As presented in this Thomson Reuters Mergers & Acquisition Review, worldwide mergers and acquisitions (M&A) activity was up by 32 percent compared to 2014. The deal value of $3.2 trillion, including the announcement of 47 deals with a value in excess of $10 billion, reflected the strongest nine months for worldwide M&A since 2007.
In the United States, M&A activity for U.S. targets of $1.5 trillion during the first nine months of 2015 reflected a 46% increase compared to 2014 and the strongest period for U.S. M&A since records began in 1980.
ISS counts Tempur Sealy as among the 28 proxy contests during the first six months of 2015, the busiest period for contests since 2009, even though the dissidents waged a “vote no” campaign instead of nominating alternative director candidates. The overall dissident “win rate” calculated by ISS decreased from 67% for all of 2014 to 46% for the first six months of 2015, particularly where the targeted company had a market cap above $1 billion. The firm believes that these results were affected by the absence of notable “heavyweights” in contests owing in part to settlements.
At Tempur Sealy, according to news reports, H Partners missed the company’s advance notice deadline to nominate its own slate and chose instead to urge investors to withhold votes for three of the company’s nominees, including the CEO, the chairman of the board and the chairman of the nominating and corporate governance committee. Both outside directors were affiliated with private equity firms that had previously exited their positions.
In its contested solicitation materials with a separate proxy card, H Partners noted that it owns nearly 10% of the company’s stock and is a “long-term stockholder,” since it had held shares since 2012. H Partners pointed out that the company has majority voting and a resignation policy that requires directors who receive less “for” votes than “against” votes to tender their resignations. Since there was no proxy contest with more candidates than seats available, the company’s majority voting standard continued to apply.
The background in the solicitation materials outlined a series of meetings that had begun in 2013 with requests for a board seat that H Partners claimed were never seriously put forth before the company’s nominating and corporate governance committee, suggestions for executive compensation changes and books and records demands. All three of the targeted nominees ultimately did not receive majority support at the meeting and left the board. The CEO also resigned his position. One of the outcomes was the adoption of a board shareholder liaison committee, which states in its charter that the committee’s responsibility is to “promote and develop better and richer communications between stockholders and the board” but notes that the committee’s efforts are “intended to complement management’s efforts with stockholders” and “will be coordinated.”
Tune in tomorrow for the webcast – “Transaction Insurance as a M&A Strategic Tool” – to hear Dechert’s Markus Bolsinger, Aon Transaction Solutions’s Matt Heinz, Pepper Hamilton’s Jim Epstein, Norton Rose Fulbright’s Scarlet McNellie and Haynes and Boone’s George Wang discuss all the “in’s & out’s” as insurance in M&A transactions has gained in popularity.
In Corwin v. KKR Financial Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015), the Delaware Supreme Court affirmed the Court of Chancery’s grant of defendants’ motions to dismiss with prejudice a suit challenging the acquisition of KKR Financial Holdings LLC (“KFN”) by KKR & Co. L.P. (“KKR”). In December 2013, KKR and KFN executed a stock-for-stock merger agreement, which was subject to approval by a majority of KFN shares held by persons other than KKR and its affiliates. The merger was approved on April 30, 2014, by the requisite majority vote. Nine lawsuits challenging the merger were brought in the Court of Chancery and consolidated. The operative complaint alleged, among other claims, that the members of the KFN board breached their fiduciary duties by agreeing to the merger and that KKR breached its fiduciary duty as a controlling stockholder by causing KFN to enter into the merger agreement.
The Court of Chancery ruled that KKR, which owned less than 1% of KFN’s stock, was not a controlling stockholder. The Delaware Supreme Court affirmed on the ground that plaintiffs did not plead facts sufficient to support an inference that KKR could prevent the KFN board from “freely exercising its independent judgment in considering the proposed merger.” The Court of Chancery also ruled that the business judgment standard of review would apply to the merger “because it was approved by a majority of the shares held by disinterested stockholders of KFN in a vote that was fully informed.” The Delaware Supreme Court affirmed, clarifying that, under Delaware law, a fully informed, uncoerced vote of the disinterested stockholders invokes the business judgment rule standard of review, even if that vote is required by statute.
Yesterday, the Delaware Supreme Court posted video of that day’s oral argument for the appeal of RBC v. Jervis. This is the case seeking to reverse Rural/Metro. Its not a new thing to have oral argument archive available online – but I think it’s typically not available so fast…
Here’s an excerpt from a piece by Finsbury’s Chuck Nathan entitled “Observations on Short-Termism and Long-Terminsm”:
The fourth fallacy in the short-term—long-term debate is that, given every company’s finite resources, choosing a corporate strategy that can be implemented in a relatively short-time period (often a type of so-called “financial engineering”, such as a major stock buyback, a divestiture or spin-off of a business or a sale of the entire company) almost certainly prejudices, if it does not preclude, longer-term more beneficial strategies (such as greater investment in R&D, upgrading productivity of plants and equipment or acquisitions). This formulation of the debate associates activist investors with short-term strategies at the cost to the company and its other shareholders of greater long-term value creation.
But this formulation of the debate simply does not make sense. Activist funds are in business to maximize value creation for their investors (and for their principals who get rich on their carry and their investment in their own funds). Why would any rational activist investor consciously forgo the higher net present value of a long-term company business initiative in favor of the investor’s lower short-term value creating idea? Activist fund managers don’t get paid for ego trips; they get paid for maximizing returns. The same, of course, is true for all actively managed institutional investors. Even index and other quantitative investors should opt for the highest net present value creator if they have the capability of understanding and evaluating the competing proposals. In theory, only short sellers should oppose the highest net present value added program regardless of its duration.
On Thursday, September 17, 2015, in In re Riverbed Technology, Inc. Stockholders Litigation, the Delaware Chancery approved a disclosure-only settlement related to the go-private deal for Riverbed Technology, Inc. Although the court approved the settlement, it expressed serious reservations about the broad releases provided to Riverbed’s directors in exchange for enhanced disclosures that provided little value for shareholders. In re Riverbed is yet another in a line of Delaware cases that have expressed dissatisfaction with the current trend of merger litigation resulting in disclosure-only settlements.
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– Retention Payment Program: Decision Tree
– Earn-Out Covenants
– Spin-Offs & Executive Compensation: Keys to Success
– D&O Insurance: Maximizing Returns In the Face of M&A Lawsuits
– Providing Effective, Practical Counsel Regarding Acquisition Surprises
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Tune in tomorrow for the webcast – “Evolution of M&A Executive Pay Arrangements” – to hear Morgan Lewis’ Jeanie Cogill, Sullivan & Cromwell’s Matt Friestedt, Cravath’s Eric Hilfers and Wachtell Lipton’s Andrea Wahlquist cover the latest about executive compensation arrangements in deals.