A recent Troutman Pepper Locke memo discusses some of the key issues associated with side letters entered into between VC investors and the portfolio companies in which they invest. The memo address three categories of rights that may be provided to a VC investor in a side letter: (i) rights that the company has already granted to existing investors, such as standard information and board observer rights; (ii) rights that the company has already granted to existing investors that could impact the other investors, such as preemptive rights, “major investor” status & carve-outs to drag-along provisions; and (iii) novel rights that no existing investors have been granted. Here’s an excerpt from the memo’s discussion of this last category of rights:
The last bucket is perhaps the most nuanced – granting novel rights via a side letter that no existing investors have been granted. For example, including a provision in a side letter that prohibits the company from using the investor’s name in press releases or other publications is likely not a material issue, but could the same be said about granting carve-outs to a drag-along provision that applies to all equity holders under the company’s governance documents? A drag-along provision is a provision in an agreement requiring all equityholders who executed such agreement to contractually agree to sell their securities on terms and conditions approved by the company’s board and/or a subset of its equityholders.
Assume an investor, via a side letter, negotiates certain carve-outs or conditions to the applicability of the drag-along against that individual investor while no other investors with the same class of security receives the benefit of such carve-outs or conditions. In those instances, in addition to investor relations considerations, both the company and the investor must consider whether the provisions in the side letter are enforceable, and the risks associated with them. If the parties are considering granting rights in a side letter that are substantive enough to be material to the company or potentially violate or contradict the governance documents, then the side letter may not be enforceable absent additional board and equityholder approvals to amend the applicable underlying governance document(s).
The memo also points out that certain items that are requested in a side letter may need to be set forth in the underlying governance documents in order to be enforcable, and cites carve-outs from certain transfer restrictions contained in governance documents as an example of a term that other investors might contend should be included in the governance documents themselves. In a situation like this, the side letter’s objective of saving time and expense by avoiding the need to reopen documents will no longer be served.
Cooley recently published its “2024 Life Sciences M&A Year in Review.” There’s plenty of good stuff in there, but I thought the section discussing the return of dual track process, whereby a seller pursues both a potential sale and an IPO simultaneously was particularly interesting:
2024 saw a return of the prevalence of dual-track processes for private biotech companies. This approach, combining M&A and initial public offering (IPO) preparations on parallel tracks, allows companies to maximize optionality in an uncertain market. As deals get smaller, mid- and late-stage biotech companies, some of which may have been planning to go public, increasingly become targets for acquisition by large pharmaceutical companies. Biotech M&A involving private company targets was actually up 17% by deal count and up 12% by deal value compared to the prior year.
The report notes that a target’s leverage on the sale side of a dual-track process depends a lot on the viability of the IPO alternative, and Cooley says that landscape for life sciences IPOs gained steam over the course of the year. With the IPO market expected to rebound more broadly during 2025, perhaps we’ll see the dual-track process make a comeback for sellers in other sectors in the near future.
Per this Freshfields blog, the Chamber — along with the Business Roundtable, American Investment Council, and the Longview Chamber of Commerce — filed a lawsuit in early January seeking to enjoin the enforcement of the recently finalized overhaul of the HSR filing regime on the basis that the changes violated the APA. The blog says:
– The court could enjoin enforcement of the entirety of the Final Rules, or the court could enjoin enforcement of only those changes that it finds to be out of bounds. The Final Rules do have a “savings clause,” meaning that if any part is held to be invalid, the remainder stays in effect. Further, the parts of the Final Rules relating to foreign subsidies are mandated by Congressional statute and likely will remain in place.
– The challenge to the HSR rules could provide relief to merging parties more quickly than a new Republican majority at the FTC if they decided to streamline the rules using APA rule-making procedures. President-Elect Trump has indicated that, upon taking office on January 20, he will designate sitting Republican FTC Commissioner Andrew Ferguson to serve as FTC chair. Both Commissioner Ferguson and fellow Republican Commissioner Melissa Holyoak voted with the Democratic majority to adopt the changes to the HSR rules, but view the final product as “not perfect.” Any attempt to streamline the rules would require a Republican majority, which will arise only upon Senate confirmation of President-Elect Trump’s additional FTC Commissioner selection, Mark Meador. Revising the HSR rules under the APA procedures, which would be required, could take 12 months or more (the APA process for the current rules changes took more than 15 months).
With the changes set to be effective next month, the blog reminds readers that parties with deals expected to sign after February 10 should assume and plan for the final rules to be effective at that time — until the court rules or Congress or the FTC acts.
Earlier this week, the Delaware Supreme Court issued its opinion in In re Oracle Corp. Derivative Litig. (Del. Sup.; 1/25) affirming the Delaware Chancery Court’s decision to apply the business judgment rule in the derivative matter by Oracle’s stockholders arguing that it overpaid for NetSuite because Larry Ellison, founder, director and officer of Oracle and significant stockholder of NetSuite, was a conflicted controller. As we shared in May 2023, in his seventh memorandum opinion in the litigation involving Oracle’s 2016 acquisition of NetSuite, VC Glasscock found that Ellison was not a controller of Oracle — distinguishing Ellison’s potential to control from actual control.
Here’s an excerpt from the Delaware Supreme Court’s opinion:
The test for actual control by a minority stockholder “is not an easy one to satisfy.” The minority stockholder must have “a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.” To prove actual control over a specific transaction, a plaintiff must prove that the minority stockholder “exercised actual control over the board of directors during the course of a particular transaction.”
The Court declined to weigh evidence on appeal — noting that this appeal is not from an early-stage dismissal decision and facts and testimony favorable to plaintiffs’ arguments were fully vetted during a 10-day trial — and the plaintiffs were not arguing on appeal that the Vice Chancellor’s factual findings were clearly wrong. The Court nonetheless gives this helpful summary of unchallenged facts that VC Glasscock cited to conclude that Ellison did not exercise actual control:
– the Oracle board and management were not afraid to disagree with Ellison;
– Ellison neither controlled Oracle’s day-to-day functions nor dictated Oracle’s operations to the Oracle board;
– Ellison “scrupulously avoided” discussing the transaction with the Special Committee;
– Ellison neither proposed the transaction nor indirectly controlled the merger negotiations through his January 27, 2016, phone call with Goldberg; and
– although Ellison could have controlled the transaction, he did not interfere with or actually exercise control over the transaction.
The ongoing litigation between Elon Musk and Sam Altman is not the first place I’d think to turn to get updates on the FTC and DOJ’s latest positions on the application of Section 8 of the Clayton Act. But, since several of Musk’s claims turn on antitrust arguments relating to OpenAI and Microsoft, the DOJ and FTC filed a statement of interest in the case earlier this month. Here’s an excerpt from this Cadwalader memo:
In the joint DOJ and FTC “statement of interest” filed in Elon Musk v. Samuel Altman, the agencies argue that “section 8 bars relationships that create an interlock regardless of form.” The agencies argue:
“[A]n individual cannot evade liability by serving as an ‘observer’ on a competitor’s board. … [A] company or individual cannot use an indirect means to a prohibited end, such as by asking another person to serve as a board observer to obtain entry to a meeting that is otherwise off limits due to Section 8’s ban on interlocks. Such misdirection would undermine Section 8’s intent to impose a clear ban on direct involvement in the management of a competitor.”
Although the DOJ has touted that the interlocks initiative has led to 15 interlocking director resignations from 11 boards, this Bryan Cave memo notes that the agencies are also saying in the statement of interest that resignation may not be sufficient:
Historically, the agencies allowed Section 8 cases to be resolved by resignation or withdrawal of the nomination of the alleged interlocking director. In this statement of interest, however, the agencies now argue that “ending an interlocking directorate, e.g., by having a person resign from a corporate board, is not sufficient, on its own, to moot a claim under Section 8 of the Clayton Act.”
The agencies continue that “if a plaintiff properly pleads a likelihood of recurrence or an ongoing harm through the wrongful retention of competitively sensitive information obtained through the alleged interlocks, Section 8 claims are not moot.” However, the agencies do not cite a single case supporting this conclusion.
It sounds like these positions — and the FTC’s focus on interlocks generally — are not likely to change, even as agency leadership shifts. Here’s more from the Cadwalader memo:
Firms and individuals should recognize this position was adopted by a unanimous commission, including President-elect Trump’s designee for FTC Chairman (and current Commissioner), Andrew Ferguson, and Republican-appointed Commissioner Melissa Holyoak.
The antitrust agencies’ efforts to identify and break interlocks, broadly defined, are not going to be shelved in the second Trump administration. Notably, the revised reporting rules for transactions subject to the Hart-Scott-Rodino Act include a requirement that filing parties identify certain officers and directors. One purpose of this reporting requirement is to identify interlocks that may impact competition, including interlocks that are not prohibited by Section 8.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, John and J.T. Ho were joined by Jonas Kron, Chief Advocacy Officer for Trillium Asset Management. John and J.T. spoke with Jonas about how Trillium approaches the engagement process, trends in ESG activism, and how activist investors like Trillium are responding to the headwinds facing ESG activism.
Topics covered during this 33-minute podcast include:
– How Trillium decides which issues it intends to prioritize and which companies it is going to engage
– Trillium’s approach to engaging with the management of its portfolio companies
– Advice for companies when engaging with socially conscious investors like Trillium
– How Trillium works with other socially conscious investors
– Top issues for engagement by Trillium and other ESG-focused investors during the upcoming proxy season
– Investor responses to headwinds facing them on ESG and DEI initiatives
– Alternative investor approaches if Rule 14a-8 is pared back
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John and J.T. continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
Last month, the FTC and DOJ announced that they were withdrawing their Antitrust Guidelines for Collaborations Among Competitors. In announcing the reasons for their decision, the agencies said that the Guidelines, which were issued in 2000, did not reflect case law developments under the Sherman Act, relied upon withdrawn and outdated policy statements, and risked creating safe harbors with no basis in the antitrust statutes.
Whatever their reasons, this excerpt from a Winston & Strawn blog points out that the antitrust regulators’ decision to again rescind long-standing guidelines has increased the risk associated with joint ventures and other collaborations between competitors:
With this dismantling of yet another long-accepted safe harbor, businesses that are considering engaging in collaborations with competitors are simply “encouraged to review the relevant statutes and case law to assess whether a collaboration would violate the law.” It continues to be prudent for businesses—particularly those in industries that often involve collaborative efforts between competitors and sectors that are prime targets of antitrust enforcement and scrutiny (e.g., health care, technology)—to engage early and often with counsel who are antitrust specialists and can help navigate the murky waters of statutory and case law precedent and can advise businesses on how to steer clear of compliance violations and regulatory risk.
Companies should also consider working with experienced counsel to engage with the DOJ and/or FTC preemptively through the agencies’ business review processes, whereby companies can receive specific guidance on whether a particular collaboration among competitors would violate antitrust laws according to that agency.
The FTC’s decision to withdraw the Guidelines was approved by a 3-2 vote along partisan lines, and prompted sharp dissents from the two Republican commissioners, Melissa Holyoak and Andrew Ferguson, and given the upcoming change in administrations, it seems likely that new guidelines will eventually be issued. Until that happens, this Wilson Sonsini memo has some advice for companies looking to establish joint venture or other collaborations with competitors:
Although we expect the new administration to reintroduce the guidelines for competitor collaborations (or issue new ones), it could take time to do so. In the meantime, companies may mitigate the antitrust risks of competitor collaborations by clearly documenting the pro-competitive bases for any collaborations, limiting the scope of information exchanges to general, non-competitively sensitive information unless first consulting with counsel, and not entering into agreements regarding pricing or output without first consulting with counsel.
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.