DealLawyers.com Blog

Here’s an excerpt from this recent Towers Watson memo from Scott Oberstaedt and Mary Chico:

When we dissected the responses to identify retention plan design features and practices that were most effective in enhancing retention, several design trends emerged that may assist acquiring companies:

– Personalized selection: High-retention companies are more likely than others to identify eligible employees for retention based on their ability to affect the success of the transaction (73% for high-retention acquirers versus 33% for low-retention companies).
– Engagement with acquired company leadership during the selection process: High-retention companies are more likely (66% versus 27%) to tap into the target’s senior leadership for information about which employees to keep. They are also significantly more likely than low-retention companies to include management discretion (that is, the opinion of the target’s leadership) in the retention-agreement selection process (32% versus 8%).
– Simple plan design, focused on cash bonuses: High-retention companies focus on cash bonuses more than other forms of retention awards. Cash bonuses (exclusively or with other forms of compensation) are more likely to be used in retention agreements at high-retention acquirers (80% for senior leadership, 89% for other employees) than at low-retention companies (50% and 55%, respectively). They are also less likely than low-retention companies to adjust the value of retention awards where employees earned some value due to the sale of the company.
– Higher target values: Finally, the high-retention companies offer retention awards with higher target values per employee than low-retention acquirers. For senior leaders, the median value of the retention plan among high-retention companies is 60% of base salary, versus 35% for low-retention companies.

Here’s news from this blog by David Jenson of Stinson Leonard Street:

The Broker-Dealer section of the North American Securities Administrators Association (NASAA) has proposed a model uniform state rule (the “Model Rule”) that would exempt parties that act only as deal brokers in M&A transactions from regulation under applicable state broker-dealer laws.

Last January, the SEC released a no-action letter (the “SEC Letter”) in which it outlined circumstances in which it would not recommend enforcement against a party for failing to register as a broker-dealer pursuant to Section 15(a) of the Exchange Act when the party acted as an M&A broker (shopping an M&A transaction, providing relating services, and earning a fee in connection with the closing of a successful transaction) (our prior coverage here). The SEC Letter defined the concept of an “M&A Broker” and provided that it would not seek enforcement action against an M&A Broker that engaged solely in M&A Transactions for privately held companies, subject to several condition and limitations.

The Model Rule would provide exemption from state broker-dealer registration requirements, but not from other provisions, such as anti-fraud measures.

Under the Model Rule, a “Merger and Acquisition Broker” is defined as a broker or person associated with a broker engaged in the business of effecting transactions in securities solely in connection with the transfer in ownership of an “eligible privately held company,” if the broker or person reasonably believes that (i) following the transaction the acquirer will control and be active in the management of the business of the target (or its assets), and (ii) any person receiving securities in exchange for securities or assets of the target will receive or have access to certain financial information of the issuer prior to becoming legally bound to consummate the transaction. An “eligible privately held company” for purposes of the Model Rule is a company that (i) does not have securities registered under the Exchange Act and is not required to file periodic reports under the Exchange Act, and (ii) in its prior fiscal year had revenue of less than $250 million and EBITDA of less than $25 million.

A Merger and Acquisition Broker is only eligible for the exemption under the Model Rule if it avoids engaging in certain “Excluded Activities” and is not subject to certain final orders or disqualifications under the federal securities laws. The Excluded Activities consist of (i) having custody or control of the funds or securities that are the subject of the transaction, (ii) engaging in any public offering, and (iii) engaging in a transaction involving a shell company.

Although the Model Rule generally tracks the SEC Letter closely, there are conditions that were of note to the SEC but that are not present in the Model Rule, such as:

– The requirement that an M&A broker not have the ability to bind a party to an M&A transaction
– The requirement that the M&A broker not provide direct or indirect financing to any party for an M&A transaction
– Certain disclosure requirements if the M&A broker will represent both buyers and sellers in a transaction
– The requirement that the M&A broker cannot have assisted in the formation of a buying group in an M&A transaction.

The NASAA is requesting comment on the Model Rule, including comments on a set of specific questions included with the rule, until February 16, 2015.

Here’s a set of league tables from MergerMarket listing the law firms that most often represent companies in deals, broken out on a global and regional basis…

As noted in this memo, the thresholds set forth in the HSR Act have been revised ― as they are annually―based on the change in gross national product. The minimum size of transaction has been raised from $75.9 million to $76.3 million effective thirty days after the notice is published in the Federal Register. The notice is expected to be published next week.

This January-February issue of the Deal Lawyers print newsletter includes articles on:

– Retention Awards at Acquired Companies
– Delaware Chart: Determining the Likely Standard of Review for Board Decisions
– Respecting Boilerplate: Liability, Party & Enforcement Provisions
– More on “Anatomy of a Proxy Contest: Process, Tactics & Strategies”

If you’re not yet a subscriber, try a 2015 no-risk trial to get a non-blurred version of this issue on a complimentary basis.

Here’s analysis from Cliff Neimeth of Greenberg Traurig:

In an “under the radar” decision the Delaware Court of Chancery recently denied a TRO seeking to enjoin the operation of Kreisler Manufacturing Corporation’s (“KMC”) advance notice bylaws (“ANBs”). The plaintiff, AB Value Partners LP (“AB Value”), sought to nominate and solicit votes to elect its opposition slate of directors at KMC’s December 18, 2014 annual meeting.

In 2007, KMC adopted fairly “plain vanilla” (older generation) ANBs with a 30-day window period for the submission of insurgent director nominations. To be timely, the notice of nomination was required to be submitted to the Secretary of KMC not earlier than the 90th day nor later than the 60th day prior to the anniversary date of KMC’s 2013 annual meeting (which was held on December 17, 2013). Accordingly, the window period opened on September 18, 2014 and closed on October 18, 2014. AB Value submitted its notice after the October 18, 2014 deadline.

While not disputing that its notice was untimely, AB Value nevertheless sought to have the ANBs set aside because of alleged “material events” that occurred after the window period expired. Namely, AB Value argued that the distribution to four beneficiaries of an approximately 32% KMC voting share block previously held in trust, recently approved compensation increases for KMC’s senior management team, and errors in KMC’s notice of annual meeting, constituted sufficient after the fact “material change” to warrant, in effect, the issuance of a mandatory injunction ordering KMC to waive the ANBs.

AB Value challenged KMC’s use of the ANBs and not their facial validity, relying on the time-tested doctrine announced in Schnell v. Chris-Craft Industries (some 43 years ago) that “inequitable action does not become permissible just because it is legally possible.” Meaning, just because a provision is, for example, authorized under the DGCL or a company’s certificate of incorporation or bylaws, its use in any variety of unfair and inequitable future circumstances, is subject to invalidation as applied.

In AB Value Partners, L.P. v. Kreisler Manufacturing, Vice Chancellor Parsons recognized the decades-long prevalence of ANBs as a valid company defense to ensure the conduct of orderly stockholder meetings (i.e., where insurgent director candidates are sought to be nominated and elected and/or other stockholder business is being proposed) while, at the same time, acknowledging that ANB requirements that “unduly restrict the stockholder franchise or are applied inequitably, . . . will be struck down.” The Vice Chancellor noted that KMC’s ANBs were adopted on a “clear day” and not post hoc in response to a threatened election contest or other threat scenario (which would have animated Unocal, Unitrin and, perhaps, Blasius review).

The Vice Chancellor distinguished two cases (Hubbard v. Hollywood Park Realty Enterprises, Inc. and Icahn Partners LP v. Amylin Pharmaceuticals, Inc.) relied on by the plaintiff where ANBs were enjoined because of the occurrence, after expiration of the advance notice deadline, of material, unanticipated and Board- initiated changes in company circumstances. He noted that those fact-intensive decisions instruct that compelling circumstances must exist before a court exercises the extraordinary remedy of enjoining the operation of an otherwise facially valid ANB. In other words, there must be a “radical shift in position, caused by the directors.” At the end of the day, AB Value did not meet that burden.

It’s important to remember that the ability to freely vote is the most sacrosanct stockholder right in Delaware and practically all states. That said, ANBs do serve the legitimate corporate and policy objective of protecting a company from insurgent ambush with little or no advance warning or information so that a company has a reasonable time to react, vet the situation and inform itself as to any corporate risk implications, and to ensure that stockholders have adequate disclosure of the Board’s assessment and recommendations to fully inform their voting decisions.

Like many things, there is a delicate legal and commercial balancing act here, and provisions that on their face (or as applied) operate inequitably to frustrate or unduly impede the proxy machinery will be highly suspect if challenged. ANB “technology” has evolved quite a bit over the last 10 years and the informational requirements have been expanded significantly since the early generation versions of these bylaws. Borrowing from improvements in rights plan (poison pill) technology , the inclusion in ANBs of requirements to disclose the existence of synthetic securities (and similar derivatives) arrangements is commonplace and, in more rare instances, a few aggressive companies have introduced “wolf pack” disclosure requirements and covenants. Like all organic (or contractual – e.g., rights plans) shark repellents, ambiguities and overreach generally will be construed against the company (most especially because these devices are implemented via unilateral board action). The court reached the correct result.

Here’s news from this WSJ article entitled “Merion Capital’s Victory in Fight With Ancestry.com Could Mean Higher Payouts in Corporate Buyouts”:

Hedge funds looking for higher payouts in corporate buyouts scored a win this week. In a case stemming from the 2012 buyout of Ancestry.com Inc., a judge on Monday ruled shareholder Merion Capital LP didn’t have to prove it voted its shares against the family-tree website’s buyout to challenge the deal’s $1.6 billion price tag in court. The decision keeps open what has become an increasingly popular strategy—known as “appraisal arbitrage”—for these investors: buying up shares of companies on the cusp of a takeover, opposing the deal and then seeking more in court in a legal process known as appraisal.

At issue in the Ancestry.com case was whether Merion could prove its shares weren’t voted in favor of the sale to European private-equity firm Permira. Appraisal seekers must abstain or vote “no” on a deal. Merion had bought its 3% stake too late in the process—just days before the buyout vote—to be eligible to vote them itself. Instead, its shares were nominally held by Cede & Co., a centralized warehouse for stock certificates. In a buyout, Cede acts as an aggregator, collecting ballots from shareholders and then voting its stock in bulk accordingly. Cede held 29 million shares of Ancestry.com, of which about 10 million either voted “no” or abstained, according to court filings.

Ancestry.com said Merion couldn’t prove its shares were among them, and indeed, when asked in a deposition, a Merion executive said he couldn’t be sure.
But the judge said there were enough Cede votes against the buyout to “cover” Merion, which only own 1.3 million shares. Historically, courts didn’t scrutinize the issue as long as the total number of shares seeking appraisal didn’t exceed the number of shares that abstained or voted “no”—as was the case here. The ruling’s takeaway also applies to a similar defense mounted by BMC Software Inc. against Merion in pending appraisal litigation over BMC’s 2013 buyout. The judge on Monday let Merion’s claims, valued at some $350 million based on the buyout price, go forward. A decision the other way would have complicated appraisals by forcing hedge funds to buy their shares far earlier in the process. That increases their risk of the deal going bust and crimps their annualized returns by tying up their money longer.

The appraisal strategy has gained popularity in recent years on the heels of several big wins for shareholders. A record 33 appraisal claims stemming from public-company takeovers were filed last year in Delaware, the legal home to most U.S. listed firms, according to a Wall Street Journal review of court documents.
And the strategy is attracting new and larger players. Pennsylvania-based Merion has nearly $1 billion under management, according to a person familiar with the matter, and some $750 million tied up in pending lawsuits. Magnetar Financial LLC, Fortress Investment Group LLC and Gabelli Funds all have active appraisal cases. “Sophisticated investors are seeing significant valuation gaps in certain deal prices,” said Kevin Abrams, a lawyer for Merion, adding that he expects more to come.

About 81% of Delaware appraisals that went to trial since 1993 have yielded higher prices, according to law firm Fish & Richardson PC. Merion has averaged an 18.5% annualized return across five completed appraisals, four of which settled, according to documents reviewed by the Journal.

In this Wachtell Lipton memo, there is a nice list of bullets of reasons why 2014 could be considered the “Year of the Wolf Pack”…

Here’s news culled from this memo by O’Melveny & Myers’ Paul Scrivano & Sarah Young:

It is not uncommon in sell-side auctions for the target board to make decisions on whether a particular bidder is capable of reaching the “finish line”, many times due to the perceived willingness or capability of the particular bidder to meet a certain price point or to agree to certain deal terms. This sometimes manifests itself in the target board making the rational decision to focus its energy on one bidder who is likely or “favored” to win, to the exclusion of one or more other bidders.

The recent Delaware Court of Chancery decision in In re Novell, Inc. Shareholder Litigation highlights the potential risks to a target board of a claim of breach of the duty of care, and possibly even breach of the duty of loyalty, for actions taken by a target board in Revlon-mode that go too far in favoring one bidder over another in a sell-side process.

In Novell, the court identified a number of target board actions as troubling. These included refusing to waive for the loser a “no partnering with other bidders” provision (although waiving it for other bidders), granting the winner exclusivity with multiple extensions, having discussions with the winner (but not the loser) as to the price necessary to win and inbound interest for target patents, and failing to respond to the loser’s last bid to see if it would increase its price.

Here’s analysis from Cliff Neimeth of Greenberg Traurig:

A few weeks ago, the Delaware Court of Chancery denied plaintiffs’ motion to enjoin the pending vote (scheduled for December 23, 2014) on Dollar Tree’s $76 per share cash and stock acquisition of Family Dollar Stores. Back in September 2014, Interloper and Family Dollar direct competitor, Dollar General, commenced an unsolicited tender offer to acquire Family Dollar at (a now-revised) $80.00 net per share in cash. The July 27, 2014 merger agreement between Family Dollar and Dollar contains a relatively unremarkable package of deal protections and fiduciary outs and related covenants.

Importantly (due to substantive antitrust risk and as a tactical knock out punch to Dollar General), Dollar Tree has agreed to “hell or high water” provisions, effectively requiring it to divest as many stores as necessary to obtain FTC approval of the deal, whereas, to date, Dollar General merely has offered to divest up to 1,500 stores as necessary to obtain FTC approval and to pay Family Dollar a $500 million reverse break up fee in the event FTC approval of its offer would not be obtained.

Moreover, Dollar General’s tender offer, which cannot be consummated even if sufficiently valid tenders are deposited (due to HSR voting stock $$$ purchase limits and Family Dollar’s rights plan currently in effect), remains subject to Dollar General’s completion of confirmatory due diligence. Dollar General has not indicated a willingness to match Dollar Tree’s hell or high water approach, and Family Dollar’s counsel has advised the board that Dollar General’s offer has a 60% chance of failing to obtain FTC approval.

In short, after consultation with counsel and its financial advisor, Family Dollar has declined, to date, to furnish information to and engage in discussions with Dollar General pursuant to the “window shop” exceptions to the no-solicitation covenant in the merger agreement. Plaintiffs’ asserted, among other things, that Dollar Family’s directors have acted unreasonably under Revlon by failing to determine under the window shop clause that Dollar General’s offer is “reasonably likely to lead to a Superior Proposal.”

Without detailing here the factual findings and analyses of the Chancery Court (please read the decision for these – there are some interesting touch points), Chancellor Bouchard determined that plaintiffs’ failed to demonstrate a reasonable probability of success on the merits, and further failed to find irreparable harm or that the balance of the equities under the circumstances warranted injunctive relief.

This decision illustrates, yet again, that under Revlon, it is not unreasonable for a target board to avoid risking a premium bid with a high degree of closing certainty (thus, a known “bird in the hand”) and potentially breach the no-shop covenants in a merger agreement, to pursue a nominally higher, yet highly conditional, bid with uncertain consummation certainty.

Once again, this decision underscores that the courts will not lightly second guess the decisions of independent and disinterested directors who act properly to seek to obtain the highest immediate value in a sale of control. Such directors are generally free to select the timing and pathway to achieve value maximization and they are (and should be) the architects and overseers of a target’s negotiating strategy. Revlon does not require perfection; it does, however, require substantive reasonableness with respect to the decision to sell control and the process utilized to seek price maximization (including the information obtained and relied on).