DealLawyers.com Blog

Tune in tomorrow for the webcast – “Activist Profiles and Playbooks” – to hear Bruce Goldfarb of Okapi Partners, Dan Katcher of Joele Frank Wilkinson Brimmer Katcher, Damien Park of Hedge Fund Solutions LLC and Darren Wallis of Alara Capital identify who the activists are – want what makes them tick. Over 20 activists will be dissected!

Recently, PwC issued its annual survey on M&A prospects for the coming year. Check it out.

Here’s news from Steven Haas of Hunton & Williams:

On December 20th, the Court of Chancery issued a temporary restraining order in Sherwood v. Chan barring a company from holding its annual stockholders meeting in Beijing later that day. The court found that the plaintiff/dissident had sufficiently alleged colorable disclosure claims and irreparable harm with respect to the company’s proxy materials and the dissident’s proxy contest.

By way of background, the dissident, who was an incumbent director, initially had been included in management’s slate for reelection as a director. After the company mailed its definitive proxy statement and approximately 12 days before the stockholders meeting, the board removed the dissident from its slate. The company cited, among other things, the dissident’s alleged disruptive behavior and certain trading activity that had been reported to the SEC. In response, the dissident initiated a proxy contest but was unable to solicit proxies under Rule 14a-6 until after the date scheduled for the annual meeting. The company also argued that the dissident did not comply with the company’s advance notice bylaw.

Here are a few key points from the court’s decision granting the dissident’s request for a TRO:

– The court found that the plaintiff had sufficiently alleged two colorable disclosure claims for purposes of obtaining a TRO. The first related to whether the dissident was removed from management’s slate due to his alleged disruptive behavior or over “sincere policy disputes.” “A reasonable shareholder,” the court stated, “likely would perceive a material difference between, on the one hand, an unscrupulous, stubborn, and belligerent director as implied by the Proxy Supplement and, on the other hand, a zealous advocate of a policy position who may go to tactless extremes on occasion.” The second claim related to the company’s description of the status of an SEC review into the dissident’s stock trades, which disclosure may have been misleading in light of the dissident’s claim that the SEC had informed him it was not pursuing the matter.

– The court found that there would be irreparable harm even if the dissident was unable to wage a proxy contest. The company argued that, in the absence of a proxy contest, there was no irreparable harm because directors were elected under a plurality standard. Thus, according to the company, the alleged disclosure violations would not affect the legal outcome of the election. The court disagreed on the issue of irreparable harm, finding that the ability to “withhold” a vote was an important decision that should be fully and fairly informed.

– The court also found the defendants’ argument that the company’s advance notice bylaw precluded the dissident was waging a proxy contest to be “less than compelling.” The advance notice bylaw required the dissident to, among other things, provide notice of his intent to nominate a person for election as director no later than the close of business on the tenth day after the meeting date was announced. Although the dissident failed to give notice within the ten-day period following the initial announcement of the annual meeting date, the company had postponed the annual meeting.

The company argued that compliance with the advance notice requirement was based on the announcement of the initial meeting date, while the dissident argued that he only had to provide notice within ten days after the announcement of the meeting as postponed. While not providing any definitive ruling, the court found a “fair possibility that Plaintiffs can nominate an opposing slate.” The court also noted that the advance notice bylaw did not contain a clause found in other companies’ bylaws expressly stating that an adjournment or postponement does not commence a new time period for providing notice.

– The court emphasized that its role was not to judge which candidate was preferable over another, which Delaware law leaves to the “shareholder franchise.” Rather, the court’s role was to provide stockholders with “a fair opportunity to vote their preference on the future direction of the Company.”

Here’s news from Steven Haas of Hunton & Williams LLP

The contingency fee practice in corporate litigation is alive and well in Delaware. Last month, Chancellor Strine awarded a much-publicized $285 million fee award to the plaintiffs’ attorneys in In re Southern Peru Copper Corp. S’holder Deriv. Litig. The fee relates to the court’s $1.2 billion damages award announced in October in which the court found that a controlling stockholder’s sale of an asset to its partially-owned subsidiary was not entirely fair.

Also in December, Vice Chancellor Laster awarded $22.3 million to the plaintiffs’ attorneys in the Del Monte litigation. The fee award was based on the court’s February 14, 2011, decision that enjoined a stockholders meeting and the operation of certain deal protections in a merger agreement. The decision was followed by an $89.4 million settlement payable to the stockholder class. The $22.3 million fee award is in addition to the $2.75 million previously awarded by the court to the plaintiffs’ attorneys as a result of Del Monte’s voluntary disclosures about the sale process, which were made after the litigation was commenced but prior to the court’s injunction decision.

Vice Chancellor Laster also recently awarded $2.4 million in attorneys’ fees in the Compellent litigation. There, he found that the plaintiffs had conferred a “benefit” on the target company’s stockholders by “relaxing” certain deal protections in a merger agreement, even though no topping bid emerged.

The issue of fee awards has received significant attention lately, particularly in the context of disclosure-based settlements — the most common form of settlements in M&A litigation. Delaware courts seem to have increased their scrutiny of these settlements, partly to make sure that “good cases” are not settled “on the cheap” and partly to police the filing of “bad cases.” As an example of the latter category, Vice Chancellor Laster issued a length opinion in April 2011 in In re Sauer-Danfoss. There, he awarded $75,000 to the plaintiffs’ attorneys for a “kitchen sink” list of disclosures that he generally termed as “not helpful.” In that case, he also assembled a list of prior fee awards granted by Delaware courts, categorizing them into three “buckets” ranging from small fee awards for marginally helpful disclosures to large fee awards for “significant” disclosures.

Disclosure-based settlements and attorneys’ fee awards remain important areas for deal lawyers and litigators, especially for purposes of obtaining deal certainty through pre-closing settlements and for valuation purposes (i.e., buyers taking into account the cost of litigation and any potential settlement payments). It’s also worth noting that Delaware arguably continues to walk a fine line with attorneys’ fees. M&A litigation has risen significantly over the years, with some commentators suggesting that 85% of M&A transactions are now challenged. In addition, a particular transaction may be challenged in multiple venues.

If Delaware cracks down too much on what many in the defense bar perceive as “knee-jerk reaction” lawsuits, it risks losing market share as plaintiffs could file elsewhere. There is evidence that this migration to other states has occurred in recent years, perhaps due to a perception that Delaware courts are not “generous” with fee awards. Recent cases should show, however, that Delaware courts will award significant fees where its judges believe the plaintiffs have strong claims. To that end, Ronald Barusch recently wrote this in Deal Journal piece that the Southern Peru award is an invitation for good cases.

According to Dykema’s 2011 M&A Outlook Survey, after slowly increasing the last two years, confidence in the U.S. M&A market has dropped slightly. 26% of industry leaders believe the market will be strong during the next 12 months, down from 38% last year, while 57% are neutral on the outlook for the coming year. Looking at the overall U.S. economy, nearly half of respondents are neutral on the prospects for 2011, but for the second consecutive year, respondents have a more pessimistic outlook compared to the previous year.

Respondents believe that availability of capital (39%) is the biggest driver for current M&A activity, due in large part to strategic buyers and private equity firms with greater access to financing. However, an uncertain economy has been the most frequent obstacle to successful deals during the past year, and as a result, over half of the respondents think the coming year will bring an increase in the number of distressed transactions.

The economy is also affecting deal structures and dealmakers saw even more alternative financing in 2011 than in past years. Purchase price adjustments, which were not included as an option on last year’s survey, are the number one provision of increased negotiation in purchase agreements according to respondents. A third of respondents identified earnouts as a major discussion point, a figure down sharply from 2010 when 66% of industry leaders selected that option. Financing contingencies continue to be a hot button issue but are also down from last year with an improving financing market (41% in 2011; 54% in 2010).

According to Dykema, the survey yielded a number of other interesting conclusions, including:

– Respondents believe strategic buyers are most likely to increase their presence in the M&A market over the next 12 months (51%), a figure that has remarkably stood for the last four years. Financial buyers are most likely to decrease their presence (43%), which flip-flopped with foreign buyers this year.

– For the third consecutive year, strategic buyers (44%) were seen as the group most influencing deal valuations over the previous year. Financial buyers are not seen as driving valuations any more than they were a year ago.

– China, Europe, India and Canada are named the most likely regions for foreign buyers in the U.S. M&A market over the next year. Respondents continue to look at China as the principal source for investors in U.S. companies, far outranking any other region. Interestingly, Europe is named the second most likely region for U.S. investment despite the current economic turmoil.

Recently, as noted in this Sullivan & Cromwell memo (other memos are posted in our “Antitrust” Practice Area), the DOJ and FTC extracted their first publicized penalty for a corporate executive’s failure to make a Hart-Scott-Rodino Act filing before receiving stock of his employer as part of his compensation. Although the historical background of the enforcement proceeding is somewhat unusual, the proceeding makes clear that the DOJ and FTC will, in appropriate cases, seek penalties against executives who fail to comply with the HSR Act’s filing requirements when they receive stock as part of their executive compensation.

In this speech last week, SEC Chair Mary Schapiro gave us a few broad parameters of what the agency’s overhaul of the beneficial ownership reporting rules might look like (the speech also addresses proxy plumbing, proxy access, say-on-pay, etc.). Here is what she said on that topic:

Next year, we plan to begin a broad review of our beneficial ownership reporting rules. We think it’s important to modernize our rules, and we are considering whether they should be changed in light of modern investment strategies and innovative financial products.
Issues that we will consider include:

– Whether the 10-day initial filing requirement for Schedule 13D filings should be shortened;
– Whether beneficial ownership reporting should be changed with respect to the use of cash-settled equity swaps and other types of derivative instruments;
– How the presentation of information on Schedules 13D and 13G can be improved.

The Dodd-Frank Act has provided the Commission with new statutory authority to shorten the 10-day filing deadline for 13D, as well as to regulate beneficial ownership reporting based on the use of security-based swaps. And, earlier this year, the SEC received a petition for rulemaking recommending amendments to Regulation 13D-G.

The petition asks the SEC to broaden the definition of beneficial ownership to include interests held by persons who use derivative instruments. The petition also specifically requests that the time period within which initial beneficial ownership reports must be filed be shortened to one calendar day because technological advances have rendered the 10-day window obsolete.

Many feel that the 10-day window:

– Results in secret accumulation of securities;
– Results in material information being reported to the marketplace in an untimely fashion; and
– Allows 13D filers to trade ahead of market-moving information and maximize profit, perhaps at the expense of uninformed security holders and derivative counterparties.

In response, some argue that:

– Tightening the timeframe may reduce the rate of returns to large shareholders, and thereby result in decreased investments and monitoring of and engagement with management;
– There is no evidence that changes in trading technologies and practices have led to significant increases in pre-disclosure accumulations of large ownership stakes; and that
– State law developments, such as the validity of poison pills, staggered boards and control share statutes, have tilted the regulatory balance in issuers’ favor.

Our first step will likely be a concept release given the controversy surrounding some of the issues.

Here’s news from Steven Haas of Hunton & Williams:

On Friday, the Delaware Court of Chancery approved a $2.4 million fee award arising out of the M&A litigation in In re Compellent Technologies Shareholder Litigation. The fee award was based on a settlement agreement in which the merger agreement was amended to “relax” numerous deal protections, including the no-shop provisions, information rights, and termination fee. The settlement also required the target to delay its stockholder meeting and rescind a rights plan that had been adopted specifically in connection with the announcement of the merger.

The court concluded that, by “shift[ing] the agreement’s protective array from the aggressive end of the spectrum towards the middle,” the settlement had conferred a “benefit” by increasing the likelihood of a topping bid, even though none materialized. The court also made clear that it was not reviewing the deal protections under enhanced scrutiny or analyzing whether the target’s board of directors might have breached its fiduciary duties in approving the deal protections. Rather, those issues had been mooted by the settlement and the court’s only job was to award attorneys’ fees based on the “benefit” conferred.

in this “Mergercast,” J. Neely of Booz & Co. talks about a new approach to corporate growth that looks likely to remain a strong trend in 2012. Here is a teaser about the program:

“A number of industries have gone through substantial portfolio realignment in 2011, grouping together similar business lines by spinning off those that don’t align with them closely. This has been especially useful for very large corporations as they re-evaluate their strengths, enabling them to put more focus behind lines of business that have the strongest synergy,” Neely says.

He adds, “One prominent example is Kraft, for whom the costs of managing an extremely diverse set of businesses proved greater than the benefits of running them together. However, spinning off two separate entities focusing, respectively, on grocery products and snacks foods, allowed their distinct capabilities systems to be leveraged individually, which was beneficial for driving the growth of each new organization.”

Neely also looks at Sara Lee, Fortune Brands, McGraw Hill and Hewlett Packard, as well as the strong likelihood that the spinoff trend will continue into 2012.

Recently, Dechert and Preqin combined to put out this study that analyzes transaction and monitoring fees in private equity deals. The study found that there has been a notable increase in the mean and median percentage transaction fees across all private equity deal sizes since the recovery began, comparing the 2009-2010 period to the 2005-2008 period. Average monitoring fees have also increased during this period, although these vary more depending on deal size.