Boards have enjoyed a lot of success in the Delaware courts invoking the Corwin doctrine to foil post-closing fiduciary duty claims. But a recent Chancery Court decision shows that there are some limits to the doctrine’s scope. InLavin v. West Corp. (Del. Ch.; 12/17), the Court rejected efforts by the defendant West Corporation to use Corwin to support a motion to dismiss a books & records demand.
The Section 220 action arose in connection with West’s sale to Apollo Global Management. West contended that the inspection demand was invalid because the deal was approved by a fully-informed vote of its stockholders, and that any fiduciary duty lawsuit (other than one for waste) would lack merit. This Shearman & Sterling memo says that Vice Chancellor Slights wasn’t persuaded by that argument:
The Court rejected West’s argument and wrote, “[s]imply stated, Corwin does not fit within the limited scope and purpose of a books and records action in this court.” The Court reiterated that, the purpose of a books and records action is to investigate potential claims prior to filing a formal complaint which will eventually be subject to merits-based defenses (e.g., a Corwin defense).
Vice Chancellor Slights noted that Delaware courts have long encouraged stockholders to use Section 220 requests to gather information before filing complaints that will be subject to heightened pleading standards and that where a plaintiff has shown a credible basis from which the court can infer mismanagement, waste or wrongdoing, the plaintiff should not be deprived of the ability to use a books and records action to enhance the quality of the plaintiff’s future pleadings.
The Court determined that the factual record showed a “credible basis” to infer potential wrongdoing and a lack of disinterestedness for purposes of the Section 220 request. The Court pointed to, among other things, “some evidence” that West’s directors and officers knew that a sale of West’s business segments in separate transactions would have provided greater value to stockholders than a sale of the whole company, but that two private equity sponsors that had the right to elect half of the board may have pushed the board to pursue a sale of the whole company to obtain a prompt liquidation of their investment. Accordingly, the Court ordered West to produce certain of its books and records pursuant to the Section 220 request.
Ultimately, the plaintiffs’ victory may turn out to be a fleeting one – the Vice Chancellor noted that answering West’s Corwin defense in any subsequent litigation with facts supporting a reasonable inference that the vote was uninformed or coerced would be “no easy task.”
This Wilson Sonsini memo reviews 2017 M&A antitrust enforcement trends in the U.S., the EU, and China. One area of note is the DOJ’s changing approach to vertical mergers – i.e., deals involving businesses operating at different levels of a supply chain. Here’s an excerpt:
Antitrust agencies have, generally, resolved competitive concerns in vertical mergers, through behavioral decrees that enable the transaction to proceed while targeting specific conduct that is the source of potential competitive harm. The DOJ’s Remedy Guide issued in 2010 states that behavioral remedies may be a valuable tool in alleviating competitive harm that may result from a merger while preserving its potential efficiencies.
For example, where the agencies have a concern about the merged entity withholding acquired assets from rivals, transacting parties may be required to continue to license or sell their products to third parties. The merged company may also be required to establish firewalls that prevent the sharing and misuse of information newly accessible as a result of the transaction.
In a notable departure, in one of his first speeches as AAG, Makan Delrahim expressed his significant skepticism about behavioral remedies, describing them as “overly intrusive and unduly burdensome for both businesses and government.” He noted that the DOJ will “return to the preferred focus on structural relief to remedy mergers that violate the law and harm the American consumer.” Four days later, on November 20, 2017, the DOJ filed a complaint challenging AT&T’s proposed acquisition of Time Warner—a vertical merger combining AT&T’s video distribution business with Time Warner’s content business.
The DOJ alleges that AT&T will have the incentive to withhold Time Warner’s content from third-party distribution businesses. In reply, AT&T and Time Warner note that they offered third-party distributors licensing terms similar to those accepted by the DOJ in 2010’s Comcast/NBC Universal deal.
While the DOJ’s actions in the AT&T/Time Warner case may signal an important shift in approach, the memo points out that the FTC has continued to endorse settlements involving behavioral remedies, and that it remains unclear whether the FTC will follow the DOJ’s lead here.
This Forbes article has an interview with Damien Park & Greg Taxin from Spotlight Advisors on “dos & don’ts” for companies dealing with activist proxy contests. Here’s what Damien has to say about the biggest mistake companies make when dealing with activists:
I would say one of the worst things a company can do is disregard an activist’s recommendations or treat them with contempt. Management and board members must remain objective and unemotional when analyzing an activist’s perspective and requests for change.
It’s important to establish a constructive dialogue in an attempt to gain a better understanding of their concerns and to determine if a resolution can be obtained before a full-blown, costly and distracting proxy contest ensues. Ignoring an activist’s demand for change just simply isn’t an option. Suing an investor is almost always a bad idea. Adopting a poison pill, changing advance notice provisions and implementing other governance changes to thwart an activist shareholder are also generally bad ideas.
Companies engaged with activists are, in our experience, better served by providing transparent, honest disclosures about the board’s rationale for its decisions and actions. Explaining how value will be created with the current strategy, capital allocation plan, management team, and incentive compensation structure is usually more productive than ignoring an activist or disparaging them.
Other topics addressed in the interview include whether directors should be involved in shareholder engagement, the advisability of attacking the activist, and the toll contested meetings take on boards & management.
Incidentally, Damien will once again be a panelist on this year’s edition of our popular “Activist Profiles & Playbooks” webcast scheduled for March 6th.
This Wachtell Lipton memo lays out some thoughts on M&A for the upcoming year. The memo cover a lot of ground – topics include the impact of tax reform, unsolicited deals, shareholder activism, acquisition financing & cross-border M&A, among others. Here’s what they had to say about hostile deal activity:
2017 was a significant year for hostile and unsolicited M&A deals, with $575 billion of unsolicited bids, representing 15% of total global M&A volume, including Broadcom’s proposed $130 billion acquisition of Qualcomm. The percentage of hostile and unsolicited bids out of total M&A deal volume in 2017 was greater than both 2015 (11%) and 2016 (9%).
We expect the percentage will continue to remain high, given that the stigma once associated with pursuing unsolicited transactions is long gone. It is still possible to defeat a premium, hostile bid with a thoughtfully executed defense, as illustrated by Rockwell Automation’s successful defense against Emerson Electric’s $29 billion unsolicited offer. That defense focused on the value of Rockwell Automation’s long-term prospects and the inadequacy of the consideration offered.
This Sullivan & Cromwell memo highlights some of the key ways that M&A transactions are likely to be impacted by the recently enacted U.S. tax reform legislation. Here’s an excerpt addressing some of the implications for tax-free and taxable transactions:
– Increased Available Cash. There should be significantly more cash available for acquisitions of U.S. companies and assets due to the mandatory deemed repatriation of offshore earnings and profits, combined with the 100% dividends received deduction from a U.S. corporation’s foreign subsidiaries. (As a technical matter, this “participation exemption” applies to the foreign-source portion of dividends distributed from a controlled foreign corporation to a “10% shareholder.” For this purpose, a 10% shareholder is a shareholder that owns 10% or more of the vote or value of any foreign corporation, and a controlled foreign corporation is a foreign corporation more than 50%-owned by 10% shareholders.)
– Effect of Immediate Expensing of Capital Expenditures. Although the immediate expensing of capital expenditures makes taxable transactions more attractive, we do not expect to see a significant shift away from the paradigm wherein sellers favor tax-free transactions and buyers favor taxable transactions. The immediate 100% deduction mostly applies to property that was already subject to an immediate 50% deduction under prior law (mostly machinery and tangible goods), and not to property like real property, intellectual property, and goodwill. As a result, a taxable transaction is still a trade-off between immediate ax to the seller and a future benefit to the buyer. Moreover, there may be limited financial statement benefit (other than timing) to the accelerated depreciation of properties otherwise entitled to bonus depreciation.
– Reduced Benefit of Tax-Free Spinoffs. The benefit of tax-free spinoffs is significantly reduced. As a result, there are likely to be more taxable separations (including spinoffs electing to be treated like sales under Section 336(e)). Splitoffs and debt-for-stock exchanges in the context of spinoffs may also appear incrementally less attractive relative to taxable separations (e.g., a sale) in the lower tax rate environment.
– Tax Due Diligence. M&A tax due diligence procedures should be reviewed in light of the changes in the Act. For example, until balance sheets and income statements catch up to the changes in the Act, acquirors should carefully examine the current and deferred tax accounts on a target’s financial statements.
The consensus of most commenters appears to be that tax reform will have an overall positive effect on the M&A environment, due to the repatriation of significant amounts of cash into the U.S., and lower corporate tax rates that will help juice buyers’ returns & give them more room in pricing discussions with potential sellers. We’re posting memos in our “Tax” Practice Area.
Over on TheCorporateCounsel.net, I recently blogged about some PCAOB Staff guidance on the new standard for audit reports. This Steve Quinlivan blog notes that the most controversial aspect of the new standard – the requirement to disclose “Critical Audit Matters” or CAMs – may well have important implications for M&A:
In addition to preparing the audit committee regarding potential CAMs, public companies should consider the effect of potential CAMs on M&A activity. For companies looking to be acquired, potential CAMs will likely become a subject of due diligence inquiries prior to the effective date. CAMs may also be a topic for companies subject to activist investor campaigns. Likewise, public companies looking to issue stock in acquisition transactions may receive due diligence inquiries about their potential CAMs as well.
With the exception of the provisions relating to CAMs, the new standard is effective for audits of fiscal years ending on or after December 15, 2017. For large accelerated filers, the provisions relating to CAMs go into effect for audits of fiscal years ending on or after June 30, 2019. They go into effect for all other filers for audits of fiscal years ending on or after December 15, 2020.
Another proposed acquisition of a U.S. business by a Chinese buyer just bit the dust, courtesy of CFIUS. Ant Financial and MoneyGram announced last week that they’ve called off their merger after CFIUS refused to sign-off on their efforts to address concerns about safeguarding personal data of U.S. citizens.
Ant Financial is controlled by Chinese billionaire and Alibaba founder Jack Ma, and according to this Shearman & Sterling memo, the deal’s demise reflects both rising concerns with national security issues involving acquisitions by Chinese buyers, & an increased focus on privacy issues. Here’s an excerpt:
The focus on China, especially on investments in the semiconductor and related industries, is well established. The Obama Administration blocked the acquisition of the U.S. subsidiaries of German semiconductor-equipment supplier AIXTRON SE by Chinese investors in 2016, and had a general policy of closely scrutinizing Chinese acquisitions in this sector. More recently, the Trump Administration stopped the acquisition of Lattice Semiconductor Corporation, an Oregon-based company, by a Chinese investor in September 2017, and senior officials have expressed concern about whether current U.S. laws on foreign investment are adequate to protect U.S. national security.
At the same time, CFIUS has over the past several years increased its focus on acquisitions of U.S. companies that have access to the personal information of U.S. citizens. The MoneyGram deal would have given Ant Financial access to the financial transactions of a considerable number of Americans. Concerns have been raised both within the Trump Administration and in Congress about whether such information would be adequately protected by foreign companies or used by foreign governments for geopolitical advantage.
The environment for Chinese deals in sensitive industries appears to be so tough that perhaps it’s not off base to paraphrase the last scene in the classic 1974 film “Chinatown” when it comes to summing up their chances of CFIUS approval – “Forget it, Jake – it’s a Chinese buyer.”
– Utilizing Social Media in Proxy Contests
– Planning for M&A Cybersecurity Risks
– True-Ups After Chicago Bridge: The Two Sides to Working Capital Adjustments
– Valuation Analysis: Key to Avoiding Failed M&A Deals
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Mauri Osheroff – who until recently was Corp Fin’s Associate Director who oversaw the Office of Mergers & Acquisitions – was reading the transcript of our recent webcast with the Chiefs of OM&A from the past three decades. Mauri noted that the original office was called “Tender Offers & Small Issues” – they processed tender offers and Reg A offerings. Go figure. We don’t know when Reg A offerings dropped out of the picture.
The Office Chief back then was the legendary Ruth Appleton. Here’s Ruth’s obit, which details her SEC career and the obstacles she faced as a professional woman back then…
This Orrick blog notes that the FTC recently issued new guidance concerning the filing requirements under Item 3(b) of the HSR Form – which requires parties to file copies of all agreements relating to the transaction. Apparently, the FTC has found that some parties had been withholding relevant side agreements on the theory that they were ancillary to the main agreement or protected by privilege.
The blog says that the FTC doesn’t see things that way:
On December 20, 2017, the FTC issued additional guidance in connection with Item 3(b) of the HSR Form, which requests “copies of all documents that constitute the agreement(s) among the acquiring person(s) and the person(s) whose assets, voting securities or non-corporate interests are to be acquired.” The FTC’s post clarifies that “all” really does mean all:
[A]ny agreement entered by the parties or their representatives that bears on the terms of the transaction and is binding on the parties must be submitted as part of the HSR filing. This includes any agreement that alters the terms of the merger during the antitrust review process, regardless of where those commitments are written down. If there is an enforceable agreement that binds the parties to take actions related to antitrust clearance, it must be submitted as part of the HSR form. (Emphasis in original).
Nonbinding analyses & recommendations don’t have to be provided in response to Item 3(b) – although they may be responsive to other parts of the HSR Form. However, the agreements themselves must be provided – and the FTC says you can forget about work product or any other privilege claims.