We’ve previously blogged about the bipartisan push for CFIUS reform legislation & the Trump Administration’s initiatives to impose greater restrictions on Chinese investments in U.S. companies. This O’Melveny memo says that both of those efforts continue to move forward.
Earlier this week, the White House announced the President’s decision to implement “investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology” – with specific actions to be announced by the end of June. At almost the same time, CFIUS reform legislation – The Foreign Investment Risk Review Modernization Act, or FIRRMA – was unanimously approved by the Senate Banking Committee & the House Financial Services Committee.
The memo says that both FIRRMA & the new restrictions on Chinese investment are expected to be in place by August. This excerpt says that their combined effect will represent a substantial change in US policy toward foreign investment:
Individually or in combination, the White House action and FIRRMA will mark a pronounced — and probably permanent — departure from the 225-year-old US policy of welcoming foreign investment except in narrow circumstances. By highlighting “industrially significant,” “emerging,” and “foundational” technologies as specially under CFIUS protection, the government will assume broad new regulatory authority that will set the stage over the long term for future investment controls based more explicitly on economic policy and public interest concerns.
More immediately, implementation of the new authorities will significantly impact the financing and exit strategies of early stage US companies, as well as M&A and development partnership transactions involving mature companies, that possess technologies fitting the new designations.
The memo goes on to review the key components of the White House statement & the versions of FIRRMA that emerged from the House & Senate committees.
The UK’s decision to exit the EU put a damper on inbound M&A activity – with the dollar value of inbound deals declining from its 2015 peak of $341 billion to only $91 billion last year. However, this P.J. Solomon report says that the inbound M&A market in the UK appears to be stabilizing. This excerpt highlights this year’s activity:
– 2018 year-to-date UK inbound M&A has increased $170B compared to last year. Even excluding the 3 largest announced transactions YTD (Shire’s $81B bid for Takeda, Comcast’s $41B bid for Sky and Disney/Fox’s competing $37B bid forSky), UK inbound transaction volumes are still up $29.7B or 32.2% relative to last year.
– Foreign investment into the UK is being driven by greater comfort around Brexit and continued strength of global currencies relative to the British Pound (even despite the Pound’s recent run up)
– Overall, inbound M&A dollar volume has increased to 70% of all UK cross-border transactions, up from 57% in 2016. U.S. and Japanese companies have been the top bidders for UK targets in 2018, at $91B and $82B, respectively.
The report also covers other trends in global cross-border M&A, and provides a variety of data on YTD 2018 U.S. outbound & inbound activity.
Vice Chancellor Laster’s ruling earlier this year in the Aruba Networks appraisal case raised a lot of eyebrows. In that case, he determined that since the market for Aruba’s stock was efficient, the stock’s unaffected market value prior to the deal was the right approach for determining its fair value – even though neither of the parties argued for that approach, and even though it resulted in a value that was lower that the price that Aruba itself advocated.
As I blogged at the time over on “John Tales”, some even suggested a “Straussian” reading of the opinion. This interpretation holds that the Vice Chancellor was frustrated by the Supreme Court’s approach to appraisal in recent cases, and therefore his goal in Aruba Networks might have been “to embarrass the Supreme Court into reversing him again and admitting that markets aren’t that efficient.”
The plaintiffs seem to have incorporated this idea into their motion for reargument – suggesting at one point that the Vice Chancellor “misapprehended the law due to [his] ‘frustration with many of the Supreme Court’s pronouncements.'” That may not have been their best play, but this excerpt from his opinion denying the motion shows that it certainly got Vice Chancellor Laster’s attention:
The petitioners initially argue that I issued the Post-Trial Ruling as an act of political theater designed to show the Delaware Supreme Court the error of its ways. They sympathize that the Post-Trial Ruling must reflect my “frustration with many of the Supreme Court’s pronouncements,” only to posit that this frustration led me to pen a decision designed to show “the absurdity of the literal application of certain pronouncements made by the Supreme Court in Dell and DFC to appraisal actions.”
They conclude that I must be engaging in a “battle of legal titans” with the Delaware Supreme Court and that the emotional fervor of intellectual combat led me to impose an unjust ruling. The motion strives to remind me that the petitioners are not characters in an academic hypothetical but “real” litigants with “real dollars at stake” who should not be turned into “collateral damage.”
Laster went on to make it clear that he wasn’t buying any of this “political theater” argument:
For starters, I am not a legal titan. I am a state court trial judge. I personally do not think that the role of a trial judge accommodates active resistance to Delaware Supreme Court pronouncements. I rather view the job as calling for adherence to Delaware Supreme Court precedent. While I think it is fair game for a trial judge to suggest potential changes in the law, I do not believe that a trial judge has the flexibility to disregard the Delaware Supreme Court’s holdings, nor do I think that a trial judge should look for clever ways to evade their implications. When a new precedent arrives, I view my job as requiring that I update my understanding of Delaware law to incorporate the new precedent.
In fact, the Vice Chancellor wasn’t buying anything that the plaintiffs were selling – he reiterated that he meant exactly what he said in his prior opinion, and denied the motion for reargument.
Earlier this week, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which is intended to reduce the regulatory burdens imposed on financial institutions under Dodd-Frank. President Trump is expected to sign the legislation by Memorial Day. Although the legislation makes a number of changes to existing law, its most significant change is the increase in the threshold for designation of an entity as a “systemically important financial institution” (SIFI) from $50 billion to $250 billion in assets.
Financial institutions falling within the SIFI classification face particularly burdensome regulation, and this Wachtell memo says that the change in the SIFI threshold may result in a big upswing in financial institutions M&A. Here’s an excerpt:
The $50 billion threshold has been a powerful deterrent to bank M&A. Since the passage of Dodd-Frank in 2010, only one bank holding company has crossed the $50 billion threshold as a result of an acquisition – CIT through its acquisition of OneWest in 2015. As a practical matter, the $50 billion threshold even deterred mergers where the combined company would exceed $40 billion as the company would then have to demonstrate to its regulators its readiness to cross the $50 billion threshold. For banks above the $50 billion threshold, the complexity and uncertainties of the CCAR stress test also discouraged acquisitions.
The memo notes that the legislation comes at a time when other factors encouraging bank M&A are falling into place. These include a gradual easing of the regulatory environment by new leadership at the regulatory agencies, growing confidence that deals will receive regulatory approval, increasing competition for deposits & millenials’ preference for larger banks. All of these factors point to a significant increase in bank M&A.
This “Pensions & Investments” article says that CalSTRS can’t find any private equity funds that will take its money. This excerpt says the problem is California’s transparency legislation:
New transparency requirements and a seller’s market for private equity investments are putting California public pension funds at a disadvantage when seeking to invest.
CalSTRS and the Los Angeles Fire & Police Pension Plan are just two of the asset owners whose general partners have declined to accept their commitments, citing the state’s new law. The law requires all public pension plans in the state to obtain information about private fund fees and expenses, and to make that information public.
“We’ve lost three opportunities,” said Christopher J. Ailman, chief investment officer of the $222.5 billion California State Teachers’ Retirement System, West Sacramento, in an interview.
The situation is being aggravated by the enormous amount of money chasing the asset class, as investors look to alternative investments to produce returns not expected to be delivered by traditional asset classes.
California enacted legislation in 2016 mandating that California public investment funds disclose detailed information about the fees and expenses associated with investments in private equity, venture & hedge funds. At the time, some expressed concern about the impact the new disclosure requirements would have on California funds’ ability to access alternative investments. It appears that they had good reason to be worried.
This Shearman & Sterling memo notes that the proposed 2018 DGCL amendments would eliminate appraisal rights for 2-step stock-for-stock deals structured in conformity with Section 251(h). This excerpt explains that the amendment would accomplish this by extending Delaware’s “market out” to stock-for-stock exchange offers:
Delaware law does not provide dissenting shareholders with appraisal rights in transactions that are effected pursuant to a “long-form” merger (in which the target company calls a special meeting for purposes of obtaining shareholder approval), so long as the consideration paid to the target’s shareholders consists solely of stock that is listed on a national securities exchange or is held by more than 2,000 holders. This is the “market out” exception.
However, as currently written, Delaware law does not extend the “market out” exception to two-step mergers effected pursuant to §251(h), in which the target company is acquired without the need for a stockholder vote following a tender offer.
A proposed amendment to the DGCL on March 20, 2018 is designed to eliminate this inconsistency. Under the proposed amendments, the same “market out” exception that applies to long-form mergers would apply to short form mergers effected pursuant to §251(h) – i.e., in stock-for-stock deals.
It is very uncommon for stock-for-stock deals to be structured as 2-step transactions, and the memo speculates that the availability of appraisal rights may be one of the reasons. Plenty of impediments would nevertheless remain, including the need to register the shares to be issued & the delays associated with SEC review. Still, the memo suggests that the amendment could increase the utility of Section 251(h) in these transactions.
Last week, Chancellor Bouchard issued a letter ruling in CBS v. National Amusements, (Del. Ch.; 5/18), denying CBS’ efforts to enjoin the Redstone family, its controlling shareholder, from interfering with the board’s consideration of a dividend that would deprive them of voting control over the Company. This Morris James blog summarizes the Chancellor’s ruling. Here’s an excerpt:
In this letter decision, the Court declined to restrain the Redstones at this time. While plaintiffs had shown a colorable claim for breach of fiduciary duty, they failed to show threatened, imminent irreparable injury absent the restraints. Rather, the Court relied on its extensive power to provide redress if the Redstones ultimately decided to take some action inconsistent with a controlling stockholder’s fiduciary obligations with respect to the dividend plan. Also notable is the Court’s balancing of the equities and its discussion of the apparent tension in Delaware law between a controlling stockholder’s right to protect its control position and the right of independent directors to respond to the threats posed by a controller, including through possible dilution.
If you’re looking for a deep dive on the case, check out this blog from Prof. Ann Lipton.
As part of the brawl over the now-abandoned Xerox/Fuji deal, a New York Court enjoined Xerox from using its advance notice bylaw deadline to thwart shareholder Dawin Deason’s efforts to run a competing slate of directors at the company’s annual meeting. Now this Kirkland & Ellis memo says that the Court’s decision may have significant implications for other companies dealing with activist campaigns. Here’s what they’re concerned about:
Relying on a 1991 Delaware Chancery Court decision, the New York court ordered Xerox to waive the advance notice deadline on the basis that a waiver is appropriate “when there is a material change in circumstances” after the nomination window closes. The court concluded that the board’s refusal to waive the nomination deadline “was without justification,” and that the directors “likely breached their fiduciary duty of loyalty” in doing so.
This decision requires attention from boards and transaction planners. Opportunistic activist shareholders or even hostile bidders may start searching for events after a company’s nomination deadline that could be argued to be material as a means to force a re-opening of the nomination window. While the decision in this case was undoubtedly colored by the court’s broader decision relating to the Fuji transaction itself (it also issued a highly unusual preliminary injunction blocking the deal) and the Delaware case that the New York court cited has always been understood to involve extremely narrow situations, companies should consider the intersection of timelines for nomination deadlines, annual meeting dates and significant corporate announcements.
The cased relied upon in the New York decision is Hubbard v. Hollywood Park Realty Enterprises (Del. Ch.; 1/91). However, as the memo notes, the ability to use a change in circumstances to pry open a nomination deadline that had passed was intended to apply in very limited situations. In that regard, Broc blogged a few years ago about a more recent Delaware decision holding that only a “radical shift in position, caused by the directors,” will allow the nomination deadline to be disregarded.
Most companies have the need for an HSR filing on their checklist whenever they have a sizeable M&A transaction on the horizon. But the FTC recently posted guidance on its blog reminding companies that conventional purchase transactions aren’t the only ones that may give rise to an HSR reporting obligation. This excerpt provides some examples of other transactions that may trigger a filing:
Exchange of one type of interest in a company for another – Acquisition of some kinds of interests in companies are reportable, while others are not. If you exchange one type of interest for another, that acquisition may be subject to HSR reporting and waiting requirements even though you’re exchanging one interest for another in the same company. For example, in 2013 Berkshire Hathaway exchanged convertible notes of USG Corporation for voting securities of USG Corporation. Even though both interests were in the same company, the conversion required an HSR filing. But Berkshire Hathaway’s compliance program missed it, and Berkshire Hathaway paid a civil penalty for the violation.
Backside acquisitions – When one corporation buys another, consideration often comes in the form of voting securities of the buyer. For example, Corporation A may buy Corporation B for cash and a certain number of shares in Corporation A. The payment of Company A shares to the target’s shareholders is known as a “backside transaction.” If you hold shares of company B and will end up holding shares of A as part of a backside transaction, you may have to file and observe the waiting period before acquiring these new shares.
Consolidations and acquisition of shares in Newco – In a Consolidation, when Corporation A and Corporation B combine under a Newco that will be its own ultimate parent entity, the shareholders of A and B may receive voting securities of Newco in exchange for their shares in A or B. Similar to backside transactions, if you are going to receive shares of Newco, you may have to file for the acquisition even though no money changed hands and you took no direct action to cause the acquisition or to exchange the shares.
The blog also notes that internal reorganization transactions and compensation awards may trigger HSR filings, and reminds companies to take these situations into account in designing their compliance programs.
Shareholder activism in the U.S. & Europe has been a growth industry for at least a decade – and this Bloomberg article says that in recent years, companies in Asia have attracted increasing attention from activists as well. This excerpt says that Asian companies should be on high alert:
Activists, both homegrown and American, are coming after bloated balance sheets and family-controlled firms, and succeeding more often than hitherto in forcing through higher dividends and board changes.
Whether it’s because the Japanese and South Korean governments want their companies to respect minority investors’ interests, or because the activists themselves have adopted a less abrasive style, Asia is a hunting ground like never before. Last year, 31 percent of total involvement by activists outside the U.S. was in the region, up from just 12 percent in 2011, according to a report by JPMorgan Chase & Co.
In addition to big U.S. names like Elliott Management & Third Point, Asia-based activists such as Japan’s Sparx Group Co. & Hong Kong’s Oasis Management Co. and PAG Asia Capital have gotten into the game in a big way. According to this recent J.P. Morgan report, activist campaigns in Asia accounted for 31% of total non–U.S. activism activity in 2017 – that’s up from only 11% in 2011. Campaign volume has grown at a compound annual growth rate of 48%, & in 2017, 4 of the 10 most targeted non–U.S. countries were in Asia.