This recent blog from Steve Quinlivan reviews the Delaware Chancery Court’s decision in In re Tangoe Stockholders Litig. (Del. Ch.; 11/18), where Vice Chancellor Slights held that company’s failure to provide audited financial statements & other disclosure shortcomings precluded its directors from relying on the Corwin doctrine in post-closing litigation.
The deal sounds like a complete mess – it involved a take private with a negative premium that took place in the shadow of, among other things, allegedly false SEC filings & the company’s inability to get a restatement completed. Despite these issues, the parties signed-up a deal. This excerpt from Steve’s blog describes what happened next:
Ultimately the Director Defendants recommended that stockholders tender into a negative premium deal. Inevitable litigation followed, and the Director Defendants moved to dismiss the Complaint. Their showcase argument was that they were entitled to business judgment rule deference under Corwin v. KKR Fin. Hldgs. LLC because a majority of disinterested, fully informed and uncoerced stockholders approved the Transaction. The Plaintiff claimed Corwin was not applicable because it had pled facts from which it may reasonably be inferred that stockholders were either coerced to tender or did so without the benefit of material information.
The Court found the facts pled supported a reasonable inference that stockholder approval of the negative premium transaction was not fully informed in the absence of audited financial statements and other adequate financial information about the Company and its value. According to the Court there was an information vacuum, which was compounded by the fact that the Company had failed to file multiple 2016 quarterly reports and had not held an annual stockholders meeting for nearly three years. The Court also noted that Board did not advise stockholders that all forensic accounting had been completed and only a formal audit remained, depriving stockholders the opportunity to wait and see the audited results.
Delaware courts have been pretty liberal in their application of Corwin, but the doctrine is premised on full and fair disclosure to the shareholders who approved the deal – and the Tangoe case makes it clear that it’s awfully hard to disclose your way through a financial fog as thick as pea soup.
Earlier this year, the SCOTUS issued its decision in South Dakota v. Wayfair, which overruled prior decisions holding that an out-of-state seller with no physical presence in the state could not be required to collect sales taxes on goods it ships to in-state consumers.
The decision has dramatically changed the traditional sales tax regime for businesses, and this recent PwC blog says that buyers need to consider its implications when conducting tax due diligence on potential acquisition targets. Here’s an excerpt with some of the key takeaways for M&A transactions:
– Wayfair issues will involve more time during due diligence for collecting and analyzing information regarding a target’s profile. Potential buyers should consider this additional commitment in time, up front, in scoping their potential acquisitions.
– Potential buyers will likewise have to spend additional time identifying the risk and quantum of non-filing for sales/use tax and income tax in states that have current enactments, states that will apply their rules retroactively, and states that may apply existing non-economic rules broadly. Additionally, buyers will need to consider Wayfair in their financial models in order to accurately project their go-forward after-tax cash-flows.
– Should deals move to closing, buyers will need to determine how to deal with past non-filing exposure vis-à-vis taxing authorities (e.g., voluntary disclosure agreements), if at all.
The blog recommends that buyers obtain contractual protections (such as indemnification, escrow arrangements and purchase price adjustments) to help ensure that they do not assume historical Wayfair-related exposures. It points out that exposures for pre-closing periods that arise due to a post-closing change in a state’s interpretation of its tax law are likely to present the greatest challenge.
We’ve previously blogged about the DOJ’s stated desire to speed up the antitrust merger review process. According to this Dechert memo, the 3Q 2018 results suggest that progress is being made – and that merger investigations are moving faster in the EU as well. Here’s an excerpt with are some of the stats:
– The number of significant merger investigations in both the U.S. and EU is down compared to calendar year 2017.
– In the U.S., the two significant investigations concluding during Q3 2018 averaged only 6.9 months — the quickest pace for any quarter in over four years.
– All three significant EU investigations involved Phase II cases and averaged 13.5 months, faster than the 15.1-month average in CY 2017.
– Two U.S. merger litigations concluded during Q3 2018 and averaged only 105 days from complaint to decision — nearly half as long as litigations brought in 2017 — largely due to the unique posture of one of these cases.
The head of the DOJ’s Antitrust Division recently announced that the DOJ was in the process of implementing a plan to modernize the merger review process – and that speeding up the process was a priority. The memo notes that the FTC Chair Joseph Simons has recently expressed a desire on his agency’s part to speed up the process as well. So, hopefully the most recent stats on timing represent the start of a trend.
This Cooley blog lays out a “top 10” list of cross-border M&A trends for 2018. Topping the list is the growing global emphasis on national security concerns associated with foreign investments. This excerpt highlights key national security developments:
– There is an increasing range of industries and businesses with national security touch points that historically would not have raised any eyebrows, including in semiconductors, AI, virtual reality technology, robotics and large-scale data storage. Technological superiority is now commonly equated with national security.
– In October 2018, CFIUS (the Committee on Foreign Investment in the United States) launched a pilot program to require mandatory notification of certain non-controlling investments by foreign persons in U.S. businesses touching “critical technologies.” The pilot program is a material move away from what used to be a principally voluntary regime.
– In July, the U.K. government published a white paper on its proposal to allow the scrutiny of foreign investments in any sector of the economy upon a “reasonable suspicion” of a national security threat. Examples include review of investments that may potentially lower R&D or that involve access to personal records. The U.K. government estimates that if this proposal, which looks very similar to the CFIUS construct, is adopted, it will lead to a material increase in notifiable transactions.
Other trends highlighted include the growing impact of trade relations on individual deals, the rise in failed deals due to the increased politicization of the deal process, the increasing prominence of “mega-deals,” & increasing competition for high-quality assets.
You know how one of the big trends in M&A litigation in recent years has been its migration from state to federal courts? This Woodruff Sawyer blog says that there’s some traffic heading in the other direction – at least when it comes to stock deals. Apparently, several plaintiffs have recently brought claims under Section 11 of the Securities Act in state courts against buyers in stock-for-stock mergers.
Bringing ’33 Act claims in state courts has become a bit of a cottage industry in recent years, and that industry got a boost from the Supreme Court’s Cyan decision, which upheld state court jurisdiction over ’33 Act claims. Those claims have typically arisen in connection with IPOs, but this excerpt says several state court Section 11 actions have been filed in connection with M&A deals:
Until now, we’ve considered Section 11 cases filed in state court to be mostly a problem for IPO companies. That’s because IPO companies don’t typically have a lot of shares trading other than the shares issued pursuant to the registration statement. For that reason, it’s not hard for plaintiffs to be able to trace back IPO company shares (including shares issued in a follow-on offering pursuant to a registration statement shortly after the IPO) to a registration statement. However, it’s much harder to do that for the more mature public companies since there are a lot of shares in the float, making the tracing requirement to a particular registration statement much harder to meet.
But we’ve now seen in the data Section 11 suits brought by plaintiffs in state court against three different mature public companies:
– Micro Focus International. Ribeiro v. Micro Focus International. (County of San Mateo, Calif.; filed March, 28, 2018.)
– Dentsply Sirona, Inc. (formerly Dentsply International, Inc.). Castronovo v. Dentsply Siorna, Inc. et al (County of New York; filed June 7, 2018.)
– Colony Capital, Inc. Two suits in two separate states. Bumgardner v. Colony Capital (County of Los Angeles; filed July 5, 2018) and Houser v. CenturyLink, Inc. (County of Boulder, Colo.; filed June 12, 2018.)
The reason is mergers and acquisitions. In each case, the buyer used its stock as currency and issued shares to the seller shareholders pursuant to a registration statement. Then the stock price declined below the registration statement price.
As the excerpt notes, one of the traditional problems plaintiffs in a Section 11 case have had to overcome is the need to trace their shares to a particular registration statement. But cases in which the buyer’s stock drops shortly after a merger involving the issuance of registered shares make it easier for the target’s shareholders to satisfy this requirement.
Companies finding themselves (and their directors) as defendants in state court ’33 Act cases face some real disadvantages in comparison to federal court defendants. The blog points out that the pleading standards are often lower and there’s no automatic stay pending a dismissal motion as there is in federal court actions subject to the PSLRA. While the impact on M&A litigation remains to be seen, these disadvantages have led to higher settlement payments in state court IPO cases.
This PwC memo addresses a number of topics surrounding M&A cybersecurity due diligence. One segment discusses some specific mechanisms that may be employed to reduce the buyer’s risk in this area. This excerpt addresses the use of a transition services agreement for cyber-risk mitigation:
Further protection for acquirers can come through transition services agreements (TSAs). TSAs are common in deals, but they only recently have started covering cybersecurity issues. Through a TSA, an acquirer and target can negotiate how the target will manage cybersecurity during the transition and the conditions under which the responsibility will shift to the acquirer. The latter can be crucial if due diligence has revealed any significant cyber issues that could decrease deal value.
The memo also highlights the importance of mining other intelligence beyond that available through a due diligence request in order to assess cyber-risk. In particular, it suggests reaching out to information sharing organizations:
Broader intelligence on cyber issues is available through information sharing and analysis centers and organizations (ISACs and ISAOs). These groups allow companies to share with each other information on digital threats and ways to combat them. ISACs originally were created in a few industries, most notably financial services and aerospace and defense. ISAOs build on the concept by spanning sectors to share expertise and experiences among broader communities of interest.
Tune in tomorrow for the webcast – “GDPR’s Impact on M&A” – to hear Davis Polk’s Avi Gesser and Daniel Foerster discuss the implications of the EU’s General Data Protection Regulation for M&A transactions. Please print out these “Course Materials” in advance…
This Bass Berry blog reviews some of the complexities associated with using public company stock as an acquisition currency in a private company acquisition. This excerpt deals with the maze that buyers have to navigate if they want to issue registered shares in the deal:
– A pubco issuer considering the possibility of filing a new registration statement in connection with an acquisition must consider not only the expense and timeline associated with filing a registration statement, but must also consider whether the filing of a new registration statement will trigger the requirement to file financial information regarding such pubco issuer which would not otherwise be required in the absence of such a filing.
– If a pubco issuer wishes to register the issuance of stock in connection with an acquisition, this issuance must be registered on a Form S-4 (or Form S-1). In this regard, a Form S-4 is not automatically effective on filing (unlike a Form S-3 for WKSIs). For a company that regularly issues stock in acquisition, an S-4 registration statement may, however, effectively function as an “acquisition shelf,” in that it can be used to register securities for future issuance in connection with acquisitions on a delayed basis.
– Companies may also register the resale of stock issued to targetco equity holders in an acquisition on Form S-3. For example, this may occur if the acquisition agreement requires the parties to enter into a registration rights agreement in favor of the targetco equity holders. In this scenario, the stock must be issued in a valid private placement; however, registering the resale of stock allows the stock to be resold by non-affiliates without being subject to the Rule 144 holding period noted above.
The blog also touches on a number of other legal issues, including disclosure considerations, factors that may make a private placement more or less viable, reverse due diligence issues, and the structure of the acquisition agreement.
There’s a staggering amount of money sitting in family offices, and private equity funds see those investors as an attractive source of funding. But in an increasingly competitive fundraising market, how can PE funds best position themselves to access family office capital?
According to this Nixon Peabody blog, tapping into family office capital depends on preferred access & effective communications. Here’s an excerpt:
Preferable means of access include specialized forums and working through professionals, such as high-end lawyers and accountants and retained intermediaries. However, there is room for significant growth when it comes to inroads to family offices. Research suggests that family offices are struggling to identify and motivate professionals to provide vetted introductions. The private equity funds that are taking the initiative to sensitively market to these potential investors, such as by leveraging thought leadership content, are reaping the benefits of their efforts. Firms need to give careful and creative thought as to their avenues to this attractive source of capital.
Once a private equity fund gets the introduction, however, it must be attentive to how best to communicate the value of the investment to the family office. The pitch that has been compelling to countless other investors may well be lost on the family office. The conversation must be geared to this specific audience in order to maximize the success of the messaging. Therefore, understanding how family offices think of value is critical to tailoring this presentation. Critically, traditional thinking may not make the grade.
What that last sentence means is that many family offices don’t think about their portfolios in traditional ways. Family offices that are making direct investments often have longer time horizons & seek greater returns than typical private equity funds. Bearing this information in mind may help a private equity fundraiser to have the conversation around investment in a manner that is responsive to the way that a family office investor sees value.
This Schulte Roth study reports the results of a survey of activist investors about their experience with shareholder activism & their expectations for activity over the next 12 months. Here are some of the key findings:
– 33% of activists believe that activism is becoming crowded in the U.S. and targets are becoming increasingly hard to find.
– The median number of campaigns that respondents expect to launch in the next 12 months is 3.
– 75% of respondents expect the assets allocated to activist strategies to increase”significantly” (25%) or “somewhat” (50%) over the next 12 months.
– 72% of respondents expect to raise “some” or “a lot” of new capital over the next 12 months.
– 80% of respondents disagree (72%) or strongly disagree (8%) that increased engagement by institutional investors with portfolio companies will decrease the role of activist investors.
– The U.S. remains the most popular market for activism, with 85% of respondents seeing some (51%) or a lot (34%) of opportunity for shareholder activism over the next 12 months
The survey says that activists see the greatest opportunity over the next 12 months at the lower end of the corporate food chain, with respondents identifying micro, small & mid-cap companies as the most promising targets for activism. Interestingly, the respondents also say that key stakeholders – including institutional investors, boards, management and retail investors – have become more accepting of shareholder activism over the past 12 months.