DealLawyers.com Blog

Here’s an excerpt from this Reuters article:

A major funds company is putting directors on notice: if you adopt poison pill anti-takeover measures without shareholder approval, you will be blacklisted. Since October, Dimensional Fund Advisors, the eighth largest U.S. mutual fund firm with $398 billion in assets, has been sending warning letters to companies whose stock it owns and who have adopted the measures without shareholder approval.

In the letters, the Austin, Texas-based money manager warns that it will vote against directors who approved those measures – not just at the company with the poison pills, but at every company they serve – unless they remove those pills or put them up for shareholder vote. The campaign, which hasn’t been previously reported, will eventually target 250 companies. DFA is worried that companies too often use the measures to deter acquirers and shareholder activists who could benefit shareholders, said Joseph Chi, the firm’s co-head of portfolio management.

DFA appears to be the first major fund group to blacklist individual directors across its portfolios for such conduct. That may be a sign parts of the funds industry are taking a tougher line against boards who don’t do what the funds want. Some of the largest U.S. fund managers have also recently been pressuring companies to make it easier for shareholders to nominate board candidates.

Here’s an excerpt from this BloombergView piece:

Are activists an important check on shareholder complacency? Left to their own devices, would big institutional shareholders be insufficiently protective of their own interests? Well I don’t know but here is a story about how T. Rowe Price consistently opposed the 2013 leveraged buyout of Dell, of which it was a big shareholder, but somehow voted for the deal. Like, as far as I can tell, by accident. Like the guy in charge of telling everyone what a bad deal it was never talked to the guy in charge of hitting the vote button. “We are aware of a discrepancy in the communication of our voting instruction on the Dell buyout,” says T. Rowe. What?

This is immediately relevant because T. Rowe is a plaintiff in an appraisal lawsuit, and the appraisal statute requires that you “neither voted in favor of the merger or consolidation nor consented thereto in writing.” So T. Rowe would seem to be out of luck in its appraisal demand, though it has a pretty amusing reading of the statute to mean the opposite of what it says, which happens to be supported by case law. But the broader issue is: How do you vote the wrong way on a merger? What does this story say about the need for activist investors? About T. Rowe’s concerns about high-frequency trading? About the efficiency of our public equity markets?

Here’s a blog by Allen Matkin’s Keith Bishop: Late last week, Senate Bill 75 was introduced in Delaware. This bill is in part a reaction to the Delaware Supreme Court’s holding in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) upholding as facially valid a bylaw imposing liability for certain legal fees of the nonstock corporation on certain members who participated in the litigation. The bill adds a new paragraph (f) to Section 102 of the Delaware General Corporation Law as follows:

The certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in § 115 of this title.

SB 75 also amends Section 109(b) to add a similar proscription to the Bylaws. According to the bill’s synopsis, neither provision is intended to preclude a fee shifting agreement in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced. In typical Delaware fashion, however, you can’t find those words in the text of the bill. One can only wonder at the irony of a statute of frauds that itself is not a statute and not in writing.

Assuming SB 75 is enacted, it will be interesting to see whether it will have the effect of driving companies to other states that permit fee-shifting bylaws.

Here’s a blog by Stinson Leonard Street’s Jill Radloff:

The stockholders of Cyveillance, Inc., sold their company for $40 million up-front and a $40 million earn-out if the company’s revenues reached a certain level. Section 5.4 of the merger agreement prohibited the buyer from “tak[ing] any action to divert or defer [revenue] with the intent of reducing or limiting the Earn-Out Payment.” When the earn-out period ended, the revenues had not reached the level required to generate an earn-out.

The seller representatives sued for breach of the merger agreement. The Court of Chancery found that the merger agreement meant what it said, which is that in order for the buyer to breach Section 5.4, it had to have acted with the “intent of reducing or limiting the Earn-out Payment.” The Court of Chancery found that the seller had not proven that any business decision of the buyer was motivated by a desire to avoid an earn-out payment.

The Court of Chancery also rejected the seller’s implied covenant claim. The Court of Chancery held that the merger agreement was complex and required a number of actions, including actions that would occur post-closing. It thus found that the merger agreement’s express terms were supplemented by an implied covenant. But as to whether conduct not prohibited under the contract was precluded because it might result in a reduced or no earn-out payment, the Court of Chancery held that, consistent with the language of Section 5.4, the buyer had a duty to refrain from that conduct only if it was taken with the intent to reduce or avoid an earn-out altogether.

The Delaware Supreme Court upheld the Chancery Court decision. By its unambiguous terms, that merger agreement term only limited the buyer from taking action intended to reduce or limit an earn-out payment. Intent is a well-understood concept that the Court of Chancery properly applied. The Supreme Court noted that the seller was seeking to avoid its own contractual bargain by claiming that Section 5.4 used a knowledge standard, preventing the buyer from taking actions simply because it knew those actions would reduce the likelihood that an earn-out would be due. As Section 5.4 is written, it only barred the buyer from taking action specifically motivated by a desire to avoid the earn-out.

The Delaware Supreme Court found the Court of Chancery was very generous in assuming that the implied covenant of good faith and fair dealing operated at all as to decisions affecting the earn-out, given the specificity of the merger agreement on that subject, and the negotiating history that showed that the seller had sought objective standards for limiting the buyer’s conduct but lost at the bargaining table. Therefore, the Court of Chancery correctly concluded that the implied covenant did not inhibit the buyer’s conduct unless the buyer acted with the intent to deprive the seller of an earn-out payment.

This May-June Issue of the Deal Lawyers print newsletter includes:

– M&A Antitrust Playbook for In-House Counsel
– Managing Regulatory Risk in Bank M&A
– Rep & Warranty Insurance: Negotiating Tips & Market Trends
– European M&A Dos & Don’ts for Non-European Buyers
– Break-Up Fees in Delaware: A Delicate Balance for All Parties

If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.

As noted in this blog by Falls Communications’ Rob Berick, the back and forth between Trian’s Nelson Peltz and Yale’s Jeffery Sonnenfeld is great theater – it also provides great insight into the psyche of an activist investors. It should be interesting to see how this continues to play out as neither is one to back down from a fight…

Here’s an American Banker article written by Donald Mullineaux, Chair of the Federal Home Loan Bank of Cincinnati:

What’s the relationship between increased financial regulation and industry consolidation? In his March 31 commentary in American Banker, J.V. Rizzi contends that there is none. Contrary to the evidence provided in a recent Harvard Kennedy School working paper, Mr. Rizzi suggests that the Dodd-Frank Act — and regulation in general — does not underpin merger and acquisition activity. Rather, he says, banking acquisitions are primarily driven by economies of scale. This is a bit like arguing that cigarette smoking does not cause cancer, since we have evidence that exposure to the sun and other forms of radiation are cancer-causing agents. Just as there are many causes of cancer, banks have multiple motivations for mergers.

Empirical studies of the link between regulation and mergers must try to account for all of the relevant causal factors, which is quite a difficult exercise. As researchers love to say, more work needs to be done to unravel the relationship between regulation and M&A. But there is no case for ruling out regulation as a prospective driver. Mr. Rizzi also fails to appreciate that the imposition of new regulations like those engendered by Dodd-Frank can actually be a source of economies of scale. The reason why is that some of the costs associated with regulatory compliance are fixed costs, meaning that they do not vary with the activity level or size of the bank. Spreading fixed costs across a larger asset base is a common rationale for the existence of scale economies.

Federal Reserve governor Daniel Tarullo recognized this point explicitly in a May 2014 speech at the Federal Reserve Bank of Chicago. “Any regulatory requirement is likely to be disproportionately costly for community banks, since the fixed costs associated with compliance must be spread over a smaller base of assets,” he said. Governor Tarullo has been equally vocal about the economic costs associated with the potential demise of community banks, stating in the same speech that “community banks are of special significance to local economies” and that “the disappearance of community banks could augur a permanent falloff in this kind of credit [small-business loans], at least a portion of which may not be maintained in the more standardized approach to lending, characteristic of larger banks.”

Much ink has been spilled in academic journals trying to explain the phenomenon of “merger waves,” in which M&A activity clusters during well-defined time periods, only to erode at later dates. Once again, there are multiple possible explanations for this occurrence. But a leading candidate for the cause of waves is an “industry shock.” Such a shock can be defined as an unanticipated development or event that significantly alters the cost and or revenue structure in a particular industry. The most frequently mentioned shocks in the literature relate to technology, regulation, and deregulation.

It’s hard to argue that Dodd-Frank was anything other than an unforeseen banking industry shock. Therefore, the law contains the potential to continue producing a substantial volume of new mergers.

The battle over whether to shorten the Schedule 13D filing window has been long and drawn out. For example, as noted in this blog, SEC Commissioner Gallagher said last Fall that we shouldn’t expect changes to the 13D window “this year or next.” As noted in this Cooley blog, several public watchdog organizations have weighed in with this letter to the Senate Banking & House Financial Services Committees urging that Congress take action to shorten the 10-day filing period applicable to Schedule 13D. Also see this WSJ article…

This podcast of Travis Laster with Peter Ladig & Kyle Evans Gay of Morris James is interesting. Morris James has kicked off a new series of podcasts on Delaware law developments by the way…

Here’s news from Chris Cernich and Cristiano Guerra in ISS’s Special Situations Research:

Thus far, 2015 is on track to be a record year for the number of U.S. proxy contests going to a vote, according to an analysis by ISS’ Special Situations Research team. Last year, ISS tracked 11 contests that went to a vote in May – the heart of the U.S. annual meeting season – and 17, in all, through June 30. For the full year 2014, a total of 33 contests went to a vote. By comparison, ISS is tracking 13 contested elections for meetings slated prior to May 1, and 22 more in the month of May alone – bringing the total to 35 in the first five months of the year. While some of them will most likely settle, ISS’ Special Situations Research team expects at least 30 to go to vote, based on conversations with participants in the contest.

Contest Size Increases

When looking at the size of target companies in the U.S., the sweet spot for activism is generally less than $1 billion in market cap. The median in 2009 was $94 million, and, even in that high-water-mark year for contested elections, only 9 percent of contests – four of them – had targets with a market cap of greater than $1 billion; the next year there were zero. The median size has grown over the past few years, though, from $41 million in 2012 to $191 million the next year to $260 million in 2014. The median for 2015 won’t be official for another eight months, until all the data is in, but the median for the contests expected in first half of 2015 is $623 million. That compares to a median of $255 million for the first half of last year.

There are far fewer contests going to a vote at companies with a market cap of less than $10 million. And the number of targets greater than $1 billion market cap which actually go to a vote has grown substantially as well: in 2013, there were 13 of them, or 35 percent of total contests which went to a vote. Last year the number dipped down to 10 companies, but 10 is still a very big change from prior years when one or two a year was generally the max. For the first half of 2015, ISS anticipates that as many as 15 will go to a contested election; the corresponding period last year had seven.

The Biggest Contests for 2015

Beyond DuPont, two of the biggest 2015 contests on the slate so far are at mattress manufacturers. Select Comfort, which is $1.8 billion in market cap, is facing a contest from Blue Clay Capital at its May 22 meeting. And Tempur Sealy, which is $3.4 billion in size, is facing a Vote No from H Partners at its May 8 meeting. It’s not a traditional vote no, however – they want the CEO, the chair, and a third director ousted, after which they’re hoping the board will appoint an H Partner’s executive and one other nominee. Two more are being run by a new activist, called Land & Buildings, which formed after the financial crisis to invest specifically in real estate. REITs don’t usually have contests, but after Corvex succeeded in replacing the board at Commonwealth REIT last year it seems that’s about to change – and Land & Buildings is trying to lead the charge with a May 22 contest at Associated Estates Realty Corp., which is $1.4 billion in market cap. Land & Buildings is also running a contest at MGM Resorts International, a $10.4 billion company, which will go to a vote one week later, on May 28.

ISS is tracking several other meetings in the $1 billion plus category:
– Sandell, which won seats at Bob Evans last year, is looking for seats on the board of Brookdale Senior Living, a $7 billion firm; that shareholder meeting is likely to be in June.
– Shutterfly, a $1.4 billion Internet company, is facing a contest from Marathon Partners at its May 27 meeting.
– Rovi Corp, a $1.9 billion firm whose business is centered on discovery and personalization of digital entertainment, is looking at a contest from Engaged Capital at its May 13 meeting.
– GAMCO is back for the fifth year at $2.7 billion Telephone and Data Systems.
– Barington Capital is looking for seats at The Children’s Place, a $1.3 billion firm whose last proxy contest, half a decade ago, was led by the ousted founder.