Gibson Dunn recently published its 2022 Activism Update. The report gives detailed information about individual activist campaigns & settlements and some summary stats, like this one related to settlement agreements:
23 settlement agreements pertaining to shareholder activism activity were filed during 2022, which is an increase from the 17 filed in 2021. 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-share ownership and/or maximum-share ownership covenants. Expense reimbursement provisions were included in less than half of those agreements reviewed, which is a decrease from previous years.
Potentially due to some UPC-related activism anxiety, this trend seems to have continued in 2023. With this in mind, the reminder in this recent post from the Milbank General Counsel Blog about fiduciary duties when settling an actual or threatened proxy fight seems particularly timely.
Boards often settle actual or threatened proxy fights by trading away board seats to activists. Delaware courts will analyze this trade as a defensive device, much like greenmail, where the board trades away something valuable to avoid a battle for corporate control. It follows that, like greenmail or a poison pill, this defensive device would be subject to scrutiny under the Unocal standard. Yet boards in general seem to be remarkably lax in analyzing whether they have fulfilled their fiduciary duties in making such a trade.
On the application of Unocal, the blog notes that: “settlement of a proxy fight would seem to necessarily involve the stockholder franchise, and, accordingly, be subject to review under Blasius. However, Blasius review has recently been ‘folded into Unocal review to achieve the same ends,'” citing the recent Delaware Supreme Court opinion in Coster v. UIP Companies, (Del.; 6/23), which John has blogged about twice. In light of fiduciary duty considerations and potential for Unocal scrutiny, the post then reviews the following key questions boards should ask and answer before awarding one or more board seats to an activist, discussing each:
Has the board identified a cognizable threat?
Is giving away board seats reasonable in relation to the identified threat?
What is the nominee’s relationship with the activist (including alignment on agenda and ongoing communications)?
What is the activist’s agenda?
Finally, the blog argues for improved disclosure around activist settlements, especially on what the settlement means for the company — what the company gained, what threat was neutralized and why settling for a board seat was preferable to allowing a vote.
This recent insight from DLA Piper highlights employment issues that are key for successful post-acquisition integration and best managed before signing the purchase agreement. One consideration, related to work council and union requirements, has a potentially draconian penalty if not identified and managed:
Those who do not deal frequently with global collective bodies and unions are often surprised at the consultation requirements, and even co-determination rights (ie, where collective body approval is required), involved in M&A and integrations. For example, a local asset transfer in a post-integration process can trigger consultation requirements with local works councils that, if ignored, can lead to criminal and/or financial penalties. These processes may take many months and, in some countries (eg, Germany), may hold up employee transfers until concluded. Depending on the jurisdiction and circumstances, the works council may be able to obtain a preliminary injunction to prevent the deal from proceeding until co-determination rights are adhered to.
The article also discusses the need to assess employee transfer laws, understand any restrictions on terminations, consider employee immigration needs, identify roadblocks that may arise in attempting to harmonize employee terms and conditions and identify compliance requirements for the target’s equity awards under legacy plans as well as steps needed to transition the target’s employees to the purchaser’s existing global equity program.
This recent Sheppard Mullin blog discusses the role of the independent accountant in resolving disputes in a purchase price adjustment calculation and, in particular, the impact of engaging an accountant as an expert or an arbitrator. The blog notes that many states began interpreting arbitration to include expert determinations or appraisals following the passage of the Federal Arbitration Act regardless of the language in the purchase agreement, but under Delaware case law, an expert determination is different from arbitration in a number of ways:
[B]y invoking language calling for an expert determination in the purchase agreement, the parties narrow the third-party decision-maker’s scope of authority to factual disputes within an independent accountant’s expertise. Experts will not usually be granted the power to interpret the contract or make binding decisions on issues of law. As a result, any legal determination or issue of contractual interpretation that forms part of an expert determination will be subject to plenary review. The review of arbitration awards is governed by the FAA which requires that courts provide significant deference to the arbitrator’s decision. Generally, courts are not as limited in their review of expert determinations.
Finally, the process and procedures of arbitration are more formal and similar to a judicial process, with rules for the submission of evidence and the opportunity for the parties to make arguments. In contrast, expert determinations are “attended by a larger measure of informality and [experts] are not bound to the strict judicial investigation of an arbitration.”
The blog goes on to discuss how parties can elect an expert determination or arbitration:
Delaware courts have consistently held that specifying in the purchase agreement that the independent accountant will act as “an expert and not as an arbitrator” is a key indicator of the parties’ intent to obtain an expert determination. … Where the parties have not been explicit in their intent to employ an expert determination (i.e., by failing to include the “expert not arbitrator” language), Delaware courts will examine other aspects of the purchase agreement to determine the parties’ intent, including the scope of authority granted to the accountant, the dispute resolution procedures, and whether the procedures will finally settle the dispute.
[I]f arbitration is desired, the purchase agreement should (1) clearly state that the parties intend that the accountant act as arbitrator, and (2) specifically refer to a set of procedural rules to govern the arbitration. Alternatively, if the parties intend to engage the accountant as an expert only, the purchase agreement should clearly provide that the accountant will be acting “as an expert not as an arbitrator”.
John blogged last week about the SEC’s adoption of new rules and amendments intended to tighten the regulation of private fund advisers. Like most recent rules, they were approved by a 3-2 vote along partisan lines. As John stated last year on TheCorporateCounsel.net Blog, “it’s gotten to the point where when you read one of our blogs about rule adoptions you should just assume that was the vote unless we tell you otherwise.” So, while the vote isn’t particularly noteworthy, the dissenting statements from Commissioners Peirce and Uyeda are worth spending a minute on.
While acknowledging that the final rules “are less constricting than those originally proposed,” Commissioner Peirce expressed her perspective that the final rules are “ahistorical, unjustified, unlawful, impractical, confusing, and harmful.” She discussed the related sections of the Investment Advisers Act and Dodd-Frank and argued that they don’t provide a sufficient statutory basis for the rulemaking:
These provisions fall within a subsection titled “Authority to Establish a Fiduciary Duty for Brokers and Dealers,” which is part of a section added to Dodd-Frank to address concerns around standards of care for retail investment advisers and broker-dealers. Relying on a statutory provision that is clearly aimed at retail investors’ relationships with their financial professionals is questionable, to say the least. The release nevertheless strains to use a provision aimed at “sales practices, conflicts of interest, and compensation schemes” to place itself in the middle of negotiations between private fund advisers and investors. While the release acknowledges that section 913 makes numerous references to “retail investors,” it takes comfort in the fact that “Congress spoke of ‘investors,’ and in so doing gave no indication that it was referring to ‘retail customers[]’ . . . .”
There was an indication that it was still focused on retail, even though it was using the term “investor”; that indication came in the fact that the whole section is retail-oriented. The use of the term “investor” instead of “customer” in section 211(h)(2) is not designed to pull in private fund investors, but allows the Commission to regulate interactions between financial professionals and retail investors before they become customers.
Among Commissioner Uyeda’s concerns was the rule’s potential to exacerbate the entrenchment of the largest investment advisory firms:
Finally, many commenters expressed concern that the rules will disproportionately impact smaller advisory firms, which are owned to a greater degree by women and minorities. Smaller firms will have more difficulty undertaking the additional obligations required by these rules. The House Appropriations Committee “strongly encouraged” the Commission “to reconduct the economic analysis for the Private Fund Advisers proposal to ensure the analysis adequately considers the disparate impact on emerging minority and women-owned asset management firms, minority and women-owned businesses, and historically underinvested communities.” It is unfortunate that the Adopting Release dismissively responds to these concerns by stating that investment advisers “have the option of reducing their assets under management to forego registration, thereby avoiding the costs of the final rule that only apply to registered advisers, such as the mandatory audit rule.”
Asking women- and minority-owned advisers to reduce their assets under management to under $100 million to avoid registration is astonishingly terrible advice. In other words, never dream big.
These are some big topics that we can’t help tackle here (even if we’d like to)! But Commissioner Peirce also raised the issue of implementation challenges — citing “uniformity of the disclosures required, the breadth and ambiguity of the rule’s defined terms, the operational difficulties of providing advance notice of any preferential treatment related to material economic terms, the process for obtaining investor consent, the chilling of communications between advisers and investors, and the brevity of the compliance period.” For that, we have resources! We’ve posted the adopting release in our “Private Equity” Practice Area, and we’ve already begun posting memos about the rule there as well!
The DOJ & FTC’s enforcement push targeting director interlocks raised several unanswered questions, including whether Section 8 of the Clayton Act applied to interlocks involving non-corporate entities. Last week, the FTC answered that question with a resounding “Yes!” when it announced the terms of a consent order resolving antitrust issues associated with the proposed acquisition of EQT Corporation by funds affiliated with Quantum Energy Partners.
The Quantum/EQT settlement was the FTC’s first enforcement action targeting interlocks in 40 years, but that didn’t discourage the agency from staking a broad – and controversial – claim to authority to pursue interlocks enforcement actions against non-corporate entities. The excerpt from Davis Polk’s memo on the FTC’s action explains:
By its terms, Clayton Act Section 8 applies to “corporations (other than banks, banking associations, and trust companies)” without reference to LLCs or partnerships or other forms of organization. Here, Quantum is organized as a limited partnership and the two acquisition vehicles owned by Quantum were structured as a limited partnership and an LLC. As such, we believe it is the first challenge by either the FTC or the DOJ of an interlock involving an LLC or partnership.
FTC Chair Lina Khan, joined by the two other Democratic commissioners, issued a statement that “[the consent order] makes clear that Section 8 applies to businesses even if they are structured as limited partnerships or limited liability corporations.” This follows comments from the former head of the Antitrust Division, Makam Delrahim, in 2019 that the DOJ may also be considering enforcing Section 8 against non-corporate entities.
This is a controversial position to take. The Supreme Court has previously held that Section 8 does not apply to banks because they are not “corporations” and commentators have suggested that the same reasoning should exclude partnerships and LLCs from coverage under Section 8.
The memo also notes that the FTC’s complaint claimed that the interlock was independently an “unfair or deceptive act or practice” that violated Section 5 of the FTC Act. Last year, the FTC issued a policy statement asserting that Section 5 provided it with broad authority to target alleged violations that have historically been addressed through other provisions of the antitrust laws. This enforcement action demonstrates that this policy statement wasn’t just an academic exercise on the FTC’s behalf.
The DOJ also made some interlocks news last week when it announced that two NextDoor directors had resigned from the board “in response to the Antitrust Division’s ongoing enforcement efforts around Section 8 of the Clayton Act.” The DOJ’s announcement added that the interlocks initiative has led to 15 interlocking director resignations from 11 boards and closed with a statement encouraging anyone with information on companies with interlocking directorships to drop a dime on them.
Yesterday, the SEC announced the adoption of new rules and amendments intended to tighten the regulation of private fund advisers. Here’s the whopping 660-page adopting release and here’s the 3-page Fact Sheet. This excerpt from the Fact Sheet provides a summary of the new rules:
The new rules require private fund advisers registered with the Commission to:
– Provide investors with quarterly statements detailing information regarding private fund performance, fees, and expenses;
– Obtain an annual audit for each private fund; and
– Obtain a fairness opinion or valuation opinion in connection with an adviser-led secondary transaction.
The new rules require that all private fund advisers:
– Prohibit engaging in certain activities and practices that are contrary to the public interest and the protection of investors unless they provide certain disclosures to investors, and in some cases, receive investor consent; and
– Prohibit providing certain types of preferential treatment that have a material negative effect on other investors and prohibit other types of preferential treatment unless disclosed to current and prospective investors.
Additionally, the amendments will require all registered advisers, including those that do not advise private funds, to document in writing the annual review of their compliance policies and procedures.
Media reports note that in many areas, the final rules represent a significant retrenchment from the scope of the original proposal. Yesterday’s Axios Pro Rata newsletter provided this summary of the ways in which the rules were pared back from the original proposal:
– A “prohibited activities rule” has become a “restricted activities rule,” with many of the underlying actions now allowed so long as there is investor disclosure. For example, the ban on “fees for unperformed services” like accelerated monitoring fees is gone, although an SEC official insists that’s because staff determined they were already prohibited under other statute.
– Funds still will be allowed to charge LPs for fees tied to regulatory or compliance issues, so long as it’s disclosed. They even can charge fees on a non pro rata basis, so long as it describes to LPs why it believes such a move is fair and equitable. The only exception is for fees tied to an SEC investigation.
– Disclosure also is the buzzword for a clause that would have stopped GPs from reducing clawbacks by the amount of actual or expected taxes. So long as LPs are informed, it’s allowed.
– There was no change made to private fund liability rules, which would have made it much easier for LPs to sue GPs.
Compliance dates for the new rules vary. For the rules requiring private fund audits and quarterly statements, the compliance date will be 18 months after the date of publication in the Federal Register. The rules requiring fairness or valuation opinions on adviser-led secondaries, the rules restricting preferential treatment and the restricted activities rules for advisers with more than $1.5 billion in private fund assets under management will go into effect 12 months after that date. Advisers with less than $1.5 billion in such assets will have an additional six months after the publication date to comply. Compliance with the amended rules on documentation of compliance reviews will be required 60 days after publication in the Federal Register.
The DOJ & FTC’s draft merger guidelines have resulted in an avalanche of law firm memos – which we’re posting in our “Antitrust” Practice Area. But one aspect of the draft guidelines that I hadn’t seen addressed until I read this post from a European economist on the U of Chicago’s ProMarket Blog was what signal other antitrust enforcement agencies might take from them. Here’s an excerpt that covers that topic:
Other jurisdictions have their own merger control guidelines, some very dated. The tone and posture of the U.S. Guidelines always matter and reverberate across jurisdictions. The 2010 Guidelines saw Europeans eventually come on board, for instance, with the whole paraphernalia of Upward Price Pressure indices; before that was the replacement of our ordoliberal tradition and presumptions with perceived Chicago innovation. These new draft Guidelines are an especially strong signal that the assessment of mergers is part of an economic policy toolkit that should not be narrow and self-referential, immanent and unchanging, but subject to re-evaluation.
This message strongly resonates in Europe with many: the recent controversy in the European Parliament around the appointment of a new Chief Economist at DG Competition, the distancing of multiple Commissioners and officials (including DG Comp’s) from the outgoing Chief Economist’s statements on industrial policy vs. efficiency invite a debate on antitrust enforcement that is not technocratic and insular, and away from obscure “consumer welfare” rules only economists can opine about. In a polycrisis world it would be strange and bizarre if only competition policy remained a haven immune from deep rethinking and reconsideration.
Yeah, I don’t know what the “ordoliberal tradition” is either but we’re dealing with an economist here and I think you still get the point – when US antitrust regulators sneeze, their European counterparts usually catch a cold.
Last month, I joined the chorus of commenters who proclaimed the death of the Blasius v. Atlas Industries ” standard of review after the Delaware Supreme Court’s decision in Coster v. UIP Companies, (Del.; 7/23). In that decision, the Court held that Blasius “can be folded into Unocal review to accomplish the same ends – enhanced judicial scrutiny of board action that interferes with a corporate election or a stockholder’s voting rights in contests for control.” A recent Chancery Court case suggests that we may have been at least somewhat premature in reaching the conclusion that Blasius is an “ex-Parrot.”
Vice Chancellor Zurn’s recent decision in In re AMC Entertainment Stockholder Litigation, (Del. Ch.; 8/23), suggests that at least some of Blasius remains in non-control contest settings. The case involved a proposed settlement of litigation surrounding the issuance and conversion of AMC’s APE units. One of the issues raised by the objectors to the settlement was the standard of review that should be applied to the fiduciary duty claims arising out of the issuance of the APE units for purposes of valuing those claims.
The plaintiffs claimed that Blasius should apply, while the defendants said that the business judgment rule should attach. The Delaware Supreme Court decided the Coster case while this one was pending, so Vice Chancellor Zurn had to address whether Blasius retained viability as an independent standard of review for director actions targeting the franchise outside of contests for control following that decision. She concluded that it did, although in a diluted form that cast aside the “compelling justification” standard for a heightened “reasonableness review.” This excerpt explains her reasoning:
Under my reading of Blasius and the law that followed, including Coster IV, the business judgment rule would not have applied to Plaintiffs’ breach of fiduciary duty claim. Directorial usurpation of stockholder voting power can inspire enhanced scrutiny regardless of the topic of the vote or its effect on corporate control. Case law blending Blasius with other enhanced scrutiny doctrines does not foreclose applying Blasius alone. Delaware law urges restraint in applying Blasius enhanced scrutiny alone, but it need not be coupled to another doctrine to have legs. Delaware law teaches that Blasius’s original formulation, requiring directors to prove they had a compelling justification for thwarting the franchise, is too potent for contexts in the vote does not touch on corporate control.
This opinion concludes that where a plaintiff establishes directors acted with the primary purpose of impeding the exercise of stockholder voting power for a vote on issues other than corporate control, in the absence of another basis to apply enhanced scrutiny, the directors must demonstrate their actions were reasonable in relation to their legitimate objective.
The Vice Chancellor ultimately concluded that while the Plaintiffs had established a viable claim that AMC’s directors acted unreasonably in issuing the APE units, that claim should be discounted because the directors had potentially viable defenses based on its potential bankruptcy in the absence of that issuance.
In his commentary on Coster, UCLA prof. Stephen Bainbridge noted that the standard announced there for reviewing actions targeting the franchise in contests for control could be characterized as “Unocal+”. If that’s the right way to characterize Coster, then it seems appropriate to characterize the Chancery Court’s spin on the remnants of Blasius outside of control settings as “Blasius-“,
I recently blogged about PE sponsors putting more equity in their deals in response to the challenging deal financing environment. Now, this Institutional Investor article says that those sponsors are increasingly using “Net Asset Value” (NAV) loans to fund add-on acquisitions in situations where they don’t wish to ask investors to pony up more equity. What makes the rise in NAV loans interesting is that in an industry premised in large part on using other people’s money to the greatest extent possible, this type of financing puts the PE fund’s balance sheet on the line. This excerpt from the article explains:
NAV, or net asset value, loans are revolving credit facilities extended to private equity firms and secured by an entire fund. This is different from what private equity firms have done in the past when they typically borrowed money against individual portfolio companies. NAV loans have benefits similar to subscription lines of credit, including improved internal rates of return and fewer capital calls. But NAV loans are revolvers with significantly longer terms.
The article says that NAV loans are also being used to facilitate refinancings at the portfolio company level and, in some cases, to finance distributions to investors. The article also highlights the fact that growing demand for these loans has resulted in a number of new financing sources entering the market to provide them.
This spring on TheCorporateCounsel.net, John blogged about the Delaware Chancery Court’s decision in In re Baker Hughes, a GE Company, Derivative Litigation, (Del. Ch. 4/23) involving a derivative action arising from the merger of Baker Hughes with General Electric’s oil and gas division claiming that GE exercised control over Baker Hughes and forced it to agree to transactions that unfairly favored GE. Vice Chancellor Will granted a motion to terminate the derivative action based on the recommendation of a one-person special litigation committee, even though that committee’s process wasn’t pristine:
To be sure, the committee was imperfect. Having a single member is not ideal. Nor is the fact that the member exchanged a handful of messages with an investigation subject. The committee’s report also omits any discussion of the potential transaction advisor conflicts it investigated. But despite these flaws, the committee’s independence, the thoroughness of its investigation, and the reasonableness of its conclusions are not in doubt.
John pointed out that special litigation committees can play a helpful role in addressing derivative claims in situations where a plaintiff has established demand futility. That committee has to be comprised solely of independent and disinterested directors, but there doesn’t have to be a room full of them for a company to reap the benefits of such a committee.
Sidley’s Enhanced Scrutiny blog discussed the decision in further detail and highlighted that the court carefully parsed the messages in question. At the time, the SLC member probably thought were totally innocuous — namely, “Thanks for the wine” referring to wine all company directors received as part of virtual social events during the pandemic and commentary about a remote SLC interview that the court ultimately determined was referring to “overcoming internet connection complications, rather than to the substance of the SLC’s investigation.”
Together, the court’s careful parsing of these communications illuminates a set of ground rules for committee member communications. SLC members should be mindful of their communications with others on the board and should generally not discuss the committee’s work with non-members. Any concerns in this space are best discussed with counsel. Indeed, where a reference to the SLC’s work is absolutely essential for logistical planning purposes, the communication should clearly identify the logistical need and clearly limit the communication to that need. As this case illustrates, innocuous social events such as virtual happy hours that involve de minimis gifts to the entire board likely do not jeopardize the board member’s independence, but they increase litigation risk and highlight the reasons to avoid such discussion if possible.