It’s not quite as dramatic as the end of the UConn women’s basketball team’s epic run, but after 5 straight wins in the Chancery Court, mighty Corwin has at last tasted defeat.
Delaware has been liberal in its application of the Corwin decision and the path to business judgment rule review that it provides for deals that are approved by a fully informed & uncoerced shareholder vote. But there’s a limit to everything – and as this Paul Weiss memo notes, the Chancery Court made it clear that this includes Corwin’s cleansing power. Here’s an excerpt:
In a recent decision in In re Saba Software, Inc. Stockholder Litigation, the Delaware Court of Chancery demonstrated the limits of the application of the business judgment rule under Corwin KKR Financial Holdings LLC. The court held that the target stockholder vote approving an all-cash merger with a third party buyer was coerced and not fully informed, and therefore did not “cleanse” the transaction and invoke the application of the business judgment rule.
This case involved a public company that couldn’t get a necessary restatement of its financial statements in time to avoid deregistration of its shares by the SEC. Shortly after it “went dark,” Saba entered into a merger agreement providing for a sale of the company.
Although that deal was approved by shareholders, the Chancery Court found a number of shortcomings in the company’s disclosures relating to its inability to complete the restatement and other matters. It also concluded that shareholders were coerced into approving the deal because they were compelled to either accept a depressed price for their shares due to the failure to complete the restatement or continue to hold a highly illiquid stock.
As a result, the Chancery Court found the vote was not fully informed and uncoerced – and declined to apply the business judgment rule. Instead, Revlon continued to apply – and that had some pretty significant implications for the individual director defendants:
The individual defendants were not exculpated by the Section 102(b)(7) provision in Saba’s certificate of incorporation because such provisions do not insulate directors from claims of bad faith or breaches of the duty of loyalty. Here, the court found that the plaintiff pled adequate facts to justify a pleading-stage inference of bad faith, including that the board rushed the sales process, refused to consider alternatives to a sale, cashed in worthless equity awards before the merger and directed the banker to rely on pessimistic projections.
There’s a lot to digest in Vice Chancellor Slights’ 67-page opinion, but in the end, what may be its most interesting aspect is his fairly extensive discussion of Delaware authority on what constitutes shareholder coercion. Coercion is a word that gets tossed out a lot, but rarely receives a detailed analysis like the one provided here.
This FTI Consulting report says that 2016 saw a sharp increase in the number of companies that chose to settle proxy contests with activists instead of taking their chances with a shareholder vote. What’s more, many of those settlements seem to have been on the kind of terms only Neville Chamberlain could love. Here’s the intro:
Shareholder activists showed no signs of slowing down in 2016. These investors continue to instill fear in corporate board rooms across America and bring their concerns to the public as illustrated by the growing number of proxy fights; 110 in 2016 alone, a 43% surge over 2012. In that time, companies have more frequently succumbed to these investors and at times, accepted unfavorable settlement terms instead of pushing forward and fighting through a proxy contest.
Companies that did fight it out didn’t have a bad track record – winning 27 out of the 37 battles that went to a vote. But FTI says that looks are deceiving, and what that record may really reveal is that companies only held their ground when victory was a near certainty.
Here’s a reminder from Dorsey & Whitney’s Ken Sam about the risks companies face when they pay transaction fees to unregistered brokers. Sometimes, people tend to view compliance with appropriate licensing requirements as the broker’s problem. As this excerpt makes clear, it’s a problem for everyone involved in the deal:
Finder Risks: Any unlicensed person engaging in activities designed to effect a transaction in securities may violate broker-dealer laws. The SEC or state securities regulators may seek to enjoin the unlawful activities or seek monetary penalties or criminal sanctions.
Issuer Risks: Retaining and permitting an unlicensed intermediary to effect a securities transaction may be a violation of federal and many state laws, and may subject the issuer to possible civil and criminal penalties. Any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act may be subject to aiding-and-abetting liability.
Rescission Risks: A violation of broker-dealer laws creates a right of rescission under federal and/or state securities law. The SEC or state securities regulators may require the issuer to offer investors rescission rights, and the issuer may be required to return the investment.
State Securities Violations: Many states have begun reviewing state notice filings on Form D (which report transactions exempt from registration under Regulation D) and actively monitoring finder’s fees paid in connection with securities transactions. Some states have required issuers to provide additional information related to unlicensed broker-dealers and, in some cases, to certify that finder’s fees or commissions have only been paid in compliance with broker-dealer laws.
Accounting Liability Risk: Auditors may raise accounting issues resulting from paying finder’s fees to unregistered broker-dealers and may require an issuer to account for potential liability arising from rescission rights.
The SEC has taken a limited no-action position that applies to certain unregistered “M&A brokers,” and some state securities laws accommodate this kind of arrangement as well – but otherwise, paying transaction fees to an unregistered broker-dealer can ruin everybody’s day.
This Reuters article notes that it is becoming more difficult for activists to get an endorsement from ISS in proxy contests. Why? Part of the answer may be that there’s a new sheriff in town:
Since Cristiano Guerra formally took over in January as the head of ISS’s special situations research team, the firm’s support for activists in proxy fights has fallen to 50 percent of the cases, compared with 60 percent last year, according to data from FactSet and Proxy Insight. Guerra became acting head on Sept. 1 of last year.
While it is still early in his tenure, Guerra has indicated a greater willingness to challenge activist funds pushing for changes in corporate boards and strategies, according interviews with advisors, investors, and current and former colleagues.
The article cites at least one somewhat surprising recent ISS recommendation – it gave “thumbs up” to a management proposal to eliminate cumulative voting at Cypress Semiconductor that was made during a proxy contest with the company’s founder.
Proxy advisors generally are taking heat for their alleged lack of transparency & conflicts of interest. ISS itself faces threats to its position as the leading arbiter of proxy voting as major asset managers build up their own capabilities & its former employees join competing shops. It’s hard to say whether any of these pressures are leading to a more management-friendly approach, but it will be interesting to see how the proxy advisory business and its most influential player respond to the changing environment.
Unocal v. Mesa Petroleum (Del. Sup.; 1985) and Revlon v. MacAndrews & Forbes (Del. Sup.; 1986) have guided Delaware courts in their evaluation of board decisions in the M&A arena for more than a generation. This blog from Keith Bishop notes that pending legislation in Nevada would formally reject the application of Revlon and Unocal to Nevada corporations. Here’s an excerpt:
As introduced, SB 203 includes the following statements of legislative intent:
Except in the limited circumstances set forth in NRS 78.139, an exercise of the respective powers of directors or officers of a domestic corporation, including, without limitation, in circumstances involving a change or potential change in control of a corporation, is not subject to a heightened standard of review.
The standards promulgated by the Supreme Court of Delaware in Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), and their progeny have been, and are hereby, rejected by the Legislature.
If this legislation is enacted, Nevada would join six other states that have enacted statutes rejecting Revlon (Indiana, Ohio, Pennsylvania, North Carolina, Maryland and Virginia) – and a longer list of states that have either directly or indirectly rejected Unocal. If you’re interested in more details, check out this 2009 Virginia Law Review article on “The State of State Antitakeover Laws.”
The Delaware Chancery Court hasn’t issued many preliminary injunctions in M&A transactions in recent years – but this Shearman blog reports on one issued earlier this month by Chancellor Bouchard. As this excerpt reveals, the issue that prompted the Chancellor’s action is one that has proven to be near & dear to the hearts of the Delaware courts & the SEC – financial advisor conflicts & fee disclosure:
On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. of FairPoint Communications, Inc. Vento v. Curry, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017).
Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures. The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.
In this case, general disclosure that the advisor’s affiliate would receive financing fees was not enough. The Chancellor emphasized that under Delaware law investment banker fees and potential conflicts should be fully disclosed because of the central role bankers play in mergers. The advisor rendered a fairness opinion in the deal, and the Chancellor found that the financing fees provided a potential incentive to issue that opinion. He also found that the financing fee was material in amount & quantifiable. As a result, more disclosure was necessary.
Quick settlements involving major concessions to activists have prompted a skeptical response from major institutions – who often think that board’s desire to avoid the disruption of a proxy fight may take priority over the views of long-term shareholders in these situations.
There are sometimes good business reasons to reach a quick and comprehensive settlement with an activist, but persuading investors of the merits of such a settlement is a challenging process. This blog from Cleary’s Arthur Kohn, Ethan Klingsberg & Elizabeth Bieber and Young Conaway’s Rolin Bissell discusses the novel way that one company – CSX – has approached that challenge.
CSX recently entered into a settlement with activist hedge fund Mantle Ridge. The settlement has a lot of the elements that have prompted investor angst – after only 47 days, the company conceded 4 board seats and installed a new CEO at the behest of an activist owning less than 5% of the stock. But the board signaled that investor input would be sought – at one point during the fight it announced that a special meeting would be held to address the activist’s proposals & that a board recommendation on the vote would not be issued.
The special meeting idea was abandoned when a settlement was reached, but the blog notes that the settlement included some unusual features designed to provide for investor input:
– Portions of the new CEO’s pay package would be put to an advisory vote at the company’s next annual meeting of shareholders (on which vote the board again indicated that it would not provide any recommendation)
– The decision of the board whether to have the company assume these portions of the package would be deferred until after this advisory vote, and
– The new CEO intended to resign if the board elected not to have the company assume these portions of his package.
Agreeing to submit a CEO’s pay package to a shareholder vote in this fashion goes beyond a “say-on-pay” vote – and this excerpt says that was exactly what CSX intended:
Through this additional say on CEO pay vote, shareholders are being given the gift of a unique opportunity to register their opinions on a controversial topic and arguably the strategic direction of the company which is tied to the new CEO’s presence. This aspect can be seen as a positive development for shareholder rights generally, and more specifically can be seen as responsive to State Street’s open letter criticizing companies for settling with activists too quickly and without long-term shareholder input.
The blog notes that investor perception of this approach is an open issue – an argument could be made that the shareholder vote is merely a veneer to protect the board, and not an effective means for obtaining input from long-term shareholders. It also addresses several other governance and corporate law issues raised by this unique effort to win the hearts & minds of long-term shareholders.
This Deloitte study surveyed 500 global executives with cross-border M&A experience. Despite caution about political instability and the global economy, the study says that the appetite for cross-border deals remains strong. The study finds that companies are becoming more competent and experienced in cross-border M&A, and are thus able to deliver on their deal objectives.
Here’s an excerpt from the conclusion identifying a handful of best practices that executives & deal members should consider in planning and executing cross-border deals:
– Ensure that the deal thesis and deal objectives drive all phases of the M&A lifecycle, from target selection to due diligence to execution and to integration
– Adapt the deal methodology and playbook to specific deal circumstances to pre-empt global M&A challenges
– Integrate pre-deal due diligence with pre-close planning activities to prevent handoff misses
– Structure the deal so it has the best chance of meeting its objectives — knowing that full integration may not always be the right choice
– Define the overall integration scope, approach, and plan for achieving both Day 1 and end-state goals
– Organize a global integration program that has representation from both acquirer and target around key work streams and regions/countries
– Focus efforts on effectively planning pre- and post-close integration in detail, with dependencies and critical path clearly outlined
Last week, the Delaware Supreme Court affirmed the Chancery Court’s decision in The Williams Companies v. Energy Transfer. There’s nothing unusual about that – the Supreme Court and the Chancery Court are usually on the same page. But this case is interesting because it involved a rare dissent by one of the justices – and even more interesting is the fact that the dissenter was Chief Justice Strine.
The Chancery Court’s decision upheld Energy Transfer’s termination of its deal with The Williams Companies based upon its lawyers’ inability to render a tax opinion that was a condition to closing. The Court rejected Williams’ contentions that Energy Transfer breached its obligations to use “commercially reasonable efforts” to cause its lawyers to issue the opinion and to use its “reasonable best efforts” to close the deal.
The Supreme Court disagreed with Chancery Court’s analysis of what Energy Transfer’s covenants required of it, but Vice Chancellor Glasscock’s ruling was saved by a footnote in which he applied the approach advocated by Williams and still found the complaint lacking.
Chief Justice Strine was not impressed with the footnote, particularly in light of his misgivings about whether Energy Transfer’s conduct after becoming aware of the potential issue with the tax opinion was consistent with its contractual obligations.
Anyone who has followed this case would likely agree on one thing – Energy Transfer’s tax lawyer found himself in a spot that no deal lawyer wants to be in. How he got put in that spot is a big part of what Justice Strine’s dissent is all about – and this article from Alison Frankel says that his opinion is a “cautionary tale for deal lawyers.”
Need a break? Don’t check your NCAA bracket – you’ll only get depressed. Visit our “Deal Cube Museum” instead. We’ve got prime artifacts from some of the great – and maybe not so great – M&A and financing transactions of the late 20th & early 21st centuries. Check ’em out!
