This Hunton & Williams memo discusses how a dissident was able to effectively use disclosure litigation to flip ISS’s recommendation & turn the tide in a proxy fight. Here’s the intro:
In a recent proxy contest, a dissident stockholder brought a lawsuit against the company claiming that the company’s disclosures about certain incumbent directors were deficient. The court agreed, and enjoined the company’s annual stockholders meeting until at least 10 days after the company supplemented its disclosures. As a result of the court’s ruling, Institutional Shareholder Services (“ISS”) reevaluated its support for the company’s nominees and changed its voting recommendation in favor of the dissident, who ultimately prevailed at the stockholders meeting.
Litigation is a common tactic in proxy fights, but the memo points out that the case illustrates how dissidents can use disclosure litigation as an offensive weapon to influence proxy advisors’ recommendations and help win the proxy contest.
This recent blog from Lowenstein Sandler’s Steve Hecht & Rich Bodnar notes that Delaware’s recent adoption of the “blockchain amendments” to its corporate statute could have a significant influence on future appraisal proceedings. Here’s an excerpt:
Multiple decisions in the Dell case put the potential relevance of blockchain to appraisal in focus. In July 2015, Vice Chancellor Laster reluctantly dismissed a subset of Dell shares seeking appraisal because, prior to the effective date, those stockholders’ stock certificates had been retitled. As a brief recap, in that instance, DTCC (the holder of effectively all stock in the US) certificated shares into the name of its nominee, Cede & Co. The petitioners’ custodians told DTCC to retitle the dissenting shares to the name of their own nominees – this retitling broke the record of ownership and thus denied these petitioners the right to appraisal. Blockchain, which generally does involve “titling” in this sense, could avoid such a result.
The same is likely with regard to a second opinion, from May of 2016, involving the lead petitioner in Dell. There, the lead petitioner instructed Cede (via its custodian) to vote in favor of the merger – but this was an error and the lead petitioner intended to vote against the merger. While blockchain cannot protect against mistaken instructions, blockchain could reduce the number of steps between beneficial holder and the exercise of its vote.
The blog also points out that blockchain could also have an impact on appraisal arbitrage – by potentially undermining the “fungible bulk” premise on which an arb’s ability to assert appraisal rights without showing that specific shares didn’t vote in favor of the merger is based.
This Shearman & Sterling memo summarizes the Chancery Court’s recent decision in Mrs. Fields Brands v. Interbake Foods – in which Chancellor Bouchard interpreted a termination right based on a “Material Adverse Effect” clause in a license agreement. The memo notes that the Chancellor applied the same tests to the exercise of an MAE-based termination right as those that would apply in an M&A transaction:
Even though the license agreement did not involve a merger or acquisition, in analyzing the undefined term “material adverse effect,” Chancellor Bouchard applied the Court’s three-prong MAE test from In re IBP Shareholder Litigation, which construed an MAE condition as a backstop protecting the acquirer from:
– the occurrence of unknown events,
– that substantially threaten the overall earnings potential of the target,
– in a durationally significant manner.
Under Delaware law, an adverse change must be consequential to a company’s long-term earnings power over a commercially reasonable period in order to be durationally significant. Although Chancellor Bouchard said that the period for assessing durational significance might be shorter in the context of a commercial contract than in an acquisition agreement, he found that none of the three conditions for invoking an MAE termination had been satisfied.
This Nixon Peabody blog addresses the growing trend of middle market private equity firms seeking outside investors in the firms themselves – as opposed to their fund vehicles. The major reasons for this trend include meeting the firms’ needs for growth capital, facilitating generational transfers, and deepening ties with existing fund investors.
The first two reasons for seeking outside capital could apply to companies in any industry – but the idea of seeking out capital in order to deepen ties with fund investors is unique to the fund business. Here’s an excerpt discussing how selling minority interests in the firm can enhance relations with fund investors:
Historically, minority investors in private equity firms have been current or former fund limited partners. Selling a minority stake in the firm to a long-time fund limited partner allows both the private equity firm and the limited partner to develop a deeper institutional tie. Private equity firms look for minority investors with industry expertise, deal sourcing networks and value beyond their capital.
Limited partners are attracted to minority investments in private equity firms because their investment maintains a steady stream of income from profits and distributions and avoids the fees associated with investments at the fund level. Becoming a minority investor at the firm level could also open up additional investment opportunities at the fund level.
The blog points out that – unlike fund investments – capital invested at the firm level may be tied up indefinitely without an express commitment to a future liquidity event.
Yesterday, in DFC Global v. Muirfield Value Partners, the Delaware Supreme Court reversed the Chancery Court’s decision to award a premium over the merger price in an appraisal case involving an arm’s-length deal & a robust sale process. As I previously blogged, the DFC Global case attracted a lot of interest from practitioners and academics – particularly for the potential impact of the company’s argument that the merger price in an arm’s-length deal should be deemed to represent fair value.
In his opinion for the Court, Chief Justice Strine declined to establish such a presumption:
The respondent argues that we should establish, by judicial gloss, a presumption that in certain cases involving arm’s-length mergers, the price of the transaction giving rise to appraisal rights is the best estimate of fair value. We decline to engage in that act of creation, which in our view has no basis in the statutory text, which gives the Court of Chancery in the first instance the discretion to “determine the fair value of the shares” by taking into account “all relevant factors.”
While it didn’t establish a presumption in favor of the merger price, the Court did conclude that in light of the strong & arm’s-length sale process, the reasons that Chancellor Bouchard gave for allocating only 1/3rd weight to the merger price were insufficient. Those reasons focused on regulatory risks confronting the seller during the relevant period & the fact that the purchaser was a financial buyer.
The Supreme Court also questioned the Chancellor’s approach to the DCF analysis used in his opinion.
In remanding the case to the Chancery Court, Strine noted that there was no “one size fits all” approach to appraisal:
In some cases, it may be that a single valuation metric is the most reliable evidence of fair value and that giving weight to another factor will do nothing but distort that best estimate. In other cases, it may be necessary to consider two or more factors.
The Chief Justice went on to say that what’s required is for the Chancery Court “to explain its weighting in a manner that is grounded in the record before it. That did not happen here.”
Joe Feldman has launched this new survey focused on identifying best practices in pre-closing planning for successful acquisitions. Of particular interest are the strategic side of diligence, internal deliberations & discussions ahead of a decision to proceed. If you complete the survey, you can also request a copy of Joe’s final report.
This recent blog from Davis Polk’s Ning Chiu reviews a recent J.P. Morgan study on shareholder activism during the 2017 proxy season – and highlights the fact that activism can no longer be regarded as merely a niche strategy.
As this excerpt notes, maybe the best evidence of how mainstream activism has become is that institutions are not only more willing to support activist campaigns – but to initiate them as well:
Institutional investors are increasingly joining the activist fray, launching campaigns themselves. 44 campaigns this year were initiated this season by mutual funds, investment advisers and pension funds. Governance issues are usually the target, but more than half of the campaigns were focused more generally on maximizing shareholder value. Institutional investors also agitate for higher prices in M&A transactions, and may partner with activist funds in proxy contests or side with activists seeking leadership changes.
Page 10 of the study includes an exhibit detailing how frequently the 15 top institutions support activist proxy campaigns involving full and partial director slates.
Earlier this week, Delaware Governor John Carney signed into law the 2017 amendments to the DGCL. Over at TheCorporateCounsel.net, we’ve previously blogged about the most potentially significant aspect of this year’s amendments – new provisions that permit Delaware corporations to use blockchain technology for corporate records.
So what’s the big deal? This Nasdaq article speculates about what blockchain technology might mean for equity markets. Here’s an excerpt:
The biggest impact is that businesses and enterprises around the world will have the option of issuing, executing and settling shares via a blockchain. It is also likely to fuel other related activities on blockchains tied to custodianship, trading, shareholder communication and redemption. This could lead to a fundamental reshaping of the prevailing global securities model, a key element in fostering global free enterprise and business investments.
By utilizing a decentralized model, blockchains will allow both investors and issuers to interact directly with each other, eliminating the need for third-party intermediaries like brokers, custodians and clearinghouses, thereby reducing transaction costs. Settlement can occur within a few short moments, as opposed to days, with funds being released and fees being reduced.
Legal ownership and control would be given back to investors and companies, and the system would allow for proxy voting to become more transparent and accurate. Dividends and stock splits can be easily facilitated, virtually mitigating costs and errors. Further, concerns around the single-point-of-failure risk with the prevailing system would be eliminated.
On a more mundane level, the use of blockchain technologies may help alleviate the mess that the current stock transfer system has become – a problem that hasn’t gone unnoticed by the Delaware Chancery Court.
In a competitive market, bidders are always looking for an edge over the competition – and “bid sweeteners” are one way of doing that. This McDermott Will study reports the results of a survey of more than 100 dealmakers, bankers & other M&A professionals concerning the persuasiveness of various bid sweeteners used in private company deals.
Here’s an excerpt dealing with various seller-friendly indemnification alternatives:
Almost 90% of respondents considered the offer to purchase representations and warranties (R&W) insurance as persuasive (42%) or very persuasive (47%), which confirms the increased reliance on R&W insurance by M&A professionals as a strategic tool to secure a deal.
Absent R&W insurance, the most persuasive escrow amount used to sweeten a bid in a private M&A transaction was between 3–5% of enterprise value, which falls comfortably between the escrow amount generally used in deals with R&W insurance (less than 2%), if any, and the escrow amount customarily used for private company deals (5–15%). Respondents also confirmed that offering a deductible (instead of a tipping basket), a de minimis claim threshold or an anti-sandbagging provision remain popular deal sweeteners
The survey addresses the effectiveness of bid sweeteners used in a number of other areas – including monetary terms, reps & warranties, and closing conditions and certainty issues.