Section 8 of the Clayton Act prohibits competitors from having overlapping directors or managers, regardless of whether any anticompetitive conduct actually occurs. This Sidley memo provides a refresher on antitrust issues regarding the suitability of potential director appointments. This excerpt addresses highlights the application of Section 8 in proxy contests and M&A:
Interlocking directorate issues may arise when a person serves as an officer or director of two competing companies. In a proxy contest, activist investors should ensure that their candidates do not have any interlocking directorate issues, like in the recent proxy contest launched by activist investor Ancora Holdings, Inc. against Blucora, Inc. Press Release, Blucora, Inc., “Acclaimed Antitrust Expert Believes Ancora CEO Fred DiSanto Cannot Serve on Blucora’s Board of Directors” (Apr. 12, 2021).
The memo also points out that even if a particular situation doesn’t involve an interlock prohibited by Section 8 of the Clayton Act, other provisions of the antitrust laws, including Section 5 of the FTC Act and Section 1 of the Sherman Act, may be implicated. Compliance with these provisions may require an officer or director to take steps to recuse himself or herself from participation in certain decisions and not access certain information provided to the board that is directly relevant to the competitive overlap.
Delaware’s takeover statute (Section 203 of the DGCL) has been on the books for more than a generation, but in recent years it hasn’t come up all that often in litigation. So, it’s news when the Chancery Court decides a case where the statute is front and center – even if it’s just a letter opinion. That happened last week when Chancellor McCormick issued a letter opinion denying motions to enjoin the stockholder vote on Madison Square Garden Entertainment’s (MSGE) proposed acquisition of MSG Networks on the basis of alleged violations of Section 203 of the DGCL.
Section 203 prohibits certain transactions between a Delaware corporation and an “interested stockholder,” which is defined generally to mean a beneficial owner of shares representing 15% or more of the company’s voting power. The statute prohibits business combinations with an interested stockholder for a period of three years, subject to certain exceptions. In the case of this deal, the relevant exception is the one that applies to a business combination with a person who became an interested stockholder in a transaction that received the prior approval of the board.
Both of the companies involved in this transaction are affiliated with James Dolan and his family. Rearranging the furniture at the companies that the Dolans control has been a bit of a cottage industry over the years, and two prior transactions involving those companies were relevant to the Court’s resolution of the allegations in this case. The first involved the spin-off of MSG Networks from Cablevision in 2010. As to that transaction, the Court held that the three-year prohibition on transactions with the Dolans ended in 2013.
In 2020, a third Dolan-controlled company, MSG Sports, spun off MSGE. At the time it approved the spin-off, the MSGE board approved the acquisition of MSGE common stock in the deal by members of the Dolan family group. However, due to its relationship with the Dolan family, the plaintiffs pointed out that under the statute, MSGE itself became an interested stockholder with respect to MSG Networks at the time of the spin-off. As a result, the plaintiffs alleged that it was subject to Section 203 and that none of the exceptions to the statute applied. This excerpt from her opinion explains why Chancellor McCormick rejected that argument:
Entertainment became an “interested stockholder” of Networks in 2019 solely by virtue of its relationship with the Dolan Family Group. The purpose of the statutory language by which Entertainment fits the definition of “interested stockholder” is to prohibit a holder of 15% or more of Networks’ stock from accomplishing indirectly what it is prohibited from accomplishing directly. In these limited circumstances, and where there are no allegations that the defendants are taking action to subvert the purpose of the statute, the restrictions imposed on Entertainment (the affiliate) must track those applicable to those of the Dolan Family Group (the Networks stockholder).
In her opinion, the Chancellor acknowledged that a lot more could be said about the “rich issues” presented in the case. However, she opted to issue a letter opinion due to the proximity of the stockholder vote and the upcoming holiday weekend. She promised to hold a hearing during which she’d explain the basis for her ruling in more detail. Hopefully, a transcript of that hearing will surface – and if you snag one, please send it my way.
At one time or another, most deal lawyers have been involved in transactions in which rights offerings were used to help cleanse issuances of securities to a big investor. The theory is that since every stockholder is being offered the opportunity to buy on the same terms as the investor, the pricing of the share issuance will be insulated from challenge. There’s also some evidence that a properly structured rights offering may help protect insiders from liability for share issuances to controlling stockholders as well.
Well, if Harvard Law prof. Jesse Fried is correct, we may we may need to rethink the benefits of rights offerings. That’s because he just tossed the proverbial “turd in the punchbowl” in the form of this article, in which he contends that rights offers provide insiders with an opportunity to issue themselves stock at bargain prices & at the expense of outside stockholders. Here’s an excerpt from Fried’s recent blog on his article:
Information asymmetry in both unlisted and listed firms leads to what I call a “zone of uncertainty”—a range of prices in which outsiders cannot tell whether securities offered by a firm are cheap or overpriced. As asymmetry increases, this range widens. Prices far enough beyond the boundaries of the zone will be sufficiently high or low that outsiders can easily figure out whether the offered securities are overpriced or cheap. But within the zone, outsider will be uncertain. Suppose, for example, that outsiders in an unlisted firm believe that the firm’s shares are worth between $5 and $15 each. If insiders have the firm offer additional shares for $10 each, outsiders will not know whether the offered shares are cheap or overpriced.
An offer price within the zone of uncertainty enables insiders to put outsiders between a rock and a hard place, as it forces outsiders to choose between two options, each of which (in expectation) leads to expropriation: (1) exercise rights to buy, risking overpriced-issuance expropriation or (2) refrain, risking cheap-issuance expropriation.
Fried argues that the informational asymmetry problem is greater in private companies that aren’t subject to the SEC’s disclosure rules and in companies with complex capital structures. He argues that courts need to more closely scrutinize the fairness of rights offerings to outsiders in light of these concerns.
Latham & Watkins just published this guide to take-private transactions. The guide an overview of various legal and financing issues associated with taking a public company private. Here’s an excerpt from the guide’s discussion of deal structures:
A take-private typically is structured in one of two ways: (1) a statutory merger governed by the law of the state in which the target company is organized; or (2) a tender or exchange offer followed by a “back end” statutory merger. Transactions involving only a statutory merger often are referred to as “one-step” transactions, while transactions involving a tender or exchange offer followed by a back-end merger often are referred to as “two-step” transactions.
The principal difference between the two structures is the ability, in certain circumstances, to complete a two-step transaction more quickly than a one-step transaction. However, as discussed below, there are a number of factors relevant to determining the appropriate structure in any given situation.
Regardless of whether an acquirer uses a one‑step or two‑step transaction structure, the acquirer in an acquisition of a US public company may pay in cash, stock of the acquirer, or other forms of consideration, or a combination of the foregoing.
In addition to issues relating to deal structure, topics covered by the guide include considerations for sponsor take-privates, target fiduciary duties & standards of review, friendly & hostile approaches, disclosure considerations and shareholder litigation.
We’ve posted the transcript for our recent webcast: “The Leveraged ESOP as an Exit Alternative.” This program covered a lot of ground about an attractive alternative to a sale for many privately held companies. Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman, PSC & Steve Karzmer of Calfee, Halter & Griswold LLP addressed a number of topics, including
– Overview of a Leveraged ESOP
– Tax Aspects of Leveraged ESOPs for Sellers & the Company
– Structuring and Financing an ESOP Deal
– Corporate and ERISA Fiduciary Considerations
– Restrictions and Post-Closing Obligations
I recently came across this Woodruff Sawyer blog about SPAC litigation, and it’s definitely a growth industry. According to the blog, so far 12% of pending or completed SPAC mergers have had M&A lawsuits filed against them, 4% of completed mergers have had derivative lawsuits filed against them, and 7% of completed mergers have had securities class actions filed against them.
While M&A actions represent the largest volume of claims so far, the blog says they are less troubling than securities disclosure claims. That’s because securities claims are rising – only 7 had been filed in all of 2019 & 2020, but 11 were filed during the first quarter of 2021 alone. The blog explains that the problem with these lawsuits is that while most class actions involve 10b-5 claims, these SPAC suits are vulnerable to Section 11 claims:
Classic securities class action lawsuits involve plaintiffs bringing claims when public companies disclose information that then leads to a precipitous stock drop. These lawsuits allege that the company had made material misstatements or omissions in their earlier public statements, including their SEC filings.
Many of these will be brought as what is known as 10(b) suits. While they are serious and take time and money to defend, these cases are often won by defendants on a motion to dismiss—meaning no settlement will be paid to plaintiffs.
Newly public companies that went public via a de-SPAC transaction are not just vulnerable because, like all new public companies, their management may be less practiced at the rigors of public company life, including forecasting. They are also vulnerable because most will have filed an S-1 registration statement shortly after completing the de-SPAC transaction to register the shares of the SPAC sponsors and the PIPE shares.
Registration statements have a three-year statute of limitations. So, for example, a company can be sued for misstatements or omissions in the S-1 up to three years after going public if the stock price falls below the registration statement price.
Registration statement-related suits are commonly referred to as Section 11 lawsuits, and they have been on the rise. This type of suit is particularly difficult for defendants to win a motion to dismiss because the company has strict liability for the disclosures in its registration statements.
The blog says that the good news is that federal forum bylaws have been effective in pushing Section 11 claims out of state courts, and that so far, most of the SPAC class actions have involved 10b-5 claims.
Update: Marsh & McLennan’s Ann Longmore pointed me to this article from Allison Frankel on which details “merger objection” style suits that are being filed in relation to SPAC and de-SPAC transactions in New York & quickly settled in exchange for supplemental disclosures & “mootness fee” payments.
Earlier this week, the Delaware Supreme Court issued its decision in Coster v. UIP Companies, (Del. Sup.; 6/21), which involved a disputed share issuance used by an incumbent board to resolve a stockholder deadlock at a private company. The Court overturned a prior Chancery Court decision upholding the share issuance – even though the Chancery Court determined that the transaction satisfied the entire fairness standard.
The Supreme Court didn’t reject the Chancery Court’s conclusion as to the fairness of the share issuance, but held that in light of the circumstances, that was only the first step in the required analysis. As this excerpt indicates, the Court reached that conclusion because it thought the transaction raised concerns about stockholder disenfranchisement.
In our view, the court bypassed a different and necessary judicial review where, as here, an interested board issues stock to interfere with corporate democracy and that stock issuance entrenches the existing board. As explained below, the court should have considered Coster’s alternative arguments that the board approved the Stock Sale for inequitable reasons, or in good faith but for the primary purpose of interfering with Coster’s voting rights and leverage as an equal stockholder without a compelling reason to do so.
Two precedents featured prominently in the Court’s decision. The first, Schnell v. Chris-Craft Industries, stands for the proposition that actions taken by an interested board with the intent of interfering with a stockholder’s voting rights are a breach of the directors’ fiduciary duty. The second, Blasius v. Atlas Industries, holds that even good faith actions by the board that have the effect of interfering with voting rights require a “compelling justification.”
Ann Lipton has a Twitter thread on this decision that I highly recommend. She has some interesting thoughts on how to reconcile the apparent incongruity of using Blasius, which the Delaware courts have demoted over the years to merely being a particularized application of the intermediate scrutiny called for under the Unocal standard, to knock out a transaction that’s withstood the supposedly more demanding review called for by the entire fairness standard.
According to Collier Capital’s “Global Private Equity Barometer” survey of LPs, private equity investors are all about ESG these days. Here’s an excerpt from the company’s press release announcing the survey’s results:
Two major issues will drive change in LPs’ private equity portfolios in the next few years, according to Coller Capital’s latest Global Private Equity Barometer. Three quarters of all LPs will invest differently in response to issues connected with sustainability and climate change, and a similar proportion will focus on new opportunities in healthcare and biotech.
“The fact that key ESG issues – climate, sustainability and health – are at the top of investor agendas should surprise no one,” said Jeremy Coller, Chief Investment Officer of Coller Capital, “but the fact that half of all private equity investors think ESG investing will in itself boost their portfolio returns should be a wake-up call to anyone who still thinks ESG is a ‘nice to have’ or a PR tool.”
Maybe. However, if you read the survey, you’ll discover that there’s reason to believe that – among U.S. investors at least – lip service to ESG is the order of the day. Why do I say that? Because the survey says less than one-third of LPs are willing to have any of their remuneration tied to performance with respect to ESG goals. Even among the supposedly more “tuned-in” investors in Europe & Asia, only a little more than half are willing to connect ESG performance with their payouts.
This recent ClearBridge article on compensation issues in M&A is a useful reference tool for identifying and addressing those issues. The article covers both pre and post-closing compensation concerns for the buyer & seller, and provides commentary on market practice. Here’s an excerpt on the treatment of outstanding incentive plans:
Bonus Plans:
– Target Company: Determine treatment of payouts for inflight bonus (i.e., bonus during year of acquisition), including whether to pay bonuses based on target performance or actual performance (if calculable), as well as whether to apply any proration to account for shortened performance period (if applicable)
– Acquiring Company: Determine if impact of newly acquired business should be reflected in performance results for bonus payouts for year of transaction (if applicable), or adjusted out from actual performance results for either all or a portion of the year
Unvested Equity:
– Target Company: Determine treatment of unvested equity per equity incentive plans, award agreements or employee contracts (e.g., single vs. double trigger vesting), as well as treatment of performance awards upon the acquisition (i.e., settle at target vs. actual performance)
– Acquiring Company: Assess dilutive impact of assuming any target company equity, as well as impact of target company performance on any unvested performance-based equity (e.g., excluding performance results for all or a portion of outstanding performance periods)
Market Commentary:
For Target companies, unvested stock price / total-shareholder return-based performance awards are more likely to be earned based on actual performance at time of close than based on target performance. Practice is more mixed for financial / strategic goals given the complexity of calculating performance results / outcomes for inflight plans.
A few weeks ago, I blogged about the Chancery Court’s decision in In Re GGP, Inc. Stockholder Litigation, (Del. Ch.; 5/21). My blog focused on claims relating to an extraordinary dividend paid as part of a sale transaction, but the case also involved allegations that a 35% stockholder, Brookfield Capital Partners, was a controlling stockholder owing fiduciary duties to the corporation. This Sullivan & Cromwell memo addresses that aspect of the case, and this excerpt reviews the reasoning behind the Court’s decision to reject those allegations:
The court reiterated that since Brookfield owned less than 50% of GGP’s outstanding stock, it owed fiduciary duties as a controller only if it exercised actual control over GGP either by dominating GGP during the negotiation of the Merger or exercising general control over GGP’s business.
With respect to Brookfield’s degree of control over the Merger, the court held that Plaintiffs were required to plead that Brookfield dominated the Special Committee. In particular, the court held that Plaintiffs failed to show that a majority of Special Committee members were beholden to Brookfield.
With respect to Brookfield’s overall control over GGP’s business, the court held that “there [was] no pled basis to infer that Brookfield exerted any influence over GGP fiduciaries such that they would ‘defer to [Brookfield] because of its position as a significant stockholder.’” The court also credited Brookfield’s
contractual standstill arrangements with GGP, which blunted the amount of influence that Brookfield could bring to bear.
Since Brookfield was not a controlling stockholder, the plaintiffs needed to plead that the vote approving the deal was either coerced or uninformed. The Court ultimately concluded that the plaintiffs’ pleadings were insufficient to support claims that the vote approving the deal was defective, so it dismissed their claims.