Unocal v. Mesa Petroleum (Del. Sup.; 1985) and Revlon v. MacAndrews & Forbes (Del. Sup.; 1986) have guided Delaware courts in their evaluation of board decisions in the M&A arena for more than a generation. This blog from Keith Bishop notes that pending legislation in Nevada would formally reject the application of Revlon and Unocal to Nevada corporations. Here’s an excerpt:
As introduced, SB 203 includes the following statements of legislative intent:
Except in the limited circumstances set forth in NRS 78.139, an exercise of the respective powers of directors or officers of a domestic corporation, including, without limitation, in circumstances involving a change or potential change in control of a corporation, is not subject to a heightened standard of review.
The standards promulgated by the Supreme Court of Delaware in Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), and their progeny have been, and are hereby, rejected by the Legislature.
If this legislation is enacted, Nevada would join six other states that have enacted statutes rejecting Revlon (Indiana, Ohio, Pennsylvania, North Carolina, Maryland and Virginia) – and a longer list of states that have either directly or indirectly rejected Unocal. If you’re interested in more details, check out this 2009 Virginia Law Review article on “The State of State Antitakeover Laws.”
The Delaware Chancery Court hasn’t issued many preliminary injunctions in M&A transactions in recent years – but this Shearman blog reports on one issued earlier this month by Chancellor Bouchard. As this excerpt reveals, the issue that prompted the Chancellor’s action is one that has proven to be near & dear to the hearts of the Delaware courts & the SEC – financial advisor conflicts & fee disclosure:
On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. of FairPoint Communications, Inc. Vento v. Curry, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017).
Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures. The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.
In this case, general disclosure that the advisor’s affiliate would receive financing fees was not enough. The Chancellor emphasized that under Delaware law investment banker fees and potential conflicts should be fully disclosed because of the central role bankers play in mergers. The advisor rendered a fairness opinion in the deal, and the Chancellor found that the financing fees provided a potential incentive to issue that opinion. He also found that the financing fee was material in amount & quantifiable. As a result, more disclosure was necessary.
Quick settlements involving major concessions to activists have prompted a skeptical response from major institutions – who often think that board’s desire to avoid the disruption of a proxy fight may take priority over the views of long-term shareholders in these situations.
There are sometimes good business reasons to reach a quick and comprehensive settlement with an activist, but persuading investors of the merits of such a settlement is a challenging process. This blog from Cleary’s Arthur Kohn, Ethan Klingsberg & Elizabeth Bieber and Young Conaway’s Rolin Bissell discusses the novel way that one company – CSX – has approached that challenge.
CSX recently entered into a settlement with activist hedge fund Mantle Ridge. The settlement has a lot of the elements that have prompted investor angst – after only 47 days, the company conceded 4 board seats and installed a new CEO at the behest of an activist owning less than 5% of the stock. But the board signaled that investor input would be sought – at one point during the fight it announced that a special meeting would be held to address the activist’s proposals & that a board recommendation on the vote would not be issued.
The special meeting idea was abandoned when a settlement was reached, but the blog notes that the settlement included some unusual features designed to provide for investor input:
– Portions of the new CEO’s pay package would be put to an advisory vote at the company’s next annual meeting of shareholders (on which vote the board again indicated that it would not provide any recommendation)
– The decision of the board whether to have the company assume these portions of the package would be deferred until after this advisory vote, and
– The new CEO intended to resign if the board elected not to have the company assume these portions of his package.
Agreeing to submit a CEO’s pay package to a shareholder vote in this fashion goes beyond a “say-on-pay” vote – and this excerpt says that was exactly what CSX intended:
Through this additional say on CEO pay vote, shareholders are being given the gift of a unique opportunity to register their opinions on a controversial topic and arguably the strategic direction of the company which is tied to the new CEO’s presence. This aspect can be seen as a positive development for shareholder rights generally, and more specifically can be seen as responsive to State Street’s open letter criticizing companies for settling with activists too quickly and without long-term shareholder input.
The blog notes that investor perception of this approach is an open issue – an argument could be made that the shareholder vote is merely a veneer to protect the board, and not an effective means for obtaining input from long-term shareholders. It also addresses several other governance and corporate law issues raised by this unique effort to win the hearts & minds of long-term shareholders.
This Deloitte study surveyed 500 global executives with cross-border M&A experience. Despite caution about political instability and the global economy, the study says that the appetite for cross-border deals remains strong. The study finds that companies are becoming more competent and experienced in cross-border M&A, and are thus able to deliver on their deal objectives.
Here’s an excerpt from the conclusion identifying a handful of best practices that executives & deal members should consider in planning and executing cross-border deals:
– Ensure that the deal thesis and deal objectives drive all phases of the M&A lifecycle, from target selection to due diligence to execution and to integration
– Adapt the deal methodology and playbook to specific deal circumstances to pre-empt global M&A challenges
– Integrate pre-deal due diligence with pre-close planning activities to prevent handoff misses
– Structure the deal so it has the best chance of meeting its objectives — knowing that full integration may not always be the right choice
– Define the overall integration scope, approach, and plan for achieving both Day 1 and end-state goals
– Organize a global integration program that has representation from both acquirer and target around key work streams and regions/countries
– Focus efforts on effectively planning pre- and post-close integration in detail, with dependencies and critical path clearly outlined
Last week, the Delaware Supreme Court affirmed the Chancery Court’s decision in The Williams Companies v. Energy Transfer. There’s nothing unusual about that – the Supreme Court and the Chancery Court are usually on the same page. But this case is interesting because it involved a rare dissent by one of the justices – and even more interesting is the fact that the dissenter was Chief Justice Strine.
The Chancery Court’s decision upheld Energy Transfer’s termination of its deal with The Williams Companies based upon its lawyers’ inability to render a tax opinion that was a condition to closing. The Court rejected Williams’ contentions that Energy Transfer breached its obligations to use “commercially reasonable efforts” to cause its lawyers to issue the opinion and to use its “reasonable best efforts” to close the deal.
The Supreme Court disagreed with Chancery Court’s analysis of what Energy Transfer’s covenants required of it, but Vice Chancellor Glasscock’s ruling was saved by a footnote in which he applied the approach advocated by Williams and still found the complaint lacking.
Chief Justice Strine was not impressed with the footnote, particularly in light of his misgivings about whether Energy Transfer’s conduct after becoming aware of the potential issue with the tax opinion was consistent with its contractual obligations.
Anyone who has followed this case would likely agree on one thing – Energy Transfer’s tax lawyer found himself in a spot that no deal lawyer wants to be in. How he got put in that spot is a big part of what Justice Strine’s dissent is all about – and this article from Alison Frankel says that his opinion is a “cautionary tale for deal lawyers.”
Need a break? Don’t check your NCAA bracket – you’ll only get depressed. Visit our “Deal Cube Museum” instead. We’ve got prime artifacts from some of the great – and maybe not so great – M&A and financing transactions of the late 20th & early 21st centuries. Check ’em out!
This Fried Frank memo reviews Vice Chancellor Laster’s recent decision in Columbia Pipeline Group, Inc. Stockholder Litigation (Del. Ch.; 3/17) – which held that the ability to “cleanse” transactions through a fully informed stockholder vote extends to transactions involving alleged director self-interest. Here’s an excerpt summarizing the Vice Chancellor’s decision:
The plaintiffs alleged that all of the Columbia Pipeline directors and certain officers had breached their duty of loyalty by having engineered a self interested plan (when they were directors and officers of the company’s former parent) to spin the company off and then to sell the post-spin company in order to trigger their change-in-control benefits.
In what has become an increasingly familiar pattern for disposition by the Court of Chancery of post-closing challenges to M&A transactions (not involving a controller who has extracted a personal benefit), the court: (i) found that the stockholders had approved the transaction in a fully informed vote; (ii) held that, as a result, under Corwin, the business judgment rule standard of review applied; and (iii) dismissed the case.
The Vice Chancellor also spoke to the nature of the disclosure required in order to “fully inform” shareholders about alleged self interest – and said it didn’t require “self-flagellation.” Instead, it’s enough if the proxy disclosure provides information sufficient to allow investors to “stitch together” facts sufficient to draw an inference of self-interest.
This is the fifth time since the Corwin decision that the Chancery Court has allowed a transaction alleged to involve duty of loyalty issues to be cleansed through a fully informed stockholder vote. The path to business judgment rule review that Corwin mapped out for post-closing damage actions is proving to be very wide indeed.
This Dentons memo reviews the outlook for inbound US M&A for 2017, and concludes that the glass is half full:
With 2016’s roaring inbound M&A market in mind, what can we expect in terms of inbound M&A in 2017? For now, most analysts are predicting that the US’s crossborder M&A market will cool considerably in this new year, possibly slipping by 35 percent from the previous year. However, this level of M&A activity would still be an impressive figure overall and is indicative of the strong growth the global M&A market has seen over the preceding two to three years.
Although acknowledging the uncertainties associated with the Trump Administration and potential restrictions on outbound Chinese M&A, the memo expresses optimism about the long-term outlook for inbound US deals:
In sum, the outlook for foreign investors (particularly those in China) looking to engage in M&A in the US is murky. Industry prognosticators often repeat the old adage that “if there’s one thing investors hate, it is uncertainty.” In this instance, given the directions the market could swing, foreign investors could simply choose to remain cautious when approaching crossborder M&A in the US, which could result in a cooling in the marketplace.
Despite this uncertainty, however, we remain confident in the US market’s current robustness. With a stable and growing US economy, an administration committed to increasing US jobs and investing in the country’s infrastructure, and the strength of the global M&A market over the past several years, the stage is set for such optimism.
This Simpson Thacher memo reports that a recent Fed order approving a proposed acquisition by Peoples United Financial contains good news for many future bank deals. That’s because the order expanded the presumptive safe harbors that the Fed applies when reviewing bank M&A proposals for risks to U.S. financial stability. Here’s an excerpt:
Since 2012, the Federal Reserve has presumed that a proposal that involves an acquisition of less than $2 billion in assets or that results in a firm with less than $25 billion in total assets does not raise material financial stability concerns, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross -border activities, or other factors.
In the People’s United Order, the Federal Reserve said that its “experience has shown that proposals involving an acquisition of less than $10 billion in assets, or that result in a firm with less than $100 billion in total assets, are generally not likely to create institutions that pose systemic risks.”
Accordingly, the Federal Reserve will now presume that a proposal does not raise material financial stability concerns if it involves the acquisition of less than $10 billion in assets or results in a firm with less than $100 billion in total assets, absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other factors.
For deals that qualify under the revised safe harbor, this change will substantially reduce the need to provide information relating to financial stability risk & may accelerate the Fed approval process.
This Cooley blog says that 2017 should see continued growth in rep & warranty insurance outside of the traditional private equity market:
As the underwriting process has streamlined, and premiums have come down in the US, R&W insurance has secured a significant position in the M&A toolbox for middle-market M&A nationwide (outside of the PE context). Most financial buyers and now many strategic buyers increasingly use these policies as a means to manage risk and to help facilitate a deal.
With the underwriting process now shortened to about a week and policy negotiations standardizing, R&W insurance is poised to become more mainstream in non-private equity deals.
Although it is too early to tell whether the volume of claims will make these policies sustainable – or whether strategic buyers will agree to buy R&W insurance considering their relative leverage in most transactions – targets and buyers alike should be prepared to discuss insurance as a component of any private deal.
This Woodruff-Sawyer blog provides additional insight from the underwriters’ perspective into how the market for R&W insurance is evolving.