Last week, Chancellor Bouchard issued a letter ruling in CBS v. National Amusements, (Del. Ch.; 5/18), denying CBS’ efforts to enjoin the Redstone family, its controlling shareholder, from interfering with the board’s consideration of a dividend that would deprive them of voting control over the Company. This Morris James blog summarizes the Chancellor’s ruling. Here’s an excerpt:
In this letter decision, the Court declined to restrain the Redstones at this time. While plaintiffs had shown a colorable claim for breach of fiduciary duty, they failed to show threatened, imminent irreparable injury absent the restraints. Rather, the Court relied on its extensive power to provide redress if the Redstones ultimately decided to take some action inconsistent with a controlling stockholder’s fiduciary obligations with respect to the dividend plan. Also notable is the Court’s balancing of the equities and its discussion of the apparent tension in Delaware law between a controlling stockholder’s right to protect its control position and the right of independent directors to respond to the threats posed by a controller, including through possible dilution.
If you’re looking for a deep dive on the case, check out this blog from Prof. Ann Lipton.
As part of the brawl over the now-abandoned Xerox/Fuji deal, a New York Court enjoined Xerox from using its advance notice bylaw deadline to thwart shareholder Dawin Deason’s efforts to run a competing slate of directors at the company’s annual meeting. Now this Kirkland & Ellis memo says that the Court’s decision may have significant implications for other companies dealing with activist campaigns. Here’s what they’re concerned about:
Relying on a 1991 Delaware Chancery Court decision, the New York court ordered Xerox to waive the advance notice deadline on the basis that a waiver is appropriate “when there is a material change in circumstances” after the nomination window closes. The court concluded that the board’s refusal to waive the nomination deadline “was without justification,” and that the directors “likely breached their fiduciary duty of loyalty” in doing so.
This decision requires attention from boards and transaction planners. Opportunistic activist shareholders or even hostile bidders may start searching for events after a company’s nomination deadline that could be argued to be material as a means to force a re-opening of the nomination window. While the decision in this case was undoubtedly colored by the court’s broader decision relating to the Fuji transaction itself (it also issued a highly unusual preliminary injunction blocking the deal) and the Delaware case that the New York court cited has always been understood to involve extremely narrow situations, companies should consider the intersection of timelines for nomination deadlines, annual meeting dates and significant corporate announcements.
The cased relied upon in the New York decision is Hubbard v. Hollywood Park Realty Enterprises (Del. Ch.; 1/91). However, as the memo notes, the ability to use a change in circumstances to pry open a nomination deadline that had passed was intended to apply in very limited situations. In that regard, Broc blogged a few years ago about a more recent Delaware decision holding that only a “radical shift in position, caused by the directors,” will allow the nomination deadline to be disregarded.
Most companies have the need for an HSR filing on their checklist whenever they have a sizeable M&A transaction on the horizon. But the FTC recently posted guidance on its blog reminding companies that conventional purchase transactions aren’t the only ones that may give rise to an HSR reporting obligation. This excerpt provides some examples of other transactions that may trigger a filing:
Exchange of one type of interest in a company for another – Acquisition of some kinds of interests in companies are reportable, while others are not. If you exchange one type of interest for another, that acquisition may be subject to HSR reporting and waiting requirements even though you’re exchanging one interest for another in the same company. For example, in 2013 Berkshire Hathaway exchanged convertible notes of USG Corporation for voting securities of USG Corporation. Even though both interests were in the same company, the conversion required an HSR filing. But Berkshire Hathaway’s compliance program missed it, and Berkshire Hathaway paid a civil penalty for the violation.
Backside acquisitions – When one corporation buys another, consideration often comes in the form of voting securities of the buyer. For example, Corporation A may buy Corporation B for cash and a certain number of shares in Corporation A. The payment of Company A shares to the target’s shareholders is known as a “backside transaction.” If you hold shares of company B and will end up holding shares of A as part of a backside transaction, you may have to file and observe the waiting period before acquiring these new shares.
Consolidations and acquisition of shares in Newco – In a Consolidation, when Corporation A and Corporation B combine under a Newco that will be its own ultimate parent entity, the shareholders of A and B may receive voting securities of Newco in exchange for their shares in A or B. Similar to backside transactions, if you are going to receive shares of Newco, you may have to file for the acquisition even though no money changed hands and you took no direct action to cause the acquisition or to exchange the shares.
The blog also notes that internal reorganization transactions and compensation awards may trigger HSR filings, and reminds companies to take these situations into account in designing their compliance programs.
Shareholder activism in the U.S. & Europe has been a growth industry for at least a decade – and this Bloomberg article says that in recent years, companies in Asia have attracted increasing attention from activists as well. This excerpt says that Asian companies should be on high alert:
Activists, both homegrown and American, are coming after bloated balance sheets and family-controlled firms, and succeeding more often than hitherto in forcing through higher dividends and board changes.
Whether it’s because the Japanese and South Korean governments want their companies to respect minority investors’ interests, or because the activists themselves have adopted a less abrasive style, Asia is a hunting ground like never before. Last year, 31 percent of total involvement by activists outside the U.S. was in the region, up from just 12 percent in 2011, according to a report by JPMorgan Chase & Co.
In addition to big U.S. names like Elliott Management & Third Point, Asia-based activists such as Japan’s Sparx Group Co. & Hong Kong’s Oasis Management Co. and PAG Asia Capital have gotten into the game in a big way. According to this recent J.P. Morgan report, activist campaigns in Asia accounted for 31% of total non–U.S. activism activity in 2017 – that’s up from only 11% in 2011. Campaign volume has grown at a compound annual growth rate of 48%, & in 2017, 4 of the 10 most targeted non–U.S. countries were in Asia.
Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Cleary Gottlieb’s Glenn McGrory, Sullivan & Cromwell’s Melissa Sawyer and Haynes and Boone’s Kristina Trauger share M&A “war stories” designed to both educate and entertain. The stories include:
1. Let It Go – how sometimes when you can’t seem to repair a deal after a lot of effort, maybe helping the client be disciplined and walk away actually is the right outcome
2. Déjà Vu, All Over Again – the central truth about the high-yield debt market: companies often plan to merely dip their toes in the debt market only to find, over time, that they have plunged deeper than expected
3. Knowing What the Other Side Doesn’t Know – how a seller figured out what an inexperienced buyer didn’t understand about financing and how it almost killed but ultimately saved the deal.
4. Just the Facts – how sometimes issues that seem like major obstacles in a deal can be resolved dispassionately just by taking a deeper dive into the facts and narrowing the field of the unknown
5. End Goal in Mind – for any type of deal, keep in mind the client’s ultimate objective
6. When Timing Matters, So Does Trust– how last minute issues can scupper deal announcements – and how trust between deal teams can facilitate quick solutions to allow the deals to proceed
7. Dealmakers are Architects in Four Dimensions – how solutions to complex issues in deals require non-linear, creative thinking under pressure
8. Expect the Unexpected – it’s common for clients to imagine a transaction playing out in a certain manner, only to have market conditions steer them in a new direction. So it’s vital for deal lawyers to stay nimble and be ready to quickly pivot, as needed
9. They’ll Never Be the Winner – the hazards of trying to figure out (and plan for) who you think will win an auction, only to have an unexpected contender (and its own particular issues) prevail
10. The Secret’s Not Out– the extreme measures parties take to protect the confidentiality of secret formulae in consumer product transactions
This recent Prof. Bainbridge blog points out a new article that asks an intriguing question – “Is Satan a Transactions Attorney?” The article reviews Old Nick’s deal making activities as recounted throughout Western literature. This excerpt claims that he got his start in the deal business tempting Christ in the desert:
Christ’s temptation in the desert is a turning point in the way Satan deals with human beings. In the cases of Saint Theophilus of Adana, Doctor Faustus, and their scions, the individual is no longer Satan’s victim, but party to a contract with him and complicit with the evil he oversees. Indeed, the medieval and early-modern drive to purge European society of witchcraft is but a perverse recognition of the complicity of individuals with evil. No longer a tormenter exclusively, Satan has become a negotiator, a former of contracts, a transactions attorney.
So, is the Devil a deal lawyer? If he was, it probably wouldn’t be a huge surprise. I think most lawyers would agree that they’ve worked on more than a few deals with somebody who reminded them of The Prince of Darkness.
I’m not sure I agree with a New Testament start date for Lucifer’s career as a dealmaker – although my guess is that he started off in the Old Testament as an investment banker. After all, doesn’t telling Eve that if she & Adam eat of the fruit of the tree, “ye shall be as gods,” sounds very similar to the kind of stuff you hear in bankers’ pitches?
This recent Cooley blog offers tips for addressing employment law issues when navigating acquisitions involving European buyers or sellers. This excerpt deals with issues surrounding reductions in force:
If a reduction in force is being contemplated in the EU (where it will often be referred to as “redundancy”), then that will trigger discrete information and consultation requirements. For example, redundancies in Germany require compelling operational reasons and the application of social selection criteria to potentially at-risk employees. If there is a works council in place, then that can potentially make the process slow and difficult.
Also, redundancy consultation processes in the EU often increase in scope and complexity as the number of employees at risk of redundancy increases. For example, if there is a proposal to dismiss as redundant 20 or more employees in the UK, then that will trigger collective redundancy consultation requirements including the election of employee representatives and a consultation period lasting at least 30 days before any dismissals can take place. It is not always possible to avoid redundancy consultation requirements by simply buying-out the risk (i.e., paying employees in lieu of a period of consultation), so preparation and timing is key.
Other topics addressed include the rights of employee representative organizations, implications of the EU’s Acquired Rights Directive for different transaction structures, employment contracts & protections against termination.
While many surveys report a burgeoning market for private equity-driven M&A, this recent article by Prof. John Colley of Warwick University’s Business School says that its best days may be in the rear-view mirror. Here’s an excerpt:
The longevity of the private equity industry brings its own problems. Attractive opportunities have declined as many businesses have already been through PE at some stage. The potential benefits from a secondary PE owner are bound to be less.
Such companies will already have been subject to financial engineering with assets fully leveraged, and costs honed to the point of limiting future growth. Multinationals disposing of business categorised as no longer core have become more aware of the true value in the market. In short, targets are no longer selling at bargain values which characterised many previous disposals.
The article contends that as the market continues to become tougher, we should expect more bankruptcies among portfolio companies as PE firms are forced into riskier bets. In turn, banks will increase the risk premium on borrowings to PE portfolio companies, and will reduce lending to those borrowers – which will squeeze PE returns before it slows activity in the industry.
This SRS Acquiom study reviews the financial & other terms of 925 private target deals that closed during the period from 2014 through 2017. Here are some of the key findings about trends in last year’s deal terms:
– Earnouts in non-life sciences deals in 2017 increased significantly to 23%, while the size (relative to the closing payment) and length of earnouts decreased. Several key earnout terms (buyer covenants, accelerations, and offsets), trended in a seller-favorable direction.
– Termination Fees made a comeback in 2017, with the frequency of use of termination fees at least doubling in all categories. Seller termination fees increased from 7% in 2016 deals to 14% in 2017, Buyer termination fees went from 2% in 2016 to 5% in 2017, and two-way fees made up 2% of all deals in 2017.
– The median general survival period for representations and warranties dropped slightly again to 15 months, compared to 18 months in recent years. The median general escrow size remained steady at 10% of transaction value when deals with Buy-side RWI are excluded. Once again, deals valued at $50 million or less tend to have larger escrows as a percentage of transaction value.
– Fundamental representations survive for a defined period in 88% of 2017 deals, up from only 71% prior to the Cigna v. Audax decision. Similarly, the number of deals where claw-backs are limited to less than the entire purchase price has modestly increased.
– Use of deductible baskets increased significantly to 52% of 2017 deals, from 31% in 2015. Basket sizes are most frequently less than or equal to 1% of total transaction value.
– Pro-sandbagging clauses in agreements dipped to 48% of 2017 deals, the lowest in recent years; anti-sandbagging clauses rebounded to 4% of 2017 deals.
– Use of a Material Adverse Effect standard for the accuracy of seller’s representations and warranties at closing remained high at 41% in 2017 deals, compared with 43% in 2016 deals and only 31% of 2015 deals.
This Weil blog discusses notice provisions applicable to potentially indemnification claims under the terms of acquisition agreements. The blog points out that the exact language of indemnity provisions must be reviewed in order to determine the permissibility of “placeholder claims” seeking to preserve the ability to claim indemnity for potential breaches & losses that haven’t yet been realized.
However, this except says that recent case law in Delaware & the U.K. raises another important issue – the language of the notice provision:
Recent cases in both the United States and England highlight still another issue that plagues the assertion of post-closing indemnification claims—the exact words used in the written notice asserting a claim and its compliance with the specific terms of the acquisition agreement.
Frequently, a written notice of claim provided prior to the end of the survival period is specifically required to state the claim in “reasonable detail,” include an estimate of the loss, and specify the specific representations and warranties of the seller that have allegedly been, or will be, breached as a result. And those requirements typically exist whether indemnification extends only to alleged “actual” breaches of the representations and warranties that have already occurred, covers threatened third party claims or only actual litigation, requires defense of claims that do not themselves constitute an actual breach of a representation or warranty, or otherwise permits claims respecting anticipated but not yet realized breaches or losses.
The blog explores recent decisions by the English Court of Appeal & the Delaware Chancery Court – and concludes that it’s essential not only to craft the terms of their written acquisition agreements respecting their desired indemnification procedures carefully, but also to read and abide by those terms in making indemnification claims & asserting objections to those claims.
This Francis Pileggi blog highlights a very recent Delaware decision that further underscores the importance of abiding by contractual notice provisions. In PR Acquisitions, LLC v. Midland Funding LLC, (Del. Ch.; 4/18), the court barred a claim made for escrowed funds because notice was mistakenly sent to the escrow agent, instead of the seller as required by the agreement.