Intralinks’ recently released its annual “M&A Leaks Report.” Once again, the report makes for interesting reading – it analyzes deal leaks over the period from 2009-2017, and breaks them down by world region, country & business sector. The report also looks into the effect of leaks on the premiums paid, emergence of rival bidders & time to closing. Here are some of the highlights:
– Leaked deals have significantly higher premiums than non-leaked deals. In 2017, targets in leaked deals achieved a median takeover premium of 34% vs. 20% for non-leaked deals. This 14% spread was higher than in 2016, when the difference was around 12%.
– For the 10 countries with the most M&A activity, the top three for deal leaks in 2017 were Hong Kong (21%), India (14%) and the U.S.(9%). The bottom three countries for deal leaks in 2017 were France, Germany and South Korea – all of which had no deal leaks during the year.
– TMT(12%), Consumer (11%) & Retail (11%) were the leakiest industry sectors, while Financials (6%), Real Estate (6%) and Energy & Power (3%) were the most tight-lipped.
The study cautions that despite the economic incentive to leak, regulators worldwide are increasing regulatory and enforcement efforts against what they consider to be market abuse, including M&A deals leaks.
It appears that the universal proxy many activists have longed for may actually tip the scales in favor of management in a proxy fight. In a presentation at Schulte Roth’s annual activist investing conference, Starboard Value’s CEO Jeff Smith illustrated this potential outcome using a hypothetical scenario in which an activist nominates 5 candidates to a board comprised of 8 seats. This excerpt from a recent “Activist Insight” newsletter walks through that scenario:
In a traditional proxy contest using two cards, votes will be weighted to the dissidents if shareholders feel strongly about the need for change but the three management nominees running unopposed would almost certainly be elected. A proxy contest using a universal ballot might mean investors are a bit pickier, with the result that fewer of the dissident nominees are elected – hence why companies have been keener to use a universal ballot in situations like SandRidge Energy, which faced having its entire board replaced.
A universal ballot, however, could also lead to freakish results. In a fight involving a short slate against a full one, there are enough possible outcomes for every single candidate to receive over 50% of the shares. The side running the full slate – let’s assume it’s the company – could promote different candidates to different shareholders and split the vote, romping to victory.
Here’s Starboard’s slide deck illustrating the possible outcomes of this hypothetical. As a solution, Smith suggests dividing the universal proxy into 2 sections. One of these would feature an equal number of candidates for contested seats, while the other would contain the uncontested nominees. While this would “make the proxy fight a simple first-past-the-post race,” the newsletter points out that it also would limit the degree of shareholder choice afforded by the universal ballot.
Starboard isn’t the first to point out that a universal proxy might have the unexpected effect of favoring management. As we blogged shortly after the SEC issued its universal proxy proposal, a study reviewing recent proxy fights suggested that the rule would’ve modestly favored management had it been in place at the time.
Most state LLC statutes do not expressly provide for appraisal rights, but many permit these entities to provide those rights in their operating agreements. This recent blog from Lowenstein Sandler’s Steve Hecht & Rich Bodnar discusses the ability of minority LLC investors to obtain appraisal rights by contract – and this excerpt lays out some of the reasons why they might want to consider that approach:
Many states, including New York, allow the members of an LLC–as an example–to include appraisal rights in the operating agreement. While we often cover appraisal on this blog as a statutory remedy focused on shareholder protection, negotiated appraisal rights can be a part of a corporate lawyer’s suggestion box in trying to get a deal done. A minority investor concerned about his or her minority status may be comforted by an appraisal rights mechanism in the foundational documents. Similarly, an investor who is contemplating a minority investment may wish to negotiate for an appraisal provision precisely because it can give an “out”–and, at minimum, bargaining power–if the minority investor sees issues with an otherwise-aboveboard merger.
The blog notes that a minority investor may be willing to do some horse-trading to obtain these rights at the time of its investment. For example, it may be willing to give up the right to seek to enjoin a potential transaction in exchange for a viable post-closing remedy such as a contractual appraisal right.
Here’s an interesting blog from Cooley’s Michal Berkner about some of the differences between UK & US purchase agreement terms for private company M&A. The blog highlights different approaches to reps & warranties, indemnification, post-closing adjustments, bring-down conditions and post-closing covenants. This excerpt addresses our old pal “sandbagging”:
Acquisition agreements governed by Delaware law sometimes contain provisions expressly acknowledging that a party’s right to recover for breaches of representations and warranties of the other party is not affected by any knowledge of such breach by such party, whether obtained prior to signing or between signing and closing. This heavily negotiated provision is known as a pro-sandbagging clause.
English law governed acquisition agreements often contain provisions that provide that a party does not have a right to recover for a breach of warranty of the other party to the extent the non-breaching party had knowledge of such breach prior to closing. This is known as an anti-sandbagging clause. English case law also suggests that a party generally does not have a right to recover for a breach of warranty of the other party to the extent the non-breaching party had knowledge of such breach prior to closing.
The buyer in such a case is deemed not to have relied upon the accuracy of such warranty, or to have no or de minimis damages, as such buyer is presumed to have valued the shares or assets on the basis of its knowledge that the warranty was untrue. Anti-sandbagging clauses typically limit the group of people who are deemed not to have knowledge of breach to the key deal team of the buyer, excluding attributing to them knowledge of outside advisers.
While dealmakers should have a working knowledge of the differences between the two jurisdictions, the blog acknowledges that the question of which jurisdiction’s law will govern often depends more on practical factors, such as the desire for a home jurisdiction for dispute resolution, the location of the business or the jurisdiction in which it’s organized, and tax considerations.
For most deals, everything starts with a non-disclosure agreement. In order to provide insight into market practice when it comes to NDAs, the Business Law Center surveyed the terms of 143 NDAs filed on Edgar & dated between 1/1/14 and 3/31/18. Here are some of the findings:
– The most common agreement term was 24 months. One agreement remained in force for 120 months (the longest term), and one for only three. Twenty agreements did not specify a termination date, implying a perpetual term. Twenty-three others provided for, or implied, perpetual survival of the NDA’s confidentiality provisions.
– Delaware law governed the largest portion (62%) of these agreements, an additional 22% were written under New York law. Unilateral agreements were more likely than mutual agreements to be governed by New York law.
– Reflecting the fallout from the Delaware Chancery & Supreme Court decisions inVulcan v. Martin-Marietta, “use provisions” have evolved significantly over the period surveyed. 2014’s use provisions convey a general sense of how confidential information should be used, but like the language at issue in Marietta/Vulcan, fail to give precise direction. In contrast, 2018’s use provisions are more uniform and more specific. In six of 2018’s nine NDAs confidential information is to be used “solely for the purpose of” or “solely in connection with” evaluation of a proposed transaction. These six agreements also enumerate the activities that constitute evaluation.
– 83% of the agreements surveyed had a non-solicitation clause preventing the recipient of confidential information from poaching the other party’s personnel. The duration of the non-solicitation period varied from six to 36 months, with twelve months being the most common period.
– 80% of the agreements surveyed included standstill provisions. The length of the standstill period varied considerably, from 45 days to three years. The most common term was twelve months.
– 64% of agreements with standstills included a “don’t ask, don’t waive” clause, but only 23% did not include a “carve-out” allowing the party bound by the standstill to privately communicate alternative proposals or, more commonly, by a “fall-away” automatically terminating the standstill in the event of a competing offer. Some deals had both provisions.
The survey also addresses other common NDA provisions, and reviews the differences between the terms of unilateral & mutual NDAs.
According to Dykema’s “14th Annual M&A Outlook Survey,” dealmakers are more optimistic about the prospects for M&A activity in 2019 than they’ve ever been in the history of the survey. The survey found that 65% of respondents expect the M&A market to strengthen over the next 12 months – that’s up from 39% last year.
Other highlights include:
– Automotive, energy & consumer products are the sectors where respondents expect to see the most deal activity. For the first time in 4 years, technology and healthcare dropped out of the top 3 sectors.
– 46% of respondents said a Democratic victory in the House would be somewhat or very positive, while 36% said it would be somewhat or very negative. On the Senate side, 48% saw a Democratic takeover as positive, while 36% said it would be somewhat or very negative. The “meh” vote was 19% for the House & 17% for the Senate.
– Only 33% of respondents chose availability of capital as the strongest M&A driver – that’s down from 55% in 2017. 31% cited general U.S. economic conditions, while favorable interest rates, financial markets and changes in U.S. tax laws, were each cited by 11% of respondents.
The survey also said that respondents were particularly bullish about private company M&A and deals below $100 million. That wasn’t the case for larger deals – only 26% expect growth for deals exceeding $100 million, while 41% expect deal volume to diminish.
Deal lawyers have devoted a lot of attention to the Treasury’s new FIRRMA Pilot Program regs, but some less noticed aspects of the new legislation may also have a big impact on deals. For example, here’s a recent memo from Seyfarth Shaw pointing out that with the enactment of FIRRMA, CFIUS’ jurisdiction now extends to transactions involving certain real estate.
Under FIRRMA, transactions open to CFIUS review now include now include foreign purchases or leases of real estate in an airport or martime port, or that is in close proximity to sensitive military or government faciltiies – in either case, if such transaction could provide foreign persons with the ability to collect intelligence or expose national security activities. This excerpt from the memo provides some key takeaways for parties dealing with CFIUS’s new jurisdiction over real estate:
– If you are selling or leasing property to (i) a non-U.S. entity, or (ii) an entity owned or controlled by a foreign entity or government, check to see if the property falls into one of the categories set forth above. If so, a filing with CFIUS may be required.
– If you are a landlord or property manager owned or controlled by a non-U.S. entity, does the rental application you receive contain sensitive personal information that might be used to threaten national security (for example, is the applicant is a government entity or a government contractor)? If so, a filing with CFIUS may be required.
– If a filing is required, you need to determine whether a full CFIUS filing or merely a declaration is required.
– If a CFIUS submission is required, this could delay the timing of your transaction by up to 90 days (in rare cases more).
The memo also points out that regulations under the new regime have yet to be promulgated – so stay tuned.
This Schulte Roth memo discusses the issues associated with an investor obtaining representation on a public company board. Although the memo is addressed to the investor, it’s a useful resource for companies as well. Here’s the intro:
Representation on the board of directors of a public company has significant advantages for an investment firm looking to maximize, or just simply protect or recover, an investment. But a huge compliance minefield awaits if not thought through beforehand. Seats on a public company board can result from an activist campaign, a private equity investment that has completed an IPO, participation in a private placement of securities in an already public company or even a friendly invitation from an issuer looking for investor representation on its board. However you get there, if a principal or employee of your firm sits on the board of a public company, or any company, the value of understanding the issues that come along with that cannot be understated.
Among other topics, the memo reviews trading restrictions, reporting requirements, consequences of “affiliate” status & state law fiduciary duty issues.
We’ve previously blogged about the litigation challenging Xerox & Fujfilm’s controversial proposed merger. In May, a New York Supreme Court judge issued a 25-page opinion enjoining the deal. On Tuesday, New York’s 1st Dept. Court of Appeals issued a terse 3-page order overturning that ruling.
The Court held that all of the Xerox board’s decisions about the proposed transaction were protected by the business judgment rule. Here’s an excerpt addressing the former CEO’s conflicts that featured so prominently in the trial court’s ruling:
To the extent former CEO of Xerox, Jacobson, was conflicted, inasmuch as the transaction provided that he would serve as the future CEO of the new company, the conflict was acknowledged; he neither misled nor misinformed the board (see Mills Acquisition v. Macmillan, Inc., 559 A2d 1261, 1264 [Del. 1989], compare Deblinger v. Sani-Pine Prods. Co., Inc., 107 AD3d 659 [2nd Dept. 2013]). The board, which engaged outside advisors and discussed the transaction on numerous occasions prior to voting on agreeing to present it to shareholders, did not engage in a mere post hoc review, nor was the transaction unreasonable on its face (see In re MeadWestvaco Stockholders Litig., 168 A3d 675, 683 (Del Ch 2017), compare Sinclair Oil Corp. v. Levien, 280 A.2d 717 [Del. 1971]).
In light of the foregoing, the business judgment rule does apply (Auerbach v. Bennett, 47 NYS 619 . And upon application of the business judgment rule, plaintiffs did not make a showing of the likelihood of success on the merits in the actions, which allege breaches of fiduciary duty and fraud.
While the facts relating to the conflicts in this transaction cited in the trial court’s ruling were eyebrow-raising, the 1st Dept.’s decision to overrule the decision is not all that surprising. As we noted in our prior blog, commentators observed at the time of the earlier decision that it was unlikely that a Delaware court would have enjoined the deal.
With the Court’s ruling, this Reuters article says that as far as the potential Fujifilm/Xerox deal goes, the game’s afoot once again.
After the Rural/Metro mess of a few years ago, there are few words that send a chill down a dealmaker’s spine more quickly than “aiding & abetting.” This Cleary Gottlieb blog says that a recent Delaware Chancery Court decision imposed aiding & abetting liability on an unusual suspect – an activist investor Here’s the intro:
The Delaware Court of Chancery yesterday found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018).
At issue in the case was the failure of an activist & its board representative to disclose a tip received about a potential buyer’s interest in the company to the full board. Vice Chancellor Laster said that withholding that information was inappropriate, both because the activist’s short-term focus might lead it to seek a quick sale in lieu of long-term value maximization, & because of the director’s role in spearheading the potential sale process. As a result, he held that the director breached his fiduciary duty by failing to disclose the tip, and that the activist aided & abetted that breach.
Notwithstanding the finding of liability, there was an important silver lining for the activist – the Court held that there were no recoverable damages in the case, based in large part on its conclusion that the sale process, though flawed by the non-disclosure, was sufficient under Dell & DFC Global to result in deference to the deal price as representing the company’s value.
The blog says that the key takeaways from the case are the importance of full disclosure of conflicts to the board and shareholders, and the Chancery Court’s willingness to extend the deference to the deal price found in recent appraisal cases to breach of fiduciary duty and aiding and abetting claims.