Cybersecurity and data privacy concerns are an area of increasing legal and regulatory risk for all companies. This Grant Thornton memo says that buyers should develop an “M&A cybersecurity playbook,” an “M&A cybersecurity framework,” and an “M&A cybersecurity plan” in order to appropriately address the issues that may arise during the lifecycle of an M&A transaction.
The memo says that a cybersecurity playbook’s purpose is to help companies successfully identify and monitor these risks in an ongoing and repeatable way as part of their M&A activities. A cybersecurity framework provides a template for cybersecurity integration, while a cybersecurity plan leverages the M&A cybersecurity playbook and framework to plan both tactical and strategic actions during the M&A process. This excerpt lays out the type of tactical & strategic actions encompassed by a sample cybersecurity plan:
Tactical actions:
– Specific cybersecurity threat monitoring must begin on day one and continue for at least the first phase of the merger or acquisition.
– The due diligence risk assessment feeds into remediation of the high-risk issues, followed by remediation of the medium-risk and low-risk issues if needed.
– A compromise assessment provides important input for identifying and isolating potential incidents and taking immediate actions to address them.
Strategic actions:
– A comparative analysis of cybersecurity capabilities will inform the cybersecurity consolidation, business solution migration and subsequent support.
– The cybersecurity integration strategy forms an important foundation for integrating cybersecurity policies, processes, and suppliers.
– The target operating model for cybersecurity, once designed and established, will implement a one-team approach in supporting the cybersecurity program going forward with defined performance metrics and control monitoring.
Under Delaware’s MFW doctrine, a controlling stockholder and target board can avoid application of entire fairness review to a transaction on which the controller stands on both sides if, among other things, the transaction is conditioned from the outset upon both the approval of a well-functioning, independent special committee & the uncoerced, informed vote of a majority of the minority stockholders. A recent Delaware Chancery Court decision makes it clear that there aren’t any shortcuts around these requirements.
In Berteau v. Glazek, (Del. Ch.; 6/21), a special committee that approved such a transaction tried to persuade the Chancery Court that MFW should apply notwithstanding the fact that a merger with a controller wasn’t conditioned on approval by a majority of the minority stockholders. Vice Chancellor Fioravanti rejected that argument. This Sidley blog explains his reasoning:
Members of the Special Committee (but not the other director defendants) argued that the business judgment rule should apply pursuant to the MFW doctrine. The Court held that this argument “ignore[d] the history of the MFW doctrine and what it was intended to address.”
In MFW, the Delaware Supreme Court held that a controlling stockholder transaction would be subject to the business judgment rule where “the merger is conditioned ab initio upon both the approval of an independent, adequately empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.” MFW thus created a pathway for controller transactions to obtain a pleading-stage, pre-discovery dismissal where (1) a special committee was formed to create a “bargaining agent who can negotiate price and address the collective action problem facing stockholders” and (2) a majority of the minority voted approvingly, thus giving stockholders the “chance to protect themselves.”
Because the defendants in Berteau had completed the transaction without a vote of TPB’s minority stockholders, let alone conditioning it on their approval, the Court reasoned that MFW’s business judgment protection could not attach, and found no principled reason to depart from, MFW’s dual mandate.
In what was by far the 2021 proxy season’s most high-profile contest, Engine No. 1 succeeded in electing three directors to Exxon Mobil’s board. This Alliance Advisors article asks whether this proxy fight was a bellwether of future contests. After providing a detailed blow-by-blow of the contest, Alliance offers up the following conclusion:
We believe the Exxon fight is a bellwether in at least two ways. First, there is little doubt that Engine No. 1’s victory in the Exxon proxy fight will embolden other investors to launch board contests in the future that focus on E&S issues. Second, and perhaps more important, companies should pay close attention to the ETF (The Engine No. 1 Transform 500 ETF) that Engine No. 1 recently established.
There is a reason Engine No. 1 chose the ticker symbol VOTE. With this ETF, Engine No. 1 has staked out new ground. Rather than exclude companies from its impact fund that may not meet ESG thresholds, Engine No. 1 will include them and use its vote to “[s]trategically hold companies and leadership teams accountable while focusing on environmental, social, and governance issues that create value.”
The article notes that Engine No. 1’s approach aligns with that of the major index funds, which hold shares based on broad indexes and are increasingly using their votes to promote change.
A few months ago, I blogged about the Chancery Court’s decision in In re Appraisal of Regal Entertainment Group, (Del. Ch.; 5/21). In that case, the Court held that the appraisal statute required a fair value award to take into account changes in the target’s value between the signing & closing of a merger. According to this Cooley blog, the decision has the potential to rejuvenate the appraisal arbitrage game, which has been in steep decline following a series of Delaware Supreme Court decisions. Here’s an excerpt:
Parties should be mindful of the potential impact of Regal in transactions with delayed closings (particularly those with more significant gaps between signing and closing), as it provides a roadmap for would-be appraisal arbitragers to potentially capitalize on increases in target’s value between signing and closing. Buyers should keep a detailed record of any internal discussions and deliberations regarding deal price, and carefully document the type and amount of expected synergies reflected in the deal price, as synergy reductions will help to counteract any upward adjustment for increases in value.
The blog says that it appears unlikely that Regal result in appraisal arbitrage returning to pre DFC Global, Dell & Aruba levels. That’s because petitioners will have to establish that the target’s value increased (and the amount of the increase) between signing and closing – and any such increase would have to outweigh any reduction for synergies in order for the fair value to rise above the deal price.
This Lazard report reviews shareholder activism during the first half of 2021. Here are some of the highlights:
– 94 new campaigns were initiated globally in the first half of 2021, in line with 2020 levels. Year-over-year stability buoyed by a strong Q1, with Q2’s new campaigns launched (39) and capital deployed ($9.1bn) below multi-year averages.
– The first half of 2021 was distinguished by several high-profile activist successes at global mega-cap companies, including ExxonMobil (Engine No. 1), Danone (Bluebell and Artisan Partners) and Toshiba (Effissimo, Farallon, et al.)
– U.S. share of global activity (59% of all campaigns) remains elevated relative to 2020 levels (44% of all campaigns) and in line with historical levels. The 55 U.S. campaigns initiated in the first half of 2021 represent a 31% increase over the prior-year period.
– 44% of all activist campaigns in H1 2021 featured an M&A-related thesis, in line with the multi-year average of 40%. Among all global M&A-focused campaigns in H1 2021, 56% centered on scuttling or sweetening an announced transaction (and accounted for all European M&A-focused campaigns). In contrast, campaigns pushing for an outright sale of the company accounted for only 12% of M&A-related campaigns in the first half of 2021, below the multi-year average of 34%.
The report also notes that investor support for ESG campaigns reached an all-time high, with14% of all proposals passed in H1 2021, up from a three-year average of 6%, and that short activism targeting de-SPACed companies has emerged as an increased threat in H1 2021, with prominent short sellers, such as Hindenburg Research, attacking high-profile de-SPACs such as DraftKings, Lordstown Motors and Clover Health.
SPAC buyers have typically looked to the common equity PIPEs for funding to support de-SPAC transactions. But in recent months, that market has tightened, and some SPACs have opted for alternative financing structures. This Freshfields blog reviews recent de-SPACs in which alternative financing structures have been used, and describes the terms of those financings. This excerpt provides an overview of the alternative arrangements that have been used in recent deals:
Over the past few months, with the PIPE market becoming tighter but with 400 SPACs still seeking targets for business combinations, we have been seeing some de-SPAC deals being announced with alternative and even creative financing structures. Some SPACs have raised funds through the issuance of convertible debt or preferred stock, providing investors with fixed returns with additional upside through the convert features.
Others have utilized common equity PIPEs but also included warrants together with a lockup on the shares and warrants – again to increase potential PIPE return. Some deals have included sponsor and other backstops to cover potential shareholder redemptions, thus reducing execution uncertainty. In some cases there has been no PIPE or other financing at all.
There’s another tidbit in the blog that I’d like to highlight. Not too long ago, I received a question about whether there was any reason that common equity PIPEs had to be priced at the $10.00 SPAC IPO price. I said that I didn’t think there was, but I also didn’t know of any examples where the PIPE was priced below $10.00. Thanks to the blog, I do now:
Almost every common equity PIPE is sold at $10.00 a share – the same as the SPAC’s IPO price and close to the anticipated trust value of the shares in the event of redemptions. However, another way to improve the economics for PIPE investors is to sell them discounted shares. In the DPCM Capital, Inc. / Jam City, Inc. business combination, announced on May 19, 2021, the SPAC obtained commitments from PIPE investors to purchase 11,876,485 shares of SPAC common stock for approximately $100,000,000. This translates into a heavily discounted price of $8.42 per share.
Earlier this month I blogged about Harvard prof. Jesse Fried’s article calling into question the efficacy of rights offerings as “cleansing mechanisms” for insider transactions. A member reached out with a critique of the article. He didn’t take issue with Fried’s questioning the extent to which weight should be given to the right to participate in a financing, but thought that he gave short-shrift to current practice when it comes to rights offerings:
[Fried] does not adequately recognize that practice under existing law is to be skeptical about the weight to be given to rights to participate in establishing entire fairness. I can’t count how many times I have colleagues tell me that there is no problem because the offer is being made to all shareholders and I have to point out that it is not that simple because the shareholders other than the controller (e.g., the private equity firm) are not necessarily in the same position to participate, and so they still have to pay attention to the ability to justify the fairness of the price, with the right to participate just being one factor in overall fairness. I think Delaware law already makes that clear.
This CLS Blue Sky blog reviews some fairly recent Delaware case law addressing the limitations on the use of rights offerings to shift the standard of review from entire fairness to business judgment.
In recent years, U.S. buyers & sellers have become familiar with the strategy of “bumpitrage,” in which activists challenge announced transactions and press for a price increase. This Cleary Gottlieb blog says that this strategy has become increasingly prevalent in the U.K. Here’s an excerpt:
One of the most noticeable trends that has emerged in the current boom in UK public M&A activity is the heightened level of target shareholder opposition to bids. This is manifesting itself in a number of ways, including through increased and novel “bumpitrage” campaigns as well as through institutional investors becoming more vocal in expressing their discontent at proposed bids. There appears to be a general feeling among a number of the largest UK institutional investors that private equity are acquiring UK public companies “too cheaply”.
Historically, the key negotiating ground in UK public bids has been with the target board before the public announcement of a firm bid. Once the bidder has reached agreement on price with the target board and obtained its recommendation, this has typically been sufficient to deliver a successful deal in the vast majority of cases, absent an intervention from an activist shareholder or competing bidder.
The blog says that these tactics are paying off & have resulted in bidders increasing their offers in 3 deals in the last few weeks. It also advises that bidders should expect that shareholders will be prepared to actively resist bids that they believe undervalue the target, even if the target board supports the deal.
Social media platforms are frequently an afterthought in M&A transactions. According to this recent blog from Sue Serna, that’s a big mistake. Sue highlights the reputational, legal, compliance and other issues that can arise if companies don’t get their social media teams involved in the M&A process well in advance of the closing. This excerpt discusses some of the potential reputational & legal risks associated with failing to do that:
Reputational risk: It’s ideal to loop your social team in before the deal closes, and they can actually help in the M&A process if you do so. Ask your social team to review the other company’s social media accounts and the chatter online about that company. This exercise can unearth reputational risks and highlight any ongoing issues consumers have with the company before you close the deal. Lest you think this is a fruitless exercise, I have seen deals where this analysis surfaced things concerning enough to actually stop the deal from proceeding, so they are well worth the effort.
Legal risk: Many people involved in the M&A process don’t realize that the acquiring company is legally responsible for everything that goes out on all social media channels starting on legal day one (the first day of the deal being final). That means the time to loop in the social media team is NOT on the day before day one. It’s really unfair to them to tell them that they are suddenly responsible for X number of new channels starting tomorrow, and it honestly opens the company up to all kinds of legal risks until they can coordinate with the social team at the other company and get everything under control.
Delaware’s LLC statute does not have a provision granting appraisal rights to members who dissent from a merger, but as this Dorsey & Whitney blog points out, that doesn’t necessarily mean you won’t have to deal with them in a deal involving an LLC target:
Section 18-210 of the Delaware Limited Liability Company Act states that there are no statutory appraisal rights afforded to dissenting members in a merger of a Delaware LLC. Instead, the Delaware Limited Liability Company Act provides that dissenting members only have appraisal rights if those rights are specifically created by contract, most commonly in the limited liability company agreement or an agreement of merger.
Though a merger of a Delaware LLC does not involve mandatory, statutory appraisal rights, it is important for counsel to review the limited liability company agreement and any other agreements among members of the LLC to account for appraisal rights that may have been adopted by contract. The default appraisal rights rules for mergers of LLCs vary by state. For example, Florida, California, and New York do provide statutory appraisal rights for dissenting members in an LLC merger. Counsel should check the statutes of each state under which a constituent entity to the merger was formed.
If a Delaware LLC has significant operations in another state, it would also be prudent to confirm that the statutes of the applicable state do not apply to the LLC involved in the merger. For example, the California Corporations Code extends statutory appraisal rights to apply to foreign LLCs formed on or after January 1, 2014 or qualified to do business in California on or after January 1, 2014, if members holding more than 50% of the voting power of the LLC reside in California.