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.
Potential national security issues that might be raised by a cross-border transaction are becoming matters of increasing concern to dealmakers. This Latham memo provides an overview of CFIUS, the interagency group charged with conducting a national security review of potential deals involving foreign buyers. Here’s the intro:
This guide provides an overview of the Committee on Foreign Investment in the United States (CFIUS or the Committee) — a US federal, interagency group with authority to review certain foreign investments in US businesses to determine whether such transactions threaten to impair US national security — and the process through which CFIUS reviews proposed transactions subject to its jurisdiction.
Topics covered include CFIUS’s composition & structure, the scope of its jurisdiction, factors to consider in deciding whether to submit a deal for review, the review process, and alternatives for mitigating national security risks identified in the review process.
If you’re a regular reader of “TheCorporateCounsel.net Blog,” you know that nothing excites me more than when someone fools the SEC’s Edgar & makes a fake filing! A little drool perhaps. Plug the term “fake” into the search box of that blog & you’ll see plenty of fake filings coverage.
The latest involves the filing of a fake Schedule TO-C, making it look like Fitbit was in play (here’s an article from back when that happened). The SEC brought a civil case; the DOJ brought a criminal one. And this dude went through all this trouble – and got into so much trouble – for a measly $3k in profit! Dummy.
According to the SEC’s complaint, Robert W. Murray purchased Fitbit call options just minutes before a fake tender offer that he orchestrated was filed on the SEC’s EDGAR system purporting that a company named ABM Capital LTD sought to acquire Fitbit’s outstanding shares at a substantial premium. Fitbit’s stock price temporarily spiked when the tender offer became publicly available on Nov. 10, 2016, and Murray sold all of his options for a profit of approximately $3,100.
The SEC alleges that Murray created an email account under the name of someone he found on the internet, and the email account was used to gain access to the EDGAR system. Murray then allegedly listed that person as the CFO of ABM Capital and used a business address associated with that person in the fake filing. The SEC also alleges that Murray attempted to conceal his identity and actual location at the time of the filing after conducting research into prior SEC cases that highlighted the IP addresses the false filers used to submit forms on EDGAR. According to the SEC’s complaint, it appeared as though the system was being accessed from a different state by using an IP address registered to a company located in Napa, California.
Earlier this month, in In re Cyan Stockholders Litigation, Delaware Chancellor Bouchard dismissed post-merger fiduciary duty and quasi-appraisal claims arising out of Ciena’s 2015 acquisition of Cyan in a primarily stock-for-stock transaction.
As this Wilson Sonsini memo notes, the Chancellor rejected the plaintiffs’ fiduciary duty claims based on fully-informed, un-coerced shareholder approval of the deal. He also declined to endorse the use of a “quasi-appraisal” claim as an end-run around applicable limits on duty of care claims:
Because the court had already rejected the plaintiffs’ disclosure claims and concluded that the plaintiffs failed to allege a non-exculpated breach of fiduciary duty, Count Two was barred by Cyan’s exculpatory charter provision adopted pursuant to Section 102(b)(7). The court held, “When the cause of action supporting plaintiffs’ request for a quasi-appraisal remedy is for breach of a fiduciary duty, plaintiffs cannot circumvent the protection afforded in Cyan’s certificate of incorporation through artful pleading.”
The memo also points out that the decision shows that post-closing disclosure claims require plaintiffs to identify material omissions, and not “laundry lists of disclosure violations that aren’t material or that are of the ‘tell me more’ variety.”