DealLawyers.com Blog

We’ve previously blogged about efforts to revive the de facto merger doctrine in Delaware in order to assert an appraisal claim in connection with Dr. Pepper’s merger with Keurig.  Earlier this month, in North Miami Beach General Employees Retirement Plan v. Dr. Pepper Snapple Group (Del. Ch.; 6/18), Chancellor Bouchard rejected those efforts.

The court distinguished the case from the LAMPERS v. Crawford decision highlighted in our prior blog. Although, like the dissenting shareholders in that case, the Dr. Pepper shareholders also received an extraordinary dividend, they did not relinquish their shares in the transaction. Here’s an excerpt from this Hunton Andrews Kurth memo summarizing the Chancellor’s reasoning:

The Court of Chancery rejected the plaintiffs’ argument that Dr Pepper’s stockholders were entitled to appraisal rights in connection with the transaction. First, the court said that under the Delaware General Corporation Law, appraisal rights are only available to a “constituent corporation” in the merger, which means a party being merged (whether the survivor or non-survivor).

Because Dr Pepper used a reverse triangular merger structure, its merger subsidiary was the “constituent corporation.” Second, the court held that even if Dr Pepper had been a “constituent corporation” to the merger, appraisal rights were still unavailable because Dr Pepper’s stockholders did not relinquish their shares in the transaction.

The memo notes that the decision provides increased certainty to transaction planners regarding how Delaware courts will assess transactions under the relevant merger and appraisal statutes.

– John Jenkins

If you’ve negotiated contractual drag-along rights with minority shareholders, there’s no reason to worry about the Delaware appraisal statute, right? This recent blog from Steve Hecht & Rich Bodnar says, “not so fast.” Here’s an excerpt:

Venture-backed companies should not assume an implied waiver of minority appraisal rights in a merger that utilizes a voting agreement’s drag-along rights if procedural requirements are not followed. When a waiver of appraisal rights has procedural requirements, they need to be followed or eliminated via an amendment. Alternatively, the drag-along can require minority stockholders to explicitly approve the sale, instead of having the sale be de facto valid without their signatures given the drag-along.

The blog notes that this VentureCaseLaw blog provides a detailed discussion of Delaware case law addressing the procedural issues surrounding the interplay between the appraisal statute & drag-along rights.

– John Jenkins 

We have posted the transcript for our recent webcast: “M&A Stories: Practical Guidance (Enjoyably Digested).”

– John Jenkins

In recent years, family offices have increasingly become active direct participants in the market for M&A deals. This Nixon Peabody blog discusses a unique feature of “family offices” that can sometimes give them a leg up on private equity funds – the more long-term nature of the capital they provide.  Here’s an excerpt:

Traditional sponsors typically have a four- to seven-year holding period that’s driven by the need to deliver a return within that timeframe to their limited partners. However, family offices are able to invest with substantially longer holding periods because their capital does not face the same kind of expiration date, and their investment goals stretch well beyond the next four to seven years.

Often, sellers will have concerns regarding the long-term legacy of the business, retention of the employees and “slash and burn” approach of compromising long-term growth for short-term gains – even when they don’t have a vested interest in the business after the transaction. It is in these types of situations that “patient capital” can play a key role in alleviating these types of concerns.

The blog says that this is especially true in smaller deals, where the sellers frequently are founders or multi-generation family owners As a result of their personal relationship to the business, these sellers often ascribe a greater value to the “intangibles” involved in a transaction.

– John Jenkins

Our “Women’s 100” events are governed by the ‘Chatham House’ rule – but Aneliya Crawford of Schulte Roth gave me permission to share this nugget with you. During one of these events, Aneliya was interviewed on the topic of dealing with activists. She represents many of them – and she was asked about why so few women serve as director nominees for activists during a proxy fight.

Aneliya responded that she’s studied this question in depth – and has concluded that the answer isn’t that activists don’t want nor seek women. Rather, the qualified women that they approach only want to serve on the board if the proxy fight settles. In general, they otherwise don’t want to be on a dissident slate and have their name slung through the mud. I don’t blame them. I wouldn’t want that either…

– Broc Romanek

Last week, I blogged about the first US-incorporated company to use a universal proxy card – and as an aside, I mused about whether this was a strategy by Sandridge Energy. A member responded with these thoughts:

I suppose a key element of the strategy could involve the grant of discretionary authority to the proxies appointed on the universal card. Specifically, even shareholders wishing to support (partially or fully) the Icahn group will appoint management proxies to vote in their discretion on such other business as may properly come before the meeting or any adjournment or postponement thereof.

I am not certain, but suspect, that if a card were returned with fewer than seven “for” votes in the election of directors, the proxies also would be able to vote in accordance with the board’s recommendation. Thus, if the shareholder cast five votes in favor of Icahn nominees (and cast no votes for any of the Company nominees), the proxies likely can cast two votes in favor of two Company nominees. If correct, there could be controversy because the proxies might be able to distribute those votes in a way to knock out one or more Icahn nominees. Interesting stuff.

– Broc Romanek

Here’s the intro from this blog by Davis Polk’s Ning Chiu (also see this Wachtell Lipton memo):

T. Rowe wants to make clear that activists and other investors do not speak for them, in its June ESG Spotlight, as they share their investment philosophy on shareholder activism. Activism is defined as proxy contests, campaigns to influence management and boards on strategy, capital allocation and/or governance and unsolicited hostile bids.

While the investor believes that companies tend to be better informed about their businesses and will afford management a certain amount of deference, they also stress that management and their boards should “exhibit openness, curiosity, and intellectual honesty” regarding serious and sustained ideas from outsiders.

T. Rowe’s internal policies prohibit their investment professionals from initiating activism campaigns indirectly, such as discussing or pitching ideas to activist investors or other third parties. The investor outlined its roles and responsibilities as engaged investors, to the point where they may help facilitate compromise between the parties, which they believe is usually a better outcome than a contested vote.

– Broc Romanek

For years there’s been a debate over universal proxy cards. The SEC hasn’t acted on its 2016 proposal. But according to this press release, we now we have the first US-incorporated company using one – SandRidge Energy. The proxy card names all SandRidge nominees and all Icahn Capital nominees – but Carl Icahn still sent a separate card with only the dissidents listed.

In its latest communication to shareholders, the company stresses that shareholders should use its card to vote for all company nominees and two (of seven) independent Icahn Capital nominees.

Perhaps this shows the strategy & gamesmanship that can be played with universal proxies? Maybe Sandridge knew it wouldn’t win a clean sweep – and wanted to facilitate vote splitting.

– Broc Romanek

Here’s the news from this Wachtell Lipton memo:

In a much-anticipated decision, the U.S. District Court for the District of Columbia today declined to enjoin AT&T’s $108 billion acquisition of Time Warner, rejecting the Department of Justice’s “vertical” theory of competitive harm and allowing the companies to close their merger without conditions.

In November 2017, the Antitrust Division of the Department of Justice sued to prevent AT&T from acquiring Time Warner, alleging the merger would (1) increase AT&T’s leverage and incentive to charge rival distributors more for Time Warner’s programming, (ultimately resulting in consumer price increases) and (2) stifle growth and entry of innovative distribution offerings, in violation of Section 7 of the Clayton Act. The lawsuit notably departed from the Antitrust Division’s prior precedent in “vertical” mergers—transactions involving firms that do not directly compete—including its 2011 decision to clear Comcast’s acquisition of NBC Universal, subject only to behavioral remedies. Principally at issue during trial was whether (1) AT&T and Time Warner have the requisite market power in video distribution and programming, respectively, to support the government’s theories of harm and (2) the defendants’ proposed behavioral fix, an arbitration arrangement very similar to one endorsed by the Antitrust Division in Comcast/NBC Universal, remedied the alleged competitive harm.

In Judge Richard Leon’s 172-page opinion, the Court was much less deferential to the government than in recent challenges of horizontal mergers. In the absence of significant judicial precedent—this was the first court challenge based on a vertical theory of competitive harm in 40 years—the Judge provided an exhaustive factual analysis and noted that the government’s challenge was complicated by “the recognition among academics, courts, and antitrust enforcement authorities alike that many vertical mergers create vertical integration efficiencies.”

The Court’s decision to deny the injunction was unconditional, but it is worth highlighting one of the subsidiary lines of argument as helpful guidance for future transactions. The Court credited AT&T’s letter commitment to arbitrate with rival distributors, even though the Justice Department had rejected the proposed remedy as inadequate. The proposed commitment supported defendants’ conclusion that the transaction would not result in price increases, and Judge Leon found that AT&T’s commitment “will have real-world effects,” and was “extra icing on a cake already frosted.”

Judge Leon’s opinion, while tied closely to the particular facts of the AT&T/Time Warner merger, provides much-needed guidance to transacting parties—and federal antitrust regulators—in vertical mergers, and highlights the evidentiary hurdles to making a successful Section 7 claim. It also serves as a reminder to transacting parties of the importance of monitoring the content of ordinary course and transaction-related documents. The government’s case in this matter included a limited pool of “bad” documents, and the Court’s decision chastised the government for overreaching in its interpretations of those documents. Many recent successful merger challenges, in contrast, featured clear statements about “taking out a competitor,” or otherwise ending, or at least reducing, aggressive competition. Finally, while regulators have historically succeeded in convincing courts to discount efficiency defenses in horizontal merger cases, the Court noted the particular importance of balancing merger efficiencies (conceded, in part, by the government in this case) with asserted harms in vertical mergers, which have traditionally been viewed as procompetitive.

Prior to today’s decision, Assistant Attorney General Makan Delrahim had expressed his desire to “return to the preferred focus on structural relief to remedy mergers that violate the law,” in light of the fact that “[b]ehavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and . . . demand ongoing monitoring and enforcement.” Notwithstanding those statements, there has long been a consensus that vertical mergers are generally procompetitive and, to the extent problematic, can be fixed with conduct remedies. That view is consistent with many merger enforcement decisions, including the FTC’s decision last week not to challenge Northrup Grumman’s acquisition of Orbital ATK, and will be buttressed by the AT&T/Time Warner decision.

Today’s decision demonstrates that while we can expect that the Antitrust Division and the FTC will remain vigilant and formidable, “big is bad” and similar challenges to deals will not succeed unless grounded in demonstrable proof of anti-competitive effects. The decision’s exhaustive factual analysis also reminds all potential transacting parties of the importance of close attention to detail in planning, documenting, executing and defending merger and acquisition transactions, whether horizontal or vertical.

– Broc Romanek

Here’s the intro of this Bloomberg article:

It used to take Goldman Sachs bankers days to analyze a company’s vulnerability to activist investors. Now, the firm is launching an app that lets clients do it themselves in seconds. Goldman Sachs has spent two years quietly developing “Jupiter,” a program that sifts historical data on a company’s shareholders, then combines that with other information to rate its vulnerability to activists. The firm will offer the app in coming weeks to clients that could become targets of corporate raiders.

The software gauges the risk of an activist attack in several ways. It sifts, for example, funds that own a company’s stock, showing how it ranks alongside other holdings. The idea is that a fund manager is more likely to reject an activist’s demands if the company already looks good in the portfolio — say, growing revenue faster or paying a higher dividend than other bets. Executives can use that information to ensure they don’t fall behind, or they can try to court more investors.

– Broc Romanek