According to this Cornerstone Research report, Delaware appraisal actions declined in 2018 for the second year in a row. This excerpt from Kevin LaCroix’s recent “D&O Diary” blog summarizes the study’s findings & gives some insight as to the likely reasons for the decline:
According to the report, the number of Delaware appraisal petitions rose steadily after 2009, peaking at 76 in 2016. As discussed in the Cornerstone Research report, the increase in the number of petitions followed the recent rise of appraisal arbitrage, in which investors purchased shares in the target company after the deal announcement and then contested the deal price in a subsequent transaction.
As detailed elsewhere, among the attractions to investors in pursuing this strategy for much of this period is the relatively advantageous statutory interest rate; in 2016, the Delaware legislature amended the law to allow defendants to pre-pay anticipated amounts due as a way to cut-off the accrual of statutory interest.
However, the number of appraisal petitions declined to 60 in 2017 (a decrease of 21 percent), and declined again in 2018 to only 26 (a further decrease of 57 percent. The number of merger transactions that attracted at least one appraisal petition peaked at 47 in 2016, but decreased to 34 in 2017 (a decline of 28 percent), and decreased further to 22 in 2018 (a further decrease of 35 percent). The decline follows two recent Delaware Supreme Court decisions emphasizing that greater weight should be given in appraisal actions to the deal price (as well as the changes concerning the accrual of pre-judgment interest).
This year may see further interesting developments regarding appraisal actions – the Delaware Supreme Court has scheduled oral arguments on the appeal of Vice Chancellor Laster’s decision in the Aruba Networks case for the end of next month.
Have you ever represented a public company buyer and had the accountants punt the issue of the need for acquired company financial statements to you? This is usually accompanied by a statement that that Reg S-X is a “rule” and so it’s a “legal issue.” That’s pretty lame, but okay, whatever. . .
Anyway, deciding whether you need target financial statements, what periods are required and when you need to have them can be a complicated issue. While an accountant may not have punted this issue to you yet, trust me – that day is coming. Keep this Mayer Brown memo around for that day. It provides a relatively brief and understandable primer on acquired company & pro forma financial statement requirements. This excerpt provides a good overview of the requirements:
In general, Rule 3-05 requires the filing of separate pre-acquisition, or historical, financial statements when the acquisition of a significant business has occurred or is probable. This means that the acquiring company must obtain separate audited annual and unaudited interim pre-acquisition financial statements of the target or business it acquires if such business or acquisition is “significant” to the acquiring company.
“Significance” is determined and measured by applying three significance tests prescribed by the SEC rules. The more significant an acquisition is, the more onerous the requirements relating to financial information of the target (e.g., years of historical annual audited financial statements). In addition, a registrant must also present pro forma financial statements that give effect to the acquisition, in compliance with Article 11.
As a general rule, the registrant must file these target and pro forma financial statements within 75 days after an acquisition is consummated, with a Current Report on Form 8-K. However, a registrant that registers or offers securities may need to provide these financial statements much earlier and include these in the relevant SEC filing or offering document; for instance, in its registration statement, prospectus supplement or merger proxy statement, as applicable.
The memo also points out that although these rules apply only to SEC filings and registered offerings, adhering to these requirements is the general market practice in the context of exempt offerings as well.
Want to drive a CEO crazy? Tell them that the board needs to establish a special committee. Despite the problems they create, some lawyers almost reflexively recommend the creation of a special committee if a company is considering a potential sale. In many instances, that’s because the lawyers believe that a special committee is legally required.
This recent Wachtell memo addressing the use of special committees in the REIT context is a useful reminder that this frequently is not the case – even if there are some potential board or management conflicts. Here’s an excerpt:
Forming a special committee when not required can needlessly hamper the operations of the company and its ability to transact, create rifts in the board and between the board and management, and burden the company with an inefficient decision-making structure that may be difficult to unwind. It is important, therefore, for REITs to carefully consider – when the specter of a real or potential conflict arises – whether a special committee is in fact the best approach, whether it is required at all, and whether recusal of conflicted directors or other safeguards are perhaps the better approach.
REIT management teams often stay the course through an M&A transaction and remain employed by the successor company after the deal. In such cases, it is not unusual for management to negotiate terms of employment with the transaction counterparty at some point during the deal, preferably towards the end when all material deal terms have been agreed. But while such negotiations can raise conflict issues, they do not necessarily mean that the entire transaction and surrounding process must or should be negotiated by a special committee.
The memo distinguishes between special committees and transaction committees – the latter are frequently used to make it easier for the board to provide oversight of the transaction process, but don’t involve the rigidity associated with special committees created to deal with potential conflicts.
The US government just put us all through a shutdown lasting more than a month – and that’s prompted their colleagues in the UK to respond with something along the lines of “hold my beer.” Incredibly, Her Majesty’s Government is merely a few weeks of further dithering away from the once unthinkable reality of a hard Brexit. That’s not good news for any business with interests in the UK or the EU, but this Baker Botts memo explains that it’s particularly bad news if you’ve got an M&A deal subject to antitrust review. Here’s an excerpt:
When it comes to transactions which involve a significant UK aspect (even where the merging parties themselves are not UK-based companies), the parties will need to take Brexit-related developments into account for transaction planning purposes. In concrete terms, not only will the merging parties need to be prepared to accommodate parallel EU and UK merger reviews in their transaction timelines, but they will also need to provide sufficiently for the possibility of parallel EU/UK merger reviews in the conditions precedent in their deal agreements.
The risk of potential issues arising from parallel reviews by the EU and UK will be particularly acute around the time of Exit Day: the UK’s Competition Management Authority effectively confirmed in its Draft Guidance that it fully intends to enforce UK competition law as of Exit Day in respect of mergers which otherwise would be subject only to review by the European Commission under the EUMR.
The UK’s CMA is apparently taking the position that any deal that hasn’t received a formal clearance decision from European Commission by the time the UK leaves the EU will be fair game for review by the CMA.
Over the weekend, I came across this blog from Prof. Ann Lipton discussing a recent study suggesting that “go-shops” may not be as effective in smoking out higher priced deals as they once were. The study argues that the reason for this may be that dealmakers have learned how to game the system:
There are a lot of interesting observations in the new paper, with the basic point being that deal attorneys – aware that Delaware courts focus a lot on things like the size of termination fees – instead manipulate aspects of the go-shop that tend to escape judicial notice, and that collectively function to make go-shops less effective. One particular point that stood out: The authors note that PE firms have changed how they compensate CEOs who remain with the company after the buyout.
Today, they pay based on whether the firm achieves certain multiples of invested capital, a metric that CEOs might view as functionally guaranteeing them a healthy payout, and one that incentivizes them to keep the deal price as low as possible. (The authors contrast with earlier IRR-based payouts, which were so difficult to achieve as to render compensation speculative). And even if the CEO does not negotiate compensation with the PE firm until after a deal price is reached, the CEO will know the PE firm’s practices and past history.
The new study follows up the authors’ 2008 study that generally supported the use of go-shops. The blog points out that the new study contains a bombshell quote from an unnamed PE investor to the effect that his firm tries to “corrupt” management – and that the multiple-of-invested-capital compensation structure helps accomplish that contributes to that corruption.
I’m not thinking this quote is going to play real well in Chancery Court.
Winter’s been so miserable that Las Vegas needs snow plows & there are flurries in LA – but I promise you that spring is coming. How do I know? The FTC just announced its new HSR thresholds, which means that our favorite harbinger of spring – the annual inundation of law firm memos – has commenced. Davis Polk once again won the prize for “first to my inbox” this year, so here’s an excerpt from their memo with the details:
Today, the Federal Trade Commission (FTC) announced revised Hart-Scott-Rodino Act (HSR) reporting thresholds under which transactions will be reportable only if, as a result of such transaction, the acquiring person will hold voting securities, assets, or non-corporate interests valued above $90 million, compared to $84.4 million in 2018. The newly-adjusted HSR thresholds will apply to all transactions that close on or after the effective date, which is expected to be in mid-March (the exact date will depend on when the changes are published in the Federal Register). The annual revision was delayed this year due to the recent federal government shutdown.
The FTC also announced revised thresholds above which companies are prohibited from having interlocking memberships on their boards of directors under Section 8 of the Clayton Act. The new Interlocking Directors thresholds are $36,564,000 for Section 8(a)(1) and $3,656,400 for Section 8(a)(2)(A). The new Section 8 thresholds become effective upon publication in the Federal Register.
Last summer, I blogged about a Delaware case addressing the distinction between a dispute resolution provision that requires a third party to act as an “arbitrator” & one that merely calls for that party to make an “expert determination” with respect to an issue. To make a long story short, if your agreement calls for “arbitration” you’re giving that third party powers equivalent to those of a judge; but if your agreement calls for an “expert determination,” that third party’s powers will be much more limited.
At that time, I cited a blog by Weil’s Glenn West cautioning deal professionals that because of these differences, they needed contractual language “clearly describing the third-party dispute resolution process they are contemplating for any post-closing purchase price adjustments.” Two recent Delaware Chancery cases – Agiliance v. Resolver SOAR (Del. Ch.; 1/19) & Ray Beyond v. Trimaran Fund Management (Del. Ch.; 1/19) suggest that people still aren’t getting Glenn’s message.
In the Agiliance case, the Court refused to countenance arguments that the agreement called for an “expert determination” given the unambiguous use of word “arbitration” in the agreement. Accordingly, the court ordered that a disputed matter be resolved solely by the accounting firm as an arbitration. In contrast, the Ray Beyond case involved a clear designation that the third party would as an “expert,” not an arbitrator – so the court gave effect to that language.
Glenn West is back again with another blog addressing these two cases. His conclusion isn’t surprising:
The distinction between Agiliance and Ray Beyond, then, is the existence, vel non, of a clear designation of the accounting firm as an expert, not an arbitrator, in the agreement. If you call your designated accounting firm a zebra, it will be a zebra (with potentially uncontrollable authority), and if you call your designated accounting firm a horse, even a striped one, it will be a horse (with controllable and limited authority). Say what you mean.
So, are we gonna listen this time or is Glenn going to have to come back again and beat a dead horse – or maybe a dead zebra?
Most corporate lawyers know that if you want to confer voting powers on one or more directors that are greater than those provided to other directors, Section 141(d) of the DGCL requires you to do that in your certificate of incorporation. But lawyers tend to view this narrowly, and often think that it only comes into play if you attempt to provide certain directors with more or less than 1 vote on board matters.
This Mintz Levin memo says that isn’t the case – and this excerpt points out that many of the contractual director veto rights typically found in VC investor agreements also involve disproportionate voting:
When VC funds, their portfolio companies and VC lawyers read or think about DGCL 141(d) and this disproportionate voting, they usually, and narrowly, have in mind only the question of whether certain directors may have more than or less than one vote per Director on matters voted on by the Board, or a committee of the Board.
However, what such funds, companies and practitioners less often recognize and give consideration to is that the financing documents commonly used in venture financings also often contain provisions that confer disproportionate voting rights among Directors, and that this disproportionate voting is not conferred in the COI as required by DGCL 141(d).
For example, the customary “Matters Requiring Director Approval” or “Matters Requiring Investor Director Approval” provisions found in investor rights agreements (IRAs) typically require that the majority of the Board, which majority includes one or more directors representing the holders of preferred stock (Investor Directors) approve certain corporate actions, such as incurring debt, hiring or firing executive officers, entering new lines of business or selling material technology or intellectual property.
The memo says that these and similar provisions requiring affirmative votes by the investor directors also constitute “disproportionate voting”, because they give those directors “veto rights” that are not shared by all directors. That means these rights need to be in the certificate of incorporation – and if they’re not, you’ve got a problem.
The memo points out that the good news for VC investors is that if you’re using the latest NVCA form certificate of incorporation, there’s language in there stipulating that ‘matters listed in ‘Matters Requiring Director Approval’ or ‘Matters Requiring Investor Director Approval’ provisions of the IRA require the affirmative votes by Investor Directors.”
This Bloomberg Law article says that dealmakers have made privacy issues a high priority in M&A due diligence and in negotiations. Here’s an excerpt about how privacy concerns are finding their way into deal terms:
Buyers will often assume the liabilities, including pending lawsuits and enforcement actions stemming from privacy laws, attorneys said. Data-driven companies could be a risky purchase because EU and U.S. regulatory authorities are focusing on businesses being transparent in their data collection practices, they said.
How well an acquisition target follows the GDPR and other privacy laws plays an increasingly important role in deal negotiations, attorneys said. Buyers are incorporating privacy issues in contract language, including representations and warranties, and changing deal prices to account for possible enforcement actions or lawsuits.
The article says that privacy concerns are particularly acute for data-driven businesses, and that buyers are digging into how well prepared those companies are not only to comply with existing regulations, but with those – such as California’s consumer privacy legislation – that will be coming online in the near future. Companies that haven’t taken steps to establish their right to the customer information essential to their businesses can expect to pay a steep price in terms of valuation.