2023 once again saw near-record levels of shareholder activism, and 2024 is already off to an interesting start! As activist strategies continue to evolve, it’s as important as ever to understand who the activists are and what makes them tick.
Tune in today at 2 pm ET for the webcast – “Activist Profiles & Playbooks” – to hear Juan Bonifacino of Spotlight Advisors, Anne Chapman of Joele Frank, Sydney Isaacs of H/Advisors Abernathy and Geoffrey Weinberg of Morrow Sodali discuss lessons from 2023, the evolution of activist strategies, UPC, what to expect from activists this proxy season and how to prepare.
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Late last month, the OCC announcedproposed changes to its rules regarding business combinations involving national banks and federal savings associations. This overview describes two proposed amendments to the OCC’s procedures:
– Remove provisions related to expedited review. The OCC reviews business combination applications to determine whether procedural and substantive requirements are met. Any business combination subject to a filing is a significant corporate transaction requiring OCC decisioning, which should not be deemed approved solely due to the passage of time. – Remove the OCC’s streamlined business combination application. The Interagency Bank Merger Act Application provides the appropriate basis for the OCC to review a business combination application.
The OCC also proposed a new policy statement regarding the general principles used by the OCC when reviewing proposed bank mergers under the Bank Merger Act, including criteria considered when deciding whether to hold a public meeting. The policy statement — which would be added as an appendix to the OCC’s business combinations regulation — is divided into five topics: general principles of OCC review, financial stability, financial & managerial resources & future prospects and convenience & needs. This Sullivan & Cromwell memo describes how these principles may differ from current policy and practice.
Although many of the OCC’s stated principles in the NPR are unremarkable in that they are consistent with current regulatory policy and practice on bank merger applications, certain of the specific proposals set forth in the NPR could be interpreted to represent a major reversal of certain existing policies. These reversals could chill merger activity until there is a final rule. They include:
1) Transactions involving a combined institution with less than $50 billion in assets are regarded as consistent with approval, which could be read as creating a negative implication as to acquisitions of a larger size;
2) Transactions involving a target that is less than 50% of the acquirer are regarded as consistent with approval, which could be viewed as creating a negative implication for mergers of equals; and
3) The OCC is “unlikely to find that the statutory factors under the Bank Merger Act are consistent with approval … [if t]he acquirer is a [GSIB], or subsidiary thereof,” which may be considered to contravene past approval practice.
Comments are due 60 days after publication in the Federal Register.
I think it’s fair to say that the bloom is off the rose for a whole bunch of SPACs, and many of those companies may be contemplating the viability of a take private deal. This O’Melveny memo is directed at those companies, and reviews the fiduciary duty, regulatory, financing and structural issues associated with take private transactions. This excerpt points out that when it comes to deciding between a one-step merger and a two-step transaction with a front-end tender offer, SPACs may need to sacrifice the speed of a tender offer in order to ensure the rollover equity they’ll need post-closing:
While a two-step merger may be completed more quickly than a one-step merger, parties may be sacrificing flexibility for speed if they choose the former. Two-step mergers must comply with specific tender offer rules that do not apply to one-step mergers, such as the “best price rule.” The best price rule generally requires that, subject to certain exceptions, the consideration offered to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder in the tender offer. In a two-step merger, the transaction parties may also lose some flexibility as it relates to the amount and the form of transaction consideration.
For post-SPAC companies in particular, the acquiror will likely want company management to “roll” some or all of its equity in the public company into the new private company, as opposed to cashing out its equity for the deal consideration. The securities in the new private company that company management receives could be viewed as additional or different consideration compared to what public stockholders receive in the tender offer. To address this risk, company management typically commits not to tender in the offer itself but to roll all of its equity only after the completion of the tender offer but before the second-step merger’s completion.
The memo goes on to point out that in order to address this issue, some two-step transactions require executives participating in the rollover to sign agreements under which they agree to refrain from tendering their shares, but these have been challenged by plaintiffs. Claims targeting these arrangements – regardless of their merits – could still present significant distractions and may even disrupt the deal itself.
I remember vividly working on a large public company acquisition that was approaching signing. The targeted signing date was about 3-4 days away, and the parties had made elaborate plans to roll news of the deal out to the media, analysts, investors and employees. Unfortunately, at about 5 pm that afternoon, the buyer’s CEO received a call from The Wall Street Journal asking for comment on a story that they were about to run disclosing that the parties were close to a deal.
That triggered an all-night effort to get everything buttoned up in order to allow for a signing and announcement the following day. Even though we were close to the finish line, the process still couldn’t have been more disrupted if somebody had lobbed a hand grenade into a room full of the documents that needed to be signed. That’s one of the reasons why I thought this excerpt from H/Advisors Abernathy’s recent report on M&A deal leaks addressing the need to prepare for the possibility of a leak was worth sharing:
While a rumored transaction can leak at any time, the likelihood grows as negotiations and due diligence progress and more parties are brought under the tent, from external advisors and financial backers to internal teams. This widening circle is inevitable as the path to signing and announcement moves further along, but rumors can begin to swirl even in the early “talks” phase, so it’s critical to plan for a potential leak well in advance of due diligence and announcement day.
Both parties should be aligned on how they plan to respond to potential leaks of all kinds, which could range from a speculative inquiry from a reporter with very little information to outreach from a reporter with most of the facts and enough concrete information to publish a story with or without your response.
Leak preparation should consider these different scenarios and how to prepare for and respond to each one in real-time – with draft materials for use in communicating with key stakeholders if rumors do become public and you need to address internal and external chatter.
Map out stakeholder groups and recognize that a leak may impact them in different ways and prompt different questions – shareholders may drill down on valuation and rationale, while employees are more likely to be concerned about job security, and customers about service disruption. Prepare messaging, create a rapid response plan, and, again, make sure both parties are aligned about what should and should not be said to internal and external audiences.
The report offers a lot of other information on leak-related topics, including data on how frequently information about deals leaks, how accurate leaked information is, what industries are the “leakiest”, the extent to which deal size is a factor in determining whether a leak is likely, and the role social media plays in leaking deal-related information.
Recent Delaware case law addressing non-competes has been decidedly unfavorable to those attempting to enforce them, but a new Delaware Supreme Court decision suggests that there may be more room to maneuver when a non-compete covenant isn’t used to preclude future employment, but instead as a condition to an obligation to make future payments to the party who agreed to it.
Earlier this week, in Cantor Fitzgerald v. Ainslie, (Del.; 1/24), the Delaware Supreme Court overruled a prior Chancery Court decision and held that a partnership agreement’s contractual provision requiring forfeiture of certain future payments in the event that a former partner engaged in competitive activity was enforceable. The litigation involved provisions of Cantor Fitzgerald’s partnership agreement that will likely be familiar to many of the law firm partners among our readers. Under the terms of the agreement, withdrawing partners were subject to a restrictive covenant providing that they would forfeit certain conditional payments if they engaged in competitive activity during the four years following their withdrawal.
The plaintiffs argued that the forfeiture for competition provision was unenforceable because, among other things, it and the related restrictive covenant were restraints of trades subject to reasonableness review, and that the forfeiture provision was an unenforceable penalty provision. Cantor Fitzgerald argued that the forfeiture provision was simply a condition precedent to its obligations to make the conditional payments, and not Cantor Fitzgerald’s duty to make the conditional payments, not as a per se restraint of trade, and that because it was not seeking to enforce the restrictive covenants, they were only relevant to the issue of whether the plaintiffs had breached the agreement and permitted Cantor Fitzgerald to withhold payment.
The Supreme Court noted that in deciding that the forfeiture for competition condition should be evaluated for reasonableness, the Chancery Court relied heavily on Delaware precedent questioning liquidated damages clauses enforcing non-competes. The Supreme Court concluded that this reliance was misplaced:
The two liquidated damages cases on which the Court of Chancery grounded its policy discussion—Faw, Casson & Co., L.L.P. v. Halpen, and Lyons Insurance Agency, Inc. v. Wark,— are distinguishable from this case. Both Wark and Halpen dealt with lawsuits initiated by former employers seeking to enforce liquidated damages provisions contained in employment agreements against former employees—an insurance agent and accountant, respectively. In both cases, the court considered whether the damages the employer demanded for breach of the restrictive covenant were reasonable in light of the employees’ actions and concluded that damages provisions untethered to an employer’s reasonable interests in preventing competition, and unrelated to any action taken by a former employee, were unreasonable restraints of trade.
Here the claims under review were not brought by an employer seeking to enforce a liquidated damages provision for an employee’s breach of a restrictive covenant in an employment agreement; rather, this is a lawsuit initiated by former limited partners against the partnership requesting that a forfeiture-for-competition provision be declared invalid under the same test as applied to traditional noncompete agreements. Unlike in Halpen and Wark, the provision at issue here is not a penalty enforced against an employee based on the breach of a restrictive covenant; it is a condition precedent that excuses Cantor Fitzgerald from its duty to pay if the plaintiffs fail to satisfy the condition to which they agreed to be bound in order to receive a deferred financial benefit.
The Court also cited Delaware federal court precedent holding that the considerations underlying courts’ approach to a traditional noncompete, such as a restriction on the ability to obtain employment, were absent from a provision calling only for a forfeiture of benefits. Ultimately, the Court concluded that Delaware’s case law on liquidated damages in the noncompete context was insufficient to outweigh the strong interest in enforcing contracts as written – particularly in light of the limited partnership statute’s strongly pro-freedom of contract bias.
The M&A lawyers at Morrison & Foerster recently gazed into their crystal ball and came up with their annual memo laying out their predictions for what 2024 may have in store for dealmakers. In addition to predicting an overall rebound in activity and continued strength in middle market PE deals, the memo addresses potential trends that could play out during the year. This excerpt discusses expectations for take private transactions:
In 2023, the percentage of PE deal value resulting from take privates sharply increased as sponsors searched for and found undervalued assets that they could take private and restructure to realize value. Meanwhile, many founders of private companies chose to hold onto their companies rather than reduce their valuation and sell or conduct a down round financing in a difficult and uncertain market. We expect the appetite of PE sponsors for take privates to continue and potentially increase in 2024 in some regions.
Of course, take privates can prove challenging with resistant boards, proxy fights, dissenting shareholders and the heightened risk of losing the deal at the last moment, after having expended a considerable amount on fees and expenses, as a bidder with a superior offer swoops in.
The memo hedges its bets by pointing out that there are a lot of “wild cards” that could come into play, including geopolitical issues and the U.S. presidential election, and that these could be significant both for the global economy & private equity transactions.
Reliance disclaimers can be a powerful tool to limit a seller’s exposure to fraud claims premised on alleged representations that didn’t find their way into the purchase agreement, but in order to be effective, the language of those disclaimers must clear a pretty high bar. Delaware case law suggests that if you want to have an enforceable disclaimer of liability for fraud, you need to smack the other side in the face with a 2×4. Actually, maybe the better way to put it is to say that the other side needs to smack itself in the face with that 2×4.
Vice Chancellor Zurn’s recent decision in Labyrinth v. Urich, (Del. Ch.; 1/24) illustrates this point. The case involved a post-closing dispute between the buyer and seller in which the buyer alleged, among other things, that the seller made fraudulent extra-contractual representations to it in connection with the transaction. The seller countered that these claims were barred by the stock purchase agreement’s anti-reliance language.
In support of this position, the seller pointed to the integration clause contained in Section 9.3 of the agreement, which contained standard language providing that the stock purchase agreement “sets forth the entire agreement and understanding among the parties with respect to the subject matter hereof and supersedes any and all prior agreements, understandings, negotiations and communications, whether oral or written, relating to the subject matter of this Agreement.” It also pointed to Section 4.28, which contained language stating that aside from the reps & warranties contained in the agreement, neither the seller nor any of its related parties:
has made or makes any other express or implied representation or warranty, either written or oral, on behalf of Seller or the Company, including any representation or warranty as to the accuracy or completeness of any information regarding the Company furnished or made available to Buyer and its Representatives or any information, documents or material made available to Buyer in expectation of the transactions contemplated hereby) or as to the future revenue, profitability or success of the Company, or any representation or warranty arising from statute or otherwise in law.”)
In rejecting the seller’s argument that the language it pointed to was sufficient to preclude fraud claims premised on reps made outside the contract, the Vice Chancellor first observed that a standard integration clause does not standard integration clause doesn’t bar fraud claims, but simply limits the scope of the parties’ contractual obligations.
As to the language of Section 4.28, she noted that Delaware case law “makes it clear that in order to be effective, the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” The language pointed to by the seller did not contain any such statement by the buyer and so was ineffective.
The seller had one more arrow in its quiver – the language of Section 5.7 of the agreement, which contained fairly typically language dealing with the basis for the buyer’s decision to enter into the agreement:
Buyer has conducted its own independent investigation, review and analysis of the business, results of operations, prospects, condition (financial or otherwise) or assets of the Company, and acknowledges that it has been provided adequate access to the personnel, properties, assets, premises, books and records, and other documents and data of Seller and the Company for such purpose. Buyer acknowledges and agrees that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby, none of Seller, the Company or any other Person has made any representation or warranty as to Seller, the Company or this Agreement, except as expressly set forth in Sections 3 and 4 of this Agreement (including the related portions of the Disclosure Schedules).
The seller argued that this language, together with that contained in Sections 4.28 and 9.3, should be read together to satisfy the requirement that buyer expressly acknowledge its non-reliance on extra-contractual reps. Vice Chancellor Zurn disagreed and observed that the language implies that the buyer it made its decision to purchase the company based on the information that the seller provided during the course of its “independent investigation.” In other words, rather than enhancing a non-reliance argument, the language reinforces the argument that the buyer relied on information outside of the contract provided by the seller in deciding to enter into the deal.
As Dave shared yesterday on TheCorporateCounsel.net, on Wednesday, the SEC, by a 3-to-2 vote, adopted final rules to address its concerns with SPACs. As with the proposed rules, Chair Gensler’s statement emphasized the goal of aligning “the protections investors receive when investing in SPACs with those provided to them when investing in traditional IPOs.” At a high level, this fact sheet indicates that the final rules, among other things:
1. Require additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;
2. Require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;
3. Deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders; and
4. Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).
To highlight some specific key aspects, in no particular order, the rules also:
– require a minimum 20-calendar-day dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions (where consistent with local law)
– require a re-determination of SRC status following consummation of a de-SPAC, which must be reflected in filings beginning 45 days after closing
– require additional disclosures in de-SPACs regarding the board’s determination whether the de-SPAC is advisable and in the best interests of the SPAC and its shareholders and any outside report, opinion, or appraisal materially relating to the de-SPAC
– include new Article 15 of Regulation S-X to better align the financial statements provided in de-SPACs with financial statements provided in an IPO
– make the safe harbor for forward-looking statements under the PSLRA unavailable for SPACs (most importantly de-SPACs) by adopting a new definition of “blank check company” for purposes of the PSLRA – require additional disclosures for projections, including disclosure of material bases and material assumptions
Instead of adopting controversial proposed Rule 140a — which, as proposed, would have “deemed anyone who has acted as an underwriter of the securities of a SPAC and takes steps to facilitate a de-SPAC transaction, or any related financing transaction or otherwise participates (directly or indirectly) in the de-SPAC transaction to be engaged in a distribution and to be an underwriter in the de-SPAC transaction” — and proposed Rule 3a-10 under the Investment Company Act, the Commission provided guidance regarding statutory underwriter status in connection with de-SPAC transactions and for assessing when SPACs may meet the definition of an investment company under the Investment Company Act of 1940. In their dissents, Commissioners Uyeda and Peirce state that this change is not the positive development for SPACs that it may appear to be and “instead is arguably worse” and may “function like a backdoor rule.”
The final rules will become effective 125 days after publication in the Federal Register, and compliance with the Inline XBRL tagging requirements will be required 490 days after publication of the final rules in the Federal Register. We’re posting resources in the “SPACs” Practice Area here on DealLawyers.com.
Yesterday, Vice Chancellor Laster issued a 119-page post-trial opinion in In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation (Del. Ch.; 1/24) clarifying the standard of conduct and standard of review applicable to a controller’s exercise of stockholder voting power. The case involved a public company controlled by billionaire Eddie Lampert that was spun off from Sears Holdings Corporation and operated through two business segments. A special board committee had endorsed a plan to liquidate one segment and continue operating the other.
Lampert strongly opposed the liquidation plan and expressed his concerns to the company, while also negotiating with the committee to acquire the company as a whole. After the special committee rejected his offers, countered with an “inexplicable” proposal and indicated that it would proceed with the liquidation plan unless a deal was reached shortly, Lampert acted as controlling stockholder to remove two of the three special committee members from the board and amend the company’s bylaws to add procedural hurdles to the liquidation. The plaintiff minority stockholders alleged that Lampert breached his fiduciary duties in taking these actions.
VC Laster clarified the standards of conduct and review applicable under Delaware law before finding that Lampert did not breach his fiduciary duties in exercising his stockholder-level voting power:
Some authorities suggest a controller owes no fiduciary duties when voting. Other authorities apply a fiduciary framework without spelling out the details. This decision holds that when exercising stockholder-level voting power, a controller owes a duty of good faith that demands the controller not harm the corporation or its minority stockholders intentionally. The controller also owes a duty of care that demands the controller not harm the corporation or its minority stockholders through grossly negligent action. […]
Delaware decisions have not identified a standard of review that would apply when a court reviews a controller’s actions for compliance with a standard of conduct. […] The controller faced a subtle conflict, because while the actions he took affected all stockholders equally, he had business agreements with the corporation that could have skewed his judgment. That is a controller-oriented version of a situation where enhanced scrutiny should apply.
However, the special committee ultimately decided that the procedural hurdles made a quick liquidation impossible and reengaged with Lampert, consummating a transaction with both Lampert and a third party. Since the transaction involving Lampert eliminated the minority stockholders, the order applied entire fairness review. VC Laster found that, even though the actions Lampert took by written consent were consistent with his fiduciary duties, the fallout from those actions ended up making the subsequently negotiated transaction not entirely fair and required Lampert to pay $18 million to the minority stockholders.
This opinion is a must-read, not only for VC Laster’s review of Delaware precedent for the standard of conduct and review applied to the “controller intervention,” but also for his consideration of the transaction under the entire fairness test.
I’m not usually one for fortune-telling, but this recent Freshfields blog makes some well-supported predictions for M&A trends in 2024. Among them is the expectation that an increase in hostile M&A is in our future — driven by board room optimism on both sides of the table. Here’s an excerpt:
Upticks in stock prices during 2024 will feed optimism in board rooms about standalone plans and that, in turn, will make resistance by target boards to takeover entreaties more common. At the same time, in the board rooms of bidders, directors will continue to feel pressure from investors to use their companies’ excess cash and highly-priced equity to do accretive acquisitions wherever available. In addition, board room optimism leads to taking risks on allocating capital to acquisitions rather than the more conservative approach of share buybacks.
The result is that we are going to have more companies committed to acquisition strategies in 2024, while at the same time we will have more of the companies on their lists of targets remain enthusiastic about their stand-alone prospects. The result will be a boon for unsolicited and hostile M&A. Many M&A advisors over the last several years have done very well nursing friendly combinations. There will be a premium for M&A advisors who are expert, from prior eras, on unsolicited M&A tactics.