Like a lot of other investors, traditional activist hedge funds had a tough year last year. This Morrison & Foerster memo says that the sector was down 17% 2022, after posting positive returns of 16% and 10% during the prior two years. Activists also struggled at the ballot box, winning less than half of the proxy contests that went to a vote last year. The memo doesn’t suggest that these setbacks will result in activist hedge funds abandoning their strategy, but it does speculate that so-called “occasional activists” may play a more prominent role in future activist campaigns. This excerpt explains:
Taking the place of these dedicated activists are “occasional activists” like institutional investors and individuals, including company insiders. As institutional investors have grown in size, they have become major shareholders in many companies, giving them a significant voice in corporate decision-making and greater leverage to push for changes they believe will benefit both the company and its shareholders.
At the same time, the rise of online trading platforms and social media has made it easier for individuals to organize and advocate for changes in the companies they invest in. Directors and officers of publicly traded companies who are typically seen as being aligned with the interests of the company’s management, have also become more vocal in their efforts to push for changes that they believe will benefit the company and its shareholders.
The memo goes on to list some campaigns undertaken over the past 3 years in which institutional investors or individuals played a prominent role. Last year’s list includes the unusual proxy contest between the CEO of Aerojet Rocketdyne and the company’s Executive Chairman, which saw the CEO’s slate of directors prevail with 75% of the vote.
As those of you who are readers of TheCorporateCounsel.net blogs already know, we’ve been changing over from our traditional practice of having our blogs come from the email address of one of our editors. We’ve already implemented that for TheCorporateCounsel.net blog – and now it’s our turn. Beginning on Monday, May 15th, all of our DealLawyers.com blogs will be sent from Editorial@DealLawyers.com.
We know that whitelisting is kind of a pain in the neck, so we’ve put together this whitelisting instruction page to help you and your IT department understand what actions you may need to take in order to ensure there’s no disruption in delivery.
There are a couple of things that I also want to mention about this change. First, the name of the author of a blog will always appear in the email, so if you want to respond to the author, you can just click on the author’s name and their email address will pop up. Second, Editorial@DealLawyers.com isn’t a black hole. If you hit reply, your message will go to a folder that I’ll have access to. I’ll check that every few days and forward your email to the appropriate editor. Finally, thanks for your patience and cooperation.
Last year, I blogged about how proposals to implement national security reviews of outbound investments were bouncing around Congress. While specific legislation wasn’t enacted, the possibility of a requirement for screening of outbound investments is very much alive, and this Dorsey & Whitney blog says that national security reviews of certain outbound investments may be mandated very soon.
How did we get to this point? Well, language in explanatory statements accompanying the Consolidated Appropriations Act passed last December encouraged the Treasury & Commerce to “consider establishing a program to address the national security threats emanating from outbound investments from the United States in certain sectors that are critical for U.S. national security.” The departments were also directed to “submit a report describing such a program including the resources required over the next three years to establish and implement it” not less than 60 days after the enactment of the legislation.
That report appears to have been submitted, and this excerpt from the blog summarizes its conclusions:
Press reports suggest that both Treasury and Commerce delivered the required reports to Congress in early March. These reports detailed a proposal that would establish a mechanism to review outbound investments in to-be identified countries and sectors. Almost certainly any program will focus on investments with connections to China and Russia initially, and likely include sectors such as semiconductors, artificial intelligence, and quantum computing, which are viewed as sensitive sectors essential to U.S. national security.
The U.S. Government has long held the view that Chinese investments in these sectors may raise national security concerns because the investment could potentially be used to advance Chinese military capabilities. The Committee on Foreign Investment in the United States (“CFIUS”) has exercised repeatedly its authority to prohibit in-bound investments in U.S. businesses that operate within these sectors.
The blog says that President Biden may issue an executive order implementing the recommendations contained in these reports as soon as this month, and that companies in any of the identified sectors should be aware of the potential impact of such an order on their future business operations.
Buyers and sellers frequently find plenty to fight about post-closing, but it’s unusual to see a seller claim that obligations that were spelled out as being “retained liabilities” in the contract should pass to the buyer after a period of time. Nevertheless, that’s the kind of claim that the Chancery Court recently addressed in Merck & Co. v. Bayer AG, (Del. Ch.; 4/23).
The case arose of out Bayer’s 2014 acquisition of Merck’s s Claritin, Coppertone, and Dr. Scholl’s product lines. Bayer paid $14 billion in a combined stock & asset deal, and the purchase agreement detailed the liabilities that would be assumed by Bayer and those that would be retained by Merck. After the deal closed, the parties became defendants in numerous lawsuits alleging injuries arising from consumers’ use of talc-based products. These product liability claims concerned allegedly asbestos-contaminated talcum powder that Merck used in certain Dr. Scholl’s foot powder product lines sold to Bayer.
Under the terms of Section 2.7 of the purchase agreement, Merck agreed to “absolutely and irrevocably” retain “all obligations and liabilities” for product liability claims related to the product lines acquired by Bayer, including the Dr. Scholl’s product line, to the extent such claims arise out of or relate to periods prior to the Closing Date. Accordingly, Bayer tendered all of the talc claims that it received to Merck, which conditionally accepted them while reserving its rights.
In January 2021, Merck notified Bayer that it would cease accepting tenders of all product-related claims from Bayer on October 21, 2021, which was the seventh anniversary of the closing date. In support of its position, Merck cited Section 10.1 of the purchase agreement, which provided that “[a]ll liability and indemnification obligations with respect to the Section 2.7(d) Liabilities shall survive until 5:00 P.M. (Eastern time) on the date that is the seventh (7th) anniversary of the Closing Date.” Based on this language, Merck contended that responsibility fo all product-related liabilities transferred to Bayer on October 1, 2021.
Bayer argued that the language of Section 2.7 unambiguously provided that Merck retained the liabilities at issue forever and that the language Merck relied upon in Section 10.1 dealt only with separate indemnification rights. Vice Chancellor Cook began his analysis of the parties claims by observing that that the purchase agreement dealt with two distinct forms of liability. The first was potential substantive damages liability to third-party consumers, while the second was costs incidental to litigation, even if Bayer wasn’t substantively liable for these third-party claims. This excerpt from the opinion addresses the implications of the way the contract approached those two distinct forms of liability:
While substantive third-party liability was apportioned in Sections 2.6 and 2.7, Article X addresses the separate and distinct issue of various, limited contractual indemnification rights belonging to Merck and Bayer vis-à-vis each other. In addition, Article X sets forth time limits on these contractual indemnification rights, as well as the [purchase agreement’s] representations and warranties. What Article X does not do is extinguish the underlying liability for third-party claims. Indeed, Article X cannot do this, since it addresses purely contractual rights between Merck and Bayer and has no bearing on the tort claims of third-party consumers who are not party to the [purchase agreement].
Merck argued that language in Section 10.1 providing that “all liability” for the liabilities retained under Section 2.7 would expire on October 21, 2021, but the Vice Chancellor concluded that this interpretation would lead to an absurd result:
Indeed, if I were to adopt Merck’s advocated interpretation of Section 10.1, that approach would lead, at most, only to the absurd conclusion that, after seven years, the pool of Section 2.7(d) Liabilities retained by Merck simply “expires.” Merck avers that upon this “expiration” the Section 2.7(d) Liabilities become Bayer’s, but there is no mechanism in the [purchase agreement] by which these liabilities would be transferred upon expiration. And it does not make sense to say that the third-party tort claims that comprise the Section 2.7(d) Liabilities would “expire” after seven years. As highlighted by Bayer, Merck and Bayer have no power to extinguish liability for the Product Claims, which are tort claims brought by third parties that were not parties to the [purchase agreement].
As a result, the Vice Chancellor concluded that Bayer’s interpretation of the agreement was the only reasonable one and granted its motion to dismiss the complaint.
This Cooley blog discusses how reverse mergers with existing US public companies are becoming an increasingly popular way for foreign companies to access the US capital markets. Here’s the intro:
With the US initial public offering markets continuing to remain largely closed, and special purpose acquisition company combinations being costly and complex, there’s a new kid in town for foreign companies looking to go public in the US: reverse mergers. We’ve seen a material increase in reverse merger transactions – particularly with cross-border elements, and we expect many more will follow given current market conditions. Cross-border reverse mergers are gaining momentum, particularly in the life sciences sector, due to the increasing number of US public companies with healthy cash levels but poor or failed product pipelines, proving to be a viable path to going public in the US in the near term.
The blog makes it clear that these aren’t the reverse mergers that most dealmakers are familiar with, where the dude with a chain of three video game stores opts to merge with the empty shell of a former Uranium mining company. Instead, we’re talking about real companies sitting on a bunch of cash.
The blog goes on to discuss key factors that foreign companies should consider in determining whether a cross-border reverse merger makes sense for them. These include structuring & certainty issues, tax considerations, due diligence & integration, financing & financial considerations and US public company readiness.
For the first time in three years, the FTC issued a closing statement in connection with its HSR review of Amazon’s acquisition of One Medical. This Freshfields blog says that the FTC’s statement was “lukewarm” toward the deal, and focused on warning the parties that they must live up to their commitments concerning the use of sensitive consumer health data or face consequences. This excerpt from the blog says that the closing statement serves as a reminder that antitrust issues aren’t the only things that may raise concern at the FTC during merger review – or post-closing:
During merger reviews, authorities around the world often require demanding and extensive document productions. This enables authorities to mine companies for information not just on competition issues, but also on general market and customer interactions. While merger review is a competition-based assessment, as authorities get under the skin of an industry, privacy, consumer protection, and other regulatory issues may well be spotted and tied to the merger review process. Indeed, authorities appear to also be homing in on similar issues as they review Amazon’s acquisition of Roomba maker iRobot.
This is not a new phenomenon—some of the FTC’s high-profile privacy enforcement in the tech space related to concerns it had previously highlighted in merger closing statements. The FTC’s statement reminds the parties of this and also that it has more tools in its toolkit. Specifically, the FTC enforces, among other things, Section 5 of the Federal Trade Commission Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce” (see also our previous blog on the revival of this provision).
The FTC’s most recent statement highlights potential privacy and consumer protection concerns stemming from representations by Amazon and One Medical separately and collectively about how consumers’ personal health information would be used. These statements, according to the FTC, “constitute promises to consumers about the collection and use of their data by the post-acquisition entity”.
The blog references recent FTC enforcement proceedings challenging the alleged inappropriate use of consumer health data for advertising purposes and notes that, in the closing statement, the commissioners cautioned the companies to “make clear not only how they will use protected health information. . . but also how the integrated entity will use any One Medical patient date for purposes beyond the provision of health care.”
I blogged last month about some of the reasons spin-offs might be an attractive alternative for public companies during periods of market turbulence. This Sullivan & Cromwell memo says that the advantages of a spin-off aren’t limited to US companies, and that their European counterparts have also embraced them. This excerpt provides some statistics:
Spin-offs are widely used as a method of disposing of business assets in a tax efficient manner. In a spin-off, the parent’s shareholders receive pro rata shares in the spun-out entity (“SpinCo”). In some cases of so-called partial spin-offs, which are common in France and Germany, a portion of the shares in the spun-out entity remains with the parent company (“Parent”).
While not a new phenomenon, spin-offs have become an increasingly popular tool in recent years, occurring in record-high numbers in 2021. This trend has continued in 2022. Despite the decline in global M&A activity, 78% of respondents to Aurelius’ eighth annual corporate carve-out survey said that they expect the volume of corporates divesting non-core European and UK businesses in 2023 to increase year over year and 84% of respondents believe that a need to refocus on core operations will be a key driver of divestment activity.
There were 127 spin-offs announced worldwide in 2022; and it is likely that this “spin-mania” – compared to the declining level of M&A activity – will continue in 2023.
The memo addresses some of the reasons that European companies find spin-offs to be an attractive alternative – which are similar to those that make these deals attractive to US companies. It also discusses the factors that make these particularly challenging transactions on either side of the pond.
I was searching for blog topics recently and came across this interesting piece from Institutional Investor about how private equity executives are confiding in their “coaches” over the troubles that they’re facing in the current environment:
Falling private-market valuations and a tougher fundraising environment are starting to weigh on private-equity executives — but those aren’t the only concerns driving more CEOs to seek guidance from outside coaches. Personal coaches to private-equity executives report that their clients are increasingly worried about their impact on their employees, business, and even the world.
“When everything is up and to the right, everyone feels optimistic and gets along. As clouds roll in, these high achievers tighten up and tend to become defensive and argumentative,” executive coach Justin Doyle said.
And a storm is brewing — and in some cases has already arrived, Doyle said. His 20 private-equity clients are using sessions with him to vent their frustrations and worries, freeing up mental space so they can focus on solutions and be more productive at work.
These are definitely tough times for anybody in the deal business, but – and I know I’m a terrible person for admitting this – when I read this article, I could only picture Tony Soprano working through the personal impact of the problems in his, um, “waste management consulting” business with his psychiatrist, Dr. Melfi.
Yesterday, the FTC overturned a prior administrative law judge’s ruling and ordered Illumina to unwind its 2021 acquisition of multi-cancer early detection (MCED) test maker GRAIL. Commissioner Christine Wilson, who resigned from her position effective at the end of March, concurred in her Democratic colleagues’ decision to order the divestiture. This excerpt from the FTC’s announcement of the decision summarizes the basis for its ruling:
The Commission found that the acquisition would diminish innovation in the U.S. market for MCED tests while increasing prices and decreasing choice and quality of tests. This is extremely concerning given the importance of swiftly developing effective and affordable tools to detect cancer early.
The Opinion raises other concerns about the acquisition that support the Commission’s divesture order:
– Illumina is currently, and for the reasonably near future, will remain the only viable supplier of a critical input: NSG platforms necessary for MCED tests. Entry barriers prevent rival platforms from competing with Illumina’s high throughput, high accuracy, and favorable cost profile.
– Illumina can easily foreclose GRAIL’s competitors by raising their costs or withholding or degrading access to supply, service, or new technologies—inputs on which MCED test developers rely.
– Illumina has an enormous financial incentive to ensure that GRAIL wins the innovation race in the U.S. MCED market. Illumina stands to earn substantially more profit on the sale of GRAIL tests than it does by supporting rival test developers. And Illumina’s ample mechanisms for effecting foreclosure give it multiple ways to act on that incentive.
Illumina and GRAIL attempted to address antitrust concerns by implementing what they called “Open Offer” supply agreements. Illumina claimed that these agreements provided customers with protections on service, supply, pricing, intellectual property, and confidentiality, and included several provisions that provided them provide parity with GRAIL.
The FTC rejected this approach, concluding that the supply agreements were an ineffective remedy that tackles harm on an ad hoc basis. Reflecting the agency’s strong distaste for behavioral remedies, the opinion concluded that such measures “simply cannot substitute for the incentives of a competitive marketplace.”
Illumina plans to appeal the FTC’s decision, but for now, it’s faced with an order to “unscramble the eggs.” The company’s initial decision to close the deal without obtaining sign-off from antitrust regulators in the US & Europe was controversial, and Illumina is also currently facing a proxy contest led by Carl Icahn seeking board seats & calling for the deal to be unwound.
Woodruff Sawyer recently published a guide for insurance due diligence on M&A transactions. The publication highlights the importance of insurance and risk management due diligence for private equity transactions, and notes that poor execution of due diligence and implementation of insurance and employee benefit programs may expose buyers to increased risks that could diminish short-term EBITDA and the long-term value of the target’s business.
This excerpt discusses some important findings about issues with target coverage that Woodruff Sawyer observed last year in due diligence investigations for middle-market and growth equity transactions:
No comprehensive, strategic approach to insurance and risk management. While a foundation of coverage has been established, no long-term insurance strategy for EBITDA protection has been developed or implemented. The insurance advisor should recommend ways to both professionalize the
program and raise the level of sophistication of the insurance program post-close to maximize EBITDA protection over the lifecycle of the investment.
Key coverages are missing. For many target acquisitions, the deal represents the first time the company has accepted institutional investors or considered a buy-out from a private equity sponsor. This situation means new board members and potentially a new approach to insurance. What may have been treated as low priority pre-close (due to cost, for example) may be treated differently with a new private equity owner or growth equity investment because the buyer or investor will always seek to protect their investment.
Limits are inadequate. Like the previous point, a company pre-close will choose a limit for a variety of reasons. We have found the company typically has not performed any benchmarking analysis around limit adequacy. As an institutional investor becomes involved, there should be greater thought around limit adequacy to protect the short and long-term EBITDA of the company.
Examples of key coverages that are frequently missing include D&O, commercial crime, cyber liability or product recall liability, while examples of coverages that frequently have inadequate limits include cyber liability, business income and extra expense, contingent business income, and products liability.