On Monday, the DOJ announced that it had filed a civil action against KKR, alleging that the firm “evaded antitrust scrutiny for at least 16 separate transactions by failing to comply with the Hart-Scott-Rodino Antitrust Improvements Act of 1976.” Here’s a copy of the DOJ’s 43-page complaint. This excerpt from the DOJ’s press release summarizes its allegations:
The department’s complaint alleges that over the course of two years — 2021 and 2022 — KKR failed to make complete and accurate premerger filings for at least 16 transactions. Specifically, KKR violated the HSR Act by:
– Altering documents in HSR filings for at least eight transactions. For example, in April 2021, a KKR partner instructed a deal team member to edit a portion of an Investment Committee report in advance of the HSR review process by circling the “Competitive Behavior” section of a diligence chart and writing “[need to revise for HSR purposes]” in the document. The KKR deal team member did not merely revise the language but deleted it entirely before submitting the altered document to the Antitrust Division.
– Failing to make any HSR filing for at least two transactions. KKR did not submit an HSR filing prior to consummating an acquisition valued at $6.9 billion. It also did not submit a filing prior to consummating an acquisition worth between $376 million and $919 million.
– Systematically omitting required documents in HSR filings for at least 10 transactions. KKR repeatedly certified that it had complied with the HSR Act but did not include required documents in those filings. In many cases, KKR only identified such documents in response to an Antitrust Division investigation.
KKR isn’t taking the DOJ’s actions lying down. It filed its own lawsuit seeking, among other things, a declaratory judgment that it did not violate the HSR Act. Here’s a statement from KKR that the company included in its 8-K filing disclosing the DOJ’s action and its countersuit:
Earlier today, we filed a complaint challenging the abuse of power and unconstitutional application of the HSR Act by the Antitrust Division of the Department of Justice.
As background, we have been cooperating in good faith with the Antitrust Division for nearly three years regarding certain HSR filings made in 2021 and 2022. We are confident all our filings provided the government with the necessary information to fully assess each transaction. We reached an impasse due to our strong disagreement that some inadvertent, alleged paperwork errors were in any way an intentional attempt to circumvent antitrust review.
Over the course of our discussions, it became clear that the outgoing political leadership of the Antitrust Division was mischaracterizing our actions and overstepping its statutory authority. This is a classic case study of government agency overreach.
We took this action reluctantly. We and our founders have managed our firm for 50 years by choosing to do what is right over what is easy. It is our hope that an independent arbiter might facilitate a more fact-based—and less political—approach.
Between this action by the DOJ’s Antitrust Division and the SEC’s filing of a new lawsuit against Elon Musk, it’s pretty clear that the Biden administration’s regulators have resolved not to “go gentle into that good night.” Stay tuned to see how the gang from Trump 2.0 takes things from here.
We recently posted the latest “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Jun Frank, who serves as Global Head of Compensation & Governance Advisory for ISS-Corporate. We spoke with Jun about trends in shareholder proposals and activism.
Topics covered during this 20-minute podcast include:
– Understanding shareholder proposal trends
– Impact of Anti-ESG campaigns
– Withdrawal rates and engagement
– Corporate disclosure and governance improvements and impact on support of proposals
– Proxy advisor and investor approaches to evaluating contested elections
– Emerging activism trends and proxy advisor and investor responses
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 they’re full of practical and engaging insights from true experts – so stay tuned!
On Friday, the FTC announced the new HSR filing thresholds for 2025. This excerpt from Davis Polk’s memo on the changes lays out the new numbers:
Under the new thresholds, a transaction is reportable if, after the transaction the size of person tests are met, and the acquiring person will hold voting securities, assets, or non-corporate interests valued over $126.4 million. The changes will become effective 30 days after publication in the Federal Register and will apply to transactions closing on or after the effective date, which is expected to be in mid- to late-February 2025.
In summary, the relevant HSR reporting thresholds are:
Thresholds
Original amount
2025 adjusted thresholds
Size of transaction
$50 million
$126.4 million
Size of person (if applicable)
$10 million and $100 million
$25.3 million and $252.9 million
Size of transaction above which size of person test does not apply
$200 million
$505.8 million
The memo also has the details on changes to HSR filing fees and jurisdictional thresholds for the Clayton Act’s prohibition on interlocking directorates. The changes to jurisdictional thresholds and filing fees will go into effect regardless of whether the changes to the HSR rules adopted in October go into effect.
We’ve blogged a few times about litigation surrounding insurers’ efforts to use “bump-up” exclusions in D&O policies to avoid coverage of amounts paid to settle merger claims. Last week, in Harman International Industries v. Illinois National Insurance, (Del. Supr. 1/25), the Delaware Superior Court rejected an insurer’s efforts to rely on such a policy provision to avoid coverage for a settlement of disclosure claims arising out of the sale of Harman to Samsung.
In reaching that conclusion, the Court acknowledged that the transaction, which was structured as a reverse triangular merger, involved an “acquisition” within the meaning of the policy. But it rejected the insurer’s claim that the settlement of a shareholder class action lawsuit alleging false and misleading disclosures in the merger proxy (the “Baum action”) involved an increase in the purchase price. This excerpt from a Hunton Andrews Kurth memo on the decision summarizes the Court’s rationale:
Harman contended that the settlement could not constitute an increase in inadequate deal consideration because a Section 14(a) claim can’t be used to obtain damages for inadequate consideration. The insurers disagreed, contending that the settlement had to represent an increase in deal price because the Baum complaint expressly sought damages equal to the difference between Harman’s true value and the price paid to the shareholders when the transaction closed.
The court acknowledged that the Baum action alleged inadequate consideration, but the court emphasized that damages for an undervalued deal were not a viable remedy under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Rather, the court said those claims focus on the accuracy of the proxy statement’s disclosures and did not raise any claims authorizing the court to remedy an inadequate deal price.
Lastly, the court examined the settlement and concluded it did not represent an increase in the deal price. The insurers contended that the settlement resulted in an increase in consideration because the settlement amount was based in part on the alleged fair value of Harman stock compared to what Harman shareholders actually received.
Harman argued that the settlement represented only the value of legal expenses that it avoided by not litigating. The court looked no further than the agreement itself, which denied liability and stated the sole purpose of the settlement was to avoid litigation. The $28 million settlement price closely resembled the estimated legal fees and was not in line with the potential increased deal consideration, which the court estimated would be over $279 million. Therefore, the court concluded that the Baum settlement did not constitute an adjustment of the consideration offered to Harman’s stockholders to complete the acquisition.
The memo notes that the decision is particularly significant for policyholders incorporated in Delaware. The Delaware Supreme Court has said that Delaware law should apply to disputes involving D&O policies sold to Delaware-chartered companies, and the decision may provide an incentive for companies facing potential bump-up exclusion challenges to litigate coverage claims in the Delaware courts.
I remember the first time I learned about CFIUS. It was right after the Foreign Investment and National Security Act of 2007 when CFIUS was codified. I thought the whole thing was so interesting . . . and intimidating. It’s not even an agency, but an interagency committee? Voluntary filings? The Committee can unilaterally initiate review any time – even years after closing — and unwind the transaction? Ah! Of course, it makes sense — this is national security we’re talking about!
At the time, it seemed like something many M&A practitioners rarely dealt with. Now, national security concerns are more expansive, and CFIUS risk seems to be top of mind pretty much all the time for anyone doing cross-border transactions.
The latest example of the more expansive application of national security concerns is the Biden Administration’s determination to block Nippon Steel from acquiring U.S. Steel largely on national security grounds citing the criticality of domestically-owned steel production to the country’s infrastructure, auto industry, and defense industrial base. (And, unlike many other topics, this trend may not change much with the incoming Trump Administration — President-Elect Trump has also publicly opposed the deal.) This Simpson Thacher alert says that the order was expected, given Biden Administration commentary, but followed reports that CFIUS was unable to reach a consensus in its consideration of the merger.
While the Biden Administration’s concerns may have been specific to the steel industry, the alert says there are a number of more general takeaways for dealmakers:
– First, the Order continues the recent trends within the U.S. government to treat economic security as a core component of the country’s national security. We can expect the U.S. government increasingly to rely on these authorities to protect certain sectors and supply chains considered critical to the domestic economy, even if not traditionally associated with national security.
– Second, the decision demonstrates the U.S. government’s willingness to block a well-known firm from Japan, a country traditionally considered a key ally and diplomatic partner. While each transaction requires an individualized assessment of the potential national security and CFIUS risks, Biden’s decision is the latest example of how even investors from lower-risk jurisdictions can sometimes face deal risk.
Subsequent legal challenges to the order may also provide some interesting takeaways:
Nippon Steel and U.S. Steel filed a petition on January 6, 2025 with the U.S. Court of Appeals for the District of Columbia Circuit challenging the legality of the Order. The petition alleges Constitutional violations, as well as unlawful political influence, and asks the Court to set aside the Order . . . Determinations by CFIUS and the President are rarely litigated—the Defense Production Act states that actions by the President to prohibit a transaction shall not be subject to judicial review. Efforts seeking judicial relief in the present case will provide courts with a rare opportunity to consider the contours and limits of the President’s national security authorities.
In June 2022, John blogged about the Delaware Chancery’s decision in Manti Holdings v. The Carlyle Group (Del. Ch.; 6/22) to deny a motion to dismiss allegations of “liquidity conflicts.” Specifically, that a PE sponsor and its representatives on a target company’s board were under pressure to sell to close out the fund that invested in the target — creating a conflict that justified application of the entire fairness standard.
On Tuesday, in what might be his last opinion before retiring as Vice Chancellor, VC Glasscock issued his post-trial memorandum opinion in Manti Holdings v. The Carlyle Group (Del. Ch.; 1/25) applying the business judgment rule after concluding that the PE sponsor wanted the sale to go forward, but “that its interest was the same as the minority stockholders—to maximize the value of its investment … It did not need [the target] to be sold 2017, it did not force a fire sale, and it did not extract a non-ratable benefit from the sale.”
I find that CUSGF III (which owned Authentix stock through Authentix Holdings) and Authentix Holdings, on their own, had sufficient voting control of Authentix to make them controllers. . . . However, I find below that Carlyle did not have conflicts of interests that trigger entire fairness review of the transaction. . . . Plaintiffs argue that Carlyle had liquidity-based conflicts from fund-life and clawback provisions; considerations that drove them to sacrifice fair value for speed. The evidence at trial does not support this hypothesis, however.
While the facts certainly demonstrate that Carlyle wanted to exit its investment in Authentix in 2017, the facts do not demonstrate that Carlyle needed to exit its investment in Authentix or that Carlyle was otherwise driven by time pressure to exit that would cause it to accept less than fair value for Authentix shares, for itself as well as the minority stockholders.
Here, CUSGF III’s fund life was set to end on September 30, 2017, but CUSGF III’s ten-year term did not impose a deadline for selling its portfolio of companies. Instead, Carlyle’s funds can continue to hold investments after term expiration (and Carlyle’s funds have done this before). CUSGF III’s term can also be extended to permit additional investment in portfolio companies (and Carlyle’s funds have also done this before). As such, even though Carlyle wanted to sell off its assets prior to the term expiration, there was nothing in the Limited Partnership Agreement that required it to sell off its assets or drove it to conduct a self-injuring fire sale.
This decision is consistent with the general presumption in Delaware courts that stockholders “have an incentive to seek the highest price for their shares,” and, as a result, “liquidity-driven theories of conflicts can be difficult.”
To prove a liquidity-driven conflict of a controller, it is not enough to show a general interest in investors that a fund adhere to a timeline; a plaintiff must show sufficient evidence “of a cash need” that explains why “rational economic actors have chosen to short-change themselves.” . . . I find that the record demonstrates that Carlyle was interested in moving quickly because of the volatility of Authentix’ business rather than due to liquidity pressure because of the fund life.
This recent alert from Compensation Advisory Partners updates research from 2015 on how often and when activist investors raise issues with executive pay during proxy contests. In 48 contests at Russell 3000 companies, CAP found that executive pay concerns were identified by the activists in 23 of those contests and that activists have raised concerns about compensation in about half of proxy contests annually for each of the last five years. Typically, pay concerns are included as evidence of issues with the company’s strategic direction:
Data indicates that executive compensation was often tied to broader concerns about the companies’ strategic direction, operational execution, and financial performance. Essentially, executive compensation disagreements were not the main and sole rationale for engaging in the contest. Instead, activist investors use these disagreements to highlight deeper underlying concerns with a company’s direction or performance to induce change.
For instance, if total shareholder return (TSR) is not used as a performance metric while the company has faced a prolonged period of shareholder value decline alongside rising CEO compensation, activist investors will highlight these issues as signs of a flawed business strategy and misaligned incentive structures. In many cases, concerns about executive compensation support their broader calls for leadership changes, strategic adjustments, and stronger governance practices.
Not surprisingly, the most commonly cited issue was pay-for-performance misalignment (91% of the time). But other issues were cited as well, including:
– Excessive CEO pay (57%)
– Weak corporate governance structures (26%)
– Outsized peer comparisons (17%)
– Performance metric adjustments (17%)
– High dilution (13%)
– Excessive perquisites (13%)
– Long-term incentive plan design (13%)
– High director compensation (9%)
– Lack of disclosure (9%)
– Excessive change-in-control provisions (9%)
In a recent interview, President-elect Trump said that seeking an agreement to extend the expiring tax provisions of the Tax Cuts and Jobs Act of 2017 is one of his top priorities for his first 100 days back in office. While that may be easier said than done, this McDermott Will alert says, if accomplished, doing so could have a significant influence on cross-border M&A.
For example, the bonus depreciation provision, which allows businesses to immediately deduct a large percentage of the cost of eligible property, would continue to incentivize capital investments by reducing upfront costs. In many M&A transactions, buyers engage in basis step-up planning to increase the tax basis of the acquired assets to their fair market value at the time of purchase, which can lead to higher depreciation deductions, further reducing taxable income and enhancing the financial attractiveness of such deals. This can be particularly relevant for non-US buyers who acquire US businesses with material hard assets that may qualify for 100% bonus depreciation.
Trump has also proposed a research and development (R&D) expensing provision, which would allow for the immediate deduction of R&D costs and continue to encourage innovation by reducing the tax burden on companies investing in new technologies.
Additionally, Trump has proposed easing the interest expense limitations, which would allow businesses to deduct a higher percentage of their interest expenses and impact companies with significant debt financing. Trump appears inclined to retain the foreign-derived intangible income (FDII) provision, providing a lower tax rate on income from exports of goods and services, and the global intangible low-taxed income (GILTI) provision, imposing a minimum tax on foreign business income. The FDII and GILTI effective tax rates are set to increase in 2026; it remains unclear whether Trump will modify such provisions.
The alert says that these extensions, taken together, could “enhance the attractiveness of US companies as acquisition targets and support outbound investments by providing a stable and favorable tax environment for cross-border M&A transactions.” The alert also describes the possible impact of other potential changes, including tariffs, lower corporate tax rates and the IP purchasing initiative.
FTI Consulting recently published its latest Activism Vulnerability Report, which provides an overview of the state of play in shareholder activism & ranks the vulnerability of various industries to activist campaigns. As this excerpt describes, mid-cap companies are more often finding themselves the targets of activist campaigns:
Mid-cap companies, in particular, have seen a surge in activist interest, accounting for 25% of total campaigns in 3Q24, compared to just 10% a year earlier. This shift is not without reason: year-to-date through November 1, activists are achieving higher success rates in the mid-cap segment, with an impressive 74% of concluded mid-cap campaigns delivering favorable outcomes for activists in 2024, up from 51% during the same period last year.
Here are some other notable trends referenced in the report:
– A friendlier M&A backdrop could underpin a pickup in the number of activist campaigns in 2025. For the nine-months ended September 30, 2024, there have been 40 activist campaigns with explicit demands for M&A, up 17% over the same period in the prior year, suggesting the optimism may begin to materialize.
– Board seats gained by activists in U.S. companies through September 30, 2024, remained relatively steady compared to the same period in 2023. However, the pathways to these seats shifted, with fewer board seats achieved through settlements and a slight uptick in board seats won through proxy contests.
– The Utilities industry climbed seven places to become the most vulnerable sector to shareholder activism, while Media & Publishing maintained its hold on second place, and Real Estate edged up one position to complete the top three.