One of the key regulatory changes expected to be made by the Trump Administration is a move toward more lenient antitrust enforcement. This was one of a few reasons cited by this Sidley article that activists openly endorsed Trump for president — pointing to the fact that shareholder activist funds depend on a liquid M&A market for their business model.

This anticipated shift — plus, as this V&E article notes, reduced interest rates — may mean more companies facing activist pushes for breaking up divisions, spinning off subsidiaries, or selling themselves outright. This post in the HLS Blog by Patrick Ryan of Edelman Smithfield says activists with “varying track records of success” in this area nonetheless “regularly push companies to disclose a sales process,” but companies need to consider the potential downsides of public disclosure.

With the M&A market showing signs of life, activists are increasingly pushing companies to sell themselves, often via a public process. Beyond the outcomes described above, directors should understand the common consequences of such an announcement. …

In fact, two-thirds of companies disclosing strategic reviews receive no offers within the following year, causing double-digit share price declines on average. While the prospect of a deal sends a company’s shares higher in the days following an announcement, the stock gives back these gains and more as the process drags on. An announcement that the company will continue as a standalone can send the stock into freefall.

And the issues go well beyond the company’s stock price. For example:

– Putting up a “For Sale” sign conveys that a company has problems. Employees, customers, vendors, and other partners react as you would expect.

– An announcement puts pressure on directors to accept any deal.

The blog says that boards need to weigh these risks carefully, especially since the benefits to announcing a sales process — more bidders, higher premiums and better returns — are only really benefits if the company is successfully acquired. When the decision is made that public disclosure is the way to go, see this discussion of how to craft a well-planned communication strategy focused on preserving shareholder value.

Programming Note: This blog will be off tomorrow and Friday, returning next Monday. Happy Thanksgiving!

– Meredith Ervine 

In their latest “Understanding Activism with John & J.T.” podcast, John and J.T. Ho were joined by Sean Donahue. Sean is Chair of the Public Company Advisory practice and Co-Chair of the Shareholder Activism & Takeover Defense practice at Paul Hastings, and his practice focuses on counseling public companies and their boards of directors on shareholder activism and takeover defense, mergers and acquisitions, capital markets transactions, securities regulation, and corporate governance matters.

Topics covered during this 35-minute podcast include:

1. How exempt solicitations differ from conventional proxy solicitations
2. Common exempt solicitation scenarios and when and how companies should respond
3. Will the trend toward use of exempt solicitations by pro- and anti-ESG proponents continue?
4. The goals of a typical “vote no” campaign and how these campaigns typically unfold
5. Impact of majority voting standards on the effectiveness of vote no campaigns
6. Defense strategies for vote no campaigns and how they differ from those used in a traditional proxy contest
7. What “zero slate” campaigns are and how they work
8. Potential advantages and disadvantages of a zero slate campaign for an activist
9. How companies should adjust defense strategies to address the threat of of a zero slate campaign
10. Are zero vote campaigns activism’s next big trend?

John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. They’re continuing to record new podcasts, and I have found them very engaging and filled with practical insights! Stay tuned for more!

– Meredith Ervine 

Last week, the Treasury Department announced that it has finalized rule changes proposed back in April that expand CFIUS’s penalty and enforcement authority. This Gibson Dunn memo notes that the changes were largely adopted as proposed, with the exception of modifying the time frame within which parties are required to respond to mitigation agreement proposals.

The final rule reflects the following key changes highlighted in the announcement:

– Expanding the types of information CFIUS can require transaction parties and other persons to submit when engaging with them on transactions that were not filed with CFIUS;

– Allowing the CFIUS Staff Chairperson to set, as appropriate, a timeline for transaction parties to respond to risk mitigation proposals for matters under active review to assist CFIUS in concluding its reviews and investigations within the time frame required by statute;

– Expanding the circumstances in which a civil monetary penalty may be imposed due to a party’s material misstatement and omission, including when the material misstatement or omission occurs outside a review or investigation of a transaction and when it occurs in the context of CFIUS’s monitoring and compliance functions;

– Substantially increasing the maximum civil monetary penalty available for violations of obligations under the CFIUS statute and regulations, as well as agreements, orders, and conditions authorized by the statute and regulations, and introducing a new method for determining the maximum possible penalty for a breach of a mitigation agreement, condition, or order imposed;

– Expanding the instances in which CFIUS may use its subpoena authority, including in connection with assessing national security risk associated with non-notified transactions; and

– Extending the time frame for submission of a petition for reconsideration of a penalty to CFIUS and the number of days for CFIUS to respond to such a petition.

The changes will be effective 30 days after publication in the Federal Register. We’re posting memos in our “National Security Considerations” Practice Area.

– Meredith Ervine 

The Chancery Court recent decision in GB-SP Holdings LLC et al. v. Walker, (Del. Ch.; 11/24) provides a reminder that fiduciaries who breach their duty of loyalty may find themselves facing financial consequences even if damages to the company itself are too speculative to be proven.

The case involved claims of breach of fiduciary duty against the directors of BridgeStreet WorldWide, Inc. arising out of flawed efforts to restructure the financially troubled company’s debt.  After an unsuccessful effort to sell the company, a new creditor acquired its secured debt from existing creditors. BridgeStreet subsequently defaulted and entered into a forbearance agreement with the new creditor. During the negotiation process for that forbearance agreement, the company refused to honor its largest stockholder’s right under a shareholders’ agreement to have its designee elected to the board, and stiff-armed the stockholder’s information requests, which also violated the shareholders’ agreement.

The directors obtained indemnification from the creditor for any claims asserted by the company’s largest stockholder, and members of its senior management team, including two directors, secured continued employment and bonuses from the creditor as part of the forbearance agreement.  The company subsequently violated the financial covenants in the forbearance agreement, and ultimately agreed to a consensual foreclosure under which it surrendered all of the equity in its operating subsidiaries to the creditor.

The plaintiffs brought a derivative action, alleging that BridgeStreet and certain directors breached the shareholders agreement and that the directors breached their fiduciary duties in approving the forbearance agreement and the consensual foreclosure. The plaintiffs also brought claims against the creditor alleging that it aided and abetted the directors’ breach of fiduciary duty.

In addressing the breach of fiduciary duty claims, Vice Chancellor Fioravanti rejected the defendants’ contention that the decision to enter into the forbearance agreement was protected by the business judgment rule because the indemnity and employment arrangements established by the agreement involved self-interest.  Accordingly, he evaluated the decision to adopt the forbearance agreement under the entire fairness standard and found that neither the price nor the process were fair.  He also concluded that the creditor aided and abetted the breach of fiduciary duty.

While the Vice Chancellor concluded that the plaintiffs had not established more than nominal damages for their claims, he said that didn’t mean the defendants were off the hook. Citing Guth v. Loft, 5 A.2d 503, 510 (Del. 1939), he noted that “when a fiduciary has breached the duty of loyalty, the fiduciary must be deprived of all profit flowing from the breach. He then brought the hammer down:

While the harm to the Company is too speculative to quantify, the benefits to the Pre-Forbearance Directors are clear: each received indemnification for all claims brought by GB-SP, and Curtis and Worker received lucrative bonuses under the September 2013 MOU. The Pre-Forbearance Directors cannot retain the benefits they received as a result of their breaches of fiduciary duty. Therefore, the Pre-Forbearance Directors are liable to BSW for all amounts paid to them or their counsel under the Indemnity Agreement. In addition, the bonuses paid to Curtis and Worker under the September 2013 MOU must be disgorged and returned to BSW.

BridgeStreet still owed the creditor approximately $7 million, and as a remedy for its role in aiding and abetting the breach of fiduciary duty, Vice Chancellor Fioravanti held that its claims to any funds the company received from the disgorgement would be subordinated to the claims of other creditors.

– John Jenkins

Buyers conducting due diligence in an M&A transaction need access to the target’s material agreements. Some of these agreements may have confidentiality provisions prohibiting them from being shared with third parties, and a recent Business Law Today article by Glenn West highlights a New York trial court decision that suggests that uploading these agreements to M&A data rooms without understanding the obligations imposed by those provisions is a risky approach.

In AriZona Beverages v. EVERCORE, No. 608480/2024 (Sup. Ct., Nassau Cty,. Aug. 27, 2024), the plaintiff successfully obtained a court order requiring a target’s investment banker to disclose the identity of all parties who accessed a copy of a supply agreement. This excerpt from Glenn’s article summarizes the Court’s decision:

The court found that AriZona Beverages had “brought forth sufficient information to confirm that the Can Supply Agreement is crucial to [AriZona Beverages’] business and the breach of the requirement of non disclosure permitting other part(ies) to obtain confidential and proprietary information must be addressed through the disclosure sought herein.” In addition, the court specifically found that the acts complained of by AriZona Beverages “could conceivably form the basis of a cause of action including, but not limited to, tortious interference with contract.”

Accordingly, the court ordered Evercore “to disclose the identity of each entity or individual to whom it provided access to the data room . . . [or] supplied a copy of the Can Supply Agreement or otherwise disclosed its terms.”

The article notes that bottom line is that uploading the supply agreement and sharing it on the data room would be a breach of the terms of most confidentiality provisions, and the plaintiff has the right to know who accessed the agreement in order to determine its potential damages.

The article also points out that decision provides a reminder that it isn’t only buyers who need to do due diligence on the terms of material agreements – potential targets need to understand their own contractual confidentiality obligations before sharing information about material contracts with prospective buyers. He also notes that the decision suggests that in these situations, relying on confidentiality obligations imposed on potential buyers through NDAs with the target aren’t sufficient to protect targets from breach of contract claims for sharing confidential agreements with those parties.

– John Jenkins

Last month, in Solak v. Mountain Crest Capital, (Del. Ch.; 10/24), the Chancery Court refused to dismiss fiduciary duty claims against a SPAC sponsor and other insiders arising out of alleged misrepresentations concerning the value of the SPAC’s shares in a de-SPAC proxy statement. This excerpt from an A&O Shearman blog on the case notes that Vice Chancellor Glasscock allowed the plaintiff to cast a wide net when it came to identifying potential controlling stockholders:

Although two defendants held in the aggregate 20% of the SPAC’s shares, the Court nevertheless inferred that they were controllers because they were the sole members of the SPAC sponsor, which plaintiff alleged generally controlled all aspects of the entity from creation to merger. The Court also inferred that three additional individual defendants were controlled by the two controllers because they expected to be considered for directorships in future SPACs and because they were granted 2,000 founder shares.

While these shares only represented $20,000 (an arguably nominal amount for these defendants), the shares would be completely worthless if the SPAC did not reach a merger deal. The Court inferred that the controllers and directors engaged in a conflicted transaction, triggering entire fairness review, because defendants had a financial interest in effectuating any merger, regardless of its value. The Court also credited plaintiff’s theory that defendants competed with the common stockholders for value in the transaction.

The plaintiff challenged statements in the proxy to the effect that the de-SPAC merger had a value of $10 per share. He argued that the pre-merger net cash value per share was only $7.50 and that by failing to disclose the actual net cash per share being put into the merger, the proxy statement’s claims about the value of the merger were misleading. Although Vice Chancellor Glasscock didn’t think that the plaintiff’s allegations were strong, he ultimately concluded that the plaintiff “barely” satisfied the pleading standard for its breach of fiduciary duty of loyalty and unjust enrichment claims.

– John Jenkins

In our latest “Understanding Activism with John & J.T.” podcast, J.T. Ho and I were joined by Dan McDermott. Dan is a senior vice president at strategic communications firm ICR, and is also an adjunct professor at the University of Pennsylvania Law School, where he teaches one of the nation’s few law school courses on shareholder activism. Dan’s recent article on the hidden costs of short attacks – which Meredith blogged about last month – formed the basis for our discussion.

Topics covered during this 30-minute podcast included:

– Differences between the objectives of an activist short seller and a traditional activist
– Common themes or “red flags” that activist short sellers look for in targeting companies
– How an activist short attack unfolds and typical company responses
– Use of “wolf pack” tactics & other collaborative efforts between activist short sellers
– The need to include the possibility of short attacks in company’s activist preparedness efforts
– How strategies for responding to short attacks differ from responses to traditional activism
– How often short attacks lead to traditional activism
– How companies prepare to respond effectively to short attacks
– Impact of recent SEC enforcement activity on short attack strategy
– Lessons from law school course on activism

Our objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!

– John Jenkins

We recently put the finishing touches on the annual update for the Practical M&A Treatise. This 904-page resource covers a broad range of topics, including the mechanics of an M&A transaction, documentation, disclosure, tax, accounting, antitrust, contractual transfer restrictions, successor liability, antitakeover & fiduciary duties of directors and controlling stockholders. The new edition features updates on:

– The terms of acquisition agreements, including interpretive issues relating to fraud disclaimers, sandbagging, language defining assumed and retained liabilities, ConEd clauses, and the implications of an unqualified representation on a buyer’s ability to terminate a transaction

– Fiduciary duties of directors, officers and controlling stockholders

– The 2024 amendments to the DGCL and their implications for market practice for acquisition agreements, activist settlements, and takeover defenses

– The continuing evolution of the Rep & Warranty Insurance market and its implications for claims under RWI policies

– The status of sale of business non-competes in Delaware and the potential implications of the FTC’s limitations on non-competes

– Developments in shareholder activism, including Delaware decisions addressing advance notice bylaws and poison pills, and the implications of new Section 122(18) of the DGCL,

– The evolving antitrust regulatory and enforcement environment, and developments under the federal securities laws, including the lessons from the first year under the universal proxy rules

The Practical M&A Treatise is available online as part of an upgraded DealLawyers.com membership. It’s also incorporated into our “Deal U Workshop” – an essential online course for more junior M&A lawyers, with nearly 60 podcasts and 30+ situational scenarios to test your knowledge.  Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271 to get access today.

– John Jenkins

In the wake of Crispo v. Musk, we blogged a lot in the last year about possible ways to address the enforceability issues with contractual provisions intended to preserve claims for lost premium that stockholders would have received had a busted deal closed. One of those proposed solutions was to amend the DGCL — which actually happened, effective August 1st. A recent paper — Lost-Premium Damages in M&A: Delaware’s New Legal Landscape — suggests that this was the right outcome — that lost-premium provisions should be legal.

This entry in the CLS Blue Sky Blog discusses the paper and summarizes the arguments as follows:

We suggest that allowing a target to recover lost premiums is supported by both doctrinal principles and policy considerations. … It is not clear why receiving a bargained for premium would be an unconscionable amount of damages, particularly given the often balanced bargaining power and sophistication of parties in M&A transactions. Indeed, targets are allowed to bargain for large merger termination fees that are payable to them directly. Twitter, for example, negotiated a $1 billion termination fee for its benefit.

Lost premiums can also be an appropriate measure of a target’s own damages. In the case of a breach of contract by the prospective purchaser, the target does lose the benefit of its bargain for negotiating a change in control. A target corporation expects to receive consideration for doing the deal, particularly in cash-out transactions, where the target’s singular goal in negotiating a merger agreement is to get the best possible deal for shareholders. In cash-out transactions, the target and its shareholders’ interests are aligned or even identical. The target’s loss is best assessed by its shareholders’ loss, since the consideration payable most accurately represents the value and substance of the target corporation’s bargain.

This interpretation is also sensible in policy terms because there is no other equally reliable means of calculating a target’s damages in a busted deal. If not lost premiums, should courts award (in contexts where specific performance is not available) lost synergies, lost cash flows, or another speculative measure? Awarding lost-premium damages is also most consistent with other forms of M&A structures, such as asset sales, where a target may claim the full benefit of the bargain, including a change of control premium.

It concludes by saying that while “Delaware legislature’s amendments have, at least for now, settled the issue, it may emerge in other jurisdictions. Should this occur, we suggest that courts in states without similar statutory provisions have a credible way of upholding lost-premium provisions.”

– Meredith Ervine 

Earlier this week, Bloomberg reported on the recent surge in litigation over stockholder books & records demands in Delaware that threatens the Chancery Court’s reputation for promptly addressing urgent matters. Litigation involving Section 220 demands represented as much as 15% of the court’s workload in recent years. Chancellor McCormick recently acknowledged that the situation is not ideal:

Everyone involved would rather be doing something more substantive, but they’re responding rationally to structural incentives, Chancellor Kathaleen St. J. McCormick, the court’s chief judge, said at George Washington University. Although getting inside information offers clear advantages, “complaints just get longer and longer,” she said Oct. 25. “I’m not sure I need all that at the pleading stage, but it’s not hard to see why they’re doing it, and I can’t advise against it.”

The article says the court is working through these cases using magistrates, oral rulings and judges conscripted from other courts. It also discusses the dynamics driving the increase, saying, “As the path to liability grows slimmer, the emphasis on records is a logical counterweight.” On a more long-term note, Columbia University law professor Dorothy Lund said, “You see these cycles in litigation, with bad incentives being created and weird things happening. … And then Delaware responds.”

We post memos on related decisions in our “Books & Records” Practice Area.

– Meredith Ervine