Delaware rightly prides itself as being at the cutting edge of US corporate law – so it may come as a surprise to learn that its M&A jurisprudence seems to be evolving toward positions that Canadian courts arrived at some time ago. Here’s an excerpt from this Torys memo that explains how the Delaware & Canadian approaches to deal litigation are converging:
From a Canadian perspective, Corwin essentially brings the Delaware approach in line with how Canadian courts review M&A transactions in similar cases. A Canadian target board’s decision in a change-of-control transaction is subject to deference under the business judgment rule.
As in Corwin, Canadian courts afford significant weight to the affirmative vote of shareholders in support of an M&A transaction. Arrangement transactions, which are the most frequently used structure for implementing a friendly deal in Canada, involve shareholder approval and an application to the court to determine that the transaction is fair and reasonable, a determination that relies to a large extent on the shareholder vote.
As for controlling shareholder transactions, the use of an independent special committee & fully-informed minority approval endorsed by the MFW court parallel Canada’s requirements under Multilateral Instrument 61-101. However, while MFW provides an optional path to business judgment rule review, in Canada, those procedural protections protections are mandatory in going private deals.
This Sherman & Sterling blog reviews the latest decision to follow Corwin’s approach to post-merger claims. In Appel v. Berkman(Del. Ch. 7/17), Vice Chancellor Montgomery-Reeves concluded that tendering shareholders’ decision to participate in a tender offer was fully-informed and non-coerced. Accordingly, she applied the business judgment rule to the board’s actions & dismissed the plaintiff’s claims.
The target’s Schedule 14D-9 disclosed that its chairman & founder abstained from voting on the transaction. However, the plaintiff alleged that the disclosure in the target’s Schedule 14D-9 was inadequate, because it failed to disclose the reasons behind the chairman’s decision to abstain from voting on the deal. The plaintiff also contended that the amount of the fees paid by the buyer to the target’s financial advisor for unrelated work should have been disclosed.
This excerpt says that neither of those arguments got much traction with the Vice Chancellor:
First, plaintiff asserted that Diamond failed to disclose its chairman’s “disappointment” with the merger. But according to the Court, “the significant weight of twenty-five years of Delaware authority” did not require that an individual director explain “the grounds of their judgment for or against a proposed shareholder action,” and the Schedule 14D-9 issued in connection with the transaction disclosed the chairman’s abstention.
Second, plaintiff contended that Diamond’s disclosures regarding the financial advisor’s relationship with Apollo were inadequate. The Court held otherwise. Specifically, it found that the 14D-9 did in fact disclose relationships with Apollo portfolio companies that plaintiff alleged were omitted.
The Court also determined that disclosure of the amount of compensation paid by Apollo to the financial advisor was not required in light of the extensive disclosures that the financial advisor “has provided ‘and is currently providing’ services to Apollo-affiliated entities and has been and will be receiving compensation from Apollo” and because plaintiff’s allegation of materiality was conclusory. The Court noted that “prudence would counsel in favor of disclosing the amount of compensation,” but concluded that “the alleged disclosure violation does not prevent the application of Corwin in light of the disclosures already provided.”
The Vice Chancellor’s decision on the fee disclosure may be somewhat surprising given the Chancery Court’s recent hard line on banker conflicts & fee disclosure. However, in addition to noting that the disclosure of the relationships was extensive, the opinion suggests that the overall amount of the fees received was not material to the financial advisor.
On Friday, the Delaware Chancery Court issued its ruling in the Clearwire appraisal proceeding. Despite a complex and far from pristine process, Vice Chancellor Laster rejected the plaintiff’s breach of fiduciary duty claims & concluded that the merger was entirely fair. Moreover, he found that purchase price was more than twice the target’s “fair value”!
In addition to addressing the appraisal claim, Vice Chancellor Laster’s 95-page opinion includes a lengthy review of the fairness of the process that culminated in the company’s merger with Sprint, & the price shareholders received in the deal. While the fight in appraisal cases has usually focused on whether the merger price should serve as the basis for a fair value decision, that wasn’t the case here. Neither party in the case sought to establish the merger price as fair value, and the court instead turned to competing DCF analyses from the parties’ experts.
Here’s an excerpt from a Reuters article on the case – and on Aurelius Capital Management’s very bad day:
A Delaware judge ruled Friday that wireless carrier Clearwire Corp was sold in 2013 for more than twice its fair value, a decision that dealt a stinging loss to the Aurelius Capital Management hedge fund which spent years battling to prove Clearwire was vastly underpriced.
Sprint Corp acquired Clearwire in 2013 after a bidding war with Dish Network Corp pushed the price to $5 per share, valuing Clearwire at about $14 billion. After Clearwire shareholders approved the deal, an affiliate of Aurelius that had opposed the Sprint acquisition brought what is known as an appraisal action, asking a judge to determine fair value of the stock.
The affiliate had sought $16.08 for each of its 25 million shares, or about $400 million. Vice Chancellor Travis Laster on Friday sided with Clearwire, which had said the fair price was $2.13 per share, or about $53 million for the fund’s stock. Aurelius will also collect interest.
Delaware courts have rarely found “fair values” in appraisal proceedings that are below the merger price – but this case represents the second such decision in the last 60 days.
This Weil Gotshal blog discusses the Institutional Limited Partners Association’s new guidelines on the use of subscription credit lines by fund managers. These credit arrangements – which originally were used to provide short-term financing in order to streamline investor capital calls – are being used more broadly.
The blog says that the ILPA guidelines are intended to ensure that these credit lines are used in a way that benefits investors. Here’s an excerpt:
As a general theme, the guidelines emphasize stricter parameters on the use of such lines and greater transparency with respect thereto. Specifically, ILPA calls for “reasonable thresholds” relating to such lines; namely, for such lines to be (i) capped at 15-25% of uncalled capital commitments, (ii) outstanding for a maximum of 180 days, (iii) utilized for a stated maximum period of time and (iv) secured against investors’ capital commitments only and not other fund assets. Additionally, ILPA recommends that the preferred return clock is linked to the date when a borrowing is made rather than the date capital is called from investors to repay the borrowing.
With regards to transparency, the guidelines encourage enhanced disclosure regarding the use of subscription lines and their impact on performance, both during the due diligence stage of a prospective manager and the term of the fund.
The guidelines include a number of questions that investors should ask fund managers about any proposed subscription credit line, and sponsors would be wise to review those in connection with any new or expanded facility.
It’s been a tough year in Delaware for preferred stockholders – & according to this K&L Gates blog, they just took another hit in Chancery Court:
In In re Appraisal of GoodCents Holdings, Inc., C.A. No. 11723-VCMR, Vice-Chancellor Montgomery-Reeves held that, following a merger, a provision in the target company’s certificate of incorporation only provided preferred stockholders a voting right, not an entitlement to a liquidation preference.
The Preferred Stockholders argued that Section B.6.c of Article V of the certificate of incorporation conferred a liquidation preference, entitling them to the entire merger consideration, because Section B.6.c states that “consideration payable to the stockholders of the corporation . . . shall be distributed to the holders of capital stock of the corporation in accordance with Sections B.6.a and B.6.b above [which set forth the Preferred Stockholders’ preference in the event of a liquidation, dissolution or winding up of GoodCents].”
The common stockholders argued otherwise – contending that the language was intended to confer voting rights on the preferred in a merger, but only if the merger agreement didn’t provide for them to receive their liquidation preference.
The court sided with the common holders, noting that the charter document contained language specifying the preferred’s right to a dividend in connection with a liquidation, dissolution or winding up – but was silent when it came to a merger.
Convincing business people that an earnout can be a “security” for purposes of the Securities Act is often a challenge. Fortunately, this recent Cooley blog provides some help. Here’s an excerpt:
Sellers (particularly financial investors) in private M&A transactions are increasingly seeking the right to be able to monetize their rights to contingent consideration by requesting royalty-like earn-out streams and requesting a right to sell the potential future payments to a single third-party purchaser.
However, giving the target stockholders the right to an earn-out raises significant issues for the buyer of the development-stage asset with regard to the US securities laws because the contingent consideration will likely be treated as a “security” of the buyer, requiring the buyer to comply with the federal securities laws and subjecting the buyer to liability for non-compliance.Therefore, buyers should be cognizant of these securities law considerations and some of their practical implications.
If the right to be paid contingent consideration is transferable, that right will likely be considered a “security” of the buyer under long-held SEC guidance. In general, under a line of SEC no-action letters on earn-outs and contingent value rights, there is a multi-factor test used in analyzing whether the contingent consideration is more like a contract or a “security,” with transferability being the most significant factor. If the contingent consideration is considered a “security,” any offering of the security must comply with the federal securities laws.
The blog then goes on to discuss the compliance and disclosure issues raised by an earnout’s status as a “security.”
This Dechert memo surveys the first half of 2017 and says that antitrust M&A investigations are down, but that the trend toward longer investigations continues. Here are some of the key takeaways:
– The number of significant merger investigations was down slightly to 12 during the first half of 2017 compared to 14 the first half of 2016, and 31 on a Rolling Twelve Months (RTM) basis compared to 36 during the prior period.
– The antitrust agencies filed four complaints over the RTM ending in the second quarter of 2017 compared to six during the prior period.
– Despite the reduced number of significant merger investigations, they continued to take longer on average—12.2 months in the first half of 2017 compared to 9.5 months in the first half of 2016, and 11.0 months on a RTM basis compared to 9.3 months during the prior period.
– Because merging parties either waited longer to file HSR or more of them pulled-and-refiled, the time period between deal announcement and the issuance of a second request increased by about one month between 2011 and 2017.
Companies are responding to the increased duration of investigations and lawsuits by allotting more time in merger agreements for antitrust review—about 15 months on average during 2017.
Tune in tomorrow for the webcast – “FCPA Considerations in M&A” – to hear Richards Kibbes’ Audrey Ingram, K&L Gates’ Vince Martinez and Schulte Roth’s Gary Stein to learn how to take the FCPA and other anti-corruption laws into account during M&A activities.
Weil Gotshal recently published its 10th annual “Sponsor-Backed Going Private Survey”. A related blog reviewed how going private transactions have evolved over the past decade. Here’s an excerpt highlighting some of the key differences between pre-financial crisis deal terms and those prevalent today:
– Before the financial crisis, the risk of a sponsor not being able (or willing) to close a deal was not on people’s radar in a meaningful way. In 2006, reverse termination fees were generally around 2-3% of enterprise value, a relatively small amount that became very relevant when sponsors (and banks) soured on certain signed deals in 2008 and 2009. After the trauma of the financial crisis, target companies and their advisors began to insist on higher reverse termination fees and the market is now 5-6% of enterprise value (slightly higher for smaller deals). A review of relevant agreements from 2006 and 2016 also reveals that the situations in which the reverse termination fee is payable has been made much more clear.
– The amount of conditionality in pre-crisis deals is striking. Although we noted in 2006 that financing outs were increasingly “out”, over 25% of deals under $5 billion actually included financing outs (which allowed sponsors to walk from a deal without paying any fee if the debt financing was not there). Today, the prevailing construct in sponsor-backed take privates is specific performance lite, where a company can force the sponsor to close if the debt financing is available but in other cases can only receive a reverse termination fee. In 2016, 73% of transactions featured the specific performance lite construct. No deals in 2016 (or 2015 or 2014) included a financing out.
Deals are financed very differently today too – in 2006, deals over $5 billion in value averaged only 27% equity financing. Today, leverage is much lower, & a quarter of all going private deals in 2016 were financed entirely with equity. But maybe the most striking difference is how many fewer deals there are today. In 2006, there were 50 going private transactions included in the survey – compared to only 22 in 2016.
I once worked on a big deal for a company that had a reputation for excellence in transformational acquisitions. The buyer brought the usual assortment of lawyers, financial people, and senior executives to the initial “all hands” meeting with the seller – but by far the largest group in attendance was the team responsible for post-closing integration.
Watching them in action, I learned pretty quickly exactly why this company’s M&A track record was so good. They began laying out the details for integrating the acquisition long before the parties even shook hands on a deal, and when the deal closed, they hit the ground running.
Post-merger integration is almost always the most challenging – and least sexy – part of doing deals. This Deloitte memo reviews the critical importance of integration & makes the case for increased board oversight. Here’s an excerpt with some thoughts on the role of the board in post-merger integration (PMI):
The board’s role obviously should not be to supplant management or micro-manage a transaction before or after it’s completed. Rather, board members should look to see that management has set a robust PMI strategy with appropriate resourcing and be held accountable for delivering against it, providing the board with regular updates and dashboards on timing and actions on critical issues, challenges, and milestones.
Many boards assume that everything after this phase will naturally fall into place. Often, that is not the case. In many M&A transactions, it is not until the deal is signed—or later—that the two companies have ample exposure to the leadership style and aptitude of the other company and can begin to know who the key employees will be—and where the problems are.
As a result, the board should gain visibility into the integration leadership decisions, including the appointment of a strong integration leader who can make decisions swiftly and who has the clout to execute on key decisions. A leader who understands cultural issues and is able to navigate the associated challenges is critical. Having that leader ready to combine the two entities is a key part of Day 1 preparedness and sets the stage for a successful PMI program.
The Board should also ensure that there is a well defined set of principles to guide management’s approach to the integration process. Directors should oversee the post-merger integration process, regularly evaluate its implementation, and hold management accountable.