– 187 companies targeted by activists, down 17% from 2018’s record but in line with multi-year average levels. Aggregate capital deployed by activists (approximately $42bn) reflected a similar dip relative to the approximately $60bn+ level of 2017/2018.
– A record 147 investors launched new campaigns in 2019, including 43 “first timers” with no prior activism history. Elliott and Starboard remained the leading activists, accounting for more than 10% of global campaign activity.
– Activism against non-U.S. targets accounted for approximately 40% of 2019 activity, up from 30% in 2015. This multi-year shift has been driven by a decline in U.S. targets & increased activity in Japan and Europe.
– For the first time, Japan was the most-targeted non-U.S. jurisdiction, with 19 campaigns and $4.5bn in capital deployed in 2019. Overall European activity decreased in 2019 (48 campaigns, down from a record 57 in 2018), driven primarily by 10 fewer campaigns in the U.K.
– A record 99 campaigns with an M&A-related thesis (accounting for approximately 47% of all 2019 activity, up from 35% in prior years) were launched in 2019. The $24.1bn of capital deployed in M&A-related campaigns in 2019 represented approximately 60% of total capital deployed. The technology sector alone saw $7.0bn put to use in M&A related campaigns.
Any acquisition agreement that doesn’t provide for a simultaneous sign & close is going to have some sort of covenant obligating the seller to conduct business in the ordinary course between signing and closing. This recent memo by Mintz’s Nick Perricone reviews market practice when it comes to the terms of the ordinary course of business covenant & how courts have interpreted those terms.
Here’s an excerpt addressing some of the considerations associated with using the “consistent with past practice” concept in the ordinary course of business covenant:
Unlike other features of the ordinary course covenant that are either target-favorable or buyer-favorable, the benefit of a past practice standard is largely dependent on the circumstances of the transaction and the interests of each party. If the target engaged in what may be viewed as unusual conduct in the past relative to peer companies in its industry, then using a past practice standard may provide the target with more latitude to operate without running afoul of the ordinary course covenant and triggering a termination right of the buyer.
On the other hand, if the target is interested in engaging in conduct that it did not typically perform prior to the signing date of the acquisition agreement (because, for example, its business is changing rapidly or it is experiencing problems that it never dealt with in the past), then the more vague standard of operating in the ordinary course of business without qualification may be preferable.
If the buyer has acquired a strong understanding of the target’s historical operations and is comfortable with this operating behavior, then a consistent with past practice standard may provide the buyer with more certainty than an objective industry-wide standard. The results of the ABA Study for the period of 2018–2019 seems to bear this out as 85% of acquisition agreements reviewed included this qualifying language.
The memo also addresses various other concepts often reflected in the covenant, including materiality qualifiers, efforts clauses, and “except as otherwise provided in the agreement” carve-outs.
In Garfield v. BlackRock Mortgage Ventures, (Del. Ch.; 12/19), the Delaware Chancery Court held that a plaintiff challenging a corporate reorganization had adequately pled the existence of a control group among various institutional investors. As a result, the court declined to apply the Corwin doctrine to insulate the transaction from a post-closing challenge.
The lawsuit challenged the fairness of a corporate reorganization involving PennyMac Inc. that unwound its “Up-C” corporate structure. The plaintiff alleged that the transaction created benefits for the defendants – who held high-vote Class B stock of the parent along with units in a subsidiary – but not for the parent’s Class A stockholders. The plaintiff argued that the defendants were controlling stockholders, and that the transaction should be reviewed under the entire fairness standard.
The defendants moved to dismiss. They argued that they should not be regarded as controlling shareholders, and that they should obtain the benefit of the business judgment rule under Corwin because a majority of disinterested stockholders approved the transaction. Vice Chancellor McCormick disagreed. This excerpt from a recent Morris James blog on the case explains her reasoning:
The Court declined to grant the defendants’ motions to dismiss, because the plaintiff had sufficiently alleged that BlackRock and HC Partners should be considered a “control group” with fiduciary duties. Together, they controlled 46.1 percent of the vote, they had unilateral rights under the LLC agreement to veto the reorganization, and they had the right to designate four of eleven members of PennyMac, Inc.’s board of directors.
In total, this supported the inference that they at least had transaction-specific control for the reorganization if they worked together. Following recent Delaware decisions – including Sheldon v. Pinto and In re Hansen Medical Shareholders Litigation – the Court also examined the ties between BlackRock and HC Partners to find that they had agreed to act as a group.
Prior dealings between the two defendants included their joint investment in the operating subsidiary & their joint participation in the negotiation of the reorganization. The defendants also negotiated a provision requiring the consent of both of them in order to terminate the reorganization. VC McCormick concluded that plaintiff had adequately pled that the defendants were a “control group” as well as facts that raised issues as to the fairness of the transaction.
So far, winter hasn’t been too bad here in Northeast Ohio, although I don’t think anyone is predicting that the buzzards will make an early return to Hinckley. Still, the groundhog may have been on to something, because here at DealLawyers.com, we are welcoming our own harbinger of spring – the annual inundation of law firm memos about the new HSR filing thresholds – a few weeks earlier than we did last year.
I think the government shutdown had more to do with the timing of last year’s announcement than the weather, but in any event this year’s winner of the annual “first in my inbox” contest was Akin Gump. Here’s an excerpt from their memo with the details on the new thresholds:
The Size-of-Transaction Threshold – The minimum transaction size test has increased from $90 million to $94 million (an approximate 4.4 percent increase). Thus, under the revised thresholds, HSR Act lings will be required (unless otherwise exempted) for a transaction that results in the acquiring person holding more than $94 million of the acquired person’s voting securities, noncorporate interests or assets (assuming the size-of-person thresholds are also met).
The Size-of-Person Thresholds – The size-of-person thresholds have increased by a similar percentage. While the HSR Act size-of-person rules are complex, under the new thresholds an HSR Act ling is generally not required for transactions valued at more than $94 million but less than $376 million, unless one party to the transaction has $188 million in annual net sales or total assets and the other party has $18.8 million in annual net sales or total assets. Any transaction that is valued at more than $376 million will be reportable under the HSR Act (unless otherwise exempted) without application of the size-of-person test. In other words, the potential exemption afforded by the size-of-person test will be inapplicable to transactions valued at more than $376 million.
The memo also details changes to the HSR filing fees, and notes that the FTC also revised the standards applicable to the interlocking directorate thresholds under Section 8 of the Clayton Act, which prohibits an individual from serving as an officcer or director of two competing corporations, with certain exceptions, provided the corporations meet certain thresholds. The new thresholds, which became effective January 21, 2020, are now $38,204,000 for Section 8(a)(1) and $3,820,400 for Section 8(a)(2)(A).
Delaware amended its appraisal statute in 2016 to allow companies to prepay appraisal claimants in order to stop interest from accruing, but there is no provision in the statute for a refund of those payments. As a result, it has been unclear whether companies could obtain a refund if the court determined that the deal price exceeded fair value.
Last week, in In re Appraisal of Panera Bread Company, (Del. Ch.; 1/20), the Chancery Court addressed this question for the first time. The fair value in that case was determined under the “deal price minus synergies” standard, and was substantially lower than the deal price. The company sought a refund of the difference between what it paid claimants based on the deal price & fair value, but Vice Chancellor Zurn concluded that since the statute did not expressly permit a refund, the company was out of luck. This excerpt summarizes her reasoning:
I conclude Section 262 does not explicitly provide for a refund, and that therefore I cannot order one. I am not the first to conclude that the Court must stay within the bounds of Section 262’s plain language. In 1948, the Delaware Supreme Court concluded that because the operative version of Section 262 did not provide for interest, the judiciary could not award it. More recently, before the prepayment provision was enacted, Vice Chancellor Glasscock found he was unable to order prepayment. After those exercises in judicial restraint, amendments in the statute soon followed. I will not encroach on the General Assembly’s prerogative.
Since there’s no right to a refund, the alternative for companies that want to preserve their right to a refund is to negotiate for a “clawback” right with the petitioners. As this Skadden blog notes, while Section 262(h) doesn’t require such an arrangements, many petitioners are amenable to it in practice.
Hat tip to Prof. Ann Lipton for flagging this aspect of the Chancery Court’s decision on Twitter.
This Nixon Peabody memo reviews the Chancery Court’s recent decision in Lebanon County Employees’ Ret. Fund v. AmerisourceBergen, (Del. Ch.; 1/20), which involved a books & records demand arising out of the company’s role in the opiod crisis. Certain of the company’s shareholders issued a demand for inspection “to inform themselves” regarding potential wrongdoing committed by the company’s board of directors, “and to identify and evaluate their alternatives.”
Vice Chancellor Laster granted the books & records request, and the memo notes that in doing so, he broke new ground:
In reaching the court’s decision, Vice Chancellor Laster addresses and potentially weakens a number of defenses that corporate defendants traditionally raise in such “books and records” suits. One common defense is an assertion that the plaintiff’s sole objective in inspecting the books and records is to bring litigation.
Under the court’s interpretation of Delaware law in this case, however, inspection is permissible so long as the stockholder states that it may also use the fruits of the investigation for “other purposes,” such as to seek an audience with the board to discuss proposed reforms, to prepare a stockholder resolution for the next annual meeting, or to mount a proxy fight to elect new directors. More broadly, the court criticized and rejected “a line of authority in which this court has required stockholders who wanted to investigate mismanagement to state up-front what they planned to do with the fruits of the inspection.” Id. at 25 (citing W. Coast Mgmt. & Capital, LLC v. Carrier Access Corp., 914 A.2d 636, 646 (Del. Ch. 2006)).
The court opined that this line of cases “turn[s] the purpose-plus-an-end concept into a requirement that goes beyond what Section 220 and the Delaware Supreme Court precedent require.” Id. at 27. In essence, then, the court ruled that stating a proper purpose is sufficient, and the stockholder does not need to go further to state what it will do with the documents it receives.
The memo points out the potential for an appeal of this decision to the Delaware Supreme Court, since it essentially creates a split within the Chancery Court concerning the application of a “purpose-plus-an-end” requirement to the Section 220 analysis. However, the memo suggests that the decision is likely to embolden stockholder-plaintiffs to seek Section 220 discovery whenever signicant events occur, including an M&A transaction.
According to this PitchBook article, average PE fund hold times for portfolio companies fell to 4.9 years during 2019, the first time that number’s fallen below 5 years since 2011. By way of comparison, hold times averaged 6.2 years as recently as 2014. What’s behind the decline? The article says it’s a combination of a strong seller’s market & an increasingly systematic approach to exit decisions:
Portfolio companies aren’t “positions” that can be pared down or modified if market conditions change. Whole companies are big and clunky compared with tradable shares, and buy-side love is in the eye of the beholder. But exits have been a bit easier to achieve in recent years amidst a broader M&A boom. That’s made it easier to offload companies a bit sooner than in the past. There’s also a motivation to spend more time on the fundraising trail, which, perhaps coincidentally, has been on fire since 2016.
Less coincidental is a rise in exit committees across the industry. Formalized investment committees date back to PE’s earliest days, and each portfolio company tends to have a cheerleader who spearheads the firm’s investment.
For a long time, investment decisions have passed through a more rigorous approval process while exit decisions are made by one or two senior directors who were responsible for that investment. Emotions get involved at the exit stage, and an increasing number of firms are formalizing those decisions and taking away individual decision-making. That trend is probably contributing to shorter holding times—likely making many LPs happy twice over.
Latham recently put together this 20-page guide to acquiring a U.S. public company. It’s targeted at foreign buyers, but it’s a useful and digestible reference guide for anyone working on a public company deal – particularly if you haven’t done one in a while. Here’s an excerpt on friendly v. hostile approaches:
The acquisition of a US public company can be implemented on a negotiated (i.e., friendly) basis pursuant to a definitive agreement that has been negotiated with the target and its board of directors, or potentially on an unsolicited or hostile basis, without the involvement or prior approval of the board of directors of the target.
The vast majority of transactions are implemented on a negotiated basis, and hostile acquisitions can face a number of challenges, including the ability of a resistant target to use or implement various structural and procedural defenses, the inability to conduct due diligence on non-public information of the target, and the possibility that shareholders will ultimately reject the offer.
In some instances, unsolicited approaches can help serve to bring a target to the bargaining table, with discussions thereafter proceeding on a negotiated basis (whether or not a transaction is ultimately consummated). This does not mean a hostile transaction is never the appropriate or best strategy for the acquisition of a US public company. Our experience suggests, however, that a hostile transaction should be pursued only if the acquirer understands the complexity and risks involved, and then only if the acquirer has determined that a negotiated transaction is highly unlikely or if negotiations have proved futile.
Other topics addressed include transaction structures, financing, shareholder litigation and regulatory approvals. The guide also includes sample timelines for cash-for-stock & stock-for-stock transactions.
This January-February issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers. It takes a deep dive into issues surrounding earnouts – M&A’s “siren song.” Topics include:
– An Overview of Earnouts
– Prevalence of Earnouts & Common Terms
– Tax & Financial Reporting Issues
– When Earnouts Are “Securities”
– The Risk of Post-Closing Disputes
– Earnout Litigation: Plenty to Fight About
– How Much Protection Does Good Documentation Provide?
– Key Issues in Structuring & Negotiating an Earnout
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According to this White & Case “M&A Explorer” article, the dollar value of deal traffic between the U.S. & Western Europe rose by 12% to $312.9 billion through the first 9 months of 2019. The news isn’t all good though, because the number of deals fell by 13%. However, to keep things in perspective, the article says that the overall value of global M&A during the period declined by 14% & deal volume dropped by 15%. So, when it comes to trans-Atlantic deals, the glass is decidedly half full.
The article says that dealmaking by PE funds played a big part in the relative health of the U.S. – Western Europe deal market:
Once again, PE deals helped ensure healthy total numbers in the transatlantic deal corridor. Six out of the top ten deals in the first nine months of this year involving US-based bidders and targets in Western Europe were PE buyouts.
While only one deal in the top ten this year involving bidders based in Western Europe and US-based targets was a PE buyout, the largest deal of the year was a PE exit: KKR’s planned sale of financial data provider Refinitiv to London Stock Exchange Group for US$27 billion.
Total PE deal activity involving US bidders and Western European targets was US$61.3 billion in the first three quarters of this year, a 33% drop on the same period last year. However, 2018 was an outlier year, with the highest annual figure on Mergermarket record for PE activity involving US-based bidders and targets in Western Europe.
Looking at PE activity going in the other direction, US$59.1 billion in PE deal value was announced in Q1-Q3 2019 involving Western Europe-based bidders and US-based targets—a 158% increase on the same period the year before.
The value of outbound U.S. deals remained relatively flat, while the value of outbound Western European deals increased by 35% over the prior comparable period & exceeded the entire dollar value of Western European outbound deals for all of 2018.