One of the first items on the agenda for any transaction is picking a data room provider. This Westwicke Partners blog discusses a number of different service providers and provides advice about what dealmakers should consider when making a selection. Here’s an excerpt on issues to think about when data security is the key consideration:
If data is extremely sensitive and you are very concerned about security, some companies offer digital rights management. An example is Blackberry Workspaces (which, despite the name, does not require users to have Blackberry devices). With this offering, you can place controls into the file itself. This means that people who have access to the document cannot print, edit, or forward it, allowing you tight control over sharing of your information. This generally is very cumbersome for the user, who often has to install software and might be unable to view on a mobile device. Digital rights management has not seen wide adoption yet because it’s not easy to use.
– John Jenkins
The Morris James blog highlights the Delaware Chancery Court’s recent decision in Buttonwood Tree Value Partners v. R.L. Polk & Co. (Del.Ch.; 7/17), which involved claims that controlling shareholders breached their fiduciary duty by low-balling a self tender :
This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.
In upholding the minority’s fiduciary duty claims, Vice Chancellor Glasscock noted the following facts:
– The controlling shareholders collectively owned more than 90% of the common stock of Polk;
– Directors allied with the controlling shareholders exercised that collective power as a control block;
– The controlling shareholders engineered a self-tender in a way that maintained their degree of control; and
– The tender offer price was set through a financial advisor that also did work for affiliates of the controlling shareholders.
Those facts aren’t great, but here’s the clincher – within roughly two years of the self-tender, the remaining stockholders had received extraordinary dividends amounting to 1/3rd of the self-tender price, along with merger consideration equal to 300% of the self-tender price.
As a result, Vice Chancellor Glasscock declined to dismiss the claims & determined that the controlling shareholders had the burden of proving entire fairness.
– John Jenkins
Compensation issues in spin-offs can be very complicated. Matters that need to be addressed include the terms of SpinCo’s compensation & benefit programs, treatment of outstanding parent company awards, & whether special awards will be made as part of the transaction.
This PayGovernance memo provides an overview of compensation considerations that need to be taken into account when planning a spin-off. Here’s an excerpt addressing potential transaction-related special awards:
Many spin-‐offs include “Founders’”grants of SpinCo stock and/or stock options to SpinCo’s senior management team both to provide support for team retention during an initial post-spin period and to help establish ownership of SpinCo stock by the new team. The special grants are typically determined by RemainCo’s Board, and are included in the offer letters for SpinCo’s senior management.
Some companies also provide “success” or “completion” award opportunities – either in cash or stock — to staff who will play a key role in executing the spin-off; in doing so, they may be required to take on additional responsibilities beyond those core to their role. Participants may include staff who will transition to SpinCo and/or staff who will stay with RemainCo. These awards are typically designed to support retention by vesting after the spin-off is completed and to incentivize excellence in execution of the spin-off (e.g., by linking payouts to the achievement of cost or timing goals).
In addition to discussing employee compensation, the memo also addresses factors to take into account in establishing compensation arrangements for SpinCo’s outside directors.
– John Jenkins
This Gibson Dunn memo reports the results of its survey of activism during the first half of 2017. This excerpt is from the intro:
Activism has continued at a vigorous pace thus far in 2017. As compared to the same period in 2016, this mid-year edition of Gibson Dunn’s Activism Update captured more public activist actions (59 vs. 45), more activist investors taking actions (41 vs. 35), and more companies targeted by such actions (50 vs. 38).
During the period from January 1, 2017 to June 30, 2017, seven of the 50 companies targeted faced advances from multiple activists, including two companies that each had three activists make separate demands and two companies that each dealt with activists acting jointly. As for the activists, 10 of the 41 captured by our survey took action at multiple companies. Equity market capitalizations of the target companies ranged from just above the $1 billion minimum covered by this survey to approximately $235 billion, as of June 30, 2017.
Activist priorities included:
– Changes in board composition (68% of campaigns)
– Changes in business strategy (61% of campaigns)
– Activism surrounding M&A (46% of campaigns)
– Governance changes (31% of campaigns)
– Management changes (27% of campaigns)
About 1-in-5 activist campaigns led to a proxy contest during the first half of the year – but none of those contests sought to gain control of the target’s board. Of the 12 contests reviewed in the survey, 4 went to a vote, with the dissidents winning just once.
– John Jenkins
This Fried Frank memo reviews the Delaware Chancery Court’s recent decision in In re MeadWestvaco S’holders Litig. (Del. Ch.; 8/17), in which Chancellor Bouchard dismissed allegations of bad faith in connection with a target board’s approval of a stock-for-stock merger entered into in the wake of an activist campaign. Here’s an excerpt summarizing the key aspects of the case:
– The decision — in which the court suggests that the standards of “waste” and “bad faith” are equivalent — highlights the extremely high bar to potential liability of disinterested target company directors. We note that if, under Corwin, business judgment review applies in a post-closing action for damages, the only basis on which a transaction can be successfully challenged is that it constituted “waste”; and that if Corwin does not apply, then, given the effect of the exculpation statute, the only route to a successful post-closing action for damages is that the directors’ conduct in approving the transaction was so egregious that it constituted “bad faith.” In MeadWestvaco, the court indicated that the two standards are essentially equivalent — and virtually impossible to meet.
– Non-controller, non-Revlon transactions (like the stock-for-stock merger in MeadWestvaco) continue to be subject to business judgment review both pre-closing and post-closing. We note that Corwin — which when applicable transforms the standard of review post-closing to business judgment (regardless of what the standard was pre-closing) — should have no practical impact on non-Revlon transactions.
– Although the court did not address the issue, MeadWestvaco may signal that there remains some uncertainty whether Corwin “cleanses” bad faith by directors. As discussed below, although one early post-Corwin decision stated that Corwin does cleanse bad faith, and a number of decisions since then have stated that Corwin cleanses breaches of the duty of loyalty (of which, we note, the duty of good faith is a part), MeadWestvaco may signal that some uncertainty remains as to whether Corwin would cleanse director action that is “so ‘egregious,’ so ‘irrational,’ or ‘so far beyond the bounds of reasonable judgment’ as to be ‘inexplicable on any ground other than bad faith.’”
– John Jenkins
This Ropes & Gray memo discusses recent a FTC decision to implement several internal process reforms that will streamline information requests and improve transparency in antitrust investigations. The reforms include:
– Providing plain language descriptions of the investigative demand process;
– Developing business education materials to help small businesses understand how to comply;
– Adding more detailed descriptions of the scope and purpose of investigations to give companies a better understanding of the information the agency seeks;
– Limiting the relevant time periods investigated by the agency;
– Significantly reducing the length and complexity of instructions for providing electronically stored data; and
– Increasing the amount of time allowed for responses to improve the quality and timeliness of compliance by recipients.
Other measures include closing older investigations and identifying unnecessary regulations. The FTC is also reviewing its data security investigations with a view to providing guidance to companies regarding what data security practices have been deemed sufficient.
– John Jenkins
It’s the rare deal that doesn’t have at least some tense moments during the negotiation process. This Nixon Peabody blog has some tips from a psychologist on how to keep your deal on-track when the going gets tough. Here’s an excerpt that makes the point that soft words turn away wrath:
Most of us have an internal alarm that goes off when it feels like someone is imposing their will on us. We instinctively react by digging into our point of view, pushing back with an equal amount of force or checking out of the conversation altogether. This is far from ideal when the hope is to reach a shared agreement.
Softening your message slightly can help to re-engage the other person in the dialogue. You don’t have to change to a weak argument or abandon your perspective. However, by using statements like, “In my opinion…,” “It appears….,” or “I’m wondering if….”, you demonstrate that you are open for a dialogue and willing to hear another person’s perspective. Make sure to present things as your point of view, not as a universal fact.
The blog makes the related point that it’s important to keep in mind the difference between coercion and negotiation when it comes to your approach. It also recommends starting the conversation with areas on which the parties agree, and stresses the importance of paying attention to the “mood in the room” during negotiations.
– John Jenkins
In its 2014 MFW decision, the Delaware Supreme Court set a path to business judgment rule review for controller squeeze-outs. Last week, Vice Chancellor Slights’ decision in In re Martha Stewart Living Omnimedia S’holders Litig. applied MFW to the sale of a company to a 3rd party that was alleged to involve a controller conflict. Here’s an excerpt from this Wachtell memo summarizing the decision:
While MFW provided a clear path for controllers pursuing “squeeze out” transactions, its more general application to controller conflicts has not been addressed until now. The Court of Chancery has just issued an opinion holding that the presence of the three cleansing mechanisms identified in MFW will provide business judgment protection to controllers in contexts outside of squeeze-outs. In re Martha Stewart Living Omnimedia, Inc. Shareholders Lit., C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017) (“MSLO”).
In the MSLO case, stockholder plaintiffs contended that Delaware law required the application of the stringent entire fairness standard to employment and intellectual property rights agreements that the third-party buyer of MSLO negotiated with Martha Stewart, who controlled MSLO. The plaintiffs alleged that these personal arrangements “diverted” merger consideration to the controller from the public, even though Ms. Stewart received the same stated price per share as the public stockholders.
Ms. Stewart had agreed to structure a sale process for MSLO that included the three MFW features. Accordingly, the Court held that claims that she had breached any duties to stockholders were unfounded, and that the stockholder claims should be dismissed under the business judgment rule. Describing the fact pattern as a “one-sided conflict transaction” because the buyer was unaffiliated, the Court applied the reasoning of MFW, thereby rewarding Ms. Stewart’s disavowal of her control power with dismissal of the stockholder challenge.
The MSLO case is consistent with prior decisions holding that the business judgment rule could apply to disparate consideration claims arising out of a transaction in which a controller “rolled over” its equity stake. However, MSLO addressed head-on the issue of whether MFW’s procedural protections had to apply from the outset of a proposed transaction in order to achieve that result.
Vice Chancellor Slights held that compliance with MFW’s procedural protections was required from the outset of a transaction, but he distinguished between controller squeeze-outs – which involve a “two-sided conflict” – and the one-sided conflicts potentially involved in disparate consideration claims arising in connection with 3rd party sales. In a 3rd party sale initiated by an unaffiliated buyer, Slights said that the “outset” of the transaction occurs when the controller & the potential buyer begin negotiations for disparate treatment – not when the initial approach by the buyer is made.
– John Jenkins
Privacy and cybersecurity issues are looming ever larger in M&A transactions. Buyers need to assess these risks carefully during due diligence because they can be significant and materially affect a buyer’s valuation of a seller’s business. Moreover, issues that are discovered after an M&A transaction is completed could expose companies to substantial liabilities.
This Hunton & Williams video contains the first of a two-part roundtable discuss the special consideration that should be given to privacy and cybersecurity risks in corporate transactions.
– John Jenkins
The level of deal flow between the US & the UK makes it the world’s largest bilateral deal corridor – and this Deloitte study on US-UK cross-border M&A activity during the first half of 2017 provides a number of insights into current market conditions. Here are some of the key themes:
– US dealmaking into the United Kingdom has fallen by almost 15% in the first half of 2017, with several dealmakers pointing to the Brexit effect.
– UK dealmaking into the United States has risen by almost 10% in the first half of 2017, with UK investors keen to secure revenue growth in the United States.
– Confidence over M&A volumes is high in the United States, but more guarded in the United Kingdom.
– Technology sector deals continue to provide most of the volume in the corridor, with companies attempting to capture opportunities in big data and growth in cloud-based services.
– California, New York, and London remain primary locations for transatlantic dealmakers, but US buyer interest in the UK regions outside London is growing.
– John Jenkins