Here’s news from Steven Haas of Hunton & Williams:
In a recent bench ruling in Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014), the Court of Chancery reached two key holdings applicable to freeze-out mergers. First, Vice Chancellor Laster held that the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), which allows for business judgment review of freeze-out mergers under certain conditions, applies to privately-held companies. “Historically,” he said, “we haven’t made any distinctions between public companies and private companies.” He continued that “the non-public company overlap might be taken into account as a factor, but I don’t think that it prevents the application of the Kahn-MFW test.”
Second, in applying Kahn v. M&F Worldwide, Vice Chancellor Laster granted the defendants’ motion to dismiss. He concluded that the plaintiff had failed to adequately plead that any of the six elements set forth in Kahn v. M&F Worldwide had not been met. Among other things, the freeze-out merger was negotiated by two independent directors serving on a special committee; the special committee had its own legal and financial advisors; and the merger was subjected to a non-waivable majority-of-the-minority stockholder approval condition. He also said the minority stockholders received a “public-company-style proxy statement” (which included a “fair summary” of the financial advisor’s analysis).
The ruling is notable for practitioners considering how to structure private company M&A transactions. Its greater significance, however, is the court’s dismissal of a challenge to a freeze-out merger on a motion to dismiss. Although Kahn v. M&F Worldwide charted a course for business judgment review of freeze-outs, the decision (namely, the somewhat infamous footnote 14) suggested that it will be hard to dispense with these cases before summary judgment. For that reason, many practitioners have questioned the value of that decision. But if more Delaware courts follow Swomley v. Schlecht and dismiss these challenges at the pleading stage, then more freeze-outs are likely to be structured to comply with Kahn v. M&F Worldwide.
Here’s news from Davies Ward:
The Canadian Securities Administrators (CSA) issued a major announcement that all 13 of Canada’s securities regulators have agreed they will not pursue two previously announced competing proposals on the regulation of shareholder rights plans. Instead they intend to propose amendments to their take-over bid rules that will maintain a harmonized take-over bid regime across Canada, but will significantly change the way in which hostile take-over bids are conducted in Canada. The amendments are aimed at “rebalancing the current dynamics between hostile bidders and target boards”, and, in effect, will give target boards more time to respond and seek alternatives to a hostile bid, and will make bids materially more challenging for hostile bidders than they are under current Canadian take-over bid rules.
The proposed new harmonized take-over bid rules would require all formal take-over bids to have the following features:
– Mandatory Minimum Tender Condition: The bid must be subject to a mandatory tender condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered before the bidder can take up any securities under the bid.
– 10-Day Extension: The bidder must extend the bid for an additional 10 days after the bidder achieves the mandatory minimum tender condition and the bidder announces its intention to take up and pay for the securities deposited under the bid.
– 120-Day Bid Period: The bid must remain open for a minimum of 120 days, subject to the ability of the target board to waive, in a non-discriminatory manner when there are multiple bids, the minimum period to no less than 35 days.
In the CSA’s view, the proposed amendments to the bid rules seek to “facilitate the ability of shareholders to make voluntary, informed and co-ordinated tender decisions and provide target boards with additional time to respond to hostile bids, each with the objective of rebalancing the current dynamics between hostile bidders and target boards.”
In addition to lengthening the amount of time that a hostile bid would have to remain outstanding, the proposed amendments would essentially eliminate the ability of a bidder to acquire a small but nevertheless material percentage of shares through a bid that is not widely accepted by target shareholders.
The proposed amendments are the culmination of 18 months of consultation by Canadian securities regulators following the publication in March 2013 of two different defensive tactics policy proposals by the CSA and Québec’s Autorité des marchés financiers (AMF), which are now no longer being pursued. Those proposals presented divergent approaches to regulation of defensive tactics with the AMF advocating the elimination of the CSA’s current policy on defensive tactics (National Policy 62-202 – Defensive Tactics) in favour of deference by regulators to the decisions of boards that were made in a manner consistent with their fiduciary duties.
The CSA is not currently contemplating any changes to the CSA’s existing Defensive Tactics Policy. While the proposed amendments will give target boards more time to seek alternatives to a hostile bid than boards have had through using shareholder rights plans, rights plans will continue to be relevant to regulate the ability of shareholders to accumulate large positions in a company through transactions that are exempt from the take-over bid rules. We are interested to see whether rights plans could be used to afford a target board even more time after the new 120-day bid period has elapsed, or to hold off a bidder indefinitely. At a minimum, we would expect that there will be a heavy burden on issuers to demonstrate that it is not “time for a rights plan to go” where a bidder has complied with the new rules.
The CSA intends to publish the proposed amendments to the take-over bid rules in the first quarter of 2015. Given the long period of consultation and the fact that the AMF has determined not to pursue its prior proposal, we believe there is a strong likelihood that the proposed amendments announced today will become effective. Learn more in the chart in this memo.
From this blog by Keith Bishop:
The title of this recent law review article frames the problem well, At the Whim of Your Adversaries: California’s Hazards in Sell-Side Representation and Waiver of Attorney-Client Privilege, 54 Santa Clara L. Rev. 651 (2014). In this article, the authors, practicing attorneys Mattia V. Murawski and Brian R. Wilson, argue for an amendment to the California Evidence Code because under present law “sell-side corporations and their attorneys must assume that upon merger or acquisition the substance of their privileged communications will become known, controlled, and possibly used to their detriment by their adversaries.” This is a problem that I wrote about last December after then Chancellor Leo Strine’s ruling in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013) (Surprisingly, the authors fail to mention this case). See Is The Attorney-Client Privilege An Asset? and More On Asset Sales And The Attorney-Client Privilege.
The authors unabashedly favor the approach of the New York Court of Appeals in Tekni- Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663 (N.Y. 1996), which bisected the attorney-client privilege into communications relating to general business matters and communications relating to merger negotiations. The New York Court allowed the former, but not the latter, to pass to the buyer. The authors therefore propose an amendment to Evidence Code Section 953 to achieve that result when the attorney for the seller jointly represents the directors, officers, or controlling shareholders. However, attorneys representing a corporation in a sale transaction do not inevitably represent the directors, officers or controlling shareholders. Thus, the authors’ solution would seem to apply only in those cases in which joint representation is found.
Here is an article by Ron Orol of The Deal:
An influential business lobby group may soon press the nation’s securities regulator to speed up the “proxy plumbing” process that occurs in advance of a vote on a major deal, a prospect that has sparked outrage among activist hedge fund managers who argue that the same change will hurt their ability to mobilize support for their dissident campaigns and director candidates.
At issue is the amount of time the Securities and Exchange Commission gives corporations to establish who their shareholders are in advance of an annual meeting or a special meeting, such as when investors vote on a merger or acquisition. Specifically, the agency requires that corporations begin their inquiry with various banks and brokers to determine how many beneficial owners they have 20 business days — four weeks — prior to a “record date” that the company sets in advance of the meeting. Investors who purchase stock prior to this scheduled record date are entitled to vote those shares at the upcoming scheduled annual or special meeting and those who buy shares after that day are not. (The inquiry is made so that companies can determine how many proxy statements to provide to its shareholder base).
Brian Breheny, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in Washington, said that an American Bar Association committee he chairs is debating whether the time has come for the SEC to shorten the mandatory search period. Breheny, a former chief of the SEC’s M&A unit, argued that recent technological advancements have made it easier to collect a list of shareholders, adding that a shorter period would speed up the process of preparing for a vote on a deal or other transaction and allow it to be completed with fewer headaches.
The subcommittee may soon vote to submit a petition asking that the SEC shorten the inquiry period to five days, significantly less than the current four-week investigation period, according to people familiar with the situation. The SEC is not required to follow up on the petition, but the ABA is a major and influential pro-corporate SEC constituent (made up of numerous ex-SEC officials) and agency staffers typically pay close attention to the group’s suggestions.
Backers of a compressed inquiry period insist that it would be helpful in situations where shareholders are voting on transactions, because it would provide more deal certainty and less time for external issues to arise that can lower valuations or dismantle deals — such as third-party bids, poor earnings reports, employee departures or macro-economic problems.
“In a merger transaction speed is important because the parties want to consummate their deal as quickly as possible to avoid any unforeseen, intervening circumstances,” said Sanjay Shirodkar, an attorney at DLA Piper in Washington. “Factors such as the global economic situation … can change between the time a deal is announced and when it closes. People want deal certainty. Shortening this period would serve to increase deal certainty.”
However, activists involved in proxy campaigns to seat dissident directors argue that, depending on when they launch their contests, a shorter broker-banker inquiry period could significantly reduce the amount of time available for other activists or institutional investors sympathetic to their campaign to invest in the stock before the record date hits (thereby removing many passive or pro-management shareholders). Investors who buy securities after the record date aren’t permitted to vote their shares at the meeting and those that sold stock immediately prior to the record date typically have little incentive to vote shares they no longer own. They also raise concerns about the shorter period, arguing that the extra time could be useful if it gives third-party rival corporations a chance to issue their own more shareholder-friendly offer.
“With a shorter inquiry period, a company could try to speed up the record date and the annual meeting to help ensure that pro-activist shareholders don’t rotate into the stock in any size,” said a general counsel at a major dissident investor who launches multiple campaigns a year.
Regulatory observers point out that, in the current 20-business-day system, a corporation’s inquiry to banks and brokers is supposed to be private but word often reaches the activist about when the record date will take place before it is publicly disclosed.
Activists and corporations involved in a proxy contest can only officially solicit votes in favor of their director candidates after the record date passes. As a result, activists are also eager to find out when the record date is set for because they want to be the first one to solicit the investor base to get their votes. Alternatively, the corporation would like to delay that information as much as possible, so they can have a first-strike advantage.
“Activists would have less time to campaign and convince existing investors to back their dissidents,” the general counsel added.
Activist fund manager Phil Goldstein of Bulldog Investors LLC, which has $570 million in assets, said he would prefer that the SEC required corporations to publicly disclose the record date and meeting date when they make their inquiry to identify their investors. That information, he added, would help Bulldog immediately solicit investors to support his dissident candidates after the record date passes. “They [corporations] should publicly disclose the record date and meeting date when they are sending out their search cards,” Goldstein said. “There are times when we don’t know when the record date is until after it passes.”
A managing director at a major proxy solicitor agreed that a shorter inquiry period would be distinctly pro-corporate, adding that corporations faced with proxy contests typically want to have the record date come sooner rather than later so that less stock turns over in advance of the meeting. New investors to the security after a proxy contest is launched typically back the dissident, he added.
People familiar with the SEC’s views say agency officials acknowledge technology has made it easier to establish shareholder lists but are taking dissident investors’ concerns into account as well.
In some cases institutional investors want to vote their securities at an annual meeting or a special meeting called to approve a deal but they have a huge bulk of their shares loaned out. According to an activist manager, these investors prefer the longer 20-business-day period because it gives them enough time to call back loaned shares in time to vote their stake. In other cases, hedge fund managers who have derivatives positions in a target company want sufficient time to acquire stock in the company, as part of an effort to protect their swaps stake, he added.
Nevertheless, corporate lawyers argue that activist concerns are spurious, arguing that insurgent investors can announce that they will nominate dissident directors months in advance of an annual meeting, giving sympathetic investors sufficient time to buy shares before the record date hits, regardless of whether it is expedited or not.
This would not be the first time the SEC changed its inquiry time-period. The SEC first set up a 10-calendar day inquiry period in 1977 but, after hearing from an advisory committee that recommended a longer inquiry period the agency in 1983 changed it to 20-calendar days. In 1986, the commission again extended the required time, this time to 20-business days before the record date. This change was designed to address reported delays and compliance issues. However, corporate lawyers insist that in addition to speeding up deals, a shorter inquiry period would have another benefit: to help expedite plain vanilla annual meetings.
Shirodkar noted that a rapid inquiry process would simplify and speed up the proxy system and reduce complications around SEC reporting deadlines and board schedules. In some cases, he points out, three or four months pass between when an inquiry is made and when a routine annual meeting and vote takes place. “A lot of things can happen in that time,” he said. “Compressing the inquiry timeframe would help the company get to its annual meeting faster.”
From ISS: The resurgence in proxy contest activism that began in 2012 appeared to have stalled by Q1 of 2014 when only two contested situations went to a shareholder vote, compared to eight in the first quarter of 2013. Both of these contests, however, were resounding dissident routs of incumbent boards. At The Pantry, the dissident won all three contested seats and dissident nominees outpolled management candidates by as much as a 6-to-1 margin. In a repeat consent solicitation to remove the entire board of CommonWealth REIT, more than 81 percent of outstanding shares (up from 70 percent in the first go-around seven months earlier) consented to the removal of all incumbent directors, even though this left the company without a board for as long as two months until a special meeting to elect replacements was convened.
Contested elections rebounded in the second quarter of 2014, however, with 20 contested meetings–significantly more than the 16 which went to a vote in Q2 2013, though still short of the high-watermark of 24 in 2009. Continuing a trend from 2013, moreover, the size of the targets increased. In 1H 2014, a significant number–seven of the 22 total contested elections–had market capitalizations greater than $1 billion, versus eight billion-dollar-sized targets in the same period for 2013. There were, however, considerably fewer pint-sized proxy combatants–only 18 percent of the targets were below $100 million in 1H 2014, versus 50 percent in 1H 2013. The median market cap of targets in 1H 2014 thus grew to $260 million, nearly double the $141 million median for the same period in 2013.
Dissidents continued to win at least one seat, through a vote or last-minute settlement, more often than they lost, but the 1H 2014 “win” rate, at 59 percent, was more in line with the mid-50’s rates in the 2009-2012 time period than insurgent investors’ blistering 68 percent “battling average” in 2013.
Multi-front Campaigns
Fueled by an influx of investment dollars (chasing 2013’s best-in-class hedge fund return) and new entrants drawn to the space, the 2014 season featured a number of hydra-headed activist challenges. Unlike past piling-on efforts where hedge funds were drawn to targets by the blood in the water caused by the initial contact, these multi-dissident situations often featured competing visions for changes in corporate strategic direction at target companies.
Darden Restaurants
At Darden, dissidents Barrington Capital and Starboard each separately urged the company to undertake a number of strategic initiatives, including monetizing the real estate assets of its largest restaurant chains, Red Lobster and Olive Garden, through a sale-leaseback transaction. When the company announced, instead, that it would sell or spin the struggling Red Lobster business–an action which might void the sale-leaseback strategic option–Starboard launched a three-stage activist campaign. First, Starboard sought shareholders’ written consent to call a special meeting. Next, Starboard planned that shareholders would vote on a non-binding proposal requesting that the board not execute a sale or spin off of Red Lobster prior to the 2014 annual meeting unless such a transaction was also ratified by a vote of shareholders. In the third step, Starboard would nominate a dissident slate at the annual meeting.
In April, Starboard delivered written consents from a majority of outstanding shares supporting its request for a special meeting. Several weeks later, however, the board–acting within its legal purview but with clear disregard for the strong mandate shareholders had already provided through the written consent process–announced it had agreed to sell Red Lobster to Golden Gate Capital for $2.1 billion in cash. The transaction would not be subject to a shareholder vote. Starboard announced it would now seek to replace the entire board at the 2014 annual meeting which has historically been held in the fall.
Sotheby’s
Sotheby’s also faced a hydra-headed hedge fund challenge. The auction house was first singled out in July 2103 by Mercato Capital, which targeted the company’s cost structure and capital allocation practices. A month later, Dan Loeb’s Third Point filed a 13D. While the company eventually made a number of changes–including naming a new CFO and announcing a special dividend– it was unable to satisfy Third Point that the board had a sufficient sense of urgency about either its cost discipline or the need to adapt its business to new and emerging opportunities.
Marcato, which never “settled” with the company, did not ultimately run a proxy contest. However, Third Point did, highlighting the discrepancy between the board’s defense that 2013 was a “record” year and the evidence of the financial statements. Third Point’s campaign was bolstered by the revelation that directors, in emails unearthed by Third Point’s legal challenge of the company’s discriminatory, two-tiered poison pill, freely admitted to one another that the board had become “too chummy” and the dissidents’ case for change had merit. A settlement days before the shareholder vote added all three dissident nominees to an expanded board.
Near Misses
Many of the season’s most highly anticipated contests failed to materialize as directors and senior managers at target companies sought to short-stop challenges by offering board seats or making other moves to boost stock valuations. The poster dissident for such peaceful settlements was Carl Icahn. By February it was clear once again that Icahn, himself already past the mandatory retirement age set by many boards, still had issues he wanted to discuss publicly with some of them.
At Apple, whose net cash position had grown to more than $150 billion, Icahn announced a proposal that the company return capital more aggressively to shareholders by repurchasing at least $50 billion of its own shares in fiscal 2014. The company had been ramping up its return-of-capital program over the previous two years, initiating a $10.5 billion annual dividend and several repurchase programs; based on its recent history, it appeared on track to repurchase at least $32 billion in 2014 even without Icahn’s help. In mid-February, the company announced it had repurchased $14 billion in shares in response to a share price drop after its 1Q earnings report, bringing its 12-month total repurchases to $40 billion. Icahn, helpfully noting that this left ample cash reserves to “keep going,” announced he would not present his proposal at the annual meeting after all.
Icahn then turned to eBay, announcing he would nominate two candidates and make a non-binding proposal to spin off the PayPal business. He then surfaced a number of governance issues within the board itself, including the many potential conflicts of interest that arose from having directors with significant economic interests in so many other tech companies. In particular, he highlighted eBay’s sale of the Skype business several years earlier to a consortium which included an eBay director, and which quickly resold Skype at a significant profit: the question, Icahn emphasized, was whether directors on the eBay board, and perhaps other tech sector boards, were too conflicted by their own outside business interests to act in the best interest of public shareholders. Then, somewhat inexplicably, peace broke out. On April 10, the two sides announced Icahn was dropping both the proxy contest and the precatory proposal, and the company was adding an additional, mutually-agreed independent director.