DealLawyers.com Blog

Last week, I blogged about a recent study that shows disclosure-only settlements dropping dramatically in the last quarter of 2015 as the Delaware judiciary delivered some hard-hitting decisions in that area. Now we have In re Trulia, CA 10020-CB (Del. Ch.; 1/22/16), in which Chancellor Bouchard refused to approve a disclosure-only settlement with a decision that possibly delivers a coup de grace to these types of settlements absent a showing that the additional disclosures are clearly material.

Chancellor Bouchard’s decision makes it clear that the Delaware Chancery Court will no longer approve settlements involving the release of broad claims in exchange for additional disclosures of dubious quality. These settlements have involved an exchange of near-meaningless changes to the “Background,” “Interests of Certain Persons in the Merger” and “Opinion of Financial Advisor” sections of a merger proxy or Schedule 14D-9 – and/or merely cosmetic changes to the buyer’s deal protections in a merger agreement – in return for a defendant’s agreement to support the plaintiff’s fee application.

So In re Trulia is a potential game-changer – as it comes on the heels Aeroflex, Riverbed, TW Telecom, etc. – as it may further diminish the leverage that strike suit firms have been able to wield for years. It appears to be the most potent condemnation of marginally-pled claims – and it should refocus deal litigation on those relatively rare circumstances where there is demonstrable evidence of disloyalty, bad faith and disqualifying conflicts of interest.

Notably, Chancellor Bouchard recommends the adoption – on a clear day – of exclusive forum bylaws to the extent the decision fuels an increase in deal litigation outside of Delaware. And he calls on the courts of “sister states” to appreciate the judicial waste inherent in litigation designed only to line the pockets of plaintiff firms while providing no real value to shareholders. Thanks to Greenberg Traurig’s Cliff Neimeth for his insights!

Also see this blog by Steve Quinlivan – and we’re posting memos in our “Disclosure” Practice Area…

Here’s news from this Pillsbury memo: Starting in April, UK companies will be required to maintain a publicly available register of people who have “significant control” over them. This new register is part of a wider movement to increase transparency around who ultimately owns and controls companies incorporated in the UK and is being implemented before other EU countries do the same in 2017. With final form guidance due in the next few months, now is the time for companies to consider how they will approach what could well be a time-consuming process of compiling the register, informing possible overseas shareholders on the new rules, and ensuring compliance with these new obligations.

According to this Jones Day memo, it’s possible that Nasdaq is planning to propose new rules that would require disclosure of any compensation arrangements with those who serve as dissident director candidates. This would fuel the debate over “golden leash” payments made by activists to their director nominees in a proxy fight. The memo outlines the arguments both for – and against – such payments…

Recently, as noted in the “D&O Diary Blog,” Matthew Cain (an economist fellow for the SEC) and Professor Steven Davidoff Solomon came out with this study that analyzes preliminary statistics for takeover litigation in 2015 – lawsuits were brought in 88% of completed takeovers last year versus 95% in 2014. But the real story is reflected by the stats for the last quarter of 2015, as litigation was heavily impacted by Delaware counts stepping up to challenge “disclosure only” settlements in a slew of cases – dropping the lawsuit rate to just 21% in that quarter. Despite the higher rates of dismissals, large awards and settlements were given in litigation arising from the Rural/Metro, Dole and Freeport-McMoRan, as noted in this Dodd-Frank blog…

The charts in this SharkRepellent.net article outline how activism has changed. And here’s an excerpt from this WSJ article:

After decades of being treated as boorish gate-crashers, activist investors are infiltrating the boardrooms of large companies like never before. This year activists launched more campaigns in the U.S.—360 through Dec. 17—than any other year on record, according to FactSet. They secured corporate board seats in 127 of those campaigns, blowing past last year’s record of 107. Activists now manage more than $120 billion in investor capital, double what they had just three years ago, according to researcher HFR.

The industry has come a long way since the 1980s, when Carl Icahn, Saul Steinberg, T. Boone Pickens and other mavericks would amass large stakes in companies and demand a sale of the entire company. They were called “corporate raiders” and “greenmailers” and were widely criticized.

These days activists, while not exactly welcomed in corporate boardrooms, are rarely treated as ill-mannered outsiders. “These activist funds are just a different asset class who have the same pensions and endowments investing in them as other funds,” says Rob Kindler, head of mergers and acquisitions at Morgan Stanley. “The demonization of activists, when really what they are doing is providing returns to the same pension and endowment plans, just seems overdone.”

Several factors contributed to this shift, according to corporate executives, activists, bankers and lawyers. The financial crisis fanned dissatisfaction with corporate executives and brought low interest rates that helped activists thrive. Activists got more sophisticated about analyzing target companies and built alliances with other big shareholders, including mutual funds. And broad shifts in corporate governance gave more power to all shareholders, including activists.

Recently, Nixon Peabody posted its “2015 MAC Survey.” Here is an excerpt:

Our inaugural survey, which covered 2001 to 2002, reflected the effects of the September 11, 2001, terrorist attacks on dealmaking. The next year’s study indicated a trend toward bidder-friendly MAC clauses during 2002–2003 and significant expansions of the exclusions focused on acts of terrorism and war and on broad-based market volatility. As economic activity picked up between 2004 and 2007, our surveys reported increasingly pro-target formulations with robust lists of exclusions. The economic downturn and credit crisis halted this pro-target trend, and our 2008 and 2009 surveys showed another increase in the negotiating strength of bidders through the marked decrease in the use of exclusions to MAC provisions. But as the nation began its climb out of the recession, our surveys from 2010 through 2012 signaled a return in target negotiating strength.

However, the ongoing economic recovery has been gradual, and our recent surveys note the cautious optimism of dealmakers. While our 2013 survey reflected increases in both pro-target and pro-bidder trends, the 2014 survey indicated the development of pro-bidder trends, which were continued in the 2015 survey.

This January-February issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a 2016 no-risk trial):

– Rural Metro: Lessons Learned
– Unbundling Proposals After the Holidays
– Boards & Their Financial Advisors: What Do Recent Delaware Opinions Mean for Processes & Relationships?
– Explosion of Representation & Warranty Insurance in the Lower Middle Market
– How Target Could Impact Acquirer’s Conflict Minerals Reporting
– Some Crystal Balling: M&A Insurance & the Future Role of Deal Lawyers
– So Where Are All The M&A Arbitration Provisions?
– Closing Your M&A Deal on a Weekend

Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

As noted on this MoFo blog, FINRA has filed a proposed rule with the SEC which would reduce the regulatory burden for broker-dealers that limit their activities to M&A and certain corporate financing transactions. The proposed rule would create a new category of broker-dealers called “Capital Acquisition Brokers” or “CABs.” The proposed rule was published in the Federal Register on December 23th and will become effective after SEC approval, which normally occurs within 45 days after the date of publication.

Here’s an excerpt from this Cleary Gottlieb blog:

The past few years have witnessed a resurgence in the mergers and acquisitions and initial public offering markets—particularly for health care. Many private companies have pursued a dual-track M&A/IPO process, in which the company simultaneously pursues an IPO and a confidential sale. The dual-track process has been growing in popularity among health care companies, since the IPO process can be helpful in generating momentum for a potential sale in a consolidating industry.

Examples of large private companies that have successfully gone down the dual-track road include Bausch & Lomb, which was nearing the launch of its IPO road show when it was bought by Valeant in May 2013, and Biomet, which had already filed with the Securities and Exchange Commission for an IPO when it announced its merger with Zimmer. And these are not the only examples.

Dual-track processes allow companies to leverage their preparatory work, and to some extent the publicity surrounding the SEC filing process for an IPO, to pursue both an IPO and a sale of the company simultaneously. In particular, the publicity around a potential IPO provides a deadline for potential acquirors, creating a greater sense of urgency to sign up a deal before the target goes public, since it is significantly more expensive and complicated–and riskier–to acquire a public company.

As more health care companies, including “emerging growth companies” (EGCs) under the JOBS Act, plan for monetization events, they need to weigh several considerations when planning for a dual-track process:

– Confidentiality issues EGCs are permitted to submit registration statements confidentially with the SEC, and only file publicly 21 days prior to the roadshow. Filing confidentially may allow for a smoother IPO process by avoiding market speculation about IPO timing and valuation–and the company’s responses to SEC comments. But a confidential filing will not be helpful in generating acquiror demand, and it cannot be used by potential acquirors to expedite their due diligence. Companies pursuing a dual-track process that qualify as EGCs should consider filing publicly, particularly if a sale of the company is their primary focus.

– Investor/Acquiror meetings EGCs are permitted to engage in IPO “testing-the-waters” investor meetings, even prior to filing a registration statement. Because the SEC may request any written materials used in testing-the-waters meetings, companies should make clear in meetings with potential acquirors that they are being provided in connection with a sale of the company and not part of the IPO process. To the extent written materials are used as part of M&A meetings, they should be consistent with the IPO registration statement, since they may be discoverable in any IPO disclosure lawsuit. Also, potential acquirors should sign nondisclosure agreements to help protect against leaks or misuse of information by a competitor.

– Due diligence The same data room used for due diligence by potential acquirors can be used as the basis for the IPO due diligence to be conducted by the underwriting banks. Typically, an acquiror would conduct more extensive due diligence than an underwriter, and, as a result, an M&A data room will contain more documents than an IPO data room. For that reason, companies can start with the M&A data room and pare it back for IPO due diligence.

Here’s news from Cliff Neimeth of Greenberg Traurig:

Since the Delaware Court of Chancery’s decision a couple of years ago in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), and the adoption effective August 1, 2015 of Section 115 of the DGCL (which essentially codified Boilermakers), I’ve adopted exclusive forum bylaws (“EFBs”) for dozens of Greenberg Traurig’s Delaware corporate clients pursuant to unilateral board action. We’ve especially counseled such adoption concurrently with, or immediately preceding, the public announcement of merger, business combination and similar extraordinary corporate transactions (in general anticipation, but obviously prior to the commencement or overt threat, of fiduciary litigation challenging the transaction and the actions and decisions of the board). Such “same-day” adoption was expressly upheld in City of Providence v. First Citizens BankShares, Inc., 99 A.3d 229 (Del. Ch. 2014), although the decision was legislatively modified on other grounds pursuant to Section 115 of the DGCL.

To date, hundreds of mostly (but not exclusively) public Delaware corporations have adopted EFBs and, when challenged in litigation outside of Delaware, the courts of several non-Delaware states – mostly in preliminary “stay” and other delayed-intervention hearings – have deferred to Delaware’s strong policy interest, at least in the first instance, in seeking to retain exclusive jurisdiction over the adjudication of intra-corporate disputes animating the internal affairs of Delaware corporations before subjecting the corporation to the defense of multi-jurisdictional litigation arising out of the same facts and circumstances and the risk of inconsistent judgments and erroneous interpretations of Delaware’s statutory and judicial corporate law.

The decision of the Oregon Supreme Court (Roberts v. TriQuint Semiconductor, Inc.) is significant – not just because it is the latest non-Delaware court decision acknowledging the facial and contractual validity of Delaware EFBs – but because it appears to be the only reported non-Delaware appellate court decision, to date, fully addressing on the merits the contextual (i.e., “as-applied”) validity of the EFBs. Moreover, the decision (which reversed the decision of the lower Oregon court) confirmed that an EFB adopted two days prior to the announcement of an MOE involving the subject corporation did not constitute unreasonable proximity.

The decision essentially reiterates the policy rationale for upholding EFBs that the Delaware courts (and certain non-Delaware courts) have articulated to date, although the Oregon Supreme Court noted that Oregon law controlled the determination by an Oregon court of whether the EFB of a Delaware corporation was enforceable.

It’s important to make sure that an EFB expressly allows the Delaware corporation to waive the EFB and/or consent to the jurisdiction of a non-Delaware forum. Indeed, there may be circumstances where the adoption of an EFB is inappropriate or unreasonable and, as oft-cited by the Delaware courts (especially in an “as-applied” fiduciary litigation), inequitable action does not become permissible just because it is legally possible. Also, remember that pursuant to Section 115 of the DGCL it is permissible for an EFB to expressly confer on a non-Delaware court jurisdiction over the adjudication of non-Delaware disputes, provided that such extra-Delaware jurisdiction is not exclusive. It is in this latter regard that the City of Providence decision was legislatively modified by Section 115 of the DGCL.

Notably, despite ISS’ and Glass-Lewis’ general disdain for EFBs adopted without stockholder approval and their policy of recommending “withhold authority” against corporate governance committee chairs in such context, that tail shouldn’t – in itself – wag the dog in a situation where the adoption of an EFB is otherwise warranted as determined in good faith by the Board after careful consideration of all the relevant facts, risks and merits. This is especially true when an extraordinary corporate transaction is being announced and the surrounding facts are such that it is a “clear day” for adoption of the EFB. To date, EFBs adopted unilaterally have not faced significant adverse reaction from the portfolio managers and proxy voting departments at leading national index funds, quant investors and regulated asset management firms.

The TriQuint decision should help further deter the commencement of multi-jurisdictional litigation against Delaware corporations in a (non-Delaware) jurisdiction where such corporation is headquartered or otherwise has a strong commercial nexus. Time, of course, will tell.