We’ve been cranking out podcasts lately, and our latest features my interview with Datasite’s Mark Williams on his firm’s recent M&A Outlook Survey. Topics addressed in this 23-minute podcast include:
– Survey methodology and overview of results.
– Dealmakers’ expectations for deal climate and types of deals.
– Expectations concerning the impact of macroeconomic and geopolitical issues.
– Impact of the “Great Resignation” on the M&A talent market.
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.
Last week, in In re GGP Stockholder Litigation, (Del.; 7/22), a divided Delaware Supreme Court overruled the Chancery Court and refused to dismiss breach of fiduciary duty and aiding & abetting claims premised on allegedly misleading proxy disclosure concerning the appraisal rights available to stockholders who dissented from the transaction.
According to the plaintiffs, the target’s directors and the buyer structed the transaction to “eviscerate” stockholders’ appraisal rights. In order to accomplish this objective, the plaintiffs alleged that the parties bifurcated the consideration payable under the terms of the transaction. Over 95% of the total consideration was payable in the form of a pre-closing dividend, while the remainder was paid in the form of what the proxy statement defined as the “merger consideration.” Including the dividend, a total of $23.50 per share was paid in the transaction, of which only $0.312 per share was defined as “merger consideration.”
The target’s proxy statement disclosed that its stockholders were “entitled to exercise their appraisal rights solely in connection with the merger,” and that the target’s appraised fair value “may be greater than, the same as or less than” the “per share merger consideration.” The plaintiffs contended that this language linking appraisal rights to the defined term “merger consideration” was intended to mislead stockholders into concluding that their appraisal remedy would be limited to the target’s post-dividend value.
The Supreme Court first concluded that, as a matter of Delaware law, the pre-closing dividend was part of the merger consideration. The Court pointed to two reasons for this conclusion; first, the dividend was conditioned upon approval of the merger and, second, because it was paid for with the buyer’s funds in the same wire as the per share merger consideration. The Court then rejected the Chancery Court’s conclusion that the proxy statement’s disclosure about appraisal rights was not misleading:
The Proxy defined the “merger” as occurring after GGP’s charter was amended and the Pre-Closing Dividend was declared and told the GGP stockholders that they were “entitled to exercise their appraisal rights solely in connection with the merger.” The fair value available in that proceeding, stockholders were told, would be “greater than, the same as or less than” the “per share merger consideration.” This decision capitalizes Per-Share Merger Consideration for the reader’s convenience; the Proxy defined it in lowercase as the sliver of compensation, eventually set at $0.312, that would remain after GGP declared the massive Pre-Closing Dividend.
These disclosures were, in our view, confusing and misleading. As discussed above, a properly conducted appraisal would have valued GGP before the Charter Amendments and the payment of the Pre-Closing Dividend and the Per-Share Merger Consideration. It was the fair value of this pre-Transaction entity that stockholders were set to part with if they consented to the Transaction, and therefore it was this fair value that the stockholders were entitled to in an appraisal.
The Court ultimately refused to dismiss duty of loyalty-based disclosure claims against the target’s directors and aiding & abetting claims against the buyer and concluded that the stockholders had not waived their appraisal rights by accepting the non-volitional dividend payment.
Justices Montgomery-Reeves and Vaughn dissented from the Court’s decision. They indicated that they would have upheld the Chancery Court’s decision for three reasons:
(1) the Proxy’s use of the term “per-share merger consideration” in the appraisal notice tells the stockholders what is at risk in an appraisal proceeding; (2) the Proxy’s use of the term “merger” is qualified by the phrase “in connection with,” and the entirety of the Proxy makes clear that the Pre-Closing Dividend is connected to the merger; and (3) any appraisal proceeding would exclude any value (positive or negative) arising from the Transaction and the Pre-Closing Dividend is value arising from the Transaction.
In Lee v. Fisher, (9th Cir.; 5/22), the 9th Circuit upheld a prior district court ruling dismissing federal disclosure claims and state law derivative claims on the basis of an exclusive forum bylaw designating the Delaware Court of Chancery as the exclusive forum for derivative suits. The Court reached that conclusion despite the fact that as a result of the application of the bylaw, the plaintiffs’ claims under Section 14(a) of the Exchange Act – which may only be asserted in federal court – would effectively be precluded.
This Troutman Pepper memo notes that the 9th Cir.’s decision creates a conflict with the 7th Cir., which recently held in Seafarers Pension Plan v. Bradway, (7th Cir.; 1/22), that the provisions of the DGCL authorizing exclusive forum bylaws did not permit Exchange Act claims to be brought in a Delaware court, since the Exchange Act gives federal courts exclusive jurisdiction over those claims. This excerpt from the memo summarizes the implications of the circuit split:
The circuit split created by the Ninth Circuit’s and the Seventh Circuit’s divergent rulings has injected some uncertainty into a common practice among Delaware corporations in the context of derivative claims brought under the Exchange Act. The Seventh Circuit’s decision, which is friendly to derivative plaintiffs, partially upsets standard practice in corporate affairs — that is, deciding where derivative internal corporate disputes should be heard.
The Ninth Circuit’s decision, which is friendly to Delaware corporations, generates uncertainty by splitting with the Seventh Circuit. Naturally, would-be plaintiffs and defendants will likely forum shop to the extent possible and gravitate toward their respective safe harbors. This issue could become exacerbated to the extent other circuit courts contribute to the circuit split. In that event, the uncertainty would likely continue unless and until the Supreme Court has the opportunity to, and chooses to, resolve the burgeoning circuit split.
Our new Deal Lawyers Download podcast features my interview with Michael Levin, founder of The Activist Investor & UniversalProxyCard.com, who provided an activist’s perspective on the universal proxy rules. Topics addressed in this 23-minute podcast include:
– How activists will approach universal proxy’s minimum solicitation requirement
– How the implementation of universal proxy will change the dynamics of proxy contests
– The likelihood of more proxy contests involving multiple activists
– Key decisions that companies and activists need to make
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.
The DOJ recently settled a False Claims Act proceeding against a company that erroneously certified that it qualified as a small business in connection with 22 government set-aside contracts that it entered into subsequent to a 2011 acquisition. According to this DLA Piper memo, one interesting aspect of the case is that the violations were discovered during the due diligence process for a potential 2019 acquisition of the company. After reviewing the draconian sanctions associated with FCA violations, the memo says that there’s a lesson here for potential acquirors of government contractors who have been awarded set-asides based on small business status. Here’s an excerpt:
Given the risks and liabilities associated with inaccurate small business size certifications, it is important to thoroughly perform diligence on size status in connection with a pending merger or acquisition involving a contractor that performs, or has performed, government contracts set aside for small business concerns. Because the size regulations promulgated by the US Small Business Administration (SBA) are nuanced and the resulting analysis is highly fact-specific, it is not surprising to uncover inaccurate size certifications in the course of buy-side diligence or, when representing the target, in preemptively reviewing the target’s SAM.gov profile, as well as the target’s active and historic contract documents to be made available to prospective buyers.
If an incorrect size certification is discovered, steps should be taken both within the parameters of the M&A transaction and with regard to the government to address, and ideally mitigate, the potential liability and reputational risks.
If a size certification issue is discovered, the memo says that counsel should assess, among other things, the scope and volume of the target’s set-aside contract portfolio & other government contracts, the scope & nature of the inaccurate size certifications, the business consequences of loss of small business status or other collateral consequences, and the remedial measures and strategy for communicating with the government.
Our new Deal Lawyers Download podcast features my interview with Goodwin’s Sean Donahue on the universal proxy rules. Topics addressed in this 19-minute podcast include:
– How will universal proxy change the dynamic of proxy contests?
– What strategic and tactical opportunities does universal proxy create for activists? – What are some vulnerabilities that public companies may not have focused on?
– What should public companies do between now and September 1 to put themselves in the best position to deal with the universal proxy rules?
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.
This recent blog by Paul Weiss’s Jeffrey Marell provides some advice to boards to keep in mind when they navigate the volatility and uncertainty of current market conditions. One piece of advice he offers up is the need for patience, because putting deals together & getting to closing is going to take more time in the current environment:
When markets are rising (or at least stable), it is typically much easier for companies to agree on M&A terms. Deals are, of course, still done during times of volatility, but deal valuations and modeling get more complex due to their dependence on market pricing. Deals may involve stock considerations. Even cash deals may be affected because buyer access to credit markets may be based on stock valuations. Even if the transaction involves private assets, valuations may look to public company comparables.
Separately, added scrutiny from antitrust regulators will mean that deal terms related to such approvals will be more complicated to negotiate and the approval process itself will be lengthier. Given this, boards should anticipate a longer timeline and more fits and starts than a typical M&A process in a stable or up-market environment.
This Fenwick memo discusses a proposed FTC consent order involving a completed acquisition that targets the terms of the non-competition language included in the acquisition agreement. Here’s the intro:
Last month, in a proposed consent order settling a challenge to a previously consummated transaction, the Federal Trade Commission not only succeeded in partially unwinding the transfer of certain assets but also secured a victory in substantially narrowing the scope of the noncompete provisions of the parties’ asset sale agreement.
The challenge thus underscores the commitment of FTC leadership to aggressively pursue consummated transactions it believes to be anticompetitive, but it is most noteworthy for its focus on the parties’ noncompete provisions, which historically have received little attention from the antitrust agencies. Moreover, existing federal court precedent arguably supports the legality of the specific provisions challenged by the FTC.
As such, this action is entirely consistent with FTC Chair Lina Khan’s stated intention to aggressively expand the reach of existing antitrust law, even when doing so potentially entails litigation risks. Going forward it also serves as a warning that, as noted in a joint statement by Khan and the FTC’s two other Democratic commissioners, the agency will scrutinize mergers and acquisitions agreement noncompete provisions “with a critical eye.”
The FTC’s press release announcing the proposed consent order highlighted the aspects of the non-competition provision that it found objectionable. It said that the non-compete that the seller was required to sign as part of the deal not only prohibited the seller from competing in the markets in which the gas stations it sold operated, but in many other markets as well. Even in the markets where the acquired gas stations operated, the FTC’s complaint alleged that the non-compete was “unreasonably overbroad in geographic scope and longer than reasonably necessary to protect a legitimate business interest.”
The memo provides additional background on the case and offers up some key takeaways from the case, including the need to appropriately calibrate a non-compete’s scope to the business being acquired, and the importance of being prepared to defend the duration of any non-compete provisions related to an acquisition.
Elon Musk apparently has had a lot of company over the past couple of months when it comes to trying to wiggle out of a deal. According to a recent analysis by Bloomberg Law’s Grace Maral Burnett, deal terminations have spiked in the last two months:
Last month, 48 controlling-stake global M&A deals (deals for control of the assets or entity to be acquired, e.g., buyouts, takeovers) were terminated, marking the highest monthly count of terminated controlling-stake deals since June 2020. And for all categories of deals combined—including spin-offs, joint ventures, venture capital financing rounds, and other minority stake investments—June’s total of 61 terminated deals marked the highest monthly termination count since November 2021.
To date, July has seen 21 terminations of controlling-stake deals, including the largest—and arguably one of the most drama-filled—deal terminations of the year: Elon Musk’s teetering $44 billion buyout of Twitter Inc.
Overall, the year hasn’t shaped up too badly thus far – Grace’s analysis says that the number of deal terminations for the year are roughly about the same as last year. On the other hand, the dollar volume of busted deals has surpassed that of the same period during 2020.
Speaking Musk & Twitter, here’s a copy of Musk’s filing opposing Twitter’s motion to expedite the proceedings and here’s a copy of Twitter’s latest filing in response. There is a hearing at 11:00 am eastern this morning in front of Chancellor McCormick addressing Twitter’s motion. Unfortunately, the Chancellor recently tested positive for COVID-19, so the meeting will be held via Zoom. This info comes from the Chancery Daily’s Twitter feed, which has all sorts of other details on the hearing. You can access a live audio feed of the hearing by dialing (774) 267-2687.
“Milestone” payments are a common feature of life science deals, both public & private. Whether you’re dealing with a contingent value right in a public company acquisition, an earnout in a private company deal or a milestone payment in a licensing agreement, it’s important to draft these provisions to minimize the risk of litigation. It’s also not easy to accomplish that objective, but this Freshfields blog provides some advice on how to do it:
The best way to reduce the risk of disputes is to define milestones so they are conditioned to objective events that the parties reasonably expect to be achieved as part of the anticipated development plan or commercialization strategy for the specific product. For example, milestones are often structured to be payable upon the initiation of a clinical trial, the regulatory approval of a product, the achievement of a minimum level of sales for the product, or other clear-cut achievements that signal value creation and/or de-risking of the asset.
Subjectively defined milestones, such as those requiring the “successful completion” of a clinical trial, as well as terms of art, should generally be avoided. When structuring milestone payments, another point to consider is whether payment should be conditioned on achievement of the triggering event by a certain date. While these types of deadlines have certain appeal, particularly for buyers and licensees, they also can raise the risk of disputes if the milestone is not achieved, as the record will be examined for any evidence that the buyer or licensee dragged their feet in an attempt to avoid making payment.
The blog also makes a point that has been recently reinforced by the Delaware Chancery Court – if you want to impose an obligation on a party to act with a particular level of diligence in achieving a milestone, you need to spell out exactly what your chosen language for the “efforts clause” means. If you don’t, then the default path for many courts will be to shrug their shoulders and say, “these clauses all look the same to me.”