This recent report from Activist Insight & Skadden provides an overview of shareholder activism in Europe during 2018. This excerpt from the intro addresses the year’s key themes:
Three themes stand out from 2018’s experience. First, the appeal of European and specifically U.K.-listed assets to American buyers. The likes of Whitbread, SodaStream, and Sky sold themselves or business divisions to U.S. buyers in the first nine months of the year, while the number of U.K.-based companies subjected to public demands by U.S.- based activists has doubled from 2017 to 2018.
Second, the fulfillment of a prediction made in last year’s Activist Investing in Europe report, when we wrote that “U.S. activist interest in Europe has increased and the groundwork has been laid for a sustained level of activism.” ValueAct Capital Partners now has three significant investments in the U.K., including the only non-U.S. stake in its impact investing fund, while Trian Partners raised 270 million pounds through the London Stock Exchange for what may be a U.K. target.
Third, the big campaigns have been less event-driven and more operational in nature. Non-European-based activists are more likely to push for M&A-related demands, a fact that was in evidence last year at Clariant and AkzoNobel. But ValueAct and Trian are known for their operational focus, while the year’s biggest headlines were generated by Elliott Management’s proxy contest at Telecom Italia, where the Italian government intervened to prevent asset sales. ThyssenKrupp, where Elliott and Cevian Capital pushed for a looser conglomerate structure, was more complicated than a mere breakup play, even though the interim CEO ultimately fell behind a plan to split the business in two.
Despite the increasing focus on operations, the report says that 2018 appear to exceed 2017’s level of public demands for M&A, with 17 such demands recorded during the first 3 quarters of 2018 compared to 15 during the same period last year.
I recently blogged about the growth in state court Section 11 lawsuits surrounding stock-for-stock mergers. Section 11 of the Securities Act applies only to registered offerings. Since that’s the case, this Keith Bishop blog reminds companies about an alternative to registration that some may want to consider – a state court fairness hearing that would permit the shares to be issued under the Section 3(a)(10) exemption. Here’s an excerpt:
Section 11 of the Securities Act of 1933 authorizes a cause of action against specified persons “in case any part of the registration statement, when such part became effective, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading . . . “.
It occurred to me that state law could actually be used to avoid Section 11 claims in either state or federal court. California is one of only a handful of states that offer the opportunity to take advantage of the Section 3(a)(10) exemption from registration under the Securities Act of 1933. This exemption is most typically used by public issuers who wish to acquire a closely held companies in exchange for securities. The statutory authority for the procedure in California is Section 25142 of the Corporations Code. Relying on Section 3(a)(10) by undergoing a fairness hearing eliminates the possibility of Section 11 liability because no registration statement becomes effective under the Securities Act.
The blog includes links to a number of resources on the 3(a)(10) exemption and the California fairness hearing process. In a subsequent blog, Keith discusses the reasons why companies may want to make the effort to avoid potential Section 11 claims.
This recent PE Hub article lays out 10 “best practices” for conducting sexual harassment due diligence. This excerpt lays out a few that focus on the assessment of a target’s internal workplace culture:
– Request copies of anti-harassment and anti-retaliation policies and procedures, including employee handbooks. Validate whether they’ve actually been followed. If the seller has failed to follow its own policies, that’s a red flag for broader compliance concerns.
– Request information on the seller’s anti-harassment program. Does the seller conduct anti-harassment training? If so, how often, who is required to attend, and is it completed in-person or online? Is a traditional anonymous hotline offered and, if so, how many reports have been harassment-related, and what were their outcomes? Are analytics being run on workplace equity, and if so, what are the data showing? The answers to these questions can be a good indicator of how seriously, and proactively, the seller has been addressing workplace equity.
– Get copies of any climate surveys the seller has conducted. The most revealing metrics will be in the trends around diversity and inclusion. If early surveys show a problem in these areas, what did management do to address the problem? Did the metrics improve over time?
Other recommended best practices include obtaining a #MeToo rep that’s separate from the general litigation rep, raising questions about harassment issues & diversity and inclusion during management interviews, and speaking with rank & file employees about their experience if the deal process permits.
Lawyers who work with public companies tend to think of incorporation by reference as an SEC issue – and generally assume that if incorporation information by reference to another document is permitted under SEC rules, then we’re good to go. This Morris James blog flags the Chancery Court’s recent decision in Zalmanoff v. Hardy (Del. Ch.; 11/18), which provides a reminder that this isn’t necessarily the case in Delaware.
While the SEC may have signed-off on the “access equals delivery” model for many situations, Delaware isn’t there yet – in fact, it rather grumpily adheres to the view that “our law does not impose a duty on stockholders to rummage through a company’s prior public filings to obtain information that might be material to a request for stockholder action.”
In Zalmanoff, the plaintiff challenged the adequacy of using information in a 10-K that accompanied a proxy statement to satisfy the directors’ fiduciary duty of disclosure. VC Slights held that the defendants did satisfy their duty of disclosure, and he spent several pages of his opinion sorting through precedent about how information must be delivered to stockholders. The blog provides a helpful summary of the current state of Delaware law on this topic:
This decision holds that it is acceptable to make the needed disclosures to stockholders by sending them both a Form 10-K and proxy statement at the same time. However, this does not mean that it is possible to rely on past SEC filings when a proxy statement omits material information that was disclosed previously. The key is that the various documents need to be disclosed together.
It’s worth noting that Zalmanoff didn’t involve a merger – it involved a challenge to an executive comp plan, and the decision shouldn’t be read as prohibiting incorporation by reference to documents that aren’t delivered to shareholders. For example, in Gilliland v. Motorola (Del. Ch.; 10/04), the Chancery Court seemed to endorse incorporation by reference to publicly filed documents, at least if a summary of the information contained in the other documents is provided:
In cases where adequate information is, in fact, publicly available, it will always be a simple exercise to identify the relevant disclosure documents and either include them with the notice, or extract and disclose summary information from them, and advise stockholders how to obtain more complete information.
But the bottom line is that when dealing with Delaware’s fiduciary duty of disclosure, you need to give some thought to how you deliver information about your deal to shareholders – and not just assume that if the information is incorporated by reference under SEC rules, you’re home free.
This recent blog from Steve Quinlivan reviews the Delaware Chancery Court’s decision in In re Tangoe Stockholders Litig. (Del. Ch.; 11/18), where Vice Chancellor Slights held that company’s failure to provide audited financial statements & other disclosure shortcomings precluded its directors from relying on the Corwin doctrine in post-closing litigation.
The deal sounds like a complete mess – it involved a take private with a negative premium that took place in the shadow of, among other things, allegedly false SEC filings & the company’s inability to get a restatement completed. Despite these issues, the parties signed-up a deal. This excerpt from Steve’s blog describes what happened next:
Ultimately the Director Defendants recommended that stockholders tender into a negative premium deal. Inevitable litigation followed, and the Director Defendants moved to dismiss the Complaint. Their showcase argument was that they were entitled to business judgment rule deference under Corwin v. KKR Fin. Hldgs. LLC because a majority of disinterested, fully informed and uncoerced stockholders approved the Transaction. The Plaintiff claimed Corwin was not applicable because it had pled facts from which it may reasonably be inferred that stockholders were either coerced to tender or did so without the benefit of material information.
The Court found the facts pled supported a reasonable inference that stockholder approval of the negative premium transaction was not fully informed in the absence of audited financial statements and other adequate financial information about the Company and its value. According to the Court there was an information vacuum, which was compounded by the fact that the Company had failed to file multiple 2016 quarterly reports and had not held an annual stockholders meeting for nearly three years. The Court also noted that Board did not advise stockholders that all forensic accounting had been completed and only a formal audit remained, depriving stockholders the opportunity to wait and see the audited results.
Delaware courts have been pretty liberal in their application of Corwin, but the doctrine is premised on full and fair disclosure to the shareholders who approved the deal – and the Tangoe case makes it clear that it’s awfully hard to disclose your way through a financial fog as thick as pea soup.
Earlier this year, the SCOTUS issued its decision in South Dakota v. Wayfair, which overruled prior decisions holding that an out-of-state seller with no physical presence in the state could not be required to collect sales taxes on goods it ships to in-state consumers.
The decision has dramatically changed the traditional sales tax regime for businesses, and this recent PwC blog says that buyers need to consider its implications when conducting tax due diligence on potential acquisition targets. Here’s an excerpt with some of the key takeaways for M&A transactions:
– Wayfair issues will involve more time during due diligence for collecting and analyzing information regarding a target’s profile. Potential buyers should consider this additional commitment in time, up front, in scoping their potential acquisitions.
– Potential buyers will likewise have to spend additional time identifying the risk and quantum of non-filing for sales/use tax and income tax in states that have current enactments, states that will apply their rules retroactively, and states that may apply existing non-economic rules broadly. Additionally, buyers will need to consider Wayfair in their financial models in order to accurately project their go-forward after-tax cash-flows.
– Should deals move to closing, buyers will need to determine how to deal with past non-filing exposure vis-à-vis taxing authorities (e.g., voluntary disclosure agreements), if at all.
The blog recommends that buyers obtain contractual protections (such as indemnification, escrow arrangements and purchase price adjustments) to help ensure that they do not assume historical Wayfair-related exposures. It points out that exposures for pre-closing periods that arise due to a post-closing change in a state’s interpretation of its tax law are likely to present the greatest challenge.
We’ve previously blogged about the DOJ’s stated desire to speed up the antitrust merger review process. According to this Dechert memo, the 3Q 2018 results suggest that progress is being made – and that merger investigations are moving faster in the EU as well. Here’s an excerpt with are some of the stats:
– The number of significant merger investigations in both the U.S. and EU is down compared to calendar year 2017.
– In the U.S., the two significant investigations concluding during Q3 2018 averaged only 6.9 months — the quickest pace for any quarter in over four years.
– All three significant EU investigations involved Phase II cases and averaged 13.5 months, faster than the 15.1-month average in CY 2017.
– Two U.S. merger litigations concluded during Q3 2018 and averaged only 105 days from complaint to decision — nearly half as long as litigations brought in 2017 — largely due to the unique posture of one of these cases.
The head of the DOJ’s Antitrust Division recently announced that the DOJ was in the process of implementing a plan to modernize the merger review process – and that speeding up the process was a priority. The memo notes that the FTC Chair Joseph Simons has recently expressed a desire on his agency’s part to speed up the process as well. So, hopefully the most recent stats on timing represent the start of a trend.
This Cooley blog lays out a “top 10” list of cross-border M&A trends for 2018. Topping the list is the growing global emphasis on national security concerns associated with foreign investments. This excerpt highlights key national security developments:
– There is an increasing range of industries and businesses with national security touch points that historically would not have raised any eyebrows, including in semiconductors, AI, virtual reality technology, robotics and large-scale data storage. Technological superiority is now commonly equated with national security.
– In October 2018, CFIUS (the Committee on Foreign Investment in the United States) launched a pilot program to require mandatory notification of certain non-controlling investments by foreign persons in U.S. businesses touching “critical technologies.” The pilot program is a material move away from what used to be a principally voluntary regime.
– In July, the U.K. government published a white paper on its proposal to allow the scrutiny of foreign investments in any sector of the economy upon a “reasonable suspicion” of a national security threat. Examples include review of investments that may potentially lower R&D or that involve access to personal records. The U.K. government estimates that if this proposal, which looks very similar to the CFIUS construct, is adopted, it will lead to a material increase in notifiable transactions.
Other trends highlighted include the growing impact of trade relations on individual deals, the rise in failed deals due to the increased politicization of the deal process, the increasing prominence of “mega-deals,” & increasing competition for high-quality assets.
You know how one of the big trends in M&A litigation in recent years has been its migration from state to federal courts? This Woodruff Sawyer blog says that there’s some traffic heading in the other direction – at least when it comes to stock deals. Apparently, several plaintiffs have recently brought claims under Section 11 of the Securities Act in state courts against buyers in stock-for-stock mergers.
Bringing ’33 Act claims in state courts has become a bit of a cottage industry in recent years, and that industry got a boost from the Supreme Court’s Cyan decision, which upheld state court jurisdiction over ’33 Act claims. Those claims have typically arisen in connection with IPOs, but this excerpt says several state court Section 11 actions have been filed in connection with M&A deals:
Until now, we’ve considered Section 11 cases filed in state court to be mostly a problem for IPO companies. That’s because IPO companies don’t typically have a lot of shares trading other than the shares issued pursuant to the registration statement. For that reason, it’s not hard for plaintiffs to be able to trace back IPO company shares (including shares issued in a follow-on offering pursuant to a registration statement shortly after the IPO) to a registration statement. However, it’s much harder to do that for the more mature public companies since there are a lot of shares in the float, making the tracing requirement to a particular registration statement much harder to meet.
But we’ve now seen in the data Section 11 suits brought by plaintiffs in state court against three different mature public companies:
– Micro Focus International. Ribeiro v. Micro Focus International. (County of San Mateo, Calif.; filed March, 28, 2018.)
– Dentsply Sirona, Inc. (formerly Dentsply International, Inc.). Castronovo v. Dentsply Siorna, Inc. et al (County of New York; filed June 7, 2018.)
– Colony Capital, Inc. Two suits in two separate states. Bumgardner v. Colony Capital (County of Los Angeles; filed July 5, 2018) and Houser v. CenturyLink, Inc. (County of Boulder, Colo.; filed June 12, 2018.)
The reason is mergers and acquisitions. In each case, the buyer used its stock as currency and issued shares to the seller shareholders pursuant to a registration statement. Then the stock price declined below the registration statement price.
As the excerpt notes, one of the traditional problems plaintiffs in a Section 11 case have had to overcome is the need to trace their shares to a particular registration statement. But cases in which the buyer’s stock drops shortly after a merger involving the issuance of registered shares make it easier for the target’s shareholders to satisfy this requirement.
Companies finding themselves (and their directors) as defendants in state court ’33 Act cases face some real disadvantages in comparison to federal court defendants. The blog points out that the pleading standards are often lower and there’s no automatic stay pending a dismissal motion as there is in federal court actions subject to the PSLRA. While the impact on M&A litigation remains to be seen, these disadvantages have led to higher settlement payments in state court IPO cases.
This PwC memo addresses a number of topics surrounding M&A cybersecurity due diligence. One segment discusses some specific mechanisms that may be employed to reduce the buyer’s risk in this area. This excerpt addresses the use of a transition services agreement for cyber-risk mitigation:
Further protection for acquirers can come through transition services agreements (TSAs). TSAs are common in deals, but they only recently have started covering cybersecurity issues. Through a TSA, an acquirer and target can negotiate how the target will manage cybersecurity during the transition and the conditions under which the responsibility will shift to the acquirer. The latter can be crucial if due diligence has revealed any significant cyber issues that could decrease deal value.
The memo also highlights the importance of mining other intelligence beyond that available through a due diligence request in order to assess cyber-risk. In particular, it suggests reaching out to information sharing organizations:
Broader intelligence on cyber issues is available through information sharing and analysis centers and organizations (ISACs and ISAOs). These groups allow companies to share with each other information on digital threats and ways to combat them. ISACs originally were created in a few industries, most notably financial services and aerospace and defense. ISAOs build on the concept by spanning sectors to share expertise and experiences among broader communities of interest.