One of the great truisms of M&A law has been that “Delaware has never found a MAC.” Well, that’s no longer the case. Yesterday, for the first time, the Delaware Chancery Court held that deterioration in a seller’s business resulted in a “Material Adverse Effect” entitling the buyer to terminate its merger agreement.
In his 246-page opinion in Akorn v. Fresenius (Del. Ch.;10/18) – you didn’t seriously think Delaware could do something like this in less than 200 pages, did you? – Vice Chancellor Laster held that Fresenius had established that Akorn had experienced a Material Adverse Effect entitling Fresenius to back out of its 2017 merger agreement. As this excerpt from the opinion demonstrates, Fresenius won just about every way it could have:
First, Fresenius validly terminated the Merger Agreement because Akorn’s representations regarding its compliance with regulatory requirements were not true and correct, and the magnitude of the inaccuracies would reasonably be expected to result in a Material Adverse Effect. Second, Fresenius validly terminated because Akorn materially breached its obligation to continue operating in the ordinary course of business between signing and closing. Third, Fresenius properly relied on the fact that Akorn has suffered a Material Adverse Effect as a basis for refusing to close.
That’s pretty much the ultimate MAC Trifecta – breach of a rep and a covenant & failure to satisfy a stand-alone MAC closing condition – but an appeal to the Delaware Supreme Court seems likely. That means that Chief Justice Strine, who authored the decidedly MAC-skeptical opinion inIn re IBP Shareholders Litigation, (Del. Ch.; 6/01), would have an opportunity to weigh-in. We’re posting memos in our “MAC Clauses” Practice Area.
Lawyers are a pretty diverse group when it comes to their hobbies – I’ve known chess players, rare book collectors, gourmet cooks, singers, musicians & actors in addition to the usual collection of aging male & female jocks. But I’ve got to say, I’ve never come across a hobby that’s quite like the one that Fredrikson & Byron’s Zach Olson enjoys.
Zach Olson is a practicing attorney at Fredrikson & Byron during the day. At night, he’s practicing body slams as a wrestler. About 18 months ago he started training at The Academy: School of Professional Wrestling in Minneapolis, which is owned by former WWE wrestler Ken Anderson. Olson is now performing his best impersonations of Hulk Hogan and Andre the Giant at local wrestling matches.
Lots of people try their hand at wrestling, but how many are attorneys working on complex mergers and acquisitions? Not many. Olson recently worked for Bio-Techne Corp. on its acquisition of Exosome Diagnostics for $250 million.
Zach’s wrestling name is E. Sylvester Quinton IV – or “ESQ” – because of course it is!
ESQ bills himself as “the finest legal mind of his generation.” Obviously, I can’t vouch for that, but he’s definitely become one of my personal heroes. After all, what M&A lawyer hasn’t fantasized from time-to-time about suplexing the jerk sitting across the negotiating table? This guy can actually do it!
A couple of years ago, we blogged about the need for a buyer to keep the seller’s FCC licenses in mind during due diligence – even if the seller isn’t a telecom company. This Arnold & Porter memo suggests that now may be a good time for a reminder. Here’s an excerpt:
Does your M&A due diligence checklist ask about FCC licenses? No? Well, the FCC just gave you a half million reasons to add a question—504,000, to be exact. That’s how much (in US dollars) Marriott International, Inc. agreed to pay to settle an FCC investigation into the unauthorized transfer of licenses arising out of its 2016 acquisition of Starwood Hotels & Resorts Worldwide, Inc.
You may be asking yourself what a hotel chain merger has to do with the Federal Communications Commission. The answer entails a brief introduction to FCC licensing as a prelude. The Communications Act generally prohibits anyone from “us[ing] or operat[ing] any apparatus for the transmission of energy or communications or signals by radio” within or from the United States without a license.
Broadcasters have FCC licenses for their over-the-air AM, FM, and TV signals. Mobile wireless carriers have FCC licenses for their subscribers’ calls, texts, and data usage. And businesses across the United States have FCC licenses for the radio equipment they use for security, groundskeeping, maintenance, transportation, and other internal communications needs. Several dozen of the Starwood-owned or -managed hotels that Marriott acquired are among these businesses.
The Communications Act and the regulations implementing that statute generally require prior FCC approval before control of a license passes to another party, whether by assignment of the license or transfer of control of the licensee. The FCC may consent only if it finds the transaction will serve the “public interest, convenience, and necessity.”
The memo says that this requirement is not as burdensome as it sounds – when the license is merely a peripheral part of the business, it rarely takes more than few weeks for the FCC to consent, and it often acts overnight. But you’ve got to remember to reach out in order to get the agency’s consent, and if you don’t, it may cost you.
A recent study says that hedge funds do all sorts of good things for the shareholders of buy-side companies:
Using Schedule 13D filings by hedge funds and M&A announcements made by US companies from 1993 to 2015, we show that hedge fund activism leads to lower M&A activities, lower takeover premiums, more favorable market reactions to M&A announcements, and better post-M&A stock and operating performance. We show that our results are unlikely to be driven by selection bias. Overall, our results suggest that hedge fund activism increases shareholder wealth by forcing corporate M&A to be more efficient and disciplined (e.g., fewer but better acquisitions).
Earlier this year, our panelists touched on the phenomenon of buy-side M&A activism in our “How to Handle Post-Deal Activism” webcast, and you should check out the transcript for more insight into this small but growing corner of the activist universe.
Schulte Roth recently released this study of deal terms for 2015-2017 M&A transactions involving private equity buyers & public company targets. Here are some of the key takeaways:
– Approximately 84% of all 2015–17 transactions were structured as one-step mergers rather than two-step tender offers followed by back-end mergers. Over 90% of large deals (>$500mm) were structured as one-step mergers, while 70% of the 2015–17 middle-market deals (>$100mm) were structured as one-step mergers.
– Go-shop provisions were included in approximately 33% of the 2015–17 large deals and 20% of the 2015–17 middle-market deals. The average length of the go-shop period was 37 days.
– 81% of large deals had financing “marketing period” provisions, while those provisions appeared in only 15% of middle market transactions.
– All deals surveyed provided the buyer with “match rights,” and all but one included a “last look” provision.
– 81% of large deals and 45% of middle market deals included some form of limited specific performance provision.
Termination fees averaged 2.4% of equity value for large deals & 3.3% of equity value for middle-market deals. Interestingly, the average size of the buyer’s reverse termination fee declined from 6.5% of the target’s equity value during 2013-2014 to 4.5% of its equity value during 2015-2017.
We’ve previously blogged about media reports suggesting that the SEC has shelved its universal proxy proposal. On the other hand, this MacKenzie Partners memo says that the idea of a universal proxy gained traction during the 2018 proxy season & found support from an unexpected constituency – public company issuers themselves. Here’s the intro:
Despite recent reports that it has been shelved as an item on the SEC’s agenda, the universal proxy card, which makes it easier for shareholders to pick-and-choose from a combination of management and dissident nominees in a proxy contest, found new life this year as it was used for the first time in a proxy contest involving a US-listed company, and was on the verge of being implemented in at least two other contests that were settled prior to the proxy being mailed.
The universal proxy card has long been a topic of discussion among regulators and industry practitioners, and it looked like the initiative had gained sufficient traction in October 2016 as then-SEC Chair Mary Jo White proposed a new rule on the issue. However, the new SEC administration had reported put the universal proxy on the back burner and shifted its attention towards other rulemaking initiatives.
It is somewhat surprising, then, that the private ordering that occurred this year primarily emanated from issuers rather than activists, who have historically been more outspoken in their support of the universal proxy. A closer look at these situations confirms what we have suspected for some time: that the universal proxy card can, in certain situations, be more advantageous for issuers than for activists.
The memo reviews the situations in which universal proxy cards were us – or almost used – and discusses the reasons why issuers may find it an attractive alternative in a proxy fight.
By the way, this recent blog from Cooley’s Cydney Posner suggests that those media reports about universal proxy’s demise at the SEC just may have been exaggerated.
What can companies expect from activists over the next 12 months? This ValueWalk article reviews the landscape, and says that although there are plenty of ways that activism could tail off, you probably shouldn’t count on it:
Bankers said 2018’s proxy season was one of the busiest they could remember, despite the absence of some of the biggest activists from annual meeting ballots. A big ending to 2018 would look a lot like the first eight months of the year, Morgan Stanley’s David Rosewater said in an interview, adding that while the pace of proxy fights is situation-specific, the general pace of activism is being driven as much by first-time or occasional activists as the professionals.
Even so, Trian Partners and Pershing Square Capital Management have each indicated they have new undisclosed positions. Advisers are coiled ready for Third Point Partners’ next move at Campbell Soup. United Technologies has received clear signals that the result of its strategic review should be a breakup; the consequences if it does not are hazy.
After a period when it felt as though activists were struggling to digest big projects and the gaps between proxy fights lengthened, the next 12 months look like a time for opportunism. Bankers expect plenty of activity even if markets fall and allocators continue to steadily withdraw from hedge funds, citing the ability of activists to raise special purpose vehicles for one-off campaigns. One banker said that even companies well-prepared for activists had to consider the knock-on effects if they attempted to make acquisitions or raise capital just to keep up with the strategies.
And if the S&P 500 Index continues to rise, activists will simply go overseas.
In QC Holdings v. Allconnect, Vice Chancellor Laster held that obligations to investors who had exercised a put right prior to a merger were not extinguished by that transaction – despite the fact that, prior to the deal, the selling corporation did not have funds legally available to repurchase the shares under Delaware law. This Morris James blog summarizes the case. Here’s an excerpt:
Briefly, the stockholder in this case had exercised its put rights, but the payment date was tolled according to the contract’s terms and based on the company’s then-present financial circumstances. Before the company could satisfy the put, it was acquired. The acquirer declined to respect the put. The stockholder sued and the Court ruled in its favor.
In doing so, the Court first rejected the acquirer’s argument that the put rights were a one-time exercise opportunity, rather than an ongoing obligation if funds were not available at exercise. According to the Court, the acquirer’s position would result in a commercially irrational forfeiture without the necessary clear language requiring a forfeiture. The Court also rejected the stockholder’s argument that the merger consideration constituted legally available funds of the company to satisfy the put.
The Court further found that, had the stockholder continued to hold its stock, its rights may have been limited to accepting its share of the merger consideration. But the Court ultimately ruled in the stockholder’s favor because it had transferred the put shares to the company at the time of its exercise, making it a contractual creditor, no longer a stockholder. The payment obligation of the company became the obligation of the acquirer under Section 259 of the DGCL and was due and owing.
There’s an important drafting note in the Vice Chancellor’s opinion. He suggests that the decision was a closer call than might otherwise have been the case if the contract had included language regarding the ongoing nature of the redemption obligation – language that was included in the terms of other securities issued by the company:
When sophisticated parties negotiate redemption rights, they frequently include language specifying that the obligation to redeem the shares will be ongoing. The redemption rights addressed in other cases illustrate this point. Closer to home, the redemption right enjoyed by the holders of the Series F Preferred established an ongoing redemption obligation, stating:
“At any time and from time to time thereafter when additional funds of the Corporation are legally available for redemption of shares of Preferred Stock, such funds immediately will be used to redeem the balance of the shares of Preferred Stock which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed.”
Vice Chancellor Laster pointed out that no analogous provision appeared in the put agreement, thus allowing the company to make a “linguistically plausible” argument that its obligations terminated when the merger closed.
Here’s something Liz recently blogged on CompensationStandards.com: This study examines empirical evidence to conclude what most deal lawyers already know: advisory votes on golden parachutes aren’t very effective when it comes to curbing excessive pay. Institutional investors oppose golden parachutes in principle – and the failure rate for proposals has been increasing – but overall, caveats in voting policies result in higher support than you might expect. And as long as the deal’s approved, there’s not there’s not much of a consequence if some shareholders object to the severance arrangements.
The professors recommend adding some “teeth” to these votes. Here’s the intro:
We find that the Say-on-Golden-Parachute (“SOGP”) voting regime is significantly less promising than Say on Pay in controlling compensation. First, proxy advisors appear more likely to adopt a one-size-fits-all approach to recommendations on SOGP votes, focusing mainly on the presence of an excise tax gross-up provision and secondarily on aggregate payouts if extreme.
Second, shareholders appear more likely to adhere to advisor recommendations, with standard variables explaining far less of the voting results once controls for proxy advisor recommendations are removed. Finally, golden parachutes appear to be increasing in recent years and we find that golden parachutes that are amended immediately prior to an SOGP vote tend to grow rather than shrink.
These findings contrast with those of researchers who have studied Say-on-Pay. We suggest that the differences lie in the absence of second-stage discipline for SOGP votes. Directors at target firms who fail to respond to proxy advisor or shareholder complaints do not have to risk being voted out in subsequent elections since their directorships usually cease with the acquisition. For corporate governance more broadly, our findings suggest that advisory votes are only effective in certain situations where immediate or subsequent discipline is at least plausible.
We conclude by offering potential avenues for improving SOGP’s ability to shape compensation practices. They include making SOGP votes more binding and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors and also of acquiring corporations.
Following Dell and DFC, a court finding that a deal process provides reliable indications of value is likely to give great (even dispositive) weight to the deal price. Both the Solera court and the Norcraft court acknowledged the weight given to deal price in the Delaware Supreme Court’s recent appraisal decisions and began their analyses with a review of the sales process to determine whether the sales process justified such reliance on the deal price.
Of course, the significance of such a review raises questions for a buyer, since it is hard for a buyer to know in advance exactly what kind of deal process a target company has run (though a buyer may have some indications during the process, such as the approaches made to Fortune by the conflicted executive in Norcraft).
The memo also discusses potential limitations of relying on a “go-shop” as a market check tool, and the importance of documenting synergies in order to reduce valuations. It also notes the continuing possibility of an Aruba Networks valuation at the pre-announcement trading price.