DealLawyers.com Blog

February 14, 2024

Disclosure: SEC Sanctions SPAC for Non-Disclosure of Preliminary Merger Negotiations

Deciding whether a public company needs to disclose preliminary merger negotiations is always a challenging process, but the SEC recently announced an enforcement proceeding against a SPAC that serves as a reminder that getting that decision wrong can have a significant downside. Here’s an excerpt from the SEC’s press release announcing the action:

According to the SEC’s order, Northern Star stated in its SEC filings that neither the company, nor anyone acting on its behalf, had initiated any substantive discussions with any potential target companies prior to the IPO. However, the SEC’s order finds that Northern Star had engaged in discussions with a target company and that company’s controlling shareholder in connection with a potential SPAC business combination dating back to December 2020 and continuing for several weeks. Furthermore, according to the SEC’s order, after announcing a merger agreement with the target company, Northern Star did not adequately disclose its interactions with the target company in its Form S-4 filings.

The company consented, on a neither admit nor deny basis, to an order to cease and desist from violations of Section 17(a)(2) of the Securities Act and agreed to pay a $1.5 million civil penalty if it closes a merger transaction. This Bryan Cave blog offers some key takeaways from the proceeding. Here’s an excerpt:

The lesson is clear – a SPAC should defer discussions with targets until it completes its IPO. The SEC will take seriously violations of the restriction on pre-IPO acquisition discussions by a SPAC without adequate disclosure. Further, such disclosures could result in delays, draw SEC comments and deter potential acquisition targets from engaging in acquisition discussions with a SPAC.

While this is particularly important for SPACs and blank check companies, other public companies should also take care in their SEC disclosures when addressing the potential for future mergers and acquisitions.

The blog goes on to list several specific lessons to be drawn from the case, and we’ve also discussed the issues surrounding disclosure of preliminary merger negotiations beginning on page 400 of the Practical M&A Treatise. The SEC typically cuts companies some slack when dealing with disclosure of preliminary merger negotiations, but that latitude doesn’t extend to situations in which the company is buying or selling its securities.

John Jenkins

February 13, 2024

Activism: Director Can’t Share Confidential Information with Activist Hedge Fund

In a recent letter ruling in Icahn Partners LP  v. deSouza, (Del. Ch.; 1/24), the Chancery Court held that an activist nominee was not permitted to share privileged and confidential information received in his capacity as a director with the hedge fund that nominated him. The case arose out of Carl Icahn’s proxy contest with Illumina, which resulted in the election of an Icahn-designated nominee to the Illumina’s board.  That director shared confidential information received in his capacity as a director with an Icahn fund, and that information subsequently formed the basis for allegations contained in a complaint filed against the company.

The company moved to strike the allegations that were based on this information, and Vice Chancellor Fioravanti granted that motion. Although he noted that in some situations, Delaware courts have permitted directors to share confidential information with the entities that nominated them, he held that under the facts and circumstances of the present case, such information sharing was impermissible. This excerpt from Sullivan & Cromwell’s memo on the decision explains the Vice Chancellor’s reasoning:

The court noted that it “has not developed a bright-line rule” regarding a director’s ability to share company information with a stockholder that designated them, but that a line of Delaware cases supported the principle that directors may share a company’s confidential or privileged information with their designating stockholder (without destroying privilege) in “certain limited situations,” such as when the director (i) is designated to the board by the stockholder pursuant to a contractual right or as a result of the stockholder’s exercise of voting power or (ii) serves as a controller or fiduciary of the stockholder such that the director’s brain is unable to be divided between serving as a director of the company and serving as a controller or fiduciary of the stockholder seeking the information. Neither of these circumstances were present in this case.

Moreover, given the fact that the Icahn Director expressly agreed to abide by Illumina’s code of conduct, which prohibited the sharing of confidential information with third parties, the court found that it was reasonable for Illumina to expect that the Icahn Director would not share the information it provided him with the Icahn funds despite his known association with them. As a result, the court held that the Icahn funds had not established that they were within the “circle of confidentiality” that would grant them the right to receive the same confidential and privileged information the Icahn Director received.

The memo observes that because of the uncertainties in this area, companies facing stockholder nominations should review their corporate policies and D&O questionnaires, as well as any disclaimers contained in board materials to ensure they include appropriate confidentiality restrictions on directors. It also recommends that companies thinking about a settlement or other agreement that provides a stockholder with a designation right negotiate appropriate limitations on the designated director’s right to receive or share information.

John Jenkins

February 12, 2024

Mootness Fee Award: Del. Chancery Says “This is the Business You’ve Chosen”

I went to see Barbie with my wife last summer, and one moment that provoked a smile of both amusement and self-awareness was when one of the Kens was baited into “mansplaining” The Godfather to one of the Barbies. Okay, I’m guilty as charged, but I’m also a shameless recidivist, so Barbie’s “barb” isn’t going to deter me from saying that Vice Chancellor Glasscock channeled his inner Hyman Roth in a recent opinion denying plaintiffs’ counsel’s motion for a mootness fee award in In re Oracle Corporation Derivative Litigation, (Del. Ch.; 2/24).

The plaintiffs’ motion came at the conclusion of multi-year derivative litigation challenging Oracle’s 2016 acquisition of NetSuite.  To the plaintiffs’ credit, their breach of fiduciary duty claims survived multiple motions to dismiss, and they accomplished the rare feat of persuading a special litigation committee to allow the plaintiffs to pursue a derivative action against Oracle’s founder, Larry Ellison. Ultimately, however, Vice Chancellor Glasscock ruled in favor of the defendants at trial.

Plaintiffs’ counsel responded to this setback by seeking a consolation prize in the form of a $5 million mootness fee award.  In support of this effort, they pointed to additions to Oracle’s board of directors made after the lawsuit was initially filed.  The Vice Chancellor was unpersuaded, and – like Hyman Roth in The Godfather II – pointed out that ending up with nothing for their considerable efforts was a consequence of the business they’ve chosen:

I feel sympathy for Plaintiffs’ counsel here, who proceeded derivatively, in good faith and with great skill and vigor, at great cost and effort to themselves. Moreover, the SLC—acting for the Company—decided that the litigation was in the best interests of Oracle, and recommended the derivative action go forward to determine whether damages were available. Nonetheless, this is counsels’ business model: sue derivatively, on a contingency basis, accept the freight in a losing case, while seeking a multiple of a lodestar in a successful one. The fact that this case consumed monumental effort on the part of some of the best in the plaintiffs’ bar, like the fact of my sympathy, does not change that.

John Jenkins

February 9, 2024

R&W Insurance: Claims Still Common With Established Targets and Sophisticated Buyers

Euclid Transactional recently released the results of its first study of R&W claims. The study covered claims received from July 2016 through June 2023. “With 5,089 policies placed, 1,040 claims received, and 97 payments made,” Euclid believes “this is the largest data set used in an RWI claims study produced by an underwriter to date.” This clip from the intro discusses claim volume and premium trends:

Although we are receiving claims in record numbers, pricing of RWI is approaching an all-time low. The surge in claims is expected. During the busy period from the second half of 2020 through the first half of 2022, an estimated $250 billion of transactional liability limits were placed into the market. The claims from that high-volume period are still making their way to us and we expect the number of claim notices we receive to remain elevated throughout 2024. In fact, we received the most claims we had ever received in a month in July 2023, the month after the data for this study was finalized.

Meanwhile, premiums for RWI have decreased dramatically. Deal volume, particularly with respect to larger deals, has dropped from the peaks of 2021 as rising interest rates led to a challenging lending environment and a mismatch in pricing expectations between buyers and sellers. With less deals to insure, rates in the RWI market have decreased throughout 2023. We are monitoring this trend closely, as adequate rate is required to underwrite profitably.

The data highlights that the risk of a claim doesn’t necessarily decrease with more established target companies or more sophisticated acquirers:

It is commonly assumed that acquiring a founder-owned target would present higher risk than buying from a financial or strategic seller. And yet 82.8% of our Loss Paid is attributable to policies bound where the seller was either a corporate parent or financial sponsor, which closely correlates with the 77.8% of our policies bound with such sellers. Even in these deals, risk remains.

Further, when acquiring portfolio companies, large private equity funds typically engage the best advisors and perform some of the most sophisticated due diligence money can buy. Once acquired, rigorous processes are required to satisfy the reporting obligations of funds and lenders. As a result, one might expect fewer claims or lower Loss Paid on deals involving these large private equity funds. However, 21% of our Claim Payments, resulting in $188M of Loss Paid (over a third of our total Loss Paid), have been made where one of the top 25 largest private equity funds in the world is on at least one side of the transaction.

Meredith Ervine 

February 8, 2024

Antitrust: FTC Announces New HSR Thresholds

In late January, the FTC announced new thresholds for HSR filings. Here’s an excerpt from this Greenberg Traurig memo with the new numbers:

The initial threshold for a notification under the HSR Act will increase from $111.4 million to $119.5 million.

For transactions valued between $119.5 million and $478 million (increased from $445.5 million), the size of the person test will continue to apply. That test will make the transaction reportable only where one party has sales or assets of at least $239 million (increased from $222.7 million), and the other party has sales or assets of at least $23.9 million (increased from $22.3 million).

All transactions valued in excess of $478 million are reportable without regard to the size of the parties.

The memo also includes the (1) increased thresholds for notifications of acquisitions of additional voting securities, (2) new thresholds for interlocking directors under Section 8 of the Clayton Act and (3) updated HSR filing fees. The updated thresholds and fee schedule both become effective on March 6, 2024. 

Early March is also a critical time for government appropriations, and on a related note, see this Debevoise alert on the FTC’s plans for antitrust enforcement during a shutdown. The FTC has announced that it will not “receive, accept or process” HSR filings or “respond to questions or requests for information or advice from outside parties” during a shutdown.

Meredith Ervine 

February 7, 2024

Disney Movie Magic: This Time About Proxy Voting

We haven’t generally been sharing developments in the saga between Disney, Trian and Blackwells here — I’m sure you’ve read about the moves made by the company and the two activists elsewhere. But we NEEDED to share this How to Vote video from Disney’s meeting website with narration by Bill Rogers, the voice actor announcer at Disneyland Resort, and classic movie clips. If a How to Vote video doesn’t interest you (why are you following this blog?), just watch it to see how many movies you can name!

Readers of this blog will appreciate the transcript filed with the SEC, complete with interruptions of the narration by Disney character Professor Ludwig Von Drake. And while less…remarkable, the explanation of voting in the proxy statement is really a must-read for this audience. I applaud the drafters on the clear description and liberal use of bold and underlining to get the point across. Speaking of must-reads, the proxy card is epic — or at least as epic as proxy cards get. Check it out!

Meredith Ervine

February 6, 2024

Today’s Webcast: “Activist Profiles & Playbooks”

2023 once again saw near-record levels of shareholder activism, and 2024 is already off to an interesting start! As activist strategies continue to evolve, it’s as important as ever to understand who the activists are and what makes them tick.

Tune in today at 2 pm ET for the webcast – “Activist Profiles & Playbooks” – to hear Juan Bonifacino of Spotlight Advisors, Anne Chapman of Joele Frank, Sydney Isaacs of H/Advisors Abernathy and Geoffrey Weinberg of Morrow Sodali discuss lessons from 2023, the evolution of activist strategies, UPC, what to expect from activists this proxy season and how to prepare.

If you attend the live version of this 1-hour program, CLE credit will be available in most states. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.

Members of TheCorporateCounsel.net and DealLawyers.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.

– Meredith Ervine 

February 5, 2024

Bank Mergers: OCC Announces Proposed Changes to Review Process

Late last month, the OCC announced proposed changes to its rules regarding business combinations involving national banks and federal savings associations. This overview describes two proposed amendments to the OCC’s procedures:

– Remove provisions related to expedited review. The OCC reviews business combination applications to determine whether procedural and substantive requirements are met. Any business combination subject to a filing is a significant corporate transaction requiring OCC decisioning, which should not be deemed approved solely due to the passage of time.
– Remove the OCC’s streamlined business combination application. The Interagency Bank Merger Act Application provides the appropriate basis for the OCC to review a business combination application.

The OCC also proposed a new policy statement regarding the general principles used by the OCC when reviewing proposed bank mergers under the Bank Merger Act, including criteria considered when deciding whether to hold a public meeting. The policy statement — which would be added as an appendix to the OCC’s business combinations regulation — is divided into five topics: general principles of OCC review, financial stability, financial & managerial resources & future prospects and convenience & needs. This Sullivan & Cromwell memo describes how these principles may differ from current policy and practice.

Although many of the OCC’s stated principles in the NPR are unremarkable in that they are consistent with current regulatory policy and practice on bank merger applications, certain of the specific proposals set forth in the NPR could be interpreted to represent a major reversal of certain existing policies. These reversals could chill merger activity until there is a final rule. They include:

1) Transactions involving a combined institution with less than $50 billion in assets are regarded as consistent with approval, which could be read as creating a negative implication as to acquisitions of a larger size;

2) Transactions involving a target that is less than 50% of the acquirer are regarded as consistent with approval, which could be viewed as creating a negative implication for mergers of equals; and

3) The OCC is “unlikely to find that the statutory factors under the Bank Merger Act are consistent with approval … [if t]he acquirer is a [GSIB], or subsidiary thereof,” which may be considered to contravene past approval practice.

Comments are due 60 days after publication in the Federal Register.

Meredith Ervine 

February 2, 2024

Going Private: Structural Complexities for SPACs

I think it’s fair to say that the bloom is off the rose for a whole bunch of SPACs, and many of those companies may be contemplating the viability of a take private deal.  This O’Melveny memo is directed at those companies, and reviews the fiduciary duty, regulatory, financing and structural issues associated with take private transactions.  This excerpt points out that when it comes to deciding between a one-step merger and a two-step transaction with a front-end tender offer, SPACs may need to sacrifice the speed of a tender offer in order to ensure the rollover equity they’ll need post-closing:

While a two-step merger may be completed more quickly than a one-step merger, parties may be sacrificing flexibility for speed if they choose the former. Two-step mergers must comply with specific tender offer rules that do not apply to one-step mergers, such as the “best price rule.” The best price rule generally requires that, subject to certain exceptions, the consideration offered to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder in the tender offer. In a two-step merger, the transaction parties may also lose some flexibility as it relates to the amount and the form of transaction consideration.

For post-SPAC companies in particular, the acquiror will likely want company management to “roll” some or all of its equity in the public company into the new private company, as opposed to cashing out its equity for the deal consideration. The securities in the new private company that company management receives could be viewed as additional or different consideration compared to what public stockholders receive in the tender offer. To address this risk, company management typically commits not to tender in the offer itself but to roll all of its equity only after the completion of the tender offer but before the second-step merger’s completion.

The memo goes on to point out that in order to address this issue, some two-step transactions require executives participating in the rollover to sign agreements under which they agree to refrain from tendering their shares, but these have been challenged by plaintiffs. Claims targeting these arrangements – regardless of their merits – could still present significant distractions and may even disrupt the deal itself.

Shameless plug: As we roll into proxy season, don’t forget to check out our annual “Activist Profiles & Playbooks” webcast next Tuesday at 2 pm eastern!

John Jenkins

February 1, 2024

M&A Process: Preparing for Deal Leaks

I remember vividly working on a large public company acquisition that was approaching signing. The targeted signing date was about 3-4 days away, and the parties had made elaborate plans to roll news of the deal out to the media, analysts, investors and employees.  Unfortunately, at about 5 pm that afternoon, the buyer’s CEO received a call from The Wall Street Journal asking for comment on a story that they were about to run disclosing that the parties were close to a deal.

That triggered an all-night effort to get everything buttoned up in order to allow for a signing and announcement the following day. Even though we were close to the finish line, the process still couldn’t have been more disrupted if somebody had lobbed a hand grenade into a room full of the documents that needed to be signed. That’s one of the reasons why I thought this excerpt from H/Advisors Abernathy’s recent report on M&A deal leaks addressing the need to prepare for the possibility of a leak was worth sharing:

While a rumored transaction can leak at any time, the likelihood grows as negotiations and due diligence progress and more parties are brought under the tent, from external advisors and financial backers to internal teams. This widening circle is inevitable as the path to signing and announcement moves further along, but rumors can begin to swirl even in the early “talks” phase, so it’s critical to plan for a potential leak well in advance of due diligence and announcement day.

Both parties should be aligned on how they plan to respond to potential leaks of all kinds, which could range from a speculative inquiry from a reporter with very little information to outreach from a reporter with most of the facts and enough concrete information to publish a story with or without your response.

Leak preparation should consider these different scenarios and how to prepare for and respond to each one in real-time – with draft materials for use in communicating with key stakeholders if rumors do become public and you need to address internal and external chatter.

Map out stakeholder groups and recognize that a leak may impact them in different ways and prompt different questions – shareholders may drill down on valuation and rationale, while employees are more likely to be concerned about job security, and customers about service disruption. Prepare messaging, create a rapid response plan, and, again, make sure both parties are aligned about what should and should not be said to internal and external audiences.

The report offers a lot of other information on leak-related topics, including data on how frequently information about deals leaks, how accurate leaked information is, what industries are the “leakiest”, the extent to which deal size is a factor in determining whether a leak is likely, and the role social media plays in leaking deal-related information.

John Jenkins