DealLawyers.com Blog

Here’s news from Chris Cernich, ISS’ Head of Mergers, Acquisitions, and Proxy Contests Research:

The post-crisis resurgence of contested elections, which began last year, continued into the 2013 proxy season. Proxy solicitations to replace some or all incumbent directors, which had fallen to a total of just nine in the first half of 2009, rose to 19 in the first six months of 2012, and 24 in the first half of 2013. The median market capitalization of the targeted companies also increased substantially from a five-year low of $24 million in 2012 to $141 million in 2013.

This $141 million median in 2013 was half again as high as the median of $94 million in 2009 – the record year for contested elections in the U.S.–suggesting that, in the current resurgence, activists are targeting larger companies than they did even at the recent height of the activism cycle. Activists did in fact target significantly more large companies in the first half (1H) of 2013 than in the same period in prior years; eight of 24 contests for board seats, or 33 percent, were at companies with a market cap greater than $1 billion. In the same period of 2012 and 2011, by contrast, only two targets had market caps of greater than $1 billion, and even in 1H 2009 only three targeted companies were larger than $1 billion market cap. Large, well-known activist names such as Pershing Square, Elliott, or Jana Partners, for example, have continued to engage their portfolio companies over the past several years, but had generally been able to win concessions or settlements without going all the way to a contested election.

In 2013, by contrast, many of the activist situations which in previous years might have settled simply did not take that path – or settled at the 11th hour, sometimes on the eve of the annual meeting itself. Some of the activists leading these campaigns had prior experience in large-cap activism – and generally settled at the last minute. TPG-Axon, for example, which ran a consent solicitation to replace the entire board at Sandridge Energy, ultimately settled for four seats on an expanded board of nine and a commitment to fire the CEO within three months. Elliott Associates, on the eve of the shareholder meeting, settled for three of the five seats it sought at Hess. Others – such as Ader Investment Management, which won one of three contested seats at International Game Technology – were newer funds with no activism track record.

Perhaps the most challenging of these large contests was led by a newer fund, Corvex, whose founder was formerly an executive under Carl Icahn. Corvex reportedly received written consent from 70 percent of outstanding shares to replace the entire board of Commonwealth REIT. None of its nominees has yet been seated, however, because the Commonwealth board adopted a defensive bylaw requiring a shareholder own at least 3 percent of shares for a minimum of three years to be eligible to run a consent solicitation. The governing documents also require any shareholder disputes be settled through binding arbitration, however – a Maryland judge rejected Corvex’s attempt to challenge it in the courts – and the three-member arbitration panel has not yet issued its final verdict on the legitimacy of the consent solicitation.

The striking difference in 2013, however, is not just the unusual number of large target companies, but the paucity of targets in what had previously been the “sweet spot” for U.S. activists: targets with market caps between $100 million and $1 billion. In 2009, 39 percent of targets were in this range; in 2010 and 2011, as the number of total contests began to fall, the concentration of targets in this range increased to 50 percent and 78 percent, respectively.

In 1H 2013, however, only four contests–17 percent of the total–targeted firms in this range, and none of those four contests was near the upper end of the range. Instead, building on a trend which began in 2012, the largest cluster of contests was at tiny companies with market caps of less than $25 million. In 1H 2013, nine of 24 contests–38 percent of the total–were at companies worth $25 million or less. The activists in these situations tended to be smaller funds or individuals, though some, such as Stilwell Group, have run a number of contests at microcaps in recent years.

The dissident “win rate,” defined as the percentage of situations in which dissidents won or settled for at least part of the seats they sought, jumped significantly in 2013. In 1H 2011 the dissident win rate was 56 percent; in 1H 2012 it fell to 43 percent. In 1H 2013, however, dissidents achieved as least part of their objectives in 70 percent of contests for board seats. The rate was slightly lower, 64 percent, at very small companies (market caps of less than $100 million), and slightly higher, 75 percent, at companies larger than $100 million, perhaps reflecting the smaller concentration of institutional shareholders (who generally vote in all elections) among the smallest of companies. At each size range of targets, however, the dissident “win rate” jumped significantly from 2012 levels, and nearly doubled at the largest tier, targets with market caps greater than $1 billion.

Contested Mergers

1H 2013 also saw the return of the contested merger. Shareholders rebelled against a number of proposed transactions, particularly in the tech sector, on both valuation and strategy. In most cases the opposition was overcome with a small bump in offer price, generally around 10 percent. Several saw competing bidders ignite a price war.

In five situations, however, the bidder was an insider, situations which present particularly thorny principal/agent complications for investors. At Clearwire, the bidder, Sprint, was both the controlling shareholder with unusual governance rights to thwart other bidders and a strategic investor with urgent need of the wireless spectrum which represented the company’s most valuable asset. The other four were leveraged buyouts involving or led by executives; the largest of these, at Dell Inc., has seen its shareholder meeting adjourned or delayed multiple times, and the price bumped twice at the last minute, for a total of 2.3 percent, amid sustained public opposition from a number of investors already deeply convinced by and committed to the transformational plan the company has already been pursuing.

This blog is derived from ISS’ 2013 Proxy Season Review – United States, which can be found on Governance Exchange.

We have posted the transcript for our recent webcast: “The Use of Social Media in Deals.”

Here’s the transcript of the hearing in which Delaware Vice Chancellor Laster determined to enjoin the Vivendi/Activision transaction because it constituted a “merger, business combination or similar transaction involving” Vivendi and Activision within the meaning of a charter provision requiring a majority of minority vote for any such transaction.

Here’s an excerpt from this Hogan Lovells memo:

In anticipation of the shutdown by the U.S. federal government, which began early this morning, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) released contingency plans that detail the impact on all aspects of the agencies’ operations, including their review of mergers and acquisitions.

The Bureau of Competition at the FTC will maintain a limited staff to accept and process new Hart-Scott-Rodino (HSR) filings. The agencies will then determine whether circumstances warrant further investigation of any reported transaction during the shutdown.

Although the agencies can technically challenge a merger outside of the initial 30-day statutory review period, the FTC concedes that “the nature of the available relief changes dramatically once a merger or acquisition is consummated.” As a result, the FTC intends to initiate or continue investigations where it believes that “a failure…to challenge the transaction before it is consummated will result in a substantial impairment of the government’s ability to secure relief at a later time.”

For matters currently in litigation, the FTC will “request suspensions of dates for trials, hearings and filings, or similar relief to preserve the government’s claim,” and will maintain limited staff to litigate matters where it cannot obtain deadline extensions. All non-merger investigations currently underway at the Bureau of Competition will be suspended during the shutdown.

The Antitrust Division at DOJ will similarly limit staffing to those employees necessary to launch or continue merger investigations or litigation where it cannot obtain a continuance or extension of a statutory deadline and where DOJ “leadership determines that allowing a proposed merger to go forward without objection would pose a reasonable likelihood of peril” to the government’s interests.

In In re Sirius XM Shareholder Litigation, Delaware Chancellor Strine dismissed as time-barred claims by Sirius XM shareholders that the Sirius XM board breached its fiduciary duties by failing to adopt a poison pill or taking other action to block the acquisition by Liberty Media of majority control of Sirius through open-market purchases made by Liberty as permitted by the investment agreements between the parties.

The court focused on the fact that, when Liberty invested in Sirius in early 2009, it specifically negotiated for the right to make such purchases unimpeded by the board. Accordingly, if any fiduciary breach with respect to the purchases had occurred, they occurred in 2009, more than 3 years before the plaintiffs filed their claim, which was beyond the statute of limitations period applicable by analogy to the complaint at issue through the doctrine of laches.

The Chancellor cited his decision in Hokanson v. Petty, in which he dismissed as timed-barred claims against the exercise of an option to acquire 100% of a target company at a specified price entered into more than 3 years before the actual acquisition of 100% was effected and challenged. The court also rejected the alternative argument that Liberty, as a minority but still-controlling stockholder, had a fiduciary duty not to enter into open market purchases without negotiating with the Sirius board. Among other things, the court cited cases that make the point that the exercise of a pre-existing contractual right by even a controlling stockholder cannot be a breach of fiduciary duty.

Here’s a blog by Davis Polk’s Ning Chiu:

Governance surveys indicate that the S&P 500 companies have largely dismantled their takeover defenses and have established so-called “good” governance practices, but that is not the case for all of the large-cap companies. Netflix recently held its annual meeting where a nearly unprecedented five governance shareholder proposals were on the ballot. While none of the proposals’ sponsors actively campaigned, not even filing any notices of exempt solicitations, almost all of the proposals won by a vast majority that was far above the average vote results. The outcomes were particularly high given that insiders own more than 9% of the company.

A proposal to declassify the board received 89% in support. A proposal asking the board to adopt majority voting in director elections won 81%, while another seeking a simple majority vote as the criteria for shareholder approval was favored by 81% of shareholders. In what may be the strongest vote on this proposal, 73% of shareholders endorsed having an independent chair. Only a retail version of a proxy access proposal failed to garner majority support. In addition, likely in response to putting in place a poison pill last year without shareholder approval, 2 directors barely received a majority of votes for their election while one director received a little over 49%.

These results may be somewhat surprising in light of the well-publicized acquisition of Netflix shares by Carl Icahn in the fall, which led the company to adopt the poison pill and presumably argues for maintaining its available defenses. In addition, more than an 80% increase in the company’s stock performance since the beginning of the year did not seem to persuade shareholders to vote with the board’s recommendations.

As the company has faced similar results before without making changes, it is not clear that it will be following the majority of S&P 500 companies after this meeting. In 2011 a majority vote proposal received 73% support, while in 2012 both a proposal to declassify the board and give shareholders the right to call special meetings passed. According to SharkRepellent, Netflix is among only 7% of S&P 500 companies with a poison pill in force, 15% with a classified board, and 8% that have not adopted a majority or plurality-plus vote standard to elect directors. It is also in the minority in not giving shareholders the right to call special meetings and requiring a supermajority vote to amend certain charter and bylaw provisions.

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

If you’re not yet a subscriber, try a “Free for Rest of ’13” no-risk trial to get a non-blurred version of this issue on a complimentary basis.

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.

Here’s more on this case from Francis Pileggi…

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?