This new study from MergerMarket & Donnelley takes a look at how buyers and investors are being selected and approached in M&A, IPOs & divestment transactions. Here’s an excerpt with some of the key findings:
– Negotiated sales are the deal-sourcing method of choice. Some 82% of respondents said that their use of the negotiated sales process had increased (32% of which said it had increased significantly) in the past five years.
– Finding a buyer is a slower process. Some 46% of respondents say the period of time between deciding to sell an asset and finding a buyer has increased over the past five years.
– Technology and electronic tools have changed the way sell-side dealmakers target buyers. Face-to-face meetings have become less frequent according to 52% of respondents, who attribute this to online tools such as virtual data rooms, deal marketing solutions, and video conferencing.
– Gauging what type of deal and when to execute it has also become increasingly difficult. Some 72% of respondents say that gauging market conditions to pick the best time to execute an IPO has become more erdifficult.
The study suggests that, overall, the marketing process for deals is becoming more targeted. In addition to the dramatic increase in negotiated sales, 30% of respondents said that their use of a broad auction process has declined somewhat over the past five years, while 60% said they are using targeted auctions more.
While deal lawyers have long used rights offerings as a tool to cleanse a related party transaction, they’ve done so without any clear signal from the courts that this approach actually works. However, this Cleary blog says that the Chancery Court recently hinted that those of us who’ve used rights offerings in this way might be on the right track.
At a settlement hearing last month, Vice Chancellor Laster made a number of comments suggesting that a rights offering could effectively limit insiders’ liability in a transaction with a controlling shareholder. Here’s an excerpt summarizing those comments:
Although it is important to emphasize that these comments were made at an uncontested hearing, Vice Chancellor Laster’s analysis suggests that potential liability in transactions with controlling stockholders can be substantially reduced (if not eliminated) if (1) the transaction is structured so that minority stockholders are able to participate pro rata with the controlling stockholder (e.g., as a rights offering with any rights issued being transferable), (2) there is no other alleged coercion, and (3) the controller does not receive any unique benefit at the expense of the minority.
I blogged about rights offerings over at “John Tales” a little while back. They’re cumbersome & are usually a poor option for raising capital, but if Delaware ultimately gives its imprimatur to them as a way to limit liability or avoid entire fairness review in controlling shareholder transactions, we may see a lot more of them.
The outcome of the DFC Global appraisal case that’s currently before the Delaware Supreme Court may have a significant impact on deal litigation for years to come – and it may be the most closely watched appraisal case of all time.
The Supreme Court heard oral arguments in the case on June 7th, and Steve Hecht recently blogged about some of the questions raised by the Court during the course of that argument. Here are some nuggets from the blog:
– The court asked DFC Global why they did not introduce an economics expert to corroborate the reliability of the merger price as the measure of the company’s fair value; the Chief Justice said that by not doing so, they didn’t offer much help to the Chancellor in his evaluation of the merger price and the process of wading through the respective valuation experts’ reports.
– The court asked the stockholders why their valuation expert didn’t open up his own private equity shop if he really believed in the valuation delta between merger price and his own valuation, which came out nearly two times higher than the merger price.
If you’re interested in watching the oral argument (about 50 minutes), it’s available here.
The Corwin standard generally results in the business judgment rule applying to post-closing claims arising out of a deal that’s been approved by a fully-informed shareholder vote – unless shareholder approval was somehow “coerced.” In Saba Software, the Chancery Court found that a vote was coerced when shareholders were forced to choose between a discount-priced merger & continuing to own shares in a company that had “gone dark.”
Now, in Sciabacucchi v. Liberty Media, the Court has found coercion in another setting – Charter Communications’ decision to condition a couple of beneficial acquisitions on shareholder approval of share issuances to Liberty Media, its largest shareholder, to help finance the deals. Here’s an excerpt from Steve Quinlivan’s blog summarizing the Court’s holding:
The Court held Plaintiffs had pled facts making it reasonably conceivable that the vote was structurally coercive. Those facts, and related favorable inferences, indicate that the Defendant directors achieved value for the stockholders in the acquisitions. They then conditioned receipt of those benefits on a vote in favor of transactions extraneous to the acquisitions, the Liberty share issuances and other matters.
Assuming that viable breaches of fiduciary duty inhere in the Liberty share issuances, they could not be cleansed by the vote, since that vote was not a free vote to accept or reject those transactions alone; it was a vote to preserve the benefit of the acquisitions. In other words, ratification can cleanse defects inherent in a transaction, because the stockholders can simply reject the deal. The Court stated fiduciaries cannot interlard such a vote with extraneous acts of self-dealing, and thereby use a vote driven by the net benefit of the transactions to cleanse their breach of duty.
So far, arguments that shareholder approval was coerced have proven to be the most viable line of attack against Corwin’s application to merger claims.
This article from Scott & Scott’s Keli Swann reviews IP liability considerations in M&A transactions. Here’s an excerpt about the consequences of a purchaser’s decision to retain the seller’s information technology assets:
If the purchaser chooses to retain the IT assets, it assumes the responsibility of ensuring that all software complies with the relevant licensing agreement or the purchaser risks potential copyright infringement liability. There are a number of steps the purchaser should take to mitigate potential exposure, including conducting an internal audit of the new IT assets, evaluating any existing licenses, and determining whether any remediation is required in order to become compliant.
This Fredrikson & Byron memo points out that a decision to block your proposed deal isn’t always the biggest risk of DOJ & FTC antitrust review. As this excerpt demonstrates, sometimes that process opens up a completely different bag of snakes:
Thai Union Group P.C.L., owner of Chicken of the Sea, announced its acquisition of Bumble Bee in December 2014. A year later, under scrutiny from the Department of Justice, the deal was called off. In an ominous press release, the government stated, “Our investigation convinced us—and the parties knew or should have known from the get go—that the market is not functioning competitively today, and further consolidation would only make things worse.”
Though the deal was off, the government’s investigation was not. On December 7, 2016, the Department of Justice announced that a Bumble Bee executive had agreed to plead guilty to fixing prices for packaged seafood. According to the Department of Justice, the plea was “the first to be filed in the Antitrust Division’s ongoing investigation into price fixing” in the industry. Two weeks later, another Bumble Bee executive agreed to plead guilty to similar charges.
The lesson for transaction planners is to keep a broad perspective – most dealmakers looking at antitrust issues look at market shares and overlapping industries in order to assess potential areas of concern. That focus may turn out to be too narrow:
As Bumble Bee’s experience highlights, antitrust risk in mergers and acquisitions can take other forms. As part of merger investigations, government enforcers at both the Department of Justice and the Federal Trade Commission regularly solicit millions of documents from the merging parties and their customers and competitors. The attorneys and staff who review those documents are antitrust specialists. Agreements not to compete—whether for prices to end customers, bids for projects or hiring of employees—are bound to trigger concern.
Agreements like these are likely to constitute “red flags” to regulators & should be identified before a merger is signed. As the Bumble Bee situation shows, there’s potentially a lot more than a deal at stake.
Kevin LaCroix at “The D&O Diary” recently blogged about the continuing decline in the number of deal cases being brought in Delaware Chancery Court. Along the way, he raised an important question – weren’t exclusive forum bylaws supposed to prevent cases from being brought in other jurisdictions?
Kevin cited two different reasons why exclusive forum bylaws haven’t kept deal lawsuits in Delaware:
The first factor undermining the effectiveness of the forum selection provisions, and the reason for the plaintiffs’ lawyers recent pronounced preference for filing federal court lawsuits alleging violations of the federal securities laws (rather than state court lawsuits alleging violations of state law), is that Section 27 of the Securities Exchange of Act of 1934 gives the federal courts exclusive jurisdiction over actions alleging violations of the Act.
A company’s forum selection bylaw is ineffective with respect to action subject to the ’34 Act’s exclusive jurisdiction provision. The typical federal court merger objection lawsuit alleges that the company’s proxy materials omitted material information in violation of Section 14 of the Act and Rule 14-a-9 thereunder, and is subject to Section 27’s exclusive jurisdiction provision.
The second reason is a little more. . .well . . . Machiavellian:
As Fordham Law School Professor Sean Griffith points out in his January 2017 paper (here), defense counsel “must be seen as complicit in the out-of-Delaware dynamic because they have failed to exercise Exclusive Forum bylaws to bring the litigation back to Delaware.” As Griffith explains, the defendants’ failure to invoke the provision “must be seen as a revealed preference,” one that “demonstrates defendants’ continued interest in retaining the option of a cheap settlement and a broad release in an alternative jurisdiction.”
Some defendants are reportedly even going so far as to not bring the Trulia decision to the foreign court’s attention – even where Delaware law clearly applies. If so, Prof. Griffith suggests that the lawyers involved may be on shaky ethical ground:
Even if the settlement proponents have no interest in raising Trulia, perhaps they have some obligation to do so. The rules of professional conduct may obligate counsel under some circumstances to disclose authority contrary to their position even if that authority is not raised by opposing counsel.
The Delaware judiciary can’t be happy about these practices, and if Prof. Griffith is right on his assessment of the ethical issues, then it wouldn’t surprise me if one of these proposed settlements got very messy for the parties involved at some point in the future.
I recently blogged about the differences between the takeover defense arsenals of IPO companies and more seasoned issuers. While newly public companies start out with more aggressive protections than established companies, keeping them in place risks receiving withhold recommendations on director nominees from ISS & Glass Lewis.
This Cooley blog has some advice for companies that find themselves in this position. Here’s an excerpt on how to respond if proxy advisors give a “thumbs down” to your nominees due to takeover defenses:
– Assess the impact of the negative recommendation on your stockholder base; if stockholders are heavily influenced by proxy advisory firms, consider possible outreach to stockholders before annual meeting (if appropriate)
– Educate the board (if not previously done) on the issue and evaluate the appropriateness of the stockholder protective measures (e.g., peer company practices); consider any action items following the annual meeting
– Consider various courses of action and pros/cons: changes to protective provisions, stockholder engagement, disclosure in next year’s proxy statement regarding outreach/rationale for maintaining the provisions
– Regularly assess and monitor your governance practices as the company matures and your stockholder base evolves
For most newly public companies, negative recommendations won’t have a big impact for the first few years due to the size of the insiders’ stake. But the blog notes that even if ISS & Glass Lewis don’t determine the outcome of an election, their policies are often viewed as best practices & serve as starting points for board discussions on corporate governance.
There have been some interesting developments in Delaware appraisal actions over the past few weeks. In addition to the SWS Group case that I blogged about on Friday, in In re Appraisal of PetSmart (Del. Ch.; 5/17), Vice Chancellor Slights rejected claims that the “fair value” of the dissenters’ shares should be determined by reference to the results of their expert’s discounted cash flow analysis. Instead, he concluded that the merger price represented fair value.
In reaching this conclusion, the Vice Chancellor said that the PetSmart’s sale process was “reasonably designed and properly implemented,” & that the projections underlying the plaintiffs’ DCF analysis were “fanciful.”
This Fried Frank memo says that Slights’ approach represents a trend in recent Delaware appraisals – and may have important implications for future cases:
The decision reaffirms the court’s recent trend of increased reliance on the merger price to determine appraised “fair value” when the sales process involved “meaningful competition” and the target company projections available for a discounted cash flow analysis were unreliable.
Moreover, in our view, commentary in the opinion suggests that the court may be more likely than in the past to rely on the merger price where there has been a sales process involving “meaningful competition,” even if the company projections available for a DCF analysis were reliable.
Of course, looming over all Delaware appraisal actions is the potential outcome of the DFC Global appeal. This blog from Lowenstein’s Steve Hecht speculates that the SWS Group & PetSmart decisions could influence the Delaware Supreme Court’s assessment of that case:
These decisions might factor into the Supreme Court’s approach to the DFC Global appeal and the upcoming argument in that case on June 7, as the trial judges have again proven that they are ready and willing to peg their fair value award at — or even below — the merger price, without a mandatory Supreme Court rule that might require a merger-price determination result if the sale process proved to be sufficiently robust.
This Wachtell memo discusses the Chancery Court’s recent decision in In re Appraisal of SWS Group (Del. Ch; 5/17) – where Vice Chancellor Glasscock held that the “fair value” of the seller’s stock for appraisal purposes was almost 20% lower than the merger price. Wachtell points out that this result came as particularly bad news for a group of arbs who bought in for the sole purpose of dissenting from the deal:
After the merger was announced, arbitrageurs raised funds solely to finance an appraisal action, wooing investors with assurances that the Delaware courts were extremely unlikely to assign fair value below deal price. After raising tens of millions on that basis, the arbitrageurs acquired 7.4 million shares after the deal announcement and before the merger closing — approximately 15% of total shares outstanding — over a period in which SWS traded at an average share price of $7.22. Had the arbitrageurs simply voted for the merger, their investors would have received merger consideration now worth $8.30 per share.
The Court concluded that the stock was worth $6.38 per share. Ouch! That’ll leave a mark.
Appraisal arbitrage has been a winning strategy in Delaware in recent years – there’s a big potential upside, and Delaware’s generous statutory interest rate has in the past served as a nice cushion on the downside. But this case shows that you can also lose big when you play poker with somebody’s stock as your chips. We’re posting memos in our “Appraisal Rights” Practice Area.