There are a lot of companies that have seen their stock prices fall through the floor as a result of the market’s ongoing meltdown. I know this because so many of them are well represented in my 401(k) plan. Anyway, this Morgan Lewis memo says that now might be a good time to think about implementing a poison pill – not just as a pure antitakeover device, but also to protect the potentially significant NOLs that many companies may generate in the current environment.
This excerpt says there’s plenty of precedent for this action from the last time the equity markets cratered:
A look-back at the poison pills adopted in response to the then-unprecedented market disruption and volatility that followed the 2008 financial crisis may be a helpful predictor of what to expect in the wake of the stock market’s reaction to the COVID-19 pandemic. In 2008 and 2009, there were, respectively, 61 and 57 poison pills adopted. As companies accumulated substantial NOLs during this time that they wanted to preserve and protect to offset future federal tax liabilities, there was a significant uptick in NOL poison pill adoptions.
From 2007 to 2009, the number of NOL poison pills adopted increased nine-fold, from 4 to 37. In fact, 2009 remains the all-time record year for NOL poison pill adoptions. If you look at the companies that adopted NOL poison pills in 2009, you see strong representation by the industry sectors that were disproportionately impacted by the financial crisis such as financial services, automotive, and homebuilders, among others.
The memo says that if past experience is any guide, we should expect to see a substantial increase in the number of poison pill adoptions in the coming months, as companies deal with panic-driven market valuations that may make many of them prime targets for strategic behavior by activists and others.
It looks like companies are already taking this advice to heart. On Friday, the Williams Companies adopted a limited duration rights plan that will expire on March 31, 2021. In the press release announcing the plan, Williams said that its board “has taken note that in light of the coronavirus and recent market events, the closing price of Williams common stock is, as of yesterday, 50% below the price just one month ago.”
Tomorrow’s Webcast: “Activist Profiles and Playbooks”
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from the 2019 activist campaigns, expectations from activists in the 2020 proxy season and how activism differs for large and small cap companies.
I’ve previously blogged about the possible use of the COVID-19 pandemic as a MAC trigger and the negotiation of specific carve-outs to MAC clauses addressing the outbreak. Last week, a member involved in M&A shared some information developed with a data provider about the extent to which the COVID-19 pandemic is being addressed in carve-outs to MAC clauses.
Here’s a summary of 2020 deals where MAC definition included a carveout related to the coronavirus and similar concepts. :
As of the week of 3/2/20, there were 22 pending M&A transactions involving public target companies that trade on either NASDAQ or the New York Stock Exchange. Of those:
– 41% (9 deals) included the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
– 4.5% (1 deal) specifically addressed COVID-19 by name
– 59% (12 deals) did not include the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
Of the 17 transactions involving U.S. headquartered public targets:
– 41% (7 deals) included the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
– 6% (1 deal) specifically addressed COVID-19 by name
– 59% (10 deals) did not include the term ‘pandemic’, ‘epidemic’ or ‘COVID-19’ in the target MAC definition
How does that compare to last year? The research indicated that only 4 of the 24 M&A transactions pending on 3/5/19 involving NASDAQ or NYSE traded targets included carve-out language using the word “pandemic” or “epidemic” in the target MAC definition. As for the 43 deals signed up in 2019 that were still pending, only 12 of the 43 deals have the words “epidemic”, “pandemic”, or “COVID-19” as a carve-out.
Given how quickly & dramatically the pandemic has changed nearly every aspect of business and daily life in the U.S. and throughout the world, my guess is that language in MAC clauses specifically addressing pandemics is going to quickly become ubiquitous, and is likely to have staying power.
That being said, many MAC clauses require an adverse event to disproportionately impact the seller in order to fall within their parameters. Several members have commented that this common language makes it even more difficult to use a MAC clause as the basis for terminating a deal due to an event like a global pandemic.
In its 2018 Cyan decision, the SCOTUS unanimously held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court. Some corporations responded to Cyan by adopting “federal forum” charter provisions compelling shareholders to bring 1933 Act claims only in federal court. Much to the chagrin of the defense bar, the Delaware Chancery Court struck those provisions down in Sciabacucchi v. Salzberg, (Del. Ch.; 12/18).
Yesterday, the Delaware Supreme Court unanimously reversed the Sciabacucchi decision. In Justice Valihura’s sweeping 53-page opinion, the Court rejected claims that federal forum provisions were contrary to any Delaware law or policy, and read Section 102(b) of the DGCL as a broad enabling statute that provides Delaware corporations with more than enough flexibility to include a federal forum provision in their certificates of incorporation.
Section 102(b)(1) authorizes the certificate to include “any provision for the management of the business and for the conduct of the affairs of the corporation” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders.” While that authority can’t be used to adopt provisions that violate law or public policy, the Court concluded that a federal forum provision, or FFP, didn’t raise either of those concerns:
First, Section 102(b)(1)’s scope is broadly enabling. For example, in Sterling v. Mayflower Hotel Corp., this Court held that Section 102(b)(1) bars only charter provisions that would “achieve a result forbidden by settled rules of public policy.” Accordingly, “the stockholders of a Delaware corporation may by contract embody in the [certificate of incorporation] a provision departing from the rules of the common law, provided that it does not transgress a statutory enactment or a public policy settled by the common law or implicit in the General Corporation Law itself.”
Further, recognizing that corporate charters are contracts among a corporation’s stockholders, stockholder-approved charter amendments are given great respect under our law. In Williams v. Geier, in commenting on the “broad policies underlying the Delaware General Corporation Law,” this Court observed that, “all amendments to certificates of incorporation and mergers require stockholder action,” and that, “Delaware’s legislative policy is to look to the will of the stockholders in these areas.” Williams supports the view that FFPs in stockholder-approved charter amendments should be respected as a matter of policy. At a minimum, they should not be deemed violative of Delaware’s public policy.
The Court rejected claims that the language added to Section 115 of the DGCL in 2015 codifying the Boilermakers decision permitting exclusive forum bylaws represented an implicit recognition that FFP provisions were impermissible. It also rejected the Chancery’s effort to limit Section 102(b)’s reach to matters covered by the “internal affairs” doctrine, and said that the Chancery’s decision took a narrower approach to what constituted “internal affairs” than either applicable federal or Delaware precedent.
On a personal note, I’d like to express my thanks to the Delaware Supreme Court for giving me something to blog about that’s completely unrelated to the Covid-19 pandemic & for allowing me to fulfill my dream of using the word “agonistes” in a blog title. Now, when somebody googles John Milton or Gary Wills, they may stumble across me! That’s the closest thing to literary immortality that a fat guy in pajamas pounding on a keyboard can reasonably hope to achieve. . .
Given the havoc that Covid-19 has wreaked on the world economy, you might have expected to see a spike in terminations of pending deals during the current month. But according to this Bloomberg Law article, that hasn’t happened. To the contrary, this excerpt says deal terminations are way down:
While a faltering market might normally cause deal failures, the data do not show that trend at this point. Thus far, March deal terminations are about one-half to one-third of prior years. Are parties putting their deals on hold? Are they renegotiating? We do know that companies are rushing to put out a variety of fires; perhaps deal parties that are doomed to ultimately terminate, either due to the pandemic or for other reasons, just don’t have the bandwidth to effectuate termination right now.
The article says that through March 17, 10 global M&A deals were terminated. During the same period in each of the three preceding years, an average of 26 deals bit the dust. Of those 10 terminated deals, five involved Chinese targets.
While the article suggests a lot of reasons why terminations may be down, I think it overlooks the most obvious one – a lot of companies are the proverbial “deer caught in the headlights” at this particular moment. Events are moving so fast that many businesses are still trying to figure out exactly what’s happening to them. Deciding what to do about it comes later.
It’s hard to find a single aspect of daily life that hasn’t been disrupted by the COVID-19 pandemic. This recent blog from Francis Pileggi reports that this includes the operations of the Delaware courts:
By Delaware Supreme Court Order, effective March 16, 2020, Delaware’s high court declared a judicial emergency, following the Governor of Delaware declaring on Friday, March 13, a state of emergency due to the coronavirus, and also on the same day that President Trump proclaimed a National Emergency. The foregoing hyperlink provides the actual Court Order. One provision makes it easier for trial courts, in their discretion, to postpone trials and hearings at least for 30 days. This also follows Orders highlighted on these pages a few days ago in which each of the Delaware Courts announced policies to help those with symptoms of the virus address obligations to appear for court hearings, etc.
This blog from Fox Rothschild’s Carl Neff reports that yesterday, the Chancery Court issued a new standing order providing that for the next 30 days, all hearings and trials will be conducted only telephonically, absent a request from a party for an in-person hearing & a demonstration of “imminent irreparable harm.”
So far, perhaps the most high-profile consequence of the actions taken by the Delaware courts over the past week has been Vice Chancellor Slights’ decision to delay the Tesla/Solar City trial. That decision was prompted by concerns about the anticipated size of the crowd at the proceedings.
On Friday, the FTC announced the implementation of a temporary e-filing system for HSR notifications in response to the COVID-19 pandemic. While this temporary system is in place, early termination of the HSR waiting period will not be granted for any filing.
No filings will be accepted today, but beginning tomorrow, filings will be accepted only through this temporary system, which will require documents to be uploaded through Accellion using the same file formats as specified for DVD filings on the Style Sheet for HSR Filings. This Arnold & Porter memo summarizes the temporary filing procedures:
The temporary procedures require electronic filing of notifications with the PNO and the Department of Justice, instead of the hard copy and DVD format currently in effect. Documents to be e-filed must be in searchable PDF or MS Excel files and labeled in the same manner as set forth in the PNO’s instructions applicable to DVD filings. When notified by a party that it wishes to make a filing, the Staff of the PNO will forward a link which will allow the filer to upload the contents of its complete HSR filing to a secure Accellion file-transfer platform. Filing fees are currently paid by wire transfer and the procedure for doing so remains unchanged.
The DOJ will implement the same procedures. The FTC’s Premerger Notification Office has issued specific guidance on the new e-filing system and operating procedures.
It seems fair to say that companies have gotten comfortable with the Corwin cleansing process over the past several years. If you provide your shareholders with full & fair disclosure, and obtain approval of the deal from a majority of the shares held by disinterested stockholders in an uncoerced vote, then Delaware courts will review the board’s decision under the deferential business judgment standard.
The Chancery Court’s recent decision in Salladay v. Lev, (Del. Ch.; 2/20), may ultimately change that familiar recipe – at least for companies with majority conflicted boards. Here’s an excerpt from Fried Frank’s recent memo on the decision:
In Salladay v. Lev (Feb. 25, 2020), the Delaware Court of Chancery held, at the pleading stage, that the merger (the “Merger”) of InterSections, Inc. (the “Company”) with an acquisition vehicle formed by the iSubscribed Investor Group would be subject to “entire fairness” review even though it had been approved by both a special committee (the “Committee”) and the stockholders.
The court ruled that (i) the Committee, although comprised of independent, unconflicted directors, was not formed early enough in the process to counteract the influence of the “interested” directors; and (ii) the disclosure was insufficient, thus the approval by a majority of the stockholders not affiliated with the interested directors did not “cleanse” the transaction under Corwin.
The problem, from Vice Chancellor Glasscock’s perspective, was that while the seller didn’t have a controlling shareholder, a majority of its directors did have a conflict of interest. In these situations, the memo notes that the efficacy of a special committee has traditionally been assessed by reference to whether it was “fully empowered” and “functioned effectively.” Here, however, the Vice Chancellor borrowed from another doctrine that hasn’t been applied to transactions not involving a controller – MFW’s “ab initio” requirement:
A corporate transaction entered by a conflicted board is subject to entire fairness, but our case law contemplates that if there is no controller present, then a fully constituted, adequately authorized, and independent special committee can cleanse such a transaction. This is because the true empowerment of a committee of independent, unconflicted directors removes the malign influence of the self interested directors, and thus should result in business judgement review.
Whether such a committee is truly empowered is a necessary question, to be reviewed practically to determine if the transaction, in fact, is untainted by fiduciary self-interest. The issue before me in this regard involves the timing of the formation of the committee. Must the committee be sufficiently constituted and authorized ab initio; consistent, that is, with the requirements set forth in MFW for cleansing a transaction in a control situation? The answer, I perceive, is yes.
VC Glasscock said that the rationale for MFW’s “ab initio” requirement was to remove the ability of a controller to use its procedural protections as a “bargaining chip” to obtain pricing concessions from a special committee – and that, in his judgment, the same rationale applied to situations involving a majority conflicted board.
He wrote that “[t]he acquirer—as well as any interested directors—must know from the transaction’s inception that they cannot bypass the special committee,” and concluded that starting negotiations before forming an independent special committee “may begin to shape the transaction in a way that even a fully-empowered committee will later struggle to overcome.”
There’s been a lot of action in Delaware recently about when holders of less than a majority equity stake in an enterprise may be regarded as controlling shareholders. This Fried Frank memo reviews Skye Mineral Investors, LLC v. DXS Capital (U.S.) (Del. Ch.; 2/20), the latest Delaware case to address this issue.
In the Skye decision – which involved a limited liability company – Vice Chancellor Slights held that under the right alignment of planets, contractual “veto rights” could put minority holders in the position of exercising actual control over a company. Here’s the memo’s intro:
In Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited (Feb. 24, 2010), the Delaware Court of Chancery found, at the pleading stage, that it was reasonably conceivable that the two key minority members of Skye Mineral Partners, LLC (“SMP”) had breached their fiduciary duties to SMP and the other members by intentionally using the contractual veto rights they had under SMP’s LLC Agreement to harm SMP and increase their own leverage. Also, the court found that members of the group that controlled these minority members, as well as certain affiliates of that group, may have aided and abetted the fiduciary breaches.
In addition, the court found that one of these minority members and its authorized observer on the SMP board breached their confidentiality obligations by using information they learned, through the observation right, to advance the member’s interests at SMP’s expense.
The decision serves as an explicit reminder of the fiduciary and other obligations that LLC members and managers (and their affiliates) may have when the LLC agreement does not clearly and unambiguously provide otherwise. Further, the decision indicates that, under unusual circumstances, minority members may find themselves in the unexpected position of having fiduciary obligations as controllers–if their veto rights under the LLC agreement have put them in a position of “actual control” of the LLC (and particularly if they use that control to advance their own interests while harming the company).
This case shouldn’t be read as saying that any strong contractual right provided to a minority shareholder will result in it being considered a controller. Delaware’s approach is more nuanced. For example, in Superior Vision Services v. ReliaStar, (Del. Ch.; 8/06), the Chancery Court declined to find that a minority shareholder’s exercise of a contractual right to block a dividend made it a controlling shareholder, noting that the shareholder did not control the Board’s decision making process concerning the declaration of a dividend. The Court said that to hold otherwise would result in “any strong contractual right, duly obtained by a significant shareholder…, [being] limited by and subject to fiduciary duty concerns.”
As the memo points out, the key factors in Vice Chancellor Slights’ decision in the Skye case included the that the contract right in question was so powerful that it in effect gave the minority “the unilateral power to shut SMP down,” and that the minority holders allegedly exercised their blocking right “as part of a ‘scheme to harm the company’ and advance their own interests.”
The Foreign Investment Risk Review Modernization Act, or FIRRMA, authorizes CFIUS to establish a filing fee not to exceed the lesser of 1% of the transaction value or $300,000 (adjusted annually for inflation) for parties that make notifications to CFIUS. This Ropes & Gray memo notes that the Treasury Department has recently proposed rules that would implement this filing fee requirement for parties that submit voluntary notices to CFIUS.
But as the memo notes, the proposed filing fee wouldn’t apply to all notifications, and that may influence some companies decisions about the approach they want to take:
Importantly, the Proposed Rule would not establish a filing fee for transactions that are notified to CFIUS via a declaration, the abbreviated notification process introduced by FIRRMA. Accordingly, parties to covered transactions (and covered real estate transactions) will have an additional factor to consider in determining whether to submit an abbreviated declaration, versus full-form filing:
– Abbreviated declaration: No filing fee, less preparation time, and potential for faster resolution, but no guarantee of final action by the Committee.
– Full-form notice: Filing fee, more preparation and review time, but guarantee of final action by the Committee.
The filing fee would also not apply to (1) unilateral reviews initiated by CFIUS; or (2) voluntary notices filed by the parties after submission of an abbreviated declaration. Along similar lines, the filing fee would not apply to re-submitted voluntary notices (i.e., if CFIUS requests that the parties withdraw and refile their notice, the parties will not be required to pay an additional filing fee), unless the Committee determines “a material change to the transaction has occurred, or a material inaccuracy or omission was made by the parties in information provided to the Committee.”
The proposal would permit the filing fee to be waived if “extraordinary circumstances relating to national security warrant,” although the memo says such waivers are likely to be infrequent. The proposal would also require the fee to be refunded if CFIUS concludes that a voluntary notified transaction isn’t a covered transaction. The comment period on the rule proposal expires April 8th.
Last week, I blogged about Xerox’s tender offer for HP & why from a legal perspective, it wasn’t a particularly hostile bid. I subsequently received an email from a member with an insight into another “pressure point” on HP’s board that resulted from Xerox’s decision to move forward:
I agree that filing the exchange offer gives the hostile bidder some advantage by (i) forcing the target board to respond to the offer perhaps sooner than it otherwise would; and (ii) putting the target in a position of having to update its disclosures based on material developments (e.g., entrance of a white knight).
There’s also another reason to file – namely, some investors want to see a TO document on file to give them more assurance that there’s a specific deal that can be immediately consummated if the incumbents are ousted in a proxy contest. Even if the TO is conditional, some investors will take greater comfort about the hostile bidder’s commitment to price and timing.
As the corporate law environment has evolved, a “hostile” tender offer like Xerox’s may not put much additional pressure on a target board when it comes to what the directors’ fiduciary duties require. However, the legal obligations imposed on that board by the federal securities laws do turn up the heat somewhat, and investor perceptions of the seriousness of a bidder that is willing to cross the tender offer Rubicon may really make the target’s board feel the squeeze.