Recently, I blogged a “vote counting” story that involved eRaider, a widely-media covered fund during the Internet boom in ’90s that hoped to cash in on “message board” activism. eRaider’s business model was to buy 5% stake in small companies with good products, then get shareholders together to push for governance changes that would improve the company. The idea got a lot of publicity – but little “real life” traction and eRaider shut down in 2004.
Anyway, Lois Yurow sent in this pic of her vintage swag!
Here’s the latest edition of Houlihan Lokey’s annual termination fee study. The study reviewed 183 transactions involving U.S. company targets and involving at least $50 million in transaction value announced during 2016.
The study focused on termination fees both as a percentage of “transaction value” and “enterprise value.” Transaction value is the total value of consideration paid by an acquirer, and is generally equivalent to “equity value.” Enterprise value is the number of outstanding shares multiplied by the per-share offer price, plus the cost to acquire convertible securities, debt, and preferred equity, less cash and marketable securities.
Some of the highlights include:
– Termination fees as a percentage of transaction value during 2016 ranged from 0.8% to 5.1%, with a mean of 3.2% and median of 3.3%. The mean & median fees were identical with those reported in 2015, and nearly the same as reported in 2014 (3.2% mean & 3.3% median).
– Termination fees as a percentage of enterprise value were almost as steady. In 2016, the mean was 3.1% of enterprise value while the median was 3.2%. The mean & median fees were both 3.2% of enterprise value in 2015.
– Reverse termination fees as a percentage of transaction value varied depending on whether the deal involved a strategic or a financial buyer. In 2016, the median fee for strategic buyers was 3.6% for strategic buyers and 5.8% for financial buyers. The median fees for 2015 were 4.0% for strategic buyers and 6.1% for financial buyers.
– Median reverse termination fees as a percentage of enterprise value in 2016 were 2.9% for strategic buyers and 4.5% for financial buyers. In 2015, the median fee for strategic buyers was 3.7% and the median fee for strategic buyers was 6.5%.
Of the 203 agreements surveyed, 181 (89%) contained a material adverse change in the “business, operations, financial conditions of the Company” as a definitional element. This is a slight decrease from last year’s survey, when this element appeared in 92% of all agreements. Meanwhile, just 15 of the acquisition agreements reviewed this year lacked a MAC closing condition, representing approximately 7% of all agreements reviewed, compared to 3% reported in the 2016 survey and 5% reported in the 2015 survey. We note that each of the deals valued at $1 billion or more in this year’s survey contained a MAC condition.
While last year’s survey suggested that recent pro-bidder trends could be leveling off, the small shift in this year’s results may tell a different story. More agreements contained the pro-bidder “would reasonably be expected to” language in the MAC definition – it appeared in 62% of the deals reviewed this year, while appearing in 54% of all deals reviewed last year. This language appeared in 61% of all deals reviewed in 2015, 56% of deals reviewed in 2014, 53% in 2013, 42% in 2012, 29% in 2011 and 13% in 2010. By defining a material adverse effect to involve circumstances that “would reasonably be expected to” lead to a MAC, a bidder introduces a forward-looking feature to the definition, allowing it to adopt a more lenient approach during negotiations over whether a material adverse change in the target’s prospects needs to be covered by the definition.
However, we also saw a slight decline in the usage of pro-bidder “disproportionately affect” language in the MAC exceptions during this year’s surveyed period. Such language appeared in 76% of the deals reviewed this year, while appearing in 81% of deals reviewed last year and 83% and 88% of deals reviewed the two years before—which evidenced a significant increase over the 73% found in our 2011 and 2012 surveys and the 48% and 40% found in our 2009 and 2010 surveys, respectively. “Disproportionately affect” language carves out exceptions from the MAC clause to ensure that bidders have the protections of the MAC clause in the event the target company suffers more greatly than its peers from a specified event, such as a general economic or industry downturn.
In any deal requiring regulatory approval, the time required to complete the regulatory process is a bit of a wild card – but that doesn’t mean you won’t get sued over it if there’s an unanticipated delay.
Fortunately, this Wachtell memo reports that a federal court wasn’t buying the claims in a recent lawsuit that statements about the anticipated timing of regulatory approval of a pending merger between M&T Bank and Hudson City Bancorp were misleading. Here’s an excerpt summarizing the plaintiffs’ claims and the court’s decision:
They alleged that statements of opinion about, among other things, the timing of the merger (“we currently believe we should be able to obtain all required regulatory approvals in a timely manner”) were misleading because, in light of regulatory issues that surfaced, the merger was likely to be delayed. The district court dismissed that claim as well.
In its decision last week, the court held those statements to be opinions, and that, as such, they were subject to the high bar set by the Supreme Court’s recent Omnicare decision. The district court stressed the importance of context—thecautionary language in the proxy. The allegedly misleading language, the court held,was “cherry-picked” out of surrounding warnings that M&T and Hudson City could not be certain if or when regulatory approvals would occur—that, indeed,there was “no assurance as to when or if the merger will occur.” Those warnings, and other failures of pleading, compelled the dismissal of the complaint.
The memo says that the court’s decision in this and an earlier proceeding are “an emphatic reminder” of the need for appropriate cautionary language in a merger proxy statement.
In this unanimous en banc decision, the Supreme Court of Delaware held that the Court of Chancery erred in giving no weight to Dell’s pre-deal stock price or the deal price when determining the fair value in this appraisal proceeding. In the Court’s view, “the market-based indicators of value – both Dell’s stock price and deal price – have substantial probative value” and “deserved heavy, if not dispositive, weight.”
Thus, once again giving a nod to the deal price, the Court cautioned the Court of Chancery to “be chary about imposing the hazards that always come when a law-trained judge is forced” to rely on discounted cash flow (DCF) analyses and “divergent partisan expert testimony.”
The Supreme Court observed that Dell’s sale process had many mechanisms designed to “ensure stockholders obtain the highest possible value.” It further concluded that “the trial court’s decision to give no weight to any market-based measure of fair value runs counter to its own factual findings.”
The Supreme Court’s emphasis on the significance of a deal price obtained through a sound process in determining “fair value” echoes the rationale underlying its decision earlier this year in DFC Global, and is consistent with a broader trend in Delaware appraisal cases toward increased deference to the deal price under these circumstances.
This Wilson Sonsini memo reviews the Delaware Chancery Court’s recent decision in IRA Trust FBO Bobbi Ahmed v. Crane (Del. Ch.; 12/17), in which the Chancellor Bouchard dismissed fiduciary duty claims arising out of a corporate recapitalization specifically designed to benefit the company’s controlling shareholder. Notwithstanding the conflicts of interest involved in the transaction, the Chancellor held that the process by which it was implemented satisfied the MFW framework – and that the business judgment rule applied to board’s decision.
The recapitalization involved NRG Yield, Inc., a company with a dual-class capital structure & a controlling shareholder. The company had issued stock to finance several acquisitions following its IPO, and as a result the controlling shareholder’s stake had declined from 65% to 55%. In order to prevent further erosion of the controller’s interest, the board authorized the issuance of a new class of low-vote common shares as a dividend to all of the company’s shareholders. Those new shares each had 1/100th of a vote, and the company planned to issue them to finance future acquisitions.
This excerpt from the memo summarizes Chancellor Bouchard’s decision:
Despite finding that the entire fairness standard applied to the transaction, the court still granted the defendants’ motion to dismiss the case. In particular, the court held that the Company had properly followed the “MFW” framework, named after the 2014 Delaware Supreme Court decision in Kahn v. M&F Worldwide Corp., which provides a roadmap for avoiding the entire fairness standard of review in, at least, certain types of controlling stockholder transactions.
Specifically, the Company’s board of directors – unlike some companies that have pursued similar types of recapitalizations – conditioned the recapitalization from the outset of negotiations on approval by a fully empowered independent committee of the board of directors and by a fully informed, uncoerced majority of the minority vote. Because the Company had followed MFW, the court applied the business judgment rule to the recapitalization. The court also rejected the typical panoply of disclosure allegations that plaintiffs bring in these types of claims in an effort to discredit approval by minority stockholders, which must be fully informed under MFW.
The memo touches on several other potentially significant aspects of the Chancellor’s decision – including his statement that even if MFW had not been properly followed, the company’s independent directors would have been dismissed from the lawsuit because the plaintiff didn’t meaningfully allege that they lacked independence or failed to discharge their fiduciary duties.
We have posted the transcript for our recent webcast: “M&A Stories: Practical Guidance (Enjoyably Digested).” Here are the 15 stories that were 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
In recent years, many companies have either terminated their poison pills or allowed them to expire in response to investor & proxy advisor pressure. Overall, this hasn’t caused much angst to corporate America – & that’s likely because their ease of adoption means that every company can be regarded as having a pill waiting “on the shelf” to be put in place quickly when needed.
Academic studies are mixed on the impact of explicit poison pills on corporate value – but there’s a new study that looks at the valuation implications of a board’s ability to quickly implement a pill. The study’s conclusions are pretty interesting. Here’s the abstract:
This paper analyzes the value impact of the right to adopt a poison pill – or “shadow pill” – on long-term firm value, exploiting the natural experiment provided by staggered poison pill law adoptions that validated the use of the pill in 35 U.S. states over the period 1986 to 2009. We document that the availability of a shadow pill results in an economically and statistically significant increase in firm value, especially for firms more engaged in innovation or with stronger stakeholder relationships. Our findings are robust to different specifications, including matching and portfolio analysis, and provide support to the bonding hypothesis of takeover defenses.
So what’s this “bonding hypothesis” of takeover defenses? It’s the idea that empowering the board to commit the firm to a business strategy that cannot easily be reversed through a takeover promotes the undertaking of long-term projects and stronger stakeholder relationships, thus increasing firm value.
This Skadden memo surveys the state of M&A disclosure litigation nearly 2 years after the Delaware Supreme Court’s Trulia decision fundamentally altered Delaware’s approach to “disclosure only” settlements. Here’s an excerpt:
Disclosure-based settlements before the Court of Chancery are all but extinct. Litigation has not subsided in Delaware post-Trulia but has taken a different form. Instead of preclosing requests for injunctive relief, stockholder plaintiffs have focused instead on post-closing monetary damages and have increased their use of statutory relief, such as books and records and appraisal actions pursuant to 8 Del. C. §§ 220 and 262, to challenge transactions.
Some state and federal courts outside of Delaware have adopted and applied the reasoning in Trulia, but a number of disclosure-based settlements involving companies incorporated under different state laws have found favor in other state courts, with some courts distancing themselves from Trulia. Also, since Trulia, many stockholder plaintiffs appear to be avoiding filing their disclosure claims as state law breach of fiduciary duty claims, instead filing claims relating to a proposed transaction in federal courts pursuant to federal securities laws in order to avoid forum selection bylaws requiring internal corporate state law claims (such as breach of fiduciary duty claims) to be filed in Delaware, and likely in the hopes of extracting higher mootness fee awards with less scrutiny. This proliferation of securities claims has inspired plaintiffs’ attorneys to develop new tactics and craft some novel disclosure claims.
The memo reviews several post-Trulia cases arising in other states, and concludes that although disclosure-based settlements have obtained approval in some state courts outside of Delaware, federal securities law disclosure claims have largely replaced state law fiduciary duty disclosure claims in M&A litigation.
I recently had a conversation with one of my colleagues about negotiations with a seller’s counsel in a private company deal. He sent out a buyer-favorable purchase agreement to seller’s counsel – but the deal contemplated rep & warranty insurance with no indemnity strip from the seller.
When my colleague negotiated with the seller’s lawyer on the reps & warranties, the other lawyer said at one point, “I suppose I could mark a lot of these up, but I’m not sure that I care.” The seller’s lawyer was being a bit facetious, but his comments illustrate what’s become the “new normal” in negotiating deals backed by R&W insurance. To put it simply, the tough negotiations on reps and warranties often take place between the buyer and the insurance company, not the buyer and the seller.
This Gibson Dunn memo reviews how the R&W insurance market has evolved in recent years, and the effect that the availability of that insurance is having on how parties to the deal allocate risks. Here’s an excerpt that discusses the benefits of a “no survival deal” with an R&W policy:
While limiting the seller indemnity can meaningfully shorten the negotiation timeline, eliminating it entirely can dramatically simplify negotiations.
For example, even in a $100 million transaction, the respective deal teams can spend a surprising amount of time negotiation a $500,000 indemnity strip. Eliminating the seller indemnity can also enhance the buyer’s coverage under the RWI policy.
Most policies will include two types of “coverage enhancement.” First, they will include a “full materiality scrape” – i.e., they will “read out” materiality qualifiers in the reps for purposes of determining whether a rep has been breached and the amount of losses resulting fom such a breach. Second, they will not impose a “damages exclusion” on the buyer’s recovery – i.e., they will cover a range of damages, including consequential damages and those based on multiples of earnings and lost profits.
In a no-survival deal, most RWI policies will include these coverage enhancements as a matter of course (that said, before including a materiality scrape, the insurer will want to confirm that the seller has populated the disclosure schedule without regard to the materiality qualifiers in the reps).
What’s interesting is that insurers are less generous with coverage enhancements in the case of deals with an indemnity strip. In these situations, they general require that the seller agree to a full materiality scrape and the absence of a damage exclusion.
The memo also addresses some of the limitations on R&W insurance and alternative methods of addressing gaps in coverage.