In his blog, Steve Quinlivan of Stinson Leonard Street reviews recent SEC comments on merger proxy statements – he indicates many of the comments were typical, and some are variations on a theme. Here’s an excerpt:
– Rule 14a-6(a) requires that the form of proxy be on file for ten calendar days, yet no form of proxy appears to have been transmitted. Please amend the filing to include the form of proxy, or advise. In addition, please ensure that both the preliminary proxy statement and form of proxy are clearly marked as being preliminary. See Rule 14a-6(e)(1).
– We note the statement in the first sentence of the tenth paragraph of the opinion attached as Annex C that [the financial advisors] and Company’s opinion may not be used without its prior written consent. Please revise the disclosure in this section to state, if true, that [the financial advisor] and Company has consented to the use of its opinion in this document.
– We note the limitations on reliance by shareholders in the fairness opinion provided by the [financial advisor]. Specifically, we note the statements that the opinion is furnished for the use of the Special Committee and “may not be used for any other purpose without the [financial advisors] prior written consent.” Additionally, we have similar concerns with the statement that the opinion “should not be construed as creating any fiduciary duty on [the financial advisor’s] part to any party.” Please have the advisor revise the opinion to remove these limitations on reliance by shareholders. Alternatively, please disclose the basis for the advisor’s belief that shareholders cannot rely upon the opinion to support any claims against the [financial advisor] arising under applicable state law.
– We note the disclaimer [that the parties and their financial advisors] do not assume “any responsibility for the validity, accuracy or completeness” of the projections. Please revise to eliminate the statement that these parties do not bear any responsibility for disclosure that was prepared and included in this Schedule 14A.
– We note the disclosure on page X that ABC does not intend to revise its projections. Please revise this disclosure, as publicly available financial projections that no longer reflect management’s view of future performance should either be updated or an explanation should be provided as to why the projections are no longer valid.
Here’s a new study from Cornerstone Research, which found that for the first time since 2009, the percentage of M&A deals valued over $100 million and challenged by shareholder litigation dropped below 90% in 2015 and so far in 2016 – 64% of M&A deals faced litigation in the first six months of 2016. There were 47 M&A deals with associated lawsuits during the first half of the year. The other key findings include:
– Over the first 3 quarters of 2015, plaintiffs challenged deals in the Delaware Court of Chancery 61% of the time; in the fourth quarter of 2015 and the first two quarters of 2016 combined, M&A-related litigation was filed in Delaware for only 26% of challenged deals.
– Average number of lawsuits per deal steadily declined, from 4.6 per deal in 2014 to 4.1 in 2015 and 2.9 in the first six months of 2016. In addition, M&A-related lawsuits were filed more slowly in 2015 and the first half of 2016. During that period, the first lawsuit was filed an average of 22 days after the deal announcement, compared with 14 days in 2014.
– For the first time since 2009, the percentage of M&A deals valued over $100 million and challenged by shareholder litigation dropped below 90 percent in 2015 and so far in 2016.
– Plaintiff attorneys filed lawsuits in 84 percent of all M&A deals announced in 2015 and valued over $100 million. A total of 174 M&A deals had associated lawsuits in 2015.
– Lawsuits were filed in 64 percent of all M&A deals announced in 1H 2016 and valued over $100 million. There were 47 M&A deals with associated lawsuits during the first half of the year.
– In 2015 and the first half of 2016, the percentage of M&A lawsuits that were resolved before deals closed dropped to 57 percent and 56 percent, respectively, down from 75 percent in 2014.
– The majority of litigation challenging a deal was filed in only one jurisdiction: 65 percent in 2015, and 57 percent in the first half of 2016. Only 5 percent and 9 percent of deals were challenged in three or more courts in 2015 and the first half of 2016, respectively.
– There were no deals with more than seven lawsuits filed in the first half of 2016.
– Monetary consideration paid to shareholders has remained relatively rare—there were only a handful of monetary awards and settlements reached in 2015 and in the first half of 2016.
In this report, there are a number of findings about cybersecurity due diligence in M&A, including:
– 80% say cybersecurity issues are highly important in due diligence
– 77% say importance of a target’s cybersecurity has increased significantly over the last two years
– 40% say not enough time was devoted to cybersecurity diligence for recent deals
– 30% say not enough qualified people were involved in the diligence process
Here’s an excerpt from this PwC memo on hedge fund activism:
Neither size nor status is a defense. Nearly 1,300 unique companies were activated against from 2010 to 2015. In 2015 alone, 343 public US companies were targets; 113 have been targeted as of May 2016. But that’s not the full picture—most estimate that the numbers double when you add approaches that aren’t public.
On July 14, 2016, the IRS and Treasury Department released proposed regulations regarding tax-free spinoffs by a parent corporation (the “distributing corporation”) of stock in a subsidiary corporation (the “controlled corporation”) in which the distributing corporation or the controlled corporation owns significant nonbusiness assets compared to its other assets. Under a previous IRS policy, a private ruling would not be issued if the assets comprising the active trade or business of the distributing corporation or the controlled corporation were less than 5% of such corporation’s total assets. The IRS later abandoned the unfavorable ruling policy and liberalized certain technical aspects of the active trade or business requirement for tax-free treatment.
In a course reversal, the new rules, if finalized, would implement the prior ruling policy in regulations. Accordingly, even a significant active business would no longer satisfy the active trade or business requirement if the business did not constitute at least 5% of the value of the corporation. The proposed regulations would also make tax-free treatment more difficult to achieve by adding a new per se “device” rule that would trump the longstanding weighing of facts and circumstances if the relative percentages of nonbusiness assets of the distributing corporation and the controlled corporation exceed certain ratios.
In a recent ruling (Halo Elecs., Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc.), the US Supreme Court adopted a relaxed and more plaintiff-friendly standard for determining whether to award enhanced damages in patent infringement litigation. This ruling should be taken into account when considering allocation of patent infringement risks in M&A transactions, including in connection with representations and warranties and associated indemnities.
Last week, as noted in these memos, ValueAct agreed to pay a record fine of $11 million to settle allegations by the DOJ that it had violated the HSR reporting requirements by improperly relying on the passive “investment only” exemption. In an earlier case, ValueAct paid a $1.1 million fine. In addition, ValueAct agreed to not rely on the “investment-only” exemption to avoid future HSR filings. Here’s the settlement agreement.
This is the largest HSR fine ever – double the previous largest fine of $5.67 million. ValueAct settled this now because HSR fines will increase dramatically next month – when it could have become almost $50 million after the increase…
Tune in tomorrow for the webcast – “How to Apply Legal Project Management to Deals” – to hear the experts who are on the ABA M&A Task Force for Legal Project Management – Haynes and Boone’s Bill Kleinman, QLex Consulting’s Aileen Leventon and Verrill Dana’s Dennis White – that created a new “Legal Project Management Guidebook” which contains a variety of new tools for deal lawyers – including the “Deal Issues Negotiating Tool” that you can use to identify key deal points.
Please print out the “Course Materials” in advance (they’re also available in PowerPoint via a link near the top of this page).
Yesterday, Corp Fin issued a CDI – CDI 103.11 of the Regulation 13D-G CDIs – to clarify that just because someone is disqualified (due to efforts to influence management) from relying on HSR’s “passive investment” exemption doesn’t necessarily preclude that shareholder from being eligible to file a short-form Schedule 13G rather than the longer Schedule 13D. In other words, the HSR test is applied differently than the similar one for 13G/13D. The CDI notes that control intent – as analyzed through the relevant fact & circumstances – is key.
Before providing three examples of this analysis in operation, the CDI notes that the determination might hinge on the subject matter of the shareholder’s discussions with management – with the context in which the discussions occur being “highly relevant.”
Interestingly, this CDI came out on the same day that the DOJ – as noted in these memos – announced a record fine of $11 million that ValueAct paid to settle allegations that it had violated the HSR’s “passive investment exemption”…
Here’s an excerpt from this report by Gary Lutin, who has been closely following the Dell appraisal case (and there’s a new court order today establishing a schedule for discovery):
Surprisingly little has been learned about the Dell settlement with T Rowe Price, which has in itself fueled speculation.
A transcript of the private Monday morning teleconference was obtained,[2] but actually raised more questions than it answered. Stuart Grant of Grant & Eisenhofer (“G&E”), the appointed Lead Counsel for eligible appraisal claimants, was in the teleconference acting as counsel for the ineligible T Rowe Price petitioners that had been dismissed from the appraisal case. He and Dell’s counsel verbally summarized an agreement they had negotiated to pay the ineligible “Settling Petitioners” $.88 per share simply to give up whatever rights they had to appeal, and Mr. Grant explained that it was urgent to get court approval quickly, without delays that might be involved in an open review by all claimants, “so that it could be accounted for in the second quarter for all of my clients, which, understanding that they are various funds, quarters matter to them.”[3] No mention was made of a written agreement during the teleconference, and there was no reference to any documented agreement in the Court’s subsequent Order approving what had been summarized.[4]