Monthly Archives: April 2018

April 16, 2018

M&A Communications: Key Questions to Ask

Here’s a guest blog from Eden Gillott Bowe, President of Gillott Communications:

Getting an M&A completed is tough enough. Don’t let your communications trip you up and cause the deal to go south. What are the best ways to communicate news of a merger or acquisition? Here are six factors you need to consider before crafting your strategy.

Is it friendly or hostile?

If it’s friendly, it’s easier. Your communications can be along the lines of “Look at all the amazing things that will happen as a result!”

If it’s hostile, you’ve first got to convince the other side that a merger is in their benefit and the price being offered is fair (if you’re the acquirer), or that your true value is far higher and it’s best to remain independent (if you’re the target). Your primary focus is convincing shareholders, who have the final word.

If it’s a large deal, you also have to convince regulators. Consider AT&T and Time Warner’s battle against the Justice Department’s suit to block their merger on antitrust grounds. Ultimately, the case will be decided on whether the merger is beneficial to consumers (as the companies claim), or whether it will create an unfair market and drive up prices (as the government claims).

Are the companies prominent & where do they operate?

If it’s a middle-market company and isn’t attracting widespread media attention, your primary goal is to communicate to employees, investors, vendors, etc. Your focus is on merging cultures and making sure everything goes smoothly.

Local media might cover it. Say a large out-of-town company swoops in and absorbs a smaller local company. There will be concerns (legitimate or not) about potential layoffs — how many jobs (and families) will be affected and what impact it will have on the local economy. You must deal with those delicately and with empathy.

Are the companies public or private?

Public companies must disclose material developments in public announcements or SEC filings.

If one company is large and public, a small acquisition may not be material. Still, it may be beneficial for the larger company to make a public announcement. The goal: Show how and why it’s good for the companies and the communities where they do business.

If a company’s private, the “materiality” rule doesn’t apply. Your communications are focused on reassuring employees and vendors about the positive outlook going forward.

When should you begin a campaign to earn employee buy-in and avoid an exodus?

This is tricky. When negotiations are underway but there is no agreement, you are limited in what you can say.

Internally, it’s a delicate balance. You can’t tell employees much more than you’re saying publicly because they might spill the beans. But you don’t want to leave them in the dark because they’ll lose trust in you.

Secrets don’t stay secret. Whatever you tell your employees, assume it’ll become public. If you tell them where plants will be closed, a reporter will find out and it’ll become part of the story.

One obvious way to avoid gossip: Hold meetings off-site, not at either company. Walls can talk. Employees will see people coming and going, and rumors will start flying.

Are layoffs anticipated?

If you say nothing, employees will think the worst. But never make promises you can’t keep.

While you may hope everyone keeps their job or even more are created, that’s usually not the reality. It’s better to focus your communications on how many dollars will be saved, new initiatives and projects that will be created, and how remaining workers will benefit.

Choose your words carefully. Qualify what you say, such as, “We don’t expect a significant overall decrease in our workforce.” Avoid definitive statements such as, “There will be no layoffs.”

What do I say when I don’t know the outcome?

How a deal ends up may bear little resemblance to what it looked like at the outset. So your communications strategists must be flexible.

Consider these scenarios. In a single weekend, three different announcements with different justifications had to be formulated as a company was negotiating to shed an underperforming division.

Selling the entire thing? This was the original plan. The Spin: “These assets were operating below our desired ROI, so we are monetizing them.”

Buyer decide only to acquire half? The explanation changed: “This division is a successful operator in a growing business. We’re retaining half so we can capture its upside in the future.”

Deal collapsed? New storyline: “We had considered selling the business, but its potential is too great to let it go.”

April 13, 2018

Activism: Court Upholds Board’s Rejection of Nominee

This Sidley memo discusses Blue Lion Opportunity Master Fund, L.P. vs. HomeStreet, Inc. (Wash. King Cty,; 3/18), a recent case out of Washington State where a court upheld a board’s decision to disallow an activist’s director nominee because of its non-compliance with the requirements of the company’s advance notice bylaw.

HomeStreet, Inc. is a Washington corporation that received notice from an activist hedge fund of its intention to nominate 2 director candidates at the company’s annual meeting. That notice was delivered late in the afternoon on the eve of the deadline established under the company’s advance notice bylaw. This excerpt says that’s when the fun began:

On March 1, HomeStreet rejected the notice because it failed to comply with the company’s advance notice bylaw in myriad instances. Among other things, the notice failed to provide information required under the bylaws by reference to the federal proxy rules (e.g., the activist’s estimated proxy fight cost and whether the activist planned to seek reimbursement from the company for its cost). The notice also failed to include a variety of information regarding share ownership of Blue Lion affiliates and certain required shareholder representations.

In response, on March 13, Blue Lion filed suit against the company, seeking a declaratory judgment that Blue Lion’s notice complied with the company’s advance notice bylaw, along with a motion for a preliminary injunction enjoining the company from rejecting the notice as invalid. In their briefs, both parties agreed that there was no Washington case law on point and thus advised the court to look toDelaware case law.

On March 30, the court ruled in favor of HomeStreet. The court affirmed that advance notice bylaws like the one at issue are common, that HomeStreet’s advance notice bylaw was valid and that Blue Lion failed to comply with the requirements of that bylaw. The court ruled that the company’s board of directors’ decision to reject the activist’s notice was an exercise of its business judgment that the court will not second-guess or disturb.

The court rejected the argument that the board’s action was a defensive measure aimed at the shareholders’ franchise, and thus subject to the Blasius “compelling justification” standard of review. Instead, it applied the business judgment rule to the board’s decision to reject the nominee.

John Jenkins

April 12, 2018

Delaware: Shareholder Litigation Isn’t Going Away

We’ve previously blogged about how Trulia, Corwin & recent appraisal cases have contributed to an exodus of M&A litigation from Delaware. However, this Morris James blog says that shareholder litigation in the Diamond State isn’t going away anytime soon. This excerpt lays out the reasons for that conclusion:

Here are some of the reasons why stockholder litigation will continue in Delaware. First, Delaware continues to insist that full disclosure is necessary to obtain the benefits of the “Corwin protection.” On Feb. 20, the Delaware Supreme Court in Appel v. Berkman, (C.A. 316, 2017) held that Corwin did not apply when the proxy materials failed to disclose that the chairman of the board had declined to vote for the merger because he believed it was not a good deal. That decision arguably changed prior law that mere opinions of a director need not be disclosed. This shows that Corwin protection is not automatically invoked.

Second, Delaware continues to permit broad stockholder rights of inspection of corporate records. While that right is conditional on a showing of a proper purpose, that showing has been characterized as involving the “lowest possible burden of proof.” Thus, just as recently as Feb. 22, in KT4 Partners v. Palantin Technologies, (Del. Ch. C.A. 2017-0177-JRS), the Court of Chancery upheld inspection rights as a way to compensate for the corporation’s failure to otherwise properly communicate with stockholders. While admittedly there were other reasons to permit the inspection sought, KT4 does show how broad that right is in practice. Broad inspection rights may permit litigants to adequately plead enough facts to support a stockholder’s rights to litigate claims in Delaware.

Third, Delaware law on stockholder litigation still provides favorable treatment of many claims, including requiring the close scrutiny of transactions involving conflicted directors. As held on Feb. 6, 2018, in In re PLX Technology Stockholders Litigation, (Del. Ch. C.A. No. 9880-VCL) (Order), the Court of Chancery declined to grant summary judgment because the Delaware law was still unsettled on the standard of review to be used in such cases. There is room for plaintiffs to win their case.

John Jenkins

April 11, 2018

Del. Chancery Says 33% Holder Not “Controlling Shareholder”

This Shearman & Sterling blog reviews In Re Rouse Properties, Inc. Fiduciary Litigation,(Del. Ch.; 3/18), in which the Chancery Court rejected allegations that a 33% minority shareholder was a “controlling shareholder” owing fiduciary duties to the corporation.

The plaintiffs alleged breaches of fiduciary duty by a special committee of the Rouse board that negotiated a sale to its 33% shareholder, Brookfield Asset Management. The plaintiffs alleged that Brookfield was a controlling shareholder, & that it dominated the committee during the merger negotiations. In support of those contentions, the plaintiffs alleged that two of the five directors on the committee “lacked independence from Brookfield,” and that one of those directors, Rouse’s CEO was “beholden” to Brookfield for various reasons, including the fact that Brookfield tried to discuss post-merger employment with him during the process.

Vice Chancellor Slights rejected those allegations. This excerpt summarizes his reasoning:

The Court found plaintiffs’ allegations of control insufficient. The Court explained that “our courts generally recognize that demonstrating the kind of control required to elevate a minority blockholder to controller status is ‘not easy.’” The Court noted that there had been no pre-merger discussions with Rouse’s CEO because they were precluded by the special committee, and that the CEO resigned immediately following the merger. As to the other challenged director, the Court explained that appointment to a board is “insufficient to call into question” such director’s independence.

In any event, plaintiffs did not plead that the three remaining special committee members were compromised or demonstrate that Brookfield otherwise controlled Rouse’s decision-making process. To the contrary, the Court found it clear that the special committee “negotiated hard” with Brookfield, successfully achieving “a majority of the minority voting condition despite real resistance from Brookfield” and a significant increase in the deal consideration. Given the absence of fiduciary duties owed by non-controlling stockholders, the Court dismissed the breach claims against Brookfield.

Since the deal was approved by a majority of the disinterested stockholders, the Vice Chancellor applied the business judgment rule in accordance with Corwin & dismissed the claims against the special committee directors as well.

John Jenkins

April 10, 2018

Appraisal: Resurrecting the “De Facto Merger”?

Steve Hecht & Rich Bodnar recently blogged about an interesting challenge to the pending transaction between Dr. Pepper & Keurig. The plaintiffs’ complaint raises the issue of whether a shareholder has any recourse if a company structures a deal for the purpose of avoiding appraisal rights.  This excerpt lays out the plaintiff’s beef with the deal:

According to the complaint, the ‘merger’ at issue has been structured as an amendment to Dr. Pepper’s charter, which would multiply the number of Dr. Pepper shares by seven. The shares would be issued to Keurig shareholders, the result being that post-merger/not-merger, Keurig shareholders would own about 87% of Dr. Pepper – a de facto merger, according to the complaint.

In economic effect, Keurig will purchase ‘new’ Dr. Pepper shares (as a result of the total share count being multiplied by seven) and thereby receive a supermajority of total company shares, rather than purchasing 87% of Dr. Pepper on the market or via a tender offer.

How are appraisal rights involved?  The consideration for the share issuance takes the form of a onetime cash dividend for $103.75 per share to pre-amendment shareholders.  Normally, if this were a classic merger, such a deal would be subject to appraisal rights under DGCL §262 – a cash merger has appraisal rights attached.  But the unique Dr. Pepper structure would not provide for appraisal rights – because the stockholders are just approving an amendment, so the theory goes, they are not actually engaged in a merger.

This isn’t the first time that the Delaware courts have been down this path. In Heilbrunn v. Sun Chemical, 150 A.2d 755 (Del. 1959) and again in Hariton v. Arco Electronics, 188 A2d 123 (Del. 1963), the Delaware Supreme Court refused to re-characterize deals structured as asset sales as “de facto mergers” – despite the fact that both transactions had the same substantive result as a merger.

Like the plaintiffs in this case, the plaintiffs in those earlier cases hoped that by re-characterizing the transactions as de facto mergers, they would be able to exercise the statutory appraisal rights that were unavailable in an asset purchase.

In rejecting the plaintiffs’ arguments, the Hariton Court said that “the sale-of-assets statute and the merger statute are independent of each other. They are, so to speak, of equal dignity, and the framers of a reorganization plan may resort to either type of corporate mechanics to achieve the desired end.”

That “independence legal significance” doctrine seemed pretty impregnable until 2007, when the Chancery Court decided LAMPERS v. Crawford, (Del. Ch.; 2/07). In that case, which arose out of the contested takeover of Caremark, the court treated a special cash dividend and a stock for stock merger as an integrated transaction and concluded that the Caremark shareholders were entitled to appraisal rights.

There hasn’t been much action on the de facto merger front since the Crawford case, so this will be an interesting one to watch.

John Jenkins

April 9, 2018

Non-GAAP: New CDIs Tie Up Loose Ends on M&A Forecasts

Last fall, the Staff issued a new CDI clarifying when forecasts provided to a financial advisor in connection with an M&A transaction won’t be regarded as non-GAAP financial measures subject to Reg G.  As we blogged at the time, however, some loose ends remained – such as whether financial forecasts provided to the bidder or the target’s board were also subject to similar treatment.

As Liz blogged last week on, the Staff recently issued 2 new CDIs – Non-GAAP CDIs 101.2 & 101.3 – that tie up those loose ends. This Wachtell memo explains the effect of the new guidance:

The underlying logic of the initial C&DI plainly applies to these circumstances too: disclosure of internal forecasts to bidders or the board is not intended to communicate performance expectations to investors, and reconciling them to GAAP is neither useful nor required. The SEC Staff has now helpfully confirmed that the same considerations animating the initial C&DI extend to these additional factual circumstances.

Specifically, new C&DI 101.02 confirms that companies may rely on the non-GAAP exemption from reconciliation if the forecasts provided to a financial advisor are also provided to the board of directors or board committees.

C&DI 101.03 further confirms that if a company determines that disclosure of material forecasts provided to bidders in a business combination transaction (or other material forecasts exchanged between the parties) is needed to comply with federal securities laws, including anti-fraud provisions, then “the financial measures included in such forecasts would be excluded from the definition of non-GAAP financial measures and therefore not subject to Item 10(e) of Regulation S-K and Regulation G.”

John Jenkins

April 6, 2018

M&A Activity: 1st Quarter Report

Mergermarket recently issued its Global and Regional M&A Report for the 1st quarter of 2018.  Here’s an excerpt with some of the highlights:

– The extraordinary surge in dealmaking seen at the end of 2017 has carried through into 2018 as global M&A hit its highest Q1 value on Mergermarket record (since 2001) as pressure from shareholders and the search for innovation continue to drive corporates towards M&A. In the first quarter, US$ 890.7bn was recorded across 3,774 deals, up 18% on Q1 2017’s value of US$ 754.7bn (4,672 deals).

– The US has seen a sizeable increase in M&A during the first three months of the year with six of the largest ten global deals targeting the country, and accounted for a 44.2% share of global activity by value. So far this year, US$ 393.9bn has been invested in US companies, 26.1% higher than in Q1 2017 (US$ 312.4bn) and the largest quarterly value since Q4 2016 (US$502.3bn).

– Global private equity activity remains remarkably high, with many investors pursuing larger targets as the mid-market becomes saturated. In Q1 there were 699 buyouts worth a total US$ 113.6bn, compared to the US$ 89.5bn (782 deals) in Q1 2017, representing the strongest start to the year since 2007 (US$ 212.7bn). It represents the fourth consecutive quarter in which buyout activity has reached US$ 100bn and only the third time on Mergermarket record in which this figure has been reached at this point in the year.

The report also includes the legal advisor league tables for the 1st quarter.

John Jenkins

April 5, 2018

Fiduciary Duties: Conflicts Snare VC Firm in Shareholder Claim

Conflicts are frequently a fact of life for VC & PE funds and their portfolio companies. But this Wilson Sonsini memo says that a recent Delaware Chancery Court decision is a reminder of the significant risks that that those conflicts can create for both the portfolio company’s board and the funds themselves.

In Carr v. New Enterprise Associates, (Del. Ch.; 3/18), Chancellor Bouchard declined to dismiss fiduciary duty claims against a VC investor & the board of its portfolio company. The lawsuit alleges breaches of the duty of loyalty involving a preferred financing round & the subsequent issuance of an option to buy the company to a 3rd party.

The exercise of the purchase option was contingent upon the 3rd party’s acquisition of another company backed by the VC investor – and the plaintiff also alleged that the holder of the purchase option had provided $31.5 million in funding to a separate company in which the VC firm was the largest investor.

The plaintiff argued that the preferred financing undervalued the company, involved conflicts, and inappropriately allowed the VC investor to gain a control stake. Here’s an excerpt summarizing the plaintiff’s argument & the Chancellor’s decision:

The essence of the alleged conflicts was that the board members were either affiliated with the venture firm, were participating themselves in the financing, or were members of management of other portfolio companies of the venture firm.

The court also refused to dismiss a claim that the venture firm had aided and abetted—”knowingly participated” in—the alleged breaches, given that the venture firm had a designee on the board who was partner of the firm and was allegedly “deployed” to seek an unfair price. At least at the pleadings stage, the court appeared receptive to criticisms that although the venture firm gained control of the company in the round, the board did not use a financial advisor or obtain a fairness opinion and only a “select” group of investors was allowed to participate.

As for the issuance of the warrant and the potential sale to the third party, the founder argued that the transaction was part of an orchestrated strategy to induce the third party to provide benefits to other portfolio companies of the venture firm in question. The court allowed this claim to go forward on similar grounds and also found for purposes of the motion to dismiss that, by the time the warrant was granted, the venture firm was a controlling stockholder, potentially with its own fiduciary duties and a conflict of interest.

The memo goes on to address the practical problems that Delaware’s fiduciary standards can create for VC firms & portfolio company directors.  Personal & business relationships between directors and funds can create potential conflicts of interest, while the participation in transactions by the funds or their affiliates can create conflicts for their principals with board seats.  Funds with substantial ownership & board ties also face the risk of controlling stockholder status, or risk an aiding & abetting claim.

This Francis Pileggi blog points out that the Chancellor’s opinion also includes a review of Delaware case law on the potential applicability of Revlon-like duties to a deal involving a controlled company.

John Jenkins

April 4, 2018

Delaware: Proposed 2018 Amendments

This Richards Layton memo reviews this year’s proposed amendments to the Delaware General Corporation Law. Here’s an excerpt summarizing the proposed changes:

If enacted, the amendments would, among other things,

– Amend Section 262 to apply the “market out” exception to the availability of statutory appraisal rights in connection with an exchange offer followed by a back-end merger consummated without a vote of stockholders pursuant to Section 251(h),

– Clarify and confirm the circumstances in which corporations may use Section 204 to ratify defective corporate acts,

– Allow nonstock corporations to take advantage of Sections 204 and 205, including for the ratification or validation of defective corporate acts,

– Revise Section 102(a)(1) to provide that a corporation’s name must be distinguishable from the name of (or name reserved for) a registered series of a limited liability company, and make other technical changes.

John Jenkins

April 3, 2018

Beyond CFIUS? President Targets Chinese Investment in U.S.

As part of a number of actions targeting China, President Trump recently directed Treasury Secretary Steve Mnuchin to recommend restrictions regarding Chinese investment in “industries or technologies deemed important to the United States.” This Simpson Thacher memo provides some background on the president’s directive. It also discusses possible statutory bases for executive branch action, and potential implications for Chinese investment in the U.S.

This excerpt says that the president may be trying to establish a mechanism for challenging foreign investments outside of the CFIUS process:

Neither President Trump’s directive nor Secretary Mnuchin’s public remarks on the subject clarify whether any investment restrictions will exist within the current CFIUS framework. To the contrary, the President’s directive for Secretary Mnuchin to “propose executive branch action [ ] using any available statutory authority” suggests that President and Secretary Mnuchin may be exploring whether they can open up a new front, outside of the CFIUS process, to review and prohibit Chinese investments.

The memo also says that the president’s action could be seen as a way to accomplish by Executive Branch action some of what the pending bipartisan CFIUS reform bill would achieve – and Congress appears to be on track to pass that legislation before the August recess.

John Jenkins