DealLawyers.com Blog

Here’s an excerpt from this blog by Cooley’s Cydney Posner:

The WSJ reports that the SEC is investigating whether some hedge fund activists formed 13D “groups” but failed to make appropriate disclosure of their alliances. Under Rule 13d-5, when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities, all of those persons together form a “group,” and are deemed to beneficially own all of securities owned by persons in the group. If the group together owns 5% or more of a company’s shares, all of the persons in the group may be required to make filings with the SEC. According to the WSJ report, SEC Enforcement has opened multiple investigations, sending requests for information to a number of hedge funds. The issue is whether, in targeting companies, they coordinated their efforts, or “acted in concert,” to target companies in a way that led to the formation of “groups,” but failed to make appropriate filings.

Here’s news from the Delaware Law Weekly (also see this memo):

The state House of Representatives on Thursday unanimously approved SB 75, the annual package of amendments to the Delaware General Corporation Law, which included a measure that would prevent stock corporations from enacting bylaws that impose attorney fees and costs on plaintiffs who lose after filing lawsuits alleging corporate waste or wrongdoing. The measure now goes to the desk of Gov. Jack Markell, who is expected to sign it into law.

“SB 75 helps preserve the balance between shareholders and management and ensures that shareholders in Delaware corporations have access to the Court of Chancery,” said Kelly Bachman, Markell’s press secretary. “The governor would like to thank the Corporation Law Council for its continued efforts to improve Delaware law and preserve Delaware’s place as the leading state of incorporation.”

Approval—which required a two-thirds vote—came on a 40-0 vote with one state representative absent.

Chief Deputy Secretary of State Richard J. Geisenberger came to the chamber before the vote to answer lawmakers’ questions and said its drafters were confident that the bill would maintain the delicate balance of Delaware’s franchise in corporate regulation, which he said is worth $1.1 billion annually to the First State. The state should aim, Geisenberger said, “to strike a balance between the attractiveness of our corporate statute to managers and [the needs of] raising capital from shareholders.”

He added that he did not think banning stock corporations from adopting fee-shifting bylaws posed a risk to Delaware’s attractiveness as a state of choice for incorporation. He stressed that another key provision of the act allows corporations to state in their bylaws that claims under the DGCL be brought only in the courts of Delaware.

– by Randi Val Morrison

This recent Metropolitan Counsel article does a fine job of explaining some of the principle insurance issues arising out of M&A transactions – specifically, the effects of a transaction on the selling company’s insurance program and how to bridge the resulting insurance gaps. Insurance implications and considerations are addressed in the context of a range of potential M&A scenarios, including a sale of a substantial portion of assets or acquisition of stock by another company.

Additional memos are available in our “Transaction Insurance” Practice Area.

Deloitte’s recently released survey report focuses on post-merger integration based on the input of more than 800+ executives. The report examines common success and failure factors, and what companies can do to increase the likelihood of deal success. Additionally, the survey report reveals findings and success factors around synergies, integration readiness, organization, operating models and communication.

Key Findings

– Almost 30% of respondents said that their post-merger integration fell short of success.
– When asked about synergies, 29% of respondents indicated that they exceeded synergy targets, while 18% said they fell short. An additional 10% weren’t sure if they met their targets.
– Respondents concurred on the key drivers for successful integration: executive leadership support, involvement of management from both sides, development of a project plan that often included creating a dedicated integration team, and communications.
– Ensuring a smooth transition from beginning of the merger–the day the deal closed and the combined entity became operational–correlated very highly with overall success.
– The inability to deal with unexpected challenges was the primary factor that doomed combinations. Delays and lack of preparedness also being key reasons that some integrations fail.
– In the future, respondents said they would focus on a swifter and phased post-merger integration, better communication, and a more rigorous process to select an integration team. They also said they’d allocate more budget to the integration.

 See also this FEI article and additional resources in our “Integration” Practice Area.

Research apparently shows that about 33% of target company directors are retained among Fortune 500 mergers. Yet, as much focus as there is on the actual merger transaction and post-merger integration, there are scant resources devoted to how to create and effect the most optimal post-merger integrated board. This is critical, as (as everyone knows) mergers often fail or, at a minimum, are much less successful than anticipated. So ensuring optimally effective oversight by the post-merger board should be a paramount consideration.

The authors of this NACD Directorship article do a fine job of discussing considerations relevant to effecting effective merger boards taking into account several types of common merger scenarios. Specifically, they address (i) board composition factors; (ii) objectives and tasks for one or more integrated board sessions in advance of – and possibly soon after – the first official post-deal board meeting; and (iii) post-deal oversight priorities.

Board composition considerations include identifying directors with skills and experience most relevant to successful post-deal implementation, director preferences, and chemistry – or the potential for conflict – among director candidates.

Objectives of the special session preceding the first official board meeting include:

• Introducing directors to each other and exploring their respective backgrounds, including any new directors and those from the buyer and the target company’s board.
• Meeting the new leadership team and ensuring that they meet the directors.
• “Level set” on the strategy, the goal of the merger, and the key components of value.
• Transferring knowledge – with a focus on matters most relevant to the deal (which may include discussions with key customers and/or business partners).
• Establishing the chair’s role.
• Beginning to function as an effective board, i.e., establishing a board culture and dynamic that will draw from the skills and experience of all directors and reach well-considered decisions for the company.

Post-deal oversight priorities are logically discussed in the context of transition and “value creation” phases.

This article is a welcome addition to any merger planning resource deck that contemplates a post-deal board integration.

This recent study taps “social identity theory” to address how gender differences among directors impact the board’s decision-making in the M&A context. As further described in this article, social identity theory in the board setting is the notion that the board’s behavior is a function of how individual directors perceive others and themselves in the context of the board as a whole.

Minority directors such as women, who are perceived as outside of the majority’s “in-group,” will tend to actively distinguish themselves in board group interactions. The net effect on the board as a whole is a more robust and drawn out decision-making process – consistent with the theory that diverse groups generally (regardless of context) tend to make more thorough, comprehensive decisions.

Based on social identity theory, the study’s authors expected that boards with female representation would be less likely to approve proposed deals, and – even assuming deal approval – less likely to approve larger (i.e., riskier) deals. To test the theory, the study reviewed the association between women on boards and the number and size of aquisitions among over 1,500 S&P 500 companies between 1998 and 2010.

As predicted based on the theory, greater female representation on boards was negatively correlated with the number and size of acquisitions – i.e., companies with above average representation by women on the board were associated with 18% fewer acquisitions and a 12% decreased acquisition size compared to companies with below average female board representation.

While acknowledging the strong support of their hypothesis about how social identity theory impacts boardroom conduct, the authors appropriately caution that comprehensive board decision-making and oversight – characteristic of more diverse boards – may not, in and of itself, always be good. Among other things, the board’s behavior resulting from “in” (majority) and “out” (minority) group categorizations could be associated with undesirable consequences, such as reduced cohesion and increased “coordination” costs. See also this Insead article.

This blog entitled “If You’re Waiting for ISS, It Might Be Too Late” written from the activist investor viewpoint is interesting. Here’s an excerpt:

Problems With Waiting for ISS and GL
While support from ISS and GL certainly can’t hurt, it also is by no means assured, even in poor performers. In proxy contests, both firms render opinions based on two criteria:

– Is the company bad enough that the BoD needs change, and changing the BoD will matter?
– Will the shareholder nominees do better than incumbents?

If an investor can’t persuade institutions on these two points before ISS and GL render an opinion, an investor may not persuade ISS and GL, either. Even worse, ISS and GL have less influence than one might think. Most of the largest institutions have independent proxy departments that analyze proxy contests. ISS and GL have input to their decision, but hardly determine how they vote.

Why Is It Even Close?
We prefer activist projects at portfolio companies with big problems, obvious solutions, and a concentrated institutional investor base. Who wouldn’t? There, it becomes straightforward to convince other shareholders of the case for change, and that your BoD nominees make more sense.

Obviously, not every company fits. Many situations can get close. The less it fits, the more a shareholder dependson ISS and GL to help make the case. As you depend more on ISS and GL, you lower the chances of prevailing. Worry about ISS and GL, especially if you can’t avoid a close situation. But, try not to count on them.

Here’s this thought piece from Tom Bayliss and Mark Mixon of Abrams & Bayliss:

If it becomes law, Delaware State Senate Bill 75 will prohibit Delaware stock corporations from adopting provisions in their bylaws or certificates of incorporation that would shift legal fees to the losing party in stockholder litigation. The debate over these so-called “loser pays” provisions and the proposed legislation prohibiting them has generated controversy nationwide. Opponents of the legislation argue that abusive lawsuits impose a “merger tax” and that prohibiting “loser pays” provisions would “eliminate an important mechanism” that could “protect innocent shareholders against the costs of abusive litigation.” Proponents of the legislation contend that “loser pays” provisions would “foreclose meritorious stockholder claims [and] render illusory the fiduciary obligations of corporate directors.” Both sides of the public debate have overlooked the availability of “no pay” provisions, which could transform stockholder litigation without the effects that make “loser pays” provisions unpalatable to many.

In its simplest form, a “no pay” provision requires each side to bear its own fees and costs in stockholder litigation, unless the court concludes that one side litigated in bad faith. Policymakers, practitioners and academics should consider “no pay” provisions as both a tool to address the recent torrent of stockholder litigation and potentially the next battleground if Delaware’s legislature prohibits “loser pays” provisions.

First, “no pay” provisions are important because they could restore the so-called “American Rule” to a critical type of stockholder litigation. The American Rule has been a fixture of the legal landscape in the United States since its inception. But a stockholder suit challenging a transaction that settles in exchange for the issuance of supplemental disclosures falls within the “corporate benefit” exception to the American Rule. Under this exception, the reviewing court awards the plaintiff’s attorney a fee (to be paid by the corporation) for obtaining a “benefit” for the corporation’s stockholders. Because the average fee award for a disclosure settlement is approximately $500,000, the prospect of this type of fee award subsidizes shot-in-the-dark claims by lawyers representing stockholders who do not internalize the cost of authorizing an attorney to bring suit against the corporation. “No pay” provisions applicable to class action litigation that settles for disclosures would restore the American Rule to this key type of stockholder litigation by requiring each side to bear its own fees and costs. This would fundamentally change the economics of the decision to file suit, because weak suits that could only generate a disclosure settlement would no longer be profitable for lawyers to prosecute on a contingent fee basis.

Second, “no pay” provisions lack the most problematic characteristic of “loser pays” provisions. “Loser pays” provisions threaten to impose significant costs on stockholder plaintiffs who are unsuccessful. Critics of “loser pays” provisions argue that the potential imposition of these costs on stockholder plaintiffs would reverse the limited liability structure of the corporate form by imposing the debts of the corporation (and potentially related parties) on one or more of the corporation’s stockholders. These critics also argue that that the potential imposition of millions of dollars in defense costs would chill even meritorious claims and effectively bar the courthouse door to small stockholders. By contrast, “no pay” provisions would simply eliminate the profitability of pursuing a suit that settles for specified benefits (perhaps disclosures or other non-monetary benefits), unless the stockholder plaintiffs have agreed to pay their attorneys.

Third, “no pay” provisions are endlessly scalable and could be crafted to apply only to specifically identified types of claims, forms of litigation or specific types of settlements. For example, a “no pay” provision could expressly permit fee-shifting if (a) the litigation achieves a monetary benefit for the corporation, (b) the litigation results in disclosures that exceed Delaware’s materiality threshold by a specified margin, or (c) a court determines that the non-monetary benefits obtained in the litigation exceed a specified dollar-equivalent value.

Fourth, if crafted to provide simply that each side shall bear its own fees and costs, “no pay” provisions would preserve the opportunity to seek fee awards from common fund recoveries in class actions, since the plaintiff class would be paying its own lawyers. This would be consistent with the American Rule’s fee-allocation regime. Plaintiffs’ lawyers might also retain the opportunity to seek fee awards for obtaining common fund recoveries and non-monetary, therapeutic benefits in derivative actions, since the corporation would be paying lawyers pursuing claims on the corporation’s behalf. Tailored in this way, “no pay” provisions would bite only in situations where a class action resulted in non-monetary benefits to a plaintiff class, and where the court would (absent a “no pay” provision) typically require the corporation to pay the fees of the lawyers representing the class in accordance with the “corporate benefit” doctrine.

Fifth, “no pay” provisions appear to be consistent with Delaware’s traditional approach to corporate governance, which favors private ordering within a framework imposed by a broadly enabling corporate statute and common law principles developed on a case-by-case basis under the leadership of Delaware’s judiciary. Even if Delaware’s legislature prohibits “loser pays” provisions, the Delaware Court of Chancery would retain the power to regulate “no pay” provisions in fact-specific circumstances.

Sixth, “no pay” provisions appear to be facially valid under Delaware law. On May 8, 2014, the Delaware Supreme Court rejected a facial challenge to the validity of a “loser pays” bylaw adopted by a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 560 (Del. 2014). To the extent this holding applies to Delaware stock corporations, it suggests that “no pay” provisions would survive scrutiny. Critics would undoubtedly challenge “no pay” provisions as incompatible with the authority of the courts to shift fees pursuant to the “corporate benefit” doctrine. But the corporate benefit doctrine is a common law feature founded on public policy concerns arising out of the application of the American Rule in specific contexts. A reviewing court could easily find that the public policy benefits of permitting private ordering regarding attorneys’ fees among the parties to the corporate bargain, especially in a context where the volume of non-meritorious stockholder litigation raises basic questions about the legitimacy of Delaware’s system of corporate governance, outweighs the countervailing considerations. If one conceives of “no pay” provisions as embodying a decision by stockholders to waive the right to seek fees from the corporation for obtaining specific types of corporate benefits (and forgo the associated incentives), they seem difficult to challenge as fundamentally contrary to Delaware law.

For all of these reasons, “no pay” provisions deserve far more attention from policymakers, practitioners, and academics than they have received to date. They could easily become a critical tool for regulating stockholder litigation. If Delaware’s legislature prohibits “loser pays” provisions, “no pay” provisions could also become the next battleground between the antagonists in the current debate over fee-shifting.

Here’s an excerpt from this blog by Lane Powell’s Doug Greene:

What’s the harm with taking a shot at as many fixes as possible?

Even if someone could see the big picture well enough to judge that these problems aren’t sufficient to outweigh the benefits of fee-shifting and minimum-stake bylaws, I would still hesitate to advocate their widespread adoption, because governments and shareholder advocacy groups would step in to regulate under-regulation caused by reduced shareholder litigation. That would create an uncertain governance environment, and quite probably a worse one for companies. Fear of an inferior alternative was my basic concern about the prospect that the Supreme Court in Halliburton Co. v. Erica P. John Fund, Inc. would overrule Basic v. Levinson and effectively abolish securities class actions.

Beyond the concern about an inferior replacement system, I worry about doing away with the benefits shareholders and plaintiffs’ lawyers provide, albeit at a cost. Shareholders and plaintiffs’ lawyers are mostly-rational economic actors who play key roles in our system of disclosure and governance; the threat of liability, or even the hassle of being sued, promotes good disclosure and governance decisions. Even notorious officer and director liability decisions, such as the landmark 1985 Delaware Supreme Court decision in Smith v. Van Gorkom, are unfortunate for the defendants involved but do improve governance and disclosure.

For RBC v Jervis, the opening brief of RBC seeking reversal of Rural/Metro was filed last week in the Delaware Chancery Court. According to the scheduling order:

1. RBC’s Opening Brief may be up to 70 pages long and is due on or before May 19, 2015

2. Plaintiffs Answering/Opening Brief may be up to 85 pages long and is due on or before July 20, 2015

3. RBC’s Reply/Answering Brief may be up to 45 pages long and is due on or before August 31, 2015

4. Plaintiffs Reply Brief may be up to 20 pages long and is due on or before September 11, 2015

5. Oral argument has been scheduled for September 30, 2015