A few months ago, I blogged about Prof. Brian Quinn’s suggestion that new Section 122(18) of the DGCL might permit a Delaware corporation to adopt a “dead hand” poison pill. These pills were invalidated by the Delaware courts in the late 1990s, in part because they were inconsistent with the board’s authority to manage the business and affairs of the corporation under Section 141(a) of the DGCL. Since Section 122(18) says that notwithstanding Section 141(a), a corporation may enter into contracts that delegate to stockholders the kind of governance rights invalidated by the Moelis decision, Prof. Quinn asked whether the Delaware General Assembly may have resurrected the dead hand pill? Now, Vice Chancellor Laster appears to be asking the same question.
Dead hand pills were invalidated by the Chancery Court in Carmody v. Toll Bros., 723 A.2d 1180 (Del. Ch. 1998), on the basis that the adoption of such a provision involved both a violation of Section 141 of the DGCL and a breach of the directors’ fiduciary duties. Subsequently, in Quickturn Design Systems v. Shapiro, 721 A.2d 1281 (Del. 1998), the Delaware Supreme Court invalidated a “no hand” provision that contained an outright prohibition on redeeming the pill. Like the Chancery Court in Toll Bros, the Supreme Court concluded that the no hand provision “impermissibly circumscribes the board’s statutory power under Section 141(a) and the directors’ ability to fulfill their concomitant fiduciary duties.”
In a recent LinkedIn post, Vice Chancellor Laster raised the question of whether Quickturn needs to be reassessed in light of Section 122(18). His post praised Stephen Bainbridge’s blog considering the potential implications of this new statutory provision on Omnicare v. NCS Healthcare (which is “a whole ‘nother bag of snakes”) and observed:
Also worth debating whether Quickturn survives. The synopsis to the Governance Agreement Amendment attempts to exclude rights plans as not being supported by consideration (tell that to the rights agent that wants to get paid for its services), but why not enter into a governance agreement with a continuing director feature?
I guess my response to this is the same as it was to Prof. Quinn’s argument. In Toll Bros, Vice Chancellor Jacobs didn’t just have problems with the dead hand pill under Section 141(a), but also held that in adopting it, the directors breached their fiduciary duties, and fiduciary duty claims are something that the advocates of the amendments say are unaffected by them. But this more recent LinkedIn post from Vice Chancellor Laster suggests that maybe I shouldn’t be so sanguine about the likelihood that the Delaware courts would toss such an arrangement on fiduciary duty grounds:
Here’s a quote to ponder from the Delaware Supreme Court in 2010:
“It is a well-settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.” Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010).
To be filed under “Do fiduciary duties really always trump contracts?”
We can probably add Vice Chancellor Laster’s statements about fiduciary duties not trumping contract rights in his recent Columbia Pipeline opinion into the mix here as well. I continue to think that a board’s decision to enter into a governance agreement incorporating a “dead hand” or “no hand” provision will be a tough sell under Unocal, but the language that the Vice Chancellor cites is a reminder that advocates for a different position have several arrows in their quiver.
Woodruff Sawyer recently released the 2024 edition of its “Guide to Representations & Warranties Insurance.” This edition of the guide covers a variety of topics relating to RWI, including an overview of RWI and its users, the key elements of an RWI Policy, the five main exclusions contained in the typical policy, and insights into current market conditions. Here’s an excerpt from the Guide’s discussion of claims trends:
From mid-2020 through mid-2022, we saw a large uptick in the number of policies and limits bound, and so it stands to reason that the number of R&W claims received by insurers has increased in the past year. Statistically, claims are most likely to arise within the first 12 to 18 months after a policy is bound since the first audit cycle of the target company’s finances may bring to light certain breaches—leading to the current increase in claims.
The two largest categories in which claim payouts were made continue to be breaches of (1) financial reps, and (2) customers and contracts. Those two categories account for almost two-thirds of claim payments, with compliance of laws coming in at a distant third. Most claims tend to arise within the first 12 months of the policy period, and the earliest reported claims tend to result in severe losses since these material matters are often discovered shortly after the deal has closed.
Transactions involving targets with audited financials (versus unaudited financials) often result in greater losses and a higher likelihood of claims alleging financial rep breaches. Payments for financial statements claims involving targets with audited financials averaged 41.4% of the policy limit, whereas this figure is only 22.1% for payments involving companies with unaudited financials.
The Guide says that most of the action is at the smaller end of the food chain, with deals involving less than $250 million in enterprise value resulting in 60% of claim payouts. These smaller deals have a higher incidence of breaches of compliance with laws reps and reps relating to operations, while bigger deals more typically see breaches of intellectual property and tax reps. Not surprisingly, claims for breaches of financial statements are high for deals both large and small.
We’re excited to announce the launch of “Understanding Activism with John & J.T.” – a new podcast series available to members of TheCorporateCounsel.net and DealLawyers.com. Orrick’s J.T. Ho will be John’s co-host for these podcasts. Together with their guests, they’ll focus on key issues in shareholder activism and seek out insights from both the activist and management perspectives.
Their inaugural podcast features a discussion with Kyle Pinder of Morris Nichols on recent activist challenges to advance notice bylaws and the implications of the Delaware Supreme Court’s decision in Kellner v. AIM Immunotech. Check it out & stay tuned for future podcasts in the series!
In late July, the Uniform Law Commission approved model legislation for a standardized approach to require companies to submit HSR Filings to state AGs and to permit State AGs to share filings with each other. This Freshfields blog notes that the model legislation follows the adoption of baby HSR Acts by a number of states (at least 14) and that these acts will likely “lead to increased scrutiny by State AGs who could have divergent enforcement priorities from the FTC and DOJ.” It notes these key takeaways from the model legislation:
– The model legislation requires parties to submit their HSR Filings to a State AG if (1) a filing entity is principally located in a state or (2) a filing entity’s parent has sufficient sales in a state. The creation of a new state-level filing obligation would add another compliance element to be monitored to avoid a potential liability for failure to notify.
– States may be encouraged or incentivized to pass legislation with provisions that go beyond the template language of the model, with, for example, waiting periods or filing fee requirements.
– Giving State AGs up-front access to HSR Filings opens the door to more state-level review, particularly for those transactions that have an outsized local impact and/or that may not otherwise have attracted the attention of either the FTC or DOJ.
While the model legislation is intended “to alleviate potential information asymmetries between the federal and state merger review processes,” note that “states remain free to enact their own versions of the legislation, which could lead to divergence” and undermine the intent. For example:
One point of potential deviation for some states could be the lack of a pre-closing waiting period. Many of the “baby HSR Acts” already on the books include at least a 30-day (or longer) waiting period (and at least one, as long as 180 days). States investigating complicated health care transactions, for example, may want longer lead times to ensure they have time to review thoroughly all areas of potential concern, particularly where such states may not have the same resources as the FTC or DOJ.
A second issue on which states might diverge from the model legislation could be the lack of a filing fee. States, such as California, have expressed concern that the model statute will not be “meaningful unless it is coupled with significant additional financial support for enforcement.” A recent report on state-level antitrust enforcement by the California Law Revision Commission, an independent state agency, argued that while the federal antitrust authorities receive thousands of filings per year, the cost of review is “defrayed” by filing fees. The fact that the model legislation has no filing fees creates an “unfunded burden” upon a State AG and “may in fact nullify legislative efforts to provide for filing fees” in other contexts.
In October 2022, the Treasury Dept. issued its first ever CFIUS Enforcement & Penalty Guidelines. Under the Guidelines, three types of conduct may constitute a violation, including failure to file, non-compliance with CFIUS mitigation agreements or conditions and material misstatements or omissions from filed information or false or incomplete certifications. Since the publication of those Guidelines, CFIUS has completed at least 6 enforcement actions that resulted in monetary penalties ranging from approximately $1 million to $60 million. This Ropes & Gray alert notes that this signals a significant uptick in enforcement activity since “between 1975 and 2022, CFIUS publicly reported only two penalties, both relating to failures to comply with CFIUS mitigation requirements.”
The alert notes that CFIUS also summarized conduct that has resulted in the issuance of a DONT Letter — which is issued as an alternative or as a precursor to a monetary penalty when “a CMA has ‘determined that one or more violations occurred, but [has] . . . decided not to pursue further enforcement remedies or [to] require additional information to assess if a penalty is warranted'”:
– failure to file a mandatory declaration (but, notably, only in cases where there was a first-time offense, and the lack of a filing did not lead to national security harm)
– failing to limit the receipt and distribution of specified information to a segregated network, as required under an LOA
– transferring assets to a company controlled by foreign persons, in violation of an NSA or other CFIUS mandate
– failing to prevent unauthorized access to specified intellectual property
Given these enforcement action summaries, the alert has these reminders:
– NSA Compliance is Mandatory: In connection with publication of the Guidelines, Assistant Secretary of the Treasury for Investment Security Paul Rosen stated, “Today’s announcement sends a clear message: Compliance with CFIUS mitigation agreements is not optional, and the Committee will not hesitate to use all of its tools and take enforcement action to ensure prompt compliance and remediation, including through the use of civil monetary penalties and other remedies.”3 Parties to NSAs are on notice of the potential consequences of non-compliance. In addition, parties negotiating NSAs should be transparent about any practical challenges that may arise in complying with specific mitigation proposals, in an effort to arrive at a mitigation framework that is attainable.
– Anonymity is Not Guaranteed: Historically, the Committee’s emphasis on confidentiality has extended to publication of enforcement activity. The T-Mobile case marks the first time that the Committee has publicly identified a party to an enforcement action. This unprecedented step suggests the possibility that future enforcement actions will not be kept anonymous.
This Morrison Foerster insight highlights a recent enforcement action marking the second time the Biden administration has sued for HSR Act violations and the first time the DOJ and FTC have pursued a gun jumping case in 7 years. In early August, the DOJ brought an action against Legends Hospitality Parent Holdings in connection with its proposed acquisition of ASM Global for gun jumping in violation of the HSR Act by effectively assuming control of ASM and failing to operate separately prior to the expiration of the HSR waiting period.
On November 3, 2023, Legends agreed to purchase ASM for $2.325 billion and submitted an HSR filing on November 6, 2023. The DOJ issued a Second Request on January 8, 2024, to extend its review of the deal. The DOJ closed its review on May 29, 2024. While the DOJ did not challenge the transaction itself, it filed the gun jumping lawsuit months later, on August 5, 2024.
According to the DOJ, while the DOJ’s review of the deal was still pending, Legends and ASM engaged in gun jumping. Specifically, the DOJ claims that in May 2023, Legends won the right to manage a city-owned arena in California where ASM was the previous manager. The DOJ alleged that due to the pending acquisition, Legends decided to allow ASM to continue to operate the arena instead and signed an agreement to that effect on December 7, 2023. Also during the diligence process, Legends allegedly sought to discuss competitive bidding strategies with ASM. It subsequently decided not to compete for a bid opportunity against ASM and decided to change a different Legend’s bid to a joint bid with ASM.[3]
The DOJ asserted that the violation started on December 7, 2023 (when Legends signed the agreement with ASM to manage the California arena) and continued until May 29, 2024 (when the HSR waiting period was terminated), which amounts to 175 days total. Legends agreed to pay a $3.5 million civil penalty to settle the alleged violation, approximately 40% of the maximum civil penalty, among other requirements, which include submitting regular compliance reports to the DOJ, appointing an Antitrust Compliance Officer, and implementing an antitrust training and compliance program.
The alert notes that the DOJ and the FTC have considered the following types of conduct to constitute gun jumping in the past:
– Sharing competitively sensitive information, such as current and future pricing or cost information;[10]
– Prematurely transferring beneficial ownership of the target or closing the transaction before the expiration of the HSR waiting period;[11]
– Prematurely integrating or consolidating operations;[12]
– Exercising control over the other party’s assets or its routine business, management, or operations;[13] and
– Engaging in impermissible joint conduct, such as fixing prices, terms, and conditions.[14]
The alert suggests parties “confer with legal counsel prior to discussing integration, exchanging data, or discussing the transaction with customers, suppliers, or the public, and develop safeguards for integration planning tailored to the transaction at hand” and lists other best practices to avoid even the appearance of gun jumping.
The July-August Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– Drafting of Corporate and M&A Documents for 2024 Delaware General Corporation Law Amendments – Soft Earn-out “Promises” as Potential Fraud or Merely Puffery: Delaware Chancery Court Provides Guidance in Trifecta
– Watch Your Derivatives: The Role 13Fs Play in Detecting Shareholder Activism
– We’re Back In-Person – Register Today & Join Us in San Francisco!
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
We’ve posted the transcript for our “2024 DGCL Amendments: Implications & Unanswered Questions” webcast. Our panelists – Hunton Andrews Kurth’s Steven Haas, Gibson Dunn’s Julia Lapitskaya & Morris Nichols’ Eric Klinger-Wilensky – provided their insights into this year’s controversial DGCL amendments. Topics addressed included the amendments’ implications for governance and acquisition agreements, the interplay between fiduciary duties and contractual obligations, and unanswered questions resulting from the amendments.
Here’s a snippet from Steve Haas’s thoughts on how the ability to include provisions for lost premium damages in merger may influence the drafting of specific performance language:
“Next drafting point, the final one under this ConEd, or Crispo category, is the issue of specific performance. Surely parties will continue to prefer specific performance as a remedy in a busted deal over monetary damages. The synopsis says that the statute is not intended to exclude any remedies that are otherwise available. With that said, merger agreements may want to expressly say that notwithstanding the company does have the right to seek loss premium damages, the parties still agree that monetary damages will be inadequate, and that the parties are entitled to seek specific performance. Maybe that’s a drafting nuance, but I wouldn’t be surprised to see more agreements acknowledge the damages section, but still saying very specifically that the parties are agreeing that specific performance is the chosen remedy.”
Members of this site can access the transcript of this program. If you are not a member of DealLawyers.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
According to a recent PitchBook article, strategic buyers are increasingly willing to pay through the nose for assets held by private equity funds – and a lot of those funds are increasingly looking to strategic buyers to supply an off-ramp for their investments. This excerpt explains the dynamic:
Corporate buyers, with the ability to tap cash on their balance sheets, stock, or investment grade debt, have greater flexibility and a lower cost of capital to fund larger acquisitions. In addition, corporate buyers expect to achieve cost and revenue synergies from an acquisition, positioning them to pay high multiples for ideal targets. Lured by these greater premiums, PE firms are more often looking to exit through sales to strategic buyers versus IPOs or sponsor-to-sponsor transactions, according to a recent survey of PE fund managers and portfolio-company CFOs by BDO USA. The firm mainly advises fund managers in the middle market and upper-middle market.
The article says that 57% of respondents to the BDO survey would pursue sales to strategic buyers for exits in the next 12 months, up from 33% last year. Only 9% expect to pursue exits through IPOs, compared to 29% last year, and fewer respondents said they expected to sell to other PE sponsors than last year.
A new SSC Intralinks report says that dealmakers are rapidly incorporating AI tools into M&A transactions and have very positive views on AI’s potential to generate value in the deal process. This excerpt discusses how AI tools are changing how deal teams:
AI tools are already changing the ways that surveyed dealmakers work. Indeed, only 23 percent say AI has not yet had a meaningful impact on their day-to-day role. And even in Latin America, where AI tools have gained relatively less traction, fewer than a third of dealmakers (32 percent) say they are in this position.
The good news is that the impact of AI to date has been largely positive. For example, 62 percent of respondents say that AI is creating new opportunities for dealmakers. Many of these opportunities are discussed in more detail throughout this report, but it is increasingly clear that AI tools are valuable at every stage of the deal process, from target sourcing to post-deal integration.
Moreover, AI also has a role to play in supporting some of the ancillary tasks of dealmakers. Not least, 58 percent of dealmakers say AI tools have enhanced their reporting capabilities. The ability to execute deal-related work in this way represents an important opportunity in its own right. More broadly, dealmakers are excited by the productivity improvements that AI now promises. Almost half of respondents (44 percent) say that AI tools have already improved their M&A teams’ efficiency. As implementations gather pace, that figure is likely to increase.
The report says that AI is likely to have its greatest impact in deal origination and in post-closing integration. By providing data-driven insights, AI tools can help dealmakers make better-informed decisions, investigate a much broader universe of potential targets and streamline the process of narrowing these down to the most attractive potential transactions. Post-closing, AI tools can help expedite integration planning and execution through automated workflows, intelligent systems and improved cultural alignment.