Among its many other dubious achievements, the government shutdown has thrown a monkey wrench into a lot of pending deals. Broc’s blogged several times about the shutdown’s impact on the SEC’s operations over on TheCorporateCounsel.net (here’s his most recent). Unfortunately, the SEC isn’t the only game in town – and the limited operations of other federal agencies during the pendency of our annual national dumpster fire are also causing headaches for dealmakers.
This Fried Frank memo addresses how federal agencies are being affected by the shutdown & what that may mean for your transaction. This excerpt deals with the antitrust regulators – and says that you may see more HSR second requests & can forget about early termination of your waiting period for the time being:
The Federal Trade Commission and the Department of Justice are continuing to accept Hart-Scott-Rodino filings during the shutdown. The applicable statutory HSR waiting periods will run, but early termination of the waiting period will not be granted during the shutdown. Second requests will continue to be issued. The agencies will perform certain critical functions with respect to time sensitive investigations and (if timing extensions or suspensions cannot be negotiated) pending litigation or new cases that “must be filed due to [HSR] or statute of limitations deadlines.”
Given the limited agency staff working during the shutdown, parties should expect delays. In particular, there may be additional need to pull and refile HSR filings to allow the agencies additional time to conduct preliminary reviews, with the goal of avoiding or narrowing the scope of in-depth Second Request investigations. In addition, resource constraints may prompt the agencies to issue more Second Requests than otherwise in order to allow additional time to complete their investigations. For transactions that present no substantive antitrust issues, without the possibility of early termination, parties will need to endure the full statutory waiting period (30 days for most transactions)
That’s nice. Anyway, the memo also touches on how the shutdown’s impacted the operations of other regulators you may interact with – including the SEC, FCC, CFIUS & bank regulators – as well as the federal courts.
With the explosive growth in Rep & Warranty insurance, people sometimes overlook the fact that D&O policies often come into play when dealing with claims arising out of a deal. This Woodruff Sawyer blog discusses the role that both types of coverage play in protecting a seller and its directors. This excerpt highlights a situation where the D&O policy provides a critical backstop to an R&W policy:
The predicate of this scenario is a serious breach of a representation given by the seller to the buyer.
It could be argued that some breaches of representations are the result of a lack of board-level oversight or even a pervasive cultural issue perpetrated by the board. Let’s say the board is revealed to have put pressure on managers to find the “cheapest” way to dump toxic waste; and that “cheapest way” was to just throw it in the sea. Could this action by the board also result in a claim under the sellers D&O policy?
First, one should expect the breach of the representation itself will inspire the buyer to sue the seller for the breach if not for actual fraud on the seller’s part. This difficult circumstance is actually fairly common, which is why an RWI policy is so useful. It’s also why the calibration of the limit and scope of the RWI policy is so important. The RWI policy is designed to respond in this situation and in the best case has been structured so that the buyer remains whole notwithstanding the breach. Put differently, up until the RWI policy is exhausted the buyer had not experienced any loss, making a suit against the seller’s directors and officers by the buyer unlikely.
However, let’s say the breach is so terrible that the RWI policy’s limit is exhausted without making the buyer whole. In this case the buyer might decide to sue the seller and the seller’s directors and officers. If the buyer sues the seller’s directors and officers for fraud, typically the seller’s D&O insurance to respond. If the regulators become involved as a result of the fraud and there is risk of fines or criminal prosecution against the seller’s directors and officers, it is likely that the seller’s D&O insurance policy will respond, particularly for the cost of an individual director’s or officer’s legal defense.
The blog points out that this kind of claim might well be brought after the seller’s D&O policy has expired – and illustrates the importance of purchasing tail D&O coverage to protect the seller’s directors from post-closing claims.
Section 14(e) is the Williams Act’s general anti-fraud provision, and prohibits misstatements or omissions in connection with tender offers. Last year, in Varjabedian v. Emulex, the 9th Circuit split with the other circuits that had addressed the issue & held that 14(e) liability may be based on negligence. Last week, the SCOTUS granted cert in the case – and this Wachtell memo says its decision could be an important one for M&A practitioners:
Emulex exemplifies a trend apparent since Delaware’s crackdown on the disclosure settlement racket: Deal disclosure cases have flooded into other states and into federal court. In deals involving tender offers, the legal vehicle of choice has been Section 14(e). If the Ninth Circuit’s decision endorsing a negligence standard is allowed to stand, the ongoing flood of tender-offer disclosure cases in to the federal courts could become a deluge. But if it is reversed, and depending on how, that flood could be slowed—or altogether stemmed.
This Wachtell memo provides an overview of the “state of play” for shareholder activism as of the end of 2018. The memo notes that the threat of activism remains high – and is a global phenomenon. Here are some of the other key takeaways:
– Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad. In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions.
– While the robust M&A environment of much of 2018 has recently subsided, deal-related activism remains prevalent, with activists instigating deal activity, challenging announced transactions (e.g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
– “Short” activists, who seek to profit from a decline in the target’s market value, remain highly aggressive in both the equity and corporate debt markets. In debt markets, we have also recently seen a rise in “default activism,” where investors purchase debt on the theory that a borrower is already in default and then actively seek to enforce that default in a manner by which they stand to profit.
While the memo says that there has been interest among institutional investors in initiatives to develop a governance framework focusing on creating long-term value and fighting short-termism, it also says that until such a framework is widely adopted, a decrease in activism is unlikely.
Speaking of a new governance framework, Wachtell recently updated its “New Paradigm” for corporate governance that the firm originally prepared in 2016 for the World Economic Forum.
We didn’t forget about the Chancery’s ruling invalidating federal forum charter provisions – this is Broc’s recent blog about it over on TheCorporateCounsel.net: Here’s news from Richards Layton (we’re posting memos in our “Post-Acquisition Disputes” Practice Area):
The Delaware Court of Chancery, in Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), has declared “ineffective and invalid” provisions in three corporations’ certificates of incorporation that purported “to require any claim under the Securities Act of 1933 to be brought in federal court.” Ruling on cross-motions for summary judgment, the Court, by Vice Chancellor Laster, ruled that “[t]he constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law. In this case, the federal forum provisions attempt to accomplish that feat. They are therefore ineffective and invalid.”
Happy New Year everybody – and thanks for reading. I recently watched the 1976 film “Network” again, and like many others, I was struck by how prescient it was. For instance, I was reminded of the movie when I read this article in last Friday’s WSJ – which talks about antitrust regulators’ increasing concerns about mega-M&A deals creating “monopsony power” through the sheer scale of the companies involved.
As this excerpt explains, these rising concerns about monopsonies may result in a significant shift in the way regulators both in the US & abroad approach merger review when it comes to mega-deals:
Regulators are increasingly focusing on the power that these companies have over their workers and suppliers, and companies appear to be aware of the risk. This helps explain big wage increases this year by Walmart and Amazon, which boosted its minimum hourly rate to $15, following criticism that the retail giants use their scale to give staff a raw deal.
Both the Justice Department and the Federal Trade Commission are now looking more at labor issues in merger cases, according to David Wales, antitrust partner at Skadden, Arps, Slate, Meagher & Flom in Washington, D.C. “It has come up in a couple of pending investigations where the staff has asked the parties to answer questions about the impact of the merger on labor,” Mr. Wales said, adding this is the first time he’s seen this happen.
The main concern in antitrust cases has long been the impact of a deal on consumers. If there’s not evidence suggesting that prices will rise, then there typically hasn’t been much regulatory concern. In other words, the focus has been on the impact of a dominant seller (monopoly) and not a dominant buyer (monopsony).
But the size of today’s mega-corporations has resulted in growing concerns about monopsony power. Some have derided this new approach as “hipster antitrust,” but the article says that it is “a leading theme of the Federal Trade Commission’s current hearings on whether antitrust practice is working.” It also points out that hearings like these are rare – they last were held back in the mid-1990s.
Now, this is where Network comes in – because as Ned Beatty’s character Arthur Jensen so eloquently argued, one person’s monopsony is another’s beneficent “vast ecumenical holding company”:
“The world is a business, Mr Beale. It has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that … perfect … world in which there is no war nor famine, oppression or brutality. One vast and ecumenical holding company for whom all men will work to serve a common profit. In which all men will hold a share of stock. All necessities provided. All anxieties tranquilized. All boredom amused.”
Well, that’s one point of view. Anyway, here’s a pro tip: if you get caught up in merger review based on concerns about monopsony power, quoting Arthur Jensen to the DOJ or FTC is not likely your best play.
It seemed like easy terms for M&A financing would last forever, didn’t it? But this Wachtell memo points out that the credit markets have recently tightened considerably, and that companies seeking financing for their deals are facing more challenging conditions. The memo offers tips on navigating the current environment – including this one on the importance of keeping potential lenders’ differing risk tolerances in mind when seeking financing:
When markets are volatile, different financing sources may have markedly different views of the risk that any particular financing transaction presents—and as a result, may offer vastly different terms. Of course it is always the case that different financial institutions(and particularly different types of financial institutions—money-center commercial banks, investment banks or alternative lenders) have different risk tolerances, but recent volatility and unpredictability in the financing markets have resulted in greater differentiation in the terms that individual financing sources are willing to offer potential borrowers.
Therefore, borrowers seeking to finance a transaction should test (and should ensure that engagement letters with their investment bankers provide them with sufficient flexibility to test) the market with multiple financial institutions of varied types to ensure that they are partnering with the lender(s) best suited to their transaction given the specific market conditions. Disclosing an M&A transaction to more potential financing providers prior to signing may expose a deal to greater leak risk, but a borrower can mitigate this risk and achieve substantial and offsetting benefits by properly managing and calibrating this process.
Other topics include strategies for dealing with rapidly changing deal terms from proposed lenders, managing the broader “flex terms” that lenders are likely to seek in financing commitments, and managing the impact of risks associated with the political environment.
Activist investors can use a variety of tactics to bring pressure on corporate boards, but it’s ultimately their willingness to “go to the mattresses” & launch a proxy contest that ensures that they’ll get the board and management’s attention. This Fried Frank memo provides a helpful overview of the proxy contest process. Here’s an excerpt:
Today the most common types of proxy contests are contests by activist stockholders seeking board representation or control, generally with the objective of maximizing return on the activist’sinvestment in the short-term. The proxy contest serves as a tool to drive change, including:
– Adding directors who are sympathetic to the activist’s goals or who bring fresh perspectives to the board, orchestrating a change in executive management or corporate policy, or securing other changes in corporate governance.
- Catalyzing changes in strategy, changes in capital allocation, a sale or break-up of the company or other value-enhancing transactions—changes that the activist may instigate or accelerate even if itsefforts to change composition of the board are unsuccessful.
Besides traditional proxy contests, investors today have other tools available to express dissatisfaction and drive change, including solicitations exempt from the proxy rules such as “withhold the vote” campaignsand, in the case of companies that have adopted proxy access bylaws, rights of eligible stockholders to nominate a minority of candidates for director in the company’s proxy statement.
The memo addresses a wide range of topics, including the market environment, advance preparation, timing and strategic issues, key legal considerations, as well as the process of conducting the fight & negotiating a settlement.