This Lazard report reviews shareholder activism during the first half of 2022. Here are some of the highlights:
– Despite a challenging investing environment in 2022, activity remains elevated – Q2 was the second most active quarter in the past five quarters (behind only a record-setting Q1.
– Global campaign activity for Q2 (53 campaigns) down 27% vs. Q1, in line with Q1/Q2 pattern of recent years. Regionally, the decline was most acute in the U.S., where activity materially declined by 50% to 22 new campaigns. By contrast, Europe saw a strong Q2 with a 33% increase over Q1 levels
– Technology companies accounted for 1 out of every 4 activist targets in Q2, resulting in Technology being the most targeted sector in H1 (21% of all campaigns, well above 14% multi-year average). Software, Services and Internet were the most active subsectors,
– The challenging macroeconomic and investing environment influenced activists’ demands in H1 2022. The number of “sell the company” demands was 7 in Q2, bringing the H1 total to 16 (rivaling full year totals of 20 in 2021 and 14 in 2020), as activists pushed the M&A option as an alternative to what they perceived as failed stand-alone strategies.
− As the economic outlook deteriorated through Q2 there was increased focus on strategy and operations (21% of campaigns in Q2 vs. 14% in Q1) and capital allocation policies (17% of campaigns in Q2 vs. 10% in Q1)
The report also says that first time activists accounted for 37% of all activists launching campaigns in H1, the highest level in recent years. Campaigns were also more dispersed, with the top five activists accounting for only 19% of all campaigns – which is below the concentration levels see over the past five years.
Traditionally, proxy advisory firms have effectively recommended one slate or the other in proxy contests. While they may have endorsed the election of a dissident’s candidate, their bottom line was always which proxy card to vote, not which candidate. That made it difficult for their clients to follow their recommendations on individual candidates, but with universal proxy, that’s no longer likely to be the case.
That means the qualifications of individual candidates are going to assume greater prominence under the universal proxy regime, and a recent Sidley memo suggests that proxy advisors are well aware of the implications of that change. This excerpt from the blog summarizes ISS’s commentary on the new system & its role in it set forth a recent research note:
– ISS stated that its two-prong framework for assessing the merits of a dissident proxy campaign will remain largely unchanged. ISS will still ask (1) is there a case for change? and (2) if so, how much change? “An activist leading with a brilliant nominee, but a weak case for change,” ISS observed, “will be less successful than the activist who leads with a detailed, insightful argument as to why a company may not be performing as well as it should ….”
– The second prong — “how much change?” — will come into sharper focus, given that shareholders will now be able “to more precisely adjust board composition.” ISS expects activist slates to be “proportionate” to the issues identified by the activist and implicitly cautions activists not to overreach in the number of directors they nominate, noting that doing so could “backfire” by undermining the overall quality of the dissident slate.
– ISS emphasized the importance of qualifications of individual nominees, implying that ISS intends to scrutinize candidates on an individual basis to determine which combination of candidates will be best for the company, without undue focus on whether the candidate hails from the company or dissident slate. In this spirit, ISS “will continue to highlight … nominees from either party who … appear particularly well-qualified.”
– ISS observed that because the universal proxy system allows shareholders to precisely mix and match candidate choices from the company and dissident slates, boards will be “far less able to shield their weakest contributors.” As an example, ISS mentioned the potential for replacement of a “long-tenured, overboarded director who seems disengaged with a new nominee who brings clearly-relevant skills to the board, or perhaps enhances diversity.”
One important point noted in the memo is that investors may find it difficult to evaluate the qualifications of competing nominees on their own, and thus may rely more heavily on proxy advisor recommendations. That puts ISS & its competitors in a position to exercise significantly more influence over the outcome of proxy contests than they’ve enjoyed in the past.
Reverse termination fees are an interesting topic – unlike termination fees, there’s little reason for Unocal or Revlon concerns to potentially limit their size and good reason to think that they can be pretty sizeable in comparison to overall deal value without being regarded as a penalties. That leaves a lot of room for the parties to a deal to horse trade when it comes to these fees, and a recent Bloomberg Law analysis of 78 deals with reverse termination fees entered into during the past three calendar years suggests that they often do just that.
The analysis demonstrates that the size of those fees has varied pretty widely in recent years – and that the highest fees in 2021 & 2022 are well above what you might expect to see in the context of a termination fee:
Twenty-one of the 78 M&A agreements reviewed were for deals signed in 2020. These deals contained reverse termination fees that ranged from 0.3% to 5.7% of the total deal values. The range of the reverse termination fees encompassed in agreements signed in 2021 was much wider—the reverse termination fees in those 38 deals ranged from 1.1% to 15% of the total deal values. The remaining 19 agreements—signed through mid-July of 2022—showed a similar range of percentages to the range in 2021. Specifically, these agreements’ reverse termination fees ranged from 1.6% to 14.7% of total deal value.
The analysis also looks at the sizes of reverse termination fees tied to the failure to obtain required regulatory approvals regulatory conditions versus those not tied to regulatory approvals and identifies the 2022 deals that came in at the lowest and highest ends of the reverse termination fee range.
With the universal proxy compliance date less than a week away, the SEC yesterday issued three new Proxy Rules and Schedules 14A/14C CDIs addressing issues arising under Rule 14a-19. Unfortunately, the SEC didn’t include links to the individual CDIs, so you’ll need to scroll down to the new Section 139 in order to find them. Here’s a brief summary of the issues they address:
CDI #139.01 addresses the ability of a dissident shareholder to change its slate of nominees after the Rule 14a-19(b) notice deadline due to a nominee’s decision to withdraw or a change in the number of director seats up for election.
CDI #139.02 deals with the registrant’s obligation to comply with Rule 14a-19(b)’s notice requirements in the case of a contested election in which more than one dissident shareholder intends to present a slate of director nominees.
CDI #139.03 addresses the registrant’s obligation under Rule 14a-5 to disclose in its proxy materials Rule 14a-19(b)(1)’s requirement that a dissident provide notice of its nominees at least 60 calendar days before the anniversary of the prior year’s annual meeting in situations where the registrant’s advance notice bylaw provides for an earlier notification date.
This White & Case memo says that the 1% excise tax on stock repurchases contained in the Inflation Reduction Act that President Biden signed into law earlier this month could impact certain M&A transactions as well. Here’s an excerpt:
Several other types of transactions that appear not to involve a repurchase in form, but nonetheless constitute a “redemption” under Section 317(b) of the Code could also result in unexpected application of the Excise Tax. For example, where a covered corporation is acquired with transaction consideration funded in part from cash on the covered corporation’s balance sheet and/or debt proceeds borrowed (or treated as borrowed) by the covered corporation, such transaction consideration would generally be treated as paid to the shareholders in redemption of their stock for income tax purposes.
Similarly, in partially tax-free reorganizations where a covered corporation is acquired by another corporation for at least the requisite minimum stock consideration to qualify for tax deferral and taxable cash “boot,” it is possible that all or a portion of the cash consideration would be treated as paid to shareholders in redemption of their shares for income tax purposes. It is also not entirely clear on the face of the statute whether the stock component of the consideration in such transactions (which is generally permitted to be received on a tax-deferred basis) would trigger the Excise Tax, because the statutory exclusion only exempts repurchases that are part of a tax-free reorganization where no gain or loss is recognized.
A type of tax-deferred reorganization known as a “split-off” could also trigger the Excise Tax under the statute. A split-off involves an exchange (treated as a redemption for income tax purposes) by certain shareholders of their stock in a corporation for stock of the corporation’s corporate subsidiary in a transaction that otherwise satisfies the requirements for tax-deferral. There is a technical question as to whether shareholder-level tax-deferral in the split-off is available “by reason of” the reorganization, which creates uncertainty as to whether the applicable statutory exclusion would apply.
The memo also addresses the potential implications of the excise tax on privately negotiated repurchases, ACRS programs, SPAC redemptions and other capital markets transactions.
Here in Ohio, we’re being warned to be on the lookout for the spotted lanternfly. I guess this thing showed up in the U.S. about a decade ago and is becoming quite a problem. So, the official guidance is that if we come across one, we’re supposed to terminate it with extreme prejudice. I’m not sure that deputizing a citizens’ militia to murder lanternflies is going to do much good, and I was thinking that if the government was really serious about killing off the spotted lanternfly, maybe they should regulate it under the Investment Company Act.
I say that because, according to this Institutional Investor article, subjecting SPACs to regulation under the Investment Company Act as the SEC has proposed will go a long way toward eradicating them:
The Securities and Exchange Commission’s proposed new rules on special purpose acquisition companies could force almost half of the SPACs that are still searching for a merger partner into liquidation, according to a new report from SPAC Insider. Those SPACs account for $80.6 billion in capital that is now held in trust, but which would be returned to investors.
Under the SEC’s proposal, a SPAC would need to announce a deal within 18 months from the date of its IPO and close within 24 months in order to avoid falling under the Investment Company Act of 1940.
“As investment companies, their activities would be severely restricted and subject to very burdensome compliance requirements,” wrote Kristi Marvin, the founder of SPAC Insider and author of the report. “Those requirements can get quite expensive, and most SPACs do not have the funds available to pay for it.” As a result, she said, “liquidating would be the most palatable and likely solution in that situation.”
According to the article, there are currently 141 SPACs that have been hunting for a deal for 18 months, and that number will jump to 256 by next month. That’s 44% of the SPACs currently seeking a merger partner. It remains to be seen whether any rulemaking that the SEC adopts will be the death knell for SPACs, but it seems that the agency’s proposal has already stopped SPACs’ efforts to migrate to other countries cold – which is a lot more than governments have been able to do with the lanternfly.
On Friday, the Delaware Chancery Court issued a 113-page post-trial opinion in In re: BGC Partners Derivative Litigation, (Del. Ch.; 8/22) holding that BGC Partners’ acquisition of Berkeley Point Financial from a Cantor Fitzgerald affiliate was entirely fair. The ruling provides a reminder that a deal can satisfy the demanding entire fairness standard even when a special committee’s process was far from perfect – although you may need to go through a full trial to get to that result.
Underscoring the point about this deal’s process being far from perfect, it’s worth noting that Vice Chancellor Will had previously declined to dismiss the plaintiffs’ derivative complaint alleging breaches of fiduciary duty or shift the burden of proving entire fairness to the plaintiff, holding that the plaintiff had sufficiently pled that two members of the special committee may not have been independent of the controller.
The plaintiffs alleged that the transaction was a fait accompli engineered by Cantor’s CEO, Howard Lutnick, and contended that the special committee was ineffective and did not stand up to Lutnick. They also contended that Cantor withheld valuation information & that the price paid in the deal was inflated. In her opinion, the Vice Chancellor acknowledged that the process by which the special committee negotiated and approved the deal had some fairly significant flaws, but in the end decided that the deal was entirely fair:
The plaintiffs scored some points at trial. Lutnick initiated the deal. He had a financial incentive to cause BGC to overpay for Berkeley Point. He overstepped in identifying advisors for the special committee and asking its co-chairs to serve. [Special Committee Co-Chair] Moran had one-off discussions with Lutnick that should never have happened. When it came time for the final negotiations, the special committee’s written counterproposal did not reflect its preferred structure. And there remains some mystery around how the ultimate deal was reached.
The evidence presented by the defendants, however, carried the day. The special committee and its advisors were independent. Though the process was marred by Lutnick and Moran’s actions, Lutnick extracted himself from the special committee’s deliberations after it was fully empowered. Moran pushed back on Lutnick when needed and worked tirelessly on the committee’s behalf. The special committee’s diligence requests were met and it had the information it needed to negotiate on a fully informed basis. The committee members—each engaged and diligent—bargained with Cantor and obtained meaningful concessions.
Vice Chancellor Will also concluded that the price the special committee agreed to pay was in line with what its financial advisor determined to be appropriate and fell within the range of fairness. In reaching this conclusion, she also held that the directors whose independence was challenged in fact acted independently, and that under Kahn v. Lynch, the company’s use of a well-functioning, independent special committee shifted the burden of persuasion on the entire fairness issue to the plaintiffs.
The universal proxy rules apply to all shareholders’ meetings held after August 31st. Activist investors are gearing up for the new regime, and public companies should be as well. This Olshan memo provides a “roadmap” to the director nomination and solicitation process for activists considering a proxy contest under the new rules, and it’s also likely to be of interest to public company advisors. This excerpt addresses the mechanics of the nomination process:
Preparation and Submission of Nomination Notice/Universal Proxy Card Notice
1. If required, request company-form director nominee materials by letter to the company (may require identifying stockholder of record)
2. Prepare nomination notice
a. May require extensive disclosure beyond that required in proxy statement, potentially including completed company-form director nominee questionnaire
b. Generally should include information required for universal proxy notice to satisfy universal proxy rules, including names of proposed nominees and a statement that the nominating stockholder intends to solicit proxies from at least 67% of the voting power entitled to vote in the election of directors
3. Deliver nomination notice in accordance with timing/manner requirements
a. Unless nominating stockholder is a Schedule 13D filer, in which case nomination will need to be disclosed in amendment to Schedule 13D, nomination can be delivered privately (without SEC filing or other public disclosure) if desired
b. Announcement of date of next annual meeting may impact nomination timing requirement (may be based on date of meeting or reset nomination deadline if date of meeting is outside of specified timeframe)
4. If nomination notice is not due at least 60 calendar days prior to the anniversary of the company’s previous year’s annual meeting (subject to potential adjustment), required to provide separate
universal proxy notice prior to such date
Other topics addressed by the memo include the activist’s situation analysis, engagement with potential nominees and service providers, and various matters relating to proxy cards and soliciting materials.
The universal proxy compliance date is just around the corner, and we have the resources you need to help you make sure that you’re up to speed on the new rules. In addition to the law firm memos & other materials on the new rules available in our “Proxy Fights” Practice Area, we’ve also hosted a webcast on the new regime and, more recently, podcasts with Goodwin’s Sean Donahue and The Activist Investor’s Michael Levin. Subscribe today to access these materials & our other resources! You can subscribe online, by emailing sales@ccrcorp.com, or by calling (800) 737-1271.
Courts generally recognize that controlling stockholders have an incentive to maximize stockholder value in a third-party sale, and even if that transaction is subject to entire fairness review, deal terms that provide the same per share consideration to all stockholders often provide compelling evidence of fairness. However, the Chancery Court’s recent decision in Manti Holdings v. The Carlyle Group, (Del. Ch.; 6/22) shows that claims that a controller’s unique liquidity needs create a conflict of interest occasionally get some traction in the Chancery Court.
This Debevoise memo reviews the Manti Holdings decision and other relevant Delaware case law on “liquidity conflicts” and discusses some of the alternative ways of managing the legal risks they create. This excerpt notes that either the MFW process or a special committee are often used when a controller stands on both sides of a transaction, but says that approach shouldn’t be necessary for most cases involving potential liquidity conflicts:
A conflicted controller can avoid the exacting standard of entire fairness by requiring a transaction to be approved both by a special committee of independent directors and by holders of a majority of the stock held by the company’s unaffiliated stockholders. Should a private equity investor controlling a company with minority public stockholders use a special committee — whether or not coupled with a majority-of-the-minority approval condition — in order to avoid liquidity conflict claims? In most cases, probably not. Absent other conflicts, the mere desire of a controller to achieve liquidity through an entire company sale generally would not present a level of litigation risk that would lead most controllers to cede control of a sale process to a special committee.
The memo notes that because the controlling stockholder in Manti Holdings held preferred stock instead of common stock, establishing a special committee to oversee that transaction may have provided meaningful protection. While that step may not be necessary for “garden variety” liquidity conflicts, the memo stresses that private equity sponsors and other controllers should be prepared to justify the reasonableness of the sale process chosen and avoid suggesting that the timing or manner of the sale is intended to confer a benefit on them that isn’t shared by other stockholders.
Earlier this week, a WSJ article discussed the FTC’s aggressive approach to antitrust enforcement, noting that the agency has thrown “sand in the gears” of the Wall Street deal machine. The article cited the FTC’s decision to challenge Meta’s proposed acquisition of virtual reality app developer Within Unlimited an example of the FTC’s combative new approach. This Fenwick memo discusses the FTC’s challenge, and says it involves high stakes not just for the tech sector, but for the FTC as well. Here’s the intro:
Federal Trade Commission Chair Lina Khan has consistently criticized past FTC leadership for being too lenient with Big Tech M&A activity, and for not bringing the “hard cases” that push antitrust law to its limits. Khan and others in the progressive antitrust movement have often cited Facebook’s 2012 acquisition of Instagram as a prime example of the FTC’s failure to act to protect “nascent competition,” thus allowing an allegedly already dominant player to extend and fortify its position to the detriment of the competitive process. Now, 10 years later, Khan has seized an opportunity to put her ideas to the test.
Khan led the FTC’s 3-to-2 vote on July 27th to file a last-minute and unexpected complaint seeking to prevent Meta’s proposed acquisition of virtual reality (VR) app developer Within Unlimited Inc. (Within), maker of the popular VR fitness app Supernatural. The complaint acknowledges that Meta does not compete with Supernatural in its alleged relevant market for “VR dedicated fitness apps.” However, the FTC nonetheless alleges that Meta has the proximity, knowledge and resources to enter with its own product, and thus that its acquisition of Within would substantially lessen competition in that market.
Although such a theory of competition from potential entrants is not entirely novel, as applied in these circumstances the theory is largely untested in court, and could backfire on Khan. Conversely, a victory for the FTC could have a chilling effect on tech M&A activity going forward, particularly by constraining the decisions of larger established incumbents weighing “build or buy” options for growth.
The memo goes on to describe the basics of the FTC’s case. But the really interesting part of the memo is its discussion of the potential downside risks that the agency faces by bringing this challenge. First, the article suggests that proving its case on the merits under a traditional antitrust analysis may be an uphill battle.
More importantly, however, there’s the risk associated with litigating the issue of who is a “competitor” under the antitrust laws. The memo notes that the FTC’s enforcement program benefits from the judicial ambiguity concerning that issue. The Meta case may provide the court with an opportunity to resolve that ambiguity in a way that the FTC won’t necessarily like, and that would hamper its efforts to challenge other “killer acquisitions.”