Over on TheCorporateCounsel.net, I recently blogged about the SEC’s enforcement action against Andeavor LLC, which arose out of the company’s implementation of a stock buyback at a time when was about to resume negotiations with a potential buyer. This Goodwin memo discusses what the proceeding has to say about when merger negotiations may constitute material nonpublic information, and says that the SEC’s cease & desist order in the case provides some helpful guidance on this topic. Here’s an excerpt:
The question of whether merger discussions or other circumstances constitute MNPI is always a facts and circumstances assessment, so this case is not dispositive of that question under other sets of facts. But the SEC’s cease and desist order offers important lessons for assessing whether a company is in possession of MNPI in the context of ongoing M&A discussions.
First, the order highlights the importance of the process used to determine the existence of MNPI. The SEC found that the target had used an “abbreviated and informal process” that “did not require conferring with the persons reasonably likely to have potentially material information regarding significant corporate developments.” While the order does not detail steps that the target did take, it highlights that the target’s process took at most one day and did not include discussing the likelihood of a transaction with the target’s CEO, who was the “primary negotiator” of the transaction.
The SEC’s position is that a company should employ a formal process that includes “conferring with persons reasonably likely to have potentially material information regarding significant corporate developments” and yields “an accurate and complete understanding of the facts and circumstances necessary to determine whether [the company is] in possession of material non-public information.”
Second, the order highlights certain considerations relevant to determining whether a potential M&A transaction is sufficiently likely as to constitute MNPI. The SEC criticized the target’s failure “to appreciate that the probability of [a transaction] was sufficiently high as to be material to investors.” Citing Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the SEC noted that “an acquisition need not be more likely-than-not to occur for it to be material” to investors.
The order identifies a number of factors that the memo suggests were relevant to the SEC’s determination that the probability of a transaction was high enough to conclude that the resumption of negotiations was MNPI. These include, among other things, the duration of the pre-“pause” negotiations & the resolution of the issues that prompted the pause; the sharing of information under a confidentiality agreement & the drafting of a merger agreement.
This Morgan Lewis “white paper” takes a deep dive into what companies should be preparing for when it comes to shareholder activism during the 2021 proxy season. Here’s the intro:
The shock, turmoil, uncertainty, and lack of visibility that followed the immediate onset of the coronavirus (COVID-19) pandemic in March 2020 were significant factors accounting for why shareholder activism was relatively subdued during the 2020 proxy season. However, given that activist investors have now had more than eight months to acquire their “sea legs” and recalibrate their playbook for the evolving “new normal,” it is likely that, even as the COVID-19 pandemic shows no signs of abating, activist investors will be less reluctant to wage an activism campaign in whatever “new normal” we find ourselves in during the 2021 proxy season.
Notably, unlike with respect to the 2020 proxy season, activist investors currently planning for the 2021 proxy season are making those plans aware of the existence of the COVID-19 pandemic and its evolving implications and having to anticipate and incorporate into their plans the possibility that, even if the current COVID-19 case surge is reversed and further extended lockdowns are avoided, the COVID-19 pandemic is not likely to materially subside between now and the end of the 2021 proxy season.
In addition, as we will discuss below, we are likely at a point where the COVID-19 pandemic may be more of a catalyst for shareholder activism than an inhibitor. Accordingly, companies should not expect that shareholder activism during the 2021 proxy season will be as subdued as it was in 2020.
The white paper reviews how activism was impeded by Covid-19 during 2020, and also addresses the factors that may result in the pandemic become a catalyst for shareholder activism during the 2021 proxy season. It also lays out other forces that could drive activism this year, how Covid-19 may have created vulnerabilities for companies, what to expect from activists during the upcoming proxy season, and how companies can avoid being “sitting ducks” for activists.
This November-December Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– Duty of Loyalty Issues for Designated Directors and the Boards of Portfolio Companies
– Conflicted CEO Tilts Company Sale in PE Firm’s Favor
– SBA Announces New Guidance on Consent Requirements for PPP Borrower Changes of Ownership
– Court Rejects Challenge to M&A Transaction Despite Activist Pressure
– Do Reps and Warranties Policies Actually Pay Claims?
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
By now, you’ve probably heard the news that Simon Properties & Taubman Centers have agreed to settle their dispute and move forward with a deal at a purchase price of $43 per share. That’s a pretty substantial haircut from the $52.50 that Simon originally agreed to pay, so what did Taubman get in return?
The press release announcing the deal said that in addition to revising the purchase price, other provisions of the agreement were amended to “reduce closing conditionality.” A review of Taubman’s Form 8-K filing on the terms of the revised deal and the amended & restated merger agreement reveals some of the key changes that the parties negotiated to their original original merger agreement in order to enhance deal certainty. These include:
– Amending definition of the term “Material Adverse Effect” contained in Section 9.03 to, among other things, provide a carve-out for “any effect, change, event or occurrence disclosed in any of the [Taubman] SEC Documents filed prior to the date of this Agreement, any written communications delivered by the [Taubman] Parties to the Simon] Parties pursuant to the Original Merger Agreement or referred to in any of the [Simon] Parties’ or the [Taubman] Parties’ filings, written submissions or written correspondence in connection with the Merger Litigation.”
– Tightening Simon’s closing condition in Section 7.02(a) tied to the accuracy of Taubman’s reps and warranties by, among other things, including language providing that this condition won’t apply to “any failure of any representation or warranty of the [Taubman] Parties to be true and correct that was Known to the [Simon] Parties prior to the date of this Agreement (or based on any fact or circumstance Known to the [Simon] Parties prior to the date of this Agreement),” and also excluding any such failure that occurs “primarily as a result of or in connection with exogenous events that were beyond the reasonable control of any of the Taubman Parties.”
– Including a provision in Section 9.10 similar in concept to the one in the LVMH/Tiffany agreement to the effect that, in the event of certain litigation brought prior to the closing to enforce Simon’s obligations under the agreement, the amount of the merger consideration will be the $52.50 per share amount set forth in the original agreement.
Unlike LVMH and Tiffany’s amended deal, this one didn’t originally have a standalone MAE condition. The parties didn’t need to carve out the pandemic from the MAE definition in the revised agreement, because that carve was already contained in the original deal. That feature of the deal is one of the reasons academics & others who write about M&A for a living are disappointed that this case ultimately won’t be litigated. Personally, I’m conflicted – the case would have been great blog fodder, but the deal lawyer in me joins with the parties & their lawyers in their sighs of relief.
As you may recall, Simon’s lawsuit was scheduled for trial this week in a Michigan state court. The parties apparently decided that they’d prefer a more traditional venue in the event they end up in litigation over the revised deal, because Section 9.08 of the revised agreement changes the law governing the agreement from Michigan to Delaware, and provides that the Delaware courts would be the exclusive forum for any litigation arising out of the deal.
Tune in tomorrow for the webcast – “Doing Deals Remotely” – to hear Joseph Bailey of Perkins Coie, Murad Beg of Provariant Equity Partners and Avner Bengara of Hughes Hubbard & Reed discuss adjusting to doing deals remotely, including lessons learned and emerging best practices for completing a successful transaction in this strange new environment.
This Woodruff Sawyer blog addresses the importance of “tail” coverage for the seller’s directors in an M&A transaction. Here’s an excerpt:
In M&A, the D&O insurance policy that responds to a claim is the policy that is in place at the time the claim is made. So, for example, if in 2020 a set of actions took place that is later challenged in 2021, it’s the 2021 policy that would respond, assuming you still have an active insurance policy in place.
This is where a D&O tail policy is crucial. A tail policy covers what would otherwise be a gap in coverage for directors and officers after the sale of a company. The gap exists because the D&O policy of the acquiring company will typically not respond on behalf of the selling company’s directors and officers for claims that arise post-closing that relate to pre-closing activities.
When a tail policy is purchased, the insurance carrier for the selling company agrees to hold open the D&O insurance policy for a specified period past the policy’s normal expiration date. In the United States, six years is the standard.
In other words, if a claim arises within six years after a company is sold, the selling company’s directors and officers will be covered under their original D&O insurance policy.
Another benefit of a tail policy is that it’s generally non-cancelable. This feature guarantees that the seller’s former directors and officers will not run the risk of the acquiring company cancelling the policy in order to get back the cash paid for the policy.
The blog addresses a number of related issues, including who should purchase the policy, when it should be purchased and – last but not least – how to go about purchasing tail coverage.
The Delaware Supreme Court’s recent decision in the Jarden appraisal proceeding appears to have given new life to the use of a target stock’s “unaffected market price” as a valuation metric in appraisal. However, this Cadwalader memo says that the Court’s decision last month in Brigade Lev. Cap. Fund, et. al. v. Stillwater Mining Co., (Del.; 10/20), confirmed that deal price remains the most reliable indicator of fair value if the seller runs a sound, conflict-free sales process:
The Delaware Supreme Court’s decision in Stillwater confirms—with caveats—pre-Jarden speculations that transaction price will often be found to provide the most reliable indicator of fair value. Unlike the deficient sale in Jarden, the Delaware Supreme Court agreed with Vice Chancellor Laster that Stillwater’s sale process presented “objective indicia” to support the conclusion that the merger consideration reliably indicated fair value in this instance.
In affirming, the Delaware Supreme Court observed that the lower court had discretion in selecting the valuation model best tailored to the circumstances. Quoting Jarden, it stated that “‘[i]n the end, the trial judge must determine fair value, and fair value is just that, fair. It does not mean the highest possible price that a company might have sold for.’” However, this was the Court’s only mention of Jarden, suggesting that the facts there that led the Court to reject merger consideration as evidence of fair value were not present in Stillwater.
The memo reviews the Jarden and Stillwater decisions, and identifies key takeaways as to the current state of appraisal litigation in Delaware. It notes that the decisions provide a reminder that “the judicial valuation process demands a case-specific inquiry in which a single factor, such as a deficient sales process, can be outcome determinative,” and that the decisions also confirm that the Delaware courts continue to look to market-based factors as the best indicators of fair value.
This Cahill memo addresses best practices for addressing FCPA and related anti-bribery issues during the due diligence phase of a potential acquisition and during the post-closing integration process. Here’s the intro:
When considering acquisitions or significant investments, acquirers should conduct a thorough review of the target’s corruption risk and its compliance (or non-compliance) with the Foreign Corrupt Practices Act of 1977 (FCPA) and other applicable anti-bribery and corruption (ABC) laws. ABC due diligence is important not only to identify evidence of actual corrupt activity, but also to aid the assessment of overall risk when evaluating a transaction.
Pre-acquisition ABC due diligence can help inform post acquisition compliance integration at the target company and reduce post-closing exposure of the acquirer. A thorough review in advance of the transaction is particularly warranted for acquisitions in high-risk emerging markets. In the current M&A environment, acquirers should consider increased ABC risks that may arise from the COVID-19 pandemic. Modifications to the target’s anti-corruption program due to operational hardships and efforts to accelerate government approvals at a time when many governmental functions are significantly delayed should be particularly evaluated.
The memo provides an in-depth review of the various actions that should be taken as part of the due diligence process, and also provides guidance on developing and implementing an appropriate post-closing compliance program.
Most of the time, the Delaware Chancery Court’s opinions that are blog-worthy are quite lengthy. I run a volume business here, so when I find a short one that fits the bill, you can bet it moves to the top of the pile. That’s the case with Vice Chancellor Zurn’s recent 12-page order granting plaintiff’s motion for judgment on the pleadings in Hallisey v. Artic Intermediate LLC, (Del. Ch.; 10/20).
The case arose of out the buyer’s failure to delivery a “Closing Date Report” detailing working capital & other post-closing adjustments that it sought within the time period specified in the purchase agreement. The plaintiff filed a declaratory judgment action alleging that the buyer’s failure to file the report in a timely fashion waived its rights to seek a post-closing adjustment under the terms of the purchase agreement.
In response, the buyer alleged that “[t]here were valid and justifiable reasons, caused by one or more Sellers, for any delay in Buyer’s submission of a Closing Date Report.” In particular, the buyer alleged that the company’s former CFO, who was also a seller, had “actively manipulated and misrepresented” the target’s financial information before and after the closing.
The buyer claimed that these misdeeds made it impossible for it to provide the Closing Date Report on a timely basis, and that the former CFO and the plaintiff, as sellers’ rep, “engaged in actions so egregious that they offend the very sense of equity” to which the plaintiff appealed, and that the plaintiff should be equitably estopped from the relief that he sought. The Chancery Court didn’t buy that argument:
Even assuming that [the former CFO’s] egregious actions could soil Hallisey’s hands, the doctrine of unclean hands is inapplicable because Hallisey appeals not to equity, but to the law of contract. The parties bargained to allow Buyer six months to submit a Closing Date Report. The parties also bargained to allow Buyer certain indemnity rights if all was not as was represented to be. Those contractual provisions govern the acquisition, purchase price, and the parties’ rights of recovery: they will be respected by this Court, and will not yield to unclean hands.
Vice Chancellor Zurn also rejected the defendant’s argument that the plaintiff was equitably estopped from enforcing the relevant provisions of the purchase agreement. She said that they buyer bargained for representations about the target’s financial information and records, as well as for the remedies applicable to breaches of those reps. VC Zurn concluded that “equitable estoppel is not available to enforce such a bargained-for contract right.”
The FTC’s Bureau of Competition recently blogged some guidance about the types of communications covered by the “all documents” specifications in its Second Requests, CIDs & document subpoenas. Not surprisingly, the agency says that the term encompasses a lot more than email & files:
Executives and employees of modern businesses communicate with one another, and with suppliers and customers, in a wide variety of ways. Especially with the current challenges of in-person meetings, electronic exchanges are now the norm for doing business. Emails, memoranda, voicemails, SMS/text messages, instant messages, hard copy notes and collaborative documents are all routinely created and circulated in the ordinary course.
It should come as no surprise, then, that each of these forms of communication (among others) are covered by the “all documents” specifications in our Second Requests, Civil Investigative Demands, and subpoenas for documents. This means that, absent modification of the scope of a request to which FTC staff have affirmatively agreed, recipients must preserve such documents and include them in their collection and production efforts in FTC investigations. As the forms of communication evolve, so too do the obligations of counsel to search for and produce communications in whatever form they take.
Regarding this last point, the Bureau cautions that recipients shouldn’t unilaterally omit any category of documents and materials from their document preservation, collection, & response process. Such action may lead to unwelcome consequences, including rejection of a certification of substantial compliance with a Second Request and the lengthening of the time required for the FTC to complete its investigation.
The blog also cautions that when counsel makes representations to its staff about responsive documents, counsel’s duty of candor and professionalism when practicing before the FTC is implicated, and the Bureau will take violations of that duty seriously.