Last fall, the DOJ formalized its corporate enforcement policy for FCPA violations – which provides strong incentives for voluntary corporate disclosure & remediation efforts. Earlier this month, the DOJ clarified that the policy extends to successor entities in M&A transactions. Here’s an excerpt from this Sullivan & Cromwell memo summarizing the application of the DOJ’s policy to successor entities:
During a speech delivered on July 25, 2018 at the American Conference Institute 9th Global Forum on Anti-Corruption Compliance in High Risk Markets, Deputy Assistant Attorney General Matthew Miner, who oversees the U.S. Department of Justice’s (“DOJ”) Fraud Section (which includes the DOJ’s Foreign Corrupt Practices Act (“FCPA”) Unit), announced that successor companies that identify potential FCPA violations in connection with a merger or acquisition and disclose that conduct to the DOJ will be treated in conformance with the DOJ’s FCPA Corporate Enforcement Policy (the “Policy”).
The Policy, which went into effect in November 2017, created a presumption that the DOJ would decline to prosecute a company for potential FCPA violations when the company has satisfied the Policy’s standards for voluntary self-disclosure, cooperation, and remediation (although the company still is responsible for paying any applicable disgorgement, forfeiture, and/or restitution), absent certain aggravating factors.
The memo points out that the policy does not represent a significant departure from prior DOJ practice when it comes to the FCPA liability of successor entities. The DOJ has long taken the position that a successor is generally responsible for FCPA liability incurred by a company that it acquires, but can reduce the risk of an enforcement action through voluntary disclosure, remediation and cooperation with authorities.
The DOJ’s position also highlights the importance of FCPA due diligence in connection with a potential acquisition and the need to take appropriate action based on the results of that due diligence.
In public company deals, target company equity awards are frequently converted into awards under the buyer’s equity plan, and new awards under the buyer’s plan are also often made to target executives who will be retained post-closing. This Hunton Andrews Kurth memo outlines exemptions under NYSE & Nasdaq rules that a buyer can use to make M&A related awards without putting a dent in the shares reserved under its shareholder approved equity plans. This excerpt addresses how shares available under the target’s plan can be used for post-closing awards:
The share reserve under a preexisting shareholder-approved target equity plan may be used for post-transaction grants without additional shareholder approval under certain circumstances. Shares available under such a preexisting plan may be used for post-transaction grants of acquiror equity awards (assuming the acquiror remains a publicly-traded company), under either the preexisting target equity plan or another plan (such as the acquiror’s equity plan), without further shareholder approval, under the following conditions:
– The shares must be available under a plan that was not adopted in contemplation of the M&A transaction.
– The number of shares available for grants is appropriately adjusted to reflect the M&A transaction.
– The time during which those shares are available for grant is not extended beyond the period when they would have been available under the preexisting plan absent the M&A transaction.
– The equity awards are not granted to individuals who were employed, immediately before the transaction, by the acquiror and such grants are therefore generally limited to grants to employees of the target and its subsidiaries who continue employment with the acquiror post-transaction.
The memo also outlines exemptions that would permit outstanding target equity awards to be converted into or replaced by awards denominated in shares of the buyer’s stock without shareholder approval.
In light of Papa John’s recent decision to adopt a “poison pill” rights plan targeting its founder, former chair & largest stockholder, Bloomberg’s Matt Levine has devoted a couple of columns this week to poison pills. His most recent column discusses the complexity of pills, and how that complexity has recently tripped up an investor looking to play hardball with a small cap company.
Like the Selectica situation almost a decade ago, the one Matt flagged involved an investor in a small cap company who decided to intentionally trigger the company’s pill. Unfortunately, this press release issued by the company – Tix Corporation – suggests that he didn’t understand what he was getting himself into. After buying shares that sent him above the pill’s threshold, the investor apparently issued a statement to the effect that “I/we dare you to proceed with the poison pill”; and, “if my estimates are correct, CEO Mitch Francis, you will dilute yourself out of control.”
This excerpt from the company’s press release points out that this isn’t how it works:
Mr. Bhakta’s correspondence clearly demonstrates no comprehension of how a shareholder rights plan operates and which shareholders risk having their ownership diluted. Under the Shareholder Rights Plan, every shareholder EXCEPT the acquiring person and its “group” has the right to purchase a significant number of new shares at a very low price. As a result, all shareholders who exercise their rights will protect and increase their proportionate ownership of the Company, while the acquiring person and his “group” would have their ownership percentage effectively wiped out. The issuance of so many new shares would also ensure that the acquiring person, in this case Mr. Bhakta and his group, would suffer significant financial losses on their investment.
It is important to note that the effect of a company activating a shareholder rights plan and issuing shares is so financially devastating to the acquiring person, that it has never been done in US history. No shareholder would ever deliberately trip a poison pill because their entire investment could be virtually wiped out.
That last paragraph is a bit of an overstatement, because people have triggered pills intentionally. In fact, pills were deliberately triggered on at least two other occasions in addition to Selectica – although the terms of those pills weren’t as formidable as those contained in more modern versions.
Harold Simmons technically triggered the “flip-in” provisions of NL Industries’ pill in 1986, by acquiring 20% of its shares, but that poison pill did not provide that merely crossing the ownership threshold would result in the dilution to the bidder. In 1985, Sir James Goldsmith acquired a controlling position in Crown-Zellerbach and triggered its pill, but because that pill contained only a flip-over provision, he was able to avoid dilution by refraining from a second-step transaction.
What’s more, one study actually suggests triggering a pill as part of a strategy to avoid its full impact in the event of a takeover, so not everybody thinks that the idea of triggering a pill is completely nuts. However, one thing that people didn’t really focus on until Selectica was that if you trigger a pill, the company’s not out of ammo – instead, it can just reload and blast you with round after round of dilution.
What am I talking about? After Selectica’s pill was triggered, it essentially reloaded its pill by promptly declaring a new dividend of preferred share purchase rights. As a result, any additional purchases by the investor would trigger another round of dilution. Since fractional preferred shares backstopped the pill, the company’s board could theoretically do the same thing over & over again. That’s the really toxic part of a poison pill.
This DLA Piper memo says that the long-awaited CFIUS reform bill has been finalized & will be voted on this week. Here’s the intro:
Congress has released the final version of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) – a bill to modernize and strengthen the Committee on Foreign Investment in the United States (CFIUS) to more effectively guard against the risk to US national security posed by certain types of foreign investments. FIRRMA is incorporated into the must-pass National Defense Authorization Act for FY19, which Congress expects to pass this week.
The House and Senate passed parallel versions of the bill in June and recently completed conference negotiations to resolve various differences between the two bills. House and Senate negotiators have agreed on new provisions that would broaden the jurisdiction of CFIUS in order to address national security concerns associated with foreign investment in US critical technology and other types of foreign transactions.
Most notably, FIRRMA creates four new types of “covered transactions,” expands the definition of “critical technology” to include “emerging and foundational technologies,” imposes a deadline on the CFIUS response to written notices, extends the Committee’s timeframe for review, creates the option for (and in some cases mandates) a written declaration, imposes a CFIUS filing fee and establishes a process to identify non-notified transactions.
The memo provides a summary of the legislation, which President Trump is expected to sign within the next few weeks.
Earlier this month the Treasury & IRS issued final regulations dealing with “inversions” – the generic term for a domestic corporation’s adoption of a foreign-parented corporate structure – and certain post-inversion restructurings. The final regulations primarily follow the roadmap laid out in the temporary regulations issued in April 2016, with several changes & clarifications.
This 29-page KPMG memo provides a detailed review of the final regulations & highlights differences between the temporary & final regs. I’d include an excerpt – but I don’t understand enough of this to provide a coherent intro, and I can’t even fake it like I usually do!
In In re: Trulia, the Chancery Court adopted a more demanding standard for approving disclosure-only settlements in merger objection litigation. Under the new regime, supplemental disclosures had to be “plainly material” in order to support a broad release & fee award.
Shortly after the Trulia decision, a few other courts decided to toe Delaware’s line – most notably the 7th Circuit with its decision in the Walgreen case. But states have generally been slow to fall in line with Trulia, with a New York court notably rejecting its application in 2017. However, in recent months, a New York decision suggests that the Empire State may be warming to Trulia, & at least one California court has endorsed the doctrine.
Now this D&O Diary blog says you can add at least one Florida Appellate Court to the list of courts in major jurisdictions that have signed on to Trulia:
In a series of rulings that culminated in the January 2016 decision in the Trulia case, the Delaware courts evinced their hostility to the disclosure-only settlements that so often characterize the resolution of merger objection lawsuits. Since that time claimants have been filing the merger objection suits in courts outside Delaware. The question has been whether the other courts where the merger objection cases are now being filed would follow Delaware’s strict Trulia standard when reviewing disclosure-only settlements. In a ruling late last week, an intermediate appellate court in Florida expressly adopted Delaware’s Trulia standard. The Florida ruling does raise hopes that other courts might follow as well, which in turn could help stem the tide of proliferating merger objection litigation.
Does your company think ESG is for tree-huggers? You’d better recalibrate fast, because this recent FT article says activists are weaponizing it:
One activist investor, who declined to be named, says many activists know that using ESG will help round up wider support from pension funds and traditional asset managers, but also believe there is investor demand. “[ESG in activist investing] has increased in recent years, because a lot of investors are seeing that ESG funds are doing well and have had success in the market.”
Jana is in the process of setting up a specialist activist fund with an ESG focus, which is expected to launch later this year. It has added staff to help with its push into ESG, including Dan Hanson, a former manager of socially responsible funds at BlackRock, and Pulkit Agarwal, who previously worked at the International Finance Corporation in India, according to Reuters.
The article says that other big name activists – including Trian Partners, Blue Harbour, Red Mountain Capital & ValueAct, are also looking to capitalize on investor demand for ESG focused investments.
The latest edition of Cornerstone Research’s M&A Shareholder Litigation Study says that the move away from Delaware and toward federal courts as the preferred venue for M&A objection litigation continued in 2017. Here are some highlights:
– In 2017, the number of M&A deals litigated in federal court increased 20%, while state court filings declined. The 3rd Circuit was the most active federal court last year.
– The number of M&A deals litigated in Delaware declined 81% from 37 in 2016 to seven in 2017.
– A total of 112 M&A deals valued over $100 million had associated lawsuits in 2017 compared to 137 in 2016 (an 18% decline).
– Lawsuits were filed more slowly in 2016 and 2017 compared to pre-Trulia trends. In 2017, the first lawsuit was filed an average of 48 days after the deal announcement, compared to 40 days in 2016 and 21 days in 2015.
The study also notes that litigation rates have dropped markedly since Delaware’s Trulia decision made it more difficult to obtain judicial approval of broad, disclosure-only settlements. In 2013, 94% of M&A deals valued over $100 million were litigated. In contrast, shareholders filed lawsuits in 71% and 73% of comparably sized deals announced in 2016 and 2017, respectively.
Earlier this week, the SEC brought an enforcement action against a hedge fund sponsor for alleged violations of Section 13(d)’s beneficial ownership reporting provisions. Here’s an excerpt from this Steve Quinlivan blog describing the proceeding:
The hedge fund had a senior managing director and portfolio manager that became a candidate for a board seat on a public company and began acting as a de facto board member. On October 28, 2014, the portfolio manager and a financial analyst emailed a list of recommended changes to the public company’s lead outside director and Chief Executive Officer. The e-mail noted “operations are a mess” and that “[i]nvestors don’t have unlimited patience.”
On November 6, 2014, the public company, at the suggestion of the portfolio manager, formed a special sub-committee of the top three officers and the independent directors. Thereafter, the special sub-committee held regular discussions with management of the public company, including the consideration of proposals for cost cutting, capital allocation, oil well development, and changes to the tone at the top. The portfolio manager participated in these discussions even though he was not yet appointed to the public company board.
The hedge fund had reported its ownership interest in the company on a Schedule 13G, which allows certain large investors to report their position without complying with the more extensive disclosure obligations imposed under Schedule 13D. However, only those persons who qualify as “passive investors” are eligible to use Schedule 13G. Persons who may seek to exercise or influence control over the issuer can’t use 13G – and they have to promptly file a Schedule 13D once they’re no longer eligible for the short-form filing.
The hedge fund ultimately filed a 13D once its designee was elected to the Company’s board. The Division of Enforcement said that was too late – it alleged that the hedge fund’s actions prior to that time involved “substantial steps in furtherance of a plan, which was ultimately successful,” to place its designee on the board. Accordingly, it incurred an obligation to file a Schedule 13D in advance of the designee’s election. The parties consented to the entry of a cease & desist order and $260,000 in civil monetary penalties without admitting or denying the SEC’s allegations.
Much to the chagrin of activist targets, the SEC hasn’t brought a lot of Section 13(d) enforcement proceedings against activists, but as we blogged at the time, it did bring one last year against a group of activists for alleged disclosure shortcomings during the course of a campaign.
Last week, Reuters reported that the SEC has shelved its proposal to implement a “universal proxy”. Despite Reuters’ report, there’s been no official word from the SEC indicating that the proposal has assumed room temperature. If it is gone, we’re kind of sad to see it go. It’s not that we’re pro or con – it’s just that universal proxy’s been such fertile “blog-fodder” for us!
We’ve previously blogged about the potential impact on activism of an SEC decision to adopt – or not adopt – the proposal. We’ve also discussed Pershing Square’s unsuccessful efforts to persuade ADP to use a universal proxy card – and, more recently, SandRidge Energy’s decision to become the first company to use a universal proxy card in a proxy contest.
This recent blog from Cooley’s Cydney Posner provides some history on the universal proxy proposal. If the SEC’s proposal truly is on the shelf, it will be interesting to see if there’s a move toward more aggressive private ordering when it comes to the use of a universal ballot.