The fourth quarter of 2023 saw an uptick in global M&A activity that’s continued through the second quarter of 2024, but until recently, Private Equity didn’t appear to participate in the rebound. According to a new PitchBook report on PE deal activity, that started to change in the second quarter. Here’s an excerpt from the intro:
For the six months ending March 2024, PE had been holding back what appeared to be a budding recovery in global M&A dealmaking. Consequently, PE share of M&A deal value plummeted to a worrisome 32.6% in Q1 2024, extending a one-year losing streak after eight years of steady gains and peaking at 44.0% in 2022. This left many observers—ourselves included—concerned as to whether PE would participate fully in the upside of an M&A rebound. In the latest quarter at least, PE appears to be joining in. PE deal activity is now tracking ahead of the prior year by approximately 12.0% through H1 2024. This has arrested the decline in PE share of dealmaking, which has stabilized at 36.8% of all M&A.
The report also says that, after being mired in a decade-plus low during 2022-2023, exit volumes are starting to pick up, although many of these are partial exits such as a sale and rollover of a minority stake.
Earnouts are perhaps the most contentious of deal terms, and over the years, disputes about earnout provisions have provided us with a rich source of blog topics. Despite all the problems with them, earnouts continue to be a popular tool for bridging valuation gaps. If you’re thinking about incorporating an earnout into a deal you’re working on, you may want to check out this recent Cooley memo, which offers up four drafting tips to avoid earnout disputes. This excerpt addresses the need to explicitly define the terms used to measure “efforts” obligations:
Drafters should clarify whether the buyer has an obligation to operate the acquired business in such a way as to maximize the earnout opportunity for the benefit of the seller. However, inclusion of so-called best efforts or commercially reasonable efforts clause, without further detail or definition, can lead to uncertainty.
In the Delaware Chancery’s 2022 decision in Menn v. ConMed Corp., for example, the contract between the buyer and seller included a “commercial best efforts” provision. While some “commercial best efforts” clauses contain what is called a contractual yardstick — a method to measure the efforts — the contract in Menn lacked any express standard by which to gauge the buyer’s efforts.
The court turned to other sources of interpretation for best efforts and found that, in that context, “commercial best efforts” required “a party to do essentially everything in its power to fulfill its obligation.”
The Menn case should serve as a warning to buyers to build guardrails into earnout provisions around how they will be expected to manage the business post-closing, such as whether they must retain certain employees; continue past practices, including discounts and training; and fund future improvements or development.
Other drafting tips include using clear and unambiguous terms, setting strict timelines for dispute resolution, and clearly defining what disputes will go to an expert.
In Maso Cap. Invs. Ltd. v. E-House (China) Holdings Ltd., (2d. Cir. 6/24), the 2nd Circuit rejected Rule 10b-5 claims premised on allegations that the defendants’ proxy materials for a going private merger were false and misleading. The plaintiffs contended that the company’s proxy materials included projections that were stale and had been supplemented by more recent projections that were undisclosed. The plaintiffs also alleged that the company misled investors about the purposes of the deal and post-merger plans.
In rejecting those allegations, the 2nd Circuit observed that the plaintiffs were unclear as to the source of the updated projections and stressed the proxy statement’s inclusion of cautionary language about them. The Court’s opinion also highlights the impact of the SCOTUS’s recent Macquarie decision on “pure omissions” disclosure claims. This excerpt from A&O Shearman’s blog on the decision summarizes the Court’s reasoning:
The Court first addressed plaintiffs’ allegations that the Company’s projections contained in the Proxy were artificially low and supplanted by newer projections that allegedly would have supported a higher Company valuation and, thus, more lucrative share price. The Court held, as a threshold matter, that plaintiffs’ failure to explain who created those new projections, for what purpose they were prepared, and to whom they were made available doomed plaintiffs’ claim.
But even assuming plaintiffs could explain the origination of the allegedly stronger projections, the Court found that the Proxy contained express cautionary language that would have put the reasonable investor on notice that the projections did not take into account events or circumstances that occurred after the projections were prepared. Finally, the Court rejected plaintiffs’ assertion that the Company had an independent duty to disclose the allegedly newer projections under a “pure omission” theory, opining that, following Macquarie Infrastructure Corp. v. Moab Partners L.P., 601 U.S. 257, 265 (2024), it is no longer a viable theory of liability.
The Court also rejected the plaintiffs’ allegations relating to the failure to disclose post-merger plans, noting that all of the statements cited by the plaintiffs in support of those allegations were made after the merger closed, and that the proxy statement itself included language disclosing actions that the company might take following the merger.
The list of unanswered questions about Delaware’s statutory Moelis fix – new Section 122(18) of the DGCL – isn’t getting any shorter. A recent post on the Harvard Governance Blog by Stanford Law School lecturer Jim An says that parties to the kind of governance agreements enabled by Section 122(18) may find themselves unable to obtain specific performance – and perhaps unable to obtain monetary damages as well.
The blog lays out a hypothetical under which a party has a contractual right to veto the appointment of a new CEO, but the company appoints that CEO over the party’s objections. The blog notes that this an equitable remedy like specific performance to compel the CEO’s removal would be the preferred remedy in this situation, but this excerpt suggests that might not work:
A problem arises, however, if the remedy of specific performance is put up against the legislative purpose of § 122(18). As a reminder, § 122(18)’s sponsors repeatedly represented to Delaware’s legislators that, at least in the § 122(18) context, “fiduciary duties trump contracts, always.”
To elaborate on the above CEO-veto example, suppose that the directors of the corporation have made a good-faith determination that Candidate A is the best choice for CEO, and that it would violate their fiduciary duties to allow the side-letter counterparty to veto that choice. Accordingly, the directors cause the corporation to breach the terms of the side letter and appoint Candidate A anyway, as the directors must to fulfill their fiduciary duties.
If, however, a court subsequently enforces the veto right at the behest of the counterparty, it will have rendered the clear intent of § 122(18)’s drafters and proponents a nullity—the contract would have trumped the board’s fiduciary duties, and no “efficient breach” would be possible in any meaningful way. The only way for a court to give meaning to the purpose of § 122(18) is to hold that specific performance is unavailable for § 122(18)-enabled contracts where a corporation can show that it breached the contract as a result of its directors’ fiduciary obligations under the relevant standard of review (which would be the deferential business judgment rule in most cases). Moreover, if a board intentionally avoids such a breach to escape, say, public harassment from the counterparty, the board may be engaging in self-dealing conduct and exposing itself to a fiduciary duty suit from other shareholders subject to enhanced scrutiny.
The blog goes on to say that an alternative like a liquidated damages provision with teeth might also preclude a board from engaging in an efficient breach, and in the absence of such a provision, economic damages may be very difficult to prove – thus leaving the party with a contract right that’s essentially illusory.
I do think the Chancery Court is going to spend an inordinate amount of time over the next several years sorting out the fiduciary duties v. contract rights thicket created by these amendments, but I guess I’m as skeptical about this addition to the parade of horribles supposedly associated with this statute as I am about the suggestion that dead hand pills are now undead. It seems to me that the unfortunate phrase “fiduciary duties always trump contracts” is being used as a straw man here, and I doubt that the Chancery Court is going to see these issues in black and white terms.
Fortunately, you don’t have to rely on my half-baked thoughts on the DGCL amendments, because we’ve assembled a panel of experts for our upcoming webcast – “2024 DGCL Amendments: Implications & Unanswered Questions” – to help you navigate Section 122(18) and the other recent changes to the DGCL.
In Sciannella v. AstraZeneca, (Del. Ch. 7/24), the Chancery Court dismissed breach of fiduciary duty claims arising out of the 2021 sale of Viela Bio, Inc. to Horizon Therapeutics PLC. In a 79-page opinion, Vice Chancellor Fioravanti rejected claims that pharma giant AstraZeneca, which owned approximately 27% of Viela’s shares, was a controlling stockholder.
The plaintiffs contended that their claims should be evaluated under the entire fairness standard because AstraZeneca was a controlling stockholder and pushed the company into the transaction because it wished to acquire a direct competitor. In alleging that AstraZeneca was a controlling stockholder, the plaintiffs pointed to, among other things, certain blocking rights provided to AstraZeneca in Viela’s charter.
Under the terms of the charter, certain corporate actions, including bylaw amendments, taken without the approval of Viela’s board would require the approval of the holders of 75% of its outstanding shares. As a practical matter, AstraZeneca’s ownership stake gave it the ability to block transactions subject to this supermajority vote requirement, but the Vice Chancellor concluded that the limited nature of these rights made them insufficient to confer controlling stockholder status on AstraZeneca. In his opinion, he distinguished the blocking rights provided to AstraZeneca from those in other Delaware cases in which blocking rights were held to be sufficient to convey control:
AstraZeneca’s equity position gave it limited blocking rights under the Viela Certificate. Though these blocking rights are meaningful, they are not nearly as formidable as the blocking rights highlighted in other cases. For example, unlike in Voigt where the defendants had the ability to block board decisions, AstraZeneca only had the right to veto bylaw amendments initiated by stockholders, and then only if the Board did not recommend them. . .
The supermajority voting requirements under the Viela Certificate gave AstraZeneca—by virtue of its 26.72% voting block—veto power over limited corporate actions, but as a whole, did not give AstraZeneca power to wield control over the Board or “operate[] the decision-making machinery of [Viela].” Thermopylae Cap. P’rs, L.P. v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch. Jan. 29, 2016). Nor did AstraZeneca ever exercise its blocking rights. Cf. Tornetta, 310 A.3d at 503 (noting that the CEO exercised his veto rights to block bylaw amendments on two separate occasions).
Vice Chancellor Fioravanti also rejected the plaintiffs’ arguments that support agreements entered into when Viela was spun-off by AstraZeneca, AstraZeneca’s designation of two members of the board, and the fact that Viela’s executive officers were former employees of AstraZeneca, were sufficient to make it a controlling stockholder. Finally, he rejected claims that AstraZeneca exercised transaction-specific control over the board through allegedly coercive threats made in a letter to Viela’s board to terminate its contracts with Viela. Rather than a coercive threat, the Vice Chancellor concluded that the letter at issue was a “proposal” to facilitate a business separation that had been in the works since Viela’s IPO in October 2019.
The transaction was structured as a merger with a front-end tender offer, and the plaintiffs also asserted that the company’s Schedule 14D-9 recommendation statement for the tender offer was misleading because it failed to disclose AstraZeneca’s alleged decision to abandon the company absent a sale and because it failed to disclose a set of projections prepared prior to the projections provided to stockholders in the 14D-9. The Vice Chancellor rejected those claims as well and held that because Viela’s stockholders were fully informed, the transaction satisfied Corwin and board’s actions in connection with it were subject to review under the business judgment rule. Accordingly, he dismissed the plaintiffs’ claims.
Last week, I blogged about the FTC & DOJ’s “Request for Information” (RFI) asking the public to provide information to help the agencies “identify serial acquisitions and roll-up strategies throughout the economy that have led to consolidation that has harmed competition.” A group of former FTC officials recently responded to this initiative with a letter pointing out that it was pretty one-sided and calling for a more balanced approach. Here’s an excerpt:
The current RFI, however, suggests that the agencies have already concluded that “serial acquisitions” harm competition. Although several questions take a neutral approach, many of them solicit negative information about acquisitions, and not one asks about any benefits. For example, Question 2(c) asks whether serial acquisitions encourage “actual or attempted coordination or collusion between competitors” and Question 3 posits nine subparts about ways in which an acquirer might harm competition, including tying and refusals to deal. By contrast, the RFI includes no questions that solicit information about possible pro-competitive benefits from acquisitions; at most, Question 4 asks the public to identify “claimed” business objectives and whether they came to pass.
The letter asks the FTC to supplement the RFI with a series of additional questions proposed by the authors soliciting information about the pro-competitive benefits of serial acquisitions. It also requests that the agencies withdraw certain questions included in the RFI that “create an appearance that the agencies are interested in ideological issues unrelated to their statutory mission.”
Earlier this week, the SEC updated its FAQs on Draft Registration Statements to address how companies should deal with the SPAC rules’ new co-registrant requirement when furnishing draft registration statements. Here’s the new FAQ:
(19) Question: If a registrant uses the confidential submission process to submit a draft registration statement in connection with a de-SPAC transaction, when should it include any co-registrant’s CIK and related submission information in EDGAR Filing Interface?
Answer: EDGAR does not currently allow the entry of a co-registrant on draft registration statement submissions. See Section 7.2.1 Accessing the EDGARLink Online Submission of the EDGAR Filer Manual. Therefore, the primary registrant should submit the draft registration statement without the co-registrant’s CIK and related submission information. The draft registration statement must contain the information required by the applicable registration statement form, including required information about the target company. The primary registrant must add the co-registrant’s CIK and related submission information in EDGAR when it publicly files the registration statement. See Section 7.3.3.1 Entering Submission Information of the EDGAR Filer Manual. Co-registrants do not need to separately submit the draft registration statements or related correspondence in EDGAR since the primary registrant’s reporting history will include all draft registration statement submissions and related correspondence.
The SEC also recently posted a “Special Purpose Acquisition Companies, Shell Companies and Projections Small Entity Compliance Guide” addressing the new SPAC rules on its website.
The SEC’s new SPAC disclosure rules went into effect yesterday. Although many people assumed that the rules would be the last nail in the coffin for SPAC deals, this Institutional Investor article says that the SPAC market is actually perking up a bit:
More than two years after they were first proposed, the Securities and Exchange Commission’s new rules governing special purpose acquisition companies, or SPACs, finally are set to go into effect on July 1. The expectation of tougher requirements, along with the disastrous stock market performance of most SPACS, has already led this market to sink — but it hasn’t killed it. In fact, 2024 is on pace to outdo 2023, which was the worst year for SPACs since 2016, in terms of dollars raised through the IPO market, according to SPAC Insider.
Halfway through this year, SPACs have already raised $2.5 billion, compared with $3.8 billion for the entirety of 2023, according to SPAC Insider. It calculates that are 34 SPACS that have either filed to go public, are searching for a merger partner or have completed a deal, compared with 42 for all of 2023, The average size of the SPAC IPO is slightly bigger, too, at $156.5 million compared with $124.1 million in 2023.
The article also highlights the significant headwinds that SPACs are facing, including the difficulties many SPACs have experienced in finding a merger partner and the shortened timeframe they have to complete a deSPAC under the SEC’s new rules. Still, while SPACs are certainly ailing, it does appear that they would be right to claim, like the old man in Monty Python and the Holy Grail, that “I’m not dead yet!”
In James River Group Holdings v. Fleming Group Holdings, (NY Sup. 4/24), the New York Supreme Court’s Commercial Division recently addressed a seller’s claim for specific performance of the buyer’s obligation to close under the terms of a stock purchase agreement. The Court rejected the buyer’s allegations that the seller had breached various provisions of a stock purchase agreement and granted the seller’s request for specific performance.
In reaching this conclusion, the Court pointed to provisions of the agreement entitling the seller to specific performance (Section 8.4) and providing a post-closing “true up” process to address the monetary issues raised by the buyer (Section 1.4):
In §8.4, the SPA provides for specific performance because the parties agree that there is irreparable harm if the contract is breached, and damages would be difficult to calculate. Courts enforce such provisions when negotiated by sophisticated counsel, as is true here. [Citations omitted]. The court is inclined to accept the parties’ agreement in the SPA where the parties crafted the SPA to prevent this precise situation with SPA §8.4 and §1.4.
The Court also agreed that the seller was suffering irreparable harm as a result of the buyer’s refusal to close the transaction. In particular, it pointed to the reputational harm that the seller, a public company which had announced the sale of this subsidiary as part of a long-term strategic plan to focus on core business, had suffered when the buyer’s refusal to close became public.
Specifically, the Court noted that the seller’s share price immediately dropped to an all-time low after the buyer balked, and that an analyst opined that the refusal to close potentially impacted the seller’s core value, interfered with its employees and operations, and distracted it from its strategic plan because of the need to maintain the subsidiary’s operations.
If you’ve been paying attention to the debate over the 2024 Delaware DGCL amendments, one thing that seems pretty clear is that a lot of stuff we all thought was settled long ago is once again up for grabs. Take “dead hand” poison pills, for example. These pills contained provisions that only permitted them to be redeemed by “continuing directors” and the Chancery Court invalidated them in Carmody v. Toll Bros., 723 A.2d 1180 (Del. Ch. 1998), on the basis that the adoption of such a provision involved both a violation of Section 141 of the DGCL and a breach of the directors’ fiduciary duties. In a recent M&A Law Prof Blog post, Prof. Brian Quinn says that the Delaware Legislature may have resurrected the dead hand pill:
In Toll Brothers, VC Jacobs – on a motion to dismiss – held that since the Rights that were the fulcrum for the dead hand pill could not be redeemed pursuant to the terms of the Rights Agreement by any board other than the directors who had initially adopted the pill (or at least by the directors who were continuing from the original board following a successful proxy contest) that the Rights Agreement ran afoul of § 141(a) and (d) was therefore invalid.
OK, so fast forward to 2024. Now that § 122(18) has passed and § 141(a) no longer sits atop the statutory hill, one can imagine writing an amendment to the Shareholder Rights Agreement that designates a shareholder or shareholders (who happen to be current directors) as responsible for pulling the pill. The board covenants not to redeem the pill under the Rights Agreement unless the director/shareholder agrees. So, even if the director (or directors) are replaced in a proxy contest, their dead hands will still float around the boardroom preventing the new board from pulling the pill in a manner that the new board believes is consistent with its fiduciary duties.
I don’t know that this issue is quite as cut and dried as this blog suggests. As noted above, Vice Chancellor Jacobs also held that in adopting the dead hand provisions, the directors breached their fiduciary duties, and fiduciary duty claims are something that the advocates of the amendments contend are unaffected by them. Still, if you’re defending a dead hand provision, you’d rather try to argue your way through Unocal than confront a statutory brick wall.