When I taught law school, I’d always spend some time discussing the “winner’s curse” – the idea that because of competition among bidders for deals, most mergers didn’t create much value for the buyer’s shareholders. This disparity in outcomes between buyers & sellers has held true for a long time, and the existence of a winner’s curse in M&A has become conventional wisdom.
Now it turns out that we may need to rethink that conventional wisdom. This recent blog from Prof. Ann Lipton flags a new study that suggests that in recent years, the winner’s curse seems to have disappeared – at least at the high end of the food chain. Here’s the abstract:
M&A deals create more value for acquiring firm shareholders post-2009 than ever before. Public acquisitions fuel positive and statistically significant abnormal returns for acquirers while stock-for-stock deals no longer destroy value. Mega deals, priced at least $500 mil, typically associated with more pronounced agency problems, investor scrutiny and media attention, seem to be driving the documented upturn.
Acquiring shareholders now gain $62 mil around the announcement of such deals; a $325 mil gain improvement compared to 1990–2009. The corresponding synergistic gains have also catapulted to more than $542 mil pointing to overall value creation from M&As on a large scale. Our results are robust to different measures and controls and appear to be linked with profound improvements in the quality of corporate governance among acquiring firms in the aftermath of the 2008 financial crisis.
The authors attribute this gain to improved corporate governance, but Prof. Lipton speculates that there may be more to it than that:
Whatever value target shareholders receive is necessarily a function of the governing law – including, as the Delaware Supreme Court says, Revlon, Unocal, and the entire fairness doctrine. But with new cases like Corwin and Kahn, those are rapidly going the way of the dodo. (See, e.g., J. Travis Laster, Changing Attitudes: The Stark Results Of Thirty Years Of Evolution In Delaware M&A Litigation; Steven Davidoff Solomon & Randall Thomas, The Rise and Fall of Delaware’s Takeover Standards). It may once have been true that acquirers overpaid for targets, but it’s dangerous to change the legal landscape and expect the market to remain the same.
– John Jenkins
This Orrick blog is the first in a series addressing antitrust issues in joint ventures. Since joint ventures frequently involve collaborations between competitors or potential competitors, antitrust concerns can be significant. Here’s an excerpt outlining the major antitrust questions that need to be addressed in the joint venture context:
– Does the JV constitute a “naked” agreement among competitors which is per se unlawful, does it not present an antitrust issue because there is only a single, integrated entity performing the JV functions, or does it involve restraints within the scope of a legitimate collaboration that are virtually per se lawful?
– Does the JV impose so-called ancillary restraints on the venture itself or its members, and if so, what standard of review applies to such restraints?
– Assuming the JV is properly structured to avoid an unlawful conspiracy charge, is it “too big” to be acceptable? What guidance applies to the size or market footprint of a JV?
– Will operation of the JV involve sharing of information between or among competitors, and if so, what practical steps should be taken to manage and limit information sharing between and among the JV and JV members?
Subsequent blogs have addressed structural considerations and ancillary restraints.
– John Jenkins
Tune in tomorrow for the webcast – “Structuring, Negotiating & Litigating Public Deals: Has the Pendulum Moved?” – to hear Richards Layton’s Ray DiCamillo, Greenberg Traurig’s Cliff Neimeth and Richards Layton’s John Zeberkiewicz analyze how recent Delaware case law and statutory changes are influencing the way that M&A deals are structured, negotiated and litigated.
– John Jenkins
In this recent blog, Weil Gotshal’s Glenn West vents his frustration about the way practitioners continue to approach MAC clauses despite the lessons of several decades of Delaware case law. Instead of thinking through the implications of these cases when drafting MAC clauses, lawyers routinely defer to market practice – which often means these clauses don’t accomplish what the parties intend. Here’s an excerpt:
Many of the standard terms of M&A agreements began their existence with a brain—the brain of a smart lawyer who perceived an issue that needed to be addressed and drafted a clause to address it. And then other smart lawyers recognized the value of that newly drafted clause, and adapted and improved it until it became a standard part of most M&A agreements. But once that clause became attached to the “market” it became divorced from the brain or brains that created it, and soon everyone was using it regardless of whether they truly understood all the reasons that prompted its drafting.
Even worse, market attachment is so strong that even after a standard clause has been repeatedly interpreted by courts to have a meaning that differs from the meaning ascribed to that clause by those who purport to know but do not actual know its meaning (mindlessly using the now brainless clause), it continues to be used without modification. Such is the case for many with the ubiquitous Material Adverse Change (“MAC”) or Material Adverse Effect (“MAE”) clause.
Glenn offers up some specific suggestions for buyers negotiating MAC clauses, and closes with advice that all deal lawyers should take to heart:
Don’t let “it’s market” ever be an acceptable explanation for the inclusion or lack of inclusion of any provision of an agreement. Know what every provision of your agreement means on its face, as well as how any standardized provisions have been interpreted by the courts that could ultimately be involved in any dispute over your agreement.
– John Jenkins
This Proskauer memo addresses a recent Delaware Chancery Court decision recommending to the Supreme Court that Delaware to change its approach to the preclusive effect of judgments in derivative litigation. Here’s the intro:
The Chancellor of Delaware’s Court of Chancery yesterday urged the Delaware Supreme Court to revise Delaware law on preclusion in shareholder derivative actions. The court’s July 25, 2017 decision in In re Wal-Mart Stores, Inc. Delaware Derivative Litigation recommended that the Supreme Court adopt a rule that a judgment in one derivative action cannot bind the corporation or its stockholders in another derivative action unless either
– the first action has survived a motion to dismiss because a pre-suit demand on the corporation’s board of directors would have been futile or
– the board has given the plaintiff authority to proceed on the corporation’s behalf by declining to oppose the derivative suit.
In other words, preclusion would not apply unless the stockholder in the first case had been empowered by either a court or the board to assert the corporation’s claims.
So what’s going on here? According to this blog by Prof. Ann Lipton, the court’s moves are ultimately about responding to the threat posed by multi-forum litigation:
Delaware’s recommendation that derivative plaintiffs seek books and records before proceeding with their claims simply invites faster filers to sue in other jurisdictions – and invites defendants to seek dismissals against the weakest plaintiffs, which will then act as res judicata against the stronger/more careful ones.
Delaware’s latest proposal to deal with the problem came in the form of a suggestion from its Supreme Court: perhaps when derivative actions are dismissed for failure to allege demand futility, it would violate the constitutional due process rights of subsequent plaintiffs to bind them to that decision. The theory is that until the demand requirement is satisfied, a plaintiff represents only him or herself, and not the corporate entity; therefore, any dismissal only extends to that plaintiff. In January, the Supreme Court remanded to Chancery to make a determination of the constitutional law issues. See Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017).
Well, a few days ago, Chancellor Bouchard came back with an answer. He concluded that an Arkansas court’s dismissal of a derivative case on the grounds that those plaintiffs failed to show demand futility should not bar similar claims by Delaware plaintiffs.
As we’ve previously blogged, Delaware has seen a dramatic decline in the percentage of deal litigation that has been filed in its courts in recent years. Although there are lots of reasons for the decline, making it harder to use out of state settlements of weak derivative claims to preclude stronger claims from being brought in Delaware courts may help to at least slow, if not stop, the bleeding.
– John Jenkins
This recent article by King & Spalding’s Rob Leclerc & John Anderson and Morris Nichols’ Eric Klinger-Wilensky & Nathan Emertiz addresses practical considerations for boards considering a “single-bidder” deal process. Here’s the intro:
Whether a public company should engage in a “single-bidder” process is one of the most difficult questions a target public company’s board of directors must consider during the early stages of a transaction. In the right circumstances, a single-bidder process can result in an expedient transaction that maximizes stockholder value while minimizing the risks associated with putting a corporation “in play.”
In other circumstances, a single-bidder process can be a high risk proposition that exposes the deal to uncertainty and the directors and officers to possible monetary liability. Although there are no“bright line” rules under Delaware law regarding the appropriateness of a single-bidder process, there are certain circumstances in which, we believe, a Delaware court likely would view a single-bidder process more favorably than in other situations.
The article reviews the factors that support a board’s decision to engage in a single-bidder process, as well as practical considerations associated with such a process – including negotiating exclusivity agreements, deal protections, and “go shops” or other market checks.
– John Jenkins
This Hunton & Williams memo discusses how a dissident was able to effectively use disclosure litigation to flip ISS’s recommendation & turn the tide in a proxy fight. Here’s the intro:
In a recent proxy contest, a dissident stockholder brought a lawsuit against the company claiming that the company’s disclosures about certain incumbent directors were deficient. The court agreed, and enjoined the company’s annual stockholders meeting until at least 10 days after the company supplemented its disclosures. As a result of the court’s ruling, Institutional Shareholder Services (“ISS”) reevaluated its support for the company’s nominees and changed its voting recommendation in favor of the dissident, who ultimately prevailed at the stockholders meeting.
Litigation is a common tactic in proxy fights, but the memo points out that the case illustrates how dissidents can use disclosure litigation as an offensive weapon to influence proxy advisors’ recommendations and help win the proxy contest.
– John Jenkins
This recent blog from Lowenstein Sandler’s Steve Hecht & Rich Bodnar notes that Delaware’s recent adoption of the “blockchain amendments” to its corporate statute could have a significant influence on future appraisal proceedings. Here’s an excerpt:
Multiple decisions in the Dell case put the potential relevance of blockchain to appraisal in focus. In July 2015, Vice Chancellor Laster reluctantly dismissed a subset of Dell shares seeking appraisal because, prior to the effective date, those stockholders’ stock certificates had been retitled. As a brief recap, in that instance, DTCC (the holder of effectively all stock in the US) certificated shares into the name of its nominee, Cede & Co. The petitioners’ custodians told DTCC to retitle the dissenting shares to the name of their own nominees – this retitling broke the record of ownership and thus denied these petitioners the right to appraisal. Blockchain, which generally does involve “titling” in this sense, could avoid such a result.
The same is likely with regard to a second opinion, from May of 2016, involving the lead petitioner in Dell. There, the lead petitioner instructed Cede (via its custodian) to vote in favor of the merger – but this was an error and the lead petitioner intended to vote against the merger. While blockchain cannot protect against mistaken instructions, blockchain could reduce the number of steps between beneficial holder and the exercise of its vote.
The blog also points out that blockchain could also have an impact on appraisal arbitrage – by potentially undermining the “fungible bulk” premise on which an arb’s ability to assert appraisal rights without showing that specific shares didn’t vote in favor of the merger is based.
– John Jenkins
This Shearman & Sterling memo summarizes the Chancery Court’s recent decision in Mrs. Fields Brands v. Interbake Foods – in which Chancellor Bouchard interpreted a termination right based on a “Material Adverse Effect” clause in a license agreement. The memo notes that the Chancellor applied the same tests to the exercise of an MAE-based termination right as those that would apply in an M&A transaction:
Even though the license agreement did not involve a merger or acquisition, in analyzing the undefined term “material adverse effect,” Chancellor Bouchard applied the Court’s three-prong MAE test from In re IBP Shareholder Litigation, which construed an MAE condition as a backstop protecting the acquirer from:
– the occurrence of unknown events,
– that substantially threaten the overall earnings potential of the target,
– in a durationally significant manner.
Under Delaware law, an adverse change must be consequential to a company’s long-term earnings power over a commercially reasonable period in order to be durationally significant. Although Chancellor Bouchard said that the period for assessing durational significance might be shorter in the context of a commercial contract than in an acquisition agreement, he found that none of the three conditions for invoking an MAE termination had been satisfied.
– John Jenkins
We have posted the transcript for our recent webcast: “FCPA Considerations in M&A.”
– John Jenkins