It’s been about a month since I last weighed in on Twitter v. Musk. I’ve found it easy to avoid commenting on the case, because most of what’s been going on in recent weeks involves discovery disputes that make non-litigators eyes glaze over. But I have been keeping tabs on what others have been saying, so here’s a selection of some recent highlights:
– For a blow-by-blow of the parties’ filings with the Chancery Court, there’s no substitute for The Chancery Daily’s Twitter feed. Here’s a great thread on how the details of Twitter’s 30(b)(6) deposition schedule for Musk essentially map out its case.
– If you’re looking for a deep dive on the availability of specific performance and alternative damage measures that the Chancery Court might opt for in the event that it finds Musk breached the agreement but decides not to award specific performance, check out this series of blogs (here’s the final one) by Prof. John Patrick Hunt on ContractsProf Blog.
– Slate’s interview with Columbia’s Eric Talley provides a great summary of the hazards Musk faces if he tries to use financing issues as a way out of the Twitter deal. It also helps explain why Twitter’s so interested in getting discovery from Musk’s banks.
This Morris James blog reviews a recent ruling from Master in Chancery Patricia Griffin addressing various privilege issues arising in a dispute between parties to a business negotiation. Twin Willows, LLC v. Lewis Pritzkur, Trustee, (Del. Ch.; 2/22) arose out of an assignment of a property sale agreement from the respondents to the petitioner. That agreement was not fully performed, and litigation ensued.
During the course of that litigation, the petitioner moved to compel production of communications between the respondents & the seller of the property. In response, the respondents asserted attorney work product and common interest privileges. This excerpt from the blog describes the Master’s ruling:
The Master granted in part and denied in part Twin Willows’ motion. The Master addressed several categories of documents. Most notably, the Master explained the common interest doctrine’s application to a situation involving both business and legal issues, while conducting an in camera review of the challenged documents. Here, Pritzkur and the other Respondents shared a sufficiently similar interest, as evidenced by their conduct throughout the litigation, and their joint goal of selling the property.
However, the Master noted that certain withheld communications appeared to relate to the negotiation of a commercial transaction, and therefore not within the ambit of the common interest privilege. While discussions of the performance or negotiation were commercial in nature and not privileged, discussions of ancillary property rights and co-tenancy issues, as well as documents related to the original partition matter were privileged. Communications not pertaining to a legal objective were ordered to be produced, and documents concerning both commercial and legal interests were ordered to be redacted accordingly.
The “common interest” privilege protects privileged information that is exchanged by two parties represented by counsel concerning a legal matter in which they share a common interest. The privilege has often been asserted to protect communications between buyers & sellers during the course of a acquisition. However, this decision follows a long line of Delaware authority holding that that if the primary focus of the alleged common interest was commercial, “[i]t is of no moment that the parties may have been developing a business deal that included as a component the desire to avoid litigation.”
When there’s a big slump in public company valuations, a surge in going private deals is almost sure to follow – particularly when private equity is sitting on a whole bunch of dry powder. A recent Institutional Investorarticle says the 2022 stock market slump is no exception:
As companies continue to trade at discount prices, more private equity firms are eyeing opportunities in the public markets. The value of take-private deals announced or closed by buyout funds was $96 billion in the first half of 2022, according to a report from Preqin. Last year, the total value of such deals led by private equity firms reached a record of $118 billion, and according to the report, that figure will soon be surpassed by this year’s number.
Notable public-to-private deals in the first half of 2022 include Blackstone’s $7.6 billion acquisition of the real estate investment trust PS Business Parks; Apollo’s $7.1 billion acquisition of the automotive manufacturer Tenneco; and Clayton Dubilier & Rice’s $4 billion acquisition of animal health services company Covetrus. TPG also announced in June that it would acquire the healthcare technology company Convey Health Solutions for $1.1 billion.
If you’ve got a client considering going private, be sure to check out this Harvard Governance Forum blog on things for boards to consider before making that decision that was posted over the weekend. The boom in take privates is a bright spot in a down year for dealmaking. According to a recent WSJ article, the dollar value of deals during the first half of 2022 was the lowest in five years (excluding pandemic-impacted 2020) and represented a nearly 40% drop from the same period in 2021.
Gibson Dunn recently published its 2021 Activism Update, which has all sorts of information on 2021 activist campaigns and settlement terms. This excerpt from the report’s introduction addresses the rationales put forward for activist campaigns and common settlement terms:
Notwithstanding the increase in activism levels, the rationales for activist campaigns during 2021 were generally consistent with those undertaken in 2020. Over both periods, board composition and business strategy represented leading rationales animating shareholder activism campaigns, representing 58% of rationales in 2021 and 51% of rationales in 2020. M&A (which includes advocacy for or against spin-offs, acquisitions and sales) remained important as well; the frequency with which M&A animated activist campaigns was 19% in both 2021 and 2020. At the opposite end of the spectrum, management changes, return of capital and control remained the most infrequently cited rationales for activist campaigns, as was also the case in 2020. (Note that the above-referenced percentages total over 100%, as certain activist campaigns had multiple rationales.)
Seventeen settlement agreements pertaining to shareholder activism activity were filed during 2021, which is consistent with pre-pandemic levels of similar activity (22 agreements filed in 2019 and 30 agreements filed in 2018, as compared to eight agreements filed in 2020). Those settlement agreements that were filed had many of the same features noted in prior reviews, including voting agreements and standstill periods as well as non-disparagement covenants and minimum- and/or maximum-share ownership covenants. Expense reimbursement provisions were included in half of those agreements reviewed, which is consistent with historical trends.
The report summarizes information on each of the 76 public activist campaigns conducted in 2021, together with the trends and key terms of the settlement agreements entered into during the year.
CFIUS recently released its latest Annual Report to Congress. The report covers calendar year 2021, which was the first full year during which FIRRMA was fully implemented. That statute significantly expanded CFIUS’s jurisdiction and resources, and this WilmerHale memo says that the report indicates that CFIUS wasn’t shy about flexing its newly acquired muscles:
The results of these changes are apparent in CFIUS’ 2021 Annual Report, which shows explosive growth in CFIUS reviews. During 2021, CFIUS reviewed 164 declarations and 272 JVNs, the largest number of transactions ever analyzed and amounting to year-over-year jumps of 30% and 45%, respectively.
Of those 272 notices, 130 (or 48%) led to an “investigation phase,” and 74 (27%) were withdrawn during the review or investigations phase. Of the 74 withdrawn notices, the parties in 63 instances filed a new notice, either in 2021 or in 2022. In nine of these instances, the parties withdrew the notice and abandoned the transactions either after CFIUS informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns, or after the parties declined to accept CFIUS’ proposed mitigation measures. In two of these instances, the parties withdrew their notice and abandoned the transaction for commercial reasons.
CFIUS required mitigation measures to resolve national security concerns about 10% of the time (in 26 of 272 notices). CFIUS adopted mitigation measures to address residual national security concerns with respect to two notices that were voluntarily withdrawn and abandoned. There were no presidential actions taken on transactions in 2021.
CFIUS has the authority and the staff to review and investigate transactions that were not notified to the Committee and to require filings. In 2021, the Committee considered 135 transactions identified through the non-notified process and requested a filing in eight of them.
The memo says that investors from Britain, Canada, China and Japan were among the most common recent filers. Canadian investors filed 14% of 2021’s declarations, while Japanese and British investors accounted for 11% and 9% of declarations, respectively. Chinese investors filed the most joint voluntary notices (16%), while investors from Canada and Japan each accounted for approximately 10% of joint voluntary notice filings.
I recently blogged about an 11th Circuit decision holding that a private equity firm can’t conspire with its portfolio company under the Sherman Act. It turns out that’s not exactly a get out of jail free card from Sherman Act liability. This Mintz memo reviews a recent decision in which a federal court refused to dismiss claims against PE firms under Section 1 & Section 2 of the Sherman Act that arose out of the conduct of their portfolio company.
As this excerpt explains, while the entities weren’t regarded as co-conspirators, they could face liability under the statute based on their status as a single enterprise:
The district court agreed with PE defendants that Charlesbank and Bain are not separate actors from Varsity capable of conspiring under the Sherman Act. However, the district court found that plaintiffs could still pursue their claim based on their allegations that Varsity (considered as one enterprise with the PE defendants) and USASF engage in an unreasonable restraint of trade and conspired together. Hence, the court kept the PE defendants in the Section 1 claim.
On the Section 2 monopolization claim, the district court held that plaintiffs need only allege anticompetitive conduct by a single actor. Thus, by alleging Varsity’s exclusionary scheme, plaintiffs sufficiently alleged a claim in which PE defendants could be viewed as a shared enterprise with Varsity.
In order to establish the existence of a proper purpose for a books & records demand under Section 220 of the DGCL, a stockholder must demonstrate a “credible basis” from which the Chancery Court may infer there is possible mismanagement that would warrant further investigation. Last month, in NVIDIA v. City of Westland Police & Fire Retirement System, (Del.; 7/22), the Delaware Supreme Court held that “reliable hearsay” evidence may support the Chancery Court’s conclusion that such a credible basis for investigation exists. This excerpt from Francis Pileggi’s blog on the decision summarizes the key takeaway from the case:
Prior to this decision, it was not well-settled whether a stockholder could satisfy the “proper purpose” requirement under DGCL Section 220 with hearsay–instead of live testimony, for example. The Delaware Supreme Court ruled that: “The Court of Chancery did not err in holding that sufficiently reliably hearsay may be used to show proper purpose in a Section 220 litigation, but did err in allowing the stockholders in this case to rely on hearsay evidence because the stockholders’ actions deprived NVIDIA of the opportunity to test the stockholders’ stated purpose.”
The Supreme Court’s problem with the Chancery Court’s decision concerning the use of hearsay in this case was based on the stockholders’ refusal to provide testimony relating to their allegations. The Court said that If stockholders are going to use reliable hearsay to establish a proper purpose, they “must communicate honestly and early with companies regarding their intent so as to allow companies to decide whether to depose the stockholders or to identify their own witnesses for trial.”
Justice Traynor issued an opinion concurring in the Court’s conclusion that the Chancery erred in allowing the stockholders to rely exclusively on hearsay in their books & records demand, but expressed “serious misgivings” about the majority’s statement that “hearsay is admissible in a Section 220 proceeding when that hearsay is sufficiently reliable.”
The July-August Issue of the Deal Lawyers print newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Universal Proxy: What Companies Need to Know in ‘Year Zero’
– How Continuous Voting with UPC Will Change Proxy Contests
– The Deal Closed – Now What? Practical Considerations of Sponsors and Management Teams of Newly Acquired Private Equity Portfolio Companies
If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271. We devote a lot of attention in the latest issue to the SEC’s universal proxy rules – which will apply to all shareholder meetings held after August 31st. The universal proxy rules fundamentally alter the landscape of proxy contests and shareholder activism, but universal proxy is just one snowball in the avalanche of rulemaking that may be forthcoming from the SEC in the next few months alone.
In this rapid-fire rulemaking environment, you can’t afford to miss our upcoming 2022 Proxy Disclosure & 19th Annual Executive Compensation Conferences and our 1st Annual Practical ESG Conference! Click here for more information on our all-star panelists and details on how to register!
As part of the 2022 DGCL amendments, important changes were made to Section 262, which governs appraisal rights. A recent Hunton Andrews Kurth memo says that companies need to appropriately address those changes in merger agreements entered into on or after August 1st. Here’s an excerpt:
The amendments implement broad changes to the appraisal provisions in Section 262. Three important and substantive changes are: (1) allowing beneficial owners to exercise appraisal rights directly in their own names instead of through the record owner (e.g., a broker or DTC), subject to specified procedures and requirements, (2) establishing appraisal rights for stockholders in a Delaware corporation in connection with the conversion of such entity to a foreign corporation or to any other entity (except if the market-out exception contained in Section 262(b) applies), and (3) eliminating appraisal rights in a merger, consolidation or conversion authorized by a plan of domestication under Section 388.
For any merger agreements entered into on or after August 1, 2022, notices of appraisal rights will be required to reference the amended version of Section 262. These amendments also permit the corporation to include a reference to a publicly available electronic resource for information on Section 262 appraisal rights, including the website maintained on behalf of the State of Delaware on which those statutes are posted, instead of having to include a copy of the applicable appraisal statute in the appraisal rights notice.
Private company valuations have taken a pounding this year, so it’s no surprise that we’re hearing a lot more talk about “down round” financings than we’ve heard in recent years. In case you need to broach this topic with a client, you may find this Foley blog helpful. It provides an overview of down rounds, their implications and potential alternatives. Here’s an excerpt from the discussion of the implications of a down round:
Down rounds can have a negative perception. They can lead to greater dilution, loss of confidence in the company, as well as lower employee morale. But for some companies, a down round may be the only way to survive, and with current conditions, the need for funding might outweigh these negative factors.
In any investment round, the founders and previous investors are going to see dilution and a reduction in their ownership percentage. As new investors come on board, their piece of the pie is reduced. The difference is that in an up round, that dilution is combatted a bit by the higher stock price of the new shares. In a down round, that does not happen and the impact of the dilution for founders and previous investors is greater.
A down round can also trigger anti-dilution protections for investors. These protections are built in for investors as they have a different category of stock than the founders and company employees. If anti-dilution protections are triggered in a down round, their stock would be diluted less than that of the founders or employees.
There are two different anti-dilution protections that can be used in a down round.
Weighted Average Adjustment: This is the more commonly used protection. In this case, the adjustment is based on the size and price of the down round in comparison to the previous round.
Full Ratchet Adjustment: This option provides greater protection for existing investors as it essentially adjusts the price of investors’ prior rounds to the lower pricing. This means that the founders and employees’ stock would take the brunt of the dilution resulting from the down round.
The blog also has an interesting discussion of possible alternatives to a down round, including other sources of financing and the possibility sweetening the economics of the deal to investors in ways other than reducing the baseline price of the securities.