The Delaware courts haven’t been too kind to poison pills in recent years, but Vice Chancellor Laster’s bench ruling in Building Trades Pension Fund of Western Pennsylvania v. Desktop Metal, (Del. Ch.; 7/23) (transcript)), upheld a rights plan in the face of a derivative action seeking to enjoin its application. At issue in the case was language in the plan providing that a person would be regarded as the beneficial owner of any shares held by another person with whom they had an “agreement, arrangement or understanding” with respect to the acquisition, holding, voting, or disposition such shares.
The plaintiff argued that this language – referred to as an “AAU provision” – prevented stockholders from sharing their views with each other on how to vote on a proposed merger. Vice Chancellor Laster disagreed, and this excerpt from a recent Richards Layton memo on the case explains his reasoning:
On July 5, Vice Chancellor J. Travis Laster, ruling from the bench on the motion to expedite, found that the plaintiff had failed to show a threat of irreparable harm and questioned whether the claims in the complaint were even colorable. The court characterized Desktop Metal’s rights plan as a whole, and the definition of beneficial ownership (including the AAU provision) in particular, as “absolutely standard,” noting that the language in the AAU provision was “not new” and that the exact same “agreement, arrangement or understanding” language has been used for years in Section 203 of the Delaware General Corporation Law, which is Delaware’s principal antitakeover statute, and in Section 13D of the Securities Exchange Act of 1934.
The court noted that the AAU provision included a standard exception for soliciting revocable proxies and also stated that “it doesn’t prohibit [stockholders from] talking about what they want to do” or from “voting down the deal if they want to do it.” In short, the court concluded that Desktop Metal’s rights plan was “a standard plain vanilla pill with a standard plain vanilla [AAU provision] in what is a standard plain vanilla buy-side deployment.” In finding there was no showing of irreparable harm, the court described the dispute as “academic,” given that the complaint was being brought by a stockholder “desirous of simply engaging in the academic question of whether, in this setting, standard [AAU provision] language creates some issue under enhanced scrutiny” rather than by a party who was being actively prevented from pursuing a course of action.
The memo says that Vice Chancellor Laster denied the plaintiff’s motion to expedite the proceedings, and the plaintiff voluntarily dismissed the complaint a few days later.
This recent Cooley blog provides guidance on how boards should approach assessments of multiple strategic alternatives and offers up 13 principles that directors should keep in mind when engaging in that process. This excerpt says that a sophisticated understanding of potential alternatives allows a board to create leverage when dealing with counterparties:
Challenges are presented when different types of available strategic alternatives would necessarily evolve on different execution timetables. Experienced advisers, especially if utilized early, can help companies manage timelines and processes to minimize situations where a decision needs to be made on one pathway before another potentially compelling pathway is ripe for consideration – and even create leverage by working to keep competing alternatives alive.
Transaction counterparties often try to use speed and a sense of urgency to drive outcomes (e.g., “accept my offer at a premium to your trading price now, or it’s off the table”). A board that proactively educates itself on a “clear day” regarding the company’s available strategic alternatives (and the time and key steps necessary to implement each) will be able to react more nimbly to unsolicited approaches, which can help mitigate the first mover advantage for the party making the unsolicited approach.
Other matters addressed in the blog include the importance of a sound process, duty of loyalty considerations, the appropriate use of board committees, and the need to understand stockholder approval requirements and the potential for stockholder challenges.
This LinkedIn newsletter from Swaney Group Advisors addresses the challenge of retaining key talent during an acquisition or merger — step 10 in their 11-step process for post-merger integration. Before addressing retention, the newsletter notes the importance of taking a nuanced approach to identifying key talent. It suggests gathering data and having conversations internally to identify anyone “instrumental in driving team cohesion, innovation, or client satisfaction” so that individuals who may be crucial to the integration process but may not be in top-tier roles aren’t overlooked in retention efforts.
When seeking to retain this broader group, the newsletter highlights important strategies beyond financial incentives, focused on communication, career development and culture:
– Regular town hall meetings, feedback sessions, and transparent communication channels are essential to quell anxieties and fortify trust. Moreover, leaders who actively engage in these dialogues signal commitment, fostering a culture of mutual respect and understanding.
– Offering clear career progression paths, continuous learning opportunities, and exposure to cross-functional projects can make employees see the merger as an avenue for enhanced career trajectory.
– Merging companies often means blending disparate corporate cultures. Ensuring that this blend is harmonious and inclusive can prevent potential fractures in the team. Celebrating cultural differences, organizing team integration events, and promoting mutual respect are steps that can foster a united, cohesive workforce.
In addition to these strategies, “financial acknowledgment remains crucial.” Periodic benchmarking can ensure competitive compensation packages for key employees.
To that end, the team at WTW asked us to share that they are currently conducting a survey of incentive structures and strategies companies use to retain key employees during an acquisition. The survey results should provide useful benchmarking information to shape retention programs more efficiently. WTW will provide a complimentary full report of the survey results to participants who complete the survey before October 27.
Earlier this week, in The Williams Companies v. Energy Transfer Equity, (Del.; 10/23), the Delaware Supreme Court affirmed a prior Chancery Court decision finding that ETE had breached its merger agreement with Williams and ordering it to pay a $410 million breakup fee. In doing so, it also affirmed the Chancery Court’s rejection of ETE’s argument that a carve-out contained in the merger agreement’s disclosure schedules permitting it to engage in a $1 billion securities offering applied to any potential violations of the agreement’s ordinary course and interim operating covenants arising out of the offering. The Court also affirmed the Chancery Court’s rejection of ETE’s claims that Williams breached the merger agreement.
Like the Chancery Court’s decision, this decision, which brought this long-running litigation to an end, is a must-read for lawyers involved in drafting and negotiating disclosure schedules and the related contract terms.
In a recent post for the CLS Blue Sky Blog, S&C’s Olivier Baum and Harvard Prof Guhan Subramanian discussed data on redemption mechanisms in shareholder rights plans based on 130 poison pills adopted by US companies from January 1, 2020 to March 31, 2023 (excluding NOL pills). Specifically, they considered the frequency and utility of the two main ways to structure the redemption provision:
Trip-Wire Feature: If the poison pill implements a “trip wire” concept, the rights granted thereunder are triggered if, and can no longer be redeemed by the board once, the acquirer exceeds the triggering threshold set in the shareholder rights plan.
Last-Look Feature: If the poison pill implements a “last look” concept, the board of the target company has a “last look” for a certain period after the poison pill has been triggered to decide whether to redeem the rights granted thereunder. If the board redeems the rights, the pill is thereby “defused,” and the bidder can continue buying shares of the target company.
The pills were almost evenly split between the two approaches, with the trip-wire feature being slightly more common. Supporting its claim with data that pills drafted by firms ranked Band 1, 2 or 3 in Corporate/M&A by Chambers tend to include the trip-wire feature, the blog argues that having a last-look feature diminishes the deterrent effect of a pill for the following reasons:
[T]he company installing a poison pill wants to be perceived as willing to dilute any bidder that acquires shares in excess of the threshold set in the shareholder rights agreement. However, if a bidder triggers a poison pill nonetheless, the company is likely to have multiple reasons for not wanting to follow through with the dilution. First, and as we show in our paper, only one-third of U.S. public companies have a sufficient number of authorized shares to effectuate a full exercise of a flip-in feature. Second, the triggering of a poison pill and the exercise of the flip-in feature result in the company receiving billions of dollars in cash on the balance sheet, which generally is way more than a company is reasonably able to use to finance its business. Third, if a bidder were to present an attractive offer contingent upon a redemption of a poison pill with a last-look feature, the board would have to comply with the fiduciary duties it owes to all shareholders and consider these alternatives.
If the board were to conclude that the offer is in the interest of all shareholders, it would have to negotiate with the bidder on the terms of a merger – however, not from a position of strength but rather a position of weakness due to (i) its failure to follow through with its threat to dilute the bidder, and (ii) the clock of – typically – 10 business days ticking until the board must decide on the redemption of a pill with a last-look feature.
All these points that may disincentivize a company’s board to follow through with the threatened dilution can be avoided under the trip-wire structure: In the case of a poison pill with a trip-wire feature, the responsibility for whether or not the dilution will be effected rests solely with the bidder’s decision (not) to trigger the poison pill. As the target company’s board has no possibility to “pull back” if and when the pill is triggered, it can effectively commit to the threatened dilution, thereby increasing the potency of such threat and thus enhancing its leverage and bargaining power.
For companies with on-the-shelf poison pills with a last-look feature, stow this away as something to discuss and consider for your next regular review. And, while on the topic of poison pills, there are a few being challenged in Delaware, as reported by Bloomberg, and we’ll be tracking how those cases play out.
In this post for the HLS Blog, three Skadden partners discuss the unique risk of short attacks. We’ve all seen that risk play out many times this year with numerous high-profile short attacks in the news. As the blog notes, while a traditional long activist is seeking to enhance value, the goal of a short attack is to have the opposite effect on shareholder value — to profit from a drop in the target’s stock price resulting from the release of a short report and accompanying media campaign. As Kevin LaCroix recently pointed out on the D&O Diary, over a third of recently filed SPAC-related securities suits include allegations that were first raised in a short report published prior to the complaint. These unique threats require tailored preparation and response.
The HLS post suggests ways boards and management teams can prepare for a short attack & understand and address vulnerabilities, provides important considerations for responding and identifies pitfalls to avoid. Here are two recommendations from the blog regarding the target’s communication strategy:
Do Not Expect To Engage With the Short Activist
There is rarely any point to engaging with a short activist. Unlike traditional long activism campaigns, where the goal is to cause the company to take action to increase shareholder value, the short activist’s sole goal is to destroy shareholder value. Consequently, the short activist is not interested in coordinating with or engaging with management to do what is in the best interests of shareholders. These investors have a thesis and generally are unconcerned with the company’s contrary position. Therefore precious time and resources should not be expended attempting to sway short activists to change their positions. Instead, energy should be directed to making the company’s case to the broader investor community.
Do Not Ignore the Attack or Leave It to Shareholders To Sort Out the Truth
In general, it is not in the company’s best interests to completely ignore a short attack. Companies should not rely on the investor community to identify how a short activist’s claims are incorrect or misleading. Failing to address a short seller report or campaign publicly may increase investor uncertainty and lead investors to assume the truth of the short seller’s claims. The onus is on the company to disprove these claims.
Responses should be well-articulated and, although time is of the essence, they should not be impulsive: They should be focused on addressing the substantive criticisms and allegations and not on the activist or its motivations. Any personal attacks or aggressive language toward the short seller are counterproductive and may be viewed as unprofessional and unbecoming of the company’s leadership, lending support to the short campaign.
In rare circumstances, if there has been no notable impact on the company’s stock price and if the campaign has not gained traction with the company’s investor base or the media, a company may consider not responding. In such instances, responding could simply put the spotlight on the short seller’s allegations.
Even if the board deems that a public response is unwarranted, the short campaign should be carefully tracked, and the company should remain prepared to respond if circumstances change.
If you’re looking for an overview of what CFIUS is all about, check out this recently updated “CFIUS Overview” from Cooley. It addresses, among other things, CFIUS’s jurisdiction, mandatory filings and the voluntary review regime, types of CFIUS filings, and filing fees. This excerpt addresses the differences between Declarations and Notice filings and their respective advantages and disadvantages:
Declarations – Advantages and Disadvantages. A Declaration is a short-form summary document with an expedited 30-day “assessment” period. Declarations require far less (and far less detailed) information than Notices and do not require the parties to pay a filing fee to the Treasury.
The 30-day assessment period is not always sufficient for CFIUS to identify and resolve national security issues arising from the underlying transaction, however, meaning that filing a Declaration can result in an indeterminate outcome (e.g., a request from CFIUS for a Notice filing). Consequently, while Declarations offer the prospect of a relatively quick and inexpensive CFIUS process, they can – in practice – cost the parties more time and money if CFIUS requests a Notice after the Declaration assessment concludes. Similarly, parties that receive a “no action” outcome must decide whether to consummate their transaction and live with the possibility of another CFIUS review in the future.
Notices – Advantages and Disadvantages. A Notice is a more comprehensive and detailed submission with lengthier “review” and “investigation” periods that collectively can last between 45 and 105 days – and sometimes much longer. Notices require payment of filing fees based on the value of the underlying transaction.
R&W Insurance is a standard feature in private company transactions, but this WTW blog discusses its use in take-private transactions involving public company targets. The blog highlights some of the complexities involved when using RWI in these transactions and methods for addressing the issues they present. This excerpt discusses issues surrounding fraud & subrogation rights:
In a typical RWI placement, carriers do not require a right to subrogate against the sellers for any loss the carrier pays out to the buyer, except in the event of fraud of the sellers. This structure mirrors the traditional indemnity construct, which also carves out fraud from the exclusive remedy clause. Carriers rely on the fraud exception to ensure that sellers act in good faith during the diligence and scheduling process.
In a take-private transaction, however, not only are shareholders less likely to be involved in the transaction process, but the disparate nature of a public target’s shareholder base precludes any reasonable avenue for recovery for seller fraud by an RWI carrier. This issue can be addressed in several ways. One such way would be to require that the management team and/or certain major shareholders involved in the transaction and scheduling process agree to remain on the hook post-closing for fraud. This solution gives carriers comfort that the parties negotiating the transaction documents will act in good faith and limits, to a reasonable number, the parties that would be responsible for a post-closing fraud claim.
A second, and significantly more buyer-friendly, potential resolution is to request that the carrier forego any right to subrogate against seller parties for fraud. While, historically, carriers resisted this approach, in recent years many have become increasingly receptive given that, as the market for take-private transactions (and RWI generally) has matured, carriers are gaining comfort that all parties will act in good faith regardless of whether they are subject to recourse for fraud.
Other topics addressed in the blog include the implications of “Big MAC” qualifiers to reps on the due diligence process for insured deals, and the exclusion from coverage of claims brought by public shareholders.
This Mayer Brown memo provides an overview of the significant changes that the Biden Administration is attempting to make when it comes to antitrust regulation of M&A. Interestingly, while the memo recounts the very aggressive actions that the antitrust agencies have taken in litigation and in proposed changes to the HSR form & Merger Guidelines, it also raises the possibility that the DOJ & FTC may be pulling back from their publicly announced aggressive enforcement positions. This excerpt explains:
Could the agencies be pulling back from their publicly stated aggressive enforcement position? As mentioned above, the agencies have faced tough sledding in court, where government losses have far outnumbered the wins. In addition, importantly, the courts have endorsed the traditionalist approach of favoring settlements that address competition concerns without necessarily blocking a deal outright. While it is too early to tell, the FTC’s recent settlements of ICE/Black Knight and Amgen/Horizon through more traditionalist-style remedies could signal a less confrontational approach to antitrust review going forward.
There are other signs that the agencies may be tempering their views. For example, an FTC official recently discussed the draft Merger Guidelines and suggested that the final version will be amended to make clear that the agencies will consider merging parties’ arguments that a transaction’s increase in concentration will not necessarily harm competition.
Finally, the Merger Guidelines are just what their title states – guidelines, not law. Courts do not have to follow the agencies’ pronouncements on how the agencies review mergers. Courts will follow the law and facts, and as made evident by the agencies’ recent losses, courts do not mechanically defer to the government’s position.
The memo also addresses the implications for dealmakers of the aggressive positions taken to date by the DOJ & FTC, including their impact on deal terms. It also makes the point that although the agencies have taken a hard line publicly, the vast majority of deals are still clearing antitrust review. It points out that the agencies opened initial investigations into 270 deals, which represented just under 8% of HSR reportable transactions. Second requests were issued in only 65 deals and, ultimately, only 32 deals were stopped. That’s less than 0.1% of reportable transactions.
Last February, the DOJ announced a new corporate voluntary self-disclosure (VSD) policy that provides incentives to encourage self-disclosure of corporate misconduct, cooperation in investigations & appropriate remediation efforts. Those incentives are potentially substantial and may even include a decision not to prosecute a company. In a recent speech, Principal Deputy AG Marshall Miller addressed the application of the VSD policy to M&A transactions. Here’s an excerpt from his speech:
One area where we’ve received lots of feedback about self-disclosure from the private sector relates to mergers and acquisitions. Encouraging corporate responsibility includes avoiding unintended consequences – like deterring companies with good compliance programs from acquiring companies with histories of misconduct. Acquiring companies should not be penalized when they engage in careful pre-acquisition diligence and timely post-acquisition integration to detect and remediate misconduct at the acquired company’s business.
The Criminal Division’s Evaluation of Corporate Compliance Programs emphasizes the importance of including compliance voices in the M&A process. The Criminal Division’s Corporate Enforcement Policy also offers the incentive of the prospect of a declination – in essence, a safe harbor – for misconduct reported to the Department that is uncovered during pre- or post-acquisition due diligence.
Deputy AG Miller pointed to the DOJ’s 2022 Safran declination as an example of the benefits of self-reporting, cooperation and remediation in the M&A context. In that case, the company voluntarily self-disclosed that two acquired companies had, prior to their acquisition, paid a consultant to help them win contracts with the Chinese government, despite knowing that some of that money would be used to bribe government officials. In addition to its voluntary self-disclosure, the company cooperated with DOJ and took appropriate remedial actions. As a result, the DOJ opted not to prosecute it.
He went on to note that the DOJ intends to “highlight the critical importance of the compliance function having a prominent seat at the table in evaluating and de-risking M&A decisions.” He promised that as part of the DOJ’s efforts to enhance “consistency, transparency and predictability in corporate enforcement,” he expected that Deputy AG Lisa Monaco – who spearheaded the development of the VSD program – will address voluntary self-disclosure in M&A in “the near future.”