This Shearman & Sterling memo highlights a recent FTC challenge to a pending deal prompted by ownership interests that two of the buyer’s minority shareholders held in a competitor. Here’s the intro:
On November 3, 2017, the Federal Trade Commission filed a complaint challenging Red Ventures’ proposed acquisition of Bankrate. The FTC alleged that the deal likely would have lessened competition in the market for third-party paid referral services for senior living facilities—even though Red Ventures was not itself present in that market—since two of Red Ventures’ large private equity shareholders jointly own the closest competitor to Bankrate’s Caring.com. To remedy the FTC’s concerns, Red Ventures agreed to divest Caring.com.
The memo notes that the FTC’s action is a reminder that PE-backed entities must consider their shareholders’ portfolio companies when assessing the antitrust risks of a merger, & that minority shareholders can raise competition concerns among antitrust regulators. Those competition concerns are heightened when minority shareholders have the ability to influence company management.
Shareholders frequently assert their need to obtain information necessary to value their shares as a “proper purpose” for a books & records demand. This Pepper Hamilton memo says that a recent Chancery Court decision limits a shareholder’s ability to establish a proper purpose for inspection on this basis. Here’s an excerpt:
A recent decision by the Delaware Court of Chancery, Mehta v. Kaazing, (Del. Ch.; 9/17), confirms that stockholder demands to inspect corporate books and records based on the need to value a stockholder’s shares may be validly denied if the stockholder is unable to demonstrate that it has a “present” need to value its shares.
Indeed, as the court makes clear, simply reciting a proper purpose, such as valuing one’s shares or investigating mismanagement, is not enough. To justify inspection, the stockholder must set forth the circumstances underlying its need for inspection and demonstrate that the stockholder has a need to inspect corporate books and records at the present time.
While Section 220 has been construed liberally, the memo says that the Court’s decision provides an arrow in the quiver of a Board to resist a demand based on valuation when a shareholder does not provide specifics on why it has a need to value its shares at the time.
Last month, I blogged about the DOJ’s decision to file a rare post-merger challenge to a deal that had cleared HSR review. Now it’s the EU’s turn. According to this Simpson Thacher memo, a European appellate court recently overturned the European Commission’s approval of Liberty Global’s purchase of Ziggo – a deal that closed more than 3 years ago! Here’s the intro:
On October 26, 2017, the lower court of appeals of the European Commission (the Commission), the General Court, reversed the Commission’s approval of Liberty Global plc’s (Liberty) already-completed acquisition of Ziggo N.V. (Ziggo). The Commission’s 2014 clearance decision had been appealed by a rival cable provider which successfully persuaded the General Court to reverse on the grounds that the Commission failed to complete a proper investigation and did not properly analyze whether pay-TV sports channels could constitute a separate market from other pay-TV channels, such as film channels, and raise vertical concerns.
The Commission’s merger decisions are typically granted wide deference if challenged, particularly where the challenging party is a market competitor with a direct interest in derailing a transaction, and it is very rare for a challenge to succeed. The last successful appeal of Commission merger clearance occurred in 2006, when the European Court of First Instance (CFI) annulled the creation of a joint venture involving Sony and Bertelsmann, but the CFI’s decision was ultimately set aside by the European Court of Justice 18 months later.
The memo says that the near-term fallout from the decision is that the EC is likely to be “particularly cautious and diligent” in investigating proposed deals and more deferential to 3rd party concerns raised during the process. This is likely to result in lengthier and more burdensome merger investigations in the EU.
“Dead horse” deals are a part of every deal lawyer’s life. But what makes a deal fall apart? This Intralinks blog cites a recent study that asked that question. This excerpt summarizes the study’s findings about the factors that make it more – and less – likely that a deal will not make it to closing:
The probability of failed deal completions for public targets is influenced by five significant predictors: target termination fees (break fees), target and acquirer size, the target’s initial reaction to the deal announcement, the number of financial and legal advisers representing the acquirer, and the type of consideration offered to the target company’s shareholders. The probability of deal failure for public targets is reduced by: target termination fees, deals involving smaller targets and larger acquirers, agreed or solicited deals, multiple acquirer financial and legal advisers, and all-cash consideration.
The probability of failed deal completions for private targets is influenced by four significant predictors: the relative size of the target compared to the acquirer, the liquidity of the acquirer, the type of consideration offered to the target company, and acquirer termination fees (reverse break fees). The probability of deal failure for private targets is reduced for deals involving: smaller targets and larger acquirers, liquid acquirers, all-cash consideration, and acquirer termination fees.
Overall, the study found that announced deals involving public targets had a significantly higher failure rate (11%) than those involving private targets (4%). The study also reviewed other causes for deals falling apart, including catastrophic outside events, and compared deal failure rates across a number of jurisdictions.
This recent Nixon Peabody survey reviewed key M&A indemnification terms contained in 100 publicly filed acquisition agreements involving private company targets entered into between June 2016 & August 2017. Here are some of the findings:
– Approximately 76% of deals surveyed had an indemnity cap, with a median cap size of 10% & a median basket of 0.40% of the purchase price
– 43% of deals excluded breaches of “fundamental reps” from the indemnity cap & 20% excluded breaches of the tax rep
– Indemnification was the exclusive remedy in 80% of the deals surveyed
– Approximately 77% of deals surveyed had survival period of 12 to 18 months
– The median reps & warranties survival period for deals surveyed was 18 months; 60% of the deals did not specify a survival period for covenants
– Approximately 75% of deals surveyed included a materiality scrape provision & 40% included a double materiality scrape
– 75% of deals were silent on sandbagging; the remaining 25% contained pro-sandbagging language
Transactions in the survey included asset purchases, stock purchases and mergers, and had values between $100 million and $4.6 billion. The median deal size was $250 million.
I’ve previously blogged about the growing length of antitrust M&A investigations – and according to this recent Dechert memo, the trend toward longer investigations continues. The good news is that the DOJ has noticed this trend too, and says that it wants to do something about it.
In a recent speech, the Antitrust Division’s DAAG for Litigation Don Kempf said that the Division’s current leadership wants to reverse the trend by speeding up the review process and reducing the burdens associated with it. This excerpt has some thoughts about streamlining the second request process:
When a second request appears necessary, tell us how you think we can make the investigation more efficient by improving our ability to identify the information we need to make our enforcement decisions. We know that second requests can be burdensome. I saw one downside to broad second requests when I was in the defense bar: they impose a huge burden on parties to produce the documents. Now that I’ve joined the government I’ve seen another downside: it’s also a huge burden on the government to review them. Our goal should not be more information, but better information. The Division is looking for relevant documents, not a needle in a haystack.
Don also recommended that companies work with the Division to help it tailor document requests to limit the universe of responsive documents to those most likely to be relevant to assessing the deal’s impact on competition, and make efforts to provide relevant information early in the investigation.
In his speech, Don Kempf noted that “one source” said that the average time to complete significant merger reviews has increased from 7 months in 2011 to 11.6 months, which is a new high. If you’ve been reading our blogs on this topic, you know that the source is likely the Dechert folks – who’ve been highlighting this issue in their quarterly “Dechert Antitrust Merger Investigation Timing Tracker.”
This Wachtell memo discusses the recent proxy contest over the merger of EQT Corporation & Rice Energy – which involved efforts by Jana Partners & other activist hedge funds to derail the transaction – and shares the lessons that can be learned from that fight about how to respond to “deal activism.”
The memo covers a number of topics, including the importance of broad shareholder engagement efforts, & the need to focus on the long-term investor and the company’s value creation strategy. This excerpt addresses the need to stay “on message” throughout the process:
In all deals, but especially those subject to activist challenge, a strong rollout, and staying on message throughout the process, is critical. In the course of an activist assault it is often difficult not to be distracted by the wide variety of criticisms the activists may raise, and the wide variety of “experts” whose presentations often oversimplify the many complicated and subtle judgments involved. In this often chaotic context, it is critical to maintain focus on the benefits of the deal and the credibility of the board and management. EQT introduced the transaction with a detailed investor presentation and conference call.
In the face of a barrage of disparagement by activists, much of it ad hominem, EQT maintained its composure and continued to focus the market on the deal. EQT’s Board also wisely made real, public commitments to underscore the strength of its focus on the interests of shareholders and its intention to address valuation issues. The ISS and Glass-Lewis recommendations are still important, and the Lead Independent Director and CEO personally and effectively presenting to those firms were key factors in EQT’s success in obtaining their recommendations. The merger’s opponents also made presentations, but ultimately failed to persuade the proxy advisory firms, and then withdrew the challenge shortly following the advisory firms’ recommendations in favor of the deal.
Procter & Gamble Co. apparently lost to activist investor Nelson Peltz in the biggest proxy battle ever over a board seat, according to results released Wednesday night by an independent firm. The Cincinnati-based maker of consumer goods such as Pampers diapers (NYSE: PG) had projected victory during the Oct. 10 annual meeting of shareholders at P&G’s downtown headquarters, so the official tally reported Nov. 15 by the outside firm is sure to shock some shareholders.
Peltz, who as CEO of Trian Fund Management oversees P&G stock worth $3.5 billion, had refused to concede the election, claiming the vote was too close to call. The margin of victory by the New York hedge fund apparently was tiny. Shareholders reportedly approved the candidacy of Peltz by 42,780 votes, or 0.0016 percent.
P&G could challenge the results. Both P&G and Trian are entitled to have their solicitors visually inspect the ballots cast by shareholders. That could take three to four weeks, which means a final result might not be disclosed until mid-December. P&G said it would respect the will of shareholders, but wants to ensure that every vote has been counted accurately. Peltz wasn’t available for comment, but his hedge fund recommended that P&G seat him now.
“Trian strongly urges P&G to accept the Inspector’s tabulation and not waste further time and shareholder money contesting the outcome of the annual meeting,” Trian stated Wednesday. “Shareholders have voted, and they have indicated that they want Nelson Peltz to join the board.” Procter & Gamble CEO David Taylor wasn’t available for comment, a spokesman said. “The results are still preliminary and are subject to a review and challenge period during which both parties will have the opportunity to review the results for any discrepancies,” the P&G spokesman noted in a statement. “P&G will disclose the final results after receiving the independent inspector of elections’ final certified report, which we expect in the weeks ahead.”
P&G based last month’s claim it had won on estimates provided by the company’s proxy solicitors, D.F. King & Co.and MacKenzie Partners. IVS Associates, a Delaware-based firm that specializes in independent tabulation and certification of voting results, shared the actual vote count with P&G and Trian after the stock market closed at 4 p.m. Nov. 15.
P&G said last month that Peltz had lost the election by less than 1 percent of the votes cast. A total of more than 2.6 billion shares were voted in the election, representing more than 75 percent of those entitled to vote, according to P&G. Peltz had campaigned for a board seat on the promise to boost the value of P&G stock through aggressive cost-cutting, and he advocated restructuring P&G as a holding company. P&G CEO David Taylor had argued that the Peltz approach would result in higher costs, lower efficiency, reduced profits and an added layer of management complexity P&G stock closed at $88.23 on Nov. 15, down less than 1 percent from the previous close of $88.87. The value of shares has ranged from $81.18 to an all-time high of $94.67 over the past 52 weeks.
Shareholder activism has evolved quite a bit over the years, and so have the tactics used by companies to respond to it. In the early days, companies relied on 80s-style antitakeover defenses designed to “stiff-arm” activists. Companies quickly discovered that those tactics simply didn’t work in the new environment. So, their approach shifted to efforts to preempt activism – or appease activists – by “thinking like an activist” and addressing the vulnerabilities that activists might exploit.
This Camberview Partners memo reviews this history, and argues that companies wanting to mount an effective defense against activists need to shift their focus toward their institutional investors. Here’s an excerpt:
Rather than “think like an activist,” the right approach for companies is to “think like a shareholder representative”: engage with investors, understand and incorporate their perspectives, and educate them on why the company is pursuing a particular strategy, particularly before an activist appears.
Ongoing dialogue enables companies to build credibility with key decision-makers within both the investment and governance teams at institutions, even if there are topics where these disparate teams are not in complete agreement. Even in situations where there is a large and supportive base of retail investors, it is these key decision-makers who will make the ultimate difference between winning and losing.
The memo points out that sweeping changes in the investor landscape have made this investor-centric approach essential. In recent years, a few asset managers have amassed enough voting power in most major companies to effectively determine the outcome of an activist campaign – and are more willing than ever to exercise their vote.
Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Withersworldwide’s Ridge Barker, Ropes & Gray’s Jane Goldstein, Morgan Lewis’ Keith Gottfried and our own John Jenkins share M&A “war stories” designed to both educate and entertain.
Here are the 15 stories that will be told during this program:
1. Dig Your Well Before You Are Thirsty
2. Diligence Isn’t Just About Looking for Problems, But for Opportunities Too
3. Expect the Unexpected
4. Keep Your Eye on the Ball
5. Keep Your Friends Close (And Your Enemies Closer)
6. Strategic Deals Require Creativity & Patience
7. The Speech the Director Never Delivered
8. Another Rat’s Nest
9. Don’t Attempt to Win the Championship Football Game With an All-Star Basketball Team
10. What Does Collegiality Really Mean?
11. The Board Book’s Tale: Bankers, Stick to the Numbers!
12. Preparing for Battle
13. Driving a Deal Is Not Unlike Filming a Movie
14. Assumptions Make an *%$ Out of You & Me
15. A Deal So Nice, We Did it Twice