing for stronger regulations on private equity advisory firms. The letter is in response to a call for feedback from the regulator on how it administers the Investment Advisers Act of 1940.
“This is a culmination of our efforts on this issue,” Chris Hayes, senior policy counsel at ILPA, said by phone Tuesday.
ILPA and the institutions that signed its letter are asking the SEC to enforce tougher standards for private equity fund advisers by requiring clearer standards for disclosures of conflicts of interest, according to the letter.
The letter was signed by some pretty heavy hitting PE investors – including CalPERS, CalSTRS, & the New York City and State retirement systems, among others.