Here’s the intro from this Cooley memo:
While acquisitions of up to 10% of the voting interest in a target that are made “solely for the purpose of investment” are in many circumstances exempt from Hart-Scott-Rodino (HSR) reporting requirements, even when the value of the investment exceeds the $76.3 million HSR “size of transaction” threshold, federal antitrust authorities have long interpreted that “exemption” to be a narrow one.1
The Department of Justice this week sued three affiliated hedge funds and their New York-based management company for acquiring shares in Yahoo! in 2011, in excess of the then applicable HSR threshold, and simultaneously agreed to settle the action, prohibiting future violations, without obtaining any civil penalty. The suit sends a clear message to investors that taking actions other than voting shares likely takes an investment out of the exemption.
The Complaint, which was filed on behalf of a divided Federal Trade Commission, targets actions taken by Third Point LLC in connection with its acquisition of voting securities in Yahoo!. By late August 2011, three Third Point funds each had Yahoo! holdings exceeding the then applicable $66 million size-of-transaction threshold. On September 16, 2011, the three funds each filed a notification and report form under the HSR Act for the voting securities purchased, and the waiting period of those filings expired on October 17, 2011. Notwithstanding this filing, the DOJ alleged that the funds were in violation of the HSR Act from the point in August when they had each acquired shares putting their holdings above $66 million until the expiration of the waiting period in October 2011, given that they engaged in “various actions inconsistent with [qualifying for] an investment-only purpose” exemption.
Here’s an excerpt from this interesting blog from a while back by “The Activist Investor”:
For one of the most-discussed investors these days, we know surprisingly little about Carl Icahn’s activist investing. Numerous magazine and journal articles profile or mention him. But, unlike Warren Buffett or Peter Lynch, we could find only one book, from over twenty years ago, that covers his investment thinking.
Fortunately, we have abundant data about his activist projects. We studied these projects a bit, to see what lessons other activist investors could learn. We found some surprises.
Carl Icahn has a distinct approach. With a couple of notable exceptions, he avoids mega-cap companies, even though he has the assets and profile to tackle just about any company. He achieves his goals, and superior returns, though publicity, his outsized reputation, and financial clout. He follows-through on his threats less frequently, with few proxy contests. That threat alone means he usually settles with a company, accepting some BoD seats or the promise of a restructuring.
And then there’s this more recent blog entitled “Corporate Governance, The Icahn Way” by The Activist Investor…
Here’s something that Randi Morrison blogged on TheCorporateCounsel.net a few days ago: Recently, Deloitte released 2015 M&A Trends Report reveals a booming, wide-reaching M&A environment spanning small, mid-sized and large public and private companies and private equity firms, multiple industry sectors, and domestic and overseas markets. The report reflects the results of an early 2015 survey of more than 2,000 public and private companies and over 400 private equity firms.
Noteworthy findings include:
– Strong interest in overseas expansion. Among private equity respondents, 85% indicated that their deals involve acquiring a company domiciled in a foreign market – up from 73% last year. And 74% of the corporates are investing overseas – up from 59% last year.
– 39% of corporates expect to tap into the robust M&A environment to pursue divestitures – up almost 25% from last year.
– 85% of corporates anticipate acceleration of – or at least sustaining – last year’s M&A pace; only 6% expect deal-making activity to decrease.
– 94% of private equity firms forecast average to very high deal activity – up from 89% last year.
– Private equity firms anticipate ramping up both add-on acquisitions and portfolio exits.
Note that global M&A value in the first half of this year reportedly hit an 8-year high – second only to the all-time record set in 2007.
Deloitte’s report also notes that the vast majority of corporate and private equity respondents said that their deals fell short of financial expectations. See our earlier blog on tips to achieve post-merger integration success.
This NACD interview with Delaware Chief Justice Leo Strine covers a number of topics including certain potential adverse consequences of federal attempts to regulate corporate governance and the Delaware Supreme Court’s decision in Nabors addressing the reasonableness under the circumstances of actions by the buyer’s board where the buyer was giving up control. [Don’t forget our own upcoming webcast: “An M&A Conversation with Myron Steele & Jack Jacobs.”] Here’s an excerpt:
Q. After your first year-plus on the high court, what cases do you feel are most important in terms of their effect on how directors do their jobs on a day-to-day basis?
A. The Nabors decision, in a very dynamic M&A environment, is one that directors would probably find noteworthy. It emphasizes that directors are given credit for dealing with the contextual circumstances that they face, that the world is a dynamic place and not every deal is exactly the same, and that there can be unusual situations where boards have to do something innovative, and that as long as they do it with care and good faith, then they get credit under our law.
Q. As you know, the Nabors decision overturned a trial judge who apparently had ordered the board to hold a 30-day auction—which leads me to ask how far the board needs to go to determine that a deal that they have signed off on is the best deal possible for shareholders.
A. One of the things that people say they like is discretion, but then what they really like is to be told exactly what to do. With discretion comes the responsibility to exercise it responsibly. The way our law works is you get credit for exercising good faith judgment. Different deals present different contexts. Nabors was an unusual situation because, remember, the person—the party on the buy side—was giving up control. If you’re a buyer, that affects how you deal with the world, so there’s no simple answer.
The key thing that was reaffirmed in Revlon is a reasonableness test. Directors get credit for acting reasonably under the circumstances, and although there’s heightened scrutiny, the court cannot grant relief unless it has a belief that directors have not acted reason ably under the circumstances.
In terms of what sort of market check is appropriate, that’s contextual, and what directors get credit for is their thoughtful reflection on the particular circumstances facing their company and making reasoned judgments about the best way to obtain the best value for their stockholders.
Q. And so, if that gets called into question, then they just have to demonstrate that they have exhibited reasonableness?
A. Right. If you’re actually going to do something like engage in a change-of-control transaction—which is as important a topic as a board of directors is going to address—the court, plaintiffs, and stockholders are going to ask hard questions like: Did you consider all of the relevant options? Who were the likely strategic buyers? Who were the likely private equity buyers? Were people given an opportunity to look at the situation without the inhibition of deal-protection measures? These are all the things that you would typically expect boards to consider when they face the question of whether they’re going to sell control of the company.
What Nabors makes clear is that in a contextual situation and when a board pursues a reasonable course of action, then they get credit for that. And that has been the law for a long time, and it echoes the iconic decision in QVC.
Q. The passage of Dodd-Frank in 2010 increased the federalization of some corporate governance mandates. How does that affect the courts?
A. The increased federalization has actually probably helped Delaware because we’re a place of stability and dependability compared to the federal environment, where you get crisis-driven and federal responses that seem to have no logical connection to the crisis.
For example, at the federal level, there’s nothing about the banking crisis that’s connected to some of the mandates around activism. It’s actually fairly implausible. Frankly, the risk taking that companies were engaged in was, well, it tended to be favored by the investment community. And so you would think, if anything, the policy response would be to make people focus more on issues of substantial risk and long-term durability. But you get a response that actually, in some ways, makes companies more, not less, accountable to the immediate whims of short-term traders. In Delaware, our law is relatively stable and dependable, and that actually tends to increase people’s desire to at least use Delaware, because they can depend on that element in their governance structure.
I don’t know that it affects the courts directly, but it certainly affects boards of directors. The concern of federalization—and you have to include the increased mandates of the exchange rules as well—in my view is what I call the “more, more, more” problem. It was a pretty bad disco-era song, and it also is a very bad way to run the world.
I tend to analogize. If you have a kid at one of these schools where they give way too much homework—we don’t have a very long school year in the U.S.A., so we tend to compensate by giving a lot of homework—and if the kid already has a full load of math, science, English, history, and a foreign language, there really isn’t any time to do more homework. One of the problems we’ve done with boards of directors is we’ve assumed that we can just list more things for boards to do. When you create checklists of legal requirements, people tend to do the things that they legally need to do first. There isn’t a checklist requirement that says: spend a quarter of your time as a board making sure you have a good business strategy, spend another quarter of your time making sure that you are looking forward to what the key risks are to the business whether legal, financial or any other kind, right?
Q. What troubles you about that?
A. One of the things that troubles me is the assumption that directors have a lot more time to give. My sense is directors are spending more hours than they ever have. That doesn’t necessarily mean that they’re spending them in in the wisest way. And one of the concerns about federalization is the effect on how the board spends its time. One of the things that we need to think about is: What are the most important subjects?
Let’s make sure that any mandates align with that. And if there are things that are less important, take them out of the mandatory category. We have to be careful when we talk about ourselves internationally that we don’t harm ourselves as a nation because sometimes we have debates within our own borders and fail to understand how that might be perceived abroad. We might think that Sarbanes-Oxley or Dodd-Frank went too far—and that may be true—but from an international, comparative perspective, there might still be much more flexibility for American corporate managers to make decisions than there would be in other markets.
Here’s an excerpt from this blog by Pillsbury’s Peter Gillon and Alexander Hardiman:
Recently, we have seen insurers assert the price change exclusion as a potential defense to coverage at the most critical moment: just when the litigants are seeking to settle shareholders’ breach of fiduciary duty claims against the directors and officers. The result has been to inject several complicating factors into the already difficult process of litigating and settling these claims. One factor is that the exclusion generally does not apply to defense costs, and therefore the insureds may be incentivized to continue litigation – particularly because after the merger closes, the parties in charge of the litigation (the executives of the acquirer), are unlikely to be in the cross-hairs of discovery and unlikely to be as concerned with the burden of litigation as the target’s former directors and officers.
Another factor is that pre-closing, the remedies may include increased disclosures and other non-monetary consideration, which may justify Plaintiffs’ attorneys’ fees, which are generally covered. For claims being litigated after the merger closing, settlement becomes more difficult, as non-monetary settlement terms are frequently no longer available as settlement tools, and directors’ monetary payments may be non-indemnifiable. (As in other derivative claims, Side A DIC coverage may drop down and fill in any coverage gaps).
Fortunately, policyholders have numerous avenues to challenge insurers’ assertion of the price change exclusion with respect to breach of fiduciary duty claims. First, because the exclusion requires that “the [acquisition] price or consideration is effectively increased” to be triggered, the exclusion should not apply unless there has in fact been an increase in the price paid for the acquisition as a result of the merger objection lawsuit.
Thus, for example, a settlement of a pre-merger closing suit which consists of increased disclosures and other non-monetary relief, plus plaintiffs’ attorneys’ fees, would not fall within the exclusion. Similarly, claims based on Sections 14(a) and 20 of the Securities Exchange Act, which typically seek damages for alleged misrepresentations or omissions in a proxy filing, would not implicate the exclusion because they do not seek a change in the acquisition price.
I’ve been meaning to blog about this development. Here’s an excerpt from this blog by Gunster’s Gus Schmidt:
The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.
This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few options for actually issuing securities outside of filing a registration statement and subjecting themselves to Exchange Act reporting obligations. This was particularly the case in instances where there were a large number of target company shareholders who were not deemed to be accredited investors and the acquirer could not rely on the private offering exemption.
Based on the new SEC staff interpretations, these issuers may now consider using Regulation A to issue equity in connection with business combination transactions. Although there are certain reporting and other obligations that would be required under Regulation A, they are significantly less burdensome than those that would be required of an Exchange Act reporting company. For that reason, Regulation A offering are sometimes referred to as “mini-IPOs.”
Joe Feldman is working on an article for the next issue of our Deal Lawyers print newsletter – and has put together this short 3-question survey about advice you provide clients towards preparing for – and mitigating the impact of – post-closing surprises. Any responses used in the article will be without attribution. Please participate…
With yet another appraisal arbitrage decision in Delaware being widely written about – Longpath Capital v. Ramtron International (see these memos) – check out this paper written by the Analysis Group entitled “Appraisal Arbirtrage: Is There a Delaware Advantage?” The article posits that there are three significant economic advantages available to appraisal arbitrageurs under the current Delaware appraisal regime, each of which advantages parties seeking appraisal and creates an incentive for appraisal arbitrage.
In this decision – Fox v. CDX Holdings – the Delaware Court of Chancery was extremely critical of the valuation work of two valuation firms working on behalf of the seller. Significantly, this litigation relates to the sale of a private company – David Halbert, the founder of Caris, owned 70.4% of its fully diluted equity and JH Whitney VI, L.P. (“Fund VI”), a private equity fund, owned another 26.7%. Most of the remaining approximately 2.9% of Caris‘s fully diluted equity took the form of stock options that were cancelled in connection with the Merger. The plaintiff, Kurt Fox, sued on behalf of a class of option holders.
This decision highlights the potentially significant commercial, reputational and – if they had been named as defendants – legal and financial risks that financial advisors/valuation firms can face even when advising privately held companies with only a small percentage of the equity held by persons outside the control group. Luckily for the valuation firms, because the plaintiffs were option holders and not stockholders, this was a contract claim and Delaware law does not recognize a claim for aiding and abetting a breach of contract.
Separately, the opinion contains interesting dicta regarding providing aggressive projections (as opposed to fraudulent projections):
“During a sales process, a company may provide optimistic or bullish projections to bidders, even ‘extremely optimistic valuation scenarios for potential buyers in order to induce favorable bids.”16 There is an important line, however, between responsibly aggressive projections and outright falsehoods: “Pushing an optimistic scenario on a potential buyer is to be expected; shoveling pure blarney at that stage is another.”
Pennaco Energy, 787 A.2d at 713. “An optimistic prediction regarding a company‘s future prospects” may rise to the level of a “falsehood” if accompanied by “evidence that it was not made in good faith (i.e., not genuinely believed to be true) or that there was no reasonable foundation for the prediction.”
16 In re Pennaco Energy, Inc., 787 A.2d 691, 713 (Del. Ch. 2001) (Strine, V.C.) (citations and internal quotation marks omitted); see also In re Topps Co. S’holders Litig., 926 A.2d 58, 76 (Del. Ch. 2007) (Strine, V.C.) (“[O]ne of the tasks of a diligent sell-side advisor is to present a responsibly aggressive set of future assumptions to buyers, in order to extract high bids.”).