In a recent speech, Jonathan Kanter, the head of the DOJ’s Antitrust Division discussed his approach to merger remedies. What did he have to say? Well, how can I put this – remember the scene in the movie “Diner” where Tim Daly’s character threatens someone trying to pick a fight by saying “I’ll hit you so hard I’ll kill your whole family?” Kanter’s approach appears very similar to that. Check out this excerpt from Paul Weiss’s memo on the speech:
The head of the Antitrust Division of the Department of Justice (DOJ) said that when it “concludes that a merger is likely to lessen competition, in most situations” the division “should seek a simple injunction to block the transaction,” rather than agree to a remedy. He went on to add that while divestitures will be an option in certain circumstances, in his view “those circumstances are the exception, not the rule.” Mr. Kanter delivered his remarks at a virtual meeting of the Antitrust Section of the New York State Bar Association.
According to Mr. Kanter, divestitures may be viable solutions where “business units are sufficiently discrete and complete that disentangling them from the parent company in a non-dynamic market is a straightforward exercise.” However, Mr. Kanter suggested that companies with “evolving business models” operating in “innovative markets” may find increased resistance to a remedy if the DOJ determines that their deal presents competitive concerns.
This stance may lead to more merger challenges in the courts. Indeed, AAG Kanter welcomed the prospect of more litigation, saying that “settlements do not move the law forward.” Mr. Kanter went on to say that “we need new published opinions from courts that apply the law in modern markets in order to provide clarity to businesses” and that “this requires litigation that sets out the boundaries of the law as applied to current markets.” He said that the DOJ “need[s] to be willing to take risks and ask the courts to reconsider the application of old precedents to those markets.”
Whether the DOJ’s bite will match its bark over the long term remains to be seen – but there’s no denying that that’s quite a bark.
On Wednesday, the SEC announced proposed amendments to Form PF, the confidential reporting form used by certain SEC-registered investment advisers to private funds to make reports upon the occurrence of key events. Here’s the 236-page proposing release and here’s the 2-page fact sheet. Davis Polk came out with this memo yesterday summarizing the proposed changes. This excerpt addresses the potential new obligations of advisers to large PE funds:
The proposed amendments would reduce the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management. In addition, the proposals seek to expand the information gathered from large private equity advisers by amending section 4 of Form PF to require disclosure of information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies (CPCs) and CPC borrowings, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations.
Comments are due 30 days after publication of the proposal in the Federal Register. But Cadwalader’s Steven Lofchie already won the comment period with his commentary the end of the firm’s memo on the proposal. After characterizing Form PF as “worthless,” he went on to say exactly why he thinks that’s the case:
In the decade since Form PF was required, there has not been a single public report analyzing the data and demonstrating its value. That is not because the data must be kept a secret. Any lawyer knowledgeable about the issues as to which Form PF is intended to elicit information can tell, without seeing the responses, that the questions asked by the report are completely ambiguous and badly stated. There is no way that the responses to the Form PF questions could yield significant results across the industry.
Responses to badly drafted and ambiguous questions do not provide useful information. Rather than insisting upon the collection of more useless information, the SEC should take some time and really revisit the Form, and either get it right or throw it away.
Check out our new Deal Lawyers Download podcast, featuring my interview with Woodruff Sawyer’s Yelena Dunaevsky about her recent article on trends in SPAC litigation. Topics addressed in this 23- minute podcast include:
– The six kinds of lawsuits SPACs are facing
– Unique aspects of SPAC litigation
– Investment Company Act claims
– Delaware’s MultiPlan decision
– Where SPAC lawsuits may be heading
– Tips for insurance and risk management
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Over on The Activist Insight Blog, Josh Black recently discussed Mercury Systems’ decision to adopt a shareholder rights plan with a 7.5% threshold in response to an activist campaign by Starboard Value and Jana Partners, whch own 7.3% and 6.6% of the company, respectively. Josh wasn’t too impressed:
Poison pills are little to no deterrent for activists. Starboard and Jana have little incentive to halt their campaigns now and sell the stock and are in no way hindered from nominating directors or winning a proxy fight. Indeed, irritating institutional investors by pushing the boundaries of acceptable practice might put Mercury itself at a disadvantage. Mercury already has an advance notice bylaw, forcing the activists to make their intentions known well in advance of a shareholder meeting. Takeover bids by tender offer are vanishingly rare, and a board should be equipped to deal with standard proposals. The most practical effect is to limit the upside activists can earn by limiting the amount of capital they can invest.
While Mercury’s management offered the standard claim that the pill would allow its board to make informed decisions, Starboard wrote a measured letter to the board asking for the threshold to be raised to 15%.
But the real question is not so much how the pill will affect these campaigns or the ultimate future of Mercury but about the future of poison pills themselves. Perhaps the only reason a lawsuit has not yet been forthcoming is that Mercury is incorporated in Massachusetts, rather than Delaware, and thus benefits from a much more management-friendly legal regime.
Regarding the potential for irritating institutions by pushing the envelope, the blog notes that only five of the 55 non-NOL pills adopted at Russell 3000 companies in 2020 had a threshold of less than 10%, while Mercury’s was the only one adopted in 2021.
The blog alludes to the fact that pills targeting activism have recently taken it on the chin in Delaware, but even before the Delaware courts weighed in, some commentators were calling into question the relevance of pills to respond to shareholder activism. Pills may still have a role to play, but in the current environment, a defensive strategy that puts undue faith in a rights plan at the expense of a more comprehensive approach to the challenges of activism is one with a decidedly limited upside.
The FTC recently announced the new HSR thresholds for 2022. Here’s an excerpt from this Shearman memo with the details:
Generally, HSR notifications are required for an acquisition of voting securities, non-corporate interests or assets when the transaction reaches a certain threshold (the “size of transaction” test) and the parties are of sufficient size (the “size of parties” test). The size of transaction test is adjusted annually based on changes in the gross national product for the preceding year. The new size of transaction threshold will be $101 million, an approximate 10 percent increase from the previous threshold of $92 million.
Under the new thresholds that will be in effect next month:
– Transactions valued up to and including $101 million are not reportable;
– Transactions valued at more than $101 million but not more than $403.9 million are reportable only if one party has assets or annual net sales of at least $20.2 million and the other party has assets or annual net sales of at least $202 million (unless an exemption applies); and
– Transactions valued at more than $403.9 million are reportable, regardless of the parties’ size (unless an exemption applies).
The memo reports that notification thresholds for acquisitions of voting securities were also increased. Notifications are now required for acquisitions of additional voting securities at each of the following thresholds: $101 million, $202 million, $1.0098 billion, 25% of the voting securities if their value exceeds $2.0196 billion; and 50% of the voting securities if their value exceeds $101 million. Remember, you overlook these voting securities filing requirements at your peril.
No changes were made to the amount of filing fees payable for HSR filings, although the breakpoints for the different fee levels have been revised to reflect the changes in the thresholds.
Last week, I blogged about the Microsoft-Activision Blizzard deal, which has a nearly $70 billion price tag and is a “mega deal” by any definition. Deals this big don’t happen every day, but this analysis from Bloomberg Law’s Grace Maral Burnett says that both “mega deals” with valuations in excess of $10 billion and “mega mega” deals with valuations of more than $50 billion happen more frequently than you might think. Here’s an excerpt:
The past decade has seen the announcements of 301 mega deals, each valued at $10 billion or greater, that are either completed or are currently pending with definitive agreements in place. Counting the number of days between these announcements reveals an impressive frequency of one deal every 12 days. Meanwhile, the average period between mega mega deals—the 26 of these deals valued at $50 billion-plus—was 122 days. That’s a huge deal announced roughly every four months.
In fact, the Microsoft-Activision deal broke the decade’s longest mega mega deal drought. Grace says nearly two and a half years separated the announcement of that deal and the 2019 announcement of the $84 billion Allergan-AbbVie deal.
If you go to Grace’s Twitter feed, you’ll find a cool interactive graphic that plots the date and size of each M&A deal over $10 billion since 2012. While you’re there, you should give her a follow if you’re not following her already.
Activision Blizzard recently filed the merger agreement for Microsoft’s proposed $70 billion acquisition that the two companies announced earlier this week. Since Activision is the current poster child for workplace harassment issues & because the deal was announced on the same day that antitrust regulators promised to revamp their merger guidelines to tighten the screws on mega deals, I thought it might be interesting to poke around the agreement to see how it addressed these issues.
If Activision Blizzard were a private company, you might expect detailed reps, covenants, closing conditions & maybe even special indemnification terms to address the risks associated with the company’s high-profile workplace harassment legal problems. But it’s a public company – and public company deals are different. Here’s the relevant rep, which is included in Section 3.19 of the merger agreement:
No Allegations of Sexual Harassment, Sexual Misconduct or Retaliation. To the Knowledge of the Company, the Company and each of its Subsidiaries have not been party to a material settlement agreement entered into since January 1, 2018 with a current or former officer or employee resolving material allegations of sexual harassment, sexual misconduct or retaliation for making a claim of sexual harassment or sexual misconduct, in each case, that was alleged to have occurred on or after January 1, 2018 in the United States, by either a current (i) officer of the Company or any of its Subsidiaries; or (ii) employee of the Company or any of its Subsidiaries holding a position at or above the level of Senior Vice President. There are no, and since January 1, 2018, there have not been any, material allegations of sexual harassment, sexual misconduct or retaliation for making a claim of sexual harassment or sexual misconduct, in each case, that was alleged to have occurred on or after January 1, 2018 in the United States, by or against any current director, officer or employee holding a position at or above the level of Senior Vice President, in each case, of the Company or any of its Subsidiaries.
This is a subsection of a broader labor & employment matters rep, and as is typical in a public company deal, the rep is qualified by any disclosures made in Activision’s SEC filings & in the agreement’s disclosure schedules. There’s also a customary bring-down condition to closing in Section 7.2(a) that requires the reps made in the agreement to be true and correct at closing, “except for such failures to be true and correct that would not have or reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.”
So, assuming Activision has come clean on all of those issues, then unless there’s a development that makes the rep false and has a MAE on Activision, the risk associated with that particular hot mess falls squarely into Microsoft’s lap. That means that Microsoft has essentially priced that risk into its valuation of Activision, which is usually how it works in public company deals.
Antitrust issues are addressed in a mutual covenant on regulatory approvals set forth in Section 6.2 of the agreement. Some deals facing challenging antitrust issues include “hell or high water” language that essentially compels the buyer to take whatever actions the FTC or DOJ insists on to clear their deal. This isn’t one of those deals. Paragraph (a) of the covenant obligates the parties to use their “reasonable best efforts” to take “all actions necessary” to obtain required clearances, but paragraph (b) makes it clear that there are significant limits to what Microsoft will be obligated to do:
Regulatory Remedies. In furtherance and not in limitation of the foregoing, if and to the extent necessary to obtain clearance of the Merger pursuant to the HSR Act and any other Antitrust Laws or Foreign Investment Laws set forth in Section 7.1(b) and Section 7.1(c) of the Company Disclosure Letter, each of Parent and Merger Sub (and their respective Affiliates) will and, solely to the extent requested by Parent, the Company and its Affiliates will: (i) offer, negotiate, commit to and effect, by consent decree, hold separate order or otherwise, (A) the sale, divestiture, license or other disposition of assets (whether tangible or intangible), rights, products or businesses of the Company and its Subsidiaries; and (B) any other restrictions on the activities of the Company and its Subsidiaries; and (ii) contest, defend and appeal any Legal Proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the Merger. Notwithstanding the foregoing, Parent will not be required, either pursuant to this Section 6.2(b) or otherwise, to offer, negotiate, commit to, effect or otherwise take any action would reasonably be expected to (i) have a material adverse impact on the Company and its Subsidiaries, taken as a whole, (ii) have a material impact on the benefits expected to be derived from the Merger by Parent or (iii) have a more than immaterial impact on any business or product line of Parent (any of clauses (i), (ii) or (iii), a “Burdensome Condition”).
That “Burdensome Condition” carve makes this covenant pretty far from being a hell or high-water clause. On the other hand, Microsoft has billions of reasons to try to obtain antitrust clearance. That’s because under Section 8.3(c) of the merger agreement, if the deal is terminated because of an antitrust injunction or the failure to obtain required antitrust clearances by the drop-dead date, then Microsoft could be obligated to pay a reverse termination fee to Activision that starts at $2 billion and ratchets up to a maximum of $3 billion depending on when the deal is terminated.
By the way, the parties pretty clearly understand that they may be in for a long battle when it comes to antitrust clearance. That’s because the agreement includes a mechanism for extending the drop-dead date by up to six months past its original January 18, 2023 date in order to satisfy antitrust regulatory approval requirements.
Many private company acquisition agreements exclude consequential damages from the scope of the coverage provided under the agreement’s indemnification provisions. This recent blog from Weil’s Glenn West takes a look at that practice, which he contends arises out of a myth concerning the type of losses encompassed by these terms.
Specifically, Glenn says that the myth is that consequential damages are “somehow damages beyond the actual, compensatory damages incurred by the buyer as a result of the breach, and instead somehow covered damages that were remote or speculative.” This excerpt says that’s not the case:
The fact, however, is that remote or speculative damages are not recoverable as damages for breach of contract as a matter of traditional common law principles. Indeed, all damages awarded for breach of contract are, in most cases, required to be reasonably certain and foreseeable. And historically, the only difference between general damages and consequential damages was the fact that general damages were deemed foreseeable because they were the normal consequence of a breach of any similar contract with any counterparty, whereas consequential damages only arose because of the special circumstances of a particular counterparty (like the fact that the counterparty entered into a contract with a third party that was dependent upon performance of the primary contract).
As a result, consequential damages (also known as special damages) required enhanced foreseeability and the need to actually communicate those special circumstances to the breaching party at the time of contracting in order to hold the breaching responsible for such special or consequential damages.
The blog argues that excluding consequential damages can end up depriving the buyer of the right to be compensated for “real, actual and foreseeable damages.” It also claims that this risk is magnified by the fact that not all courts embrace the traditional understanding of consequential damages, with some courts taking the position that it has no established meaning. That means that a court’s idiosyncratic interpretation of the term might result in the buyer waiving rights to damages that it did not intend to waive.
Yesterday, the DOJ & FTC announced that in order to address “mounting concerns” about the impact of mergers on competition, they are “soliciting public input on ways to modernize federal merger guidelines to better detect and prevent illegal, anticompetitive deals in today’s modern markets.” This Cleary Gottlieb’s memo addresses comments from FTC Chair Lina Kahn & Assistant AG Jonathan Kanter during a joint press conference announcing the initiative. Here are some of the highlights from their remarks, which suggest that some big changes may be in store:
– The new guidelines may combine horizontal and vertical merger analysis into a single set of guidelines. Notably, while the DOJ is not yet withdrawing from the Vertical Merger Guidelines, AAG Kanter expressed skepticism about those Guidelines and suggested that they may receive limited weight in internal review and may not reflect how DOJ litigates cases with vertical issues.
– Areas of particular interest included multiple references to labor markets, labor issues, and the effect of mergers on labor, as well as to monopsony power more broadly.
– Chair Khan also specifically referenced “private equity roll-ups” as an area for assessment during the review process.
– AAG Kanter called out the section of the Clayton Act that refers to mergers that “tend to create a monopoly” as an area for potential development. Some discussion suggested that this might involve some sort of assessment of whether sheer company size, separate and apart from market power, might be considered for a role in the guidelines.
Kahn & Kanter also emphasized that potential harms from a merger will be evaluated in a “broad and holistic way, including looking beyond impact on end consumers.” Public comments are due by March 21, 2022, and the agencies seem to be on a fast track. According to the Cleary memo, Chair Kahn & AAG Kanter both expressed a desire to have new Merger Guidelines in place before year end.
The January – February issue of the Deal Lawyers newsletter was just posted and sent to the printer. Articles include:
– Delaware Supreme Court Upholds Advance Waiver of Statutory Appraisal Rights
– SPACs and the Implications for D&O Insurance
– Purchase Price Adjustments in Technology Deals
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