Earlier this year, I blogged about the FTC’s $5 million settlement with Canon & Toshiba arising out of their efforts to structure the sale of the Toshiba Medical Systems Corporation (TMSC ) to avoid compliance with the HSR Act. The authority for the FTC’s challenge to that transaction was provided by Rule 801.90 promulgated under the HSR Act – which allows regulators to disregard any transaction or device employed for the purpose of avoiding compliance with the Act.
Now, in the wake of the Canon/Toshiba settlement, the FTC has blogged guidance setting forth its views on the reach of Rule 801.90, using the TMSC transaction as a starting point. Here’s an excerpt:
According to the Statement of Basis and Purpose for Rule 801.90, “[f]or purposes of determining whether transactions or devices for avoidance have been employed, of obvious relevance will be the existence of reasons other than avoidance for the manner in which a particular transaction is consummated.” Some have argued that so long as there is a legitimate purpose for the overall structure of the transaction, then there is not a purpose to avoid. This is not correct.
Rule 801.90 is not a normative provision, nor is it even focused on the competitive effects of transactions. Rather, it poses a simple question: does the benefit that is the motive behind the transaction’s structure result from avoiding or delaying filing? If the answer is yes, the structure is an avoidance device under the Rule.
So, in this case where Toshiba’s desire to quickly realize the gains from the transaction so as to avoid bankruptcy may have been “legitimate”—and certainly was not anticompetitive—that benefit flowed directly from delaying the filing. In contrast, if a transaction’s structure creates a benefit entirely unrelated to HSR filing – such as a tax benefit from a proposed structure that has nothing to do with filing – but the filing is delayed or avoided as an incidental consequence of the structure, there is no avoidance device.
The Canon/Toshiba proceeding was the first proceeding based on Rule 801.90 in a long time, but the blog makes it clear that it was a “shot across the bow” – and that companies can expect to face stiff penalties if they restructure a reportable acquisition in order to avoid complying with the HSR’s pre-merger notification requirements.
Xerox turned up the heat on its unlikely bid for HP yesterday when it sent a letter to HP’s board stating its case for a deal & threatening to “take its compelling case to create superior value for our respective shareholders directly to your shareholders” unless HP agreed to allow Xerox to conduct due diligence.
That’s a good old fashioned “bear hug” – a letter designed to maximize the pressure on a target’s board to move forward with a deal. It usually includes some kind of a threat to launch a hostile bid unless the bidder gets a favorable response from the board within a short period of time. These aren’t always made public – at least at first – but they’re always drafted with an eye on their ultimate public disclosure.
I’ve got to admit, I’m a sucker for these letters. Xerox’s is one of the more aggressive of the genre – sometimes called a “grizzly bear hug” – because it laid out price & terms and immediately made the letter public. About a decade ago, the NYT published an article called “The Art of the Bear Hug”, which recounts prominent examples of the use of bear hug letters. Here’s an excerpt with a little history about how this practice got its start:
This unusual letter-writing practice dates back to the early 1980s. Bruce Wasserstein, Lazard’s chairman and a longtime player in the mergers game, tracks the practice back to 1982, when Boone Pickens sent a bear hug letter to Cities Service, a small oil company.
Mr. Pickens made “an offer directly to Cities’ C.E.O. and announced it to the world,” Mr. Wasserstein wrote in his book “Big Deal.” “The likelihood of that happening was slim. However, that wasn’t the point. Pickens just wanted to build pressure on Cities’ incumbent managers and board of directors.”
And that last sentence summarize what these things are all about. Bear hug letters are ultimately a pressure tactic to get a target’s board to the negotiating table. That’s why they prominently feature some spin about the premium being offered and the other wonders associated with the combination. Xerox’s letter is no exception.
But it’s not all about the spin. These letters are often intended to create disclosure issues for the target under the federal securities laws and they may also implicate state takeover statutes – which can sometimes be a trap for the unwary for a bidder who doesn’t pay close attention to the wording of the bear hug.
Xerox’s threat to go hostile isn’t its only leverage point with HP – and it’s probably not even close to being its most significant one. After all, activist Carl Icahn holds a big stake in both companies & is on record as supporting a combination.
A few months ago, I blogged about a Delaware Superior Court decision holding that a D&O policy’s duty to defend “securities claims” extended to appraisal actions. Late last month, in In re Verizon Insurance Coverage Appeals, (Del.; 10/19), the Delaware Supreme Court rejected a similar argument for coverage in the context of common law & statutory claims. Here’s an excerpt from this recent Morris James blog discussing the case:
The Delaware Supreme Court, applying principles of contract interpretation under Delaware law, held that claims of breach of fiduciary duty, unlawful dividends and fraudulent transfer were not Securities Claims reflecting a violation of any “regulation, rule or statute regulating securities” and hence the defendant’s director and officer insurance policy that covered such claims did not apply. The Supreme Court thus reversed a holding of the Delaware Superior Court that the insurance coverage applied because the claims “pertain[ed] to laws one must follow when engaging in securities transactions.”
The Supreme Court held that the unambiguous plain meaning of the policy language was that the parties intended coverage only for claims arising under regulations, rules or statutes that “regulate securities.” Using that definition, the Supreme Court held that claims of breach of fiduciary duty, aiding and abetting fiduciary duty breaches, and promoter liability were not Securities Claims because they do not involve regulations, rules and statutes regulating securities. Likewise, the claim for unlawful dividends arose under statutes that regulated dividends, not securities, and the fraudulent transfer claims arose under statutes that were not “specific to transfers involving securities.”
Verizon argued that the term “Securities Claims” as used in the policy should be construed to apply to “any laws one must follow while engaging in securities transactions.” The Court concluded that this was an overly broad interpretation: “Parties involved in a securities-related transaction must follow laws not specifically directed toward securities. Verizon’s interpretation would make any unlawful conduct committed during a securities-related transaction fall within the Securities Claim definition.”
The Court’s decision in Verizon didn’t address the issue of whether appraisal claims should be regarded as “Securities Claims,” but appraisal actions address the issue of whether a shareholder received fair value for their shares in a transaction, so they are more directly related to transfers of securities than the common law & statutory claims at issue in Verizon.
In the era of the index fund, common institutional ownership among large public companies is almost ubiquitous. As I’ve previously blogged, this has raised a number of governance-related concerns, but it seems that common institutional ownership also has a big impact on M&A. According to a recent study, common ownership among a buyer & its potential competitors substantially reduces the number of competing bids that a target receives:
In summary, we find that the presence of common ownership between the acquirer and potential contesting bidders is negatively associated with the likelihood that the target receives a competing bid. The common ownership effect is highly statistically significant and economically substantial: one common institutional investor lowers the likelihood of bid contest by about 45 percent.
While targets might bemoan the role that common institutional ownership plays in reducing competing bids, the study says that buyers have a lot to cheer about. Common institutional ownership between the acquirer and potential competing bidders is associated with greater synergies & also results in more of those synergies going to the buyer’s shareholders.
Last week, in High River Limited Partnership v. Occidental Petroleum, (Del. Ch.; 11/19), the Chancery Court held that an intent to launch a proxy fight was not a “proper purpose” for a books & records request under Section 220 of the DGCL. The case was prompted by a proxy contest being waged by entities affiliated with Carl Icahn. In turn, that arose out of Occidental’s agreement to acquire Anadarko Petroleum, its issuance of $10 billion in preferred stock to Berkshire-Hathaway in order to fund the transaction, and a related agreement to sell Anadarko’s African operations.
The plaintiffs objected to a number of aspects of the Anadarko transaction, including the terms of the Berkshire financing & the adequacy of the price at which Occidental agreed to sell Anadarko’s African assets. Accordingly, they filed preliminary proxy materials seeking four board seats & certain bylaw amendments. They also issued a books & records demand for a variety of materials relating to the Anadarko deal.
The plaintiffs put forward two arguments in support of their position that they had a “proper purpose” for their books & records demand. One argument was fairly typical – the plaintiffs’ inspection demand was prompted by a need to investigate mismanagement. The other argument was somewhat novel – that the plaintiffs’ intent to mount a proxy contest surrounding the transactions “is a proper purpose that justifies inspection of board-level documents relating to those transactions in order to enhance the quality of their communications with fellow stockholders.”
Vice Chancellor Slights rejected the first argument, observing that the plaintiffs failed to articulate a credible basis for alleged wrongdoing by Occidental’s board. He also refused to recognize the proxy fight as providing a proper purpose for inspection. In doing so, he distinguished this situation from a few other decisions involving books & records requests made in connection with proxy contests – including High River Partnership v. Forest Labs, (Del. Ch.; 7/12), a bench ruling involving the same plaintiffs:
Forest Labs presented a distinct factual context, and the court there was careful to limit its ruling to the case sub judice. In doing so, the court observed that the law in this area is unsettled and could use some clarity. I agree. But this case is not the vehicle to provide that clarity.
Where, as here, the documents sought by Plaintiffs relate to a dispute with management about substantive business decisions, pleading an imminent proxy contest is not enough to earn access to broad sets of books and records relating to the details of questionable transactions, particularly when the board’s decision-making is subject to the business judgment rule, and the facts of record reveal that Plaintiffs already have what they need to fulfill their stated purpose.
When the court in Forest Labs decided that the plaintiffs there had articulated a proper purpose, it turned to the well-settled limiting principle embedded within Section 220 that stockholders are entitled to inspect only those documents that are “necessary, essential and sufficient” to their stated purpose. Applying that limiting principle here, I am satisfied that Plaintiffs have failed to demonstrate that the broad set of books and records they have requested are necessary and essential.
The Vice Chancellor pointed out that the plaintiffs’ request related to a series of widely-publicized transactions that were well known to Occidental’s shareholders. Under the circumstances he concluded that it was “difficult to discern how a fishing expedition into the boardroom is necessary and essential to advance Plaintiffs’ purpose to raise concerns with their fellow shareholders about the wisdom of the Board’s decisions to engage in these transactions.”
According to Dykema’s “15th Annual M&A Outlook Survey,” dealmakers aren’t quite as upbeat about the prospects for M&A activity during 2020 as they were last year. Only about 1/3rd of respondents expect the M&A market to strengthen over the next 12 months – that’s down from 65% last year. Still, only 1/3rd expect a downturn in M&A, so roughly 2/3rds of respondents expect that 2020 will at least equal 2019’s performance. Here are some of the other highlights:
– Despite trade issues with China, respondents picked that country as the top destination for U.S. outbound M&A activity. A year ago, the country didn’t make the top five, showing the complex nature of U.S./China relations. After China, the top three destinations were Europe, Canada and Japan.
– 33% of respondents said the main driver of U.S. M&A activity in the next 12 months will be general U.S. economic conditions, displacing availability of capital (24%) which had been in the top spot for the past six years.
– 58% of respondents expect an increase in M&A activity involving privately owned businesses in the next 12 months, down from 82% in 2018.
– Financial U.S. buyers, as they were in 2018, are expected to be the biggest influencers on U.S. deal valuations. Respondents believe foreign buyers will have greater influence compared with a year ago, perhaps because the U.S. is still a relatively safe bet compared with other countries.
– Respondents predict the following sectors will see the most M&A activity in the next 12 months: 1) Automotive; 2) Healthcare; 3) Energy; 4) Consumer Products; 5) Technology. Healthcare moved up two spots from 2018.
This survey is a somewhat more pessimistic about M&A activity than the EY survey that I recently blogged about – but even that survey saw some concerns about the pace of M&A activity in the U.S. next year.
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– How the Type of Buyer May Affect the Target’s Remedies in a Public M&A Deal
– The Risks of Not Strictly Complying with a “No Shop” Clause
– When Passive Investors Drift into Activist Status
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And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Dechert’s most recent quarterly review of merger investigations during the current year provides several data points supporting the view that companies are facing a more challenging environment when it comes to antitrust review of proposed acquisitions. Here are some of the highlights:
– The Trump administration’s efforts to block mergers are at near record levels, with 5 significant investigations resulting in complaints in 2019 YTD. That’s on-pace with the Obama adminstration’s record of 7 complaints during 2015.
– The number of significant antitrust merger investigations is up, with 20 resolved in 2019 YTD compared to 15 for the same period in 2018.
– The average duration of significant investigations continues its climb, reaching 12.6 months for 2019 YTD, up from 9.8 months for the same period in 2018.
– Merger review reforms at DOJ are having an impact, with DOJ significant investigations taking 3.9 months less on average than FTC significant investigations.
Companies expecting to confront significant antitrust issues may delay HSR filings or “pull & refile” in the hope that providing regulators more time at the front end will avoid or streamline a second request. The memo says that this isn’t usually a successful strategy:
Despite the increasing use of this pre-second request strategy over the past several years, merging companies might not be making a wise investment of their time if their goal is to achieve shorter overall investigations. For 2019 YTD, when companies subject to a significant investigation allotted more than the median time (73 days) for pre-second request discussions, the average duration of the significant investigation was 14.2 months. By contrast, merging companies allotting less than the median time endured significant investigations lasting an average of 10.9 months. DAMITT shows a similar trend for the 2011–2018 period.
The memo also says that U.S. regulators’ insistence on identification of upfront buyers as a condition to approving a deal based on divestitures has become nearly a universal practice. During the first 3 quarters of 2019, 80% of divestiture consents requiring upfront buyers. For the rolling 12 months ended Q3 2019, 88% of consents required an upfront buyer, compared to 73% of consents requiring an upfront buyer in the rolling 12 months ended Q3 2018.
This Weil blog reviews the Delaware Chancery Court’s recent bench ruling in Brown Robin Capital v. The Anschutz Corp. (Del. Ch.; 8/19) (transcript) and says that it demonstrates the “need for vigilance” when it comes to drafting forum selection clauses. Here’s an excerpt:
The sell-side of a Delaware law governed business acquisition agreement sought an injunction to prevent the buy-side from pursuing a suit they had filed in Texas based on allegations that the sell-side had made fraudulent representations. Vice Chancellor Slights noted that “[u]nder binding Delaware Supreme Court precedent, a party suffers irreparable harm when forced to litigate in a jurisdiction other than the one selected by a valid forum selection clause.” But the issue was whether the particular forum selection clause in the parties’ business acquisition agreement mandated suit in Delaware for claims premised upon fraud. The forum selection clause (which was combined with the choice of law clause) read as follows:
This Agreement, and the Transaction Documents, shall be exclusively construed and interpreted according to the Laws of the State of Delaware, without regard to its conflict of law provisions which would require the application of the Laws of a state other than Delaware, and each Party irrevocably consents to the exclusive personal jurisdiction and venue of the Chancery Court of the State of Delaware (or if such a court shall not have jurisdiction, any other state or federal court sitting in such State).
Because the choice of law component of this clause limited itself to the construction and interpretation of the agreement, and did not include broad language making the governing law apply to other matters “arising from,” “relating to,” or “in connection with,” the agreement, and because the choice of forum clause was part of that limited regime, Vice Chancellor Slights interpreted the choice of forum clause as only mandating a Delaware forum for claims directly related to the construction and interpretation of the agreement.
However, despite VC Slights’ conclusion, he granted an injunction against the Texas action because the fraud claims would require construction and interpretation of the agreement. Although the case ultimately had a happy ending for the seller, the blog notes that this result came only after costly briefing & analysis, which could have been avoided “with the use of broad language, rather than the narrow language that it is often found in favored older templates.”
The blog recommends that parties drafting forum selection clauses consult the chart appearing at the end of Prof. John Coyle’s recent Iowa Law Review article, “Interpreting Forum Selection Clauses,” in order to ensure that the clause they draft means what they want it to mean.
This Sullivan & Cromwell memo reviews U.S. shareholder activism during 2019. Here are some of the key themes identified in the memo:
– Board seats obtained per announced campaign remain at elevated levels, as activists on average obtained 0.7 board seats per 2019 campaign (a 35% increase from 2017)
– Despite the recent focus in shareholder discourse on “purpose” and maximizing value for all stakeholders, institutional investors appear to give activists a pass on ESP topics
– Active managers are increasingly adopting activist tactics, highlighted by Neuberger Berman’s proxy contest at Verint Systems
– Activists are focused on M&A in record numbers, either by agitating for sales or divestitures or by intervening to break up previously announced transactions
– Almost 50% of issuers that added activist designees to their boards in 2017 or 2018 have since either sold themselves or engaged in a meaningful divesture
– Activists continue to hone in on issuers without a permanent CEO or with impending CEO retirements, evidenced by several prominent 2019 campaigns.
The memo says that activism levels in 2019 have been consistent with prior years. There were 205 new campaigns launched through the end of August and activists won 76 board seats. During the comparable period in 2018, there were 203 new campaigns and activists won 113 board seats. Starboard has been the most active investor this year, launching 10 new campaigns, while Icahn launched 4 & Elliott launched 3.