On Monday, I blogged about the Top 10 trends for the US – below are some trend thoughts from Torys:
As explained further in this memo, we predict that 2010 will be remembered as a comeback year with significant M&A activity. While 2009 was a slow year in the M&A space, in 2010 the pickup in M&A activity will be considerable.
We expect activity to include acquisitions in the “green” and media and telecom sectors. Life sciences will continue to be robust though mid-market focused. Well-run Canadian pension funds and banks will also take advantage of their relative strength to make international acquisitions. Large conglomerates, including financial institutions, will carve out their non-core assets. Private equity is also showing signs of renewed interest in acquisitions.
Although foreign buyers will face some scrutiny from the Canadian government when national security issues are triggered, “national security” will not be viewed as broadly as was once feared. Canadian M&A deals may also face more lengthy and onerous antitrust reviews.
In 2010, shareholders will continue their unprecedented level of activism, which began in 2009. Canadian directors may experiment by trying to “just say no” to unsolicited offers, while recent developments suggest that U.S. directors may tread more cautiously on this front.
On December 22nd, the Delaware Court of Chancery issued an important decision in NACCO Industries v. Applica, where it refused to dismiss claims brought by a jilted buyer against a target corporation for breaching the no-shop provisions of a merger agreement. The potential buyer alleged that the target failed to comply with notice requirements set forth in the merger agreement when the target responded to, and eventually accepted, a topping bid from hedge fund Harbinger Capital Partners. Here is our client alert – and the opinion.
Equally important, the Court refused to dismiss the potential buyer’s common-law fraud claims against Harbinger based on allegedly false statements made in Harbinger’s Schedule 13D filings. The potential buyer claimed that Harbinger had fraudulently concealed its intent to acquire control of the target, and the Court concluded that federal courts do not have exclusive jurisdiction over false statements in SEC filings. The Court also refused to dismiss the potential buyer’s claim that Harbinger tortiously interfered with its merger agreement with the target by, among other things, publicly misrepresenting its acquisition intent and colluding with the target’s officers who were breaching the merger agreement.
The decision demonstrates that Delaware courts will enforce reasonable deal protections to give parties the benefit of their agreement. Going forward, it should also cause activist hedge funds and some private equity funds to evaluate their disclosures carefully. The decision raises many other interesting issues, however, such as the proper calculation of the potential buyer’s damages against the target and whether the potential buyer’s reliance was reasonable. It is also important to note that, because the opinion ruled on a motion to dismiss, the Court was required to assume the truth of the allegations in the complaint, which purported to quote several of Harbinger’s internal emails that appeared inconsistent with its SEC disclosures (for Harbinger’s response to the opinion, see DealBook’s article.
Recently, PricewaterhouseCoopers Transaction Services released its annual year-end U.S. M&A forecast for 2010.
How accurate was the PwC Transaction Services 2009 M&A forecast? Here is what PwC says about that:
1. Troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity
Correct. 2009 saw patient buyers take advantage of favorable pricing to achieve their strategic goals.
2. Innovation will be a key for private equity to evolve as an industry in 2009.
Correct. Private equity firms have succeeded in getting creative to gain control of businesses through nontraditional means. Taking control of debt positions became a tool of choice by private equity to gain control of a company.
3. The new administration and the stimulus plan would generate opportunities for both private equity and corporate buyers in healthcare, technology and energy.
Too early to call. We may have overestimated the speed to which the stimulus would flow into the economy. We’ll see what 2010 holds.
4. More traditional consolidation will drive results in financial services in 2009.
Partially correct. There were some consolidation plays in banking and asset management; however, overall deal value was not significant related to recent years. The FDIC-assisted bank deals led the stats in terms of numbers.
5. Automotive and oil & gas M&A activity will remain quiet.
Correct. M&A activity was stagnant in these industries.
6. Emerging markets will lead us out of the slump in deal activity with Brazil, India and China as the key regions of focus for those who sat on the sidelines over the last five years.
Partially correct. It was certainly true for the equity markets in these regions. The jury is still out on the extent of emerging market M&A.
A few weeks ago, I blogged about the introduction of the the “Tax Extenders Act of 2009” in the House. On December 9th, the House passed this Act, which would tax as ordinary compensation income carried interest earned from investment partnerships or LLCs. This provision is similar to legislation passed by the House in 2007 and 2008 – but rejected by the Senate. Learn more in this Kirkland & Ellismemo.
Here are some further thoughts from Kevin Miller of Alston & Bird on fairness opinions (some prior thoughts are here):
There continues be confusion regarding whether Evercore rendered a relative fairness opinion in the ACS/Xerox transaction. Recent articles in a few publications continue to suggest that it did. I don’t think so.
While the Evercore opinion does state that Evercore took into account the additional merger consideration to be received by the holders of the Company Class B Common Stock in the Merger in evaluating whether the Merger Consideration received by the holders of Company Class A Common Stock was fair, from a financial point of view, to the holders of the shares of Company Class A Common Stock (other than those holders who also hold shares of the Class B Common Stock), I think the Evercore opinion includes an express disclaimer of relative fairness:
“We have not been asked to pass upon, and express no opinion with respect to, any matter other than the fairness to the holders of the Company Class A Common Stock, from a financial point of view, of the Merger Consideration. We do not express any view on, and our opinion does not address, the fairness of the proposed transaction to, or any consideration received in connection therewith by, the holders of any other securities [i.e, holders of Class B Common Stock], creditors or other constituencies of the Company, nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company, or any class of such persons, whether relative to the Merger Consideration [received by the holders of Class A Common Stock] or otherwise.” (emphasis added)
See the top of page 3 of Annex D of the draft Joint Proxy/Prospectus relating to the Merger.
The Evercore language that it “took into account” the additional Class B consideration is sometimes included in opinions relating to top hat/double dummy transactions – i.e., where a new holdco is formed and the two combining entities merge with separate merger subs formed by new holdco. In those transactions, in order to properly evaluate the exchange ratio in the merger between Company A and Merger Sub A, you need to “take into account” the exchange ratio in the merger of Company B with Merger Sub B because without giving effect to the second merger, you can’t calculate the percentage of new holdco that will be owned by the former shareholders of Company A – or other merger consequences – e.g., pro forma earnings per share for accretion dilution and other analyses.
Similarly, in ACS, you can’t calculate what percentage of Xerox will be owned by the former holders of ACS Class A Common Stock or other merger consequences without taking account orgiving effect to the additional consideration being paid to the holders of Class B Common Stock.
Given the disclaimer of relative fairness, I think it would be a stretch to interpret the “giving effect to language” in the Evercore opinion as implying that the opinion was intended to address relative fairness.
Nevertheless, I believe Evercore did provide the ACS committee with data and financial analyses with which the ACS committee could evaluate the financial implications of the additional Class B consideration in accordance with the Delaware Supreme Court’s holding in Levco (see pages 99-100 of the draft joint proxy/prospectus). I just don’t think they addressed relative fairness in their opinion.
Not that they have ever truly been welcome with RiskMetrics, but the pressure has been ratcheted up on companies that have shareholder rights plans (commonly called poison pills). Under its new policy updates that were recently released, RMG will issue a withhold or against recommendation against ALL board nominees (except new nominees) if a company adopts a poison pill without shareholder approval. Starting in 2010 RMG will analyze companies with a classified board every year, and an annually elected board once every three years, and they will issue a withhold or against recommendation from all Board members if a company maintains a non-shareholder approved pill.
In prior years, RMG would only issue a negative recommendation at the shareholders meeting immediately following adoption or renewal of the pill. The new policy is not retroactive, and only applies to companies adopting or renewing pills after November 19, 2009. However, please note that RMG states in future years it may apply the new policy retroactively.
RMG is also making a distinction between long-term pills (a term of more than 12 months) and short-term pills (a term of less than 12 months). Companies that adopt short-term pills have a little more leeway with RMG as they will consider other factors before issuing a negative recommendation. These other factors include the date of the pill adoption relative to the next shareholder meeting, the rationale for adoption or renewal, the company’s governance practices, and the company’s track record of accountability to their shareholders.
This update is no doubt a negative development for companies with poison pills. Companies have always had to consider the RMG implications for adopting or renewing a pill. However, now companies have to consider the fact that RMG will be issuing a withhold or against recommendation every three years or every one year depending on the Board structure. Among other things companies will need to consider is the level of influence of RMG among their shareholders, how a negative recommendation may impact the vote (e.g. plurality versus majority voting), and whether or not to adopt a shareholder friendly pill.
Continuing the proxy solicitor podcast series, in this podcast, Scott Winter of Innisfree provides some insight into how e-proxy intersects with proxy contests, including:
– Can you provide an overview of how notice & access works in a proxy contest?
– How common is notice & access in a proxy contest?
– Will the proposed amendments to the notice and access rules increase use of notice & access by dissidents?
– Should companies or dissidents utilize notice & access in a proxy contest?
The Tax Extenders Act would tax income and gains associated with “carried interests” as ordinary income and would expand reporting obligations and penalties to curb foreign tax evasion and fraud. Although these proposals have been proposed previously in separate bills, they are being incorporated into the Tax Extenders Act as a means of financing the $31 billion price tag for extending expiring tax provisions through 2010.
Analysts note that the bill is expected to pass the House easily, but its future in the Senate is unclear. While it is likely that the Senate Finance Committee will take up an extenders bill, it may not do so until next year – after the Senate finishes its work on health care legislation – and it may well include a different set of offsets. It is possible that Congress could delay resolution of the bill, because most of the provisions can be extended retroactively in 2010.
Here are some thoughts from Ken Adams, originally posted in his “Adams Drafting” Blog:
Methinks that the recitals in the average big-time-M&A merger agreement are bloated. By way of example, below are the recitals from the August 31st merger agreement for Disney’s acquisition of Marvel. I’ve noted some big-picture comments in bracketed italics; I’ll spare you my many micro-level objections.
RECITALS
WHEREAS, the parties intend that, subject to the terms and conditions hereinafter set forth [“subject to” phrase occurs several times, but flawed logic–the intent precedes the contract, not the other way round], Merger Sub shall merge with and into the Company (the “Merger”) [appropriate topic for recitals], on the terms and subject to the conditions of this Agreement and in accordance with the General Corporation Law of the State of Delaware (“DGCL”);
WHEREAS, the parties intend that the Merger shall be immediately followed by a merger of the Surviving Corporation (as defined below) with and into Merger LLC (the ” Upstream Merger “) [appropriate topic for recitals], on the terms and subject to the conditions of this Agreement and in accordance with the Delaware Limited Liability Company Act (the ” LLC Act “);
WHEREAS, the parties intend that the Merger be mutually interdependent with and a condition precedent to the Upstream Merger and that the Upstream Merger shall, through the binding commitment evidenced by Section 5.18 , be effected immediately following the Effective Time (as defined below), on the terms and subject to the conditions of this Agreement and in accordance with the LLC Act, without further approval, authorization or direction from or by any of the parties hereto [too much information for recitals, and anyway covered in the body of the contract];
WHEREAS, the Boards of Directors of Parent and the Company each have determined that a business combination between Parent and the Company is advisable and in the best interests of their respective companies and stockholders and accordingly have agreed to effect the Merger provided for herein upon the terms and subject to the conditions set forth herein [standard feature of merger-agreement recitals, but is unnecessary, given that authorization is addressed in board consents and in representations in the merger agreement; if this is in effect PR intended for shareholders, that function is better served by the proxy statement];
WHEREAS, simultaneously with the execution and delivery of this Agreement and as a condition and inducement to Parent’s and Merger Sub’s willingness to enter into this Agreement, Parent is entering into a voting agreement with the Company and certain stockholders of the Company (the “Voting Agreement”) [if this is a condition to entry into the merger agreement, I’d expect to see that stated in the body of the contract; simpler just to say in the recitals that the parties have entered into the voting agreement]; and
WHEREAS, it is intended that the Merger and the Upstream Merger, considered together as a single integrated transaction for United States federal income Tax purposes along with the other transactions effected pursuant to this Agreement, shall qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the ” Code “) [omit, as (1) covered in the body of the contract, in obligations relating to tax treatment, and (2) is misleading, as I gather that it’s settled law that intent of the parties doesn’t control the tax consequences of their actions; instead, when referring to the merger for first time say that it’s structured as a regoranization].
NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and subject to the conditions set forth herein, the parties hereto agree as follows [as always, a joke]:
Recently, the ABA Journal named Ken as one of their fifty “Legal Rebels.” The ABA’s profile of Ken includes a video in which he spend four minutes critiquing two bits of the merger agreement in Oracle’s proposed acquisition of Sun Microsystems.
With investors becoming more active – with many pursuing the same agenda – the issues implicating Schedule 13D and 13G have become more common and more complex. Join us tomorrow for the webcast – “Ask the Experts: Schedule 13D and Schedule 13G Issues” – and hear from:
– Dennis Garris, Partner, Alston & Bird LLP and former Chief, SEC’s Office of Mergers & Acquisitions
– Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions
– Chuck Nathan, Partner, Latham & Watkins LLP
– David Sirignano, Partner, Morgan Lewis & Bockius LLP and former Chief, SEC’s Office of Mergers & Acquisitions
Act Now: Renew your membership for 2010 as all memberships expire at the end of this month. Or try a no-risk trial for 2010 and catch this webcast for free.