Monthly Archives: January 2018

January 31, 2018

Podcasts: “Fully Invested” – The Bankers Speak

I never used to listen much to podcasts – that is, until I taped a few of them with Broc and ended up getting hooked on listening to them.  Now, I can’t even think about going on my morning walk without downloading a couple for the road – usually something from the BBC’s vast “In Our Time” collection or, more recently, Slate’s “Slow Burn.”

If you’re looking for podcasts with an M&A focus, check out “Fully Invested” – a series of podcasts from the investment bankers at Western Reserve Partners. It’s designed for middle market business owners & decision-makers looking to buy or sell a business. Individual episodes cover topics such as valuation, how to approach potential buyers, price negotiations, pitfalls for buyers to avoid & the art of closing a deal.

If you’re interested in podcasts covering a wide variety of topics of interest to corporate lawyers, be sure to check out the extensive collection in our “Inside Track with Broc” series over on

John Jenkins

January 30, 2018

Derivative Suits: “Anywhere But Delaware?”

This Potter Anderson memo discusses the Delaware Supreme Court’s recent decision in CALSTRS v. Alvarez (Del.; 1/18) – in which the Court affirmed an earlier Chancery Court decision holding that derivative claims filed by Walmart stockholders in Delaware were precluded because a federal court in Arkansas had already dismissed a derivative complaint filed by different Walmart stockholders for failure to satisfy the demand requirement.

We’ve previously blogged about this case – and pointed out that some commentators suggested that the Supreme Court might act to prevent derivative plaintiffs in M&A cases from scurrying to other jurisdictions that aren’t as insistent on pre-suit books & records demands as Delaware has been.  But as the memo notes, that didn’t happen:

On appeal, the Supreme Court directed the Court of Chancery to reconsider the Due Process implications of giving preclusive effect to the dismissal by the Arkansas federal court. In answering the question posed by the Supreme Court, the Court of Chancery concluded that the Delaware plaintiffs’ Due Process rights were not violated under existing law, but nonetheless recommended that the Supreme Court adopt a rule that would not give preclusive effect in Delaware to prior dismissals based on demand futility.

In so recommending, the Court of Chancery relied on the then-recent decision in In re EZCORP Inc. Consulting Agreement Derivative Litigation, 130 A.3d 934 (Del. Ch. 2016), which suggested in dicta that, as a matter of Delaware law and Due Process, a derivative plaintiff may not bind a later derivative plaintiff unless and until the first derivative plaintiff survives a motion to dismiss, or the board of directors has given the plaintiff authority to proceed by declining to oppose the suit.

The Supreme Court declined to adopt the Court of Chancery’s recommendation, however, and instead affirmed the Court of Chancery’s original decision to dismiss the Delaware action on the basis of collateral estoppel. The Supreme Court concluded that, under existing federal Due Process law, an exception to the general rule against nonparty preclusion was appropriate because the interests of the plaintiffs in Arkansas and Delaware were sufficiently aligned and the Arkansas plaintiffs were adequate representatives, despite their decision not to seek books and records.

This recent blog from Francis Pileggi suggests one possible result of the Court’s decision:

A cynical wag might conclude that an unintended consequence of this decision will be to encourage some plaintiffs to file stockholder suits in courts “anywhere but Delaware” without the added expenditure of time and money using the tools of Section 220 before filing their plenary complaint.

Count me among the cynical wags – if you’re a plaintiff, why file in Delaware if it will give collateral estoppel effect to a judgment from a less burdensome jurisdiction?

John Jenkins

January 29, 2018

Post-Closing Integration: The Role of Change Management

This Norton Rose Fulbright blog reviews the vital role that effective “change management” plays in integrating an acquired business.  Here’s an excerpt from the intro:

Successfully directing the integration of two businesses following the closing of an M&A transaction is vital to realizing the value of a merger. The process by which post-closing change within a business is overseen – often referred to as “change management” – plays a key role in determining whether or not the integration process is smooth and the objectives of the merged entity are achieved.

According to a report by Bain & Company, people, culture, change management and communication have been identified by business leaders as some of the main causes of poor integration following an M&A transaction. Although executives often intend to devote a significant amount of attention to properly managing change in the aftermath of a merger, these aspirations are easily overshadowed by the resources and focus required to meet the day to day needs of the business.

The blog discusses specific actions that should be taken to address change management issues in the integration process.

John Jenkins

January 26, 2018

Due Diligence: California’s New ‘Comp History’ Law

Effective January 1st, Section 432.3 of California’s Labor Code was amended to prohibit employers from seeking salary & compensation history from applicants for employment, and to require employers to provide applicants with the pay scale that applies to the position they’re seeking.

This Orrick memo says that these amendments have some important implications for M&A transactions. Here’s an excerpt:

Buyers and sellers alike will need to think carefully about the potential application of these new requirements within the M&A context – where oftentimes employees of the target company may continue their positions, but as new employees of the buyer. In particular, buyers should consider evaluating their current approach to HR diligence.

If a buyer intends to inherit all employees of the seller, it may posit that none of these employees are “applicants” covered by the new statute. However, in almost all acquisitions, there is an element of uncertainty with respect to at least some positions. Accordingly, buyers should be mindful of the overall structure of the acquisition, particularly in situations where acquired employees may be regarded as job applicants.

The memo goes on to offer specific tips for addressing the issues raised by the new law during the due diligence process – and flags a couple of other recent changes in California employment law to keep in mind.

John Jenkins

January 25, 2018

Antitrust: No HSR? You Aren’t Out of the Woods Yet. . .

A few months ago, I blogged about the DOJ’s post-closing challenge to Parker-Hannifin’s acquisition of Clarcor.  That blog pointed out that post-closing challenges to deals that cleared HSR review have been exceedingly rare.  But what about deals that are small enough to avoid HSR filing requirements?  Many people assume that these deals pose little risk and simply aren’t big enough to attract the attention of the FTC & DOJ.

This Goodwin memo suggests that this is a dangerous assumption to make.  In fact, antitrust regulators followed up Parker-Hannifin/Clarcor with 2 more post-closing challenges – and both involved deals that were too small to require HSR filings.  Here’s the intro:

In the last several months the United States’ federal antitrust enforcement authorities, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ), have challenged and sought to unwind three consummated mergers in whole or in part.  These challenges serve as a stark reminder that the antitrust authorities will seek to unwind consummated mergers that, in their view, have reduced competition or have created a monopoly.

In fact, many are unaware that antitrust authorities may challenge closed transactions even if the transactions were not required to be reported first under the Hart-Scott-Rodino Act pre-merger notification regime. Thus, even when a proposed transaction does not meet the filing requirements, parties to a transaction should nevertheless seek experienced antitrust counsel that can assess the potential for substantive antitrust risk. Failing to do so can result in inadvertent entanglement with lengthy investigations and, indeed, even litigation.

The memo goes on to review each of the FTC & DOJ challenges, and says that even in small deals, it’s essential to scope out the antitrust risk profile of the transaction carefully so that the scope of the risk is known before a decision is made to close the deal.

John Jenkins

January 24, 2018

League Tables: M&A Lawyers

Here’s MergerMarket’s ’2017 Global M&A Roundup’, which includes the latest set of league tables listing the law firms that most often represent companies in deals, broken out on a global and regional basis. . .

John Jenkins

January 23, 2018

Tomorrow’s Webcast: “How to Handle Post-Deal Activism”

Tune in tomorrow for the webcast – “How to Handle Post Deal Activism” – to hear Paul Weiss’ Ross Fieldston, Vinson & Elkins’ Shaun Mathew, Morrow Sodali’s Mike Verrechia and Innisfree’s Scott Winter discuss the legal & other issues surrounding activism following a deal’s announcement. This post-deal activism happens frequently. But it’s poorly understood – and the failure to respond to it effectively can have a devastating effect on the chances to successfully complete the transaction.

John Jenkins

January 22, 2018

Appraisal: Game Over for Hedge Fund Appraisal Arbitrage?

It’s not really a stretch to say that 2017 was a crappy year for appraisal arbitrage funds. After getting clobbered more than once in the Delaware Chancery Court, arbs took two big hits in the Delaware Supreme Court – first with the DFC Global decision, and then with Dell Computer.

In light of the ruling in Dell and other 2017 cases, this FT article says that some are suggesting it’s “game over” for appraisal funds:

That ruling and similar ones in recent months are forcing appraisal-focused hedge funds to revisit their approach. One long-time investor in this area told the Financial Times that the Dell reversal means “game over” for the strategy. He said that the initial Dell victory in 2016, among others, had made it too easy to raise money for the strategy and that many funding sources would now pull the plug.

The article says that other investors continue to believe that appraisal arbitrage is a viable strategy – but that funds must be more selective about their targets.  My own guess is that this view is probably right.  To me, the potentially greater long-term threat to appraisal arbitrage isn’t Delaware’s renewed emphasis on deal price, but improvements to corporate recordkeeping made possible through the use of blockchain technology.

John Jenkins

January 19, 2018

Change-in-Control: What Does “Voting Power” Mean?

Nearly every change-in-control clause makes reference to the acquisition or transfer of a specified percentage of a company’s “voting power” as a potential trigger. However, a lot of those clauses don’t get very specific when it comes to what “voting power” means. This recent blog from Weil’s Glenn West highlights a recent New York case demonstrating that failing to define the term voting power can have some pretty significant consequences.

In Special Situations Fund III QP, L.P. v Overland Storage, Inc. (N.Y. Sup. Ct. 10/17), a New York trial court was called upon to interpret whether a merger triggered a contractual change-in-control clause.  Certain shareholders of Overland Storage had paid $3 million to Overland for a 20% stake in the proceeds of a pending patent infringement claim. Their purchase agreement include a clause provided that “an acquisition by any Person and its Affiliates of more than 50% of the then outstanding voting power” of Overland would trigger the shareholders’ right to a $6 million payment.

The shareholders claimed that the clause was triggered by a transaction in which Tandberg Data Holdings’ sole shareholder – FBC – acquired 54% of Overland’s common stock in exchange for 100% of its shares of Tandberg. However, the terms of the transaction provided that for a specified period, FBC was only entitled to nominate 2 of Overland’s 7 board members.

As this excerpt points out, in the absence of a definition, that raised the question of what the term “voting power” meant:

Because the board of directors ultimately manages the affairs of a corporation, it was the board that would ultimately decide whether to continue prosecuting or settle the patent litigation. So based on the purpose of the provision and an examination of various corporate statutes defining “voting power,” the court concluded that, in this context, the term “voting power” referred to the “ability to elect directors;” and that it was largely irrelevant what other voting rights the holders of shares had if they didn’t have the ability to elect more than 50% of the directors.

Since that was the case, the court concluded that in the context of this case, “‘voting power’ must be read to refer to a shareholder’s actual power and discretion to control the election of directors.” The transfer of shares to FBC, subject to the voting agreement was, therefore, not a transfer of more than 50% of the voting power of Overland.

The blog notes that one of the interesting aspects of this case is that the agreement originally spoke in terms of transfers of 50% or more of Overland’s outstanding “voting securities” – which presumably would’ve caught this transaction. However, the shareholders opted to negotiate for different language due concerns that the term voting securities would’ve left them vulnerable to a transaction involving the issuance of a small amount of high-vote shares.

I think the most common formulation of the term voting power in agreements that I’ve seen is consistent with the way the court approached it here – “voting power in the election of directors.” But I also think that this language doesn’t get as much attention as other aspects of the typical change-in-control clause – and this case makes it clear that it should.

While the Overland Storage case was decided by a New York court, it was governed by California law – and this blog from Keith Bishop highlights the important role that the definition of the term “voting power” in California’s Corporations Code played in the decision.

John Jenkins

January 18, 2018

Activism: Glass Lewis Says, “Hey, Don’t Blame Us!”

Many companies have grumbled that proxy advisors like ISS and Glass Lewis are fueling activism by generally supporting insurgent nominees in activist campaigns.  This Glass Lewis blog pleads “not guilty”:

This perception isn’t borne out by the overall numbers. We’d caution against reading too much into the data, since the yearly sample of contested meetings is both too small to be free of significant variance, and too big to reflect the particular combination of parties and moving parts that makes each contest unique. That said, Glass Lewis’ support for contests dropped from 40% in 2016 to 32% in 2017, and has historically stayed within that range. Nor has Glass Lewis’ approach to contested meetings changed in a way that would result in increased activist support; our methodologies, our case-by-case approach and our team have remained consistent.

Glass Lewis suggests that the perception that proxy advisors are all-in for activists is fueled by the changing nature of the activism. Larger activists have a lot of capital, sophisticated strategies & a long-term approach, and that’s allowed them to hunt larger game & win proxy advisor support in some cases:

This combination of long-term goals, sophisticated tactics and significant investment has allowed activists to pursue larger, more established companies that perhaps were not previously at risk of a shareholder campaign. As well known companies are targeted, the contests themselves are generating more headlines; and with campaign strategies getting more and more refined, Glass Lewis supported some, but not all, of the highest profile dissidents in 2017 — for example at Arconic, Cypress Semiconductor and P&G.

There were also a number of large contests where we supported management (General Motors, Buffalo Wild Wings and Ardent Leisure), and as noted above Glass Lewis’ overall support for 2017 contests was at the lower end of the historical range; nonetheless, the combination of high profile contests, and sophisticated campaigns, may explain a perception of increased overall dissident support.

John Jenkins