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 The FTC announced on October 6th that this old rule is no longer applicable – and the change in the treatment of debt is effective immediately.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.
This Perkins Coie memo reviews the FTC & DOJ’s HSR Annual Report for fiscal 2015. Here’s a summary of the key findings:
– The number of HSR filings increased 8.3% in fiscal 2015, compared to fiscal year 2014. The percentage of transactions investigated decreased 13.1%. The percentage of investigated transactions leading to second requests dropped 2.1%, but the percentage of challenges to reported deals increased 17.4%.
– The agencies continue to enforce the HSR Act’s notification and waiting period requirements in “failure to file” situations, as reflected in the $480,000 civil penalty to be paid by Caledonia Investments plc for its failure to make the required HSR filing prior to a 2014 acquisition of voting securities of Bristow Group Inc.
This recent SRS Acquiom paper suggests that M&A lawyers are still sorting out the privilege issues raised by the Delaware Chancery Court’s 2013 decision in the Great Hill Equity Partners case – which held that the seller’s attorney-client privilege transferred to the buyer following the closing of a merger. According to the paper, here’s how dealmakers have addressed the decision in their merger agreements:
– One-third of the merger agreements surveyed don’t address the privilege issue at all.
– More than half of the remaining agreements assign the privilege to the target shareholders as a group, or to the shareholder group and their representative.
– One-third of the agreements that address privilege assign it to a single shareholder representative.
Assigning ownership and control of the privilege to a single representative avoids the potential for inadvertent waiver and uncertainties about who can assert the privilege. The white paper also notes that approximately one-third of all of the agreements surveyed included language prohibiting the buyer from using privileged communications to assert claims against the target’s shareholders. We’ve calendared a webcast on this topic: “Privilege Issues in M&A.”
This Cleary blog speculates on what the future of M&A litigation in a post-Corwin environment might look like:
As the Delaware Supreme Court narrows the avenues for post-closing challenges to mergers, we expect that plaintiffs’ lawyers will increasingly seek to base their merger suits on specific allegations of conflicts that may have tainted the oversight of processes to sell companies in hopes of supporting claims for breaches of the duty of loyalty and the applicability of the enhanced scrutiny of the entire fairness doctrine.
Public company merger agreements routinely contain provisions – such as indemnification covenants – protecting directors from pre-merger claims. If director conflicts become fertile ground for litigation, will these arrangements be subjected to greater scrutiny? Probably not:
Although these protections constitute a special benefit for these insiders that is not shared with the other stockholders, they are not generally viewed as grounds for claims of disabling conflicts. These merger agreement benefits are typically redundant assurances to comply with pre-existing, ordinary course commitments to these insiders and therefore, except for the incremental outlay for the customary purchase of a six-year D&O tail policy, do not increase costs.
Other contractual provisions protecting directors from pre-deal claims may be subject to closer scrutiny. The Delaware Chancery Court’s recent decision in In re Riverstone National provides a framework for evaluating when arrangements like this may present an issue:
– The personal benefit to the directors must be real, as opposed to highly contingent. Thus, the potential claims from which the directors are being protected by the merger agreement must not be hypothetical claims, but ones that appear to be claims that would have survived motions to dismiss by the defendant directors.
– At the time of the negotiation of the merger agreement, the defendant directors benefitting from these merger agreement provisions must be aware of both these imminent exposures to pre-merger claims and the beneficial provisions in the merger agreement.
– The potential liability against which these director are being insulated must be of a magnitude that is material to the directors in question.
Tune in tomorrow for the webcast – “Middle Market Deals: If I Had Only Known” – to hear Joe Feldman of Joseph Feldman Associates talk about how to best avoid post-closing deal surprises for a mid-market deal. Please print these “Course Materials” in advance.
This blog from Anthony Rickey of Margrave Law reports on his survey of post-Trulia disclosure-only settlements in Delaware and other jurisdictions – and the results may come as a bit of a surprise:
The Walgreen decision has led at least one academic to suggest that “[I]t appears Trulia is on its way to general acceptance in the context of merger litigation.” Yet decisions endorsing Trulia appear to be less common than approvals of disclosure settlements.
Courts in California, Delaware, Indiana, Michigan, New York, Ohio and Virginia have approved a total of 14 disclosure-only settlements in M&A litigation subsequent to the Trulia decision. Not all of these cases involved Delaware companies – but eight of them did, including three settlements approved by the Delaware Chancery Court itself.