This Freshfields blog discusses an oft-overlooked issue in post-closing M&A disputes — crossover witnesses. Here’s the issue:

A crucial aspect of any M&A deal is the transfer of employees along with the Target company. […] But often those same individuals – whether senior executives of the Target or knowledgeable employees of the Seller – may have been key players at the deal stage, responsible for preparing relevant technical and financial documents constituting the basis of the Purchaser’s due diligence and final decision.

It is therefore no surprise that these employees’ knowledge of the Target and the transaction becomes crucial in resolving any subsequent disputes. […] However, complications arise when these individuals are now employed by the opposing party in the same proceedings. Even if the Seller manages to engage with the witness, there is no guarantee that the witness will cooperate or agree to testify against their new employer.

When a deal provides for the transfer of key personnel or where future employee transfers are foreseeable, the blog suggests sellers take a proactive approach “to ensure a full presentation of the party’s factual and legal case in a subsequent dispute and to preclude disruptive procedural conflicts over access to witnesses.” Here are excerpts from the recommendations:

– Seller should ensure that the key face-to-face negotiations are not led by individuals who are likely to transition to the Purchaser’s side post-Closing – or at least minimise the risk by having two co-leads for crucial workstreams and meetings

– [I]ncorporate appropriate provisions in the deal documents regarding access to transferred employees in case of a dispute. For example, a provision could state that in the event of a dispute, the Seller will not be prevented from having conversations with former employees and potentially presenting them as a witness

– Care should be taken to ensure that documents (or copies thereof) remain with the Seller and are not transferred in their entirety along with the Target. Best practices must be implemented to prepare meeting minutes and handover protocols. All documents in the transferring employee’s possession and control must be archived properly particularly ensuring that relevant transaction documents stored in personal folders or storage devices are handed over to the former employer

– [E]nter into a non-disclosure agreement imposing appropriate confidentiality obligations on the employee. The aim should be to prohibit the employee from discussing or sharing confidential information in relation to any future disputes arising out of the transaction. If the employee transfers after the dispute has arisen, it would be advisable to set out the scope of the confidentiality obligations in more detail

– Meredith Ervine 

The November-December Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:

– Delaware Court Addresses Ability to Sue Buyers for Lost Premiums in M&A Deals
– Delaware Chancery Addresses Section 271 of DGCL’s ‘Substantially All of the Assets’ Requirement

The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.

– Meredith Ervine

While every conflict is different, this Skadden alert discusses examples of what to do — and what not to do — when persons involved in a deal process have conflicts. The examples of behavior viewed favorably or unfavorably are based on four recent Delaware decisions involving deal processes challenged by stockholders due to conflicts.

This example highlights how the independence — and also the experience — of the financial advisor to the board or special committee can influence the court’s perception of the deal process:

– The courts in the Tesla, Oracle and Columbia Pipeline cases praised the boards or special committees for selecting top-tier financial advisors without longstanding relationships or conflicts with their companies or counterparties.

– In the Tesla case, the court positively noted that, during due diligence, the company’s banker investigated the seller’s financial state, had discussions with the seller’s financial advisor, adjusted the focus of its work as concerns arose, reran analyses as needed, and kept the board apprised of new developments. The court also noted that, in response to information discovered during due diligence, the board lowered the offer price.

– In the Mindbody decision, the court applauded the company’s banker for sharing its knowledge about the buyer, including its modus operandi and associated risks, but said that the company’s CEO ignored that information.

– Meredith Ervine

I’m sure you’ve already heard about the Starbucks proxy contest led by the Strategic Organizing Center, a coalition of labor unions, including the Service Employees International Union (SEIU). If not, this Wall Street Journal article discusses the coalition’s concerns and its three nominees. The article notes that the coalition has submitted shareholder proposals in the past, but this is the first time it has launched a proxy contest. It makes only a brief reference to universal proxy — noting that UPC could benefit the coalition.

But others have expanded on this point. Michael Levin at The Activist Investor has called this “the first ESG proxy contest under UPC.” And, while this Paul Hastings alert is cautious about extrapolating too much from one contest, it says this might be early evidence that some of the corporate world’s concerns about UPC are coming to fruition:

Some corporate observers recognized the possibility that universal proxy would enable and encourage labor unions and other single-agenda activists to hijack the director election process as a means to advance their agenda and extract management concessions. SEC representatives, universal proxy supporters and some corporate advisors dismissed the idea as fear mongering, and were quick to seize on the lack of comparable campaigns during the 2023 proxy season as clear and irrefutable evidence that such fears were unwarranted [but] [t]he SEIU campaign should remind corporations that the full implications of the universal proxy card cannot be assessed after a single proxy season. We would expect similar campaigns organized by labor and other interest groups will occur in the coming proxy seasons.

The alert explains how UPC has made using “the annual shareholder meeting process as a very public platform to pressure corporate management and advance their agendas” more attractive to activists:

The fact is that these nominal contests by single-agenda activists can be conducted inexpensively with the activist mostly freeriding on the company’s proxy solicitation efforts. The universal proxy rules require that a dissident solicit shareholders representing at least 67% of the voting power of shares entitled to vote on the election of directors. While the SEC Staff has made clear through interpretive guidance that merely filing a proxy statement on EDGAR is not sufficient to meet the 67% solicitation requirement, according to the SEC’s adopting release, these solicitation costs even at a mega-cap company would be less than $10,000. Further, based on publicly available data from FactSet, we estimate that the SEIU would have to mail proxy materials or provide electronic access through e-proxy procedures to less than 300 Starbuck’s shareholders to meet the 67% solicitation requirement.

[…] In addition to lowering the campaign cost for a dissident group, the inclusion of the dissident’s nominees on the management proxy card is likely to increase the chances that shareholders elect at least one of the three SEIU nominees.

What’s a board to do? The alert makes some recommendations. One cites a workers’ rights proposal that received support from a majority of shareholders at the 2023 annual meeting, and suggests companies closely consider voting results on shareholder proposals and, where a proposal garners significant support, proactively engage with shareholders “to make sure [the board is] responding to the concerns that caused shareholders to vote in favor of such proposal.”

– Meredith Ervine 

Cooley recently blogged about some of the challenges associated with navigating M&A executive comp issues in a volatile market. The first topic covered by the blog was how to deal with outstanding target equity awards. Typically, those awards are converted into buyer equity awards and new hires and incoming employees may also be granted additional awards. Since these transaction-related awards may deplete the buyer’s equity plan share reserve, buyers need to map out a strategy for handling them in the most effective way.

The blog discusses the pros and cons of alternative ways of dealing with target equity awards, including converting target awards into buyer awards, assuming the target’s unused share reserve, the use of inducement grants, and adoption of a new equity plan. This excerpt reviews the alternative of simply converting the target equity awards into buyer equity awards:

One option is to convert target equity awards into acquirer equity awards.

Advantages of this option:

– Stockholder approval is not required to convert, replace or adjust outstanding target equity awards to reflect the transaction.

– This exemption covers both assumptions and substitutions of target equity awards.

– Equity plans commonly address substitute awards and may explicitly provide that substitute awards do not count against the share reserve. (The buyer’s equity plan should be reviewed to confirm permissible treatment.)

Challenges of this option:

– The target equity plan should be reviewed to confirm that assumption and/or substitution are permitted actions.

– The buyer’s plan may provide that substitute awards count against the share reserve.

– While substituted or assumed awards may be excluded from the burn rate analysis used by proxy advisory firms, such awards will be considered as part of the overhang analysis in determining whether to support a subsequent equity plan proposal.

Other M&A comp-related topics addressed in the blog include aligning interests of investors, directors and employees, and disclosure issues relating to insiders’ interests in the transaction, say-on-parachute pay and, for private targets, a Section 280G vote.

– John Jenkins