I have heard that the Chancery Court’s 246-page decision in Akorn v. Fresenius is the longest opinion ever issued by the Court. While most commentators have focused on the Court’s analysis of the MAE clause at issue in the case, I thought it was impressive that Steve Quinlivan scoped out an interesting sidebar discussion of “efforts clauses” that doesn’t appear until page 212 of that opinion. Here’s an excerpt from Steve’s recent blog:
Describing how many deal lawyers think, the Court cited the ABA Committee on Mergers and Acquisitions which ascribed the following meanings to commonly used standards:
– Best efforts: the highest standard, requiring a party to do essentially everything in its power to fulfill its obligation (for example, by expending significant amounts or management time to obtain consents).
– Reasonable best efforts: somewhat lesser standard, but still may require substantial efforts from a party.
– Reasonable efforts: still weaker standard, not requiring any action beyond what is typical under the circumstances.
– Commercially reasonable efforts: not requiring a party to take any action that would be commercially detrimental, including the expenditure of material unanticipated amounts or management time.
– Good faith efforts: the lowest standard, which requires honesty in fact and the observance of reasonable commercial standards of fair dealing. Good faith efforts are implied as a matter of law.
The Court noted that commentators who have surveyed the case law find little support for the distinctions that transactional lawyers draw. Consistent with this view, in Williams Companies v. Energy Transfer Equity, L.P., the Delaware Supreme Court interpreted a transaction agreement that used both “commercially reasonable efforts” and “reasonable best efforts.” Referring to both provisions, the high court stated that “covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.” The high court did not distinguish between the two.
I salute Steve for reading this entire opinion – I’m only on page 120. Also, it looks like the folks at Kirkland & Ellis have read it cover-to-cover too – check out their memo addressing the efforts clause discussion in Akorn.
A few months ago, I blogged about the DOJ’s decision to apply its FCPA corporate enforcement policy – which provides significant incentives for voluntary disclosure & remediation efforts – to successors in M&A transactions. Now, the DOJ is extending that policy to other types of misconduct. Here’s the intro from this Wachtell Lipton memo:
In an important speech, Deputy Assistant Attorney General Matthew Miner of the Department of Justice’s Criminal Division announced on Thursday that DOJ will “look to” the principles of the FCPA Corporate Enforcement Policy in evaluating “other types of potential wrongdoing, not just FCPA violations” that are uncovered in connection with mergers and acquisitions. As a result, when an acquiring company identifies misconduct through pre-transaction due diligence or post-transaction integration, and then self-reports the relevant conduct, DOJ is now more likely to decline to prosecute if the company fully cooperates, remediates in a complete and timely fashion, and disgorges any ill-gotten gains.
The memo urges buyers to engage in “careful pre-acquisition due diligence and effective post-closing compliance integration” in order to best position themselves to take advantage of the DOJ’s enforcement approach in situations where misconduct at a target is uncovered.
In order to rely on MFW’s path to business judgment review of transactions with a controlling shareholder, the deal must be conditioned on independent committee & majority of the minority shareholder approval “ab initio.” In Flood v. Synutra, (Del.; 10/18), the Delaware Supreme Court affirmed an earlier Chancery Court decision & held that MFW’s ab initio requirement doesn’t necessarily require those conditions to be spelled out in the buyer’s first overture. Here’s an excerpt from this Potter Anderson memo that explains the Court’s reasoning:
The Synutra International case involved a proposal by Liang Zhang to acquire the approximately 36.5% of the stock of Synutra International that he did not already own. Zhang’s initial offer to Synutra was not conditioned on either special committee approval or a vote of a majority of the minority stockholders. Shortly after the formation of a special committee, however, Zhang sent a second letter to the newly-formed special committee that did contain these requisite conditions.
As the Supreme Court explained in affirming the Court of Chancery’s dismissal of the action based on compliance with MFW, this second letter satisfied the ab initio formulation, coming as it did in the “beginning” of the process and before economic negotiations commenced. As the Court stated, “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, . . .and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied.”
Justice Karen Valihura issued a lengthy dissent from the Court’s opinion. In her view, the intent to comply with MFW’s key procedural protections must be contained in the controlling shareholder’s initial formal written proposal. We’re posting memos in our “Controlling Shareholders” Practice Area.
The memo also points out that the Court overruled dicta in its MFW opinion suggesting that a plaintiff asserting a due care claim could avoid application of the business judgment rule by challenging the deal’s pricing. The Court said that “a plaintiff can plead a duty of care violation only by showing that the Special Committee acted with gross negligence, not by questioning the sufficiency of the price.”
Yesterday, the Treasury Department issued regulations for a pilot program under the “Foreign Investment Risk Review Modernization Act.” The pilot program focuses on controlling & non-controlling investments in U.S. businesses involved with a “critical technology” in any of 27 industry sectors.
Most export-controlled technologies are considered “critical technologies” under the pilot program. Industry sectors covered by the program include a variety of aerospace & defense, infrastructure, industrial, & technology businesses. This Akin Gump memo summarizes the new regulations. Here’s an excerpt addressing the program’s mandatory notification requirement:
The pilot program establishes a mandatory declarations requirement for transactions that (i) could result in control of a Pilot Program U.S. Business by a foreign person or (ii) involve a noncontrolling investment in a Pilot Program U.S. Business. The parties to such transactions may either submit a written notice that triggers a full CFIUS review or a “declaration” (i.e., abbreviated notices that generally should not exceed five pages in length).
If parties file a declaration, CFIUS will have 30 days to either clear the transaction, request a written notice, initiate a CFIUS review or inform the parties that CFIUS did not have enough time to complete its review and that the parties may submit a written notice.
Here’s the Treasury’s Fact Sheet on the pilot program. The program will become effective on November 10, 2018. The memo notes that it doesn’t apply to certain transactions that were under a binding written contract prior to October 11, 2018. We’re posting memos in our “National Security Considerations” Practice Area.
The case involved minority shareholders who had agreed to customary “drag along” provisions giving the majority shareholders the ability to compel a sale of the minority’s shares in any sale transaction approved by a majority of the outstanding shares. The drag along language also included an agreement to refrain from exercising appraisal rights. The plaintiffs argued that this waiver of appraisal rights was unenforceable. This excerpt from the memo discusses those arguments and the Vice Chancellor’s response:
First, the plaintiff stockholders made a number of textual arguments regarding the language of the drag-along provisions. For instance, because the drag-along provisions stated that the stockholders were to “refrain from exercising” their appraisal rights, as opposed to “waiving” those rights, the plaintiffs maintained that their appraisal rights did not extinguish. According to the plaintiffs, the provisions merely obligated them to delay the exercise of those rights until after closing. The court disagreed, finding that reading to be an unreasonable interpretation of the provision. Although the use of the word “waive” might have been clearer, the court ultimately held that the use of the term “refrain” unambiguously extinguished the stockholders’ appraisal rights.
Second, the plaintiff stockholders argued that the drag-along rights, if construed to include an appraisal waiver, were unenforceable because they violated section 151(a) of the DGCL. As a general rule, holders of common stock in a Delaware corporation are entitled to appraisal rights in accordance with section 262. Further, section 151(a) requires that limitations on classes of stock must be set out in, or derived from, the corporation’s certificate of incorporation. Thus, the plaintiffs argued that to be enforceable, a waiver of appraisal rights must appear in the certificate of incorporation pursuant to section 151(a), and that appraisal rights cannot be waived by contract, such as a stockholder agreement.
The court disagreed, finding that enforcement of the appraisal waiver in the stockholder agreement is “not the equivalent of imposing limitations on a class of stock.” It reasoned that the stockholder agreement “did not transform the [plaintiffs’] shares of stock into a new restricted class.” Rather, “individual stockholders took on contractual responsibilities in return for consideration,” which included refraining from seeking appraisal.
The memo notes that this decision provides increased certainty to private equity & venture investors that incorporate drag along provisions & appraisal waivers into their investor agreements. But it also points out that the case demonstrates plaintiffs’ continued willingness to challenge the terms of these arrangements, and the importance of careful drafting.
Tune in tomorrow for the webcast – “This Is It! M&A Nuggets” – to hear Hogan Lovells’ Rick Climan, Arnold & Porter’s Joel Greenberg, McDermott Will’s Wilson Chu and Sullivan & Cromwell’s Rita O’Neill impart a whole lot of practical guidance!
Here’s an interesting article from investor relations firm ICR that says the outcome of a proxy contest with an activist may turn on a company’s total shareholder return:
The evaluation frameworks used by both ISS and Glass Lewis address multiple dimensions including, but not limited to, a company’s operations, capital allocation, corporate governance, executive compensation and Total Shareholder Return in relation to both its peers and its relevant indices. Of those factors, our analyses reveal that TSR may be the most significant variable in determining the proxy advisors’ vote recommendations.
Since 2013, in 91.4% of contested elections the dissident shareholder has cited poor shareholder return as a reason for change at the board level. Over the same period, ISS has issued a vote recommendation for a dissident slate when the company has outperformed its ISS defined peer group on a backward looking 3-year and 5-year basis less than 3% of the time.
ISS has consistently recommended a partial or full dissident slate when a company has significantly underperformed its ISS defined index and ISS defined peer group. Based on the median values, when ISS has recommended a partial or full dissident slate, the company has dramatically underperformed its ISS defined peers and ISS defined index.
Of course, once you’ve got an activist campaign on your hands, it’s too late to start worrying about your TSR performance. For that reason, the article recommends that boards and management monitor TSR performance and understand how to manage its components as part of their overall framework for assessing the company’s vulnerability to activism.
This Norton Rose Fulbright blog discusses gender diversity among M&A professionals. It notes a 2011 Reuters article that characterized M&A as continuing to be “overwhelmingly a man’s game.” The blog says there’s been only limited movement toward greater gender diversity since then, but offers some reason for optimism about closing M&A’s gender gap. Here’s an excerpt:
The distinct characteristics of female players in the M&A domain are being recognized and celebrated. Collaboration, creativity, relationship-building and heightened emotional and social intelligence, are just a few attributes that set women apart at the negotiating table. In her interview with Mergermarket, Jennifer Muller, Managing Partner of Houlihan Lokey, discusses studies that have shown that “diversity improves performance because it makes people a bit uncomfortable which forces everyone to be on their game and perform their best.” A report by the Harvard Business Review emphasizes that companies with a higher number of women on their boards made fewer bids and paid less for acquisitions.
While the industry is still a long way from gender parity, the narrative about women in M&A is different now. Women are heading up M&A groups in the biggest investment banks in the world. Clients and investors are recognizing the value of diversity in viewpoints to solve problems and showcasing stories highlighting women who are attaining successes in the M&A field act as testimonials for females in the industry.
Many companies assume that, because of Exchange Act Rule 14c-2, they’ll at least have 20 days before any shareholder written consent action becomes effective. This Cleary Gottlieb blog says that this is likely a mistaken assumption – at least insofar as it relates to actions taken unilaterally, without corporate involvement.
During the course of the dispute between CBS & National Amusements Inc. (NAI), its majority shareholder, NAI adopted a bylaw amendment designed to thwart proposed board action involving the issuance of a dilutive dividend. CBS filed a preliminary information statement with the SEC that stated that under Rule 14c-2, the new bylaw wouldn’t become effective until 20 calendar days after the information statement was sent to shareholders.
This excerpt lays out what transpired during the Staff’s review of the filing:
NAI argued in a letter to the SEC staff that Rule 14c-2 was inapplicable to the Bylaw Amendments and that, even if it were applicable, it would not delay the effectiveness of the Bylaw Amendments because Section 14(c) of the 1934 Act and Rule 14c-2 do not preempt Section 228 of the Delaware General Corporation Law (“DGCL”).
The SEC staff, in its initial comment letter to CBS regarding the preliminary proxy statement asked for the basis of the statement in the preliminary information statement that the Bylaw Amendments could not become effective under SEC rules until 20 calendar days after distribution of the information statement to stockholders. The staff also requested CBS’s analysis as to whether and how Section 14(c) and Rule 14c-2 preempt Delaware law with respect to the effectiveness of the Bylaw Amendments. Following receipt of CBS’s response, the staff stated in a subsequent comment letter that they had no further comments but they concluded that “we are unable to agree with the legal conclusions” set forth in CBS’s response.
The blog discusses the possible reasons for the Staff’s position – which include the plain language of the rule itself, prior no-action positions, and policy & state law considerations.