This recent Deal Law Wire blog from Norton Rose reviews a 2020 study addressing why companies divest businesses. The study found that a staggering 77% of divestitures are attributable to M&A failures. The blog says that the study identified two driving forces behind these “corporate divorces” – post-acquisition industry shocks and cultural dissimilarities. Here’s an excerpt:
Post-Acquisition Industry Shocks. “Industry shocks”, or unforeseeable events that disturb industry structures and the economic landscape, were found to have a high correlation with the long-term success of a merger or acquisition, both positively and negatively. Targets who experienced a positive shock to their respective industry were less likely to be divorced, while divestitures were more likely to occur when the target’s industry experienced a negative shock. A similar effect is likely to occur as the result of the ongoing COVID-19 pandemic, with companies taking a sharp look at the profitability of their pre-COVID investments. While the pandemic has already led to significant changes in the M&A landscape, it may be years before the effects of this “industry shock” can fully be measured.
Cultural Dissimilarities. Cultural dissimilarities between acquiring and target companies was found to be the greatest driver of corporate divorce. Unions between companies with vastly different values and disparate ages frequently ended in divorce. According to the authors, this pattern reveals executives’ failure to adequately consider cultural values and symmetries, such as trust, hierarchy and individualism, before concluding M&A deals. CEOs often address M&A failures stemming from insufficient cultural awareness by quickly undoing unsuccessful deals, with 40% of corporate divorces happening within fours years of a new CEO’s term.
Many companies are expected to be active buyers during the upcoming year, and the blog says that careful due diligence and a proper assessment of corporate culture are essential to ensuring the long-term success of those acquisitions.
This January-February Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– An Extraordinary Course: Important Lessons from the Delaware Court of Chancery Decision in AB Stable VIII v. MAPS Hotels
– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency
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.
Is a controlling stockholder’s “mere presence” on both sides of a transaction enough to invoke application of the entire fairness standard of review, or is something more required? That’s the question that the Chancery Court recently grappled with in In re Viacom Inc. Stockholders Litigation (Del. Ch.; 12/20). The case arose out of CBS and Viacom’s 2019 merger. The complaint alleged that, among other things, Viacom & CBS’s controlling stockholder, Shari Redstone, exerted her control over Viacom’s board in a manner that caused them to negotiate and approve the merger out of loyalty to her on terms detrimental to Viacom and its public stockholders.
The plaintiffs argued that the mere presence of the controlling stockholder on both sides of the transaction was sufficient to invoke the entire fairness standard of review. In response, the defendants argued that more was required:
For their part, Defendants, and in particular the NAI Parties, accurately quote Sinclair, where, to reiterate, the court held, “[t]he basic situation for the application of the [entire fairness] rule is the one in which the [controller] has received a benefit to the exclusion and at the expense of the [minority].”173 In keeping with this “basic” pronouncement, the NAI Parties maintain that in each instance where a Delaware court has observed that a controller’s presence on both sides of a transaction will trigger entire fairness review, there is always something more that causes the court to conclude that the controller is conflicted.
The defendants went on to note that the plaintiffs “can point to no Delaware case where the court reviewed the controller’s conduct for entire fairness where all the plaintiff had alleged was that the controller stood on both sides of a transaction.”
While acknowledging that the defendants were “right to seize upon nuance,” Vice Chancellor Slights cited the Delaware Supreme Court’s decision in Emerald Partners, in which the Court stated that a controller’s “stance on both sides as a corporate fiduciary, alone, is sufficient to require the demonstration of entire fairness.” He observed that Delaware courts generally can be trusted to “say what they mean and mean what they say,” and that the rule in Emerald Partners appeared to leave little room for nuance.
However, the Vice Chancellor did not need to formally resolve the issue of whether a controller’s mere presence was sufficient to invoke entire fairness review. That’s because he found that the plaintiffs had adequately pled that the controlling stockholder had received a “non-ratable benefit” by using the merger “as a means to consolidate her control of Viacom and CBS at the expense of the Viacom minority stockholders.”
This excerpt from a recent Sidley blog summarizes the key takeaways from the Vice Chancellor’s decision:
Although the Court’s discussion of “mere presence” is dicta, it provides important insight that future decisions from the Court of Chancery will find that the mere presence of a controller on both sides of a merger alone is sufficient to trigger entire fairness review in the absence of MFW dual protections (i.e., that the merger is approved by an independent special committee and a majority of the minority stockholders). It also reminds that while a controller who receives the same consideration as others may not trigger the “nonratable” benefit analysis, the receipt of control-related intangible benefits may suffice.
Nixon Peabody recently posted its 2020 MAC Survey, and the results suggest that the terms of MAC clauses continue to move in a buyer-friendly direction. Here’s an excerpt:
Of the 220 agreements surveyed, 97% contained a material adverse change in the “business, operations, financial conditions of the Company” as a definitional element. This is essentially the same percentage as contained this definitional element last year, when this element appeared in 98% of all agreements. Meanwhile, 8% of the 220 acquisition agreements reviewed this year lacked a MAC closing condition, compared to none reported last year, 7% reported in the 2017 survey, and 3% reported in the 2016 survey. These trends demonstrate the universal acceptance of MAC clauses in M&A documents although the use of a MAC closing condition tends to vary slightly from year-to-year.
This year’s results indicate a continuation of the shift toward a more objective test in determining whether a change constitutes a MAC. More agreements contained the pro-bidder “would reasonably be expected to” language in the MAC definition—it appeared in 65% of the deals reviewed this year, while appearing in 74% of all deals reviewed in 2019. This language appeared in 62% of all deals reviewed in 2017, 54% of all deals reviewed in 2016, 61% of deals reviewed in 2015, 56% in 2014, 53% in 2013, 42% in 2012, and just 29% in 2011.
By defining a material adverse effect to involve circumstances that “would reasonably be expected to” lead to a MAC, a bidder introduces a forward-looking feature to the definition, allowing it to adopt a more lenient approach during negotiations over whether a material adverse change in the target’s prospects needs to be covered by the definition.
So what about the pandemic? The survey says that a pandemic or COVID-19 carve appeared in 25% of all the agreements reviewed. The survey acknowledges that these results may have understated dealmakers’ concerns about the pandemic, because only 70 of the 220 agreements included in the survey the were entered into on or after February 1, 2020.
It’s worth noting that in AB Stable, Vice Chancellor Laster held that a MAC carve-out based on “calamities” was broad enough to cover the pandemic. The survey found that 46% of all deals included a carve for a national calamity and 26% included a carve for an international calamity directly or indirectly involving the United States.
This Fried Frank memo discusses managing antitrust risk in the Biden Administration. After noting that regulators have evolved toward more enforcement & have demonstrated a greater willingness to tolerate litigation risk in recent years, the memo suggests that because antitrust enforcement is one of the few truly bipartisan issues, the new Administration may well have incentives to “push the limits of the law.” The memo discusses various potential legislative initiatives, and then turns to the enforcement side of the equation. Here’s an excerpt on that topic:
Apart from proposed legislative changes, any change in enforcement will depend on President-Elect Biden’s appointments to lead the FTC and the DOJ. What is clear, however, is that the sitting Democratic-appointed FTC Commissioners support major changes in the next Administration’s approach to antitrust.
For example, Commissioner Chopra has been critical of the FTC’s long-standing practice of approving pharmaceutical mergers with divestitures limited to overlap products and has argued that the Commission should also consider the overall impact of the size of the companies on competition. He has also been particularly critical of private equity, arguing that roll-up acquisitions by PE-backed firms allow them to quietly accumulate market share and harm competition.
Commissioners Chopra and Slaughter recently dissented from the DOJ/FTC Vertical Merger Guidelines and Vertical Merger Commentary because they believe that vertical merger enforcement has been too lax, and strongly cautioned the market against relying on these guidelines as an indication of how the FTC will act going forward.
While the rhetoric from some commissioners may be strong, the memo also points out that the FTC’s enforcement efforts may be constrained by both the lack of judicial receptivity to novel antitrust theories and the agency’s own budgetary constraints.
This may sound strange to most of you, but when I took Corporations in the fall of 1984, corporate law was kind of a sleepy backwater. Of course, the area awoke with a vengeance in 1985, but when I took the class, Van Gorkom, Moran, Unocal, Revlon, etc. weren’t even on the radar screen. In fact, one of the few things I do remember from that class was spending an inordinate amount of time on Zapata v. Maldanodo, a 1981 Delaware Supreme Court decision about the standards that would apply to a special litigation committee’s decision not to pursue a derivative action.
I’ve come across Zapata many times in reading Delaware cases, but it never seemed to be worth the time my professor invested in it – at least until now. That’s because Zapata v. Maldanodo featured prominently in the Chancery Court’s recent decision in In Re WeWork Litigation, (Del. Ch.; 12/20). Like almost everything associated with The We Company, the case is pretty convoluted. It arose out of breach of contract claims against the company’s new controlling shareholder that were brought by a special committee that was established to negotiate the deal in which that shareholder acquired its controlling stake.
After the new controller acquired control, the company’s board established a new special committee, which determined that the other special committee lacked authority to continue the suit and moved to dismiss the case. Noting that this was a case of first impression, Chancellor Bouchard decided to look to Zapata for guidance, and ultimately denied the motion to dismiss. This excerpt from a recent Shearman blog on the case explains his approach:
The Court determined to engage in an analysis akin to that developed for assessing special committee motions to dismiss derivative claims under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). Zapata entails a two-part assessment (i) testing the independence, good faith and reasonableness of the investigation, and (ii) applying the court’s own independent business judgment as to whether the motion should be granted.
The Court denied the motion because it found (i) the new committee did not establish the reasonableness of its investigation and conclusions, and (ii) the special committee was authorized to pursue the litigation and it would be “fundamentally unfair” to dismiss the claims.
In applying the the Zapata test, The Chancellor found “significant shortcomings and errors” in the new special committee’s investigation and concluded that that it was clear that the previously established committee had the authority to file the lawsuit.
Now, just to make things more convoluted, Chancellor Chandler issued another decision in the WeWork litigation on the same day. In that decision, the Chancellor dismissed fiduciary duty claims that were duplicative of the contract claims addressed in the other opinion. This blog from Francis Pileggi has the skinny on that part of the case.
Shortly after issuing these two opinions and a third letter opinion addressing a discovery dispute in this litigation, Chancellor Bouchard announced that he planned to retire from the bench in April. There’s no indication that this lawsuit played a role in that decision, but as somebody who had to read this company’s goofy IPO S-1 filing, I wouldn’t be shocked if it did.
Last year’s dispute between LVMH and Tiffany raised all sorts of intriguing legal issues, but the parties ultimately settled their case before the Chancery Court could weigh-in. But what if that case had gone to trial?
That’s the hypothetical situation that UCLA’s Stephen Bainbridge recently addressed on his blog. After concluding that Tiffany should not have been regarded as having experienced a MAC as a result of the pandemic, the blog addresses the potential implications of the Chancery’s AB Stable decision on the MAC analysis. Here’s an excerpt:
I think Tiffany had a strong argument that there had been no MAC. As a cautionary matter, however, I note that in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, the Delaware Chancery Court (per VC Travis Laster) assumed that the Seller had “suffered an effect due to the COVID-19 pandemic that was sufficiently material and adverse to satisfy the requirements of Delaware case law. Based on that assumption, the burden rested with Seller to prove that the effect fell within at least one [carveout] exception.”
As was typical of merger agreements entered into before (or in the early days of) the pandemic, the LVMH-Tiffany deal lacked an express carveout for pandemics. As was often the case with disputes over MACs in the wake of the pandemic’s outbreak, Tiffany would have pointed to carveout number viii’s exception for adverse changes arising out of “natural disasters.”
In AB Stable VIII LLC, the MAC contained an exception for adverse changes arising out of “natural disasters or calamities.” VC Laster had little difficulty concluding that the pandemic was a calamity.
The COVID-19 pandemic fits within the plain meaning of the term “calamity.” Millions have endured economic disruptions, become sick, or died from the pandemic. COVID-19 has caused human suffering and loss on a global scale, in the hospitality industry, and for [Seller’s] business. The COVID-19 outbreak has caused lasting suffering and loss throughout the world.
The court further concluded that the pandemic “arguably” fell within the definition of a natural disaster.
The blog goes on to review VC Laster’s analysis of the MAC exclusion for natural disasters, and concludes that “in the unlikely event that the pandemic would have been regarded as a material adverse change in Tiffany’s business, it would have fallen within the exemption for natural disasters.”
By the way, we may not have to wait too much longer for more guidance from Delaware on Covid-19 busted deal issues. Trial began last week in the $550 million dispute over KKR’s termination of a deal to buy Snow Phipps’ portfolio company DecoPac last April. The trial is expected to be completed by the end of January, and this “On the Case” column by Alison Frankel provides some play-by-play of last week’s proceedings.
Over the past few months, I’ve blogged about several decisions involving potential liability on the part of corporate officers. Frequently, these cases involve situations in which corporate directors have managed to avoid liability due to exculpatory charter provisions that don’t extend to corporate officers. This Skadden memo reviews recent trends in officer liability, and highlights the role that the lower level of protection provided to officers has played in making them increasingly attractive targets for plaintiffs. Here’s the intro:
More than a decade ago in the seminal case Gantler v. Stephens, the Delaware Supreme Court clarified that officers of Delaware corporations owe the same fiduciary duties of care and loyalty that directors owe to the corporation and its stockholders.
While directors and officers owe the same fiduciary duties, they are not entitled to the same defenses. Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permits a corporation to adopt a provision in its certificate of incorporation exculpating directors from money damages for breaches of the duty of care. Those provisions, which are routinely adopted by Delaware corporations, do not apply to corporate officers. To adequately plead a breach of the duty of loyalty, a plaintiff must show that fiduciaries acted in a self-interested manner or in bad faith, which is a high bar to meet. By contrast, to plead a breach of the duty of care, a plaintiff must allege only that the fiduciaries acted in a grossly negligent manner, a far lower bar that makes care claims a prime target for stockholder plaintiffs.
Even so, until recently, officer liability cases were still few and far between. The rare officer liability claim was typically brought in derivative litigation and involved either allegations of disloyal conduct for which neither a director nor an officer could be exculpated or conduct by an individual serving in both an officer and director role. Claims against an officer for breach of the duty of care — particularly in class action merger litigation — were exceedingly rare.
Over the past year, however, stockholder plaintiffs have increasingly pursued claims against officers for breaches of the duty of care. Moreover, such claims have been raised not only in the derivative context but in class action merger litigation as well, with mixed results.
The news isn’t all bad for corporate officers – the memo says that while they aren’t afforded the same protections as directors under Section 102(b)(7), the Chancery Court hasn’t given plaintiffs a free pass. In order to state a claim, plaintiffs must allege not only a breach of the duty of care, but also that the individual in question was acting in their capacity as an officer and not a director. It notes that the Chancery Court has issued three recent decisions dismissing plaintiffs’ claims against officers due to the failure to adequately pled these allegations.
This recent Morris James blog discusses the Delaware Superior Court’s decision in Ashland LLC v. Heyman Trust, (Del. Super. 11/20), in which the Court held that the plaintiff was not entitled to be indemnified for its attorneys fees for first party claims under the terms of a stock purchase agreement. This excerpt from the blog summarizes the Court’s decision:
In this case, the parties’ Stock Purchase Agreement (“SPA”) required defendants to indemnify against “Losses” – which was defined to include reasonable attorneys’ fees and expenses. The Court previously had found that the defendants breached a section of the SPA. Plaintiff then sought to recover as “Losses” its attorneys’ fees and expenses in proving the breach.
The Court reasoned that indemnification provisions are presumed not to provide for fee-shifting in claims between the parties (first-party claims) absent a clear and unequivocal articulation of that intent. While there is no specific language that must be used, the SPA here contained a separate, relatively straightforward and narrower prevailing party fee-shifting provision, which did not apply to the claims at issue.
The Court reached this conclusion despite the fact that Article I of the SPA defined “Losses” to include reasonable attorneys’ fees, “whether or not involving a Third Party Claim.” It noted that under the terms of the SPA, “Third Party Claim” was a defined term, not a generic term for third party claims, and that its use in the Losses definition did not imply “clearly and unequivocally” that first party claims were included.
The Court ultimately held that the SPA’s indemnification language did not clearly provide for fee-shifting for first-party claims, and granted defendants’ motion for summary judgment that the language of the contract did not entitled the plaintiff to recover its attorneys’ fees and expenses.
Shortly before the Christmas holiday, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance Topic: No. 11, which provides Corp Fin’s views regarding disclosure considerations for SPACs in connection with both their IPOs & subsequent de-SPAC transactions. Here’s an excerpt from this Skadden memo summarizing the guidance on disclosure considerations for de-SPAC deals:
Many of the disclosure considerations relevant at the IPO stage remain important through the business combination stage, such as disclosure involving the terms of any additional financing sought or obtained to facilitate the business combination and how that funding affects the interests of existing shareholders.
As during the IPO stage (when SPACs disclose the disproportionate interest and control sponsors and other insiders would stand to gain in a business combination generally) once a specific acquisition is proposed and the valuation is known, the SPAC should disclose the expected total percentage ownership of the insiders in the combined entity and the total expected return on the insiders’ initial investment, giving effect to the exercise of warrants and the conversion of convertible debt. The SPAC also should update investors with respect to the services provided by the underwriter in the business combination, the compensation due for such services and the terms of the compensation, including whether any of it is delayed or contingent.
Additionally, the SPAC also should provide clarity with regard to the acquisition selection process and inform investors about how the target was selected. Details should include the circumstances involving first contact; explaining why a particular target was selected over others; what factors the board determined were material in its selection process; whether the interests and potential conflicts of individual insiders were considered; and the process for negotiating the value of the acquisition. To the extent any conflicts of interest were identified, the SPAC should disclose them and how they were handled, including whether any waivers to a policy that addressed conflicts of interest were granted.