This Nixon Peabody memo reviews the Chancery Court’s recent decision in Lebanon County Employees’ Ret. Fund v. AmerisourceBergen, (Del. Ch.; 1/20), which involved a books & records demand arising out of the company’s role in the opiod crisis. Certain of the company’s shareholders issued a demand for inspection “to inform themselves” regarding potential wrongdoing committed by the company’s board of directors, “and to identify and evaluate their alternatives.”
Vice Chancellor Laster granted the books & records request, and the memo notes that in doing so, he broke new ground:
In reaching the court’s decision, Vice Chancellor Laster addresses and potentially weakens a number of defenses that corporate defendants traditionally raise in such “books and records” suits. One common defense is an assertion that the plaintiff’s sole objective in inspecting the books and records is to bring litigation.
Under the court’s interpretation of Delaware law in this case, however, inspection is permissible so long as the stockholder states that it may also use the fruits of the investigation for “other purposes,” such as to seek an audience with the board to discuss proposed reforms, to prepare a stockholder resolution for the next annual meeting, or to mount a proxy fight to elect new directors. More broadly, the court criticized and rejected “a line of authority in which this court has required stockholders who wanted to investigate mismanagement to state up-front what they planned to do with the fruits of the inspection.” Id. at 25 (citing W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 646 (Del. Ch. 2006)).
The court opined that this line of cases “turn[s] the purpose-plus-an-end concept into a requirement that goes beyond what Section 220 and the Delaware Supreme Court precedent require.” Id. at 27. In essence, then, the court ruled that stating a proper purpose is sufficient, and the stockholder does not need to go further to state what it will do with the documents it receives.
The memo points out the potential for an appeal of this decision to the Delaware Supreme Court, since it essentially creates a split within the Chancery Court concerning the application of a “purpose-plus-an-end” requirement to the Section 220 analysis. However, the memo suggests that the decision is likely to embolden stockholder-plaintiffs to seek Section 220 discovery whenever signicant events occur, including an M&A transaction.
According to this PitchBook article, average PE fund hold times for portfolio companies fell to 4.9 years during 2019, the first time that number’s fallen below 5 years since 2011. By way of comparison, hold times averaged 6.2 years as recently as 2014. What’s behind the decline? The article says it’s a combination of a strong seller’s market & an increasingly systematic approach to exit decisions:
Portfolio companies aren’t “positions” that can be pared down or modified if market conditions change. Whole companies are big and clunky compared with tradable shares, and buy-side love is in the eye of the beholder. But exits have been a bit easier to achieve in recent years amidst a broader M&A boom. That’s made it easier to offload companies a bit sooner than in the past. There’s also a motivation to spend more time on the fundraising trail, which, perhaps coincidentally, has been on fire since 2016.
Less coincidental is a rise in exit committees across the industry. Formalized investment committees date back to PE’s earliest days, and each portfolio company tends to have a cheerleader who spearheads the firm’s investment.
For a long time, investment decisions have passed through a more rigorous approval process while exit decisions are made by one or two senior directors who were responsible for that investment. Emotions get involved at the exit stage, and an increasing number of firms are formalizing those decisions and taking away individual decision-making. That trend is probably contributing to shorter holding times—likely making many LPs happy twice over.
Latham recently put together this 20-page guide to acquiring a U.S. public company. It’s targeted at foreign buyers, but it’s a useful and digestible reference guide for anyone working on a public company deal – particularly if you haven’t done one in a while. Here’s an excerpt on friendly v. hostile approaches:
The acquisition of a US public company can be implemented on a negotiated (i.e., friendly) basis pursuant to a definitive agreement that has been negotiated with the target and its board of directors, or potentially on an unsolicited or hostile basis, without the involvement or prior approval of the board of directors of the target.
The vast majority of transactions are implemented on a negotiated basis, and hostile acquisitions can face a number of challenges, including the ability of a resistant target to use or implement various structural and procedural defenses, the inability to conduct due diligence on non-public information of the target, and the possibility that shareholders will ultimately reject the offer.
In some instances, unsolicited approaches can help serve to bring a target to the bargaining table, with discussions thereafter proceeding on a negotiated basis (whether or not a transaction is ultimately consummated). This does not mean a hostile transaction is never the appropriate or best strategy for the acquisition of a US public company. Our experience suggests, however, that a hostile transaction should be pursued only if the acquirer understands the complexity and risks involved, and then only if the acquirer has determined that a negotiated transaction is highly unlikely or if negotiations have proved futile.
Other topics addressed include transaction structures, financing, shareholder litigation and regulatory approvals. The guide also includes sample timelines for cash-for-stock & stock-for-stock transactions.
This January-February issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers. It takes a deep dive into issues surrounding earnouts – M&A’s “siren song.” Topics include:
– An Overview of Earnouts
– Prevalence of Earnouts & Common Terms
– Tax & Financial Reporting Issues
– When Earnouts Are “Securities”
– The Risk of Post-Closing Disputes
– Earnout Litigation: Plenty to Fight About
– How Much Protection Does Good Documentation Provide?
– Key Issues in Structuring & Negotiating an Earnout
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
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.
According to this White & Case “M&A Explorer” article, the dollar value of deal traffic between the U.S. & Western Europe rose by 12% to $312.9 billion through the first 9 months of 2019. The news isn’t all good though, because the number of deals fell by 13%. However, to keep things in perspective, the article says that the overall value of global M&A during the period declined by 14% & deal volume dropped by 15%. So, when it comes to trans-Atlantic deals, the glass is decidedly half full.
The article says that dealmaking by PE funds played a big part in the relative health of the U.S. – Western Europe deal market:
Once again, PE deals helped ensure healthy total numbers in the transatlantic deal corridor. Six out of the top ten deals in the first nine months of this year involving US-based bidders and targets in Western Europe were PE buyouts.
While only one deal in the top ten this year involving bidders based in Western Europe and US-based targets was a PE buyout, the largest deal of the year was a PE exit: KKR’s planned sale of financial data provider Refinitiv to London Stock Exchange Group for US$27 billion.
Total PE deal activity involving US bidders and Western European targets was US$61.3 billion in the first three quarters of this year, a 33% drop on the same period last year. However, 2018 was an outlier year, with the highest annual figure on Mergermarket record for PE activity involving US-based bidders and targets in Western Europe.
Looking at PE activity going in the other direction, US$59.1 billion in PE deal value was announced in Q1-Q3 2019 involving Western Europe-based bidders and US-based targets—a 158% increase on the same period the year before.
The value of outbound U.S. deals remained relatively flat, while the value of outbound Western European deals increased by 35% over the prior comparable period & exceeded the entire dollar value of Western European outbound deals for all of 2018.
I’ve previously blogged about Xerox’s efforts to corral HP into a deal. While Xerox has been understandably reluctant to make a hostile tender offer for HP, yesterday it ratcheted up the pressure on HP by launching a proxy fight for control of the company’s board. According to Xerox’s press release, it notified HP that it intended to nominate a full slate of 11 director nominees to HP’s board. That notice was necessary to comply with HP’s advance notice bylaw (the deadline for submitting nominees under that bylaw is today).
Proxy fights are a common tactic among activist shareholders, who aren’t shy about seeking control of the board. According to this Sullivan & Cromwell piece published over on the Harvard Governance Blog, nearly 70% of proxy contests waged by activists in 2018 involved control slates.
When it comes to a potential strategic buyer though, this WSJ article points out that a proxy fight for control of the target’s board is a very unusual tactic – only 5 have been launched since 2013. The most recent such fight was engaged in by Broadcom as part of its effort to acquire Qualcomm, but President Trump drove a stake through that deal’s heart on national security grounds before the shareholder vote.
Proxy fights are disruptive and expensive to wage, but the biggest reason that many strategic bidders don’t adopt this as a tactic may be the one noted by Profs. Bebchuk & Hart – they’re really hard for them to win:
The difficulty with a proxy contest, we argue, is that of persuading shareholders that a rival’s victory would be beneficial for them. Because control provides private benefits, the fact that a rival is interested in replacing the incumbent does not imply that the rival would manage the company better. Consequently, if shareholders do not observe the quality of rivals, but know that the average quality of potential rivals is worse than the incumbent’s, the rational strategy of shareholders will be to vote for the incumbent.
While this quote comes from an article written more than 15 years ago, it nicely describes the dilemma that now faces HP’s shareholders. Neither company has exactly blown the doors off in terms of results in recent years. But given Xerox’s particularly bumpy ride & the fact that its proposed deal would involve the proverbial “guppy swallowing the whale,” you couldn’t blame HP’s shareholders for being skeptical about handing the keys to Xerox.
Of course, that doesn’t mean this isn’t going to be fun to watch. After all, Carl Icahn’s sitting on the Xerox side of the ledger, and he’s been known to break some furniture on occasion.
Francis Pileggi recently posted his 15th annual review of key Delaware decisions on his Delaware Corporate & Commercial Litigation Blog. With some exceptions, Francis focuses his review on what he refers to as “the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications.” This excerpt on the Chancery Court’s decision in Mehta v. Mobile Posse, (Del. Ch.; 5/19) is a case in point:
A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam.
In Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM (Del. Ch. May 8, 2019), the court identified the six primary issues in this case as follows:
(1) Whether DGCL Section 262 was not complied with in connection with the failure to notify stockholders of their appraisal rights within the required timeframe;
(2) Whether DGCL Section 228 was not complied with due to the failure to send prompt notice of the written stockholder consents;
(3) Whether the merger agreement, or documents it incorporates, failed to comply with DGCL Section 251 by not including the amount of cash the preferred stockholders would receive for their shares;
(4) Whether the stockholder consents did not enjoy the ratifying effect under DGCL Section 144;
(5) Whether the director defendants breached their fiduciary duty of disclosure; and
(6) Whether the director defendants breached the fiduciary duty of loyalty because the merger was a self-dealing transaction and not entirely fair. With one small exception, the court found that the statutory violations were sufficiently established at the early procedural stage of a motion for judgment on the pleadings.
Since Francis refers to this case as an unsung hero, I feel kind of glad that I actually blogged about it. Admittedly, I didn’t quite cover as much ground as he does, but hey, we run a volume business here.
Tune in tomorrow for the webcast – “Cybersecurity Due Diligence in M&A” – to hear Jeff Dodd of Hunton Andrews Kurth, Sten-Erik Hoidal of Fredrikson & Byron and Jamie Ramsey of Calfee Halter discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.
If you’ve spent any time at all doing deals, you’ve had the experience where somebody on the deal team insists that all that’s needed to get a deal done is to “get everybody in a room and hammer things out.” Sometimes, that’s the right call – but many times, it just isn’t. This Andrew Abramowitz blog does a really nice job of laying out why this isn’t usually a good idea. Here’s an excerpt:
A deal can only actually get done at such a meeting if there are a discrete number of well-defined issues that require negotiation and give-and-take. Often, however, these meetings are called before the transaction gets to that point, when there are a number of open issues requiring the involvement of third parties.
For example, a landlord may need to consent to a particular action being taken in the deal, so the tenant needs to address that with the landlord. Or some specialist, like a tax attorney or accountant, needs to review and sign-off on a particular structure. If you call your meeting with the agenda of not leaving before you’re finished, and you end the meeting with a list of open items even though the meeting was productive, the parties may be resentful that they were asked to block out the time.
Most of the time, you can move the deal along more effectively simply by diligently working with the other side and its advisors to resolve the open issues – while keeping your principals’ powder dry until you really need to call them together.
Vertical mergers involve combinations of companies involved in different stages of the supply chain for a product or service, and it has been nearly 40 years since the DOJ & FTC last updated their guidance on transactions of this type. Since that’s the case, the agencies made news last week when they issued draft Vertical Merger Guidelines laying out their approach to these transactions. Here’s the intro from this Sullivan & Cromwell memo summarizing the draft guidelines:
For the first time in 36 years, U.S. antitrust regulators have published guidance concerning their analysis of vertical mergers (i.e., mergers between companies involved in different levels of the same supply chain). The guidelines, which have been issued in draft form for public comment until February 11, 2020, provide significant insights into the analyses that would be applied by U.S. regulators and will be significant for companies planning vertical combinations in many industries.
The guidelines could substantially change (i) the way in which vertical mergers are assessed in allocating antitrust risk in the context of merger negotiations; (ii) the number of vertical mergers subjected to lengthy investigations by the regulators; and (iii) the number of vertical mergers that lead to enforcement actions.
The draft guidelines decline to adopt a standard under which regulators would view vertical mergers as presumptively lawful or unlawful, but propose, among other things, a 20% “screen” that would serve as a preliminary indicator of whether a vertical merger warrants scrutiny (i.e., if the merged firm has a less than 20% share in a relevant market and a less than 20% share in a market vertically “related” to the relevant market, the regulators are unlikely to view the merger as problematic). Although the “screen” is informative, the guidelines emphasize that enforcement decisions will continue to be subject to a fact-specific competitive effects analysis in each case.