If the increasingly stringent approach of the DOJ & FTC wasn’t enough to convince dealmakers of the need to pay close attention to antitrust compliance, a recent 4th Circuit decision may do the trick. In Steves and Sons v. Jeld-Wen, (4th Cir.; 2/21), the Court affirmed a lower court’s decision to order a divestiture of assets acquired in a deal that closed almost a decade ago!
That would be an interesting result even if the action was brought by regulators – but it wasn’t. As this Nixon Peabody memo explains, the lawsuit involved a private plaintiff:
Jeld-Wen, CMI, and another competitor, were the three makers of “doorskins,” an outer layer for molded doors. The three firms sold the doorskins to independent door makers—such as Steves— and also to finish their own molded doors. In October 2012, following the closing of a U.S. Department of Justice investigation, Jeld-Wen and CMI merged. The Department of Justice
investigated the merger again in early 2016, and again took no action. In July 2016, almost four years after the merger, Steves sued Jeld-Wen, contending the merger violated Section 7 of the Clayton Act, 15 U.S.C. § 18. A jury subsequently found for Steves, and the district court, among other things, ordered Jeld-Wen to divest the doorskins plant it had acquired from CMI.
On appeal, the defendant argued that divestiture was an improper remedy because, among other things, Steves had waited too long to bring its case. The 4th Circuit disagreed, and affirmed the lower court’s divestiture order. The memo points out that Jeld-Wen is the first case to order divestiture at the behest of a private plaintiff.
We’re posting memos on the decision in our “Antitrust” Practice Area.
– John Jenkins
DLA Piper recently released this 44-page guide to selling a company. The title – “Selling the Company: A Practical Guide for Directors & Officers” – suggests that the publication’s target audience is non-lawyers, but lawyers (particularly those who aren’t regularly involved in sell-side M&A) will also find it to be a useful reference.
The guide provides an overview of the entire M&A process, from confidentiality agreements to appraisal rights. Along the way, it reviews key Delaware doctrines applicable to the sale process & deal protections, alternative transaction structures, issues associated with interested mergers, and other matters. The guide also takes an in-depth look at the terms of the merger agreement itself. For instance, this excerpt addresses “naked no-vote” provisions:
A naked no-vote is “a shareholder vote to decline” a proposed merger agreement “that is not followed by the acceptance of an alternative transaction.” Some buyers negotiate for deal protection measures in connection with such no-votes by a selling company’s shareholders. Most notably, buyers targeting Delaware corporations have negotiated for “termination fees contingent solely on a ‘naked no vote.’”
The Delaware Court of Chancery has approved naked no-vote fees “of up to 1.4% of transaction value.” Indirectly, through reference, the same court has provided that naked no-vote fees are practically termination fees and have suggested that termination payments of such kind equating to under 4 percent of transaction value are generally “unremarkable.”
In reviewing the decision to accede to a naked no-vote fee in connection with a proposed business combination, the justices and chancellors of the Delaware courts will “undertake a nuanced, fact intensive inquiry” that examines the “reasonableness” of such terms in a manner “contemplated by the Unocal and Revlon standards….” In searching the reasonableness of a board’s decision to agree to a buyer’s demand for a naked no-vote fee, “the court [will] attempt, as far as possible, to view the question from the perspective of the directors themselves, taking into account the real world risks and prospects confronting them when they agreed to deal protections.”
Moreover, because a naked no-vote fee is a deal protection mechanism, it will be viewed in conjunction with any other such measures applicable to a particular merger agreement and, as a whole, cannot be preclusive or coercive if it is to survive enhanced scrutiny in the Delaware courts.
Other potential merger agreement terms are treated in similar depth. As you can see from this excerpt, this guide may be targeted to directors and officers, but there’s a lot for lawyers to sink their teeth into as well.
– John Jenkins
On Friday, Vice Chancellor Kathleen McCormick issued an 88-page opinion in The Williams Companies Stockholders Litigation, (Del. Ch.; 2/21), declaring the company’s poison pill unenforceable & permanently enjoining its application. The Vice Chancellor characterized the pill as “unprecedented,” with “a more extreme combination of features than any pill previously evaluated by this court.”
The Williams Companies adopted its pill last March, during the period of market turmoil following the initial onset of the pandemic. The pill was aggressive, and contained both a 5% beneficial ownership trigger and a broad “wolf pack” provision under which certain shareholders could be regarded as acting in concert in determining whether the pill had been triggered. It also narrowly defined the type of “passive investor” whose ownership would be excluded from triggering the pill.
As with other unilateral defensive measures, the board’s decision to adopt the pill was subject to Unocal scrutiny, which requires the board to establish both that it was reasonably responding to a cognizable threat to the corporate enterprise, and that its response was reasonable and proportionate to the nature of the threat. According to the Vice Chancellor, the board’s argument was that it adopted the pill in response to three potential threats:
The first threat was quite general—the desire to prevent stockholder activism during a time of market uncertainty and a low stock price. The second threat was only slightly more specific—the concern that activists might pursue “short-term” agendas or distract management. The third threat was just a hair more particularized—the concern that activists might rapidly accumulate over 5% of the stock and the possibility that the Plan could serve as an early detection device to plug the gaps in the federal disclosure regime.
In assessing these arguments, Vice Chancellor McCormick noted that Unocal requires the board to establish that it is responding to a legitimate threat: “If the threat is not legitimate, then a reasonable investigation into the illegitimate threat, or a good faith belief that the threat warranted a response, will not be enough to save the board.” She noted that the board was not concerned about any specific activist threat and was not acting to preserve an asset like an NOL (which is a common reason for pills with 5% triggering thresholds). Instead, VC McCormick said that the board “was acting pre-emptively to interdict hypothetical future threats.”
The Vice Chancellor pointed out that, under Delaware law, directors can’t justify their actions by arguing that “without their intervention, the stockholders would vote erroneously out of ignorance or mistaken belief.” She then characterized generalized concerns about activism as a threat to be a “an extreme manifestation” of this “proscribed we-know-better justification for interfering with the franchise,” and therefore concluded that these generalized concerns were not a cognizable threat under Unocal.
With respect to the board’s second justification for the pill, VC McCormick noted that “reasonable minds could dispute” whether “short-termism” & “distraction” are cognizable threats, but went on to observe that when the board acted, these concerns were merely hypothetical – and that when “untethered to a concrete event,” these phrases were nothing but “mere euphemisms for stereotypes of stockholder activism generally.” She therefore concluded that these not cognizable threats.
The Vice Chancellor did not rule on whether the board’s effort to address “gaps” in the SEC’s reporting scheme for beneficial ownership was a cognizable threat under Unocal. Instead, she focused on Unocal’s second prong – the requirement that the board’s response be reasonable & proportionate in relation to the threat – in evaluating this third justification. Here, she emphasized the extreme nature of the pill’s provisions. In particular, she noted that the board’s financial advisor had advised it that only 2% of poison pills had a 5% beneficial ownership trigger, and that this was one of only nine plans outside of the NOL context to ever use that low a trigger. But it wasn’t just the trigger provision that the Vice Chancellor found extreme:
The Plan’s other key features are also extreme. The Plan’s “beneficial ownership” definition goes beyond the default federal definitions to capture synthetic equity, such as options. The Plan’s definition of “acting in concert” goes beyond the express-agreement default of federal law to capture “parallel conduct” and add the daisy-chain concept. The Plan’s “passive investor” definition goes beyond the influence-control default of federal law to exclude persons who seek to direct corporate policies. In sum, the Plan increases the range of Williams’ nuclear missile range by a considerable distance beyond the ordinary poison pill.
Ultimately, the Vice Chancellor concluded that the board failed to carry its burden of proving that the “extreme, unprecedented collection of features” contained in the pill were a reasonable means of carrying out the board’s objective, and invalidated the pill.
While a decision from the Chancery Court to invalidate a poison pill is a very rare event, the Vice Chancellor’s concern about aggressive terms in pills targeting activists shouldn’t come as a complete surprise. As I blogged back in January, Vice Chancellor Laster’s transcript ruling in the Versum Materials case suggested that the members of the Chancery Court were skeptical about whether some of the terms would pass Unocal muster.
The Vice Chancellor’s opinion leaves a lot of questions about the role that a poison pill may legitimately play in the board’s response to shareholder activism, but at the very least, it is likely to prompt companies to take a hard look at how aggressive their pill provisions are. It may also provide yet another reason for companies to keep pills “on the shelf” until such time as a more definitive threat than general concerns about the consequences of activism arises.
We’ll be posting memos in our “Poison Pills” Practice Area.
– John Jenkins