This March-April Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer – and includes articles on:
– Pre-Closing Covenants: Operating in the Ordinary Course of Business
– CFIUS 2020: Five Things to Know about Filings and CFIUS Risk
– FTC Targets M&A Agreements in Continued Campaign Against Noncompete and No-Poach Clauses
– Delaware Supreme Court Examines Director Liability for Acquisitions
– FTC and DOJ Announce New Draft Vertical Merger Guidelines
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.
That was fast. A couple of weeks ago, I blogged about the FTC’s implementation of temporary e-filing procedures and its decision to deny HSR early termination requests while the new procedures were in place. On Friday, the FTC issued new guidance indicating that early termination requests were back on the table. However, as this excerpt from the guidance indicates, it’s still far from business as usual:
Parties and their counsel should not call the PNO or the litigation shops to advocate for early termination of the waiting period applicable to a notified transaction. We understand that all parties who request it would like early termination of the waiting period, but current conditions require us to prioritize processing filings that raise competitive concerns.
Premerger staff is at capacity, and both Agencies’ litigation teams are already working hard to evaluate the extent to which individual transactions might present competitive concerns. Forcing our staff to spend additional time engaging with parties or their counsel will slow our review, not expedite it, and will increase the stress on the premerger program.
In case they have to hit people over the head, the FTC’s guidance goes on to make it clear that during the Covid-19 crisis, early termination will be granted in fewer cases, and more slowly, than under normal circumstances.
This Sidley memo says that one of the consequences of the coronavirus outbreak may be a decline in proxy contests during the current season. As this excerpt points out, the reason is that given current market volatility, activists may be unwilling to commit to the kind of long-term hold that a successful proxy fight would necessitate:
It is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future – at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward.
An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.
The memo cautions that once the crisis passes, companies should expect activists to return to proxy contests with a vengeance. It notes that 130 proxy contests were launched in 2009, after the financial crisis, and many companies that can hide during a bull market have their vulnerabilities laid bare during a downturn.
Speaking of vulnerabilities, Sidley recently published a follow-up memo discussing the advisability of implementing a poison pill. This excerpt provides a reminder about how Delaware courts will evaluate such a decision:
In the current environment, boards of public companies should, at a minimum, make sure they have an up-to-date poison pill on the shelf and consider whether to adopt one. At least in Delaware, the standard of review of the board’s decision to adopt depends on the company’s particular circumstances at the time of adoption. In Delaware, if a poison pill is adopted on a “clear day” (i.e., where the company is not facing a hostile takeover bid or other specific threat), the business judgment rule applies (Moran), whereas adoption of a poison pill as a defensive measure in response to a specific threat is subject to enhanced scrutiny (Unocal).
Notably, even if a poison pill is adopted on a clear day, the decision whether to redeem the poison pill in the face of a hostile bid remains subject to enhanced scrutiny. In these extraordinary times, a board may, in the exercise of its reasonable business judgment, conclude that it is in the best interests of the company and its shareholders to adopt a poison pill even in the absence of a specific threat.
We’re starting to see some information on how Covid-19 has affected the deal market, along with some speculation about what it may mean for M&A going forward. Here’s an excerpt from this Greenberg Traurig memo on the current state of the market for public deals:
It’s not surprising that, to date, M&A activity for Q1 2020 is down substantially from the corresponding period of 2019. While activity was already somewhat slower due to uncertainty about future fiscal, tax, trade, regulatory, environmental and other policies at issue in the U.S. federal elections in November, the COVID-19 pandemic has had a pronounced negative impact on deal making and poses significant threats to near and medium-term corporate earnings performance and the global economy.
Industries such as travel, tourism, hospitality, sporting events, motion picture exhibition, live entertainment, consumer retail, home construction, auto manufacturing and financial services are being hit hard by the sharp reduction in demand as well as state and local government directives to cease operations at least for the near-term. Several industries will have to continue to contend with significant disruptions in their supply chains.
Not surprisingly, the memo goes on to say that until the crisis passes, U.S. & global M&A will likely remain soft. The memo also provides some interesting commentary about deal structures – including this excerpt addressing whether the precipitous fall in market values will impact stock for stock “mergers of equals”:
Except in cases of unusual, historical issuer-specific stock price volatility (where collars, price protection mechanisms and possibly walkaway rights might be requested, but are seldom agreed to), concerns about diminution of the issuer’s stock price between signing and closing are mitigated because, assuming the rationale for a synergistic business combination is sound and accepted by investors and analysts, macroeconomic impacts should affect the stock price of each merger constituent approximately equally and their stock prices should trade in tandem between signing and closing.
As a result, the memo concludes that the decline in stock values due to Covid-19 shouldn’t influence the business decision of strategic dealmakers about whether to proceed with true business combinations or MOEs. Of course, the memo says it’s likely to be a different story in situations involving a sale of control, where sellers are likely to have a strong preference for cash in a “volatile and bearish” stock market.
Earlier this week, I blogged about the possible resurgence of poison pills in response to the unprecedented market volatility resulting from the Covid-19 pandemic. This Cooley blog provides recommendations about other actions companies should take to shore up their defenses against activist challenges in the new environment. This excerpt discusses the need to refresh the company’s strategic plan:
The future of virtually all issuers will be materially affected by the pandemic. As with enterprise risk assessment, now is the time for companies and boards to review their strategic plan as affected by these developments, assess opportunities and challenges facing the company and review the company’s expected financial performance, capital requirements and balance sheet. Management should also be prepared to regularly review with the board current responsive updates to its operating plan and discuss the strategic, technological, market or other contingencies that are addressed and anticipated.
Not only may these efforts enable your company to weather the storm in a healthier position, it will be important to consider how corporate strategy promotes the long-term success of the company and interests of stakeholders to effectively respond to activism or opportunistic takeover proposals should they arise.
Other areas addressed by the blog include board engagement, enterprise risk assessment, shareholder communication and takeover preparedness.
I blogged last week about the FTC’s decision to not grant early termination of the HSR waiting period while its Covid-19 driven temporary e-filing rules are in effect. In the unlikely event that you’re in a rush to close a pending deal, this Winston & Strawn memo says that the DOJ’s Antitrust Division has more bad news for you:
Following the Federal Trade Commission’s (FTC) recent announcement regarding temporary changes to its Hart-Scott-Rodino (HSR) processes, the DOJ Antitrust Division (“Division”) announced that it also has adopted temporary changes to its HSR processes, which will apply during the COVID-19 emergency.
For “mergers currently pending or that may be proposed,” the Division announced that it is “requesting from merging parties an additional 30 days to timing agreements to complete its review of transactions after the parties have complied with document requests.” This follows a similar announcement from the FTC in which it indicated that it would seek modifications to timing agreements with merging parties on a “matter-by-matter” basis.
The memo says that this request will “almost certainly” result in longer review times for companies that have received a Second Request, since it will tack on an additional 30 days to the 60-90 period typically called for in the timing agreements that parties receiving a second request merging parties routinely enter into with the DOJ.
There are a lot of companies that have seen their stock prices fall through the floor as a result of the market’s ongoing meltdown. I know this because so many of them are well represented in my 401(k) plan. Anyway, this Morgan Lewis memo says that now might be a good time to think about implementing a poison pill – not just as a pure antitakeover device, but also to protect the potentially significant NOLs that many companies may generate in the current environment.
This excerpt says there’s plenty of precedent for this action from the last time the equity markets cratered:
A look-back at the poison pills adopted in response to the then-unprecedented market disruption and volatility that followed the 2008 financial crisis may be a helpful predictor of what to expect in the wake of the stock market’s reaction to the COVID-19 pandemic. In 2008 and 2009, there were, respectively, 61 and 57 poison pills adopted. As companies accumulated substantial NOLs during this time that they wanted to preserve and protect to offset future federal tax liabilities, there was a significant uptick in NOL poison pill adoptions.
From 2007 to 2009, the number of NOL poison pills adopted increased nine-fold, from 4 to 37. In fact, 2009 remains the all-time record year for NOL poison pill adoptions. If you look at the companies that adopted NOL poison pills in 2009, you see strong representation by the industry sectors that were disproportionately impacted by the financial crisis such as financial services, automotive, and homebuilders, among others.
The memo says that if past experience is any guide, we should expect to see a substantial increase in the number of poison pill adoptions in the coming months, as companies deal with panic-driven market valuations that may make many of them prime targets for strategic behavior by activists and others.
It looks like companies are already taking this advice to heart. On Friday, the Williams Companies adopted a limited duration rights plan that will expire on March 31, 2021. In the press release announcing the plan, Williams said that its board “has taken note that in light of the coronavirus and recent market events, the closing price of Williams common stock is, as of yesterday, 50% below the price just one month ago.”
Tomorrow’s Webcast: “Activist Profiles and Playbooks”
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from the 2019 activist campaigns, expectations from activists in the 2020 proxy season and how activism differs for large and small cap companies.
I’ve previously blogged about the possible use of the COVID-19 pandemic as a MAC trigger and the negotiation of specific carve-outs to MAC clauses addressing the outbreak. Last week, a member involved in M&A shared some information developed with a data provider about the extent to which the COVID-19 pandemic is being addressed in carve-outs to MAC clauses.
Here’s a summary of 2020 deals where MAC definition included a carveout related to the coronavirus and similar concepts. :
As of the week of 3/2/20, there were 22 pending M&A transactions involving public target companies that trade on either NASDAQ or the New York Stock Exchange. Of those:
– 41% (9 deals) included the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
– 4.5% (1 deal) specifically addressed COVID-19 by name
– 59% (12 deals) did not include the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
Of the 17 transactions involving U.S. headquartered public targets:
– 41% (7 deals) included the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
– 6% (1 deal) specifically addressed COVID-19 by name
– 59% (10 deals) did not include the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
How does that compare to last year? The research indicated that only 4 of the 24 M&A transactions pending on 3/5/19 involving NASDAQ or NYSE traded targets included carve-out language using the word “pandemic” or “epidemic” in the target MAC definition. As for the 43 deals signed up in 2019 that were still pending, only 12 of the 43 deals have the words “epidemic”, “pandemic”, or “COVID-19” as a carve-out.
Given how quickly & dramatically the pandemic has changed nearly every aspect of business and daily life in the U.S. and throughout the world, my guess is that language in MAC clauses specifically addressing pandemics is going to quickly become ubiquitous, and is likely to have staying power.
That being said, many MAC clauses require an adverse event to disproportionately impact the seller in order to fall within their parameters. Several members have commented that this common language makes it even more difficult to use a MAC clause as the basis for terminating a deal due to an event like a global pandemic.
In its 2018 Cyan decision, the SCOTUS unanimously held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court. Some corporations responded to Cyan by adopting “federal forum” charter provisions compelling shareholders to bring 1933 Act claims only in federal court. Much to the chagrin of the defense bar, the Delaware Chancery Court struck those provisions down in Sciabacucchi v. Salzberg, (Del. Ch.; 12/18).
Yesterday, the Delaware Supreme Court unanimously reversed the Sciabacucchi decision. In Justice Valihura’s sweeping 53-page opinion, the Court rejected claims that federal forum provisions were contrary to any Delaware law or policy, and read Section 102(b) of the DGCL as a broad enabling statute that provides Delaware corporations with more than enough flexibility to include a federal forum provision in their certificates of incorporation.
Section 102(b)(1) authorizes the certificate to include “any provision for the management of the business and for the conduct of the affairs of the corporation” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders.” While that authority can’t be used to adopt provisions that violate law or public policy, the Court concluded that a federal forum provision, or FFP, didn’t raise either of those concerns:
First, Section 102(b)(1)’s scope is broadly enabling. For example, in Sterling v. Mayflower Hotel Corp., this Court held that Section 102(b)(1) bars only charter provisions that would “achieve a result forbidden by settled rules of public policy.” Accordingly, “the stockholders of a Delaware corporation may by contract embody in the [certificate of incorporation] a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself.”
Further, recognizing that corporate charters are contracts among a corporation’s stockholders, stockholder-approved charter amendments are given great respect under our law. In Williams v. Geier, in commenting on the “broad policies underlying the Delaware General Corporation Law,” this Court observed that, “all amendments to certificates of incorporation and mergers require stockholder action,” and that, “Delaware’s legislative policy is to look to the will of the stockholders in these areas.” Williams supports the view that FFPs in stockholder-approved charter amendments should be respected as a matter of policy. At a minimum, they should not be deemed violative of Delaware’s public policy.
The Court rejected claims that the language added to Section 115 of the DGCL in 2015 codifying the Boilermakers decision permitting exclusive forum bylaws represented an implicit recognition that FFP provisions were impermissible. It also rejected the Chancery’s effort to limit Section 102(b)’s reach to matters covered by the “internal affairs” doctrine, and said that the Chancery’s decision took a narrower approach to what constituted “internal affairs” than either applicable federal or Delaware precedent.
On a personal note, I’d like to express my thanks to the Delaware Supreme Court for giving me something to blog about that’s completely unrelated to the Covid-19 pandemic & for allowing me to fulfill my dream of using the word “agonistes” in a blog title. Now, when somebody googles John Milton or Gary Wills, they may stumble across me! That’s the closest thing to literary immortality that a fat guy in pajamas pounding on a keyboard can reasonably hope to achieve. . .
Given the havoc that Covid-19 has wreaked on the world economy, you might have expected to see a spike in terminations of pending deals during the current month. But according to this Bloomberg Law article, that hasn’t happened. To the contrary, this excerpt says deal terminations are way down:
While a faltering market might normally cause deal failures, the data do not show that trend at this point. Thus far, March deal terminations are about one-half to one-third of prior years. Are parties putting their deals on hold? Are they renegotiating? We do know that companies are rushing to put out a variety of fires; perhaps deal parties that are doomed to ultimately terminate, either due to the pandemic or for other reasons, just don’t have the bandwidth to effectuate termination right now.
The article says that through March 17, 10 global M&A deals were terminated. During the same period in each of the three preceding years, an average of 26 deals bit the dust. Of those 10 terminated deals, five involved Chinese targets.
While the article suggests a lot of reasons why terminations may be down, I think it overlooks the most obvious one – a lot of companies are the proverbial “deer caught in the headlights” at this particular moment. Events are moving so fast that many businesses are still trying to figure out exactly what’s happening to them. Deciding what to do about it comes later.