As Michael Levin at The Activist Investor (TAI) reports, in multiple instances this year, activist investors have identified more people than there are available board seats—initially designating a larger slate and then picking which of the designees will actually stand as nominees at a later date—presumably because more information is available later in the process. TAI cites three situations in 2023 where the activist designees exceeded the number of nominees for whom the activist intended to solicit proxies:
– Disney, where Trian nominated Nelson Peltz with his son as an alternate
– Rogers Corporation, where Starboard listed six candidates for four nominations
– Envestnet, Inc., where Impactive Capital lists four candidates for three seats
You can see how delaying the identification of the actual nominees might be beneficial to the activist, but I originally read the cited CDI 139.01 together with CDI 139.03 as not permitting this—other than Trian at Disney since the CDI clearly allows the identification of an alternate. However, the TAI blog explains that these activists have capitalized on the interplay between advance notice bylaws and the 60-day notice period in the UPC rules, as follows:
They know they must set forth the specific nominees in the 60-day notice, or alternatively in the definitive proxy statement. Nothing in SEC rules, state statute, or company bylaws requires the activist to decide on these specific nominees before then.
They complied with advance notice terms in company bylaws by listing all the possible nominees in the notice to the company. Later, they decide which candidates will stand for election, either when the activist files a definitive proxy statement with the SEC, or when it notifies the company of the nominees pursuant to the UPC rule.
Also, for those who don’t follow TheCorporateCounsel.net Blog, check out Liz’s post on a voting instruction form development based on a position Trian took in its aborted Disney proxy contest.
Public benefit corporations (PBCs) have been getting a lot of attention in recent years with the ongoing discourse on corporate purpose, and the number of publicly traded PBCs has been ticking up since 2020. Ropes & Gray recently advised the acquirer of a publicly traded PBC and shared some key insights following that transaction. Specifically, the memo highlights some unique challenges with PBCs as targets given that their boards must balance potentially divergent interests:
Director Duties – In a PBC, directors must balance stockholder interests, the interests of those materially affected by the company’s conduct, and the public benefit identified in its organizational documents. That balance applies to day-to-day operations as well as a change in control transaction, but uncertainty remains because there have not been any Delaware judicial decisions addressing PBC director duties in the M&A context.
Fiduciary Outs and Intervening Events – It’s also unclear whether that balance continues to apply after a target has signed a merger agreement, and this needs to be considered in drafting the fiduciary out and intervening event provisions.
Due Diligence – Due diligence complications exist for both sides: buyers need to consider the target’s compliance with DGCL requirements for PBCs, and, due to its balancing requirement, the target needs to consider the buyer’s purpose, culture and strategy, among other things, if there’s an element of stock consideration.
Life science targets with clinical or near-clinical products often come with early-stage pipeline assets, the value of which is dependent on the achievement of a development or milestone that remains uncertain. The target may see great potential in these pipeline assets, but large pharma buyers who are primarily interested in the clinical assets are often not willing to agree to a purchase price that fits the target’s valuation expectations for these pipeline assets.
Enter two deal structures that can bridge this gap: spin-off mergers and CVRs. This Freshfields blog discusses the pros and cons of each option in public M&A. This excerpt addresses the business reasons why a buyer might want to consider a spin-off:
Spin-off mergers are often considered by buyers in the biopharma industry who wish to acquire a target company’s clinical or near-clinical stage products, but who are not interested in its early-stage products. They provide a means for the buyer to leave behind the assets it does not wish to own (or to pay for) and for the target shareholders to continue to realize value from those assets. This is especially true for buyers facing patent expirations, who may be seeking to supplement their portfolios with revenue-generating in-market or near-market assets without the burden of cost-intensive pipeline products.
CVRs represent the right of the target’s shareholders to receive payments when specified milestones are achieved and are the public company equivalent of the earnouts often used to bridge valuation gaps in private deals. The blog acknowledges that both alternatives present their own challenges, but predicts that these structures may start to have more widespread appeal—outside the life sciences industry—as volatility and uncertainty exacerbate valuation gaps.
This Woodruff Sawyer article makes some predictions about the market for rep & warranty insurance in 2023, in light of macro conditions, including the M&A and IPO markets. While acknowledging the difficulties these deals present, they expect trends toward RWI policies in minority investments, secondaries and distressed deals to continue. The article predicts that we will see more distressed deals this year and describes related evolving practices:
These are typified by fast speed and light diligence; these sales have been problematic historically. However, there are some new methodologies evolving to utilize RWI. We have seen policies bound that allow for deeper diligence post-close, with bracketed exclusions at the time of signing. We’ve also seen policies that shy away from the financial aspects but provide coverage for operational issues that are just as likely to cause problems post-close as they are with a profitable business.
Given a seller’s interest in a clean exit, the article notes that sellers’ counsel routinely tried to introduce severability of fraud in RWI policy subrogation rights in 2022. While this push will continue, Woodruff Sawyer doesn’t expect this to become a standard term in the RWI context.
On retention and premium rates, they expect retention rates to stay around 0.75% to 1% and premium rates – following a peak in recent years – to stay low but not go much lower. If they go much lower, these policies may not be worthwhile for the underwriters.
The FTC & DOJ have been taking an aggressive approach to antitrust enforcement, which has meant a number of high-profile challenges to deals. That approach has met with mixed success. The antitrust agencies have had at least one big win, but they’ve also struggled in many cases to persuade courts to accept some of their more novel theories. However, this Harvard Business Review article suggests that it’s not necessarily about wins and losses – and that the antitrust agencies’ enforcement actions may have a deterrent effect even in defeat:
The government doesn’t necessarily need to win cases for lawsuits to have an impact. For starters, big cases against big companies send a message designed to discourage future dealmaking. This is particularly true for today’s most successful technology companies, which have long expanded into emerging markets by gobbling up promising startups already on the field. As ex-Biden competition advisor Tim Wu recently noted, it can make a huge difference to an industry if the major players know they’re “under heavy surveillance from the government.”
Even if deals eventually close, regulators see value in everyone understanding that all transactions will be more closely scrutinized. From the outset, companies will find themselves encouraged to make voluntary concessions. In the Activision deal, for example, Microsoft preemptively offered substantial limits on how it will treat Activision’s products post-merger. Flagship titles including Call of Duty, notably, will not be pulled from other platforms, and offered instead as Xbox exclusives.
The article points out that, regardless of its success, an aggressive litigation strategy can be extremely effective in creating disruptions for companies that are deemed to be too powerful. Major antitrust cases can take years to resolve, and while they’re pending, members of senior management may face significant distractions due to the time they need to spend dealing with their lawyers instead of their business.
According to a recent report, the Delaware Chancery Court’s case load has grown at a compound annual rate of 5% since 2017, with much of the growth coming from cases in which the Chancery’s jurisdiction is grounded in Section 111 of the DGCL. In addition, motions to expedite proceedings continue to grow, with nearly 1/3rd of the Court’s cases requesting expedition.
This Morris Nichols memo explains that the Delaware Supreme Court recently took an unusual step to help address the increasing demands on the Chancery Court. Here’s an excerpt summarizing the Court’s action:
To alleviate the increasing strain on the Court of Chancery, on February 23, 2023, the Delaware Supreme Court issued a Standing Order designating the five Superior Court judges who serve on that court’s Complex Commercial Litigation Division (the Honorable Eric. M. Davis, Paul R. Wallace, Abigail M. LeGrow, Sheldon K. Rennie, and Meghan A. Adams) as Vice Chancellors empowered to hear and resolve any case filed under Section 111, as selected by the Chancellor of the Court of Chancery and the President Judge of the Superior Court.
The memo explains that the CCLD was formed in 2010 and was intended to create a panel of judges with in complex commercial disputes, and its cases are given priority over others on the Superior Court’s docket. The CCLD also has rules and standing orders to help further expedite proceedings. The Supreme Court’s Standing Order will remain in effect for one year, and then will be reviewed by the Chief Justice, the Chancellor, and the President Judge to determine whether it should remain in place and for how long.
Weil’s Glenn West recently posted a very unusual blog on one of his favorite topics – choice of law and choice of forum provisions. The blog starts out conventionally enough, with an overview of the importance and complexity of these contract provisions:
The decision as to which law applies in resolving a dispute arising from or related to a contract can be outcome determinative—i.e., a claim may be sustainable if one state’s law applies, but unsustainable if another state’s law applies. Contractually-related disputes include both traditional breach of contract claims, as well as tort-based claims such as fraud and negligent misrepresentation. A properly-worded choice-of-law clause can, in most instances, ensure that the contractually chosen law will be the law applied to both kinds of disputes.
A similar but related decision that can be outcome determinative in a contractually-related dispute is the decision as to what is the proper forum for the dispute. Regardless of what law is required to be applied in that forum by an otherwise valid choice-of-law clause, procedural rules of a forum can override the application of certain aspects of the chosen substantive law. As a result, valid claims under the chosen substantive law can be rendered unsustainable based on procedural rules of the forum (some of which are not recognizable to most as procedural), unless the choice-of-law clause is sufficiently broad to address these procedural rules.
Despite the importance of these issues, and the number of times courts are forced to decide which law applies to a particular claim, or whether the forum court should even hear the claim, these provisions continue to receive short shrift by deal lawyers. There is what UNC Law Professor John Coyle, who is the foremost authority in this area, a “Secret Language of Choice-of-Law and Forum Selection Clauses.” Becoming fluent in this secret language is not difficult, and prior Weil Private Equity Blog posts have provided frequent opportunities to master this language. Nevertheless, it seems like new cases requiring the courts to apply this secret language to clauses that were drafted by lawyers who have refused to learn this language, or remain unaware of its existence, are ubiquitous.
This is where things begin to get unconventional – Glenn provides links to the resources he’s cited in the last paragraph, and then challenges readers to take a quiz on the topic. This quiz is not easy – at least for me – but the topic’s an important one & as they say, “knowledge maketh a bloody entrance.”
Yesterday, the DOJ announced that it filed a lawsuit seeking to block JetBlue’s proposed acquisition of Spirit Airlines. While the DOJ & FTC have pursued novel theories of liability in some of their merger litigation, this excerpt from the DOJ’s press release suggests that the theory here is fairly straightforward & focuses on the deal’s alleged impact on consumers:
The complaint, which seeks to block the acquisition under Section 7 of the Clayton Act, alleges Spirit has been a particularly disruptive force, growing rapidly, introducing innovative products, and allowing customers to choose which services to purchase, all while charging customers very low fares.
Spirit has forced larger airlines, particularly the already-low-cost JetBlue, to compete for customers by introducing unbundled, customizable ticket options and lowering their own fares, allowing more Americans to travel. If the acquisition is allowed to proceed, prices would increase on routes where the two airlines currently compete. This is particularly the case on the over 40 direct routes where the two companies’ combined market shares are so high that the deal is presumptively anticompetitive.
As further alleged in the complaint, in the last 10 years, Spirit has doubled its network in size and, before this deal, expected to continue expanding at a quick pace. The acquisition stops this future competition before it starts.
The acquisition would also make it easier for the remaining airlines to coordinate to charge travelers higher fares or limit capacity. JetBlue has already partnered with American Airlines, the largest airline in the world, through the Northeast Alliance, which the Department sued to block. Now, JetBlue is doubling down on consolidation, seeking to acquire and eliminate its main ultra-low-cost competitor, depriving travelers of yet another choice.
The DOJ contends that if JetBlue acquired Spirit, it would likely increase prices on every current Spirit route, which would result in travelers either having to pay more for amenities they don’t want or put them in a position where they can’t afford to travel at all.
The DOJ’s action can’t come as a surprise to either of the parties to the deal. Spirit made much of the antitrust risks of a deal with JetBlue when it opposed JetBlue’s ultimately successful efforts to “deal jump” its proposed merger with Frontier. Page 13 of the DOJ’s complaint highlights those concerns by including a slide from Spirit’s presentation opposing JetBlue’s hostile tender offer that details the deal’s potential antitrust problems.
Yesterday, I blogged about antitrust risk allocation provisions contained in merger agreements, so it’s probably worth mentioning how the parties addressed them here. The relevant antitrust covenant in this deal is contained in Section 5.5 of the merger agreement. While Section 5.5 requires the parties to use their reasonable best efforts to obtain required approvals, JetBlue isn’t required to make any divestitures that would reasonably be expected to result in a MAE. According to JetBlue’s 8-K filing announcing the deal, it’s also not required to agree to any divestitures that, in JetBlue’s discretion, would be reasonably likely to materially and adversely affect the anticipated benefits of its alliance with American Airlines – an arrangement which, as noted above, the DOJ is also challenging.
However, Section 5.18 of the agreement obligates JetBlue to pay a $.10 per share monthly ticking fee to Spirit’s stockholders beginning after stockholder approval of the merger has been obtained and ending when the deal closes or is terminated. The ticking fee is characterized as a prepayment and will be credited against the amount payable to stockholders at closing.
In the event that the deal is terminated because of the inability to obtain required regulatory approvals, then in certain circumstances JetBlue will be obligated under Section 7.2 of the agreement to pay directly to Spirit’s stockholders a reverse termination fee of up to $400 million, with an additional $70 million payable to Spirit itself. Those reverse termination fees add up to a hefty 12.4% of the deal’s $3.8 billion value.
With the FTC & DOJ taking an increasingly aggressive approach to merger review and enforcement, merger agreement terms allocating antitrust risk are becoming an ever more important part of the negotiation process. This Cahill article reviews various antitrust risk-shifting terms that may be contained in merger agreements.
Some of these provisions, such as antitrust covenants, are targeted specifically at antitrust risk. Others, such as specific performance clauses, MAE clauses and termination and reverse termination fee arrangements, allocate a broader range of risk but also contain provisions that may implicate antitrust issues. For example, here’s an excerpt from the article’s discussion of MAE clauses:
Both parties should consider whether the MAE has an impact on other clauses allocating general and antitrust risk. For example, hell or high water or best efforts antitrust covenants requiring a purchaser to undertake divestitures and other actions to obtain antitrust approval may be limited, purposefully or inadvertently, by an MAE provision.
Additionally, an MAE clause that provides that a substantive divestiture is an MAE could arguably undercut a hell or high water clause in the antitrust covenant. Parties should also consider the potential impact on antitrust risk provisions of taking a vague versus specific approach to defining an MAE.
We have posted the transcript for our recent “Activist Profiles & Playbooks” webcast. Our panelists, Joele Frank’s Anne Chapman, Okapi’s Alexandra Higgins, Spotlight’s Damien Park and H/Advisors Abernathy’s Dan Scorpio provided expert insights on what may be in store when it comes to activism in 2023. Here’s an excerpt from Damien Park’s comments about what’s driving activism this year:
What’s fueling activism this year? Clearly, the new adoption of universal proxy as John mentioned at the start of this discussion is going to contribute to activism this year. The amount of increase is still up for debate, but it’s not going to decrease the amount of activism, that’s for sure.
Without going into too much detail right now, we expect universal proxy will make it easier and slightly cheaper for activists to elect one or maybe two directors to a board. It also makes the unreachable, reachable – for example, traditional ESG type funds that typically don’t have the capital to carry out a costly campaign at companies with large retail shareholder bases to elect a director, can now do so at much less cost.
There are a few things we see trending both publicly and privately with our clients this year. One is this phenomenon when more than one activist approaches a company with demands that aren’t necessarily compatible with each other. In fact, their demands may be completely at odds with each other.
To give you a simple example, one activist may demand increased investments into areas of profitable growth while another demands a stepped-up return of capital to shareholders. Both activists may be seeking board representation and threatening a disruptive fight as leverage to get what they want. The difficulty with managing these situations is being able to balance all of these demands somewhat effectively in order to reach global peace, and still be able to run the business well.