While I was on vaca, Tesla filed this Form S-4 for its acquisition of Solar City. The “Background” section contains this disclosure – which appears to be an attempt to ensure that approval by a majority of SolarCity’s disinterested stockholders is fully informed resulting in the irrebutable presumption of the business judgment rule:
On August 18, 2016, Lazard became aware of a computational error, which double-counted certain amounts of SolarCity’s projected outstanding indebtedness, in certain SolarCity spreadsheets setting forth SolarCity’s financial information that Lazard used in its discounted cash flow valuation analyses, more fully described in the section entitled “-Opinion of Financial Advisor to the SolarCity Special Committee” beginning on page 86. Tesla and Evercore subsequently confirmed that the computational error was not included in Tesla’s or Evercore’s valuation analysis. At the Special Committee’s request, Lazard recalculated its discounted cash flow analyses after correcting the computational error. On August 24, 2016 and August 26, 2016, the Special Committee and SolarCity Board, with Mr. Gracias absent, respectively, met with representatives of Lazard in attendance. Representatives of Lazard reviewed with the Special Committee and the SolarCity board, respectively, its recalculated discounted cash flow analyses as of July 29, 2016, and the differences in Lazard’s discounted cash flow analyses that resulted from the computational error described above.
Representatives of Lazard confirmed to the Special Committee and the SolarCity Board, respectively, that, based upon economic, monetary, market and other conditions as in effect on, and the information made available to Lazard (other than with respect to the computational error noted above) as of, July 29, 2016, and subject to the assumptions, limitations, qualifications and conditions set forth in Lazard’s opinion dated as of July 29, 2016, the recalculated discounted cash flow analyses would not have changed the conclusion set forth in Lazard’s opinion as of the date it was delivered. Following receipt of Lazard’s confirmation, the Special Committee on August 24, 2016 and those SolarCity Board members present on August 26, 2016 unanimously affirmed their recommendations that the stockholders of SolarCity vote to approve the merger proposal.
On August 25, 2016, the Tesla Board held a special meeting with Messrs. Elon Musk and Antonio Gracias absent, having recused themselves, at which members of Tesla management, Evercore and Wachtell Lipton were present. Evercore and Tesla management discussed new information that it had received relating to Lazard’s valuation of SolarCity, including the computational error discussed above, as well as additional projections that SolarCity management had prepared prior to the execution of the Merger Agreement (as described in the section entitled “The Merger-Certain Tesla and SolarCity Unaudited Prospective Financial Information” beginning on page 97) but had not previously shared with Tesla or its representatives. Evercore explained why none of these factors changed its prior valuation analysis, and after discussion, the Tesla Board determined that none of the factors changed its view as to the value of SolarCity.
– Broc Romanek
Here’s news from the intro of this WSJ article:
House lawmakers on Friday approved a bill to ease regulatory requirements on private-equity managers, legislation that the White House has threatened to veto. The House voted 261 to 145 to advance the bill sponsored by Rep. Robert Hurt (R., Va.), largely along party lines. The measure exempts private-equity firms from having to provide regulators with certain information, such as the debt levels of their portfolio companies and the countries where investments were made.
The legislation, which lacks a companion bill in the Senate and is opposed by the Obama administration, faces long odds of becoming law. Its likelihood of enactment hangs on the possibility of its provisions being added to a must-pass spending bill Congress often advances at the end of the year. The bill comes after years of failed attempts by the industry to exempt most managers of private-equity funds from having to register with the Securities and Exchange Commission. Instead, Friday’s legislation aims to roll back regulatory provisions that supporters say are unduly burdensome and crimp funds’ investment in companies that create jobs. Thirty-five Democrats supported the measure. Managers of private-equity funds pool their money alongside institutional investors such as pension funds and university endowments to buy equity stakes in companies or pieces of them.
Before Friday’s vote, the House agreed to modify some provisions that opponents found objectionable, approving by voice vote an amendment sponsored by Rep. Bill Foster, an Illinois Democrat. The amendment has the effect of preserving investor-protection rules set up in the wake of the Bernard Madoff Ponzi scheme. Those rules require that funds undergo a third-party audit or a surprise SEC examination to verify they actually own the assets they say they do.
– Broc Romanek
Most advance notice bylaws establish a deadline of between 60 – 120 days before an annual meeting for director nominations – and prescribe detailed informational requirements that must be complied with by any shareholder nominee. This Kirkland & Ellis memo describes an activist hedge fund’s recent attempt to skirt those provisions through the use of “placeholder” nominees. Here’s what the hedge fund did:
With an impending deadline for nominations under the bylaws, the hedge fund announced that it would nominate 10 of its own employees to stand for election. These nominees were described as “placeholders” until the fund could identify qualified candidates ahead of the annual meeting. The hedge fund’s nominees, if elected, would commit to resign immediately following their election and replace themselves with the qualified independent candidates that are identified in the intervening months.
The hedge fund’s use of placeholders has not been tested in court – but companies should include language in their advance notice bylaws requiring a shareholder nominee to represent that the individual currently intends to serve out their full term if elected.
– John Jenkins
This Stanford Law Review article discusses current market practices for deal protections – and highlights four areas in which those protections have evolved over the past decade:
1. Termination fee “creep,” which was pervasive in the 1980s and 1990s, seems to have gone away by the 2000s
2. Match rights, which were unheard of in the 1990s, have become ubiquitous by the 2010s
3. Asset lockups, which disappeared from the landscape for thirty years, have re-emerged (though in a “new economy” variation)
4. Implementing side agreements to the deal that have a commercial purpose along with a deal protection effect
– John Jenkins
This Gibson Dunn memo reviews the state-of-play in activism for the first half of 2016. Here are the highlights:
-Changes in board composition (73.3%), and M&A related activities (53.3%), remained the most common areas of focus for activist investors.
-Mid & smaller cap companies were the targets of a majority of public activist actions, as 55.3% of the companies targeted had equity market capitalizations below $5 billion.
-The percentage of publicly-filed settlement agreements providing for strategic initiatives – replacement of management, spin-off company governance, etc. – has increased (82.4% in 2016 vs. 58.8% in 2014 and 2015).
– John Jenkins
Two recent Delaware Chancery Court opinions indicate that the court is taking last year’s Corwin decision to heart, while a third suggests that there’s still room for debate on the scope of the decision. As this Morris James blog explains:
Larkin v. Shah is one of two recent Court of Chancery decisions explaining that the Corwin case really does mean that there is an “irrebuttable business judgment rule” that bars challenges to a merger approved by a majority of the fully-informed, disinterested and uncoerced stockholders, in the absence of a conflicted controlling stockholder.
Thus, along with In re Volcano Corporation Stockholder Litigation at least two members of the Court of Chancery will allow only a well-pleaded claim for waste to survive dismissal in such circumstances. It is less clear that the Chancellor agrees with the word “irrebuttable” in those circumstances, however. See City of Miami v. Comstock, C.A. 9980-CB (Del. Ch. Aug. 24, 2016) (applying Corwin but still examining whether the plaintiffs had alleged a basis for entire fairness review).
We’re posting memos in our “Fiduciary Duties” Practice Area.
– John Jenkins
In the latest chapter of the Rural/Metro saga, the SEC announced yesterday that RBC had consented to a $2.5 million settlement in order to resolve allegations of deficiencies in the bank’s fairness opinion presentation to Rural/Metro’s board, and in the description of that opinion in the company’s proxy materials.
The SEC said that its investigation found that RBC’s presentation contained materially false and misleading statements which made the buyer’s bid look more attractive, and caused that information to be included in the proxy statement filed in connection with the deal. Here are some of the issues cited by the SEC:
– The SEC found that RBC’s presentation described one of its valuations as being based on Wall Street analysts’ “consensus projections” of Rural/Metro’s 2010 adjusted EBITDA, a pretax earnings figure. In fact, the valuation did not reflect analysts’ research or a “consensus” view, but was Rural/Metro’s actual 2010 adjusted EBITDA of $69.8 million.
– Rural/Metro’s proxy statement included a summary of RBC’s valuation analysis, which falsely stated that RBC used “Wall Street research analyst consensus projections” for 2010 “consensus” adjusted EBITDA. The SEC order found that in addition to being false, the proxy statement was misleading because shareholders would be led to believe the analysis reflected the “consensus” calculation of $76.8 million.
– The SEC also found that RBC caused the proxy statement to include a misleading disclosure that suggested RBC had relied on another valuation analysis in its fairness presentation to Rural/Metro’s board when, in fact, RBC did not rely on the analysis for valuation purpose.
– John Jenkins
Broc recently blogged about the 7th Circuit’s Walgreen decision, which endorsed Delaware’s “plainly material” approach to disclosure-only settlements announced in the Trulia case. The Walgreen case suggests that Trulia is gaining traction in other jurisdictions. Still, many commentators anticipate that one of the consequences of Delaware’s hard line in this area will be the migration of many M&A claims to jurisdictions that are friendlier to disclosure-only settlements.
But what if other jurisdictions must apply Trulia to those migratory Delaware cases? That’s the provocative question raised in this recent “Business Law Prof Blog.” Professor Ann Lipton noted that since Trulia addresses only the standard that applies to approval of settlements, its applicability in courts outside of Delaware is uncertain:
Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.” Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial. It is not the standard that an individual plaintiff would have to meet. It is only the standard for the settlement of a merger class action.
Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company? Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?
What’s the internal affairs doctrine? The Supreme Court described it in Edgar v. MITE:
The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs — matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders — because otherwise a corporation could be faced with conflicting demands.
If Trulia establishes a substantive rule of corporate law, then it implicates the internal affairs doctrine and courts in other jurisdictions applying conflicts principles generally would be obligated to follow it in cases involving Delaware corporations.
If that’s the right answer, then the forum-shopping game that many have predicted could end very quickly. Is it? The jury’s still out. Professor Lipton notes that the 7th Circuit’s opinion in Walgreen does not seem to view Trulia as involving internal affairs, but she points out that a recent New Jersey case – Vergiev v. Aguero – reached the opposite conclusion.
– John Jenkins
Here’s a memo from Schulte Roth that provides a reminder that you don’t actually have to purchase stock to run afoul of HSR’s notification and waiting period requirements:
On Aug. 10, 2016, Caledonia Investments agreed to settle FTC charges that Caledonia violated the premerger reporting requirements of the Hart-Scott-Rodino Act in connection with the vesting of RSUs in Bristow Group. Pursuant to the settlement, Caledonia agreed to pay $480,000 in civil penalties. According to the government’s complaint, the vesting of the Bristow RSUs was a reportable acquisition of voting securities for which a filing, and observance of the mandatory waiting period, was required.
HSR requires parties to acquisitions of voting securities, non-corporate interests and assets meeting certain annually adjusted thresholds to file notifications with the federal antitrust agencies and to observe a waiting period prior to consummation of the acquisition.
Acquisitions of non-voting securities or convertible securities are considered exempt transactions. However, the subsequent exercise, vesting or conversion into securities with the present right to vote for directors is a potentially reportable “acquisition” that may require that an HSR filing be made, and the waiting period observed, prior to such exercise, vesting or conversion. Failure to comply with HSR’s filing and waiting requirements when required can result in injunctive relief as well as civil penalties of up to $40,000 for each day during which any applicable person is in violation.
We have posted the transcript for our recent webcast: “How to Apply Legal Project Management to Deals.”
– John Jenkins