This recent alert from Compensation Advisory Partners updates research from 2015 on how often and when activist investors raise issues with executive pay during proxy contests. In 48 contests at Russell 3000 companies, CAP found that executive pay concerns were identified by the activists in 23 of those contests and that activists have raised concerns about compensation in about half of proxy contests annually for each of the last five years. Typically, pay concerns are included as evidence of issues with the company’s strategic direction:
Data indicates that executive compensation was often tied to broader concerns about the companies’ strategic direction, operational execution, and financial performance. Essentially, executive compensation disagreements were not the main and sole rationale for engaging in the contest. Instead, activist investors use these disagreements to highlight deeper underlying concerns with a company’s direction or performance to induce change.
For instance, if total shareholder return (TSR) is not used as a performance metric while the company has faced a prolonged period of shareholder value decline alongside rising CEO compensation, activist investors will highlight these issues as signs of a flawed business strategy and misaligned incentive structures. In many cases, concerns about executive compensation support their broader calls for leadership changes, strategic adjustments, and stronger governance practices.
Not surprisingly, the most commonly cited issue was pay-for-performance misalignment (91% of the time). But other issues were cited as well, including:
– Excessive CEO pay (57%)
– Weak corporate governance structures (26%)
– Outsized peer comparisons (17%)
– Performance metric adjustments (17%)
– High dilution (13%)
– Excessive perquisites (13%)
– Long-term incentive plan design (13%)
– High director compensation (9%)
– Lack of disclosure (9%)
– Excessive change-in-control provisions (9%)
In a recent interview, President-elect Trump said that seeking an agreement to extend the expiring tax provisions of the Tax Cuts and Jobs Act of 2017 is one of his top priorities for his first 100 days back in office. While that may be easier said than done, this McDermott Will alert says, if accomplished, doing so could have a significant influence on cross-border M&A.
For example, the bonus depreciation provision, which allows businesses to immediately deduct a large percentage of the cost of eligible property, would continue to incentivize capital investments by reducing upfront costs. In many M&A transactions, buyers engage in basis step-up planning to increase the tax basis of the acquired assets to their fair market value at the time of purchase, which can lead to higher depreciation deductions, further reducing taxable income and enhancing the financial attractiveness of such deals. This can be particularly relevant for non-US buyers who acquire US businesses with material hard assets that may qualify for 100% bonus depreciation.
Trump has also proposed a research and development (R&D) expensing provision, which would allow for the immediate deduction of R&D costs and continue to encourage innovation by reducing the tax burden on companies investing in new technologies.
Additionally, Trump has proposed easing the interest expense limitations, which would allow businesses to deduct a higher percentage of their interest expenses and impact companies with significant debt financing. Trump appears inclined to retain the foreign-derived intangible income (FDII) provision, providing a lower tax rate on income from exports of goods and services, and the global intangible low-taxed income (GILTI) provision, imposing a minimum tax on foreign business income. The FDII and GILTI effective tax rates are set to increase in 2026; it remains unclear whether Trump will modify such provisions.
The alert says that these extensions, taken together, could “enhance the attractiveness of US companies as acquisition targets and support outbound investments by providing a stable and favorable tax environment for cross-border M&A transactions.” The alert also describes the possible impact of other potential changes, including tariffs, lower corporate tax rates and the IP purchasing initiative.
FTI Consulting recently published its latest Activism Vulnerability Report, which provides an overview of the state of play in shareholder activism & ranks the vulnerability of various industries to activist campaigns. As this excerpt describes, mid-cap companies are more often finding themselves the targets of activist campaigns:
Mid-cap companies, in particular, have seen a surge in activist interest, accounting for 25% of total campaigns in 3Q24, compared to just 10% a year earlier. This shift is not without reason: year-to-date through November 1, activists are achieving higher success rates in the mid-cap segment, with an impressive 74% of concluded mid-cap campaigns delivering favorable outcomes for activists in 2024, up from 51% during the same period last year.
Here are some other notable trends referenced in the report:
– A friendlier M&A backdrop could underpin a pickup in the number of activist campaigns in 2025. For the nine-months ended September 30, 2024, there have been 40 activist campaigns with explicit demands for M&A, up 17% over the same period in the prior year, suggesting the optimism may begin to materialize.
– Board seats gained by activists in U.S. companies through September 30, 2024, remained relatively steady compared to the same period in 2023. However, the pathways to these seats shifted, with fewer board seats achieved through settlements and a slight uptick in board seats won through proxy contests.
– The Utilities industry climbed seven places to become the most vulnerable sector to shareholder activism, while Media & Publishing maintained its hold on second place, and Real Estate edged up one position to complete the top three.
The recent changes to the HSR form create a new document custodian known as the “Supervisory Deal Team Lead” and this excerpt from the transcript of a recent Ropes & Gray podcast notes that the requirement to produce so-called “4C documents” extends to documents prepared by or for this new custodian:
The new rule requires production of all 4C documents, which HSR filers are used to. The current rule covers 4C documents prepared by or for officers or directors, and now, the new rule will expand to a newly minted document custodian called the “supervisory deal team lead,” or otherwise the “SDTL”—we’ll use that for purposes of not having to say “supervisory deal team lead” every time. The SDTL is an individual who functionally leads or coordinates the day-to-day process for the transaction who is not otherwise an officer or director. The purpose of this is reaching down lower into the organization to capture more real time documents that aren’t filtering up to management, so to say.
The SDTL has to be identified in the HSR filing, and will need to sign the form under penalty of perjury. Since this is the case, the podcast participants noted that identification of this person should be given quite a bit of thought. The SDTL ideally should be identified in advance and appreciate the scope of the their responsibilities as a document custodian. Fortunately, the podcast participants observed that as a practical matter, it’s often relatively clear who this person should be and that companies have been pretty quickly able to identify a single person who will serve as the SDTL for all of their transactions.
We’re going to our holiday blogging schedule next week and that means absent some earth-shattering developments, this blog won’t be back until after January 1, 2025. Merry Christmas and Happy Hannukah to those who celebrate, and best wishes to all of our readers for the new year!
The November-December issuer of the Deal Lawyers newsletter was just sent to the printer. It is also available now online to members of DealLawyers.com who subscribe to the electronic format. This issue includes the following articles:
– 2024 Survey of Trends and Key Components of CVRs in Life Sciences Public M&A Deals
– Comment Letter Trends: Contested Election Disclosures for the 2024 Proxy Season
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
In Sunder Energy, LLC v. Tyler Jackson, (Del.; 12/24), the Delaware Supreme Court addressed a plaintiff’s argument that the Chancery Court erred in refusing to blue pencil a non-compete agreement that the Court found to be impermissibly overbroad. The Supreme Court upheld the Chancery Court’s decision, and in doing so shed some light on the circumstances under which Delaware courts will use their discretion to blue pencil unenforceable non-competes.
The case involved arose out of one the company’s founder’s decision to depart and work for a competing business. The company and the founder were parties to a non-compete agreement, which the company sought to enforce. The Chancery Court ruled that the non-compete was overbroad in scope and unreasonable in duration and, as has happened in several recent cases, also refused to “blue pencil” its terms to make the agreement enforceable.
The plaintiff argued that the Chancery Court should have blue penciled the agreement because the founder’s actions would have clearly breached even the narrowest restrictive covenant. The Supreme Court rejected that argument, and this excerpt from a Sheppard Mullin blog on the case summarizes the rationale underlying the Supreme Court’s decision:
On appeal, the Delaware Supreme Court affirmed, reasoning that Sunder’s argument “turns the analysis on its head and creates perverse incentives for employers drafting restrictive covenants,” who would “be less incentivized to craft reasonable restrictions from the outset.” The Court explained, whether a restriction should be blue-penciled “cannot turn on the egregiousness of the employee’s conduct,” but rather “should be based on the covenants themselves and the circumstances surrounding their adoption.”
The Court noted that Delaware courts have exercised their discretion to blue-pencil restrictive covenants under circumstances that indicate an equality of bargaining power between the parties, such as where the language of the covenants was specifically negotiated, valuable consideration was exchanged for the restriction, or in the context of the sale of a business.
The Court concluded that the facts and circumstances of this case indicated that these criteria had not been satisfied, and that to provide the plaintiff with the relief it sought would in effect require the Court to create an entirely new agreement between the parties which neither bargained for.
In our latest “Deal Lawyers Download” Podcast, Alliant’s Dan Schoenberg joined me to discuss tax and transactional risk insurance. We addressed the following topics in this 35-minute podcast:
– Overview of uses of tax insurance in transactional and non-transactional settings
– Pricing of tax insurance and key exclusions
– Additional coverages required
– Claims experience for tax insurance policies
– Overview of the RWI policy process and common exclusions and limitations
– RWI claims experience and trends
– Litigation risk insurance and overview of general market for transactional risk insurance
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Last week, the SEC announced settled enforcement proceedings against Cantor Fitzgerald for its alleged role in causing two SPACs that it controlled to make misleading statements to investors about the status of their discussions with potential acquisition targets ahead of their initial public offerings (IPOs). This excerpt from the agency’s press release summarizes the allegations:
The SEC’s order finds that Cantor Fitzgerald caused the SPACs in their SEC filings to deny having had contact or substantive discussions with potential business combination targets prior to their IPOs. However, the Order finds that at the time of each SPAC’s IPO, Cantor Fitzgerald personnel, acting on behalf of the SPACs, had already commenced negotiations with a small group of potential target companies for the SPACs, including with View and Satellogic, the companies with which the SPACs eventually merged.
Without admitting or denying the SEC’s allegations, Cantor Fitzgerald agreed to a cease & desist order and a civil money penalty of $6.75 million.
What makes this proceeding interesting isn’t really the allegations themselves, but a dissenting statement issued by Commissioner Uyeda covering several SPAC-related enforcement actions. In that statement, the Commissioner argues that SPACs are different than operating companies in ways that matter to deciding when preliminary merger negotiations should be regarded as “material”:
The U.S. Supreme Court in Basic v. Levinson adopted the probability/magnitude test for assessing the materiality of preliminary merger negotiations. The Second Circuit case cited by Basic for this test involved a small corporation that would be merged out of existence. For this corporation, the Second Circuit stated, and Basic agreed, that its merger was “the most important event that can occur in [its] life, to-wit, its death” and accordingly, information about the merger “can become material” before there is an agreement on the acquisition price and structure.
Unlike the corporation discussed in Basic, each SPAC respondent’s stated purpose was to acquire a target company. The SPAC’s “death” is planned for and sought after from the time the SPAC is formed. Given this distinction, the probability/magnitude test, as applied to information concerning a SPAC’s preliminary merger negotiations, should result in such information not becoming material until a time much closer to the SPAC and target company reaching a binding agreement on the acquisition price and structure. Any discussions prior to such time, even if they are “substantive,” are part of the day-to-day operations of a SPAC.
With the upcoming change in administrations, my guess is that Commissioner Uyeda’s views on this topic may be more influential – and that today’s dissenting statement could well become tomorrow’s policy.
Winston & Strawn recently released this survey of “Baby HSR” laws — legislation requiring parties to seek state-level clearance before closing certain transactions. The survey identifies which states have adopted premerger notification requirements and, for each state statute, describes key details, like:
– Covered transactions
– Who must file
– Any materiality threshold
– The recipient, timing and contents of the required notice
– The review timing
Back in August, I blogged about model legislation approved by the Uniform Law Commission but noted that states are free to enact their own versions of the legislation and identified some likely points of deviation. This guide can “help buyers and sellers quickly identify states with Baby HSR laws that may impact a transaction” — which is important since noncompliance may mean fines or enforcement actions — and understand the key details above. Check it out!
In November, John blogged about the Chancery Court’s recent decision inGB-SP Holdings LLC et al. v. Walker (Del. Ch.; 11/24). This Fried Frank M&A briefing on the case discusses the facts that caused Vice Chancellor Fioravanti to evaluate the adoption of the forbearance agreement under the entire fairness standard. He found that the directors were materially conflicted as a result of indemnification rights they secured for themselves — under unusual circumstances — in connection with approving a Foreclosure Agreement with the company’s creditor.
The scope of the indemnification rights in the Indemnity Agreement between Versa and the Company extended beyond claims arising out of the Foreclosure Agreement, to cover also any claims brought by the company’s controlling stockholder, GB-SP, Inc. (whether relating to the Foreclosure Agreement or not). When the directors sought the indemnification rights, they knew that they had breached GB-SP’s rights under a Shareholders Agreement, and knew that they could not obtain insurance that would cover liability for those breaches because the policy excluded claims from major shareholders.
The alert highlights this related key takeaway:
Under some circumstances, directors may be rendered self-interested when they secure indemnification rights in connection with approving a transaction. Normally, obtaining indemnification rights would not render directors self-interested—because indemnification is commonplace in corporate affairs and does not increase a director’s wealth. In this case, however, the court stressed “the troubling circumstances surrounding the receipt of indemnification.”