On January 13, 2020, the Treasury Department issued final regulations implementing the Foreign Investment Risk Review Modernization Act, or FIRRMA. Here’s an excerpt from this Shearman & Sterling memo summarizing the regulations:
The final regulations implement key provisions of the Foreign Investment Risk Review Modernization Act (FIRRMA) enacted by Congress in August 2018. First, the regulations expand the jurisdiction of CFIUS to review minority, non-controlling investments in U.S. businesses developing or producing critical technologies; owning or operating U.S. critical infrastructure assets; and possessing or collecting sensitive personal data of U.S. citizens.
Second, the regulations mandate CFIUS filings for many foreign investments in U.S. businesses producing or developing certain critical technologies and for transactions in which a foreign government-controlled entity acquires control of certain U.S. businesses. Lastly, the regulations significantly broaden CFIUS’s jurisdiction by providing it with authority to review foreign acquisitions of certain U.S. real estate interests.
The final regulations exempt certain investors from Australia, Canada and Great Britain from the mandatory filing requirements and from CFIUS’s expanded authority to review non-controlling minority investments and acquisitions of certain U.S. real estate interests. These exemptions had been eagerly anticipated as they represent the first blanket exemptions from CFIUS regulation for any category of foreign investors.
The Treasury Department indicated that it may consider exempting investors from other countries in the future. The key provisions of the final regs generally track those contained in the proposed regs issued last September, and the regulations will go into effect on February 13, 2020. We’re posting memos in our “National Security Considerations” Practice Area.
The case involved an advance notice bylaw entitling two closed-end investment fund trusts to request additional information after they received notice of a slate of trustee nominees put forward by an activist hedge fund, and requiring the hedge fund to respond within 5 days. The trusts used that bylaw provision as justification for sending the hedge fund a supplemental request requiring them to respond to over 90 questions. When they didn’t provide the information within 5 days, the trusts said that since they didn’t respond in a timely fashion, their nominations were defective.
The Chancery said that the advance notice bylaw didn’t give the trusts a license to engage in an unreasonably broad inquiry, and held that the plaintiff had established that some of the questions exceeded the authority granted by the bylaw. As this Wachtell Lipton memo points out, the Delaware Supreme Court saw things differently:
The Supreme Court held that, even if some of the questions asked went beyond the bounds of the bylaw, it is not acceptable for a shareholder “to simply let pass a clear and unambiguous deadline contained in an advance-notice bylaw, particularly one that had been adopted on a ‘clear day’.” Writing for the Court, Justice Valihura stated:
Bylaws, including advance notice bylaws, are “commonplace” and are interpreted using contractual principles. If such provisions are unclear, we resolve any doubt in favor of stockholders’ electoral rights. But the provisions at issue here were clear, as the Court of Chancery held. A rule that would permit election-contest participants to ignore a clear deadline and then, without having raised any objection, proffer after-the-fact reasons for their non-compliance with it, would create uncertainty in the electoral setting.
The Court noted that instead of seeking relief from the deadline for responding, the dissidents sat on their hands and simply let the deadline pass. The Court’s decision sends a strong message that deadlines in advance notice bylaws are going to be respected by the Delaware courts, and that dissidents who object to the scope of supplemental inquiries must assert those objections before the deadline passes.
This recent Wachtell Lipton memo reviews U.S. M&A antitrust enforcement during 2019 and gazes into the crystal ball to predict what 2020 may bring. Here’s an excerpt addressing the role of state AGs:
Also worth watching in 2020 will be potential increased activism by state AGs in merger reviews. Traditionally, state AGs have participated in the federal agencies’ review of mergers and sometimes joined them in court challenges or settlements. Rarely has an AG brought a challenge of a transaction reviewed and cleared by one of the federal agencies.
Last year’s challenge of the T-Mobile-Sprint merger, led by California and New York, is the most significant instance of such intervention to date, and a clear sign that state AGs are willing to pursue independent merger enforcement actions when they believe the federal agencies have been too lax.
The memo notes that 2019 was an active year for enforcement, with the FTC & DOJ challenging four proposed transactions in court and requiring remedies in 17 more. In addition, five deals were abandoned due to opposition from regulators. In 2020, parties should expect close scrutiny of strategic deals, with structural divestitures to an identified buyer likely to remain the remedy of choice if antitrust concerns are present.
This recent blog from Weil’s Howard Dicker & Lyuba Goltser reviews the potential benefits to PE funds, IPOs & participants in M&A transactions associated with proposed changes to the SEC’s auditor independence rules. This excerpt discusses how the rule changes would address inadvertent independence violations that can arise in M&A transactions when the buyer’s auditor has also performed impermissible non-audit services for the target:
The SEC proposes a transition framework to address these types of inadvertent independence violations. An accounting firm’s independence will not be impaired because an audit client engages in a merger or acquisition that gives rise to a relationship or service that is inconsistent with the independence rules, provided that the accounting firm:
– is in compliance with applicable independence standards from inception of the relationship or service;
– corrects the independence violations arising from the merger or acquisition as promptly as possible (and in no event later than six months post-closing); and
– has in place a quality control system to monitor the audit client’s M&A activity and to allow for prompt identification of potential independence violations before closing.
The blog also points out that for PE funds, rule changes would codify Staff practice concerning independence issues that arise when sister companies with a common PE fund owner have engaged an audit firm to provide non-audit services that could impair the independence of the audit firm with respect to another sibling company. The rule changes would also shorten the look-back period for auditor independence from three years to one year, which would provide increased flexibility for IPO companies to address potential disqualifying relationships with their audit firms.
In Morrison v. Berry, (Del.; 12/18), the Delaware Supreme Court reversed an earlier Chancery Court ruling and refused to dismiss a shareholder plaintiff’s claims alleging that disclosures related to the relationship between the company’s founder & the PE firm that ultimately acquired the company, together with other matters relating to his role and actions in the board’s sale process were misleading.
The case returned to the Chancery Court, which decided various motions to dismiss at the end of last month. There’s a lot going on in Vice Chancellor Glasscock’s 72-page opinion, and we’re likely to revisit it in the coming weeks, but this recent blog from Stinson’s Steve Quinlivan focuses on the Court’s response to a motion to dismiss breach of fiduciary duty claims targeting the company’s General Counsel.
While the plaintiff asserted a variety of claims against the GC premised on alleged breaches of the duty of care and loyalty, VC Glasscock dismissed all of them – with the exception of allegations that the General Counsel violated his duty of care in preparing the disclosures in the company’s Schedule 14D-9 filing. This excerpt from the blog discusses this aspect of the Vice Chancellor’s opinion:
Turning to the claim of gross negligence, the Court noted “Because fiduciaries . . . must take risks and make difficult decisions about what is material to disclose, they are exposed to liability for breach of fiduciary duty only if their breach of the duty of care is extreme.” Given the omissions noted by the Supreme Court, the Court observed the Schedule 14D-9 offers stockholders a version of events that left them lacking information material to a decision.
The Vice Chancellor concluded that the extent of the alleged disclosure shortcomings created a reasonable inference that the GC may have conceivably acted with gross negligence in his role with regard to the 14D-9. However, the blog notes that he also observed that “another reasonable interpretation is that the Schedule 14D-9 represents a good faith but failed effort to make reasonable disclosures, but given the pleading stage, the Court must choose the inference favoring the Plaintiff.”
It’s worth noting that disclosure claims relating to the 14D-9 were also asserted against the directors, but they were dismissed because, like most Delaware corporations, the company included a Section 102(b)(7) provision in its charter eliminating directors’ monetary liability for breaches of the duty of care. That protection does not extend to corporate officers.
Over the years, descriptions of fairness opinions in proxy statements have proven to be fertile ground for disclosure litigation. However, in Hurtado v. Gramery Properties, (D. Md. 12/19), a federal court recently rejected disclosure claims premised on alleged omissions with respect to a merger proxy statement’s description of a banker’s fairness opinion. Here’s an excerpt from this Shearman & Sterling blog summarizing the decision:
Plaintiff claimed that the comparable public company analysis (“CPC Analysis”) underlying the fairness opinion was flawed because it failed to list the REIT classifications of the five comparable companies included in the analysis. According to plaintiff, this allegedly flawed analysis, which formed the basis for the fairness opinion cited in the proxy, rendered the proxy materially misleading.
In dismissing all claims as to all defendants, the Court concluded that the omitted REIT classifications were not material in light of the proxy’s “thorough and accurate” summary of the financial advisor’s seven financial analyses, the proxy’s explicit, cautionary language, and the fact that the omitted REIT classifications were “easily accessible in the public domain.” The Court further held that, even assuming these omissions were material, they still did not render the fairness opinion misleading because the proxy specifically explained how the comparable REITs were selected and disclosed that they “were not identical to Gramercy.”
The Court held that omitted information was not material in light of the extensive information provided in the proxy of all of the banker’s financial analyses, as well as by language expressly disavowing that any of the companies used in the comp companies analysis were a “perfect match.” It also noted that since REIT classifications were publicly available, their absence was immaterial because “an interested shareholder had the option of researching the comparators and determining for herself whether the comparators were good ones.”
This Sullivan & Cromwell memo highlights the increasing scrutiny that antitrust regulators in the U.S. & abroad are applying to transactions involving emerging technologies – even if the targets are small. Here’s the intro:
On January 2, 2020, Illumina, Inc. (“Illumina”) and Pacific Biosciences of California, Inc. (“PacBio”) abandoned their proposed $1.2 billion merger following antitrust probes by the Competition and Markets Authority (the “CMA”) in the United Kingdom and the Federal Trade Commission (the “FTC”) in the United States. The antitrust enforcers articulated serious concerns about the transaction’s effects on competition in the global market for DNA-sequencing systems.
This scenario highlights the ongoing – and perhaps escalating – antitrust scrutiny that companies in the biopharmaceutical and technology sectors are facing across jurisdictions. The case exemplifies the regulators’ increased attention to the preservation of nascent competition and comes on the heels of statements by authorities on both sides of the Atlantic that “the elimination of even a very small or nascent competitor could remove an important source of competition.”
The Illumina/PacBio combination demonstrates both the CMA’s and FTC’s willingness to scrutinize acquisitions by established competitors of smaller players still in the development phase – especially in the biopharmaceutical sector.
I recently blogged about FTC guidance reminding companies that competition concerns aren’t raised only by deals involving major players – transactions that involve emerging players that may be disruptors or innovators are going to be looked at closely as well. The memo suggests that fate of the Illumina/PacBio deal is a case in point.
Last month, I blogged about the inclusion of a so-called “naked no vote” termination fee in the merger agreement for Google’s pending acquisition of Fitbit. At the time, I pointed out that this is a fairly unusual provision – and one that the Delaware courts haven’t provided much guidance on.
That lack of guidance makes this recent Kirkland & Ellis memo reviewing the naked no vote fee concept a very helpful resource. Here’s an excerpt addressing the rationale behind such a fee & the reasons for the relatively small size of a typical naked no vote fee:
M&A parties also often discuss the consequences of a straight no-vote by the target company shareholders in the absence of a competing bid — a so-called “naked” no-vote. These conversations have taken on more practical relevance with the increase in activists seeking to disrupt M&A transactions — a recent study showed 18 different U.S. deals challenged in the first half of 2019.
Here the prevalence of a set break-up fee payable by the target is more limited. Deal studies show such a fee being used in a relatively small number of deals; instead, it is more common (roughly one-third of deals) to have a capped expense reimbursement in favor of the jilted suitor ranging anywhere from a few million dollars to tens of millions depending on deal size. The set fee and expense reimbursement constructs produce some interesting contrasts. The pending Google/Fitbit transaction includes a fee of 1% of deal value payable on a no-vote ($20 million). By comparison, the recently closed Celgene acquisition had a capped expense reimbursement of nearly double that amount — $40 million — but representing only about 1/20 of 1% of the deal value.
The hesitation to mandate a significant termination fee in this circumstance is usually attributed to sensitivity about the fiduciary implications and coercive impression of incurring a significant fee obligation arising from the target’s shareholders simply exercising their right to vote against the proposed sale.
The memo also points out that it isn’t just buyers that should consider the need for some sort of protection against a negative shareholder vote – with the rise of M&A activism, this is an issue that also should be considered by a seller in any transaction that’s subject to approval from buyer’s shareholders.
It used to be one of corporate law’s great truisms that the Delaware courts had never endorsed an attempt to terminate a merger based on a “Material Adverse Change” or “Material Adverse Effect” provision. But that changed in 2018 when Delaware upheld Fresenius’ termination of its deal to acquire Akorn based on the agreement’s MAC clause.
One of the questions raised by Akorn v. Fresenius was whether – having crossed the MAC Rubicon – Delaware courts would become more lenient in their treatment of MAC-based termination attempts. In his recent 119-page opinion in Channel Medsystems v. Boston Scientific, (Del. Ch.; 12/18), Chancellor Bouchard made it clear that when it comes to trying to use a MAC clause to terminate a deal, buyers still have a mountain to climb.
To make a long story short, after the deal was signed, Channel determined that one of its executives had engaged in fraudulent conduct that implicated a pending application for FDA approval of its only product. However, it also moved quickly to address the fraud, notifying regulators and the buyer, and took remedial action.
While the FDA approved Channel’s remedial action plan (and subsequently approved the product), Boston Scientific nevertheless attempted to terminate the agreement. As this Fenwick & West memo notes, Chancellor Bouchard said “no dice” & granted Channel’s motion for specific performance. Here’s an except:
In granting Channel specific performance, the court found that even though a number of Channel’s signing date representations in the merger agreement were breached, there was no reasonable expectation that those breaches would result in an MAE.
Consistent with past decisions, including Akorn, the court considered both quantitative and qualitative factors in evaluating the existence of an MAE, noting that “a mere risk of an MAE cannot be enough” and “[t]he important consideration… is whether there has been an adverse change in the target’s business that is consequential to the company’s long-term earnings power over a reasonable period, which one would expect to be measured in years rather than months” (quoting Akorn).
The court also examined the interplay of the closing condition and termination provisions of the merger agreement, determining that Boston Scientific bore the burden of showing that, as of the date of termination, the inaccurate Channel representations would reasonably be expected to have an MAE as of the expected closing date of the merger.
The memo says that the case illustrates that Delaware courts believe that there is a”meaningful difference” between a theoretical risk and a determined MAE – and that a party attempting to get out of a deal on that basise has to do a lot more than just provide “unsubstantiated speculation” to establish an MAE.
It’s also worth noting that Boston Scientific’s case wasn’t helped by evidence that it exhibited “buyer’s remorse” shortly after signing the deal, which called into question whether it was acting in good faith in its efforts to terminate the agreement.