This article from Scott & Scott’s Keli Swann reviews IP liability considerations in M&A transactions. Here’s an excerpt about the consequences of a purchaser’s decision to retain the seller’s information technology assets:
If the purchaser chooses to retain the IT assets, it assumes the responsibility of ensuring that all software complies with the relevant licensing agreement or the purchaser risks potential copyright infringement liability. There are a number of steps the purchaser should take to mitigate potential exposure, including conducting an internal audit of the new IT assets, evaluating any existing licenses, and determining whether any remediation is required in order to become compliant.
This Fredrikson & Byron memo points out that a decision to block your proposed deal isn’t always the biggest risk of DOJ & FTC antitrust review. As this excerpt demonstrates, sometimes that process opens up a completely different bag of snakes:
Thai Union Group P.C.L., owner of Chicken of the Sea, announced its acquisition of Bumble Bee in December 2014. A year later, under scrutiny from the Department of Justice, the deal was called off. In an ominous press release, the government stated, “Our investigation convinced us—and the parties knew or should have known from the get go—that the market is not functioning competitively today, and further consolidation would only make things worse.”
Though the deal was off, the government’s investigation was not. On December 7, 2016, the Department of Justice announced that a Bumble Bee executive had agreed to plead guilty to fixing prices for packaged seafood. According to the Department of Justice, the plea was “the first to be filed in the Antitrust Division’s ongoing investigation into price fixing” in the industry. Two weeks later, another Bumble Bee executive agreed to plead guilty to similar charges.
The lesson for transaction planners is to keep a broad perspective – most dealmakers looking at antitrust issues look at market shares and overlapping industries in order to assess potential areas of concern. That focus may turn out to be too narrow:
As Bumble Bee’s experience highlights, antitrust risk in mergers and acquisitions can take other forms. As part of merger investigations, government enforcers at both the Department of Justice and the Federal Trade Commission regularly solicit millions of documents from the merging parties and their customers and competitors. The attorneys and staff who review those documents are antitrust specialists. Agreements not to compete—whether for prices to end customers, bids for projects or hiring of employees—are bound to trigger concern.
Agreements like these are likely to constitute “red flags” to regulators & should be identified before a merger is signed. As the Bumble Bee situation shows, there’s potentially a lot more than a deal at stake.
Kevin LaCroix at “The D&O Diary” recently blogged about the continuing decline in the number of deal cases being brought in Delaware Chancery Court. Along the way, he raised an important question – weren’t exclusive forum bylaws supposed to prevent cases from being brought in other jurisdictions?
Kevin cited two different reasons why exclusive forum bylaws haven’t kept deal lawsuits in Delaware:
The first factor undermining the effectiveness of the forum selection provisions, and the reason for the plaintiffs’ lawyers recent pronounced preference for filing federal court lawsuits alleging violations of the federal securities laws (rather than state court lawsuits alleging violations of state law), is that Section 27 of the Securities Exchange of Act of 1934 gives the federal courts exclusive jurisdiction over actions alleging violations of the Act.
A company’s forum selection bylaw is ineffective with respect to action subject to the ’34 Act’s exclusive jurisdiction provision. The typical federal court merger objection lawsuit alleges that the company’s proxy materials omitted material information in violation of Section 14 of the Act and Rule 14-a-9 thereunder, and is subject to Section 27’s exclusive jurisdiction provision.
The second reason is a little more. . .well . . . Machiavellian:
As Fordham Law School Professor Sean Griffith points out in his January 2017 paper (here), defense counsel “must be seen as complicit in the out-of-Delaware dynamic because they have failed to exercise Exclusive Forum bylaws to bring the litigation back to Delaware.” As Griffith explains, the defendants’ failure to invoke the provision “must be seen as a revealed preference,” one that “demonstrates defendants’ continued interest in retaining the option of a cheap settlement and a broad release in an alternative jurisdiction.”
Some defendants are reportedly even going so far as to not bring the Trulia decision to the foreign court’s attention – even where Delaware law clearly applies. If so, Prof. Griffith suggests that the lawyers involved may be on shaky ethical ground:
Even if the settlement proponents have no interest in raising Trulia, perhaps they have some obligation to do so. The rules of professional conduct may obligate counsel under some circumstances to disclose authority contrary to their position even if that authority is not raised by opposing counsel.
The Delaware judiciary can’t be happy about these practices, and if Prof. Griffith is right on his assessment of the ethical issues, then it wouldn’t surprise me if one of these proposed settlements got very messy for the parties involved at some point in the future.
I recently blogged about the differences between the takeover defense arsenals of IPO companies and more seasoned issuers. While newly public companies start out with more aggressive protections than established companies, keeping them in place risks receiving withhold recommendations on director nominees from ISS & Glass Lewis.
This Cooley blog has some advice for companies that find themselves in this position. Here’s an excerpt on how to respond if proxy advisors give a “thumbs down” to your nominees due to takeover defenses:
– Assess the impact of the negative recommendation on your stockholder base; if stockholders are heavily influenced by proxy advisory firms, consider possible outreach to stockholders before annual meeting (if appropriate)
– Educate the board (if not previously done) on the issue and evaluate the appropriateness of the stockholder protective measures (e.g., peer company practices); consider any action items following the annual meeting
– Consider various courses of action and pros/cons: changes to protective provisions, stockholder engagement, disclosure in next year’s proxy statement regarding outreach/rationale for maintaining the provisions
– Regularly assess and monitor your governance practices as the company matures and your stockholder base evolves
For most newly public companies, negative recommendations won’t have a big impact for the first few years due to the size of the insiders’ stake. But the blog notes that even if ISS & Glass Lewis don’t determine the outcome of an election, their policies are often viewed as best practices & serve as starting points for board discussions on corporate governance.
There have been some interesting developments in Delaware appraisal actions over the past few weeks. In addition to the SWS Group case that I blogged about on Friday, in In re Appraisal of PetSmart (Del. Ch.; 5/17), Vice Chancellor Slights rejected claims that the “fair value” of the dissenters’ shares should be determined by reference to the results of their expert’s discounted cash flow analysis. Instead, he concluded that the merger price represented fair value.
In reaching this conclusion, the Vice Chancellor said that the PetSmart’s sale process was “reasonably designed and properly implemented,” & that the projections underlying the plaintiffs’ DCF analysis were “fanciful.”
This Fried Frank memo says that Slights’ approach represents a trend in recent Delaware appraisals – and may have important implications for future cases:
The decision reaffirms the court’s recent trend of increased reliance on the merger price to determine appraised “fair value” when the sales process involved “meaningful competition” and the target company projections available for a discounted cash flow analysis were unreliable.
Moreover, in our view, commentary in the opinion suggests that the court may be more likely than in the past to rely on the merger price where there has been a sales process involving “meaningful competition,” even if the company projections available for a DCF analysis were reliable.
Of course, looming over all Delaware appraisal actions is the potential outcome of the DFC Global appeal. This blog from Lowenstein’s Steve Hecht speculates that the SWS Group & PetSmart decisions could influence the Delaware Supreme Court’s assessment of that case:
These decisions might factor into the Supreme Court’s approach to the DFC Global appeal and the upcoming argument in that case on June 7, as the trial judges have again proven that they are ready and willing to peg their fair value award at — or even below — the merger price, without a mandatory Supreme Court rule that might require a merger-price determination result if the sale process proved to be sufficiently robust.
This Wachtell memo discusses the Chancery Court’s recent decision in In re Appraisal of SWS Group (Del. Ch; 5/17) – where Vice Chancellor Glasscock held that the “fair value” of the seller’s stock for appraisal purposes was almost 20% lower than the merger price. Wachtell points out that this result came as particularly bad news for a group of arbs who bought in for the sole purpose of dissenting from the deal:
After the merger was announced, arbitrageurs raised funds solely to finance an appraisal action, wooing investors with assurances that the Delaware courts were extremely unlikely to assign fair value below deal price. After raising tens of millions on that basis, the arbitrageurs acquired 7.4 million shares after the deal announcement and before the merger closing — approximately 15% of total shares outstanding — over a period in which SWS traded at an average share price of $7.22. Had the arbitrageurs simply voted for the merger, their investors would have received merger consideration now worth $8.30 per share.
The Court concluded that the stock was worth $6.38 per share. Ouch! That’ll leave a mark.
Appraisal arbitrage has been a winning strategy in Delaware in recent years – there’s a big potential upside, and Delaware’s generous statutory interest rate has in the past served as a nice cushion on the downside. But this case shows that you can also lose big when you play poker with somebody’s stock as your chips. We’re posting memos in our “Appraisal Rights” Practice Area.
In light of the continuing growth of rep & warranty insurance, this AIG report on the claims made under those policies makes for interesting reading. Here are some of the highlights:
– Claims frequency continues to rise. Last year’s report showed claims on policies issued during the period 2011-2014 reflecting a frequency of around 14%, but now approximately 21% of those same policies have resulted in a claim. When 2015 policies are included, overall claims frequency is 18%.
– Big deals had the highest frequency of claims, with 23% of policies for deals north of $1 billion having received claims. Factors that heighten the exposure of these “mega-deals” include “the scale and complexity of diligence required,” as well as “the pressure to complete transactions quickly.”
– The breaches of reps underlying claims varied by geographic region. In Europe, the Middle East & Africa, alleged tax breaches were the largest category, accounting for 31% of overall claims. In the Americas, compliance with laws led the pack with 19% of overall claims – while in the Asia Pacific region, financial statements and material contracts accounted for nearly 2/3rds of claims.
Interestingly, while fewer sell-side policies are issued than buy-side, the sell-policies have a much higher frequency of claims (29% v. 18%). The report also notes that roughly 55% of claims involving amounts in excess of $100K during the period from 2011-2015 incurred a “seven digit” claims cost, and that 7% of claims exceeded $10 million.
Under Delaware law, controlling shareholders are generally free to dispose of their shares as they see fit. This Morris James blog notes that the Chancery Court recently addressed an exception to that general rule in Ford v. VMware (Del. Ch.; 5/17):
Generally speaking, controllers can sell their stock to whoever they want. After all, why be a controller unless you have the right to exercise control free from liability for doing so. But, as this decision points out, there are limits, such as selling to a known looter who in fact ends up looting the company. Along the same lines, directors may be liable for failing to protect the company against a controller’s sale to a known looter.
This excerpt from Vice Chancellor Laster’s opinion lays out the elements of a “known looter” claim :
To state a claim under the “known looter” doctrine, a complaint must allege facts supporting a reasonable inference that the seller (i) knew the buyer was a looter or (ii) was aware of circumstances that would “alert a reasonably prudent person to a risk that his buyer [was] dishonest or in some material respect not truthful.” Harris, 582 A.2d at 235; accord Abraham, 901 A.2d at 758. The complaint also must allege that the buyer subsequently looted the corporation, thereby inflicting injury. Abraham, 901 A.2d at 758. If the feared or threatened looting never occurred, then there is no harm to remedy and no ripe claim to address.
In this case, the Vice Chancellor determined that the derivative plaintiff’s allegations did not state a claim. However, the opinion provides a detailed overview of the “known looter” doctrine and the circumstances under which it may apply to controlling shareholders & directors.
This BloombergBusinessWeek artlcle discusses Etsy’s recent travails with activist investors. Etsy is a “certified B corporation,” which means that it is committed to social responsibility and considers the interests of its workers, communities and the environment in conducting its business. Despite its idealistic goals, Etsy recently learned the hard way that its B corp status does not exempt it from Wall Street’s version of the “Golden Rule” – as in “the one with the gold makes the rules.”
Led by Seth Wunder of Black-and-White Capital, activist investors have pushed Etsy to improve its performance. The article points out that those efforts came to a rather dramatic head in early May, with the board’s decision to replace CEO Chad Dickerson:
In March, Wunder laid out his thinking in a letter to Etsy’s board requesting a meeting about the declining stock price and “what appears to be a lack of cost discipline at the company.” A second letter, in early April, made reference to a private conversation between Wunder and Fred Wilson, in which Wilson, co-founder of Union Square Ventures and Etsy’s longest-serving board member, had shared a “frank, private opinion” on an unspecified matter.
In early May, just hours before Etsy was slated to report earnings, Wunder went public, releasing the letters on the web and publishing a press release that accused Dickerson and the board of overspending and of failing to take investors’ concerns seriously. It suggested that Etsy drastically cut costs and remove Dickerson as chairman, often a precursor to firing a CEO. It also suggested that Etsy “begin evaluating any and all strategic alternatives for creating shareholder value,” or, in English, consider selling itself.
Hours later, Etsy announced that it was laying off 80 employees—about 8 percent of its staff—and that Dickerson had been fired by the board.
What about Etsy’s B corp status? In order to maintain its certification, Etsy needs to formally reincorporate under a state benefit corporation statute this summer. The article says that even before the events of the past month, that was unlikely to happen.
The DOJ’s Antitrust Division has traditionally used civil processes (subpoenas & CIDs) to gather evidence. However, this Clifford Chance memo says that 2 recent “dawn raids” may signal a change in tactics:
On May 2, 2017, the DOJ raided the Michigan corporate offices of Perrigo. The Ireland headquartered generic drug manufacturer stated that the inspection was associated with an ongoing investigation regarding drug pricing in the pharmaceutical industry. Just two months earlier, in March 2017, the DOJ raided a meeting in San Francisco of the world’s largest container shipping operators as part of an ongoing investigation into the shipping industry. These mark a decided uptick in the number of antitrust-related dawn raids by the DOJ, which traditionally conducted only a handful every few years.
The memo discusses what to expect with a dawn raid & what to do if you’re on the receiving end of one.