The January-February Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Delaware Court Addresses Freeze-Out Merger Confronted with Topping Bid
– Tortious Interference Claims in M&A: Deal Jumping
– Bandera Master Fund: Delaware Supreme Court Defers to General Partner’s Contractual Authority
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
A couple of weeks ago, I blogged about how Vice Chancellor Will’s decision in Garfield v. Boxed, (Del. Ch.; 1/23), prompted a number of SPACs to file actions seeking to validate defective charter amendments under the procedure established in Section 205 of the DGCL. Last week, Vice Chancellor Will issued several orders validating those amendments and issued an explanatory opinion in In re Lordstown Motors, (Del. Ch.; 2/23). This Locke Lord blog summarizes the Vice Chancellor’s reasoning and explains the implications of her orders for the affected companies and for those not eligible for relief under Section 205:
The court ruled in Lordstown that the validations were justified under the standards of section 205(d), including in the situations where the corporate action might not have been legally defective because the class vote was in fact obtained even though not sought, finding that the uncertainty as to validity was sufficient to invoke section 205.
As we previously noted, the uncertainty resulting from the Boxed decision has caused auditors to raise concerns about the effect of that uncertainty on a company’s financial statements and, in some cases, to seek comfort from the company’s counsel. Where section 205 validation has been obtained, there should be no concern. Where that is not the case, the extent to which comfort can be provided without section 205 validation will depend upon the particular facts and circumstances.
For example, if the corporation had opted out of the need for a class vote by a provision in its certificate of incorporation, as permitted by DGCL section 242(b)(2), counsel may, if requested by the auditor, be able to provide an opinion on the validity of the stockholder approval of the amendment. Such an opinion would be akin to a typical third‑party opinion and not governed by the ABA Statement on audit responses regarding loss contingencies.
Late last week, we learned of a potential fly in the ointment. Apparently, the auditors for these companies approached the Staff of the SEC’s Division of Corporation Finance and were told that the Section 205 orders were insufficient, and that they needed legal opinions that the shares whose validity had been called into question were valid when issued.
A highly respected practitioner shared his view with me that the Staff may not have fully appreciated the nature and effect of the Section 205 orders. He believes that the Staff’s position is unjustified because the Court’s orders contain language providing that, consistent with Section 205(b)(8), the defective corporate actions are validated as of the time of they were taken. Since the orders are clear on their face, a legal opinion should not be necessary. Efforts are apparently being made to bring this to the attention of the auditors and the SEC.
Update: One of our members clarified that the auditors aren’t requiring formal legal “opinions”; they are requiring a memorandum from outside counsel explaining the legal basis for the company’s good-faith belief that the SPAC’s charter amendment was validly approved at the time of the deSPAC merger vote.
When it comes to ESG diligence, my sense was always that ESG considerations could be a deal breaker, but they were rarely a deal driver. In fact, John has blogged here a number of times about ESG due diligence, focused on valuation and risk mitigation in diligence and negotiation, regulatory factors and data gathering considerations.
This Wall Street Journal article suggests that strategic buyers may be thinking about ESG more holistically, based on a 2022 Deloitte survey of public companies with at least $500 million in revenue. 88% of the survey respondents said their company considered or completed acquisitions to improve its ESG profile, and the numbers were similar for divestitures. That may be even higher in some industries. 90% of energy, resources, and industrials respondents indicated they were acquiring companies or assets to add capabilities needed for the transition to a low-carbon future, and 100% of technology, media and telecommunications companies responded that they review their portfolios for ESG-related acquisitions.
But the best intentions seemed to break down a bit when companies actually sought to execute on ESG considerations, and the survey responses related to implementation painted a less clear picture, as summarized in Deloitte’s report:
Our data demonstrates that while there is broad alignment that ESG should be considered in deal-making, there is also broad uncertainty about how best to integrate ESG into M&A decisions and who is responsible for doing so. Our experience in this field suggests companies are struggling with how to incorporate the long-term nature of ESG issues with immediate concerns. Discounted Cash Flow (DCF) is highly sensitive to the first five years, but climate concerns are often based off views of 15-25 years.
Whether your client or company is addressing ESG from the perspective of strategy or risk avoidance, clearly there are some “pain points” associated with considering ESG factors in M&A strategy and execution.
A recent Weil going private survey showed that going private transactions reached a new high in 2022 by volume and value (up 51% from 2021), with over half of the targets in the technology/software space. The increase from 2021 slowed in the second half of the year due to macroeconomic conditions and uncertainty and the state of debt financing markets.
The survey attributes this increase, in the face of an otherwise depressed M&A market to:
– the pressure on public company valuations and stock prices due to financial/political turmoil and market sell-off making public companies more attractive targets when fundamentals are strong;
– companies who were quick to go public—maybe a little too quick during previous heights of the public markets and de-SPAC transactions—feeling strained by the burdens that accompany being publicly traded; and
– boards realizing that market high valuations may have been inflated and that premiums to a current price, rather than record price, present an opportunity to maximize value.
The survey goes on to review some interesting developments in take private transactions in recent years, including the focus on interim operating covenants and consequences of breaches, complications for recently de-SPAC or IPO companies and the sharp uptick in the use of CVRs (contingent value rights) in 2022.
Speaking of CVRs, in Q4 2022, Nasdaq proposed to adopt Listing Rule 5732 to provide standards for listing Price-Based and Event-Based CVRs on the Nasdaq Global Market. The SEC recently solicited comments on an amended form of the listing rule and approved the proposed rule, as amended, on an accelerated basis.
John previously blogged about Politan’s lawsuit against Masimo Corp. seeking to overturn the bylaw amendments adopted by the company following the effectiveness of the universal proxy rules. In case you missed it, Masimo has since backed down from the bylaw amendments and announced that the Board adopted amended and restated bylaws that revert them back to their prior form.
Unfortunate for us, maybe, since we won’t be able to see how this would have played out in court, but Masimo’s decision is understandable in light of the heat it has been taking on the bylaw amendments. Most recently, according to Reuters, the hedge fund industry association, MFA, filed an amicus brief supporting Politan’s position that the amendments were “draconian”.
To the extent your company adopted amendments reflecting the new universal proxy requirements and you’re wondering if you should be concerned, as John previously highlighted, there were particular provisions of Masimo’s bylaws that weren’t widely used by other companies. Further, Masimo’s bylaw amendments weren’t adopted on a “clear day,” so these challenges may not have particularly wide-ranging implications, except as a cautionary tale for the types of provisions that investors will take serious issue with.
Want to work for the SEC? Longtime Chief of Corp Fin’s Office of Mergers & Acquisitions Ted Yu was recently promoted to the position of Associate Director – Legal, which has created an opening for his former position. Here’s the summary description of the position from the USAJobs website:
The Office of Mergers and Acquisitions (OMA) within the Division of Corporation Finance administers the SEC’s rules and regulations for tender offers, beneficial ownership reporting, “going-private” transactions, proxy solicitations, business combinations transactions, and rights offerings. If selected, you will serve as the Office Chief responsible for day-to-day operations and planning of the office; managing a broad range of assignments; and collaborating with Division leadership to ensure that filing review, rulemakings, and interpretive positions taken by OMA staff serve the Commission’s statutory mission.
More details on the position are available on the USAJobs website. By the way, speaking of new jobs, my new colleague Meredith Ervine will be blogging on this site for the balance of the week. After more than six years of a steady diet of my blather, I’m sure you’ll enjoy the break.
This Cooley blog discusses 10 key trends from the European market that shaped global M&A in 2022 and are expected to continue to impact deals this year. Many of these trends mirror those in the US market, including the importance of “dry powder” among potential buyers, extended timelines for antitrust review, heightened national security scrutiny, and an increased focus on “bolt-on” acquisitions.
However, as someone who hasn’t paid close attention to the European market, one trend came as a bit of a surprise to me – the continuing interest in SPACs and deSPAC transactions:
Reverse mergers gained substantial momentum in 2022 as the more traditional IPO market remained shut, share prices in the public market took a significant hit, and avenues for additional liquidity became scarce. Acquiring a distressed public target, especially one with a healthy cash balance, via a reverse merger provided an alternative path to becoming a public company and potentially gaining access to additional financing, and there is no sign of slowdown into 2023 as the number of distressed public companies remains on the rise.
While deSPAC transactions in the US declined significantly in 2022 – in light of relevant Securities and Exchange Commission guidance, record-high redemptions and fewer investors willing to provide private investment in public equity (PIPE) financing – we continued to witness solid deSPAC activity in 2022 in the cross-border M&A space.
The blog says that because many SPACs will reach the end of their life cycles in 2023, we should look for a final push by sponsors to sign up deals with target companies this year – assuming that regulators don’t effectively kill SPACs.
Last month, I blogged about the Chancery Court’s decision in Garfield v. Boxed, (Del. Ch.; 1/23), which indicated that a separate class vote was required to authorize a charter amendment increasing the number of outstanding shares of Class A Common Stock in a company with a dual class structure. This Locke Lord blog says that the decision has prompted many companies to pursue validation actions under Section 205 of the DGCL.
The blog says that those petitions are pending and the first hearing on some of them will be held next week. It also points out that the defective charter amendments fall into one of two categories:
There are two different situations to consider: (i) a majority vote of both Class A and Class B shares voting together and of Class A shares voting separately was obtained, although no separate Class A vote was held or its need disclosed; and (ii) a majority of Class A shares A and Class B shares voting together was obtained but not a majority of Class A shares.
It might be possible to conclude that the stockholder approval in the first situation was legally sufficient despite the failure to hold a separate Class A vote and disclose to stockholders the need for that separate vote, as well as to conclude that the increase in Class A shares and their issuance in the deSPAC transactions and otherwise are unlikely to be invalidated on equitable grounds in the absence of evidence of any real prejudice resulting from the deficient actions. However, that has not been judicially decided. Consequently, many companies, to avoid uncertainty, are pursuing validation under DGCL section 205, which is anticipated to be obtained in short order.
In the second situation, the alternative of concluding that the vote was legally sufficient is unavailable and therefore companies in that situation also are filing for relief under section 205. There is optimism that the Court of Chancery will use its broad authority under section 205 to validate those actions in that situation.
The blog notes that public companies that are seeking validation of these charter amendments are filing Form 8-Ks disclosing the issue and have suspended the use of outstanding registration statements until the matters are resolved. It also points out that the separate class vote issue isn’t limited to charter amendments increasing the number of shares, and has been raised in litigation challenging charter amendments authorizing exculpation of corporate officers as well.
In a statement accompanying the FTC’s annual report to Congress on the HSR Act, the Democratic commissioners again called for legislation extending the time periods for review of HSR filings:
We continue to recommend that Congress revisit statutory timelines imposed by the HSR Act on the agencies. The 30-day window provided for the agencies to assess whether a transaction warrants close investigation and the 30-day window in which we must decide whether to challenge a transaction after parties certify that they have “substantially complied” with our inquiries are no longer adequate.
Since the HSR Act was passed in 1976, the volume and complexity of information and data produced by merging parties have increased by several orders of magnitude. The fact that the FTC routinely resorts to voluntary timing agreements with merging parties to provide the necessary time for staff review is further evidence of the inadequacy of the enabling statutory timelines. We should not have to rely on permission from merging parties to have enough time to do the work required by law.”
In support of their position, the commissioners note that the FTC’s report confirms that the volume of notified transactions surged by 115% in 2021 to “historic levels,” and contend that the agency “simply [does] not have the capacity to keep up with the markets in terms of the scrutiny mergers should receive.”
The sole Republican commissioner, Christine Wilson, submitted a statement of her own in which she basically told her colleagues that it’s their own fault that the HSR review timeline is a problem:
For decades the timelines did not create problems for the agencies. Parties routinely entered timing agreements with staff that provided adequate time for investigations. But, early in the current administration, the Commission flouted a negotiated timing agreement after the parties voluntarily extended the review period several times. The Commission also took affirmative steps to increase the burden, heighten the risk, and increase the uncertainty attendant to the HSR process.
Commissioner Wilson punctuated her remarks by resigning from the FTC and publicly breaking a whole lot of furniture on her way out the door.
If you haven’t encountered the problem of an unlicensed “business broker” who expects to be paid for their role in bringing a buyer & seller together, you probably haven’t spent much time doing deals at the lower end of the M&A food chain. These folks show up with alarming regularity in small deals, and they can create all sorts of headaches, because paying them can quickly cause the parties to run afoul of federal or state securities law restrictions on payments to unlicensed brokers.
The SEC has tried to take a practical approach to this situation, and in 2014 the Staff issued a no-action letter indicating that it would not take action against “M&A Brokers” that met the conditions laid out in that letter. The problem is that positions expressed in a no-action letter are subject to change with little notices – and when it comes to no-action letters relating to broker-dealer licensing issues, the SEC has a history of being somewhat mercurial. However, this Stinson memo says that provisions of the Consolidated Appropriations Act signed into law by President Biden in late December now codify an exemption for M&A Brokers from federal broker-dealer licensing requirements:
The Exemption defines an “M&A Broker” as a broker and any associated person that is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an “eligible privately held company” through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving securities or assets of the eligible privately held company, if the broker reasonably believes that:
– Upon consummation of the transaction, any person acquiring securities or assets, acting alone or in concert (1) will control the eligible privately held company or the business conducted with the assets of the eligible privately held company (for example, by electing executive officers, approving the annual budget, or serving as an executive or other executive manager); and (2) directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company
– Any buyer, before becoming legally bound to consummate the transaction, has received or has reasonable access to various disclosure documents, including, among others, the company’s most recent fiscal year-end financial statements, as well as information pertaining to the management, business, results of operations, and material loss contingencies of the issuer.
The exemption is limited to “eligible privately held companies,” which is defined as a company that has, in the fiscal year ending prior to the one in which the M&A broker is initially engaged: (i) no class of securities registered or required to be registered under §12 of the Exchange Act and (ii) EBITDA less than $25 million and/or gross revenues less than $250 million.
The exemption largely tracks the Staff’s 2014 no-action letter, and includes a laundry list of potentially disqualifying activities that the M&A Broker must not engage in. The exemption also does not preempt state blue sky restrictions on unlicensed brokers, so the parties will still have to navigate those compliance hurdles.