Two days after the Wall Street Journal reported that Paramount Global was in exclusive discussions with Skydance regarding its potential acquisition of Paramount’s controlling stockholder, National Amusements (NAI), or NAI’s controlling stake in Paramount rather than a transaction with Paramount itself, the Employees’ Retirement System of Rhode Island, a Paramount stockholder, served the company with a books and records demand. The demand sought the production of materials related to a transaction involving NAI, Paramount, or its assets, any board committee evaluating any such transaction, and any change-in-control agreements with company management — including emails and texts.
The company rejected the demand, arguing that it lacked a proper purpose — as it hadn’t identified “a theoretically viable form of wrongdoing” — and failed to identify sufficient evidence to support a credible basis to suspect wrongdoing. Litigation ensued. The Delaware Chancery Court posted its opinion last week in State of Rhode Island Office of the General Treasurer v. Paramount Global (Del. Ch.; 1/25).
Citing the demand’s reference to “usurping Paramount’s corporate opportunities,” Paramount argued that whenever a controlling stockholder could veto a potential transaction, there’s no “corporate opportunity” that the controlling stockholder could usurp. Vice Chancellor Laster notes this is a “valid point” but that the demand does not need to articulate a specific legal theory. He found that Paramount sought to “put the cart before the horse” by insisting that the demand articulate a conceptually viable legal theory — a demand must “explain why the stockholder has a credible basis to suspect wrongdoing,” and a controlling stockholder “steering bidders away from a company-level transaction and toward a parent-level transaction” can involve breaches of the duty of loyalty.
With respect to the stockholder’s evidentiary burden, the opinion notes that it must only show that there is a credible basis from which the court can infer a possibility of wrongdoing by a preponderance of the evidence — not to prove that wrongdoing or mismanagement is actually occurring or that wrongdoing is probable.
Paramount argued that the stockholder impermissibly relied on post-demand events to support proper purpose — specifically, the WSJ’s continued reporting on transaction-related developments. While the opinion says, “this decision need not establish rules for all cases,” it allows the plaintiff to rely on post-demand evidence about pre- and post-demand events — noting that the stockholder promptly raised post-demand developments during the litigation and that it would be wasteful to exclude the evidence and require a new demand be served.
VC Laster also disagreed with Paramount’s argument that news articles referenced by plaintiffs were not reliable enough to constitute evidence of the stockholder’s credible basis to suspect wrongdoing — noting that plaintiffs may rely on circumstantial evidence or hearsay for this purpose.
VC Laster found that the stockholder is entitled to the necessary books and records and remanded to the magistrate judge to address the scope of production.
– PPAs are now virtually ubiquitous, appearing on well over 90% of private deals. A decade ago, PPAs were present in only around half of deals.
– No two PPA provisions are the same, as parties continue to actively negotiate and customize terms such as which financial metrics to include, accounting methodology, PPA escrows, and caps.
– The median size of a separate PPA escrow increased to about 1% of transaction value for the last two years, which tracks with the average size of buyers’ initial PPA claim sizes (0.9% of transaction value), However, 24% of PPA claims exceeded 1% of transaction value.
– SRS Acquiom continued to see an increase in working capital surpluses (seller-favorable), with nearly equal prevalence of claims and surpluses for deals closed in 2024.
– Buyers’ proposed calculations were reviewed and ultimately accepted in 7 out of 10 PPAs.
The report also says that although the amount of time necessary to resolve PPA claims varies, even contested claims took less than two months to resolve on a median basis. The report also offers tips on drafting key purchase agreement PPA terms, including the seller rep’s information rights, dispute resolution provisions, sources of recovery and escrow release mechanics.
In HBK Master Fund v. MaxLinear, (S.D. Cal. 1/25), a California federal district court dismissed securities fraud claims asserted by target stockholders against the proposed buyer arising out of a failed acquisition. In essence, the plaintiffs’ claimed that MaxLinear and its affiliates made material misrepresentations and omissions about the company’s commitment to its proposed acquisition of Silicon Motion Technology Corporation, while secretly planning to breach the merger agreement and terminate the deal.
The Court concluded that because the plaintiffs’ weren’t stockholders of the purchaser, they lacked standing to assert securities fraud claims based on that company’s statements. This excerpt from a recent A&O Shearman memo summarizes the plaintiffs’ arguments and the Court’s reasoning:
Plaintiffs, investment funds that invested in the Target Company from June 2 to June 26, 2023, alleged that defendants misled investors about the Company’s commitment to merge with the Target Company and the potential benefits of such a merger. Specifically, plaintiffs alleged that defendants allegedly made material misrepresentations and omissions about the Company’s intent regarding the combination with the Target Company, all while allegedly secretly planning to breach the merger agreement after the merger no longer appeared to be an attractive business proposition. Plaintiffs further alleged that when the merger was approved by the regulatory authorities, defendants fabricated a breach by the Target Company to avoid liabilities associated with terminating the transaction.
Applying the Ninth Circuit purchaser-seller rule, the Court held that a plaintiff has standing under Section 10(b) of the Exchange Act if the plaintiff purchased or sold the securities about which the alleged misrepresentations were made. According to the Court, the Ninth Circuit has set a “bright-line rule that the security at issue must be one about which the alleged misrepresentations were made.” Because the alleged misrepresentations were made about the Company’s security, rather than the Target Company’s security, and because plaintiffs did not hold the Company’s securities during the relevant period, the Court held that plaintiffs did not allege statutory standing to bring their Section 10(b) and 20(a) claims.
The Court’s position that only buyers and sellers of stock in the corporation making an alleged misstatement have standing to pursue securities fraud claims is in keeping with the 9th Circuit’s decision in Max Royal LLC v. Atieva, Inc. (9th. Cir.; 8/24), which we blogged about last year.
In the past, the tax treatment for divisive reorganizations such as corporate spin-offs has typically been addressed through IRS private letter rulings. However, earlier this month, the IRS issued proposed regulations that would apply to corporate spin-offs. This excerpt from intro to Wachtell’s memo on the proposal summarizes the potential implications of the proposed rules for companies considering a spin-off:
Although the Proposed Regulations would liberalize certain areas relative to the IRS’s recent policy in issuing private letter rulings (see our prior memo), they would tighten others and introduce new onerous reporting and filing requirements. If finalized, the regulations would be effective generally for transactions that are announced after the date of finalization. Finalization could take considerable time, as many aspects need to be clarified, corrected, and refined in order to ensure that the regulations do not impede transactions that should qualify as tax-free. However, the IRS has announced that it will now issue private letter rulings based on the Proposed Regulations, rather than based on previously issued guidance.
The Proposed Regulations reflect an intention to publish rules binding on taxpayers and on which taxpayers can rely without the need to seek a private letter ruling. While it remains to be seen to what extent final regulations will deviate from the current proposal, the Proposed Regulations would, in certain respects, constrain taxpayers in structuring spin-off transactions, especially with respect to capital structure considerations.
The proposed regulations address the parent company debt & liabilities eligible to be assumed or repaid by the spun-off subsidiary and identify the types of permissible debt-for-debt and debt-for-equity exchanges. The proposed rules would also provide for somewhat greater flexibility in the terms of the parent’s commitment to dispose of retained stock in the spun-off subsidiary, restrict certain parent re-borrowings undertaken in connection with de-leveraging transactions as part of a spin-off, and limit payments by the parent company to its shareholders using cash received from the spun-off subsidiary. In addition, the proposed rules would require a taxpayer to file its “plan of reorganization” or “plan of distribution” with the IRS, and only those steps included in the final plan would be eligible for tax-free treatment.
A recent Troutman Pepper Locke memo discusses some of the key issues associated with side letters entered into between VC investors and the portfolio companies in which they invest. The memo address three categories of rights that may be provided to a VC investor in a side letter: (i) rights that the company has already granted to existing investors, such as standard information and board observer rights; (ii) rights that the company has already granted to existing investors that could impact the other investors, such as preemptive rights, “major investor” status & carve-outs to drag-along provisions; and (iii) novel rights that no existing investors have been granted. Here’s an excerpt from the memo’s discussion of this last category of rights:
The last bucket is perhaps the most nuanced – granting novel rights via a side letter that no existing investors have been granted. For example, including a provision in a side letter that prohibits the company from using the investor’s name in press releases or other publications is likely not a material issue, but could the same be said about granting carve-outs to a drag-along provision that applies to all equity holders under the company’s governance documents? A drag-along provision is a provision in an agreement requiring all equityholders who executed such agreement to contractually agree to sell their securities on terms and conditions approved by the company’s board and/or a subset of its equityholders.
Assume an investor, via a side letter, negotiates certain carve-outs or conditions to the applicability of the drag-along against that individual investor while no other investors with the same class of security receives the benefit of such carve-outs or conditions. In those instances, in addition to investor relations considerations, both the company and the investor must consider whether the provisions in the side letter are enforceable, and the risks associated with them. If the parties are considering granting rights in a side letter that are substantive enough to be material to the company or potentially violate or contradict the governance documents, then the side letter may not be enforceable absent additional board and equityholder approvals to amend the applicable underlying governance document(s).
The memo also points out that certain items that are requested in a side letter may need to be set forth in the underlying governance documents in order to be enforcable, and cites carve-outs from certain transfer restrictions contained in governance documents as an example of a term that other investors might contend should be included in the governance documents themselves. In a situation like this, the side letter’s objective of saving time and expense by avoiding the need to reopen documents will no longer be served.
Cooley recently published its “2024 Life Sciences M&A Year in Review.” There’s plenty of good stuff in there, but I thought the section discussing the return of dual track process, whereby a seller pursues both a potential sale and an IPO simultaneously was particularly interesting:
2024 saw a return of the prevalence of dual-track processes for private biotech companies. This approach, combining M&A and initial public offering (IPO) preparations on parallel tracks, allows companies to maximize optionality in an uncertain market. As deals get smaller, mid- and late-stage biotech companies, some of which may have been planning to go public, increasingly become targets for acquisition by large pharmaceutical companies. Biotech M&A involving private company targets was actually up 17% by deal count and up 12% by deal value compared to the prior year.
The report notes that a target’s leverage on the sale side of a dual-track process depends a lot on the viability of the IPO alternative, and Cooley says that landscape for life sciences IPOs gained steam over the course of the year. With the IPO market expected to rebound more broadly during 2025, perhaps we’ll see the dual-track process make a comeback for sellers in other sectors in the near future.
Per this Freshfields blog, the Chamber — along with the Business Roundtable, American Investment Council, and the Longview Chamber of Commerce — filed a lawsuit in early January seeking to enjoin the enforcement of the recently finalized overhaul of the HSR filing regime on the basis that the changes violated the APA. The blog says:
– The court could enjoin enforcement of the entirety of the Final Rules, or the court could enjoin enforcement of only those changes that it finds to be out of bounds. The Final Rules do have a “savings clause,” meaning that if any part is held to be invalid, the remainder stays in effect. Further, the parts of the Final Rules relating to foreign subsidies are mandated by Congressional statute and likely will remain in place.
– The challenge to the HSR rules could provide relief to merging parties more quickly than a new Republican majority at the FTC if they decided to streamline the rules using APA rule-making procedures. President-Elect Trump has indicated that, upon taking office on January 20, he will designate sitting Republican FTC Commissioner Andrew Ferguson to serve as FTC chair. Both Commissioner Ferguson and fellow Republican Commissioner Melissa Holyoak voted with the Democratic majority to adopt the changes to the HSR rules, but view the final product as “not perfect.” Any attempt to streamline the rules would require a Republican majority, which will arise only upon Senate confirmation of President-Elect Trump’s additional FTC Commissioner selection, Mark Meador. Revising the HSR rules under the APA procedures, which would be required, could take 12 months or more (the APA process for the current rules changes took more than 15 months).
With the changes set to be effective next month, the blog reminds readers that parties with deals expected to sign after February 10 should assume and plan for the final rules to be effective at that time — until the court rules or Congress or the FTC acts.
Earlier this week, the Delaware Supreme Court issued its opinion in In re Oracle Corp. Derivative Litig. (Del. Sup.; 1/25) affirming the Delaware Chancery Court’s decision to apply the business judgment rule in the derivative matter by Oracle’s stockholders arguing that it overpaid for NetSuite because Larry Ellison, founder, director and officer of Oracle and significant stockholder of NetSuite, was a conflicted controller. As we shared in May 2023, in his seventh memorandum opinion in the litigation involving Oracle’s 2016 acquisition of NetSuite, VC Glasscock found that Ellison was not a controller of Oracle — distinguishing Ellison’s potential to control from actual control.
Here’s an excerpt from the Delaware Supreme Court’s opinion:
The test for actual control by a minority stockholder “is not an easy one to satisfy.” The minority stockholder must have “a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.” To prove actual control over a specific transaction, a plaintiff must prove that the minority stockholder “exercised actual control over the board of directors during the course of a particular transaction.”
The Court declined to weigh evidence on appeal — noting that this appeal is not from an early-stage dismissal decision and facts and testimony favorable to plaintiffs’ arguments were fully vetted during a 10-day trial — and the plaintiffs were not arguing on appeal that the Vice Chancellor’s factual findings were clearly wrong. The Court nonetheless gives this helpful summary of unchallenged facts that VC Glasscock cited to conclude that Ellison did not exercise actual control:
– the Oracle board and management were not afraid to disagree with Ellison;
– Ellison neither controlled Oracle’s day-to-day functions nor dictated Oracle’s operations to the Oracle board;
– Ellison “scrupulously avoided” discussing the transaction with the Special Committee;
– Ellison neither proposed the transaction nor indirectly controlled the merger negotiations through his January 27, 2016, phone call with Goldberg; and
– although Ellison could have controlled the transaction, he did not interfere with or actually exercise control over the transaction.
The ongoing litigation between Elon Musk and Sam Altman is not the first place I’d think to turn to get updates on the FTC and DOJ’s latest positions on the application of Section 8 of the Clayton Act. But, since several of Musk’s claims turn on antitrust arguments relating to OpenAI and Microsoft, the DOJ and FTC filed a statement of interest in the case earlier this month. Here’s an excerpt from this Cadwalader memo:
In the joint DOJ and FTC “statement of interest” filed in Elon Musk v. Samuel Altman, the agencies argue that “section 8 bars relationships that create an interlock regardless of form.” The agencies argue:
“[A]n individual cannot evade liability by serving as an ‘observer’ on a competitor’s board. … [A] company or individual cannot use an indirect means to a prohibited end, such as by asking another person to serve as a board observer to obtain entry to a meeting that is otherwise off limits due to Section 8’s ban on interlocks. Such misdirection would undermine Section 8’s intent to impose a clear ban on direct involvement in the management of a competitor.”
Although the DOJ has touted that the interlocks initiative has led to 15 interlocking director resignations from 11 boards, this Bryan Cave memo notes that the agencies are also saying in the statement of interest that resignation may not be sufficient:
Historically, the agencies allowed Section 8 cases to be resolved by resignation or withdrawal of the nomination of the alleged interlocking director. In this statement of interest, however, the agencies now argue that “ending an interlocking directorate, e.g., by having a person resign from a corporate board, is not sufficient, on its own, to moot a claim under Section 8 of the Clayton Act.”
The agencies continue that “if a plaintiff properly pleads a likelihood of recurrence or an ongoing harm through the wrongful retention of competitively sensitive information obtained through the alleged interlocks, Section 8 claims are not moot.” However, the agencies do not cite a single case supporting this conclusion.
It sounds like these positions — and the FTC’s focus on interlocks generally — are not likely to change, even as agency leadership shifts. Here’s more from the Cadwalader memo:
Firms and individuals should recognize this position was adopted by a unanimous commission, including President-elect Trump’s designee for FTC Chairman (and current Commissioner), Andrew Ferguson, and Republican-appointed Commissioner Melissa Holyoak.
The antitrust agencies’ efforts to identify and break interlocks, broadly defined, are not going to be shelved in the second Trump administration. Notably, the revised reporting rules for transactions subject to the Hart-Scott-Rodino Act include a requirement that filing parties identify certain officers and directors. One purpose of this reporting requirement is to identify interlocks that may impact competition, including interlocks that are not prohibited by Section 8.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, John and J.T. Ho were joined by Jonas Kron, Chief Advocacy Officer for Trillium Asset Management. John and J.T. spoke with Jonas about how Trillium approaches the engagement process, trends in ESG activism, and how activist investors like Trillium are responding to the headwinds facing ESG activism.
Topics covered during this 33-minute podcast include:
– How Trillium decides which issues it intends to prioritize and which companies it is going to engage
– Trillium’s approach to engaging with the management of its portfolio companies
– Advice for companies when engaging with socially conscious investors like Trillium
– How Trillium works with other socially conscious investors
– Top issues for engagement by Trillium and other ESG-focused investors during the upcoming proxy season
– Investor responses to headwinds facing them on ESG and DEI initiatives
– Alternative investor approaches if Rule 14a-8 is pared back
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John and J.T. continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!