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.
This Pepper Hamilton memo discusses the Delaware Chancery Court’s recent decision in Basho Technologies v. Georgetown Basho Investors, (Del. Ch.; 7/18) and says that venture capital funds holding minority stakes may find themselves characterized as “controlling shareholders” owing fiduciary duties. Here’s an excerpt with some of the key factors that may lead to such a conclusion:
Determining whether a VC firm exercises actual control over the corporation is a fact-specific inquiry involving the analysis of multiple factors, including the percentage of stock the VC firm owns; how many directors the VC firm designates; the VC firm’s ability to wield negative controls or other contractual rights; the degree of control the VC firm has over directors, managers or advisers; the VC firm’s other commercial relationships with the corporation, such as lending relationships; and other factors that tend to increase the VC firm’s ability to influence corporate decisions.
Although potentially significant to the control inquiry in certain cases, particularly when the corporation is cash-starved, the exercise of consent rights is not determinative and, in some cases, may be deemed insignificant.
Finally, the ultimate takeaway from the Basho opinion is that, if a VC firm exercises control over the corporation to secure benefits for itself at the expense of the corporation and its other stockholders, the VC firm is at risk of being deemed to be a controller and to have breached the fiduciary duties that arise as a result of that controller status.
The VC firm’s contractual right to block alternative financing played a key role in the Court’s decision in this case. However, as the memo notes, the existence of strong contractual rights does not inevitably lead to a minority shareholder being considered a controller.
In that regard, in Superior Vision Services v. ReliaStar, (Del. Ch.; 8/06), the Chancery Court declined to find that a minority shareholder’s exercise of a contractual right to block a dividend made it a controlling shareholder, noting that the shareholder did not control the Board’s decision making process concerning the declaration of a dividend. The Court said that to hold otherwise would result in “any strong contractual right, duly obtained by a significant shareholder…, [being] limited by and subject to fiduciary duty concerns.”
Tune in tomorrow for the webcast – “Blockchain in M&A” – to hear Potter Anderson’s Chris Kelly, Matt O’Toole and Mike Reilly discuss the implications of blockchain technology for M&A transactions – as well as what it may mean for busted deals & the inevitable litigation that follows. Please print these “Course Materials” in advance.
This September-October issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on:
– #MeToo Clauses Being Added to Merger Agreements
– Shareholder Activism: Evolving Tactics
– Delaware Emphasizes Duty to Make Proper Disclosures to Stockholders
– Delaware Provides Insight on Minority Shareholders as Controllers
– Indemnification: Because We Have to Fight About Something
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Last month, in Fortis Advisors LLC v. Stora Enso Ab, (Del. Ch.; 8/18), Vice Chancellor Slights declined to dismiss a breach of contract claim arising out of a buyer’s failure to make contractual milestone payments relating to the construction of two plants & the production of certain materials. Here’s an excerpt from this Shearman & Sterling blog summarizing the decision:
Plaintiff asserted that defendant breached certain of its representations in, and failed to satisfy certain requirements of, the merger agreement, both of which were intended to increase the likelihood the milestones would be achieved. Plaintiff alleged that a representation in the merger agreement by defendant that the latter had “taken all corporate action necessary . . . to perform its obligations” under the merger agreement required defendant to have received pre-closing authorization to order, in a timely manner following closing, a piece of equipment alleged to be the “centerpiece” of achieving one of the milestones.
Defendant argued, however, that the representation was nothing more than “a standard corporate authorization provision that simply acknowledged [its] legal authority to enter into and consummate the [m]erger” and not a representation that it had obtained all internal approvals required to take all post-closing steps necessary to build the plants contemplated by the milestones.
Plaintiff also alleged that defendant breached a provision of the agreement obligating business to be conducted in accordance with a “financial and human resource plan” that included a timeline for a required number of employees and expenditures in connection with the milestone process. But defendant countered that the timeframes were guidelines and plaintiff’s construction would nullify the contingency of the milestone payments.
The Vice Chancellor concluded that both sides’ interpretations were reasonable, and so declined to dismiss the complaint. Look, I know a case holding that earnout milestone language is ambiguous is “dog bites man” stuff – so just consider this blog another addition to the “But the earnout seemed like such a good idea at the time!” file.
Since we’re adding things to that file – be sure to check out this Fried Frank memo, which reviews two other recent Delaware cases dealing with the pitfalls of earnouts.
This Norton Rose Fulbright blog says that Canadian dealmakers are crazy for “The Chronic.” Here’s the intro:
The Canadian market has seen a surge in M&A activity since 2017 and it looks as though 2018 will follow suit. According to a PwC Canada 2018 M&A mid-year review, in the first half of 2018 alone, Canada hit CAD$93 billion in M&A activity and outbound deals increased by 8% as compared to the first half of 2017, largely due to a surge in cannabis sector deals. While we have noted this increase previously, recent legislative changes regarding cannabis warrant another look to determine the robustness of this trend. For example, in health-care, overall deal value and deal volume have increased by 233% and 48%, respectively, which is significant given that cannabis falls into this category.
Earlier this summer, Canada enacted legislation legalizing the recreational use of marijuana throughout the nation. The blog says that this action, coupled with Ontario’s subsequent decision to privatize retail channels for sales of the drug, are the likely drivers of the boom.
It’s worth noting that US investors have their own case of reefer madness – British Columbia based cannabis producer Tilray has been this year’s best performing IPO. Yesterday, it closed at $95.79 per share, more than 500% over its $17 July IPO price.