DealLawyers.com Blog

Tune in tomorrow for the webcast – “This Is It! M&A Nuggets” – to hear Hogan Lovells’ Rick Climan, Arnold & Porter’s Joel Greenberg, McDermott Will’s Wilson Chu and Sullivan & Cromwell’s Rita O’Neill impart a whole lot of practical guidance!

– John Jenkins

Here’s an interesting article from investor relations firm ICR that says the outcome of a proxy contest with an activist may turn on a company’s total shareholder return:

The evaluation frameworks used by both ISS and Glass Lewis address multiple dimensions including, but not limited to, a company’s operations, capital allocation, corporate governance, executive compensation and Total Shareholder Return in relation to both its peers and its relevant indices. Of those factors, our analyses reveal that TSR may be the most significant variable in determining the proxy advisors’ vote recommendations.

Since 2013, in 91.4% of contested elections the dissident shareholder has cited poor shareholder return as a reason for change at the board level. Over the same period, ISS has issued a vote recommendation for a dissident slate when the company has outperformed its ISS defined peer group on a backward looking 3-year and 5-year basis less than 3% of the time.

ISS has consistently recommended a partial or full dissident slate when a company has significantly underperformed its ISS defined index and ISS defined peer group. Based on the median values, when ISS has recommended a partial or full dissident slate, the company has dramatically underperformed its ISS defined peers and ISS defined index.

Of course, once you’ve got an activist campaign on your hands, it’s too late to start worrying about your TSR performance. For that reason, the article recommends that boards and management monitor TSR performance and understand how to manage its components as part of their overall framework for assessing the company’s vulnerability to activism.

– John Jenkins

This Norton Rose Fulbright blog discusses gender diversity among M&A professionals. It notes a 2011 Reuters article that characterized M&A as continuing to be “overwhelmingly a man’s game.” The blog says there’s been only limited movement toward greater gender diversity since then, but offers some reason for optimism about closing M&A’s gender gap. Here’s an excerpt:

The distinct characteristics of female players in the M&A domain are being recognized and celebrated. Collaboration, creativity, relationship-building and heightened emotional and social intelligence, are just a few attributes that set women apart at the negotiating table. In her interview with Mergermarket, Jennifer Muller, Managing Partner of Houlihan Lokey, discusses studies that have shown that “diversity improves performance because it makes people a bit uncomfortable which forces everyone to be on their game and perform their best.” A report by the Harvard Business Review emphasizes that companies with a higher number of women on their boards made fewer bids and paid less for acquisitions.

While the industry is still a long way from gender parity, the narrative about women in M&A is different now. Women are heading up M&A groups in the biggest investment banks in the world. Clients and investors are recognizing the value of diversity in viewpoints to solve problems and showcasing stories highlighting women who are attaining successes in the M&A field act as testimonials for females in the industry.

– John Jenkins

Many companies assume that, because of Exchange Act  Rule 14c-2, they’ll at least have 20 days before any shareholder written consent action becomes effective.  This Cleary Gottlieb blog says that this is likely a mistaken assumption – at least insofar as it relates to actions taken unilaterally, without corporate involvement.

During the course of the dispute between CBS & National Amusements Inc. (NAI), its majority shareholder, NAI adopted a bylaw amendment designed to thwart proposed board action involving the issuance of a dilutive dividend.  CBS filed a preliminary information statement with the SEC that stated that under Rule 14c-2, the new bylaw wouldn’t become effective until 20 calendar days after the information statement was sent to shareholders.

This excerpt lays out what transpired during the Staff’s review of the filing:

NAI argued in a letter to the SEC staff that Rule 14c-2 was inapplicable to the Bylaw Amendments and that, even if it were applicable, it would not delay the effectiveness of the Bylaw Amendments because Section 14(c) of the 1934 Act and Rule 14c-2 do not preempt Section 228 of the Delaware General Corporation Law (“DGCL”).

The SEC staff, in its initial comment letter to CBS regarding the preliminary proxy statement asked for the basis of the statement in the preliminary information statement that the Bylaw Amendments could not become effective under SEC rules until 20 calendar days after distribution of the information statement to stockholders. The staff also requested CBS’s analysis as to whether and how Section 14(c) and Rule 14c-2 preempt Delaware law with respect to the effectiveness of the Bylaw Amendments. Following receipt of CBS’s response, the staff stated in a subsequent comment letter that they had no further comments but they concluded that “we are unable to agree with the legal conclusions” set forth in CBS’s response.

The blog discusses the possible reasons for the Staff’s position – which include the plain language of the rule itself, prior no-action positions, and policy & state law considerations.

– John Jenkins

In a recent speech, DOJ Antitrust Division chief Makan Delrahim outlined the DOJ’s plan to “modernize” the merger review process.  Picking up the pace of the review process is a big part of those modernization plans, with Delrahim pledging that – assuming parties “expeditiously cooperate and comply” during the process – the DOJ will aim to resolve most investigations within six months of filing.

That’s good news – but as this Wachtell Lipton memo points out, the FTC hasn’t signed on to the DOJ’s pledge:

This new framework notably would not apply to mergers reviewed by the FTC, which shares authority to investigate mergers with the Antitrust Division. Last month the FTC adopted a Model Timing Agreement that requires parties to agree not to close their transaction for 60 to 90 days following substantial compliance with a Second Request, and also contemplates extensive investigational hearings and other procedural requirements that could result in additional delay and expense for the parties.

The memo also notes that a senior FTC official recently issued guidance to the effect that “expedited review is the exception, not the norm” – particularly when it comes to approval of proposed remedies.

– John Jenkins

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 in In 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.

– John Jenkins

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.

What’s Zach do? He’s a professional wrestler! This Minn./St. Paul Business Journal article explains:

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!

– John Jenkins

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.

– John Jenkins

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.

– John Jenkins

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.

– John Jenkins