PE funds and activists have had a mutually beneficial relationship for years – activists with event-based strategies have pushed companies to do a deal, and PE funds have been more than happy to provide one. But in recent years, some major activists have looked to sponsor their own deals, and according to this recent report from Axios, that strategy is growing in popularity:
Both private equity and activist investor funds are considered alternative asset classes, but the latter is becoming an increasingly popular alternative to the former.
Starboard Value today agreed to invest $200 million into Papa John’s, after the troubled pizza chain failed to secure attractive enough private equity offers during a four-month auction process. The deal also includes another $50 million infusion by the end of March, with Starboard’s Jeffrey Smith being named chairman. Company namesake John Schnatter reportedly voted against the deal, thus extending his recent losing streak.
Elliott Associates, after failing to successfully work with Apollo Global Management on an Arconic takeover, is seeking to raise $2 billion for an actual takeover fund — not so much evolving into private equity but seeking to co-opt it.
The bottom line: Activists for years have helped to create private equity opportunities, by agitating for sales. Now they are beginning to take some of those opportunities themselves.
Our old pal the earnout – everybody’s favorite way to bridge valuation gaps – found itself back in the Delaware Chancery Court again late last year. In Himawan v. Cephalon, (Del. Ch.; 12/18), the Court refused to dismiss claims premised on allegations that the buyer breached its obligations under an earnout provision in a merger agreement.
The seller was a biotech company & the earnout payments were tied to the buyer’s commercialization of two antibody-based disease treatments in development at the time of the deal. The buyer was obligated to use “commercially reasonable efforts” to develop the treatments – which the agreement defined to mean “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon], with due regard to the nature of efforts and cost required for the undertaking at stake.”
While the buyer made milestone payments of $200 million for one of the treatments, it ultimately abandoned the other. The plaintiffs sued, and the defendant moved to dismiss their breach of contract claim. This K&L Gates blog summarizes the Court’s decision to deny that motion. Here’s an excerpt:
Vice Chancellor Glasscock denied Cephalon’s motion to dismiss the breach of contract claim, recognizing in the decision that the merger agreement’s “commercially reasonable efforts” provision created an objective standard for evaluating Cephalon’s conduct. While indicating that potential alternative reasonable interpretations may be considered in construing Cephalon’s specific obligations under this standard, the court determined that this provision should not be held to be meaningless for purposes of ruling on a motion to dismiss for failure to state a claim.
The Court found that Ception’s former shareholders had sufficiently pled that Cephalon failed to comply with its obligations under this provision by alleging that similarly situated companies were pursuing treatments for the other identified condition. On the basis of this finding, the Court held that dismissing the breach of contract claim would be inappropriate.
The Vice Chancellor dismissed the plaintiffs allegations of breach of the implied covenant of good faith – reasoning that since the implied covenant was essentially a “gap filler,” its use was inappropriate when a contract contained an objective standard defining the nature of the obligations at issue.
Delaware’s hard line on disclosure-only settlements adopted in In re Trulia has been slow to catch on in other jurisdictions, with only a few adopting the standard so far. But now this Gibbons blog says that we may be able to add New Jersey to the list – sort of:
In the first published New Jersey state court opinion addressing the Trulia standard, the Chancery Division in Strougo v. Ocean Shore Holding Co. followed Trulia in holding that disclosure-only settlements are to be subject to “more exacting scrutiny,” but it is doubtful that the Chancery Division scrutinized the settlement to the degree envisioned by Chancellor Bouchard in Trulia.
According to the Chancery Division in Strougo, when a court is asked to approve a disclosure-only settlement, the court should determine whether the supplemental disclosure was “material,” meaning that “there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote.” Trulia requires more: it requires that the supplemental disclosure be “plainly material,” meaning that “it should not be a close call that the supplemental information is material.”
Consistent with its Trulia-lite approach, the Court said that supplemental disclosures about the deal’s fairness opinions were material enough to support a settlement – even though the Trulia court concluded that supplemental disclosures like these rarely add value for shareholders.
Tune in tomorrow for the webcast – “Earnouts: Nuts & Bolts” – to hear Pepper Hamilton’s Michael Friedman, Cravath’s Aaron Gruber, Fredrikson & Byron’s Sean Kearney and K&L Gates’ Jessica Pearlman – discuss the nuts & bolts of earnouts, and how to prevent this popular tool for bridging valuation gaps from becoming a post-closing albatross for your deal.
Here’s MergerMarket’s “2018 Global M&A Roundup,” which includes the latest set of league tables listing the law firms that most often represent companies in deals, broken out on a global and regional basis. . .
This Activist Insight article says that corporate reimbursements of expenses incurred by activists in proxy contests were way up last year. Here’s an excerpt:
The average reimbursement paid by companies to activist investors for proxy solicitation costs increased dramatically last year. U.S. companies disbursed an average $431,831 to cover activists’ campaigning costs in 2018, nearly three times the average in 2017, according to data compiled by Activist Insight Online.
The growing bill comes as the number of settlements has swelled; as many as 142 settlements were reached in 2018 versus 119 in the prior year. In part, 2018’s increase in costs could be explained by the fact that there were more reimbursements at mid- and large-cap companies, which totaled $10.4 million in 2018 compared to $1.5 million in 2017.
Most reimbursements involve small cap companies, but the article speculates that more reimbursements by mid and large-cap companies may account for the spike. Longer campaigns may also be a factor, with campaigns taking an average of 82 days to reach a settlement in 2018, compared with 79 days in 2017. The article also says that the increased reimbursement may reflect more advance preparation by small cap activists – including retaining counsel before launching a campaign.
The article reviews notable large-cap campaigns where activists obtained reimbursements, and addresses how institutional investors may react to reimbursement requests.
Sure, you probably think I have it pretty good – but sitting around in my pajamas trying to come up with things for you to read with your first cup of coffee every morning isn’t as easy as you might think. That’s why the Chancery Court’s Xura decision has been such a godsend for me! I’ve already blogged twice about it, but it’s proving to be the gift that keeps on giving.
The latest take on Xura is in this recent blog from “The Conference Board” authored by several Cleary Gottlieb lawyers. The blog points out that Xura touches on one of corporate law’s great open questions – the extent to which the business judgment rule applies to officers. Here’s an excerpt:
In a footnote to the Xura opinion, Vice Chancellor Joseph R. Slights indicated his presumption that “the business judgment rule applies to Tartavull as CEO,” but acknowledged that “this point is not settled in our law and that there is a lively debate among members of the academy regarding whether corporate officers may avail themselves of business judgment rule protection.”
Vice Chancellor Slights cited a number of law review articles suggesting, alternatively, that (i) executive conduct should be protected by the business judgment rule and (ii) executive conduct should be evaluated under a negligence paradigm based on agency principles.
In advising non-director officers about conduct that could give rise to fiduciary claims, it is certainly prudent to routinely advise that they take steps – e.g., ensuring that they act with due care, not in a conflicted context and in good faith – to meet the conditions of the business judgment rule. However, practitioners should also keep in mind that there may be a question whether officers will be entitled to business judgment rule protection, at least in certain contexts.
The blog goes on to suggest that the BJR should apply to officers. In particular, it points to the Delaware Supreme Court’s decision in Gantler v. Stephens (Del. Sup.; 1/09) as supporting application of the BJR to officers. In that case, the Court acknowledged that Section 102(b)(7) of the DGCL – which permits companies to include exculpatory provisions in their certificate of incorporation protecting directors against duty of care claims – doesn’t apply to corporate officers. But the Court also said that it would be “legislatively possible” for Section 102(b)(7) to be extended to officers.
The memo seizes on this latter statement and suggests that “if officers were not shielded from liability through the business judgment rule, and instead were subject to liability for ordinary negligence, it would make little sense to apply Section 102(b)(7) to exculpate them from liability for duty of care claims, which require a higher showing of gross negligence.”
The Corwin & MFW decisions and their progeny have dramatically changed the M&A litigation landscape in Delaware. But this case law is also relatively new and is likely to continue to evolve. This Wachtell memo discusses how plaintiffs have responded to these decisions, and provides some tips to transaction planners on how to best position themselves to obtain the protection of Corwin & MFW during a period of uncertainty as to their precise doctrinal contours. Here’s an excerpt:
In 2018, stockholder plaintiffs persistently attacked the sufficiency of disclosures, raised novel claims that stockholder approvals were “coerced,” and sought to expand the definition of controlling stockholder. The objective? To escape MFW and Corwin by de-legitimizing majority stockholder votes reflecting the considered judgment of large asset managers and institutional investors, often acting with the assistance of specialized proxy advisory firms. And in circumstances that some observers considered surprising, the courts allowed several such cases to survive motions to dismiss and proceed to the discovery stage—where they acquire vast settlement value.
Looking ahead, the question is whether Delaware’s market- and investor-facing doctrine will be given full effect despite this concerted opposition. Ultimately, the line of new Delaware case law is sufficiently rooted in today’s economic reality that it should withstand attack. Stockholders are now too sophisticated and too engaged to justify, as a matter of routine, the costs of litigating issues that the stockholders themselves have approved. Indeed, in ending the scourge of “disclosure-only” settlements, the Court of Chancery confirmed the often limited utility to stockholders of incremental disclosure.
Because the Corwin & MFW line of cases are of such recent vintage, the memo says that transaction planners should expect some unpredictability from the Delaware courts. The memo recommends that parties that want to realize the benefit of Corwin would be wise to “avoid cross-conditioning related transactions when commercially practical and draft disclosure documents with an eye toward negating the inevitable claims that material information was omitted.” In situations where parties seek to rely on MFW, they should “ensure the proper functioning of any special committee, from inception through negotiation and any final decision.”
Transaction planners usually view the DOJ or FTC scuttling their deal as the “worst case scenario” for the outcome of an antitrust merger investigation. But as bad as that downside is, this Crowell & Moring memo is a reminder that it can get much worse – parties could find themselves facing civil or even criminal antitrust charges. This excerpt addresses a recent example:
In recent years, for example, the U.S. Department of Justice’s Antitrust Division has brought several civil and criminal prosecutions for anticompetitive conduct uncovered during a merger investigation. The most recent example of such follow-on prosecutions surfaced over the last several weeks when the DOJ announced that it had reached settlements with a number of the nation’s largest broadcast television station groups in a civil information sharing investigation.
In these cases, the DOJ charged the seven defendants with participating in an unlawful information sharing scheme where they exchanged – either directly or through advertising sales firms – non-public, competitively sensitive information in order to prevent local and national advertisers from negotiating better terms, including lower prices.
Since filing these enforcement actions and the accompanying settlements, the DOJ has publicly confirmed that it uncovered this information sharing scheme during its investigation into a proposed merger involving two of the defendants – a merger that was eventually abandoned after the DOJ and Federal Communications Commission (FCC) raised concerns about the deal’s likely competitive effects. The DOJ has also indicated that it is actively investigating other companies and that this ongoing investigation will likely result in additional charges in the coming months.
The memo provides an overview of this DOJ investigation and outlines key steps that companies can take to mitigate the risk of civil or criminal antitrust charges arising out of a merger investigation.
With the SEC’s recent expansion of Reg A eligibility to Exchange Act reporting companies, this Sheppard Mullin blog says public company buyers may want to give some thought to using Reg A to register shares issued in small transactions. Here’s an excerpt:
Regulation A could prove particularly useful to reporting companies that seek to use stock consideration ($50 million or less in a Tier 2 offering) to acquire a target company with many equity holders in a transaction that would otherwise require registration on Form S-4 due to the unavailability of Rule 506 of Regulation D or another exemption from registration under the Securities Act.
The SEC Staff has confirmed in published guidance (Compliance & Disclosure Interpretation, Question 182.07) that Regulation A may be relied upon by an issuer for business combination transactions, such as a merger or acquisition.
Advantages to Reg A as compared to S-4 include the ability of non-S-3 eligible issuers to incorporate information by reference into a Form 1-A, reduced line-item disclosure requirements, a generally “lighter touch” from the Staff on review, the absence of a required 20 business day solicitation period if information is incorporated by reference, blue sky preemption & the absence of Section 11 liability.
Of course, there are some disadvantages too – including an overall $50 million cap on offering size, limits on the value of unlisted securities to be received by a non-accredited target company shareholder and an inability to forward-incorporate by reference. Still, for many buyers, Reg A may be an option worth exploring.