A few days ago, FINRA proposed a new regulatory regime – through Regulatory Notice 14-09 – for firms that limit their activities to advising companies and private equity funds on M&A, capital raising and corporate restructuring. This proposal fits with the SEC’s new position that private M&A brokers are not required to register as brokers (see the memos posted on this).
Many firms limit their business to corporate advisory services, but this nevertheless can fall within the broad definition of broker-dealer activity. Such firms advise companies on mergers and acquisitions, assist them in raising capital in private placements to institutional investors and/or help them assess strategic and financial options.
The SEC and FINRA (and, from time to time, the courts) have taken the position that such firms must register as broker-dealers because they are involved in key points in the distribution of securities. This is especially true when such firms receive transaction-based compensation for their services.
Realizing that such firms do not engage in most of the activities typically associated with broker-dealers, FINRA is proposing a bespoke set of rules for what they now refer to as “limited corporate financing brokers.”
In this podcast, Matt Little of PKWARE explains how his software enables lawyers and other deal participants to securely access and share files without using a data room, including:
– What can happen if practitioners don’t address data security issues if they aren’t using a traditional or virtual data room?
– Minimum someone should do to address data security challenges?
– What Viivo is, and how it’s used in the context of a deal?
– What factors should be considered in determining whether to use a product like Viivo vs. a data room?
– What are some success stories?
As noted in this article from The Deal, Delaware Vice Chancellor Travis Laster was at his most aggressive in a Friday order where he asked probing questions of the shareholders and lawyers who brought a fiduciary duty lawsuit challenging the $68 million sale of Theragenics to Juniper Investment. Here is an excerpt from the article:
Laster directed several questions to the Theragenics shareholder plaintiffs Leslie Baker and Julia Davis. He wanted to know their economic interest in the company at the time the complaint was filed and the date of settlement; “a description of the plaintiff’s investment portfolio sufficient to determine the materiality of the plaintiff’s economic interest in the issuer;” and “a description of the plaintiff’s investment strategy.”
Laster also asked a series of questions designed to reveal the relationships between shareholders and their counsel. Laster queried how the plaintiff came to hire Rigrodsky, “including whether counsel advertised for potential plaintiffs; how plaintiff came into contact with counsel; whether plaintiff contacted any other law firms; any referral process among counsel; [and] whether the plaintiff has any other relationships with counsel.” He requested a table of “representative actions filed by the plaintiff within the last five years” including the counsel retained, venues in which the matters were filed, outcomes, and any “compensation that the plaintiff received.”
Finally, Laster directed a pointed question at Rigrodsky. Counsel for shareholders generally work on a contingency basis, but Laster asked the law firm how many times in the last year it’s been hired by the hour “together with an estimate of the percentage of total firm revenues represented by such engagements.” Corporate lawyers complain that firms such as Rigrodsky do nothing but file form complaints designed to induce a quick settlement and accompanying fee. Laster wants to know how much of Rigrodsky’s business is comprised of those cases.
Corporate lawyers and litigators have asked similar questions — and cynically theorized answers — for many years. They view most M&A-related shareholder litigation as an unwarranted tax on dealmaking. Delaware judges have often agreed with that critique but said they were unable to curb strike suits because of the problem of multijurisdictional litigation. Plaintiffs’ lawyers bring M&A-related class action suits in multiple state courts, and defendant companies seek global settlements rather than fight dubious suits because of the cost of defending the matters and the risk of an adverse decision. But many Delaware corporations have in recent years adopted forum selection bylaws or charter provisions that require all fiduciary duty litigation to be brought in Delaware.
Tune in tomorrow for the webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Brian Breheny of Skadden Arps, Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
Recently, the Economist ran this article about how regulators should make it easier – not harder – for activists. Also see this 1-minute video I just made:
Recently, a number of investors as well as certain hedge funds have adopted a strategy of seeking an appraisal of the fair value of their shares in a target corporation acquired via merger merely to earn the currently very attractive statutory rate of interest on the appraised value of those shares from date the merger closes to the date of payment of the judicially appraised value. In the current low interest rate environment, the relatively high statutory interest rate of 5% above the Fed. Reserve Discount Rate may generate an attractive return even if the appraised value is less than the merger consideration.
In a new case – Huff Fund Investment Partnership v. CKx, Civil Action No. 6844-VCG (Del Ch; 2/12/14) – the respondent target corporation valiantly but unsuccessfully attempted to stop interest from accruing at the overly generous statutory rate on that portion of the value of its shares that it was not challenging in the appraisal proceeding and was willing to pay immediately. Here is an excerpt:
The Respondent requests that I order the Petitioner to accept an unconditional tender of $3.63 per share, which represents its expert’s base case scenario for valuing CKx, plus accrued interest. In other words, the Respondent agrees that under no circumstances could CKx be valued at less than $3.63 per share, and it is willing to tender that amount to stop the accrual of interest on that payment, which interest is currently accruing at five and three-quarters percent, five percent above the Federal Reserve discount rate. In effect, the Respondent seeks the equitable analog of an offer-of-judgment rule, which allows Superior Court, but not Chancery, litigants the ability to limit the adverse effects of a verdict.
In addition to agreeing that the Petitioner would not be required to return the tendered amount to the Respondent, the Respondent has offered to indemnify the Petitioner for any negative tax consequences incurred as a result of accepting a partial payment—an offer conditioned on the Petitioner turning over certain tax decisions to the discretion of the Respondent. Despite those concessions, the Petitioner continues to reject the Respondent’s offer, and for the reasons explained below, I deny the Respondent’s request for an order requiring the Petitioner to accept it. . . .
I am aware that equitable principles may support such a tolling of interest, in certain situations. However, where the General Assembly has provided a specific standard governing interest awards, such a statutory directive must trump those considerations.
This decision makes it clear that the Delaware legislature needs to act – hopefully sooner rather than later – to address the issues created by an overly generous statutory interest on the appraised value of shares. Otherwise, given the current low interest rate environment, we will continue to see a large number of long, drawn-out appraisal claims burdening the Delaware courts.
In this chart from SharkRepellant, over the past decade, you can determine how many proxy fights were won by management or dissidents, how many were settled and how many were withdrawn or pending…
Last week, in American Capital Acquisition Partners, LLC v. LPL Holdings, Inc. (February 3, 2014), the Delaware Court of Chancery, in connection with a disputed earnout provision, allowed a claim for breach of the implied covenant of good faith and fair dealing to survive a motion to dismiss. In taking this relatively rare step, the court showed a willingness to fill a ‘gap’ in contractual drafting with an obligation to act in good faith, and deal fairly, with respect to a matter the parties did not focus on in negotiations. Specifically, the claims that survived were based on allegations that clients, personnel and opportunities of the acquired company were actively diverted post-closing to another subsidiary of the buyer, thereby impeding the acquired company’s ability to meet the performance guidelines that would have entitled the sellers (plaintiffs) to certain contingent payments (both under the Stock Purchase Agreement (SPA) and their employment agreements).
On the other hand, the court dismissed the claims alleging breach of those implied covenants by the buyer in failing to make technological adaptations to help increase profitability because the plaintiffs anticipated, but failed to bargain for, such an obligation in the SPA.
Interestingly, this case also involved a non-reliance issue, and since the SPA included both an integration clause and a provision disclaiming reliance on extra-contractual representations, the court did not allow the sellers’ fraudulent inducement claim. Here’s the language:
“Non-Reliance. Except for the representations and warranties by the Company in this Agreement, Buyer and Seller each acknowledge and agree that no Person is making, and Buyer nor Seller is not relying on, any representation or warranty of any kind or nature, express or implied, at law or in equity, or otherwise, in respect of the Company, the Business, the Sellers or the Buyer, including in respect of the Company’s Liabilities, operations, assets, results of operations or condition.”
On a related topic, in the recent case of Blaustein v. Lord Baltimore Capital Corp. (January 21, 2014), the Delaware Supreme Court held that the directors of a closely held corporation do not have a fiduciary duty to consider buying out minority stockholders. Instead, stockholders should rely on contractual protections to facilitate liquidity. The court also affirmed that, based on the repurchase provisions in the relevant stockholders agreement, the implied covenant of good faith and fair dealing did not create a duty to negotiate a reasonable repurchase price for the shares.