ISS announced yesterday that it’s changing hands – for the fifth time in 15 years or so. Genstar Capital, a San Francisco-based private equity firm, is buying the company from the previous PE owner – Vestar Capital Partners – for $720 million.
The ISS press release gives a few details on expected timing & transition plans:
The transaction is expected to close by early fourth quarter, subject to customary closing conditions.
ISS will continue to operate independently once the transaction is completed and the current ISS executive leadership team will remain in place.
Based on the press release, Genstar has some experience in backing service providers in the financial services sector – and plans to continue ISS’s strategic infrastructure & ESG initiatives.
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– Revenue Recognition Representations: Impact of FASB’s New Standard
– Tilting the “Proxy Contest” Playing Field: The Latest Tactic
– Dissident’s Disclosure Lawsuit Leads to ISS Recommendation Change
– DFC Global: A Few Observations from Delaware
– 29 Tips for Young Deal Lawyers
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online. Try a “Free for Rest of ’17” no risk trial now!
Companies employ a variety of strategies in response to shareholder activism, but this “Institutional Investor” article says that, according to a new study, withholding negative forecasts & managing earnings sometimes play a part. Here’s an excerpt:
When activist hedge funds intervene at portfolio companies, company managers often take defensive action.
Managers at these firms are likely to strategically change voluntary disclosure practices and earnings management strategies in order to protect against heightened career and reputational risks, according to forthcoming research in academic journal Management Science.
The study’s authors said companies embroiled in these types of battles become more likely to withhold bad news and use earnings management techniques to inflate their reported performance. The research was based on a study of 510 companies targeted by 191 activist hedge funds, using data from U.S. regulatory financings and management earnings forecasts.
The study found that the practice of withholding bad news was more pronounced when hedge fund activists posed greater threats to management & where their interventions were short-term in nature.
This Cleary memo reviews M&A litigation during the first half of what’s been a very eventful 2017. In addition to addressing developments under Corwin, MFW & appraisal actions, the memo discusses how plaintiffs have responded to Trulia & the decline of disclosure-only settlements. Here’s an excerpt:
Plaintiffs have responded to Trulia in several ways. First, some plaintiffs have attempted to file suits in other fora that they hope will be more receptive to approving disclosure-only settlements. Certain state courts have indicated that they will adopt Trulia’s enhanced scrutiny of such settlements, but the response has been mixed. These attempts have been hampered by exclusive forum bylaws, which have been widely adopted by corporations and require challenges to mergers and acquisitions to be brought in a designated forum. Although some observers speculated that certain corporations may be willing to waive an exclusive forum bylaw in the hope of securing a quick, disclosure-only settlement in another forum, early research has found no evidence of such willingness thus far.
Second, some plaintiffs have attempted to file claims in federal court under the Exchange Act. Consequently, the number of securities class actions alleging federal disclosure violations skyrocketed in 2016, and this trend continued in the first half of 2017. Exclusive forum bylaws cannot require the filing of these claims in the Court of Chancery because the claims are based on federal law.
The memo notes that based on how federal courts have responded to Trulia, they may turn out not be any more receptive to disclosure-only settlements than Delaware courts – and that these developments have encouraged plaintiffs to agree to quickly dismiss their individual claims in exchange for supplemental disclosures & the payment of a small mootness fee to plaintiffs’ counsel.
One of the first items on the agenda for any transaction is picking a data room provider. This Westwicke Partners blog discusses a number of different service providers and provides advice about what dealmakers should consider when making a selection. Here’s an excerpt on issues to think about when data security is the key consideration:
If data is extremely sensitive and you are very concerned about security, some companies offer digital rights management. An example is Blackberry Workspaces (which, despite the name, does not require users to have Blackberry devices). With this offering, you can place controls into the file itself. This means that people who have access to the document cannot print, edit, or forward it, allowing you tight control over sharing of your information. This generally is very cumbersome for the user, who often has to install software and might be unable to view on a mobile device. Digital rights management has not seen wide adoption yet because it’s not easy to use.
This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.
In upholding the minority’s fiduciary duty claims, Vice Chancellor Glasscock noted the following facts:
– The controlling shareholders collectively owned more than 90% of the common stock of Polk;
– Directors allied with the controlling shareholders exercised that collective power as a control block;
– The controlling shareholders engineered a self-tender in a way that maintained their degree of control; and
– The tender offer price was set through a financial advisor that also did work for affiliates of the controlling shareholders.
Those facts aren’t great, but here’s the clincher – within roughly two years of the self-tender, the remaining stockholders had received extraordinary dividends amounting to 1/3rd of the self-tender price, along with merger consideration equal to 300% of the self-tender price.
As a result, Vice Chancellor Glasscock declined to dismiss the claims & determined that the controlling shareholders had the burden of proving entire fairness.
Compensation issues in spin-offs can be very complicated. Matters that need to be addressed include the terms of SpinCo’s compensation & benefit programs, treatment of outstanding parent company awards, & whether special awards will be made as part of the transaction.
This PayGovernance memo provides an overview of compensation considerations that need to be taken into account when planning a spin-off. Here’s an excerpt addressing potential transaction-related special awards:
Many spin-‐offs include “Founders’”grants of SpinCo stock and/or stock options to SpinCo’s senior management team both to provide support for team retention during an initial post-spin period and to help establish ownership of SpinCo stock by the new team. The special grants are typically determined by RemainCo’s Board, and are included in the offer letters for SpinCo’s senior management.
Some companies also provide “success” or “completion” award opportunities – either in cash or stock — to staff who will play a key role in executing the spin-off; in doing so, they may be required to take on additional responsibilities beyond those core to their role. Participants may include staff who will transition to SpinCo and/or staff who will stay with RemainCo. These awards are typically designed to support retention by vesting after the spin-off is completed and to incentivize excellence in execution of the spin-off (e.g., by linking payouts to the achievement of cost or timing goals).
In addition to discussing employee compensation, the memo also addresses factors to take into account in establishing compensation arrangements for SpinCo’s outside directors.
This Gibson Dunn memo reports the results of its survey of activism during the first half of 2017. This excerpt is from the intro:
Activism has continued at a vigorous pace thus far in 2017. As compared to the same period in 2016, this mid-year edition of Gibson Dunn’s Activism Update captured more public activist actions (59 vs. 45), more activist investors taking actions (41 vs. 35), and more companies targeted by such actions (50 vs. 38).
During the period from January 1, 2017 to June 30, 2017, seven of the 50 companies targeted faced advances from multiple activists, including two companies that each had three activists make separate demands and two companies that each dealt with activists acting jointly. As for the activists, 10 of the 41 captured by our survey took action at multiple companies. Equity market capitalizations of the target companies ranged from just above the $1 billion minimum covered by this survey to approximately $235 billion, as of June 30, 2017.
Activist priorities included:
– Changes in board composition (68% of campaigns)
– Changes in business strategy (61% of campaigns)
– Activism surrounding M&A (46% of campaigns)
– Governance changes (31% of campaigns)
– Management changes (27% of campaigns)
About 1-in-5 activist campaigns led to a proxy contest during the first half of the year – but none of those contests sought to gain control of the target’s board. Of the 12 contests reviewed in the survey, 4 went to a vote, with the dissidents winning just once.
This Fried Frank memo reviews the Delaware Chancery Court’s recent decision in In re MeadWestvaco S’holders Litig. (Del. Ch.; 8/17), in which Chancellor Bouchard dismissed allegations of bad faith in connection with a target board’s approval of a stock-for-stock merger entered into in the wake of an activist campaign. Here’s an excerpt summarizing the key aspects of the case:
– The decision — in which the court suggests that the standards of “waste” and “bad faith” are equivalent — highlights the extremely high bar to potential liability of disinterested target company directors. We note that if, under Corwin, business judgment review applies in a post-closing action for damages, the only basis on which a transaction can be successfully challenged is that it constituted “waste”; and that if Corwin does not apply, then, given the effect of the exculpation statute, the only route to a successful post-closing action for damages is that the directors’ conduct in approving the transaction was so egregious that it constituted “bad faith.” In MeadWestvaco, the court indicated that the two standards are essentially equivalent — and virtually impossible to meet.
– Non-controller, non-Revlon transactions (like the stock-for-stock merger in MeadWestvaco) continue to be subject to business judgment review both pre-closing and post-closing. We note that Corwin — which when applicable transforms the standard of review post-closing to business judgment (regardless of what the standard was pre-closing) — should have no practical impact on non-Revlon transactions.
– Although the court did not address the issue, MeadWestvaco may signal that there remains some uncertainty whether Corwin “cleanses” bad faith by directors. As discussed below, although one early post-Corwin decision stated that Corwin does cleanse bad faith, and a number of decisions since then have stated that Corwin cleanses breaches of the duty of loyalty (of which, we note, the duty of good faith is a part), MeadWestvaco may signal that some uncertainty remains as to whether Corwin would cleanse director action that is “so ‘egregious,’ so ‘irrational,’ or ‘so far beyond the bounds of reasonable judgment’ as to be ‘inexplicable on any ground other than bad faith.’”
This Ropes & Gray memo discusses recent a FTC decision to implement several internal process reforms that will streamline information requests and improve transparency in antitrust investigations. The reforms include:
– Providing plain language descriptions of the investigative demand process;
– Developing business education materials to help small businesses understand how to comply;
– Adding more detailed descriptions of the scope and purpose of investigations to give companies a better understanding of the information the agency seeks;
– Limiting the relevant time periods investigated by the agency;
– Significantly reducing the length and complexity of instructions for providing electronically stored data; and
– Increasing the amount of time allowed for responses to improve the quality and timeliness of compliance by recipients.
Other measures include closing older investigations and identifying unnecessary regulations. The FTC is also reviewing its data security investigations with a view to providing guidance to companies regarding what data security practices have been deemed sufficient.