This Paul Weiss memo reviews the Chancery Court’s recent decision in In re United Capital Stockholders Litigation – in which Vice Chancellor Montgomery-Reeves dismissed “quasi-appraisal” claims in connection with a short-form merger between United Capital & its controlling stockholder. The plaintiff alleged that the notice of the merger sent to stockholders omitted various items of material information, but the VIce Chancellor concluded that none of them were material to the only decision the minority stockholders had to make – whether or not to seek appraisal.
Here’s an excerpt discussing the Court’s analysis:
In considering plaintiff’s claims, the Court, relying on the Delaware Supreme Court’s opinion in Glassman v. Unocal Exploration Corp., noted that in the context of a Section 253 short-form merger, the parent corporation is not required to establish entire fairness; rather, “absent fraud or illegality, the only recourse for a minority stockholder who is dissatisfied with the merger consideration is appraisal.”
The company is only required to notify the minority of the availability of appraisal rights, provide them with a correct copy of the appraisal statute, and disclose information material to the decision of whether or not to seek appraisal. The Court noted that a disclosure violation results in irreparable injury, which the Court may remedy through “quasi-appraisal.”
Detailing the contents of the eighty-page merger notice, the Court noted that the plaintiff used the financial statements attached to the notice to decide that the merger price’s $186.6 million implied total equity value significantly undervalued the company in view of, among other measures, total assets of $342.4 million (nearly twice the implied equity value). Thus, the Court noted that plaintiff’s allegations suggest that the financial disclosures gave plaintiff “the minimum information necessary to determine whether he could ‘trust that the price offered is good enough,’ or whether the price undervalued the company ‘so significantly that appraisal is a worthwhile endeavor.'”
This Cooley M&A blog addresses 2017 antitrust trends & developments. Many observers expect that the Trump Administration will not be as aggressive in opposing mergers as its predecessor – but Cooley cautions that vigorous enforcement is likely to continue when it comes to HSR violations:
For years, the FTC has focused substantial resources on civil penalty actions against individuals and companies that fail to file for acquisitions under the HSR Act. This past year was no exception: in 2016, the agencies settled three HSR enforcement actions. Penalties imposed ranged from $480,000 for an inadvertent failure to file notification, to a record-breaking $11 million for the alleged misuse of the HSR Act’s “solely for the purpose of investment” exemption.
We are likely to see increased penalties imposed on parties that fail to comply with the premerger notification requirements of the HSR Act, as this past August the maximum civil penalty for noncompliance increased steeply – from $16,000 to $40,000 per day – a 150% increase.
The potential of significantly increased penalties will likely bring parties to the negotiating table. As a spokesperson for one defendant in a recent case said in a statement released after entering into a settlement agreement with the government, the “sudden and unanticipated 150 percent increase in the potential penalties” left it “no choice but to resolve the case as quickly as possible.”
Last month, the Delaware Supreme Court issued its decision inSandys v. Pincus. The Court reversed an earlier Chancery Court decision and found that the close business and personal ties among certain directors of Zynga, Inc. were sufficient to render a majority of the board non-independent. As a result, the Court held that the plaintiff in a derivative action was excused from complying with the pre-suit demand requirement in connection with a suit alleging insider trading by senior corporate officials.
This Cleary blog takes a deep dive into the Court’s independence analysis for various director groups. Here’s an excerpt addressing Delaware’s nuanced approach to the impact of NYSE independence rules on its assessment of director independence:
Sandys, along with two other Delaware cases decided within the last few years, Baiera and MFW, provide some context for how to view the stock exchange rules juxtaposed against independence for Delaware law purposes. Effectively, courts seem inclined to respect the business judgment of directors who have made a determination that certain directors do not meet the independence standards of the stock exchange rules, thus creating a rebuttable presumption of non-independence for Delaware law purposes. However, in instances where the determination of non-independence is based on the bright-line stock exchange rules that prescribe a three-year bar on independence, and the facts have changed significantly within this three-year period, a court, as the Delaware Court of Chancery did in Baiera, may be willing to accept arguments rebutting this presumption.
This rebuttable presumption, however, is not symmetrical. A determination of independence under the stock exchange rules by the board does not seem to create a rebuttable presumption of independence more broadly under Delaware law for the Delaware courts. In such cases, a finding of independence is a fact for the courts to consider in an independence determination, treated and weighed like other alleged facts and circumstances.
Meanwhile, Evan Williford notes that the procedural posture of the case may have played a significant role in the court’s review of the independence issue:
The appeal concerned a motion to dismiss ruling using a somewhat plaintiff-friendly standard. Delaware courts will be more skeptical as to whether – after trial – a plaintiff has proven a director non-independent for purposes of invoking the stringent entire fairness standard.
This Perkins Coie memo highlights a potentially important shift in emphasis by the DOJ & FTC in antitrust merger challenges:
In a stark deviation from the traditional emphasis on consumer harm, as detailed in the Horizontal Merger Guidelines, both the FTC and the DOJ have pursued cases to block mergers based on potential competitive harm to large, national customers—the type of powerful, sophisticated customers that had previously been considered able to defend themselves against postmerger price increases by exerting their considerable buying power.
Increasingly, however, the federal agencies and some courts are adopting the argument that within certain narrowly drawn national markets, there are so few actual and potential competitors able to serve those large customers that the apparent countervailing power to restrain price increases is insufficient to prevent price increases.
If this trend continues, companies will need to assess the likely effects of their deal on all customer segments – and should be prepared to address the transaction’s implications for nationwide customers for whom local competitors don’t provide an alternative. However, the memo points out that depending on how the Trump Administration decides to approach antitrust merger review, this trend may prove to be short-lived.
This blog from Lowenstein’s Steve Hecht suggests that a buyer’s insistence on an appraisal condition – or a “blow provision” – might chill the exercise of appraisal rights. Here’s an excerpt discussing the potential impact of a 20% appraisal rights condition in a recent deal:
The very existence of a blow provision may cause some stockholders to hesitate in seeking appraisal, fearing that their dissenting vote might push the appraisal class over the 20% hurdle. Some casual observers find that only about 10% or less of the outstanding share population ultimately seeks appraisal.
Accordingly, a lower blow provision, on the order of 10% or 15%, could pose a very real challenge to appraisal and would test the resolve of stockholders who are unsatisfied with the deal price but concerned about blowing up the deal altogether. That may be true, for instance, where dissenters feel that the target is being sold at the right time but at the wrong price.
Buyers negotiate appraisal rights conditions to protect themselves against uncertainties associated with the appraisal rights process. If those provisions deter appraisal rights claims from being made in the first place – well, I guess they work. That’s a feature, not a bug.
Tune in tomorrow for the webcast – “Privilege Issues in M&A” – to hear Alston & Bird’s Lisa Bugni, Bass Berry’s Joe Crace & Akin Gump’s Trey Muldrow discuss how to deal with the attorney-client privilege in M&A transactions.
– While 100% of Merger Agreements called for the reps & warranties to be accurate at the closing, only 80% called for them to be accurate at signing.
– 98% of deals surveyed gauged the accuracy of reps & warranties by reference to whether their failure to be accurate would result in a Material Adverse Effect, up from 93% in the prior year.
– 95% of deals surveyed had a “double materiality” carve out, that called for disregarding materiality qualifiers in individual reps & warranties when assessing their accuracy at closing.
– Only 1% of deals surveyed had language that included an adverse change in the seller’s “prospects” within the definition of an MAE, but 69% included any event that would create a prohibition, material impediment, or material delay in the consummation by the seller of the merger within the definition.
– Only 23% of the deals surveyed had language conditioning the deal on the absence of litigation challenging the transaction by a governmental authority. Not a single deal was conditioned on the absence of private litigation challenging the transaction.
There’s lots more where this came from. As always, the Deal Points Study will give you something to talk about aside from politics & the NFL playoffs at your next practice group lunch.
Sorting out all of the nuances in Delaware’s approach to transactions involving controlling stockholders can be a challenge. The courts apply different standards of review depending on whether the controller is the buyer, is cutting its own deal as a seller, is participating pro rata with all other stockholders in a sale, or is acquiring an ownership stake in the surviving corporation.
This K&E memo reviews case law addressing each of these situations, and notes that identifying that a controlling stockholder is involved in the deal is merely the first part of the analysis:
A finding that there is a controlling stockholder of a target company is just the first part of the analysis in determining the applicable standard of review that the court will use in assessing an M&A transaction involving that target. As a number of recent cases have shown, the contours and terms of the M&A transaction are as important as the question of whether the stockholder is “controlling” to the court’s determination of whether — and to what extent — heightened scrutiny will be applied.
Understanding how a court will approach a particular transaction allows dealmakers to implement appropriate procedural safeguards when necessary, while avoiding excessive and unnecessary procedural protections.
This Morris James blog reviews Delaware case law on disclaimers of reliance in acquisition agreements & raises an important practice point. As this excerpt notes, a clause that specifically disclaims reliance on any extra-contractual statements is preferable to one that simply states what the buyer relied upon:
IAC Search found that a disclaimer or anti-reliance clause that states affirmatively what the buyer relied upon in entering into a purchase agreement, together with a standard integration clause, is sufficient to bar a fraud claim based on extra-contractual representations. The safer course of action to preclude a claim for fraud, however, is to include both an integration clause and an anti-reliance clause that expressly states that the buyer did not rely upon any extra-contractual statements or information outside of the purchase agreement in its decision to enter into the agreement.
This Sheppard Mullin blog suggests that the SEC’s recent amendments increasing the amount that can be raised under Rule 504 of Regulation D to $5 million may have made the little-used exemption a viable alternative for funding smaller M&A deals.
Rule 506’s disclosure requirements when securities are offered to non-accredited investors have limited its usefulness in M&A – but this excerpt points out that Rule 504 takes a different approach:
Rule 504, however, does not require the issuer to provide any particular information to investors to establish the exemption. Accordingly, it may be used in transactions involving the offer and sale of smaller amounts of securities to non-accredited investors where the burden of preparing disclosures meeting the requirements of Rule 502(b)(2) would otherwise be cost prohibitive or take too much time.
While Rule 504 doesn’t prescribe specific disclosures, Rule 504 offerings remain subject to Rule 10b-5 & are not entitled to the benefits of NSMIA’s preemption of state “blue sky” requirements.