Dissident stockholders that have nominees rejected based on the terms of an advance notice bylaw often argue that the board’s rejection of the nomination notice was an action designed to interfere with the effectiveness of the company’s stockholder vote. As a result, they argue that the board’s decision should be evaluated under the Blasius“compelling justification” standard. This Cooley blog reviews recent case law involving advance notice bylaws and concludes that courts generally reject arguments that Blasius should apply. Instead, they apply an intermediate level of scrutiny to board actions:
Recent Delaware cases addressing board use of advance notice bylaws to defeat proxy fights illustrate the growing recognition by the Delaware judiciary that the outcome-determinative nature of the compelling justification standard limits its applicability in legal analysis. Advance notice bylaws provide the procedural steps that need to be followed for directors to be nominated for election to a board.
Even with relatively high stakes – after all, the enforcement of advance notice bylaws has the potential to cut off the opportunity for stockholders to decide elections, and there is the specter of directors acting in their own self-interest – Delaware courts have applied an intermediate level of review in favor of strict scrutiny. As long as stockholders had fair notice of the rules, and the rules were not enforced in a contrived manner to preclude a dissident from having a fair opportunity to launch a proxy fight, the board’s action would not be overturned.
The blog says that while the Delaware courts’ decision not to apply Blasius in this context is helpful to boards, the case law demonstrates that courts are willing to consider the board’s motives, procedures and interests when evaluating actions concerning director nominations. Accordingly, it is essential for companies to prepare and adhere to clear guidelines concerning the adoption and operation of their advance notice bylaws, and the blog shares some specific practice pointers on these topics.
Our new Deal Lawyers Download podcast features my interview with K&L Gates’ Jessica Pearlman & Bass Berry’s Tatjana Paterno about the new ABA Private Targets Deal Points Study. Topics addressed in this 15-minute podcast include:
– Universe of transactions & methodology for the Private Targets Deal Points Study
– Noteworthy trends in deal terms
– Trends in insured v. uninsured deals
– Results that were a little surprising
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.
Twitter filed its merger agreement last night. The 8-K filing has a fairly detailed description of the agreement and based on the description and a quick flip through the merger agreement it looks fairly standard issue. The merger agreement includes a limited specific performance clause compelling Elon Musk to fund his equity commitment if the other financing is set to go and the closing conditions are met. It also gives Twitter the ability to respond to unsolicited proposals and allows it to terminate the deal to accept a superior proposal.
The deal has both termination and reverse termination fees in the amount of $1 billion. That’s about 2.3% of the deal’s value, but reverse termination fees can get fairly large so this one doesn’t appear to be “higher than average” as some media reports suggested it would be. For example, the $70 billion Activision Blizzard deal has a reverse termination fee that could be as much as $3 billion, or 4.3%, and the most recent Houlihan Lokey data doesn’t make the size of the fee look outsized either.
Based on the terms of the regulatory cooperation covenant, it also doesn’t look like the parties anticipate any significant regulatory hurdles. I’ll read it in more depth over the next couple of days and blog about it if I find some interesting tidbits (or if somebody else does). Speaking of interesting tidbits, there are a couple worth noting, and not surprisingly, they relate to Elon Musk himself.
– The definition of a “Company Material Adverse Effect” on p. 5 includes a customary carve-out for an MAE arising out of the negotiation and execution of the agreement, but what’s unusual about it is that it specifically says that the carve-out extends to any MAE arising “by reason of the identity of Elon Musk.” Although carves from MAE clauses based on the identity of the buyer are common, I don’t think I’ve ever seen one that calls out an individual by name.
– Section 6.8 of the agreement contains the customary covenant obligating both parties to coordinate communications about the transaction and generally prohibits public statements that aren’t required by law unless one party obtains the other’s consent. But there’s a one of a kind carve out in this section that says the following: “Notwithstanding the foregoing, [Elon Musk] shall be permitted to issue Tweets about the Merger or the transactions contemplated hereby so long as such Tweets do not disparage the Company or any of its Representatives.”
While we’re on the topic of tweets, Twitter also filed a handful from its founder yesterday as DEFA14A material. I suspect the deal team will be chasing tweets down until this thing closes. Like I said yesterday, being the junior associate on this deal (or the low person on Twitter’s law department team) has got to be no fun.
Twitter and Elon Musk announced mid-afternoon yesterday that their bizarre mating dance had culminated in a signed merger agreement under the terms of which an entity controlled by Musk would acquire Twitter for $54.20 per share in cash. The parties didn’t file their merger agreement with last night’s 8-K filing, so I suppose we’ll have to wait a few days to see it, but here are some of the things I’ll be looking to see:
1. No-Shop & Other Deal Protections – How tightly drawn will they be? Media reports indicate that Twitter asked for – and was refused – a “go shop” clause. Given the global attention that’s been devoted to this deal (including from Ukrainian war correspondents with bigger fish to fry), it’s understandable why Musk’s team might push back against Twitter’s argument that it needed a go shop to smoke out potential bidders. But just how much room will the board have to respond to competing offers and terminate the deal to accept a superior proposal? My guess is that, like Twitter’s poison pill, the deal protections will be plain vanilla. As UCLA’s Stephen Bainbridge pointed out, this deal puts Twitter’s board in Revlon-land, with all the fiduciary baggage that goes with that status, so the board will need some room to maneuver – particularly since it wasn’t able to move the price a nickel from Musk’s original offer.
2. Specific Performance – Full or Limited? The press release says there are no financing conditions, but Musk’s l13D amendment originally disclosing his financing arrangements indicates that they are very much on the private equity model – everything depends on him satisfying his equity commitment, and the only parties who can enforce that commitment are Musk and the entities he controls. Typically, deals with private equity buyers include limited specific performance provisions entitling the target to compel the sponsor to fund the equity commitment, but only if buyer’s closing conditions are satisfied and the buyer’s financing is ready to be funded. Deals with strategic buyers typically have stronger specific performance provisions, but there is also some precedent for larger PE deals (especially in take privates) to include full specific performance.
Note that the 13D amendment Musk filed this morning contains new language in the equity commitment letter indicating that Musk has provided a limited guaranty of the buyer’s obligations under the merger agreement & Bloomberg is reporting that Twitter extracted a “higher than average” reverse breakup fee.
3. Regulatory approvals – On the surface, it appears that the deal wouldn’t raise concerns among antitrust regulators applying traditional criteria, and I guess that’s the conventional wisdom. But in today’s environment, who knows? Congress started poking around last week, and I’d be willing to bet we haven’t heard the last of their always helpful input yet either (and as if on cue, here’s Sen. Warren). What’s more, let’s just say that the buyer here comes with some regulatory baggage of his own, and we can probably add the circumstances surrounding Musk’s acquisition of his 9% ownership stake in Twitter & his rapid transition from a (late) 13G filer to a 13D filer to that baggage. All of that will make it interesting to see how the parties perceived and allocated the regulatory risk associated with this deal in the merger agreement.
I mentioned that Musk amended his 13D this morning, but it doesn’t have any information on any equity partners, so we’ll have to continue to see if any surface. Of course, even after we see the agreement, we’re still going to have to wait a bit longer to see the really interesting stuff – the back and forth about how this very strange deal unfolded that’s going to appear in the “Background of the Merger” section of the proxy statement.
Twitter being Twitter, we’re also seeing multiple tweets from insiders being filed as DEFA14A material. My guess is that’s likely to be a regular event as the deal moves forward. Boy, I’d hate to be a junior associate on this deal.
This Shearman blog discusses the 8th Circuit’s decision in Carpenters’ Pension Fund of Ill. v. Neidorff, (8th Cir.; 4/22). The case involved allegations that the buyer’s directors and officers concealed their knowledge of significant financial problems at the target from shareholders, and that as a result, the joint proxy statement was false and misleading.
The court dismissed those allegations and related breach of fiduciary duty claims, but the most interesting part of the decision to me is the Court’s response to claims that the buyer failed to update information in the proxy statement. The Court rejected those allegations out of hand. In fact, according to the Court, Section 14(a) of the Exchange Act imposes no duty to update information in a proxy statement:
As to Appellants’ argument that the failure to update the Proxy Statement rendered it materially misleading, Appellants have not cited, and we have not found, any authority supporting the proposition that § 14(a) requires a company to update its proxy statement. Moreover, this argument is inconsistent with the text of Rule 14a-9(a), which provides that a proxy statement may not contain “any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact,” 17 C.F.R. § 240.14a-9(a) (emphasis added), and the language of the Proxy Statement itself, which provides in all capital letters that neither Centene nor Health Net intends to update the Proxy Statement and that both companies disclaim any responsibility to do so.
Based on a quick look, there appears to be at least some 8th Cir. authority recognizing a duty to update under the federal securities laws, but as the Court noted in a footnote, none of the authority cited by the plaintiffs involved Section 14(a) claims. What about a 10b-5 claim? It turns out there wasn’t’ one, because it looks like the plaintiffs simply alleged that the directors and officers were negligent, and while that’s good enough to support a Rule 14a-9 claim, isn’t enough to establish the level of scienter required for a Rule 10b-5 claim.
Most corporate lawyers have a Delaware-centric view of the world and expect that most other U.S. jurisdictions will fall in line with Delaware when it comes to major corporate law doctrines. That’s often a safe bet, but as this Arendt Fox Schiff memo points out, it isn’t when it comes to whether minority shareholders owe fiduciary duties.
Delaware says that minority shareholders generally don’t owe fiduciary duties, unless they can be squeezed into the controlling shareholder box. But most states don’t agree with Delaware – at least in the case of close corporations. This excerpt from the memo discusses how the positions adopted by several of those states would apply in the case of hypothetical involving a minority shareholder of a shipping company who learns of an opportunity to contract with a trucking company for its own business at a discount to what the shipping company currently pays for its trucking contract:
In jurisdictions like Illinois that follow the majority approach, shareholders of closely held corporations typically owe each other fiduciary duties by virtue of their status as shareholders. But there are variations across jurisdictions.
Indiana: Indiana courts closely follow Illinois’s approach, where shareholders of closely held corporations owe fiduciary duties even if they are not directors or officers of the corporation. If Corporation is an Indiana closely held corporation, then Shareholder likely cannot pursue the discounted trucking contract for personal use without first disclosing the opportunity to Corporation and giving Corporation an opportunity to pursue it.
New York, Massachusetts, and D.C.: Minority shareholders of New York closely held corporations owe each other the duty of good faith and a high degree of fidelity. Similarly, shareholders of Massachusetts closely held corporations owe each other and their corporations the duty of utmost good faith and loyalty, and shareholders in D.C. closely held corporations owe each other the highest degree of good faith and must deal fairly, honestly, and openly with each other. These are heightened standards that closely resemble the duties that partners owe each other. If Corporation is a New York, Massachusetts, or D.C. closely held corporation, then it is unlikely that Shareholder can pursue the discounted trucking contract absent disclosure of the opportunity to and approval by Corporation.
Michigan: Under Michigan law, minority shareholders of close corporations owe fiduciary duties only in certain circumstances, such as when those shareholders also participate in company management. Whether minority shareholders of close corporations in Michigan owe fiduciary duties is a context-dependent analysis and will vary depending on the relationship of the shareholders to the company. It is possible that, under Michigan law, Shareholder could safely pursue the discounted trucking contract without disclosure to and approval from Corporation, because Shareholder may not owe fiduciary duties to Corporation.
Many states have “close corporation statutes,” and while states typically impose fiduciary duties only on minority holders in close corporations, the memo says that most states adopt a functional approach to deciding whether to classify an entity as a close corporation, and don’t require the entity to have been established in conformity with a close corporation statute.
Wachtell Lipton recently issued the 2023 edition of its “Spin-Off Guide.” This 83-page publication is a terrific resource for getting up to speed on the wide variety of issues associated with spin-off transactions. Tax issues loom large for spin-offs, and companies considering a spin-off must decide whether to move forward on the basis of legal opinions or seek a private letter ruling. One of the Guide’s 2022 updates relates to a new IRS pilot program for obtaining a private letter ruling on an accelerated basis. Here’s an excerpt:
Depending on the complexity of the request, the process of obtaining a ruling has, in recent years, taken approximately six months from the date of submission. However, in January 2022, the IRS established an 18-month pilot program (expiring July 2023) permitting taxpayers to request expedited handling of private letter ruling requests through a “fast-track” process. If the IRS grants a request for “fast-track” processing, it will generally endeavor to complete its review of the ruling request, and, if appropriate, issue the ruling, within 12 weeks after the request is assigned to an IRS review team.
A taxpayer can request that the IRS process its ruling request within a period shorter than 12 weeks if certain additional requirements are satisfied, including demonstrating that there is a business exigency outside the taxpayer’s control necessitating faster processing and there will be adverse consequences if the IRS does not accommodate the request. Ruling requests involving particularly complex transaction structures or legal issues, while eligible for “fast-track” processing, may be subject to a review period longer than 12 weeks.
Our new Deal Lawyers Download podcast features my interview with Lippes Mathias’ John Koeppel about current trends in private equity deals. Topics addressed in this 12-minute podcast include:
–How has the increasing competition for deals impacted the deal process?
– How are private equity buyers approaching deal financing in the current market?
– What trends are you seeing in deal terms?
– What’s the current market for RWI like?
– What are some effective tax mitigation strategies you’re seeing employed?
– What advice do you have for sellers considering a deal with a private equity buyer?
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.
Twitter filed its shareholder rights plan with the SEC yesterday and it’s pretty boring. There aren’t any aggressive twists on the definition of beneficial ownership or express “acting in concert” language. Also, because the pill has a 15% ownership threshold, there isn’t a “passive investor” exemption for 13G filers – that’s a feature that’s typically found in low threshold (e.g., 5% beneficial ownership) pills.
Twitter’s Form 8-A filing for the pill includes a description of the securities that makes it clear that the pill is very traditional in terms of its mechanics. It includes a flip-in and flip-over feature, as well as a “last look” provision allowing the board 10 business days after a bidder crosses the 15% beneficial ownership threshold to redeem the pill. The board also has the ability to exchange each preferred share purchase right for a share of Twitter stock.
This exchange right proved to be an important feature in the Selectica situation, which is still the only meaningful example of the intentional triggering of a poison pill. In that case, the board opted to exercise the exchange right, which although less dilutive to the bidder, eliminated the uncertainty about how many shareholders would be willing to actually exercise the rights, which would involve cutting checks for real money. After it exercised the exchange right, Selectica promptly adopted a new pill, so the difference in potential dilution between the exchange and full exercise of the rights under the initial pill didn’t amount to much in the grand scheme of things.
Elon was making weird allusions to a possible tender offer on his own Twitter account over the weekend. He could still do that, but he’d reach uncharted heights of recklessness if he launched one that wasn’t conditioned on the pill being pulled.
If you’re interested in finding out more on the terms of recent poison pills, check out our Poison Pills Practice Area. In particular, you should take a look at this CII report on 2020-21 pills, and this Morrison & Foerster report on 2020 pill adoptions.
On Friday, Twitter announced that it was adopting a shareholder rights plan in response to Elon Musk’s unsolicited buyout proposal. That document hasn’t been filed yet, but there are a few things to keep an eye out for when it is, because while Delaware courts have taken a dim view of some recent innovations in poison pill design targeting activists, they haven’t addressed those innovations in pills targeting old fashioned hostile bids.
Delaware courts have traditionally upheld a board’s decision to adopt a poison pill, but a couple of recent cases have taken a more skeptical approach to pills incorporating aggressive provisions aimed at shareholder activism. The most notable of these cases includes Vice Chancellor McCormick’s decision in The Williams Companies Stockholder Litigation, (Del. Ch.; 3/21), which invalidated the Williams board’s decision to implement a pill with a 5% trigger and several other aggressive provisions, including a very broad beneficial ownership definition & acting-in-concert (“wolfpack”) provision, and a very narrow exclusion for passive investors.
While the recent focus in the Delaware courts has been on pills targeting activists, Twitter’s pill was adopted in response to an unsolicited takeover bid, and it will be interesting to see how aggressive an approach Twitter takes to some of these provisions. This excerpt from its press release suggests that its pill is likely more mainstream:
The Rights Plan is similar to other plans adopted by publicly held companies in comparable circumstances. Under the Rights Plan, the rights will become exercisable if an entity, person or group acquires beneficial ownership of 15% or more of Twitter’s outstanding common stock in a transaction not approved by the Board. In the event that the rights become exercisable due to the triggering ownership threshold being crossed, each right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase, at the then-current exercise price, additional shares of common stock having a then-current market value of twice the exercise price of the right.
Despite the statement about the pill being “similar” to those put in place by companies in comparable circumstances, because Twitter’s plan was adopted in response to a hostile bid, it might decide to take a more aggressive approach to the pill’s definition of beneficial ownership, acting in concert provisions & passive investor exclusion. That’s because, as commentators observed after the Delaware Supreme Court’s affirmed The Williams Companies decision, it is unclear whether the same analysis used in that decision would apply to a pill adopted in response to a hostile bid, and whether a Delaware court would accept a pill with “extreme” terms in the face of an actual hostile bid.