I’ve previously blogged about Xerox’s efforts to corral HP into a deal. While Xerox has been understandably reluctant to make a hostile tender offer for HP, yesterday it ratcheted up the pressure on HP by launching a proxy fight for control of the company’s board. According to Xerox’s press release, it notified HP that it intended to nominate a full slate of 11 director nominees to HP’s board. That notice was necessary to comply with HP’s advance notice bylaw (the deadline for submitting nominees under that bylaw is today).
Proxy fights are a common tactic among activist shareholders, who aren’t shy about seeking control of the board. According to this Sullivan & Cromwell piece published over on the Harvard Governance Blog, nearly 70% of proxy contests waged by activists in 2018 involved control slates.
When it comes to a potential strategic buyer though, this WSJ article points out that a proxy fight for control of the target’s board is a very unusual tactic – only 5 have been launched since 2013. The most recent such fight was engaged in by Broadcom as part of its effort to acquire Qualcomm, but President Trump drove a stake through that deal’s heart on national security grounds before the shareholder vote.
Proxy fights are disruptive and expensive to wage, but the biggest reason that many strategic bidders don’t adopt this as a tactic may be the one noted by Profs. Bebchuk & Hart – they’re really hard for them to win:
The difficulty with a proxy contest, we argue, is that of persuading shareholders that a rival’s victory would be beneficial for them. Because control provides private benefits, the fact that a rival is interested in replacing the incumbent does not imply that the rival would manage the company better. Consequently, if shareholders do not observe the quality of rivals, but know that the average quality of potential rivals is worse than the incumbent’s, the rational strategy of shareholders will be to vote for the incumbent.
While this quote comes from an article written more than 15 years ago, it nicely describes the dilemma that now faces HP’s shareholders. Neither company has exactly blown the doors off in terms of results in recent years. But given Xerox’s particularly bumpy ride & the fact that its proposed deal would involve the proverbial “guppy swallowing the whale,” you couldn’t blame HP’s shareholders for being skeptical about handing the keys to Xerox.
Of course, that doesn’t mean this isn’t going to be fun to watch. After all, Carl Icahn’s sitting on the Xerox side of the ledger, and he’s been known to break some furniture on occasion.
Francis Pileggi recently posted his 15th annual review of key Delaware decisions on his Delaware Corporate & Commercial Litigation Blog. With some exceptions, Francis focuses his review on what he refers to as “the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications.” This excerpt on the Chancery Court’s decision in Mehta v. Mobile Posse, (Del. Ch.; 5/19) is a case in point:
A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam.
In Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM (Del. Ch. May 8, 2019), the court identified the six primary issues in this case as follows:
(1) Whether DGCL Section 262 was not complied with in connection with the failure to notify stockholders of their appraisal rights within the required timeframe;
(2) Whether DGCL Section 228 was not complied with due to the failure to send prompt notice of the written stockholder consents;
(3) Whether the merger agreement, or documents it incorporates, failed to comply with DGCL Section 251 by not including the amount of cash the preferred stockholders would receive for their shares;
(4) Whether the stockholder consents did not enjoy the ratifying effect under DGCL Section 144;
(5) Whether the director defendants breached their fiduciary duty of disclosure; and
(6) Whether the director defendants breached the fiduciary duty of loyalty because the merger was a self-dealing transaction and not entirely fair. With one small exception, the court found that the statutory violations were sufficiently established at the early procedural stage of a motion for judgment on the pleadings.
Since Francis refers to this case as an unsung hero, I feel kind of glad that I actually blogged about it. Admittedly, I didn’t quite cover as much ground as he does, but hey, we run a volume business here.
Tune in tomorrow for the webcast – “Cybersecurity Due Diligence in M&A” – to hear Jeff Dodd of Hunton Andrews Kurth, Sten-Erik Hoidal of Fredrikson & Byron and Jamie Ramsey of Calfee Halter discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.
If you’ve spent any time at all doing deals, you’ve had the experience where somebody on the deal team insists that all that’s needed to get a deal done is to “get everybody in a room and hammer things out.” Sometimes, that’s the right call – but many times, it just isn’t. This Andrew Abramowitz blog does a really nice job of laying out why this isn’t usually a good idea. Here’s an excerpt:
A deal can only actually get done at such a meeting if there are a discrete number of well-defined issues that require negotiation and give-and-take. Often, however, these meetings are called before the transaction gets to that point, when there are a number of open issues requiring the involvement of third parties.
For example, a landlord may need to consent to a particular action being taken in the deal, so the tenant needs to address that with the landlord. Or some specialist, like a tax attorney or accountant, needs to review and sign-off on a particular structure. If you call your meeting with the agenda of not leaving before you’re finished, and you end the meeting with a list of open items even though the meeting was productive, the parties may be resentful that they were asked to block out the time.
Most of the time, you can move the deal along more effectively simply by diligently working with the other side and its advisors to resolve the open issues – while keeping your principals’ powder dry until you really need to call them together.
Vertical mergers involve combinations of companies involved in different stages of the supply chain for a product or service, and it has been nearly 40 years since the DOJ & FTC last updated their guidance on transactions of this type. Since that’s the case, the agencies made news last week when they issued draft Vertical Merger Guidelines laying out their approach to these transactions. Here’s the intro from this Sullivan & Cromwell memo summarizing the draft guidelines:
For the first time in 36 years, U.S. antitrust regulators have published guidance concerning their analysis of vertical mergers (i.e., mergers between companies involved in different levels of the same supply chain). The guidelines, which have been issued in draft form for public comment until February 11, 2020, provide significant insights into the analyses that would be applied by U.S. regulators and will be significant for companies planning vertical combinations in many industries.
The guidelines could substantially change (i) the way in which vertical mergers are assessed in allocating antitrust risk in the context of merger negotiations; (ii) the number of vertical mergers subjected to lengthy investigations by the regulators; and (iii) the number of vertical mergers that lead to enforcement actions.
The draft guidelines decline to adopt a standard under which regulators would view vertical mergers as presumptively lawful or unlawful, but propose, among other things, a 20% “screen” that would serve as a preliminary indicator of whether a vertical merger warrants scrutiny (i.e., if the merged firm has a less than 20% share in a relevant market and a less than 20% share in a market vertically “related” to the relevant market, the regulators are unlikely to view the merger as problematic). Although the “screen” is informative, the guidelines emphasize that enforcement decisions will continue to be subject to a fact-specific competitive effects analysis in each case.
On January 13, 2020, the Treasury Department issued final regulations implementing the Foreign Investment Risk Review Modernization Act, or FIRRMA. Here’s an excerpt from this Shearman & Sterling memo summarizing the regulations:
The final regulations implement key provisions of the Foreign Investment Risk Review Modernization Act (FIRRMA) enacted by Congress in August 2018. First, the regulations expand the jurisdiction of CFIUS to review minority, non-controlling investments in U.S. businesses developing or producing critical technologies; owning or operating U.S. critical infrastructure assets; and possessing or collecting sensitive personal data of U.S. citizens.
Second, the regulations mandate CFIUS filings for many foreign investments in U.S. businesses producing or developing certain critical technologies and for transactions in which a foreign government-controlled entity acquires control of certain U.S. businesses. Lastly, the regulations significantly broaden CFIUS’s jurisdiction by providing it with authority to review foreign acquisitions of certain U.S. real estate interests.
The final regulations exempt certain investors from Australia, Canada and Great Britain from the mandatory filing requirements and from CFIUS’s expanded authority to review non-controlling minority investments and acquisitions of certain U.S. real estate interests. These exemptions had been eagerly anticipated as they represent the first blanket exemptions from CFIUS regulation for any category of foreign investors.
The Treasury Department indicated that it may consider exempting investors from other countries in the future. The key provisions of the final regs generally track those contained in the proposed regs issued last September, and the regulations will go into effect on February 13, 2020. We’re posting memos in our “National Security Considerations” Practice Area.
The case involved an advance notice bylaw entitling two closed-end investment fund trusts to request additional information after they received notice of a slate of trustee nominees put forward by an activist hedge fund, and requiring the hedge fund to respond within 5 days. The trusts used that bylaw provision as justification for sending the hedge fund a supplemental request requiring them to respond to over 90 questions. When they didn’t provide the information within 5 days, the trusts said that since they didn’t respond in a timely fashion, their nominations were defective.
The Chancery said that the advance notice bylaw didn’t give the trusts a license to engage in an unreasonably broad inquiry, and held that the plaintiff had established that some of the questions exceeded the authority granted by the bylaw. As this Wachtell Lipton memo points out, the Delaware Supreme Court saw things differently:
The Supreme Court held that, even if some of the questions asked went beyond the bounds of the bylaw, it is not acceptable for a shareholder “to simply let pass a clear and unambiguous deadline contained in an advance-notice bylaw, particularly one that had been adopted on a ‘clear day’.” Writing for the Court, Justice Valihura stated:
Bylaws, including advance notice bylaws, are “commonplace” and are interpreted using contractual principles. If such provisions are unclear, we resolve any doubt in favor of stockholders’ electoral rights. But the provisions at issue here were clear, as the Court of Chancery held. A rule that would permit election-contest participants to ignore a clear deadline and then, without having raised any objection, proffer after-the-fact reasons for their non-compliance with it, would create uncertainty in the electoral setting.
The Court noted that instead of seeking relief from the deadline for responding, the dissidents sat on their hands and simply let the deadline pass. The Court’s decision sends a strong message that deadlines in advance notice bylaws are going to be respected by the Delaware courts, and that dissidents who object to the scope of supplemental inquiries must assert those objections before the deadline passes.
This recent Wachtell Lipton memo reviews U.S. M&A antitrust enforcement during 2019 and gazes into the crystal ball to predict what 2020 may bring. Here’s an excerpt addressing the role of state AGs:
Also worth watching in 2020 will be potential increased activism by state AGs in merger reviews. Traditionally, state AGs have participated in the federal agencies’ review of mergers and sometimes joined them in court challenges or settlements. Rarely has an AG brought a challenge of a transaction reviewed and cleared by one of the federal agencies.
Last year’s challenge of the T-Mobile-Sprint merger, led by California and New York, is the most significant instance of such intervention to date, and a clear sign that state AGs are willing to pursue independent merger enforcement actions when they believe the federal agencies have been too lax.
The memo notes that 2019 was an active year for enforcement, with the FTC & DOJ challenging four proposed transactions in court and requiring remedies in 17 more. In addition, five deals were abandoned due to opposition from regulators. In 2020, parties should expect close scrutiny of strategic deals, with structural divestitures to an identified buyer likely to remain the remedy of choice if antitrust concerns are present.
This recent blog from Weil’s Howard Dicker & Lyuba Goltser reviews the potential benefits to PE funds, IPOs & participants in M&A transactions associated with proposed changes to the SEC’s auditor independence rules. This excerpt discusses how the rule changes would address inadvertent independence violations that can arise in M&A transactions when the buyer’s auditor has also performed impermissible non-audit services for the target:
The SEC proposes a transition framework to address these types of inadvertent independence violations. An accounting firm’s independence will not be impaired because an audit client engages in a merger or acquisition that gives rise to a relationship or service that is inconsistent with the independence rules, provided that the accounting firm:
– is in compliance with applicable independence standards from inception of the relationship or service;
– corrects the independence violations arising from the merger or acquisition as promptly as possible (and in no event later than six months post-closing); and
– has in place a quality control system to monitor the audit client’s M&A activity and to allow for prompt identification of potential independence violations before closing.
The blog also points out that for PE funds, rule changes would codify Staff practice concerning independence issues that arise when sister companies with a common PE fund owner have engaged an audit firm to provide non-audit services that could impair the independence of the audit firm with respect to another sibling company. The rule changes would also shorten the look-back period for auditor independence from three years to one year, which would provide increased flexibility for IPO companies to address potential disqualifying relationships with their audit firms.
In Morrison v. Berry, (Del.; 12/18), the Delaware Supreme Court reversed an earlier Chancery Court ruling and refused to dismiss a shareholder plaintiff’s claims alleging that disclosures related to the relationship between the company’s founder & the PE firm that ultimately acquired the company, together with other matters relating to his role and actions in the board’s sale process were misleading.
The case returned to the Chancery Court, which decided various motions to dismiss at the end of last month. There’s a lot going on in Vice Chancellor Glasscock’s 72-page opinion, and we’re likely to revisit it in the coming weeks, but this recent blog from Stinson’s Steve Quinlivan focuses on the Court’s response to a motion to dismiss breach of fiduciary duty claims targeting the company’s General Counsel.
While the plaintiff asserted a variety of claims against the GC premised on alleged breaches of the duty of care and loyalty, VC Glasscock dismissed all of them – with the exception of allegations that the General Counsel violated his duty of care in preparing the disclosures in the company’s Schedule 14D-9 filing. This excerpt from the blog discusses this aspect of the Vice Chancellor’s opinion:
Turning to the claim of gross negligence, the Court noted “Because fiduciaries . . . must take risks and make difficult decisions about what is material to disclose, they are exposed to liability for breach of fiduciary duty only if their breach of the duty of care is extreme.” Given the omissions noted by the Supreme Court, the Court observed the Schedule 14D-9 offers stockholders a version of events that left them lacking information material to a decision.
The Vice Chancellor concluded that the extent of the alleged disclosure shortcomings created a reasonable inference that the GC may have conceivably acted with gross negligence in his role with regard to the 14D-9. However, the blog notes that he also observed that “another reasonable interpretation is that the Schedule 14D-9 represents a good faith but failed effort to make reasonable disclosures, but given the pleading stage, the Court must choose the inference favoring the Plaintiff.”
It’s worth noting that disclosure claims relating to the 14D-9 were also asserted against the directors, but they were dismissed because, like most Delaware corporations, the company included a Section 102(b)(7) provision in its charter eliminating directors’ monetary liability for breaches of the duty of care. That protection does not extend to corporate officers.