This Cooley blog notes that the FTC & DOJ are increasingly challenging mergers on the theory that they may harm innovation. Here’s an excerpt:
Most recently, Lam and KLA-Tencor abandoned their proposed $10.6 billion merger which would have combined a manufacturer of machines used to inspect circuitry on computer chips and the largest maker of machines that etch away materials on silicon wafers used to make computer chips in the face of DOJ pressure. DOJ said in a press release that the proposed transaction presented “concerns about the ability of the merged firm to foreclose competitors’ development of leading edge fabrication tools and process technology on a timely basis.”
Potential loss of innovation was also a major focus of the DOJ in its lawsuit challenging the $34 billion Halliburton-Baker Hughes merger, which the companies ultimately abandoned.
Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper. Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.
Vice Chancellor Slights rejected each of the alleged disclosure violations – and explained when proxy disclosures are sufficient to invoke Corwin. He held that Corwin applied & that the board’s decision was protected by the business judgment rule.
This Cleary blog discusses a recent Delaware case – In re: Books-a-Million Stockholders Litigation – involving a sale of a company to its controlling stockholder (we’re posting memos on this case in our “Fiduciary Duties” Practice Area). The deal was structured to comply with MFW’s standard for business judgment rule review, but the plaintiffs contended that the special committee’s actions made MFW inapplicable. Here’s an excerpt describing the gist of the allegations:
The plaintiffs alleged that the committee’s decision to recommend the transaction was irrational and in bad faith because (i) a third party had indicated an interest in acquiring BAM at a price higher than that offered by the family, (ii) the committee determined that pursuing the third party offer was not feasible because the family (as is normal in these types of situations) indicated it was unwilling to sell its controlling interest in BAM and (iii) the committee nonetheless proceeded to negotiate with the family and ultimately recommend that the family’s offer be accepted even though the offered price was less than that proposed by the third party.
Vice Chancellor Laster rejected these arguments & applied MFW to the board’s decision. He reiterated Delaware’s long-standing position that a controlling stockholder is under no obligation to sell – and doesn’t breach any duty by offering a buyout at a lower price than a third party might offer.
This Cooley blog notes that a federal court recently refused to dismiss claims that a buyer breached its obligations to use “diligent efforts” to hit milestones for payment of “contingent value rights” issued to an acquired company’s shareholders. The blog also flags an important issue for sellers to keep in mind if earn-outs – or CVRs – are part of the deal:
According to recent case law in Delaware, buyers do not have an independent obligation under the implied covenant of good faith and fair dealing to try to maximize value or pay an earn-out if a contract’s plain language does not require it to do so, which suggests that well-advised sellers should include express efforts covenants in the acquisition agreement.
The United Kingdom prohibited “deal protections” in M&A transactions in 2011. Before that time, termination fees of up to 1% of transaction value were permitted and there were no restrictions on other protection devices such as “no-shops” and “force the vote” clauses. A new study on the results of that prohibition comes to some interesting conclusions:
– M&A deal volumes in the UK declined significantly in the aftermath of the prohibition, relative to deal volumes in the European G-10 countries.
– There were no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids.
– Completion rates and deal jumping rates also remained unchanged.
– Before the prohibition on deal protections, approximately 50% of all deals in the sample involved targets from the UK. After the ban, this proportion fell to approximately 34%.
– In addition, the authors estimate $19.3 billion in lost deal volumes per quarter in the UK relative to the control group due to the prohibition on deal protections, implying a quarterly loss of $3.2 billion for shareholders of UK companies.
The results suggest that deal protections provide “an important social welfare benefit by facilitating the initiation of M&A deals.”
This Goodwin Procter memo notes that last week, the FTC announced an immediate change in the way debt is addressed in calculating whether the HSR filing threshold as been crossed. As a result of this change, that deal you thought was exempt from filing may no longer be. Here’s an excerpt:
Under the HSR Act, a pre-closing filing may be required if the deal value – or the “size of transaction” – is more than $78.2 million. A basic principle has always been that only debt which is taken on by a buyer (or any entity that is controlled by the buyer, such as a newly formed acquisition vehicle) to finance a transaction is included in the size of transaction.
Until yesterday, the FTC was of the view that new debt which is taken on by the target to help finance a transaction would be specifically excluded from the size of transaction. The FTC announced on October 6th that this old rule is no longer applicable – and the change in the treatment of debt is effective immediately.
Effective October 7, 2016, all new debt – whether it is taken on by the buyer or the target – must be taken into account in determining whether the $78.2 million size of transaction test is met.
It looks like attendance at my Sunday morning hockey game this week is going to be pretty light – several of my fellow skaters are heading home for Canadian Thanksgiving, which takes place on Monday. So I thought this might be a good time to wish a “Happy Thanksgiving” to North America’s designated driver & to point out this recent Blakes memo – which provides practical tips for foreign buyers looking to acquire a private company in Canada.
This new article suggests that Revlon, Unocal & the other Delaware takeover standards we’ve all focused on for more than a generation are in decline, and that there’s good reason for that – the growing clout of institutional investors, investor activism & the rise of the corporate governance movement. Here’s a summary of the argument:
These standards were created by Delaware courts in the mid-1980s to rectify a perceived failure in the corporate governance system, principally the apparent failure of directors to act responsibly. These new standards encouraged the rise of private enforcement activities, initially by the raiders themselves, but once hostile transactions became a less significant force, through expanded shareholder litigation.
In this new environment, private litigation became increasingly unnecessary – a fact which became quite apparent with the rise in litigation rates to 96% of all takeovers. At the same time, the rise of institutional investors, coordinating bodies such as proxy solicitors, hedge fund activism & corporate governance movements, as well as the expansion of federal securities law into areas like executive compensation & board independence/monitoring, occurred. The consequence was a largely justifiable relaxation of these standards.
This Wachtell memo discusses the Delaware Chancery Court’s recent decision in Nguyen v. Barrett, which makes it clear that if a plaintiff has a disclosure claim, it better be brought before closing:
The court rejected the plaintiff’s suggestion that “Delaware has recently established a new regime,” under which a plaintiff can elect to bring disclosure claims before or after the stockholder vote: “To be clear, where a plaintiff has a claim, pre-close, that a disclosure is either misleading or incomplete in a way that is material to stockholders, that claim should be brought pre-close, not post-close.” Only that rule, the court explained, encourages litigants to seek a remedy for disclosure problems “pre-close, at a time when the Court can insure an informed vote.”
The court also addressed the differing standards that apply to pre-closing and post-closing litigation involving disclosure claims:
Dismissing the amended complaint, the court emphasized the contrast between a “pre-closedisclosure claim, heard on a motion for preliminary injunctive relief,” and a “disclosure claim for damages against directors post-close.” A pre-close claim, the court explained, requires a plaintiff to show only “a reasonable likelihood . . . that the alleged omission or misrepresentation is material,” while a post-close damages claim carries substantial additional burdens, including the obligation to plead that the directors violated their disclosure duties “consciously,” “intentionally,” or in “bad faith.” Finding no allegations that demonstrated this “extreme set of facts,” the court ruled that the damages claims could not stand.
Applying the post-closing damages standard, the Chancery Court rejected claims premised on disclosure of projections used in the fairness opinion and the contingent nature of the financial advisor’s fee.