This September-October issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Forum Selection Bylaws: The New Frontier
– Checklist: Shareholder Outreach Following M&A Transaction Announcements
– Lock-Ups: When Can They Give Rise to “Affiliate” Status & Potentially Implicate Rule 13e-3?
– Delaware Law: Amended to Provide for Ratification & Validation of Defective Corporate Acts
– A Dozen Take-Aways: In Re: Trados
John Grossbauer of Potter Anderson notes: Recently, in Arkansas Teacher Retirement System v Countrywide Financial Corp., the Delaware Supreme Court answered a certified question of law from the Ninth Circuit Court of Appeals that questioned the standing of former Countrywide Financial Corp. stockholders to maintain a derivative action following Countrywide’s acquisition by Bank of America. The Court found standing had ceased, reiterating its holding in Lewis v. Anderson that a stockholder loses standing to maintain a derivative action when the stockholder’s shares are converted into cash or shares of another corporation in a merger, except where (1) the merger itself is subject to a claim of fraud as being “perpetrated merely to deprive shareholders of their standing to bring or maintain a derivative action,” or (2) the merger is “essentially a reorganization that does not affect the plaintiff’s relative ownership in the post-merger enterprise.”
The Court stated that the Lewis v. Anderson fraud exception had not been expanded by dictum in Arkansas Teacher Retirement System v. Caiafa, a previous ruling in a related case. The Court clarified that the “single, inseparable fraud” mentioned in the earlier dictum referenced the possible direct claims stockholders might have brought, and did not expand the category of derivative claims that could be maintained post-merger.
Last week, CFIUS closed its investigation into the acquisition of Smithfield Foods by Shuanghui International Holdings. The Smithfield filing was evidence of the potentially broad reach of national security review to areas – such as agriculture and food production – that historically might not have been viewed as raising national security concerns. As noted in the memos posted in our “National Security Considerations” Practice Area, closing the Smithfield investigation is a good indicator that CFIUS will not expand its mandate beyond reviewing acquisitions of U.S. businesses by foreign persons for their impact on U.S. national security.
Tune in tomorrow for the webcast – “The Use of Social Media in Deals” – to learn from K&L Gates’ Mary Korby; Kekst and Company’s Lissa Perlman and K&L Gates’ Cedric Powell about how social media is being used in deals – and what that means for regulatory purposes, including:
– What are common examples of social media use in deals?
– How should social media communications be treated for SEC filing purposes? For Rule 425?
– What types of activities are permissible? Which are not?
– What is the best way to leverage social media in deals?
On Friday, Delaware Supreme Court Chief Justice Myron Steele announced that he would retire effective November 30th, three years ahead of the end of his 12-year term. As noted in this article, Chief Justice Steele has served on the bench in Delaware for 25 years – and as Chief Justice since ’04.
This is a big loss for the Delaware bench. I first met the Chief Justice when we taped a panel about director duties after the Disney case for our “2nd Annual Executive Compensation Conference” in 2005. He was also kind enough to participate in a webcast on this site in ’07 entitled “An M&A Conversation with Chief Justice Myron Steele.” We wish him the best of luck in retirement or whatever he plans to do!
Recently, Professor Lucian Bebchuk wrote this WSJ op-ed entitled “The Myth of Hedge Funds as ‘Myopic Activists,'” which summarizes his co-authored empirical study that purportedly refutes the long-held belief that hedge fund activists focused on short-term profits harm issuers’ and shareholders’ long-term interests. The study – entitled “The Long-Term Effects of Hedge Fund Activism” – entails an analysis of 2,000 hedge fund “interventions” between 1994 and 2007 with tracking for five years subsequent to the hedge fund activists’ initial interventions.
John Grossbauer of Potter Anderson notes: Last week, Delaware Vice Chancellor Laster delivered this post-trial opinion in In re Trados Incorporated Shareholders Litigation. In his 114-page opinion, the Vice Chancellor finds that the entire fairness standard applied to the sale of Trados to SDL plc, in which the common stockholders received no consideration, meaning the defendants bore the burden of proving the fairness of the sale. The Vice Chancellor held that, “despite the directors’ failure to follow a fair process and their creation of a trial record replete with contradictions and less-than-credible testimony, the defendants carried their burden of proof on this issue” because the common stock had “no economic value before the merger.” Accordingly, the Vice Chancellor also held that the appraised value of the common stock was zero. The Vice Chancellor did grant the plaintiffs leave to file a petition asking for payment of their legal fees.
In this podcast, Matt Orsagh of the CFA Institute talks about the SEC’s recent enforcement case in which it charged and fined Revlon for misleading shareholders – as well as the company’s independent directors – as a result of a “going-private” transaction:
– What was the SEC’s recent Revlon enforcement action about?
– How can independent directors break down informational barriers during “going-private” transactions?
– Why are so many boards short-term focused – actively or passively?
– How should boards communicate with shareholders about these types of transactions?
The battle between Michael Dell and Carl Icahn for control of Dell over the past few months has been fascinating. As noted in this WSJ article, the Delaware Chancery Court is expected to rule today on how fast the case will move. Here’s an excerpt from the article:
A Delaware corporate-law tribunal is expected on Monday to fast-track Carl Icahn’s legal challenge to Michael Dell’s buyout deal for Dell Inc., setting up a potential showdown between the two billionaires over their competing visions for the computer giant.
Mr. Icahn has asked Chancellor Leo Strine of Delaware’s Court of Chancery to force Dell to hold simultaneous votes on the almost $24.8 billion buyout offer from Mr. Dell and Silver Lake Capital and on Mr. Icahn’s attempt to set the stage for a competing offer. The activist investor says Dell rigged the voting against his bid to replace Dell’s board with directors sympathetic to his proposal for a leveraged recapitalization of the computer maker.
Mr. Icahn is arguing that recent changes to voting rules have robbed the company’s shareholders of the right to choose between the dueling deals. Dell, meanwhile, says Mr. Icahn’s lawsuit is “just another soapbox” to publicize his fight with the special committee of the company’s board that is putting the offer from Mr. Dell and Silver Lake to a shareholder vote.
The issue up for decision Monday is how fast the case will move. With a shareholder vote set Sept. 12 on the buyout bid from Mr. Dell and Silver Lake, the financing for Mr. Icahn’s rival offer set to expire Sept. 30, and Dell’s board vote set for Oct. 17, Mr. Icahn argues that failure to get a speedy hearing on his challenge could be fatal his legal case.
Chancellor Strine could move the case along quickly or let the deal action play out and leave Mr. Icahn to pursue his remedies after the fact. Delaware courts are reluctant to interfere in shareholder votes, but the question of whether the shareholder-voting changes are fair is one the judge may want to tackle in advance, observers say. They also expect the market is right in betting that Mr. Dell’s deal for the computer company he founded will survive the legal attack, unless new facts turn up.
“When dealing with voting rights like this, I’d be stunned if [Chancellor Strine] didn’t just say, ‘Let’s cut to the chase and get this scheduled,'” said Lawrence A. Hamermesh, professor of corporate and business law at Widener University’s Institute of Delaware Corporate Law.
Last week, the Federal Trade Commission challenged a consummated acquisition by Solera Holdings that had been exempt from the reporting and waiting period requirements of the Hart-Scott-Rodino Act. Requiring a clean sweep divestiture of the acquired company’s assets, the FTC’s action highlights a trend at both antitrust agencies to seek out and challenge HSR-exempt transactions. During the Obama administration, the FTC and Department of Justice have already challenged 20 consummated deals (13% of all Obama-era merger challenges), compared with just 15 such challenges during the entire Bush administration. These challenges underscore the antitrust risk facing buyers that make non-reportable acquisitions.
Most challenged consummated deals were exempt because they fell below the HSR Act reporting thresholds (e.g., Solera involved an $8.7 million deal). Since relatively little is at stake in smaller deals, buyers may be willing to take on the risk of a post-closing challenge. Other HSR Act provisions, however, can exempt much larger transactions, where the impact on the buyer of a post-closing challenge would be substantial. In particular, certain acquisitions by banks (e.g., loan portfolios, servicing rights), insurance companies (e.g., renewal rights, reinsurance) and real estate firms may be non-reportable under the “ordinary course” exemption and other HSR rule interpretations, and certain joint ventures may not trigger the HSR Act. These deals can nonetheless raise substantive antitrust concerns.
In HSR-exempt transactions, parties may operate under the impression that antitrust concerns are moot and that there is no need to allocate antitrust risk between the parties in the acquisition agreement. In fact, ignoring the issue effectively transfers “hell-or-high water” antitrust risk to the buyer upon consummation of the deal. Buyers can try to reallocate this risk, but all such efforts have practical drawbacks and will be resisted by sellers.
For instance, parties can agree to notify the antitrust agencies of the prospective deal and to delay consummation, but this creates a potentially open-ended investigation, untethered by the normal constraints of the HSR process. Joint venture partners can seek a “business review” from the DOJ or an “advisory opinion” from the FTC, but these processes are similarly open-ended and are often impractical for other reasons. Finally, where the selling company continues to exist after closing, parties can define their respective pre- and post-closing obligations in their agreement, but the seller may resist such efforts given the hypothetical and open-ended nature of the risk.
In the face of seller resistance to these alternatives, buyers in non-reportable transactions frequently face the prospect of taking all the risk of a post-consummation challenge. Accordingly, before entering into such transactions, an acquirer should very thoroughly analyze the substantive antitrust issues raised by the transaction, the feasibility of remedies short of clean sweep divestitures, the practicality of unscrambling assets post-integration, and the impact on their business in the event of a future mandated divestiture. They should also estimate the likelihood that disappointed rival bidders for the target, disgruntled customers, or other media coverage will draw unwanted scrutiny to the consummated deal. Buyers should also be aware that the government will use post-merger actions, such as price increases, as evidence of a deal’s anticompetitive effects.