California is notoriously tough on non-competes. Sometimes, buyers try to work around California’s hard line approach by including the desired non-competes in a shareholders agreement governed by the laws of a less restrictive state – like Delaware. This Cooley blog reviews a recent Delaware Chancery Court decision refusing to enforce such a work-around. Here’s an excerpt:
In EBP Lifestyle Brands v. Boulbain, the Delaware Court of Chancery declined to enforce covenants not to compete or solicit employees against Yann Boulbain, a former vice president of The Ergo Baby Carrier, Inc., a company based in California, due to lack of personal jurisdiction. Specifically, the court found that although the restrictive covenants were contained in a stockholders agreement that was governed by Delaware law, and the company’s ultimate parent and party to the agreement was incorporated in Delaware, such “contacts” between the former employee and the State of Delaware were not, in and of themselves, sufficient to establish personal jurisdiction over the former employee in a Delaware court.
Perhaps more importantly, the Court said that even if it had personal jurisdiction, Delaware conflicts of law principles would require dismissal of the case because California had a materially greater interest in the dispute. Here’s the key takeaway from the case:
The decision serves as a clear warning to parties that, regardless of choice of law, it will be very difficult to enforce a non-compete against an individual in California in a simple stockholder purchase agreement under a statutory exception where (as here) the individual is merely purchasing, and not selling, stock. This is especially true where the person has no meaningful ties to or contacts with Delaware. Whether there are sufficient Delaware contacts will be a highly fact-specific inquiry for the Delaware court.
Most public company M&A disclosure documents include a section addressing the forecasts provided to the board and the company’s financial advisors in connection with their evaluation of the transaction. These forecasts typically include non-GAAP financial information, but Rule 100(d) of Reg G provides an exemption from its requirements that applies to disclosures summarizing “the bases for and methods of arriving at” a fairness opinion.
While these forecasts appear to be well within the scope of the exemption, plaintiffs – and in some cases the Staff – have challenged this assumption in the case of non-GAAP information disclosed under a separate heading (typically captioned “Forecasts” or “Projections”) from the discussion of the banker’s fairness opinion. Some have also called into question the applicability of this exemption to tender offer filings.
This Cleary blog sets forth a detailed argument that these distinctions are inappropriate – and that the reconciliation requirements of Reg G do not apply to this information, regardless of what type of disclosure document it appears in or where it appears. Here’s an excerpt summarizing the argument:
It is true that the projections in the “Forecasts” section of M&A disclosure documents include projections that are not GAAP. Indeed, projected unlevered free cash flows are a central input into any discounted cash flow analysis. But in our view the contention that these projections are subject to Regulation G is incorrect.
The provision of a GAAP reconciliation for these forecasts would not serve the purpose for which Regulation G was adopted – namely, to prevent a company from misleading investors by providing NGFMs that obscure its GAAP results and guidance. No such concern applies to the “Forecasts” section of M&A disclosure documents, where the data are being provided solely to enable shareholders to understand the specific, projected financial metrics that the company’s financial advisor used in its financial analyses to support a fairness opinion.
The blog notes that the Staff has sometimes issued comments to the effect that Reg G applies to these disclosures, and recommends that the Staff issue interpretive guidance confirming that the exemption applies to forecasts included in M&A disclosure documents.
This Wachtell memo addresses where things stand today in the world of shareholder activism. New capital continues to flow into activist hedge funds, & attacks on large companies have increased – but efforts to promote a more long-term focus among institutional investors are also gaining traction.
Here are some of the key takeaways on how activist strategies are evolving:
– While an activist attack on a large successful company to force acceptance of a financial engineering strategy has generally failed, e.g., GM’s resounding defeat of Greenlight Capital’s attempt to get shareholder approval of converting common stock into two classes, there has been an increase in attacks to obtain a change in a company’s CEO.
– There has been an increase in attacks designed to force the target into a merger or a private equity deal with the activist.
– There has been a significant increase in “bumpitrage” — buying a block of stock in a merger partner seeking shareholder approval to use the block to defeat approval, unless the merger price were increased.
– Several major funds have converted from classic activism to a form of merchant banker approach of requesting board representation to assist a company to improve operations and strategy for long-term success.
The memo highlights efforts to promote long-termism among investors, and points out that BlackRock, State Street and Vanguard have continued to express support for sustainable long-term investment. These investors have been active in sharing their governance and engagement expectations with public company boards and CEOs. Shareholder engagement is increasingly critical – failure to engage effectively has resulted in the loss of proxy contests, or in “Pyrrhic” victories followed by a change in management.
This recent blog from Steve Quinlivan addresses the wide-ranging impact that FASB’s new revenue recognition standard may have on M&A. Public companies will begin implementation of the new standard on January 1, 2018. For some companies, the new standard might not have a material impact on their financial statements – but that may not be the case for their deals.
The blog says that the transition to the new standard may affect everything from M&A valuation to due diligence to substantive deal terms. Here’s an excerpt on how working capital adjustment provisions may be influenced by the new standard:
A change in revenue recognition patterns will affect the calculation of a target’s working capital. The change will be most difficult to deal with when the working capital target is determined before adoption of the new standard with a true up occurring after the new standard has been adopted. Solutions will include calculating working capital using existing standards for the true up (or using the new standard for the determination of the target) but the level of effort will need to be a ssessed as it will vary amongst companies and the alternative calculations may not be feasible for some.
Working capital targets are often calculated using an average of working capital for the twelve preceding months. Thus for transactions documented after the new standard becomes effective, a method may need to be developed to account for differing accounting principles during the look back period.
The Delaware Supreme Court’s 2014 MFW decision laid out a route to business judgment review for controlling shareholder buyouts. That decision gave companies a choice – either implement MFW’s procedural protections or tough it out under the entire fairness standard of review.
This Ropes & Gray memo discusses that choice in light of Vice Chancellor Laster’s recent decision in the Clearwire appraisal case – and says that entire fairness isn’t always a show-stopper:
The burden of proving entire fairness and the perception of a significant risk of a negative outcome under an entire fairness review frequently results in deal participants allowing the fate of the transaction to be determined not only by a special committee, but, even more critically, by the majority of the minority stockholder vote. However, the recent Delaware Chancery Court decision in ACP Master, Ltd. v. Sprint Corp. / ACP Master, Ltd. v. Clearwire Corp. highlights that entire fairness may not be fatal, and that a finding of entire fairness may overcome earlier instances of conduct or process that may fall short or that otherwise had “flaws” and “blemishes.”
The memo addresses specific actions that controlling shareholder should take – or refrain from taking – in order to enhance a deal’s ability to survive entire fairness scrutiny.
This recent FTC blog provides a helpful walk-through of the HSR process, and addresses frequently asked questions about how the timing of HSR review could affect a pending deal. This excerpt talks about how long an HSR filing is valid in the event of a delay in closing:
Once a transaction receives early termination (ET) or the waiting period expires, the acquiring person has exactly one year from that date in which to cross the filed-for HSR threshold. The one-year period ends on the same date, one year later, regardless of whether it falls on a weekday, weekend or holiday. In addition, in the interest of ensuring that HSR filings reflect current information and intentions, the HSR Rules contain expiration dates. Here are the potential scenarios:
– If a Second Request was not issued, the filing will expire one year after the date on which ET was granted or the waiting period expired.
– If a Second Request was issued and the parties certified substantial compliance, the HSR filing will expire one year after the end of the extended waiting period that was triggered by the certification of substantial compliance.
– If a Second Request was issued but the parties never certified substantial compliance, the HSR filing will expire 18 months after the date on which the HSR filings were submitted to the agencies.
If the HSR notification expires and the filed-for threshold has not been crossed, the parties must submit a new HSR filing – including any new 4(c) and 4(d) documents – and will be subject to a new transaction number, new fee, and a new waiting period, if they wish to proceed with the transaction. As with waiting periods, timing agreements cannot toll the one-year or 18-month periods.
The blog also addresses questions on when the HSR waiting period will be deemed to commence, the length of the waiting period, the early termination process, the “withdraw and refile” procedure, & the second request process.
Yesterday, President Trump acted on the recommendation of CFIUS and issued an executive order blocking Canyon Bridge Capital Partners’ proposed $1.3 billion acquisition of Lattice Semiconductor. While Canyon Bridge is a US buyout fund, this Reuters article notes that it is partially funded by China’s central government & has indirect links to the country’s space program.
It’s been tough sledding for China-backed buyers of US semiconductor businesses in recent months – President Trump’s actions follow on the heels of President Obama’s decision to block another Chinese semiconductor deal last December. This Wilson Sonsini memo points out that these actions reflect bipartisan concerns about China’s investments in the sector:
The U.S. government has been expressing broad concerns with Chinese acquisitions of semiconductor companies for some time. As we noted in a previous WSGR Alert, President Obama’s Council of Advisors on Science and Technology (PCAST) released a public report in January 2017 entitled “Ensuring Long-Term U.S. Leadership in Semiconductors.” In an unusually direct statement, the PCAST stated that “Chinese industrial policies in [the semiconductor] sector…pose real threats to semiconductor innovation and U.S. national security. The report recommended heightened scrutiny of China-backed investments in the semiconductor industry.
Further, in November 2016, then-Commerce Secretary Penny Pritzker directly criticized China’s plans for the acquisition of semiconductor companies, stating that China’s “unprecedented state-driven interference would distort the market and undermine the innovation ecosystem” in the semiconductor industry. Additionally, the proposed acquisition of Lattice by Canyon Bridge faced significant bipartisan opposition from U.S. lawmakers shortly after it was announced. In December, 2016, over 20 members of Congress wrote a letter to the Treasury Secretary requesting that the transaction be blocked due to national security concerns.
As we’ve previously blogged, CFIUS review sometimes results in decisions by the parties to abandon their deals – but the decision to block the Lattice Semiconductor deal marks only the 4th time that an American president has blocked an acquisition on national security grounds.
Unprecedented levels of shareholder activism in recent years have resulted in significant changes to the composition of many public company boards. This recent IRRC study looked at the impact that activism has had on board demographics among S&P 1500 companies. Here are some of the key findings:
– Activism drives down director ages. Dissident nominees & directors appointed via settlements were younger, on average, than board appointees in connection with shareholder activism.
– Dissident directors & board appointees were general younger than their counterparts across the broader S&P 1500 index.
– While dissident directors generally reflected a wider range of ages, insurgent investors & incumbent boards both favored individuals in their 50s when picking candidates – a preference that was shared by the broader S&P 1500 index.
– Activism does not promote gender diversity. Less than 10% of the directors of companies included in the study were women. The rate at which women were selected as dissident nominees or board appointees in contested situations increased over the course of the study, but it trailed the rate of increase among the S&P 1500.
– Activism does not promote racial or ethnic diversity. Less than 5% of directors at companies in the study were ethnically or racially diverse. This also trailed the broader S&P 1500 universe.
– Activism boosts boardroom independence. Directors at companies in the study were generally more independent than their counterparts at other S&P 1500 companies. Dissident nominees and board appointees were likely to be more independent than directors appointed unilaterally by the board in response to activism.
The study also found that prior board experience wasn’t a prerequisite for dissident nominees – only about half were members of other boards. Interestingly, the study did find a number of overboarded “usual suspects” showing up repeatedly on dissident slates – raising questions about their independence from their activist sponsors. Financial professionals & corporate executives accounted for the bulk of board nominees or appointees in activist situations.
Intralinks’ annual “M&A Leaks Report” makes for interesting reading – it analyzes deal leaks over the period from 2009-2016, and breaks them down by world region, country & business sector. The report also looks into the effect of leaks on the premiums paid, emergence of rival bidders & time to closing.
This recent blog scopes out the report’s conclusions on which business sectors’ deals leaked most frequently. In 2016, consumer deals were the leakiest (16%), with retail deals (12%) & real estate deals (9%) following behind. Real estate deals were the leakiest during the prior two years, and have the highest overall rate of leaks over the eight years covered by the report. The healthcare (5%), energy & power (5%) and industrials (7%) sectors were the most tight-lipped last year.
This blog excerpt speculates on what may account for the differences between the various sectors when it comes to leaks:
– Sellers/targets in sectors which have a lot of M&A activity with significant competition for assets may be using deal leaks as a strategic tool to try to flush out the “optimal” acquirer, i.e., the one who has the greatest synergies with the target and who can therefore pay the highest price, hence the higher target takeover premiums in leaked deals. This conclusion is borne out by data from Thomson Reuters on target valuations. According to Thomson Reuters, over the past nine years the Real Estate sector has the highest average target EV/EBITDA exit ratio, at 18.1x.
– Sellers/targets in sectors which traditionally have lower valuation multiples may also be more tempted to use deals leaks to try to increase the valuations for their deals. According to the Thomson Reuters data, the Industrials and Materials sectors, which have among the lowest average target EV/EBITDA exit ratios over the past nine years, are the number three and number four ranked sectors for deal leaks over the same period.
The report also found that leaked deals have significantly higher premiums & a higher rate of rival bids in comparison to non-leaked deals.