Here’s an excerpt from this note by Glass Lewis’ Colin Ruegsegger:
The post-meeting tangle now shifts to a more granular vote certification process, with participants including Trian, P&G and P&G’s independent inspector of elections. The underlying effort—which will involve, among other things, an evaluation of whether proxies have been appropriately executed and whether the most recent proxy for each investor was counted—is expected to take roughly two months. In the interim, the remainder of P&G’s unaffiliated investors have few alternatives beyond simply waiting for the certification process to conclude.
It should be noted this razor’s-edge outcome is not unfamiliar territory for Trian. A similar campaign at E.I. Du Pont de Nemours in 2015 left Mr. Peltz narrowly short of election, with his candidacy grabbing 46% of votes cast at the meeting. This degree of support, combined with an expressed intention to acquire more Du Pont shares and remain engaged, arguably left Trian and Mr. Peltz in a position to continue pressing their agenda from outside the board room. It is noteworthy, then, that Du Pont CEO Ellen Kullman departed just five months after the contested meeting, with her replacement, Ed Breen, quickly pursuing a cost cutting campaign and, ultimately, a combination with The Dow Chemical Company.
Given the similarities between the Du Pont vote and the reported outcome at P&G, we consider it unlikely Trian will be compelled to walk back its position here. To the contrary, with a cogent set of arguments and a vote outcome that will certainly land at the very margins of P&G’s voting base, we expect Trian will leverage a patient approach and strong investor support to continue advocating— publicly or privately—for changes to the status quo.
This recent Norton Rose Fulbright blog flags a UK study that says that a solid public relations strategy can increase the likelihood that a deal will close. Here are some of the study’s conclusions:
– Proactive announcements count: 84% of deals announced as actual offers are completed, compared with just half of those which were announced in response to a leak
– Leadership matters: announcements with statements from both companies’ chairman/CEO are associated with significantly higher levels of success than those without
– Markets reward uncertainty – in the short-run: leaked M&A deals, or announcements lacking information about the underlying strategic rationale, are actually rewarded by the markets in the very short term
– PR firms earn their fees: deals involving PR firms have a higher chance of completion than those without
– Nail down the narrative: a clear message can be obscured in the process of crafting a deal announcement – it’s important to ensure key players are on board with the deal narrative from the start.
The blog says that a good public relations strategy can also help reduce the risk that opposition from consumers or other constituencies might cause regulatory problems for the deal:
The importance of a well thought-out public relations strategy can go beyond just getting the deal closed. Increasingly consumers are paying attention to combinations of large corporations and how such mergers or acquisitions may affect them in their day-to-day lives. In the past, consumers have been mobilized by corporations opposing a proposed merger between competitors by taking out advertisements and using social media campaigns that claimed the proposed transaction would lead to higher service fees or less choice for consumers.
Such campaigns have led to consumers protesting such mergers and writing to regulatory bodies in opposition of the proposed deal. Starting a public relations campaign early that shows the benefits of a proposed transaction can prevent such anti-merger campaigns from taking hold and creating regulatory and PR problems down the road.
This Akin Gump blog describes Nasdaq’s proposal for changes in its listing rules for Special Purpose Acquisition Companies. Here’s an excerpt highlighting the proposed changes:
Initial Listing Requirements in Connection with Initial Public Offering
Round Lot*
– Existing: 300 round lot holders
– Proposed: 150 round lot holders
* A round lot means 100 shares of a security.
Net Tangible Assets Requirement
– Existing: no net tangible assets requirement
– Proposed: $5 million in net tangible assets
Proposed Continued Listing Requirements and Post-Business Combination Requirements
Continued Listing
– Existing: 300 public holders
– Proposed: No holder requirement
Net Tangible Assets Requirement
– Existing: no net tangible assets requirement
– Proposed: $5 million in net tangible assets
Post-Business Combination Requirement
– Existing: Meet all initial listing requirements following the business combination
– Proposed: Meet all initial listing requirements within 30-day transition period following the business combination
SPACs that are already listed would not be required to satisfy the $5 million net tangible assets requirement, so long as they continued to meet the public holders requirement. If the rule proposal is approved, Nasdaq will publish a daily list of SPACs that don’t meet the net tangible assets requirement and don’t satisfy any other criteria for exclusion from the penny stock rules.
I recently blogged about Corp Fin’s new “M&A Forecasts” CDI – which says that forecasts provided for the purpose of rending a fairness opinion & disclosed in order to comply with Item 1015 of Reg M&A or state law disclosure requirements would not be regarded as “non-GAAP measures” subject to Reg G.
The blog noted that the new CDI didn’t cover the entire waterfront of situations that might prompt disclosure of forecasts in connection with a deal. Along those lines, here are some thoughts I received from a member about one scenario where the CDI’s applicability may be unclear:
Commentators have pointed out that historically, the Staff has taken the position that projections provided by the target company to the buyer in connection with tender offers need to be disclosed because they “crossed the table” raising 10b-5 concerns. Because the buyer is seeking to purchase shares directly from stockholders via a tender offer while in possession of material non-pubic information (e.g., target management’s projections), a summary of those projections must be disclosed to the target’s stockholders as well so that they are on an equal informational footing as the buyer.
The Staff takes the view that the same 10b-5 issue exists in long form mergers and generally requires the disclosure of a summary of the projections that have crossed the table in connection with the negotiation of long form mergers. By way of example, the lead-in to the section disclosing a summary of the target’s projections in a merger proxy statement or a Schedule 14D-9 typically explains that the summary is being provided because, in addition to having been provided to the target’s board and the target’s financial advisor, the projections were provided to the counterparty to the transaction.
But the interpretive exemption provided by the new C&DI doesn’t on its face provide an exemption from Reg G if the non-GAAP measures disclosed in a proxy statement or Schedule 14D-9 are being disclosed in part in order to address a 10b-5 issue and not solely because of Item 1015 (which the Staff interprets to require the disclosure of a material input underlying the opinion of the target’s financial advisor) or state law disclosure requirements (which the Delaware courts have have often (but not always) interpreted to require the disclosure of reliable projections in the possession of the target board and/or that the target board has authorized the target’s financial advisor to rely upon for purposes of its opinion). In contrast to the Staff of the SEC, neither Item 1015 nor state law require the disclosure of projections because they crossed the table and potentially raise a 10b-5 issue.
Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
These are the three main areas up for consideration in the US:
For the poison pills draft policy, here’s how Wachtell Lipton describes it: “ISS’s current policy provides that if a company maintains a long-term (>1 year) shareholder rights plan that has not been approved by shareholders, ISS will recommend voting against all nominees every year if the company’s board is classified. However, if the board is annually elected, ISS will recommend voting against the entire board once every three years.
ISS proposes changing its policy to recommend voting against all directors of such companies at every annual meeting. In addition, commitments to put a long-term rights plan to a vote the following year would no longer be considered a mitigating factor by ISS (but may still be relevant to individual shareholder voting decisions). ISS would also eliminate the exemption for 10-year rights plans adopted prior to November 2009, which would affect approximately 90 companies. ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”
In this note, Carl Hagberg – independent tabulator & editor of “Shareholder Service Optimizer” – writes plenty on the Procter & Gamble proxy fight. Here’s an interesting excerpt:
AN ACE IN THE HOLE FOR P&G – OR RATHER, A BIG WILD-CARD IN THE DECK – APPEARS TO BE THE EMPLOYEE OWNERSHIP PLAN VOTING, which reportedly comprises 7 ½% of the outstanding shares, and where the Plan Trustee appears to have voted the entire position “proportionately.” This surely gave management a huge edge in what is, apparently, a dead heat – even after the big boost.
As close observers of proxy fights, the OPTIMIZER has repeatedly pointed out the “wild-card aspect” of proportional voting, and why, as a result – and also because one cannot cite a sensible rationale for having it, other than to give management an added edge most times – we hate it and feel it should be abandoned: In this case, as is normally the case, it seems to have worked to skew the vote very much in P&G’s favor. But before you look to have proportional voting in your own employee plans, please remember the Walt Disney election a few years back, when the small number of employee owners who bothered to vote, voted against Michael Eisner – and where proportional voting took him down.
We would not be at all surprised to see Peltz challenge the propriety of the Plan Trustee voting proportionately in such a close election – even though they may have had the right to do so. One could argue, of course, that the non-voters were, ipso facto, “indifferent” – but that, in our opinion, is a very different thing than having a significant number of them being automatically recorded as voting for the management slate by a Plan Trustee – especially in an election where the overall vote seems close to a 50:50 split. A very bad governance provision say we.
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Private equity fund managers are increasingly interested in outside investment at the sponsor level. We’ve previously blogged about some of the reasons for that interest. This Davis Polk memo approaches fund manager investments from the investor’s perspective – and highlights some issues to keep in mind. Here’s an excerpt discussing the potential need for consents from the funds managed by the sponsor:
Depending on the size of the stake sold to the investor and the investor’s degree of control, consent may be required from each fund’s investors on a fund-by-fund basis (usually by reference to a stated percentage in the fund documents that may be required to approve a sale of the manager or, by analogy,the amendment of the underlying fund documents).
The negotiation will focus on risk allocation in several respects: is positive or negative consent required or deemed necessary on a business level; should obtaining consents with respect to all or a certain percentage of AUM (or specific clients) be a condition to closing or should the investor have to close regardless; and should the failure of any fund consent and any resulting loss in AUM lead to a price adjustment and, if so, on what basis (e.g., dollar-for-dollar, with a deductible or tipping basket, or with a deductible and a catch-up mechanism)?
The memo covers a variety of other topics, including post-closing governance, seller indemnification, retention issues, restrictive covenants, fund investment commitments & liquidity alternatives for the investor.
Lawyers like to fight over whether a party to a contract has to exercise “best efforts,” “commercially reasonable efforts” or some other level of efforts – but as we’ve noted in the past, courts either don’t seem to distinguish between different versions of “efforts clauses,” or provide little guidance on how those versions might be different.
The bottom line is that there’s not a whole lot of helpful case law on “efforts clauses,” so when the Delaware Chancery Court weighs in on one of them, it’s big news. This recent blog from Francis Pileggi reviews BTG International v. Wellstat Therapeutics Corporation, (Del. Ch.; 9/17), where the court interpreted a clause requiring a party to use “diligent efforts” to fulfill its contractual obligations. Here’s an excerpt:
This case involved a distribution agreement between two pharmaceutical companies. BTG was the larger company and agreed to promote, distribute and sell a drug called Vistogard, that the smaller Wellstat did not have the resources to promote, distribute and sell. After extensive negotiations, the parties agreed to a contractual definition of “diligent efforts” which BTG was required to employ in order to reach various sales goals for Vistogard. In addition, the parties were required to work together to formulate and finalize a business plan that would describe the details for promoting, distributing and selling Vistogard.
The court found that BTG failed to hire a sufficient number of sales representatives and failed to devote other resources to sell Vistogard, but instead focused most of its efforts and resources on a completely different product in a different division of the company – – with instructions from the CEO to keep the costs flat related to Vistogard and not to increase the resources that were necessary to implement the business plan.
The court concluded that BTG did not meet the “diligent efforts” standard & breached the agreement by failing to comply with the agreed-upon business plan.
What makes this case different from many others is that the parties to this transaction negotiated a detailed definition of what the contract’s efforts clause was intended to require. Here’s what they came up with:
Diligent Efforts means, with respect to a Party, the carrying out of obligations specified in this Agreement in a diligent, expeditious and sustained manner using efforts and resources, including reasonably necessary personnel and financial resources, that specialty pharmaceutical companies typically devote to their own internally discovered compounds or products of most closely comparable market potential at a most closely comparable stage in their development or product life, taking into account the following factors to the extent reasonable and relevant: issues of safety and efficacy, product profile, competitiveness of alternative products in the marketplace, the patent or other proprietary position of the Subject Product, and the potential profitability of the Subject Product. Diligent Efforts shall be determined without regard to any payments owed by a Party to the other Party (excluding the transfer price for supply of such Subject Product).
The court was able to latch on to that definition and use it in interpreting the scope of the obligations required under the contract – and the real takeaway from this case may be that if you want a court to take your efforts clause seriously, then you need make the effort to define exactly what it means in your contract.
Icahn Enterprises’ Jesse Lynn points out that his company still holds the record for the most amusing defined efforts clause out there. I think the man has a point. Check out Sections 7.1 & 7.6 of this purchase agreement – which say that “in determining whether such parties acted reasonably or in a commercially reasonable manner, such parties shall not be required to ‘drop everything’ or ignore their existing responsibilities to conduct their business. . .”