This Morrison Foerster alert discusses a recent SEC enforcement action under Section 14(e) of the Exchange Act and Rule 14e-8 thereunder in connection with a failed tender offer. Here’s the background from the alert:
Esmark first announced its tender offer to acquire all issued and outstanding shares in U.S. Steel for $35 per share (equity value of $7.8 billion) in a press release on August 14, 2023. This announcement came a day after Cleveland-Cliffs Inc. (“Cliffs”) announced its offer to acquire U.S. Steel in a mixed cash and stock offer, with an implied total consideration of $35 per share ($17 in cash and 1.023 shares of Cliffs).
The next day, [its Founder/Chairman and former CEO] provided an interview on CNBC to discuss Esmark’s proposed tender offer. Mr. Bouchard emphasized that, unlike Cliffs, Esmark had provided an all-cash offer. He further noted that Esmark had “$10 billion in cash committed to the deal,” and that it would not put up any of Esmark’s assets as collateral in connection with the offer. The initial offer period was to run from August 14, 2023 to November 30, 2023. However, on August 23, 2023, Esmark withdrew its offer.
In its investigation, the SEC found that Esmark did not even have 1% of the required $7.8 billion in cash required to complete the tender offer as of August 31, 2023. Consequently, the SEC determined that Esmark and Mr. Bouchard lacked a reasonable belief that they would have the means to complete the tender offer and that their public announcements had violated Section 14(e) of the Exchange Act and Rule 14e-8 thereunder.
Esmark and its Founder/Chairman and former CEO agreed to civil penalties of $500,000 and $100,000, respectively.
The alert discusses numerous other enforcement actions arising out of Rule 14e-8 and notes that this most recent enforcement action appears to break the prior pattern of bringing these actions in conjunction with Rule 10b-5 or other sections of the Exchange Act and allegations of price manipulation:
The Esmark case is thus the latest indicator of the SEC’s vigilance towards ensuring the veracity of tender offer communications under Rule 14e-8, separate and additional to any obligations under Rule 10b-5. This shift is evident from recent SEC activities and comments, which could suggest a more proactive stance in scrutinizing the authenticity and feasibility of future tender offer announcements. The case aligns with the SEC’s commitment to maintaining investor trust by holding entities accountable for misleading announcements about their ability to complete a tender offer.
The September-October Issue of the Deal Lawyers newsletter was just sent to the printer. It is also available now online to members of DealLawyers.com who subscribe to the electronic format. This issue’s article “Delaware’s Recent Controlling Stockholder Decisions” discusses several decisions by Delaware courts in recent years that address:
– Identifying when a transaction involves a controlling stockholder;
– The standards of conduct and review applicable to a controller’s exercise of its voting power;
– The application of the entire fairness standard in transactional and nontransactional settings; and
– The procedural protections necessary to permit a controller transaction to be subject to review under the business judgment rule.
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without 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.
Here’s something John shared on TheCorporateCounsel.net blog yesterday:
Last week, ISS published the results of its most recent benchmark policy survey, and this year, respondents had quite a bit to say about poison pills. The survey is part of ISS’ annual global policy development process and was open to all interested parties to solicit broad feedback on areas of potential ISS policy change for 2025 and beyond. The survey’s results reflect responses from investors and non-investors. This latter group is comprised primarily of public companies & their advisors. Not surprisingly, the survey found that they differ when it comes to what’s acceptable when it comes to poison pills. Here are some of the highlights:
– When asked if the adoption by a board of a short-term poison pill to defend against an activist campaign was acceptable, 52% of investor respondents replied “generally, no”, while 65% of non-investor respondents replied “generally, yes”.
– When asked whether pre-revenue or other early-stage companies should be entitled to greater leeway than mature companies when adopting short-term poison pills, 56% of investors and 43% of non-investors said that such companies should be entitled to greater leeway on the adoption of a short-term poison pill, as long as “their governance structures and practices ensure accountability to shareholders.”
– When asked about whether a short-term poison pill trigger set by a board below 15 percent would be acceptable, the most common response among investor respondents was “No” (39%), while the largest number of non-investor respondents (38%) said “yes, the trigger level should be at board’s discretion.”
– When asked whether a “two-tier trigger threshold, with a higher trigger for passive investors (13G filers) would be considered a mitigating factor in light of a low trigger, 78% of non-investor respondents said “yes, it should prevent the pill from being triggered by a passive asset manager who has no intention of exercising control.” On the investor, while 41% agreed with the majority of non-investor respondents, 48% considered that “no, all investors can be harmed when a company erects defenses against activist investors whose campaigns can create value, so the lowest trigger is the relevant datapoint.”
Also, it turns out that investors like their pills to be “chewable.” The survey found that nearly 60% of investors found a qualifying offer clause in a pill to be important and a feature that should be included in every pill. A small majority (52%) of non-investors said that this feature was “sometimes important” depending on the trigger threshold and other pill terms.
Last Thursday, the FTC & DOJ announced final rules that modify the premerger notification rules, Hart-Scott-Rodino (HSR) Premerger Notification and Report Form and instructions. The changes were proposed by the agencies in June 2023, and the final rules reflect a number of modifications in response to public comment. This Dechert article lists these key changes from the proposed form:
– Narrowing the scope of limited partner disclosures (which the FTC noted was in response to the Comment submitted by Dechert’s antitrust/competition group);
– Limiting the amount of required information to be disclosed regarding directors and officers, and eliminating the proposal to disclose positions held by board observers;
– Removing the requirement to submit the draft forms of documents; and
– Not adopting many of the labor-related requirements.
Dechert suggests the following aspects of the new rules are still expected to significantly increase the burden on merging parties:
– Expanding the relevant custodians for providing transaction-related documents analyzing competition beyond officers and directors, to include the supervisor of each merging party’s deal team;
– Requiring the submission of certain ordinary course documents related to competition, market shares, competitors, or markets for products and services where the filing parties overlap;
– Adding new disclosure obligations relating to products or services that are in development;
– Requiring sellers to disclose prior acquisitions in the same or related lines of business;
– Increasing the amount of required disclosure regarding investors in the buyer and other entities in the same ownership chain, including limited partners with board/management rights;
– Increasing the requirements on filings made off of letters of intent or similar preliminary agreements to now require a draft agreement, term sheet, or other dated document containing certain material terms of the transaction;
– Mandating disclosure of foreign subsidies, as required by Congress pursuant to the Merger Filing Fee Modernization Act of 2022; and
– Requiring the translation of foreign language documents.
The FTC’s announcement also stated that it is lifting its temporary suspension on early termination of filings made under the Hart-Scott-Rodino Act (which has been in place since February 2021) once the final rules come into effect (90 days after publication in the Federal Register) since the rules will help “inform the processes and procedures used to grant early terminations” because it “will provide the agencies with additional information necessary to conduct antitrust assessments.”
The FTC also announced a new online portal for public comment on proposed transactions:
In addition to these updates to the HSR Form, the Commission is also introducing a new online portal for market participants, stakeholders, and the general public to directly submit comments on proposed transactions that may be under review by the FTC. The Commission welcomes information on specific transactions and how they may affect competition from consumers, workers, suppliers, rivals, business partners, advocacy organizations, professional and trade associations, local, state, and federal elected officials, academics, and others.
Glenn West has an article in Business Law Today on the Chancery Court’s decision in Labyrinth v. Urich, (Del. Ch.; 1/24). We blogged about that decision back in January and I guess you might consider it “old news” at this point, but one thing I’ve learned is that if Glenn writes something about reliance disclaimers, all deal lawyers would be well advised to read it. Here’s the conclusion of the article, where Glenn tells you what you need to do when drafting a reliance disclaimer if you want it to be effective against fraud claims:
To defeat extra-contractual fraud claims, (a) actual disclaimers of reliance should be used, not simple “no representations” statements; (b) disclaimers of reliance should be properly placed in the acquisition agreement so that they are coming from the point of view of the buyer; and (c) the disclaimer of reliance should be “robust” (i.e., disclaim reliance on an exhaustive list of things that might be provided or discussed in the lead-up to the execution of the agreement). And, based on Labyrinth, including an independent investigation provision does not necessarily add anything and may in fact do more harm than good, particularly when it suggests that there was a lot of information provided by the seller upon which the buyer relied.
In light of the FTC & DOJ’s invitation to the public to “drop a dime” on serial acquirors and other actions targeting private equity, a recent Mintz memo offers guidance on pre- and post-acquisition best practices that will help sponsors avoid trouble with the DOJ. This excerpt says that positioning the sponsor and a newly acquired portfolio company to take advantage of the DOJ’s voluntary disclosure program & implementing a rigorous compliance program are essential:
Deploying appropriate resources after completing a deal to assess risk, detect and address any existing issues, and put proper protections in place before executing a growth strategy is the best practice and the model for successful investments in the current environment with amped-up scrutiny of private equity deals. Doing so quickly after a buy-side deal to take advantage of the six-month safe harbor is critical. On the sell-side, assessing any risk and possibly disclosing it ahead of the sale process eliminates the risk of a deal getting scuttled during diligence or significantly impacting the value of the asset.
While self-disclosure will certainly not be the best option in every situation in which a potential issue is detected, it is an option that must be considered, and quickly, to ensure the greatest benefit if that route is pursued. A robust compliance program’s key function is to prevent any wrongdoing before it occurs or detect it quickly if it does. Private equity sponsors who neglect to do a quick but deep enough dive after an acquisition or neglect to implement an appropriate compliance function in those regulated industries where it’s warranted run an increased risk of coming into the crosshairs of the DOJ and becoming a scapegoat for the supposed evils of private equity.
The default rule in Delaware is that the attorney-client privilege passes in a merger from the acquired company to the buyer. However, the parties to a merger agreement may agree to depart from the default rule, and a recent Morris James blog highlights the Delaware Superior Court’s decision in Biomerieux v. Rhodes, (Del. Super.; 5/24), which held that the language of the parties’ merger agreement was sufficient to accomplish that objective. This excerpt from the blog summarizes the Court’s ruling:
The default rule in Delaware is that the attorney-client privilege transfers from the target corporation to the surviving corporation in a merger. This rule was established by the Court of Chancery’s leading decision in Great Hill Equity Partners IV, LP v. SIG Growth Fund I, LLLP, where the Court found that, under Section 259 of the Delaware General Corporation Law, the attorney client privilege was a “privilege” whose ownership transferred to the surviving corporation, by Section 259’s express terms.
This decision from the Delaware Superior Court’s Complex Commercial Litigation Division demonstrates that parties can contract around the default rule by agreement. Here, the parties’ merger agreement provided that the attorney-client privilege “regarding” the merger agreement would remain with the sellers. Accordingly, the Court granted the seller-defendants’ motion to strike the buyer-plaintiffs’ use of an email containing the seller-defendants’ counsel’s legal advice “regarding” the merger agreement. The Court reasoned that, under the terms of the parties’ agreement, the attorney-client privilege remained with the seller-defendants and, thus, the buyer-plaintiffs were not entitled to use the privileged email.
In case you’re looking for some drafting guidance, here’s the relevant language from the merger agreement:
[E]xcept with the prior written consent of the Securityholders’ Representative, the attorney-client privilege regarding this Agreement and the Escrow Agreement and the transactions contemplated hereby and thereby shall not continue as the privilege of [the Target] but instead shall be the sole privilege of the Company Securityholders and the Securityholders’ Representative, and none of [the Buyer], [the Target], or any other person purporting to act on behalf of or through [the Buyer] or [the Target] will seek to obtain or access attorney-client privileged communications among [the Target] or any Company Securityholder and any representative of the Firm related to this Agreement, the Escrow Agreement, or the Merger or the transactions contemplated hereby or thereby.
Notice that the language references “the Firm,” which the agreement defines as the law firm representing the sellers in connection with the merger. The Buyer sought to obtain an email communication to another law firm and argued that this language limited the communications as to which the privilege belonged to the selling stockholders to communications with the law firm that represented the sellers. The Court rejected that argument, concluding that it was clear from the language of the agreement that the privilege retained by the sellers was not limited to communications with that particular firm.
Keith Bishop reached out with this thought on today’s blog: “One important point that I would add is that there is no one “attorney-client” privilege. If a case is brought in federal court or another jurisdiction (which often happens even when a Delaware corporation is the defendant), the federal court’s or the jurisdiction’s rules of evidence may be different than Delaware’s and even if the rules are the same, the court may interpret those rules differently.” Keith has addressed attorney-client privilege issues in M&A transactions many times on his own blog.
The Match Group litigation continues to meander its way through the Delaware courts. The latest round finds us back in Chancery, where Vice Chancellor Zurn recently issued a letter decision addressing the defendants’ motion to dismiss. In that decision, she refused to dismiss breach of fiduciary duty claims against the company’s directors, but did dismiss those claims against its alleged controlling stockholder – and it’s this latter ruling that makes the case interesting.
If you’ve been following the case, you know that Vice Chancellor Zurn originally dismissed the plaintiffs’ challenge to IAC/InterActive’s 2019 reverse spinoff of its Match.com dating business on the grounds that the transaction satisfied the MFW framework. The Delaware Supreme Court reversed that decision earlier this year, and the Chancery Court was called upon to consider alternative grounds to dismiss the plaintiffs’ claims asserted by the defendants.
The plaintiffs alleged that media mogul Barry Diller was a controlling stockholder of the company by virtue of his ownership of over 40% of the stock in its parent company. Citing the Chancery Court’s prior decision in In re EZCORP Consulting Agreement Derivative Litigation. (Del. Ch.; 1/16), the plaintiffs argued that because Diller was the controlling stockholder of the company’s parent, he was the ultimate controller of the company itself.
Vice Chancellor Zurn rejected that contention. She observed that in order to be a controller, a stockholder must either owns a majority of the voting power, which she referred to as “hard control”, or otherwise exercise control over the company’s business and affairs, which she referred to as “soft control.” This excerpt summarizes her reasoning:
Plaintiffs argue that because Old IAC had hard control of Old Match, Diller must be Old Match’s ultimate controller under EZCORP. But I do not read EZCORP to stand for the proposition that the controller of a parent company is the subsidiary’s ultimate controller, always and as a matter of law. Put differently, EZCORP does not identify a transitive property of control that redounds through every chain of controllers. Rather, EZCORP applied the first prong of the traditional controller analysis to successive holders of 100% voting power, culminating in hard control of the entity at the bottom.
Plaintiffs have not pled Diller has hard control of Old IAC’s voting power that would necessarily grant him control of Old Match’s voting power. EZCORP does not satisfy or excuse Plaintiffs’ burden of pleading Diller, in the absence of any voting power at Old Match, still exercised actual control over it.
The Vice Chancellor concluded that the plaintiffs failed to adequately plead Diller exerted actual control over the subsidiary entity, at all or through his inferred actual control of its parent. In particular, she noted that the plaintiffs’ sole allegation bearing on Diller’s actual control of the subsidiary was that he used the parent’s voting power to pack the subsidiary board with five officers and directors of the parent and three individuals with close ties to Diller.
Vice Chancellor Zurn pointed out that the plaintiffs did not allege that the use of the parent’s voting power handed Diller actual control over the sub. In that regard, she said that the appointment of five parent company affiliates to the board deepened the parent’s control over the subsidiary, not Diller’s. The Vice Chancellor concluded that, even assuming the other three directors were beholden to Diller, his ability to influence three members of a 10-member board didn’t amount to control. Accordingly, she held that Diller was not a controlling stockholder of the subsidiary and dismissed the claims against him.
Remember when the FTC wouldn’t let Exxon Mobil move forward with its acquisition of Pioneer Natural Resources unless the company agreed not to honor a commitment to put Pioneer’s founder on Exxon’s board? Well, they did it again last week – this time imposing a similar condition on Chevron’s acquisition of Hess. As this excerpt from a LegalDive.com article on the FTC’s action notes, that decision didn’t sit well with the two Republican commissioners:
In a pair of scathing dissents, the Federal Trade Commission’s two Republican-appointed commissioners accused the agency of operating a pay-for-peace racket by forcing Chevron and Hess Corp. to agree to settlement terms that would never withstand court scrutiny.
In the settlement, Chevron agreed to keep Hess CEO John Hess off its board in exchange for the agency’s sign-off on its merger proposal. The FTC in its complaint said Hess needs to stay off the board because of his vocal support for the Organization of Petroleum Exporting Countries restricting output to keep oil prices high.
“The Commission leveraged its Hart-Scott-Rodino Act authority by threatening to hold up Chevron and Hess’s $53 billion dollar merger even though the lack of a plausible Section 7 [of the Clayton Antitrust Act] theory had long been obvious,” FTC Commissioner Andrew Ferguson said in his dissent.
Commissioner Ferguson went on to accuse the FTC of taking the action in order to placate “Democratic politicians who have repeatedly and publicly urged the Commission to block this merger in order to advance their climate agenda.” Commissioner Holyoak echoed his accusations in her own dissenting statement, and also noted that claims of a potential Section 7 violation were particularly suspect given that “[t]he combined Chevron-Hess Corporation entity will control two percent of the global oil market. A reduction in its output would hardly remove a drop from the metaphorical bucket.”
This Sidley blog compares and contrasts two recent Chancery Court decisions — Shareholder Representative Services. LLC v. Alexion Pharmaceuticals, Inc. and Himawan v. Cephalon, Inc. — both involving acquisitions of development-stage biotech companies and both interpreting an earnout provision’s objective or outward-facing definition of “commercially reasonable efforts.” Interestingly, both buyers were later acquired by larger pharma companies. Both earnouts included a discretion clause, giving the acquiring company sole or complete discretion with respect to business decisions, with the CRE clause serving as a limitation on that discretion. As this excerpt describes, the two cases had different outcomes, and while factual differences mattered, so did the drafting of the CRE definition.
In Alexion, the stockholders prevailed: The court found that the company had breached the CRE clause. In Cephalon, the buyer prevailed: The court found that the company had complied with the CRE clause. …
In Alexion, the critical language was “such efforts and resources typically used by biopharmaceutical companies similar in size and scope to [Alexion] for the development and commercialization of similar products at similar development stages.” This language was followed by 11 factors to be “tak[en] into account,” related to, among other things, safety, efficacy, likelihood of approval, and commercial viability.
In Cephalon, the critical language was “such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon], with due regard to the nature of efforts and costs required for the undertaking at stake.”
In Alexion, the court took issue with an “idiosyncratic corporate initiative” to launch ten new drugs by 2023 and, following the acquisition of the buyer, with the parties’ pursuit of merger synergies, finding that the change in drug development efforts to accommodate this initiative and merger synergies didn’t satisfy an outward-facing efforts clause.
In Cephalon, the evidence suggested that Cephalon/Teva took the earnout’s milestone payment into account when determining whether it was a good business decision to continue on a certain development path. Focusing on the phrase “due regard to the nature of efforts and costs required,” the court found that “the CRE clause limited Cephalon’s discretion only insofar as it required the company to ‘go forward in its own self-interest.’”
The blog compares these two cases to highlight the importance of language in a CRE definition that either permits or prohibits considerations unique to the acquiring company.
The decisions suggest that for both sellers and buyers, language that includes—or excludes—considerations unique to the acquiring company can be critical, particularly as those factors may come into existence years after the acquisition. The language in Cephalon was so permissive that the company was allowed to actively work against the seller’s interests in determining not to invest in drug development.