Appraisal rights are getting more attention in public M&A deals & appraisal conditions appear to be making a bit of a comeback. This Cleary blog discusses these developments & provides some thoughts on how a buyer should approach negotiating appraisal conditions. Here’s the intro:
Appraisal rights in public M&A transactions have recently garnered greater attention, particularly in Delaware. As a result, more attention is being paid to the possible inclusion of a closing condition protecting the acquiror against excessive use of appraisal rights, and this should lead to careful attention being paid to the negotiation and drafting of any such conditions and related provisions. Discussed below are some of the reasons for this greater attention, and suggestions regarding negotiating and drafting such provisions.
The blog addresses key issues in negotiating appraisal conditions for both one-step mergers & two-step deals incorporating a tender offer under Section 251(h) of the DGCL.
– John Jenkins
This Cooley blog draws some lessons for dealmakers from the cybersecurity problems experienced in the Verizon/Yahoo! & Telstra/Pacnet transactions. Here’s an excerpt addressing the initial cyber risk assessment:
The acquirer should consider the cybersecurity exposure that the acquisition of the target may impose. To determine such exposure, a variety of techniques could be used in performing a review of the target. An overall cyber risk assessment early in the process can provide a general idea of the general cyber maturity of the target. In addition to a diligence review of the target’s cyber documentation (e.g., security policy, incident response policy, access control policy, etc.) by the acquirer’s legal team, a well-developed cyber questionnaire could provide a decent perspective on the cyber aspects of the target’s operations.
This Norton Rose blog also offers tips for buyers on how to approach cybersecurity due diligence.
– John Jenkins
Yesterday, the SEC proposed amendments to the proxy rules that would require parties in a contested election to use universal proxy cards that would include the names of all director nominees. The proposal would permit shareholders to vote by proxy for their preferred combination of board candidates – as they could do if they attended the meeting & voted in person. Here’s the 243-page proposing release.
The proposed rules would:
– Allow shareholders to vote for the nominees of their choice by requiring proxy contestants to provide shareholders with a universal proxy card including the names of both management & dissident nominees.
– Enable parties to include all nominees on their universal proxy cards by changing the definition of a “bona fide nominee” in Rule 14a-4(d).
– Eliminate the Rule 14a-4(d)(4)’s “short slate rule,” since dissidents would no longer need to round out partial slates with management’s nominees.
– Require proxy contestants to notify each other of their respective director candidates by specific dates.
– Require dissidents to solicit shareholders representing at least a majority of the voting power of shares entitled to vote on the election of directors
– Require proxy contestants to refer shareholders to the other party’s proxy statement for information about that party’s nominees and inform them that it is available for free on the SEC’s website.
– Require dissidents to file their definitive proxy statement with the Commission by the later of 25 calendar days prior to the meeting date or five calendar days after the registrant files its definitive proxy statement.
The SEC also proposed amendments to Rule 14a-4(b), which would require proxy cards to include an “against” voting option for director elections when that vote has a legal effect, & also enable shareholders to “abstain” in a director election governed by a majority voting standard.
The ability to provide a “withhold” voting option when an “against” vote has legal effect would be eliminated. In addition, the proposed amendments to Item 21(b) of Schedule 14A would require disclosure about the effect of a “withhold” vote in an election of directors.
We’ll be posting memos in our “Proxy Fights” Practice Area.
– John Jenkins
This Cleary blog provides guidance on how to address the risks associated with a seller’s pre-closing privacy-related liabilities. Here’s an excerpt discussing why a buyer shouldn’t simply rely a “compliance with law” rep to address privacy matters:
Practitioners often rely on a general “compliance with laws” representation to address privacy-related risks; however, such a representation does not always provide sufficient protection for a purchaser against privacy and data security risks. The “compliance with laws” representation is often heavily qualified and covers a limited period of time (e.g., the target’s operation during the year prior to the transaction), which may not be appropriate for privacy matters. The representation also fails to cover certain issues of concern in the privacy context.
Specific privacy-related rep are a better approach. In addition to compliance with privacy laws, these reps can address contractual obligations & other data security measures – such as industry-standard security measures, disaster recovery, and backup equipment and facilities – that are not required by law or contract. They can also be used to address a range of other issues, including threatened enforcement actions & unauthorized data access, as well as to compel disclosure of the seller’s privacy policies & practices.
– John Jenkins
This Dechert memo notes that the DOJ & FTC continue to take a hard look at antitrust issues in M&A – as a result, deals & lawsuits are taking longer to resolve. Here are some highlights:
– In the first three quarters of 2016, there were 24 significant merger investigations, which is on pace to challenge the record of 37 set in 2015.
– Significant merger investigations through Q3 2016 lasted 9.7 months on average – on par with 2015, but more than one third longer than from 2011 to 2013.
– FTC & DOJ filed three complaints in Q3 2016 & a total of five complaints so far this year, also on pace to challenge 2015’s record level of seven complaints.
– Antitrust merger litigation is taking even longer, with 147 days between complaint and the start of trial and 27 days for trial, up 47% and 125%, respectively, from cases filed in 2015
Parties to the hypothetical average litigated transaction now have to plan on a 17 month fight for their deal – maybe more if current trends continue.
– John Jenkins
This Dechert memo reviews the position of courts in Delaware, New York & California on a buyer’s ability to hold a seller liable for a breach the buyer knew about before signing. Deal lawyers refer to this practice as “sandbagging,” and the three most important US commercial jurisdictions don’t see eye-to-eye on it. Here’s the takeaway:
Delaware law and New York law may be preferable to buyers as the governing law of an acquisition agreement because in these jurisdictions, a buyer is generally not required to show reliance to claim for a seller’s breach of a representation and warranty. On the other hand, sellers may prefer California law as buyers would be required to demonstrate reliance on the seller’s representation and warranty to make a breach of warranty claim against the seller.
Of course, parties can always bypass these default rules & negotiate for a pro-sandbagging or an anti-sandbagging clause in the acquisition agreement itself.
– John Jenkins
This Fox Rothschild blog discusses the Chancery Court’s decision in Frechter v. Cryo-Cell International, where it awarded a “mootness” fee in a case involving faulty language about removal of directors in a corporate bylaw. This excerpt summarizes the issue:
The bylaw provision at issue indicated that directors could be removed “for cause” at a “special meeting” of stockholders. The plaintiff asserted that under Section 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause, and thus the provision was unlawful.
After a motion for summary judgment was filed, the company amended its bylaws to remove the language, which mooted the case. The court found that the bylaw was misleading – but since the potential harm was mostly theoretical & there was no proxy contest pending, the court awarded a fee of only $50,000.
In recent years, many public companies have moved from staggered boards – where removal only for cause is okay under Delaware law – to a single class of directors, where it’s not. It was only in 2015 that the Chancery Court invalidated bylaw provisions like the one at issue here, so the case is a reminder for companies that recently de-classified their boards to check their bylaws. It’s also a reminder that it will be cheaper to address any flawed provisions that companies find before they’re in the heat of a proxy contest.
– John Jenkins
Yesterday, the SEC posted a Sunshine Act notice for an open Commission meeting to propose universal proxy ballots next Wednesday, October 26th. This controversial rulemaking has been in the works for years, with the House of Representatives going so far to vote a few months ago to stop the rulemaking. Check out this piece on page 5 of the November-December 2014 issue of the Deal Lawyers print newsletter entitled “The Quest for Universal Ballots: Might Boards Benefit Too?”…
In addition, the SEC will vote to adopt rules to facilitate intrastate & regional offerings (amendments to Rule 147 & 504) – and to repeal Rule 505 of Regulation D…
– Broc Romanek
This Cooley blog notes that the FTC & DOJ are increasingly challenging mergers on the theory that they may harm innovation. Here’s an excerpt:
Most recently, Lam and KLA-Tencor abandoned their proposed $10.6 billion merger which would have combined a manufacturer of machines used to inspect circuitry on computer chips and the largest maker of machines that etch away materials on silicon wafers used to make computer chips in the face of DOJ pressure. DOJ said in a press release that the proposed transaction presented “concerns about the ability of the merged firm to foreclose competitors’ development of leading edge fabrication tools and process technology on a timely basis.”
Potential loss of innovation was also a major focus of the DOJ in its lawsuit challenging the $34 billion Halliburton-Baker Hughes merger, which the companies ultimately abandoned.
– John Jenkins
This Morris James blog notes the Delaware Chancery Court’s recent decision in In re OM Group Stockholders Litigation – the latest in a series of decisions interpreting the Corwin standard. Here’s a excerpt:
Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper. Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.
Vice Chancellor Slights rejected each of the alleged disclosure violations – and explained when proxy disclosures are sufficient to invoke Corwin. He held that Corwin applied & that the board’s decision was protected by the business judgment rule.
– John Jenkins