The Biden Administration has adopted an aggressive posture toward antitrust enforcement, and this Wilson Sonsini memo reviews the latest developments at the FTC & DOJ and discusses their implications for M&A. The memo says that the close scrutiny of “Big Tech” is likely to continue over the long-term, and that concerns about acquisitions that eliminate nascent competitors have already led to challenges to several deals, and that regulators are closely reviewing the impact of transactions on labor markets.
The memo also says that parties will find it increasingly difficult to resolve regulatory challenges to deals. Behavioral remedies are increasingly off the table, and any settlement is likely to require divestiture of a stand-alone business to a well-financed competitor. All of this means that the merger review process is going to be much more difficult to navigate and approvals more difficult to obtain. In this environment, the memo offers the following takeaways for companies considering acquisitions:
– Consider Deal Certainty Carefully: An attractive premium is only truly attractive if a deal can close. Potential targets must be cognizant that antitrust risk could make any offer to acquire illusory.
– Ensure That the Acquisition Agreement Protects Your Interests: Sellers must be sure that the buyers will take the necessary steps to ensure their deals close (e.g., make divestitures, litigate, pay a break fee if the deal is blocked), and buyers must be aware that expansive divestiture demands could result in a remedy that frustrates the purpose of the deal or, worse, requires the divestiture of the buyer’s own assets to get the deal closed in light of agency concerns.
– Plan for a Prolonged Review: The agencies also are demanding more time to complete their reviews. Anticipate reviews that last three months or more longer than in previous administrations. The FTC recently announced that its staff is overwhelmed with the volume of HSR notifications and that reviews are taking longer than normal as a result.
– Be Wary That the FTC May Conduct a Post-Close Review: On August 3, 2021, the FTC announced that given the volume of M&A activity, in some instances, the agency would continue its reviews beyond the time allotted under the HSR Act. Thus, a deal could conceivably receive clearance from the agencies, close, and subsequently be investigated and potentially subject to remedies or eventual FTC challenge.
The FTC is signaling a hard line, but some companies may be willing to call the agency’s bluff. Recently, Illumina closed its acquisition of Grail despite a pending FTC administrative proceeding to block the deal, and this recent Bloomberg article suggests that, given the FTC’s limited resources, other companies may be willing to do the same.
I recently blogged about Vice Chancellor Slights’ decision in Flannery v. Genomic Health, (Del. Ch.; 8/21), where he held that a mixed consideration merger consisting of 58% stock and 42% cash didn’t trigger Revlon. Over on ProfessorBainbridge.com, UCLA’s Stephen Bainbridge says that opinion perpetuates an error that’s been committed by a number of Chancery Court opinions over the years, and that under applicable Delaware Supreme Court precedent, even an all cash deal may not trigger Revlon.
Bainbridge originally laid out this argument in his 2013 article, “The Geography of Revlon-Land”, and summarizes it in the blog. In essence, he points to the third prong of the Revlon test identified in the Delaware Supreme Court’s 1994 decision in Arnold v. Society for Savings, which says that “there is no sale or change in control when “[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.” The change in control test articulated in Arnold makes no mention of a requirement for a stock-for-stock deal, and Bainbridge says that the Chancery Court simply made one up. Here’s an excerpt:
In a series of cases, the Delaware Chancery court invented a fourth trigger:
In transactions, such as the present one, that involve merger consideration that is a mix of cash and stock—the stock portion being stock of an acquirer whose shares are held in a large, fluid market—”[t]he [Delaware] Supreme Court has not set out a black line rule explaining what percentage of the consideration can be cash without triggering Revlon.”
In Flannery, VC Slights embraced the NYMEX line of cases clearly erroneous approach to all cash deals:
In an all-cash transaction, Revlon applies “because there is no tomorrow for the corporation’s present stockholders.”
NYMEX and progeny were clearly inconsistent with Arnold. They posit that a mix of cash and stock triggers Revlon, but Arnold’s clear implication is that an acquisition by a publicly held corporation with no controlling shareholder that results in the combined corporate entity being owned by dispersed shareholders in the proverbial “large, fluid, changeable and changing market” does not trigger Revlon whether the deal is structured as all stock, all cash, or somewhere in the middle. The form of consideration is simply irrelevant.
I think this is an intriguing argument. But I don’t think I’d advise a seller’s board that they could safely rely on the view that it’s possible to do an all cash deal without triggering Revlon. The Chancery may have gone off the rails in NYMEX, but however wrong-headed its doctrinal origins may be, the notion that the majority of the consideration must be in stock in order to avoid Revlon is pretty deeply embedded at this point.
Merger agreements are like puzzles, and figuring out exactly how all of their moving parts fit together can be a real challenge, particularly if a dispute develops. That’s why I think most M&A lawyers will have at least a little sympathy for the plaintiff in Yatra Online v. Ebix, (Del. Ch.; 8/21), which paid a big price for its misinterpretation of the terms of the agreement.
The case involved a dispute arising out of a July 2019 merger agreement providing for the acquisition of the target in a stock-for-stock deal. Stop me if you’ve heard this before, but the buyer’s appetite for the deal allegedly cooled after the onset of the pandemic and its impact on the target’s business. The target contended that the buyer dragged its feet on a number of contractual obligations, engaged in negotiations and signed extensions that were intended to buy it time to figure out a way out of the deal. Along the way, the buyer also surreptitiously negotiated a “Tenth Amendment” to its credit agreement with its lenders that made it impossible to honor its obligation to extend the target’s shareholders a put right for the shares they were to receive in a deal.
The target ultimately became fed up with the buyer’s dilatory tactics, and after the final outside closing date lapsed, the target terminated the merger agreement and filed a lawsuit alleging a breach of contract in the Chancery Court in June 2020. The defendants immediately moved to dismiss, alleging that the target’s decision to terminate triggered the agreement’s “Effect of Termination” provision, which precluded any post-termination claims except fraud.
The target subsequently amended its complaint to add a fraud claim and a breach of the implied covenant of good faith and fair dealing. The target also sued the buyer’s lenders for tortious interference with its contractual put right. Vice Chancellor Slights determined that the target’s decision to terminate the merger agreement was fatal to all of its claims:
For reasons explained below, Defendants’ motions must be granted in full. Under the Merger Agreement’s plain terms, Yatra extinguished its breach of contract claims when it elected to terminate the Merger Agreement. The implied covenant claim fails because there is no gap in the Merger Agreement for the implied covenant to fill. And the fraud and tortious interference claims fail because each relies on the false premise that the Tenth Amendment frustrated Yatra’s remedy for specific performance. As Yatra affirmatively pleads, it could not have sued for specific performance until the S-4 filing was approved, and it elected to terminate the Merger Agreement before that condition to closing occurred. Consequently, Yatra has failed to plead reasonably conceivable loss causation for either fraud or tortious interference.
Ann Lipton flagged this case on Twitter, and her comment was that the opinion “was almost painful to read.” I couldn’t agree more. Given the factual allegations here, it’s hard to think of a tougher situation than this one.
This Sidley blog lays out a list of 11 “bedrock” Delaware decisions that the authors suggest every M&A lawyer should be familiar with. I love these kind of lists, whether it’s something like the BFI’s poll of the 100 best films of all time, a list of the 100 best novels of the 20th century, or a list of the best players in NFL history.
The fun thing about lists like these is arguing over what should be included or excluded. For instance, while Sidley’s list is a good one, Smith v. Van Gorkom isn’t on it, and I think it should be. Sure, there’s a lot to dislike about a decision that most practitioners probably regard as more blunder than bedrock, but it’s had an enormous influence on the evolution of the deal process and on subsequent developments in Delaware law. Just to give one example, if there’s no Van Gorkom, does Delaware ever enact Section 102(b)(7) and permit companies to eliminate damage liability for breaches of the duty of care?
In terms of what I might exclude, the Sidley folks included Blasius v. Atlas Industries, which is a case whose bark has usually been worse than its bite (at least outside of director elections). It’s full of lofty language about protecting voting rights, but former Chief Justice Strine did his level best to demote it to a particularized application of Unocal. It looks like it may have been recently re-elevated by the Supreme Court, but I’m not sure it’s bedrock.
Anyway, your mileage may vary on all of this, but it’s an interesting topic and I highly recommend checking out the blog.
Last week, the FTC’s Bureau of Competition announced that it’s walking back an informal interpretive position that some parties have relied upon to avoid HSR filings by reducing the transaction value through repayment of target debt. Here’s an excerpt from the agency’s “Competition Matters” blog addressing the Bureau’s decision:
Under the Hart-Scott-Rodino rules, parties generally need to file if the transaction is valued over a certain dollar-value threshold. However, previous informal interpretations gave the impression that companies could avoid filing by paying off a target company’s debt, instead of paying the company with cash.
It appears that some merging parties have responded by structuring deals in ways that they believe fall outside of the filing requirements. Target companies may be incentivized to take on debt just before an acquisition, so that the acquiring company can retire the debt as part of the deal. These deals then are not being reported to the FTC and the DOJ, which means that merging parties are effectively sidestepping the law and avoiding accountability.
Herein lies the problem of unintended consequences with informal interpretations. Despite the agency’s clearly stated assertion that informal interpretations are not a legal determination, companies appear to rely on them as a substitute or supplement for their own legal analysis. In practice, this means that informal interpretations regarding instances that companies may not have to file are being treated by merging parties as if they are legal exemptions.
That outcome is not aligned with either the statute or the agency’s stated instructions. It is the Commission’s responsibility, with the concurrence of the DOJ, to determine whether and when reporting exemptions are appropriate, through rules or formal interpretations of those rules. As a law enforcement agency, the FTC must be mindful of helping firms avoid accountability, even indirectly.
If you can read the blog’s commentary on the “unintended consequences” of informal agency interpretations without muttering a few expletives under your breath, you’re a better person than I am. But be that as it may, effective September 27, 2021, the Bureau says that it will begin to recommend enforcement action for companies that fail to file when retirement of debt is part of the deal consideration. Here’s the Bureau’s updated position on debt repayment.
Shortly after I pressed the button on Friday’s blog, I received a bunch of emails from law firms informing me that they were one of the 49 firms to have signed-on to this memo challenging the assertion in recent SPAC lawsuits that SPACs are investment companies. Here’s an excerpt:
Consistent with longstanding interpretations of the 1940 Act, and its plain statutory text, any company that temporarily holds short-term treasuries and qualifying money market funds while engaging in its primary business of seeking a business combination with one or more operating companies is not an investment company under the 1940 Act. As a result, more than 1,000 SPAC IPOs have been reviewed by the staff of the SEC over two decades and have not been deemed to be subject to the 1940 Act.
The undersigned law firms view the assertion that SPACs are investment companies as without factual or legal basis and believe that a SPAC is not an investment company under the 1940 Act if it (i) follows its stated business plan of seeking to identify and engage in a business combination with one or more operating companies within a specified period of time and (ii) holds short-term treasuries and qualifying money market funds in its trust account pending completion of its initial business combination.
Personally, I think that getting 49 law firms to agree about anything is pretty impressive. But not everybody thinks so. According to this Law360 article, at least one academic expert on the Investment Company Act isn’t impressed at all:
William Birdthistle, a securities law professor at Chicago-Kent College of Law, on Twitter called the law firms’ joint statement “embarrassing,” saying the statement “cites nothing in support of its position: no cases or SEC guidance.”
Yeah, I’m not thinking the purpose here was to write a brief, so I’m not sure where the characterization of the memo as “embarrassing” comes from. In any event, the memo itself may not cite anything, but separate memos issued by two of the signatory firms – White & Case and Winston & Strawn – provide some authority in support of their position.
The aftershocks from the Pershing Square Tontine Holdings lawsuit continue to reverberate through SPAC-land. Shortly after the complaint was filed, Bill Ackman announced plans to dissolve PSTH. Ackman – whose picture appears next to the definition of the word “mercurial” in the dictionary – reiterated his belief that the suit is meritless, but said that “the nature of the suit and our legal system make it unlikely that it can be resolved in the short term.” He also said that the lawsuit was likely to chill interest from potential De-SPAC partners.
Ackman’s decision to dissolve PSTH hinges on the SEC’s approval of an offering by a new entity, Pershing Square SPARC Holdings. What’s the difference between this entity and PSTH? According to this Institutional Investor article, “[t]he primary difference between Ackman’s SPARC and a traditional SPAC is that the SPARC does not require investors to put up any money until it has identified a merger target.” The SPARC also wouldn’t be subject to the two-year time limit that applies to SPACs.
Ackman’s announcement immediately prompted triumphal crowing from Professors Jackson & Morley:
“We are gratified to see that just two days after we filed our lawsuit, the world’s largest SPAC is now offering to mail back over $4 billion worth of checks to investors,” they said in an emailed statement Friday. “This validates the strength of our claims — and the urgent need to enforce existing investor protections in this industry.”
Some of their fellow academics have also called this a win for the profs, with some even going so far as to suggest that the lawsuit may portend the doom of the SPAC industry. But whatever its consequences for SPACs generally, my guess is that Bill Ackman is positively giddy about the fig leaf the lawsuit has provided to him – and that’s probably the best explanation for his quick decision to liquidate. It’s pretty apparent that the sheer size of PSTH was making it difficult to find a suitable De-SPAC merger partner, and the lawsuit gave him an opportunity for a graceful exit before time ran out on his SPAC.
Jackson and Morley certainly have the courage of their convictions – according to this WSJ story, they followed up their lawsuit against PSTH with filings against two other SPACs premised on the same alleged violations of the Investment Company Act. The profs say that their lawsuits are “based on extensive research into the laws governing investment managers.” That’s undoubtedly the case, but practitioners don’t seem as impressed with their allegations. In fact, this excerpt from their recent memo on the filing indicates that the folks at White & Case are downright dubious about them:
The complaint misstates both the law and what PSTH, like all SPACs, proposes to do. As noted above, to be an investment company under Section 3(a)(1)(A) of the ICA, a company must do more than merely invest in securities. Investing in securities must be the company’s primary business to fall within Section 3(a)(1)(A).
The purported basis in the lawsuit for its allegation that PSTH’s primary business is investing in securities is the fact that, prior to the consummation of a business combination or liquidation, PSTH, like all SPACs, is required to deposit all of the gross proceeds from its IPO into a trust account, which may only be invested in United States “government securities” or in certain money market funds which invest only in direct US government treasury obligations. This argument was rejected long ago by the SEC.
The memo goes on to lay out in detail the argument that the complaint’s Investment Company Act allegations are without merit. This Winston & Strawn memo takes a similar position. As for the plaintiffs, it looks like we may have to wait for their response to a motion to dismiss to find out whether they’ve got some bombshell arguments supporting their allegations – or if they’ve just “released the Kraken.”
In order for a proposed merger not to trigger Revlon duties, control of the company must reside in “the market” before & after the deal and there must be a significant stock component to the consideration. As usual in Delaware, the fun part is deciding where to draw the line – how much stock is enough? That involves a case-by-case analysis.
It’s pretty clear that a deal that isn’t mostly stock won’t cut it, and the Chancery Court has held that a 50/50 cash & stock deal won’t either. On the other hand, in In re Santa Fe Pacific Corp, (Del. 11/95), the Delaware Supreme Court held that a deal with 66% stock consideration wouldn’t trigger Revlon. Just to make matters a little more complicated, there’s even case law out there suggesting that it isn’t just the percentage of stock in the consideration, but the percentage of the surviving entity that the target’s shareholders will own post-closing, that needs to be taken into account.
Anyway, this is a long-winded introduction to the fact that the Chancery Court just weighed in on this issue again, in Flannery v. Genomic Health Inc., et al., (Del. Ch. 8/21). In that case, Vice Chancellor Slights held that a deal in which 58% of the consideration was in the form of stock didn’t trigger Revlon:
[T]he consideration mix agreed to in the Merger Agreement dictates that 58% of each Genomic stockholder’s shares would be converted into Exact stock. Ultimately, it cannot be said that Genomic abandoned its long-term strategy, triggering a duty to maximize short-term gain, where 100% of Genomic’s stockholders received Exact stock in exchange for 58% of their shares. Because Plaintiff has failed to plead that Exact does not trade in a “a large, fluid, changeable and changing market” such that Genomic’s stockholders were prevented from obtaining a control premium for their shares in future transactions following the Merger, there is no reason to apply Revlon under the Court’s holding in Santa Fe.
There’s also an interesting Section 203 issue addressed in the case – check out this blog from Steve Quinlivan for a discussion of that aspect of the decision.
The CII recently published this report on poison pills adopted since January 1, 2020. Nearly 100 pills were adopted during this period, and not surprisingly, the vast majority of them were put in place following the onset of the pandemic in March 2020. But their terms were less uniform than you might expect. Here are some of the highlights from the CII’s analysis:
– Of pills adopted in January to May 2020, 37 of 46 (80%) expired in one year or less. Of all pills adopted between January 2020 and June 2021, 63 of the 97 (65%) set expiration dates of about one year or less. This dip may reflect the fact that a number of companies later extended pills that were originally adopted during the pandemic, as well as the fact that later in the pandemic companies extended existing pills that were adopted for reasons unrelated to pandemic issues.
– In total, about 40% of the pills that last more than one year will be or have been put up for a shareholder vote. There are, however, three pills that were adopted in late 2020 that will not expire for 10 years and will not be put up for a shareholder vote.
– Trigger thresholds in a significant number of 2020 and 1H 2021 poison pills have been set at low levels. A total of 28 pills would be triggered at 5% beneficial ownership or less (21 of these pills are NOL pills). Another 39 pills set their triggers at 10% beneficial ownership.
– Remarkably, four pills include “dead hand” provisions.
– 17 pills had “acting in concert” or “Wolf Pack” provisions, although the survey notes that many of these were amended in response to the Chancery Court’s Williams Companies decision.
– A dozen pills adopted during the period were “chewable pills,” which included provisions that would make them inapplicable to “qualifying offers.”
I recently blogged about the challenges of obtaining RWI coverage for non-standard deals in the current environment. This Goodwin memo provides some additional insight into current market terms for RWI policies. Here’s an excerpt:
Pricing. The premium for R&W insurance has increased significantly in the last 12 months. While the “rate on line” (premium divided by the policy limit) has been declining in the last few years (reaching as low as 2.5% and infrequently exceeding 3.5%), a more common range initially quoted recently has been around 3-4.5% depending on the industry, and sometimes exceeding 5%. Carriers cite their claims experience and deal volume for reasons for the pricing increase.
Retention. The retention for the policy has not changed. A typical retention is 1% of the enterprise value (EV) initially, dropping down to 0.5% (usually on the first anniversary of the closing). As before, the initial retention for larger deals (close to or above $500 million) is often 0.75% of the EV. For smaller deals, minimum retention may apply (around $200,000, depending on the insurer and the type of transaction).
Term Sheets and Policies. The number and types of proposed coverage limitations in quotes have become more extensive and technical, including comments on the representations, interplay with other insurance, and cap on multiple damages (for some insurers). This trend has accentuated the need for experienced R&W insurance coverage counsel to be involved early and negotiate the terms at the quote stage because it would become difficult to do so later in the process.
Despite the more challenging market conditions, the blog says that claims continue to be processed and paid, although large claims exceeding the retention are relatively infrequent, and that only a handful of R&W insurance claims have resulted in litigation so far.