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.
Earlier this week, the Delaware Supreme Court held that a company’s disregard of corporate formalities may entitle a shareholder to access its emails and other electronic communications through a books & records demand. This Proskauer blog says this decision provides yet another reason for companies to rely on traditional, formal methods of corporate recordkeeping:
The Court’s decision in KT4 Partners LLC v. Palantir Technologies, Inc. should cause corporations to focus on how they maintain key corporate records. The Court held that, “if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions, and official letters, it will likely be able to satisfy a § 220 petitioner’s needs solely by producing those books and records. But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which § 220 entitles them.”
Thus, the more formal and traditional the corporation’s recordkeeping, the better a defense the corporation might have to a § 220 request for emails and other electronic communications, which can be quite burdensome to produce.
In this case, Chief Justice Strine’s opinion concluded that Palantir had “a history of not complying with required corporate formalities,” including failing to hold annual meetings, and that the shareholder had submitted evidence that Palantir had conducted other corporate business informally, including by means of email.
As a result, the Court concluded that traditional records were insufficient to provide information that would satisfy the shareholder’s proper purpose in making the demand, and ordered the company to provide its electronic communications.
Private equity buyers don’t often focus on ESG issues as part of the due diligence process, but this Norton Rose Fulbright blog says they probably ought to take the target’s performance on key ESG issues into account. Here’s an excerpt:
In private equity, environmental, social and governance (ESG) factors are often overlooked and undervalued. Due diligence is usually more focused on the financial and quantitative aspects of the target. However, in recent years, ESG has proven to be a powerful underlying factor for business successes and failures.
As evidenced by the #MeToo movement, and the various human resource scandals that have made headlines in recent months, an unhealthy corporate culture can have serious consequences for even the biggest of enterprises. A study that looked at 231 mergers and acquisitions between 2001 and 2016 found that ESG compatible deals performed better than those with disparate positions on ESG, by an average of 21%.
This figure should be considered alongside the fact that in 2016, more than 15,000 deals were terminated or withdrawn. The face value of these terminated deals totals $3 trillion. One can appreciate the time, effort, and costs incurred in relation to these proposed transactions, which is why investors need to look beyond the bottom line, and see how a target is achieving its results early on in the evaluation process.
The blog acknowledges that a target’s ESG performance can be a tough thing for a buyer to get its arms around, but notes that the application of emerging “big data” tools to the assessment can provide insights into risks and opportunities in the ESG area.
This recent blog from Weil’s Glenn West uses the Delaware Chancery Court’s recent decision in Great Hill Equity Partners v. SIG Growth Fund (Del. Ch.; 11/18) – which I blogged about last month – as a jumping-off point for a discussion of the perils of undefined fraud carve-outs to contractual liability caps.
Glenn points out that while the shareholders in Great Hill avoided liability beyond the contractual cap despite their CEO’s fraud, other selling shareholders haven’t fared as well. In at least one case, selling shareholders have found themselves litigating their responsibility for another shareholder’s fraud for years due to uncertainties about the scope and application of an undefined fraud carve. Even worse – as this excerpt points out – this issue may just be the tip of the iceberg:
It is important to note that the issue of whose fraud matters, in uncapping the liability-limitation regime, is literally just the tip of the iceberg of perils that undefined fraud carve-outs pose. The number of other, just under-the-surface, hazards that can do serious damage to your carefully crafted and capped liability-limitation regime are legion.
They include issues as to what kind of fraud is actually being carved out (yes there are surprising forms of fraud that do not involve the deliberate conveyance of falsehoods), as well as whether the fraud carve-out encompasses fraud with respect to any statement made in the course of negotiation, or only with respect to those statements that the parties agreed were the bargained-for factual predicates for the deal and therefore important enough to incorporate into the written acquisition agreement.
The blog points out that it has become established market practice to define fraud carve-outs so that only intentional misrepresentations by a particular seller relating to the specific representations and warranties in the agreement are carved out from the liability cap.
Proxy contests are probably more about politics and the art of persuasion than they are about law – and this recent study says that activists who get in front of investors before the incumbent board gain a significant advantage. This excerpt discusses just how big that advantage can be:
I find that the dissident’s communication strategy has an important effect on voting outcome and on proxy advisors’ recommendations, controlling for firm and dissident characteristics. Effective strategies entail the use of various communication channels, especially investor presentations, and the reflection of logical reasoning in the content.
Investor presentation is potentially a snapshot of all dissidents’ demands, so I focus on understanding how it affects voting outcome. As investors have limited attention, I investigate whether the timing of the presentation affects the voting outcome. Although the dissident is the first to bring proposals to the management, in only 49% of cases is the dissident the first to make a presentation.
Strikingly, I find that the dissident is 55 percentage points more likely to win if they are the first to make an investor presentation, after controlling for firm and dissident characteristics, ISS recommendations, the severity of issues in the firm, potential solutions provided by the dissident, and third party endorsements of the dissident.
The study says that the biggest factor behind the first mover advantage is investors’ limited attention spans. The first investor presentation simply gets a lot more investor attention than the second. Not surprisingly, that’s less true when it comes to institutional investors – and the first mover advantage is magnified when a company has a large number of retail investors.
Tune in tomorrow for the webcast – “Controlling Shareholders: The Latest Developments” – to hear Potter Anderson’s Brad Davey, Cravath’s Keith Hallam, Greenberg Traurig’s Cliff Neimeth and Sullivan & Cromwell’s Melissa Sawyer discuss the latest developments surrounding transactions involving controlling shareholders.
The Trump Administration’s emphasis on an “America First” policy when it comes to trade and foreign affairs generally has had significant implications for how companies conduct business – and this PwC blog says that their M&A activities are no exception.
The blog points out that cross-border deals have typically represented about 25% of US deal volume in recent years, and that ongoing trade tensions could prompt some companies to focus more on in-country transactions. And there’s some evidence that this is already happening – after a year of steady growth, the number of outbound US deals dipped by about 20% in the third quarter of 2018.
Despite the challenges, many companies remain interested in expanding their global footprint. This excerpt has some tips for companies pursuing cross-border deals in the current environment:
– Reconsider deal size. Many deals blocked recently by the US and Chinese governments have been at least $1 billion in value, and in some cases much more. That magnitude may have been a factor in government scrutiny. More moderate acquisitions may raise fewer concerns and still allow a company to move forward with its growth strategy.
– Smaller countries out of the tariff spotlight may yield possibilities. Some emerging markets have emerged, and economic power is dispersed. With information barriers largely gone, cities are more connected than ever. An urban hub in a less developed nation could offer similar quality investments to traditionally targeted countries.
– Some sectors don’t rise to a high level of regulatory scrutiny by the US and other countries, or they don’t involve as many atypical risks, even with expanded government reviews.
On this last point, while tech has been the hottest sector when it comes to cross-border transactions, deals in that highly-scrutinized sector still accounted for only 30% of cross-border M&A volume in 2018. As the blog notes, “that leaves 70% across a wide range of industries, including some – such as consumer products, real estate and certain manufacturing – in which the security and intellectual property concerns likely aren’t as great.”
Check out this Baker McKenzie memo for a region-by-region breakdown of expectations for global M&A and IPOs during the upcoming year.