This DLA Piper memo says that the long-awaited CFIUS reform bill has been finalized & will be voted on this week. Here’s the intro:
Congress has released the final version of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) – a bill to modernize and strengthen the Committee on Foreign Investment in the United States (CFIUS) to more effectively guard against the risk to US national security posed by certain types of foreign investments. FIRRMA is incorporated into the must-pass National Defense Authorization Act for FY19, which Congress expects to pass this week.
The House and Senate passed parallel versions of the bill in June and recently completed conference negotiations to resolve various differences between the two bills. House and Senate negotiators have agreed on new provisions that would broaden the jurisdiction of CFIUS in order to address national security concerns associated with foreign investment in US critical technology and other types of foreign transactions.
Most notably, FIRRMA creates four new types of “covered transactions,” expands the definition of “critical technology” to include “emerging and foundational technologies,” imposes a deadline on the CFIUS response to written notices, extends the Committee’s timeframe for review, creates the option for (and in some cases mandates) a written declaration, imposes a CFIUS filing fee and establishes a process to identify non-notified transactions.
The memo provides a summary of the legislation, which President Trump is expected to sign within the next few weeks.
Earlier this month the Treasury & IRS issued final regulations dealing with “inversions” – the generic term for a domestic corporation’s adoption of a foreign-parented corporate structure – and certain post-inversion restructurings. The final regulations primarily follow the roadmap laid out in the temporary regulations issued in April 2016, with several changes & clarifications.
This 29-page KPMG memo provides a detailed review of the final regulations & highlights differences between the temporary & final regs. I’d include an excerpt – but I don’t understand enough of this to provide a coherent intro, and I can’t even fake it like I usually do!
In In re: Trulia, the Chancery Court adopted a more demanding standard for approving disclosure-only settlements in merger objection litigation. Under the new regime, supplemental disclosures had to be “plainly material” in order to support a broad release & fee award.
Shortly after the Trulia decision, a few other courts decided to toe Delaware’s line – most notably the 7th Circuit with its decision in the Walgreen case. But states have generally been slow to fall in line with Trulia, with a New York court notably rejecting its application in 2017. However, in recent months, a New York decision suggests that the Empire State may be warming to Trulia, & at least one California court has endorsed the doctrine.
Now this D&O Diary blog says you can add at least one Florida Appellate Court to the list of courts in major jurisdictions that have signed on to Trulia:
In a series of rulings that culminated in the January 2016 decision in the Trulia case, the Delaware courts evinced their hostility to the disclosure-only settlements that so often characterize the resolution of merger objection lawsuits. Since that time claimants have been filing the merger objection suits in courts outside Delaware. The question has been whether the other courts where the merger objection cases are now being filed would follow Delaware’s strict Trulia standard when reviewing disclosure-only settlements. In a ruling late last week, an intermediate appellate court in Florida expressly adopted Delaware’s Trulia standard. The Florida ruling does raise hopes that other courts might follow as well, which in turn could help stem the tide of proliferating merger objection litigation.
Does your company think ESG is for tree-huggers? You’d better recalibrate fast, because this recent FT article says activists are weaponizing it:
One activist investor, who declined to be named, says many activists know that using ESG will help round up wider support from pension funds and traditional asset managers, but also believe there is investor demand. “[ESG in activist investing] has increased in recent years, because a lot of investors are seeing that ESG funds are doing well and have had success in the market.”
Jana is in the process of setting up a specialist activist fund with an ESG focus, which is expected to launch later this year. It has added staff to help with its push into ESG, including Dan Hanson, a former manager of socially responsible funds at BlackRock, and Pulkit Agarwal, who previously worked at the International Finance Corporation in India, according to Reuters.
The article says that other big name activists – including Trian Partners, Blue Harbour, Red Mountain Capital & ValueAct, are also looking to capitalize on investor demand for ESG focused investments.
The latest edition of Cornerstone Research’s M&A Shareholder Litigation Study says that the move away from Delaware and toward federal courts as the preferred venue for M&A objection litigation continued in 2017. Here are some highlights:
– In 2017, the number of M&A deals litigated in federal court increased 20%, while state court filings declined. The 3rd Circuit was the most active federal court last year.
– The number of M&A deals litigated in Delaware declined 81% from 37 in 2016 to seven in 2017.
– A total of 112 M&A deals valued over $100 million had associated lawsuits in 2017 compared to 137 in 2016 (an 18% decline).
– Lawsuits were filed more slowly in 2016 and 2017 compared to pre-Trulia trends. In 2017, the first lawsuit was filed an average of 48 days after the deal announcement, compared to 40 days in 2016 and 21 days in 2015.
The study also notes that litigation rates have dropped markedly since Delaware’s Trulia decision made it more difficult to obtain judicial approval of broad, disclosure-only settlements. In 2013, 94% of M&A deals valued over $100 million were litigated. In contrast, shareholders filed lawsuits in 71% and 73% of comparably sized deals announced in 2016 and 2017, respectively.
Earlier this week, the SEC brought an enforcement action against a hedge fund sponsor for alleged violations of Section 13(d)’s beneficial ownership reporting provisions. Here’s an excerpt from this Steve Quinlivan blog describing the proceeding:
The hedge fund had a senior managing director and portfolio manager that became a candidate for a board seat on a public company and began acting as a de facto board member. On October 28, 2014, the portfolio manager and a financial analyst emailed a list of recommended changes to the public company’s lead outside director and Chief Executive Officer. The e-mail noted “operations are a mess” and that “[i]nvestors don’t have unlimited patience.”
On November 6, 2014, the public company, at the suggestion of the portfolio manager, formed a special sub-committee of the top three officers and the independent directors. Thereafter, the special sub-committee held regular discussions with management of the public company, including the consideration of proposals for cost cutting, capital allocation, oil well development, and changes to the tone at the top. The portfolio manager participated in these discussions even though he was not yet appointed to the public company board.
The hedge fund had reported its ownership interest in the company on a Schedule 13G, which allows certain large investors to report their position without complying with the more extensive disclosure obligations imposed under Schedule 13D. However, only those persons who qualify as “passive investors” are eligible to use Schedule 13G. Persons who may seek to exercise or influence control over the issuer can’t use 13G – and they have to promptly file a Schedule 13D once they’re no longer eligible for the short-form filing.
The hedge fund ultimately filed a 13D once its designee was elected to the Company’s board. The Division of Enforcement said that was too late – it alleged that the hedge fund’s actions prior to that time involved “substantial steps in furtherance of a plan, which was ultimately successful,” to place its designee on the board. Accordingly, it incurred an obligation to file a Schedule 13D in advance of the designee’s election. The parties consented to the entry of a cease & desist order and $260,000 in civil monetary penalties without admitting or denying the SEC’s allegations.
Much to the chagrin of activist targets, the SEC hasn’t brought a lot of Section 13(d) enforcement proceedings against activists, but as we blogged at the time, it did bring one last year against a group of activists for alleged disclosure shortcomings during the course of a campaign.
Last week, Reuters reported that the SEC has shelved its proposal to implement a “universal proxy”. Despite Reuters’ report, there’s been no official word from the SEC indicating that the proposal has assumed room temperature. If it is gone, we’re kind of sad to see it go. It’s not that we’re pro or con – it’s just that universal proxy’s been such fertile “blog-fodder” for us!
We’ve previously blogged about the potential impact on activism of an SEC decision to adopt – or not adopt – the proposal. We’ve also discussed Pershing Square’s unsuccessful efforts to persuade ADP to use a universal proxy card – and, more recently, SandRidge Energy’s decision to become the first company to use a universal proxy card in a proxy contest.
This recent blog from Cooley’s Cydney Posner provides some history on the universal proxy proposal. If the SEC’s proposal truly is on the shelf, it will be interesting to see if there’s a move toward more aggressive private ordering when it comes to the use of a universal ballot.
Tune in tomorrow for the webcast – “Retaining Key Employees in a Deal” – to hear Morgan Lewis’ Jeanie Cogill, Hunton Andrews Kurth’s Tony Eppert, & Proskauer’s Josh Miller discuss the latest developments on compensation strategies to retain key employees in M&A transactions.
– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Litigation challenging deals has long been a fact of life, but this recent blog from Kevin LaCroix says the cost of that litigation has soared in recent years:
As reported in a July 10, 2018 press release from Chubb, the average total cost associated with a settled merger-objection lawsuit increased 63% in the four year period between 2012 and 2016. The total cost includes attorneys’ fees and cash settlement amounts. In 2012, this figure was $2.8 million. By 2016, the figure had grown to $4.5 million. The average amount for the four year period from 2012 to 2016 was $3.6 million. Of these costs, only about 39% represented amounts going to shareholders. 61% of these amounts went to plaintiffs’ and defense attorneys in the form of fees and expenses.
For merger objection lawsuits that were dismissed rather than settled, the percentage increases over the four year period are even greater. In the four year period between 2012 and 2016, the average total cost increased 162%, from $880,000 in 2012 to $2.3 million in 2016. The average total cost associated with dismissed merger objection lawsuits during the period 2012 to 2016 was about $912,000.
Since the data ends in 2016, it doesn’t fully reflect the impact of recent Delaware decisions like Trulia & Corwin, which have led at least one prominent member of the Delaware plaintiffs’ bar to throw in the towel. But the net effect of Delaware’s actions hasn’t been to lower the volume of merger objection litigation – it’s just migrated to friendlier jurisdictions. Kevin notes that federal courts are becoming a particular favorite among the plaintiffs’ bar, with merger cases accounting for more than 40% of securities class action filings during 2018.