Monthly Archives: September 2017

September 29, 2017

Antitakeover: Case Closed on Staggered Boards?

Whether staggered boards are good or bad for shareholder value has been hotly debated in corporate governance circles for a long time.  Now, a new study claims to have settled the debate.  Here’s an excerpt from the abstract:

We address the heated debate over the staggered board. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior and conflicting studies and theoretical law review articles.

We show that neither theory has empirical support and on average, a staggered board has no significant effect on firm value. Prior studies did not include important explanatory variables in their analysis or account for the changing nature of the firm over time. When we correct for these issues in a sample of up to 2,961 firms from 1990 to 2013 we find that the effect of a staggered board on firm value becomes statistically insignificant after controlling for variables that affect both value and the incidence of a staggered board.

Well, I’m glad that’s settled.  Of course, it’s probably fair to say that this one’s already been settled on the battlefield – 90% of S&P 500 and 65% of S&P 1500 companies have eliminated staggered boards.

John Jenkins

September 28, 2017

Distracted Directors: Impact on M&A Success

Most public companies have a fair share of busy executives from other businesses on their boards. This Norton Rose Fulbright blog cites a recent study by Arizona State’s Luke Stein & Hong Zhao addressing a downside of having busy execs on a corporate board – the problem of distracted directors.

The study said that distracted directors were less effective in their advisory and monitoring roles – and that distraction concerns were most significant when their primary employer was performing poorly.  It turns out that distracted directors are a particular problem for M&A:

Of particular interest is the impact that distracted directors may have on a company’s acquisition decisions. Directors often take on an advisory role when selecting and negotiating mergers and acquisitions. When directors are not actively engaged in the process as a result of outside obligations, Stein and Zhao found there to be lower returns around the announcement of acquisitions. When directors with M&A experience in particular were distracted during this period – those who the company would presumably turn to for valuable advice – the returns were significantly lower.

The study’s authors suggest that the answer to the distracted director problem is larger boards comprised of directors from more diverse industries.

John Jenkins

September 27, 2017

Biggest All-Time Proxy Fight: Coming Down to Retail Holders?

This Reuters article talks about how the biggest proxy fight in history – the one involving Procter & Gamble – might come down to the retail shareholder:

The majority of votes for or against the nomination of Peltz, chief executive and founding partner of Trian Partners, to P&G’s board will be cast by massive index investors such as Vanguard Group and BlackRock. But small shareholders could tip the balance in a tight vote.

As a result, both P&G and Trian are spending unprecedented amounts of money and effort courting Neubecker and his fellow retail holders; by email, old-fashioned paper mail and even social media. Like most individual shareholders who vote in corporate elections, Neubecker is backing management.

Meanwhile, Equilar has conducted this analysis of P&G’s current board composition in context with broader issues shareholders and investor advisors take into account when choosing how to vote, including diversity, age, tenure and other board commitments.

Broc Romanek

September 26, 2017

Changes in Control: M&A Comp Issues for Sellers

This Semler Brossy article provides an overview of compensation issues that potential sellers should address early on in the M&A planning process.  Here’s an excerpt covering questions sellers should ask about their comp plans in advance of a sale:

– Are our change-in-control provisions and policies competitive with market practice? Is our cash severance appropriate? What about the equity acceleration provisions in our equity plans?

– Do we really understand all of the factors that could trigger a change in control? Are they the same across agreements? Are there scenarios where a change in control could be unintentionally triggered?

– Are the right people covered by severance or change-in-control plans? Are there any critical talent areas where we would be exposed?

– What is the total value of the potential severance if someone is terminated following a change in control?

– What about equity awards — and, in particular, performance-based shares? How are those treated in a change in control?

– Are our most senior executives subject to golden-parachute taxes under IRC Section 280G and 4999?

– What if we have a major transaction but a change in control is not triggered? What happens then?

The article also identifies key M&A provisions & considerations for different comp plans, and addresses the comp issues that should be considered once the M&A process has begun.

John Jenkins

September 25, 2017

Tomorrow’s Webcast: “Cybersecurity Due Diligence in M&A”

Tune in tomorrow for the webcast – “Cybersecurity Due Diligence in M&A” – to hear Andrews Kurth Kenyon’s Jeff Dodd, Lowenstein Sandler’s Mary Hildebrand and Cooley’s Andy Lustig discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.

John Jenkins

September 22, 2017

California Non-Competes: Delaware Governing Law Not a Fix

California is notoriously tough on non-competes. Sometimes, buyers try to work around California’s hard line approach by including the desired non-competes in a shareholders agreement governed by the laws of a less restrictive state – like Delaware. This Cooley blog reviews a recent Delaware Chancery Court decision refusing to enforce such a work-around.  Here’s an excerpt:

In EBP Lifestyle Brands v. Boulbain, the Delaware Court of Chancery declined to enforce covenants not to compete or solicit employees against Yann Boulbain, a former vice president of The Ergo Baby Carrier, Inc., a company based in California, due to lack of personal jurisdiction. Specifically, the court found that although the restrictive covenants were contained in a stockholders agreement that was governed by Delaware law, and the company’s ultimate parent and party to the agreement was incorporated in Delaware, such “contacts” between the former employee and the State of Delaware were not, in and of themselves, sufficient to establish personal jurisdiction over the former employee in a Delaware court.

Perhaps more importantly, the Court said that even if it had personal jurisdiction, Delaware conflicts of law principles would require dismissal of the case because California had a materially greater interest in the dispute.  Here’s the key takeaway from the case:

The decision serves as a clear warning to parties that, regardless of choice of law, it will be very difficult to enforce a non-compete against an individual in California in a simple stockholder purchase agreement under a statutory exception where (as here) the individual is merely purchasing, and not selling, stock. This is especially true where the person has no meaningful ties to or contacts with Delaware. Whether there are sufficient Delaware contacts will be a highly fact-specific inquiry for the Delaware court.

John Jenkins

September 21, 2017

Non-GAAP: Does Reg G Apply to M&A Projections?

Most public company M&A disclosure documents include a section addressing the forecasts provided to the board and the company’s financial advisors in connection with their evaluation of the transaction.  These forecasts typically include non-GAAP financial information, but Rule 100(d) of Reg G provides an exemption from its requirements that applies to disclosures summarizing “the bases for and methods of arriving at” a fairness opinion.

While these forecasts appear to be well within the scope of the exemption, plaintiffs – and in some cases the Staff – have challenged this assumption in the case of non-GAAP information disclosed under a separate heading (typically captioned “Forecasts” or “Projections”) from the discussion of the banker’s fairness opinion. Some have also called into question the applicability of this exemption to tender offer filings.

This Cleary blog sets forth a detailed argument that these distinctions are inappropriate – and that the reconciliation requirements of Reg G do not apply to this information, regardless of what type of disclosure document it appears in or where it appears. Here’s an excerpt summarizing the argument:

It is true that the projections in the “Forecasts” section of M&A disclosure documents include projections that are not GAAP. Indeed, projected unlevered free cash flows are a central input into any discounted cash flow analysis. But in our view the contention that these projections are subject to Regulation G is incorrect.

The provision of a GAAP reconciliation for these forecasts would not serve the purpose for which Regulation G was adopted – namely, to prevent a company from misleading investors by providing NGFMs that obscure its GAAP results and guidance. No such concern applies to the “Forecasts” section of M&A disclosure documents, where the data are being provided solely to enable shareholders to understand the specific, projected financial metrics that the company’s financial advisor used in its financial analyses to support a fairness opinion.

The blog notes that the Staff has sometimes issued comments to the effect that Reg G applies to these disclosures, and recommends that the Staff issue interpretive guidance confirming that the exemption applies to forecasts included in M&A disclosure documents.

John Jenkins

September 20, 2017

Activism: Where Things Stand Today

This Wachtell memo addresses where things stand today in the world of shareholder activism.  New capital continues to flow into activist hedge funds, & attacks on large companies have increased – but efforts to promote a more long-term focus among institutional investors are also gaining traction.

Here are some of the key takeaways on how activist strategies are evolving:

– While an activist attack on a large successful company to force acceptance of a financial engineering strategy has generally failed, e.g., GM’s resounding defeat of Greenlight Capital’s attempt to get shareholder approval of converting common stock into two classes, there has been an increase in attacks to obtain a change in a company’s CEO.

– There has been an increase in attacks designed to force the target into a merger or a private equity deal with the activist.

– There has been a significant increase in “bumpitrage” — buying a block of stock in a merger partner seeking shareholder approval to use the block to defeat approval, unless the merger price were increased.

– Several major funds have converted from classic activism to a form of merchant banker approach of requesting board representation to assist a company to improve operations and strategy for long-term success.

The memo highlights efforts to promote long-termism among investors, and points out that BlackRock, State Street and Vanguard have continued to express support for sustainable long-term investment. These investors have been active in sharing their governance and engagement expectations with public company boards and CEOs. Shareholder engagement is increasingly critical – failure to engage effectively has resulted in the loss of proxy contests, or in “Pyrrhic” victories followed by a change in management.

John Jenkins

September 19, 2017

Revenue Recognition: Effects of New FASB Standard on M&A

This recent blog from Steve Quinlivan addresses the wide-ranging impact that FASB’s new revenue recognition standard may have on M&A. Public companies will begin implementation of the new standard on January 1, 2018.  For some companies, the new standard might not have a material impact on their financial statements – but that may not be the case for their deals.

The blog says that the transition to the new standard may affect everything from M&A valuation to due diligence to substantive deal terms.  Here’s an excerpt on how working capital adjustment provisions may be influenced by the new standard:

A change in revenue recognition patterns will affect the calculation of a target’s working capital. The change will be most difficult to deal with when the working capital target is determined before adoption of the new standard with a true up occurring after the new standard has been adopted. Solutions will include calculating working capital using existing standards for the true up (or using the new standard for the determination of the target) but the level of effort will need to be a ssessed as it will vary amongst companies and the alternative calculations may not be feasible for some.

Working capital targets are often calculated using an average of working capital for the twelve preceding months. Thus for transactions documented after the new standard becomes effective, a method may need to be developed to account for differing accounting principles during the look back period.

John Jenkins

September 18, 2017

Controllers: “To MFW or Not to MFW, That is the Question. . .”

The Delaware Supreme Court’s 2014 MFW decision laid out a route to business judgment review for controlling shareholder buyouts.  That decision gave companies a choice – either implement MFW’s procedural protections or tough it out under the entire fairness standard of review.

This Ropes & Gray memo discusses that choice in light of Vice Chancellor Laster’s recent decision in the Clearwire appraisal case – and says that entire fairness isn’t always a show-stopper:

The burden of proving entire fairness and the perception of a significant risk of a negative outcome under an entire fairness review frequently results in deal participants allowing the fate of the transaction to be determined not only by a special committee, but, even more critically, by the majority of the minority stockholder vote. However, the recent Delaware Chancery Court decision in ACP Master, Ltd. v. Sprint Corp. / ACP Master, Ltd. v. Clearwire Corp. highlights that entire fairness may not be fatal, and that a finding of entire fairness may overcome earlier instances of conduct or process that may fall short or that otherwise had “flaws” and “blemishes.”

The memo addresses specific actions that controlling shareholder should take – or refrain from taking – in order to enhance a deal’s ability to survive entire fairness scrutiny.

John Jenkins