I’ve blogged several times about recent cases involving aiding & abetting claims against buyers. This is a significant emerging trend and I’ve generally tried to blog about new cases dealing with these claims on a timely basis. That being said, I’ve been sitting on an important one for a while. Specifically, I’m referring to Vice Chancellor Laster’s post-trial decision in In re Columbia Pipeline Group Merger Litigation, (Del. Ch.; 6/30), where he ordered a buyer to pay $400 million in damages for aiding & abetting the seller’s breaches of fiduciary duty.
I blogged about the Vice Chancellor’s earlier ruling on the defendants’ motion to dismiss the plaintiffs’ claims, and I had every intention of blogging about his post-trial decision too. However, then I clicked on the decision, discovered it was another one of the Vice Chancellor’s exhaustive – and exhausting – 150+ page opinions and, well, i just couldn’t bring myself to wade through it. I knew that law firms would eventually bail me out, so I decided to bide my time. Fortunately, I was right, and a couple of firms have ridden to my rescue in the past week with memos analyzing VC Laster’s decision. Here’s an excerpt from Dechert’s memo summarizing the decision:
The Delaware Court of Chancery penned the latest chapter, on June 30, 2023, in a long-running dispute concerning TC Energy Corporation’s (“TransCanada”) July 2016 acquisition of Columbia Pipeline Group (“Columbia”), holding TransCanada liable for aiding and abetting breaches of fiduciary duty in Columbia’s sale process, and imposing damages upwards of US$400 million.
The Court’s 192-page Post-Trial Opinion explains when a buyer’s hard bargaining crosses the line into exploiting a corporate fiduciary’s self-interest or carelessness. The Court also imposed aiding and abetting liability on TransCanada for failing to ensure that Columbia’s proxy was not materially misleading. Last, the decision evolves Delaware law to create a presumption that stockholders in public companies rely on materially misleading proxy statements, placing the burden on defendants to rebut this presumption of reliance.
Here are some of the key takeaways from the decision that Fried Frank identified in its memo:
– There is still a high bar to plaintiffs’ success on a claim that a buyer aided and abetted a target’s fiduciary breaches in a sale process. Importantly, the court emphasized that TransCanada would not have aiding and abetting liability but for its having exploited the breaches to try to obtain a better deal for itself. The court stressed the totality of the circumstances, noting that TransCanada did not make foot faults or take a small number of isolated problematic actions, but had “pushed on” the conflicted target officers for months. Then, the reduced offer price and coercive threats “caused the tower of actions TransCanada had taken over the preceding months to topple across the line of culpability.”
– The decision also furthers a recent trend of the court being more receptive to claims that a buyer aided and abetted a target’s breaches of the duty of disclosure. The court found that Columbia’s disclosure was materially false or misleading; that TransCanada knew as much (as the material omissions and misstatements related to TransCanada’s own interactions with Columbia in the sale process); and that TransCanada participated in the breach given that it reviewed the proxy statement (as it was contractually required to do under the merger agreement) but made no comments to correct the omissions or misstatements.
Vice Chancellor Laster’s decision also creates a rebuttable presumption that the stockholders of a public company relied upon materially false or misleading disclosure provided to them by the company concerning a matter requiring their approval. That’s a big deal, because this presumption would permit stockholders in future cases to receive an award of rescissory damages without the need to establish individualized reliance.
Skadden recently issued this memo with an important update from “across the pond” on the Foreign Subsidies Regulation (FSR). As a reminder, here’s a snippet from the memo on what the FSR does and how it will impact M&A:
The FSR introduces a new merger review regime, separate from and in addition to existing merger control and foreign direct investment control regimes. It requires prior notification to and approval from the EC of transactions involving companies that have received financial support from non-EU governments. It also includes a new screening procedure for public tenders involving foreign-subsidized entities, and a broad investigation tool enabling the EC to investigate any commercial activity in the EU (deal-related or not) where foreign subsidies may have a distortive effect in the EU internal market.
[…] The EC will assess whether foreign subsidies (i.e., selective FFCs) distort the EU internal market. When reviewing M&A deals, this assessment is limited to the context of the transaction, although the FSR does not appear to require the EC to establish a direct causal link between the transaction and any market distortion.
Whether a foreign subsidy distorts the internal market (i.e., improves the relative competitive position of the receiving company in the internal market) will be a case-by-case assessment, giving broad discretion to the EC. Contrary to merger control, the EC may also take into account any “positive effects” in line with the EC’s broader policy goals (e.g., EU Green Deal objectives, digital transformation, European strategic autonomy, etc.). EC guidance on the criteria for assessing distortions of the EU internal market and balancing such distortions against “positive effects” is not expected until at least next year.
The latest FSR development happened in mid-July. On July 10, the European Commission issued its final Implementing Regulation and template filing form under the FSR, which “simplified some disclosure requirements to address feedback from companies and trade associations during the consultation process.” This was the last step before the FSR took effect on July 12. The notification regime contemplated by the FSR is effective October 12, 2023 — but it will still apply to transactions signed on or after July 12 that haven’t closed before October 12.
In an acqui-hire, the buyer is primarily interested in the skills and expertise of key employees of the target, and not necessarily its products/services or assets. Circa ten years ago, acqui-hires were quite popular in Silicon Valley, but it seems that companies in more industries have caught on and started considering these transactions when they’re appealing — that is, where the target’s founders and employees are more valuable to the buyer than the underlying business.
This Sheppard Mullin blog notes that, while these transactions tend to be on the smaller end in deal value, they also tend to be just as, if not more, complex than other types of M&A and identifies some of the key issues presented in acqui-hires, including tax treatment, the focus on employment terms, unique valuation considerations and structural issues. This excerpt from the blog discusses corporate approval considerations given the composition of the board of directors of many acqui-hire targets:
In many acqui-hires, the target board of directors will include members of the employee team that is being acquired. Directors generally owe fiduciary duties to a company that requires them to act in the best interest of all equityholders. Accordingly, there is risk that by approving the deal, these employee-directors may be acting in their own self-interest with respect to the compensation package they are being offered rather than in the interest of all stockholders. To protect themselves from these types of claims, the board should work closely with the company’s lawyers to make that all compensation issues are fully disclosed and that proper approvals (including any required by stockholders of the target company) are obtained.
Developed in partnership with MergerMarket, Aon recently published a report entitled “M&A Risk in Review,” which references survey data from 50 senior executives from corporate development teams, private equity firms, and investment banks and Aon’s own experience providing transaction advisory and/or insurance solutions on deals in the first half of 2023. The key takeaways from the report highlight the impact that certain macroeconomic conditions and trends are having on dealmaking. Here are some of them:
– In response to the challenging economic and credit environment, large subsets of respondents are shifting their M&A strategies to focus more on alternative investments (34%) and minority deals/joint ventures (32%). Divestments and restructuring-related deals are also expected to come to the fore (28%), with many companies likewise narrowing their focus on core sectors and geographies (30%).
– With the recent banking crisis still fresh in everyone’s minds, 72% of respondents expect financing conditions to worsen compared to 2022, including 38% who expect them to become much more challenging. In response, dealmakers are turning increasingly toward alternative financing sources, including private equity (64%) and non-bank lending (38%).
– Almost all survey respondents, 96%, expect ESG scrutiny in deals to increase over the next three years, including 48% who expect it to increase significantly. Relatedly, 24% say environmental litigation creates the most concern with respect to potential disputes in a deal, up from just 2% who said the same in the previous edition of this research in early 2022.
– Appreciating the potentially massive risk involved in acquiring a company with subpar defenses, the vast majority of respondents to our survey, 86%, say they are likely to abandon a deal if they uncover a material cybersecurity risk at the target company, including 32% who say they are very likely to walk away from a transaction.
Last week, John shared an excerpt from the Fact Sheet highlighting the key provisions of the DOJ & FTC’s proposed 2023 Draft Merger Guidelines. This S&C memo provides some color commentary on the ideology underlying these guidelines and their impact on antitrust law. Here’s an excerpt:
The skepticism about mergers reflected in the Draft Merger Guidelines is in keeping with public statements of the Biden administration’s appointees, who have been sharply critical of prior enforcement efforts. Although guidelines are not law but rather statements of enforcement intention which are not entitled to judicial deference, prior versions of the guidelines have nevertheless played a significant role in shaping antitrust law because courts have found their analytical frameworks to be persuasive.
It is uncertain whether and to what extent courts will similarly embrace the new framework advanced in the Draft Merger Guidelines, which deviate in important respects from established law. The Draft Merger Guidelines instead harken back to 1950s and 60s Supreme Court precedent, disregarding material developments from district courts, appellate courts, and the Supreme Court itself over the intervening decades. The long-term effect on non-U.S. enforcers and state attorneys general, many of which have modelled their own policies on prior versions of the U.S. guidelines, also remains to be seen.
Although the Draft Merger Guidelines do not change the underlying law, businesses planning merger activity must evaluate their positions and potential transactions carefully in view of the announced changes in the clearance and enforcement environment. Given their potential to influence non-U.S. antitrust authorities, even businesses without a U.S. nexus should review the Draft Merger Guidelines and their potential relevance to their, and their competitors’, individual circumstances and potential transactions.
For more resources, we’re posting memos and other materials in our “Antitrust” Practice Area here on DealLawyers.com.
In a recent HLS blog, Kirkland & Ellis partners Shaun Mathew and Daniel Wolf detail ten important questions to consider to make sure your board is prepared for a public attack by an activist or a hostile takeover attempt. The blog suggests preparedness has only increased in importance as sophisticated hedge funds specializing in short attacks have expanded their targets to more mature & global companies, companies face increasing tension between the pro-ESG and anti-ESG camps and the landscape for director and officer liability for Caremark claims evolves. Here are some of the questions:
– Does the board know what may be coming? Is the board receiving periodic briefings from relevant experts inside the company (e.g., compliance, legal, cyber, government relations) on the company’s most likely vulnerabilities? Are outside advisors providing input to management and the board on industry-wide developments, company-specific threats and relevant current issues (e.g., the impact of universal proxy on the company’s vulnerability to shareholder activism and the potential impact of relevant DOJ corporate enforcement priorities)? Is the company monitoring the shareholder base (including its list of registered holders) for suspicious activity and informing the board of critical investor feedback? Is it monitoring the corporate website to detect visits by activists, potential bidders and their respective advisors, as well as from government agencies and regulators?
– Does the board periodically evaluate its structural defenses to activism and takeovers? Have management and advisors reviewed with the board potential updates to its charter and bylaws to address the new universal proxy rules and where applicable state law (e.g., officer exculpation for Delaware companies)?
– Are there policies designed to protect directors (and officers) from potential Caremark claims? Is the board regularly briefed on enterprise risks and is there a process for internal and external yellow and red flags (including from whistleblowers) to be elevated to senior management and ultimately the board? Have policies and procedures been implemented to develop a record of the board’s good faith efforts to implement and monitor oversight systems and develop policies to escalate risks that are mission critical to the company?
– Is there a protocol for directors and senior executives to follow if they receive inbounds from an activist, unsolicited bidder or other third party? Does the board receive periodic reminders of best practices for notetaking, emails, texts and other communications with a view toward protecting attorney client privilege and preparing for potential litigation and proxy fights, taking into account key recent cases and enforcement actions where emails and texts were the primary source of evidence for civil plaintiffs and/or regulators?
Last week on TheCorporateCounsel.net, Liz blogged about the potential implications of the SCOTUS’s recent decision striking down affirmative action in college admissions on governance and securities lawyers. A recent BakerHostetler memo says that M&A lawyers also need to keep the decision in mind during their due diligence review of a potential target. This excerpt provides an overview of some things that will need to be reviewed & evaluated:
Potential acquirers of companies with a material number of U.S. employees should request that any target DE&I employment policies be provided for review, and they should work with employment law specialists to assess potential risk. In addition to DE&I policies, counsel should review DE&I communications and mission statements, as well as related initiatives, programs and resource groups. If necessary, counsel can assist with the design and implementation of an alternative approach to DE&I that meets the client’s objectives in a way that is compliant with law.
As we have previously discussed on July 5, 2023, DE&I hiring or promotion policies that rely on the use of group preferences or quotas based on protected categories (including race or ethnicity, among others) are already prohibited by federal law. However, the spotlight on such policies generated by the Supreme Court’s ruling makes it more likely that policies that are either noncompliant or susceptible to attack but may have escaped scrutiny in the past will be the subject of claims by private litigants.
The memo also highlights the importance of reviewing any provisions in the target’s material contracts that bind it to comply with the counterparty’s DEI policies. These can create financial and legal risks, particularly if the terms purport to bind the target’s affiliates. Any pending or historical litigation involving the target that contains DEI claims should also be reviewed and evaluated in light of the number of cases, the dollar amount of damages, and any equitable relief or other outstanding obligations under a settlement agreement.
Yesterday, the DOJ & FTC issued for public comment their long-awaited 2023 Draft Merger Guidelines. The draft was accompanied by a 4-page Fact Sheet highlighting their key provisions. This excerpt from the Fact Sheet discusses what the agencies refer to as the 13 “core” guidelines reflecting the most common issues in merger review:
Guideline 1: Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets. Concentration refers to the number and relative size of rivals competing to offer a product or service to a group of customers. The agencies examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. If so, the agencies presume that a merger may substantially lessen competition based on market structure alone.
Guideline 2: Mergers Should Not Eliminate Substantial Competition between Firms. The agencies examine whether competition between the merging parties is substantial, since their merger will necessarily eliminate competition between them.
Guideline 3: Mergers Should Not Increase the Risk of Coordination. The agencies examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is inherently vulnerable and the agencies will presume that the merger may substantially lessen competition. In a market that is not yet highly concentrated, the agencies investigate whether facts suggest a greater risk of coordination than market structure alone would suggest.
Guideline 4: Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market. The agencies examine whether, in a concentrated market, a merger would (a) eliminate a potential entrant or (b) eliminate current competitive pressure from a perceived potential entrant.
Guideline 5: Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete. When a merger involves products or services rivals use to compete, the agencies examine whether the merged firm can control access to those products or services to substantially lessen competition and whether they have the incentive to do so.
Guideline 6: Vertical Mergers Should Not Create Market Structures That Foreclose Competition. The agencies examine how a merger would restructure a vertical supply or distribution chain. At or near a 50% share, market structure alone indicates the merger may substantially lessen competition. Below that level, the agencies examine whether the merger would create a “clog on competition…which deprives rivals of a fair opportunity to compete.”
Guideline 7: Mergers Should Not Entrench or Extend a Dominant Position. The agencies examine whether one of the merging firms already has a dominant position that the merger may reinforce. They also examine whether the merger may extend that dominant position to substantially lessen competition or tend to create a monopoly in another market.
Guideline 8: Mergers Should Not Further a Trend Toward Concentration. If a merger occurs during a trend toward concentration, the agencies examine whether further consolidation may substantially lessen competition or tend to create a monopoly.
Guideline 9: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series. If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the agencies consider the cumulative effect of the pattern or strategy.
Guideline 10: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform. Multi-sided platforms have characteristics that can exacerbate or accelerate competition problems. The agencies consider the distinctive characteristics of multi-sided platforms carefully when applying the other guidelines.
Guideline 11: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers. Section 7 protects competition among buyers and prohibits mergers that may substantially lessen competition in any relevant market. The agencies therefore apply these guidelines to assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
Guideline 12: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition. Acquisitions of partial control or common ownership may in some situations substantially lessen competition.
Guideline 13: Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly. The guidelines are not exhaustive of the ways that a merger may substantially lessen competition or tend to create a monopoly.
The Draft Guidelines reflect several themes that have been priorities in the Biden administration’s antitrust policy, including heightened scrutiny of vertical mergers, transactions involving multi-sided platforms, transactions that result in the elimination of nascent competition, and transactions that may adversely affect labor markets. The comment period for the Draft Guidelines will close on September 18, 2023.
With the first anniversary of the effective date of the universal proxy rules fast approaching, commentators are starting to provide some thoughts on the extent to which the rules have – or haven’t – changed the activism landscape. This introduction to a recent Sidley article in Directors & Boards provides an overview of the changes resulting from the universal proxy rules:
The universal proxy rules, which went into effect on September 1, 2022, have shifted the landscape of shareholder activism by allowing shareholders to “mix and match” their votes across proxy cards in contested elections. Since September, the move to candidate-based (rather than slate-based) voting has encouraged activists to nominate smaller, more targeted slates, and the added leverage in settlement negotiations has ultimately resulted in activists winning a larger number of board seats.
In addition, mega-cap companies in the United States have been targeted more than ever before, despite a modest decline in total campaigns, with some companies becoming targets of the growing “swarming” phenomenon, whereby multiple activists target a vulnerable company concurrently or in rapid succession.
The article says that in this heightened threat environment, boards can benefit from an effort to “think like an activist” by thinking critically and objectively about their vulnerabilities and taking steps to address them. As I’ve previously blogged, that’s a strategy that seems to have paid dividends for companies.
By the way, Michael Levin at The Activist Investor is putting together a webcast called “Universal Proxy Card After One Year.” The program features Prof. Slava Fos of Boston College and Abbott Cooper, Managing Member of Driver Management Company LLC. It will be held on Wednesday, July 26th from 10:00 am to 11:15 am eastern. The webcast is free and you can register for it here. I attended Michael’s program on UPC last year and found it very informative. I plan on attending this one as well.
Mootness fees have become a popular alternative for plaintiffs asserting M&A disclosure claims post-Trulia. The traditional pattern for these cases has been for plaintiffs to file disclosure claims in federal court and then agree to a settlement involving the payment of a mootness fee after corrective disclosure has been made. Some federal courts have become very dubious of this practice & the Chancery Court’s recent decision in Anderson v. Magellan Health, (Del. Ch.; 7/23) indicates that Delaware remains pretty frosty toward mootness fees for disclosure claims as well.
In that case, the plaintiff sought a $1.1 million mootness fee award as part of the settlement of a disclosure claim. Chancellor McCormick rejected that request and awarded a mootness fee of only $75,000. This excerpt from Francis Pileggi’s blog on the case explains the policy considerations behind the Chancellor’s decision:
For the avoidance of doubt, the Court underscored that Delaware public policy does not encourage plaintiffs’ counsel to: “pursue weak disclosure claims with the expectation that defendants would rationally issue supplemental disclosures and pay a modest mootness fee as a cheaper alternative to defending the litigation.” Slip op. at 22.
Delaware courts have not had much opportunity to clarify Delaware policy and law on mootness fees based on supplemental disclosures because in the wake of Trulia, the “… deal-litigation diaspora spread mainly to federal courts, where plaintiffs’ attorneys repackaged their claims for breach of the fiduciary duty of disclosure as federal securities claims.” Id.
After careful reasoning and citation to scholarship on the topic and the case law developments, the Chancellor clarified that: ” At a minimum, mootness fees should be granted for the issuance of supplemental disclosures only where the additional information was legally required.” Slip op. at 23.
Going forward, the Court gave notice that it: “… will award mootness fees based on supplemental disclosures only when the information is material”. Slip op. at 24.