In Sciannella v. AstraZeneca, (Del. Ch. 7/24), the Chancery Court dismissed breach of fiduciary duty claims arising out of the 2021 sale of Viela Bio, Inc. to Horizon Therapeutics PLC. In a 79-page opinion, Vice Chancellor Fioravanti rejected claims that pharma giant AstraZeneca, which owned approximately 27% of Viela’s shares, was a controlling stockholder.
The plaintiffs contended that their claims should be evaluated under the entire fairness standard because AstraZeneca was a controlling stockholder and pushed the company into the transaction because it wished to acquire a direct competitor. In alleging that AstraZeneca was a controlling stockholder, the plaintiffs pointed to, among other things, certain blocking rights provided to AstraZeneca in Viela’s charter.
Under the terms of the charter, certain corporate actions, including bylaw amendments, taken without the approval of Viela’s board would require the approval of the holders of 75% of its outstanding shares. As a practical matter, AstraZeneca’s ownership stake gave it the ability to block transactions subject to this supermajority vote requirement, but the Vice Chancellor concluded that the limited nature of these rights made them insufficient to confer controlling stockholder status on AstraZeneca. In his opinion, he distinguished the blocking rights provided to AstraZeneca from those in other Delaware cases in which blocking rights were held to be sufficient to convey control:
AstraZeneca’s equity position gave it limited blocking rights under the Viela Certificate. Though these blocking rights are meaningful, they are not nearly as formidable as the blocking rights highlighted in other cases. For example, unlike in Voigt where the defendants had the ability to block board decisions, AstraZeneca only had the right to veto bylaw amendments initiated by stockholders, and then only if the Board did not recommend them. . .
The supermajority voting requirements under the Viela Certificate gave AstraZeneca—by virtue of its 26.72% voting block—veto power over limited corporate actions, but as a whole, did not give AstraZeneca power to wield control over the Board or “operate[] the decision-making machinery of [Viela].” Thermopylae Cap. P’rs, L.P. v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch. Jan. 29, 2016). Nor did AstraZeneca ever exercise its blocking rights. Cf. Tornetta, 310 A.3d at 503 (noting that the CEO exercised his veto rights to block bylaw amendments on two separate occasions).
Vice Chancellor Fioravanti also rejected the plaintiffs’ arguments that support agreements entered into when Viela was spun-off by AstraZeneca, AstraZeneca’s designation of two members of the board, and the fact that Viela’s executive officers were former employees of AstraZeneca, were sufficient to make it a controlling stockholder. Finally, he rejected claims that AstraZeneca exercised transaction-specific control over the board through allegedly coercive threats made in a letter to Viela’s board to terminate its contracts with Viela. Rather than a coercive threat, the Vice Chancellor concluded that the letter at issue was a “proposal” to facilitate a business separation that had been in the works since Viela’s IPO in October 2019.
The transaction was structured as a merger with a front-end tender offer, and the plaintiffs also asserted that the company’s Schedule 14D-9 recommendation statement for the tender offer was misleading because it failed to disclose AstraZeneca’s alleged decision to abandon the company absent a sale and because it failed to disclose a set of projections prepared prior to the projections provided to stockholders in the 14D-9. The Vice Chancellor rejected those claims as well and held that because Viela’s stockholders were fully informed, the transaction satisfied Corwin and board’s actions in connection with it were subject to review under the business judgment rule. Accordingly, he dismissed the plaintiffs’ claims.
Last week, I blogged about the FTC & DOJ’s “Request for Information” (RFI) asking the public to provide information to help the agencies “identify serial acquisitions and roll-up strategies throughout the economy that have led to consolidation that has harmed competition.” A group of former FTC officials recently responded to this initiative with a letter pointing out that it was pretty one-sided and calling for a more balanced approach. Here’s an excerpt:
The current RFI, however, suggests that the agencies have already concluded that “serial acquisitions” harm competition. Although several questions take a neutral approach, many of them solicit negative information about acquisitions, and not one asks about any benefits. For example, Question 2(c) asks whether serial acquisitions encourage “actual or attempted coordination or collusion between competitors” and Question 3 posits nine subparts about ways in which an acquirer might harm competition, including tying and refusals to deal. By contrast, the RFI includes no questions that solicit information about possible pro-competitive benefits from acquisitions; at most, Question 4 asks the public to identify “claimed” business objectives and whether they came to pass.
The letter asks the FTC to supplement the RFI with a series of additional questions proposed by the authors soliciting information about the pro-competitive benefits of serial acquisitions. It also requests that the agencies withdraw certain questions included in the RFI that “create an appearance that the agencies are interested in ideological issues unrelated to their statutory mission.”
Earlier this week, the SEC updated its FAQs on Draft Registration Statements to address how companies should deal with the SPAC rules’ new co-registrant requirement when furnishing draft registration statements. Here’s the new FAQ:
(19) Question: If a registrant uses the confidential submission process to submit a draft registration statement in connection with a de-SPAC transaction, when should it include any co-registrant’s CIK and related submission information in EDGAR Filing Interface?
Answer: EDGAR does not currently allow the entry of a co-registrant on draft registration statement submissions. See Section 7.2.1 Accessing the EDGARLink Online Submission of the EDGAR Filer Manual. Therefore, the primary registrant should submit the draft registration statement without the co-registrant’s CIK and related submission information. The draft registration statement must contain the information required by the applicable registration statement form, including required information about the target company. The primary registrant must add the co-registrant’s CIK and related submission information in EDGAR when it publicly files the registration statement. See Section 7.3.3.1 Entering Submission Information of the EDGAR Filer Manual. Co-registrants do not need to separately submit the draft registration statements or related correspondence in EDGAR since the primary registrant’s reporting history will include all draft registration statement submissions and related correspondence.
The SEC also recently posted a “Special Purpose Acquisition Companies, Shell Companies and Projections Small Entity Compliance Guide” addressing the new SPAC rules on its website.
The SEC’s new SPAC disclosure rules went into effect yesterday. Although many people assumed that the rules would be the last nail in the coffin for SPAC deals, this Institutional Investor article says that the SPAC market is actually perking up a bit:
More than two years after they were first proposed, the Securities and Exchange Commission’s new rules governing special purpose acquisition companies, or SPACs, finally are set to go into effect on July 1. The expectation of tougher requirements, along with the disastrous stock market performance of most SPACS, has already led this market to sink — but it hasn’t killed it. In fact, 2024 is on pace to outdo 2023, which was the worst year for SPACs since 2016, in terms of dollars raised through the IPO market, according to SPAC Insider.
Halfway through this year, SPACs have already raised $2.5 billion, compared with $3.8 billion for the entirety of 2023, according to SPAC Insider. It calculates that are 34 SPACS that have either filed to go public, are searching for a merger partner or have completed a deal, compared with 42 for all of 2023, The average size of the SPAC IPO is slightly bigger, too, at $156.5 million compared with $124.1 million in 2023.
The article also highlights the significant headwinds that SPACs are facing, including the difficulties many SPACs have experienced in finding a merger partner and the shortened timeframe they have to complete a deSPAC under the SEC’s new rules. Still, while SPACs are certainly ailing, it does appear that they would be right to claim, like the old man in Monty Python and the Holy Grail, that “I’m not dead yet!”
In James River Group Holdings v. Fleming Group Holdings, (NY Sup. 4/24), the New York Supreme Court’s Commercial Division recently addressed a seller’s claim for specific performance of the buyer’s obligation to close under the terms of a stock purchase agreement. The Court rejected the buyer’s allegations that the seller had breached various provisions of a stock purchase agreement and granted the seller’s request for specific performance.
In reaching this conclusion, the Court pointed to provisions of the agreement entitling the seller to specific performance (Section 8.4) and providing a post-closing “true up” process to address the monetary issues raised by the buyer (Section 1.4):
In §8.4, the SPA provides for specific performance because the parties agree that there is irreparable harm if the contract is breached, and damages would be difficult to calculate. Courts enforce such provisions when negotiated by sophisticated counsel, as is true here. [Citations omitted]. The court is inclined to accept the parties’ agreement in the SPA where the parties crafted the SPA to prevent this precise situation with SPA §8.4 and §1.4.
The Court also agreed that the seller was suffering irreparable harm as a result of the buyer’s refusal to close the transaction. In particular, it pointed to the reputational harm that the seller, a public company which had announced the sale of this subsidiary as part of a long-term strategic plan to focus on core business, had suffered when the buyer’s refusal to close became public.
Specifically, the Court noted that the seller’s share price immediately dropped to an all-time low after the buyer balked, and that an analyst opined that the refusal to close potentially impacted the seller’s core value, interfered with its employees and operations, and distracted it from its strategic plan because of the need to maintain the subsidiary’s operations.
If you’ve been paying attention to the debate over the 2024 Delaware DGCL amendments, one thing that seems pretty clear is that a lot of stuff we all thought was settled long ago is once again up for grabs. Take “dead hand” poison pills, for example. These pills contained provisions that only permitted them to be redeemed by “continuing directors” and the Chancery Court invalidated them in Carmody v. Toll Bros., 723 A.2d 1180 (Del. Ch. 1998), on the basis that the adoption of such a provision involved both a violation of Section 141 of the DGCL and a breach of the directors’ fiduciary duties. In a recent M&A Law Prof Blog post, Prof. Brian Quinn says that the Delaware Legislature may have resurrected the dead hand pill:
In Toll Brothers, VC Jacobs – on a motion to dismiss – held that since the Rights that were the fulcrum for the dead hand pill could not be redeemed pursuant to the terms of the Rights Agreement by any board other than the directors who had initially adopted the pill (or at least by the directors who were continuing from the original board following a successful proxy contest) that the Rights Agreement ran afoul of § 141(a) and (d) was therefore invalid.
OK, so fast forward to 2024. Now that § 122(18) has passed and § 141(a) no longer sits atop the statutory hill, one can imagine writing an amendment to the Shareholder Rights Agreement that designates a shareholder or shareholders (who happen to be current directors) as responsible for pulling the pill. The board covenants not to redeem the pill under the Rights Agreement unless the director/shareholder agrees. So, even if the director (or directors) are replaced in a proxy contest, their dead hands will still float around the boardroom preventing the new board from pulling the pill in a manner that the new board believes is consistent with its fiduciary duties.
I don’t know that this issue is quite as cut and dried as this blog suggests. As noted above, Vice Chancellor Jacobs also held that in adopting the dead hand provisions, the directors breached their fiduciary duties, and fiduciary duty claims are something that the advocates of the amendments contend are unaffected by them. Still, if you’re defending a dead hand provision, you’d rather try to argue your way through Unocal than confront a statutory brick wall.
A recent Womble Bond Dickinson memo says that private equity funds and strategic investors are increasingly interested in taking minority positions in target companies. This excerpt discusses private equity funds’ rationale for this move and its implications:
Financial investors, particularly private equity firms, regularly rely on debt to extend their reach and enhance their return on capital. However, with high interest rates showing little sign of receding soon, the cost of this debt has made debt-financed acquisitions less attractive. In addition, the uncertain market outlook has caused these firms to seek greater protection from downside risk. As a result, private equity firms are more frequently partnering with co-investors and asking sellers to retain more equity in the target company.
Firms that have traditionally targeted buy-out options are engaging in more majority recapitalization transactions instead of relying on earnouts to bridge any valuation gap, and majority recapitalization firms are expanding their focus on minority investments. The move into minority investments allows private equity firms to further diversify their investments and mitigate potentially larger downside scenarios with majority recapitalizations. This shift has brought new players into and focus on the venture capital market.
On the strategic side, the memo says that minority investments are frequently a key third prong of large operating companies’ innovation strategies, along with traditional M&A and internal R&D. Strategics often use minority investments to, among other things, obtain early access to breakthrough technologies and obtain preferential commercial rights. The memo also highlights some of the key protections that minority investors should seek during the negotiation process.
The Hill recently published an opinion piece by a Texas lawyer who breathlessly announced that Delaware’s “activist judges” were “sending companies packing for states like Texas. . .” As UCLA law professor Stephen Bainbridge points out in his blog, that’s just not the case:
In total, there are almost 400,000 companies incorporated in Delaware. Although Delaware accounts for less than one-third of one percent of the United States’ population, it is the legal home for two-thirds of the Fortune 500 companies. As for the broader set of all public corporations, Delaware is home to more than half of the corporations listed for trading on U.S. stock exchanges. As for newly formed corporations, while most business entities form under the law of the state in which they have their primary place of business, Delaware is the leading choice of businesses that opt to incorporate outside their home state.
Guess how many publicly held Delaware corporations reincorporated outside of Delaware between 2012 and 2024. My research assistants and I have scoured SEC filings and various databases to get the answer. The answer? A whopping total of 65, with seven pending. That’s a total of 72 over 12 years. Six per year.
That’s not flight. That’s rounding error.
The facts cited by Prof. Bainbridge in his rebuttal don’t surprise me – after all, this wouldn’t be the first time that Delaware has muddled through after prominent deal lawyers got their noses way out of joint about Chancery Court decisions. What’s more, the jurisdictions that folks are advocating that Delaware corporations migrate to have their own issues.
In Texas, for example, its much-touted business court is just getting off the ground and it’s hard for me to imagine that many large companies would be interested in beta testing it over the next several years. As for Nevada, while some of its high-profile judicial decisions have been decidedly friendly to boards and controlling stockholders, its judges have been criticized for often looking to Delaware precedent instead of their own statute, and it’s still apparently unclear whether even Nevada’s statute would sanction a governance agreement like the one involved in Moelis.
My guess is that we may see a bit of a bump in re-incorporations over the short term, because hey, there’s always somebody who wants a taste of the flavor of the month, but despite the recent unpleasantness, I’d bet that Delaware is going to remain Delaware, at least for now. Whether the controversies over the Chancery Court’s recent decisions and the legislative reaction to them will buttress or erode the state’s status over the longer term is a question for bigger brains than mine.
Last year, President Biden issued an executive order directing the Treasury & Commerce Departments to adopt outbound investment screening regulations. As Meredith blogged at the time, Treasury responded by issuing an advance notice of proposed rulemaking. On Friday, the Treasury Department issued a proposed rule to implement the screening regime. Here’s the intro from this Fried Frank memo:
On June 21, 2024, the U.S. Treasury Department issued a Proposed Rule to implement President Biden October’s 2023 Executive Order (“EO”) establishing a regime to restrict certain types of outbound investment to China. The Proposed Rule builds upon and adopts the same structure as an earlier Advance Notice of Proposed Rulemaking (“ANPRM”) — the notification, and in some instances the outright prohibition, of certain investments by U.S. persons in Chinese companies (including Hong Kong and Macau) that are engaged in specific activities related to semiconductors and microelectronics, quantum computing, and artificial intelligence (“AI”).
Treasury seeks public comments on the Proposed Rule through August 4, 2024, including on several provisions for which Treasury provides alternative formulations or parameters. The investment restrictions will only apply prospectively and will not take effect until Treasury publishes a final rule.
The memo goes on to summarize the proposed rule and notes that the Treasury Department has posted a fact sheet on the proposed rules on its Outbound Investment Security Program website.
The DOJ and FTC are extending a cordial invitation to the public to drop a dime on “serial acquirers” whose deals may have harmed competition. This Morrison & Foerster memo explains the initiative:
On May 23, 2024, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) Antitrust Division announced a Request for Information (“RFI”) seeking information from the public to “identify serial acquisitions and roll-up strategies throughout the economy that have led to consolidation that has harmed competition.”
This is the latest action by the Biden administration to enforce against corporate consolidation more aggressively. The FTC and DOJ claim that serial acquisitions are particularly troublesome because a company can become “larger” and “potentially dominant” through a series of smaller acquisitions that fall below the Hart-Scott-Rodino (“HSR”) thresholds and therefore are not subject to pre-closing agency review or oversight. According to the FTC, through these smaller deals, firms can “amass significant control over key products, key services, and/or labor.”
The memo notes that the agencies’ focus on serial acquisitions is not new, and that, among other things, the new Merger Guidelines and changes to the HSR filing process illustrate their concern with roll-up strategies. The memo discusses several recent enforcement actions targeting private equity roll-ups and notes that the results of this initiative could lead to a variety of new actions by the antitrust agencies. It advises serial acquirers to keep tabs on the public responses to this RFI, which will be available on the Regulations.gov website.