As Dave shared yesterday on TheCorporateCounsel.net, on Wednesday, the SEC, by a 3-to-2 vote, adopted final rules to address its concerns with SPACs. As with the proposed rules, Chair Gensler’s statement emphasized the goal of aligning “the protections investors receive when investing in SPACs with those provided to them when investing in traditional IPOs.” At a high level, this fact sheet indicates that the final rules, among other things:
1. Require additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;
2. Require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;
3. Deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders; and
4. Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).
To highlight some specific key aspects, in no particular order, the rules also:
– require a minimum 20-calendar-day dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions (where consistent with local law)
– require a re-determination of SRC status following consummation of a de-SPAC, which must be reflected in filings beginning 45 days after closing
– require additional disclosures in de-SPACs regarding the board’s determination whether the de-SPAC is advisable and in the best interests of the SPAC and its shareholders and any outside report, opinion, or appraisal materially relating to the de-SPAC
– include new Article 15 of Regulation S-X to better align the financial statements provided in de-SPACs with financial statements provided in an IPO
– make the safe harbor for forward-looking statements under the PSLRA unavailable for SPACs (most importantly de-SPACs) by adopting a new definition of “blank check company” for purposes of the PSLRA – require additional disclosures for projections, including disclosure of material bases and material assumptions
Instead of adopting controversial proposed Rule 140a — which, as proposed, would have “deemed anyone who has acted as an underwriter of the securities of a SPAC and takes steps to facilitate a de-SPAC transaction, or any related financing transaction or otherwise participates (directly or indirectly) in the de-SPAC transaction to be engaged in a distribution and to be an underwriter in the de-SPAC transaction” — and proposed Rule 3a-10 under the Investment Company Act, the Commission provided guidance regarding statutory underwriter status in connection with de-SPAC transactions and for assessing when SPACs may meet the definition of an investment company under the Investment Company Act of 1940. In their dissents, Commissioners Uyeda and Peirce state that this change is not the positive development for SPACs that it may appear to be and “instead is arguably worse” and may “function like a backdoor rule.”
The final rules will become effective 125 days after publication in the Federal Register, and compliance with the Inline XBRL tagging requirements will be required 490 days after publication of the final rules in the Federal Register. We’re posting resources in the “SPACs” Practice Area here on DealLawyers.com.
Yesterday, Vice Chancellor Laster issued a 119-page post-trial opinion in In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation (Del. Ch.; 1/24) clarifying the standard of conduct and standard of review applicable to a controller’s exercise of stockholder voting power. The case involved a public company controlled by billionaire Eddie Lampert that was spun off from Sears Holdings Corporation and operated through two business segments. A special board committee had endorsed a plan to liquidate one segment and continue operating the other.
Lampert strongly opposed the liquidation plan and expressed his concerns to the company, while also negotiating with the committee to acquire the company as a whole. After the special committee rejected his offers, countered with an “inexplicable” proposal and indicated that it would proceed with the liquidation plan unless a deal was reached shortly, Lampert acted as controlling stockholder to remove two of the three special committee members from the board and amend the company’s bylaws to add procedural hurdles to the liquidation. The plaintiff minority stockholders alleged that Lampert breached his fiduciary duties in taking these actions.
VC Laster clarified the standards of conduct and review applicable under Delaware law before finding that Lampert did not breach his fiduciary duties in exercising his stockholder-level voting power:
Some authorities suggest a controller owes no fiduciary duties when voting. Other authorities apply a fiduciary framework without spelling out the details. This decision holds that when exercising stockholder-level voting power, a controller owes a duty of good faith that demands the controller not harm the corporation or its minority stockholders intentionally. The controller also owes a duty of care that demands the controller not harm the corporation or its minority stockholders through grossly negligent action. […]
Delaware decisions have not identified a standard of review that would apply when a court reviews a controller’s actions for compliance with a standard of conduct. […] The controller faced a subtle conflict, because while the actions he took affected all stockholders equally, he had business agreements with the corporation that could have skewed his judgment. That is a controller-oriented version of a situation where enhanced scrutiny should apply.
However, the special committee ultimately decided that the procedural hurdles made a quick liquidation impossible and reengaged with Lampert, consummating a transaction with both Lampert and a third party. Since the transaction involving Lampert eliminated the minority stockholders, the order applied entire fairness review. VC Laster found that, even though the actions Lampert took by written consent were consistent with his fiduciary duties, the fallout from those actions ended up making the subsequently negotiated transaction not entirely fair and required Lampert to pay $18 million to the minority stockholders.
This opinion is a must-read, not only for VC Laster’s review of Delaware precedent for the standard of conduct and review applied to the “controller intervention,” but also for his consideration of the transaction under the entire fairness test.
I’m not usually one for fortune-telling, but this recent Freshfields blog makes some well-supported predictions for M&A trends in 2024. Among them is the expectation that an increase in hostile M&A is in our future — driven by board room optimism on both sides of the table. Here’s an excerpt:
Upticks in stock prices during 2024 will feed optimism in board rooms about standalone plans and that, in turn, will make resistance by target boards to takeover entreaties more common. At the same time, in the board rooms of bidders, directors will continue to feel pressure from investors to use their companies’ excess cash and highly-priced equity to do accretive acquisitions wherever available. In addition, board room optimism leads to taking risks on allocating capital to acquisitions rather than the more conservative approach of share buybacks.
The result is that we are going to have more companies committed to acquisition strategies in 2024, while at the same time we will have more of the companies on their lists of targets remain enthusiastic about their stand-alone prospects. The result will be a boon for unsolicited and hostile M&A. Many M&A advisors over the last several years have done very well nursing friendly combinations. There will be a premium for M&A advisors who are expert, from prior eras, on unsolicited M&A tactics.
This K&L Gates alert discusses the ABA Mergers & Acquisitions Committee’s 2023 Private Target Deal Points Study. The new data points in this year’s study include “a more nuanced look at #MeToo representations.” Here’s a description of the content of these reps from the alert:
57% of all transactions analyzed in the 2023 Study included a stand-alone #MeToo representation, as compared to 37% of deals in the 2021 Study.
New nuanced data points measure whether the representation includes language regarding corrective action (5% of #MeToo representations in the 2023 data set do), settlement agreements (74% of #MeToo representations in the 2023 data set do, with 11% qualified by the knowledge of the party making the representation), or allegations of sexual harassment (all #MeToo representations in the 2023 data set do, with 37% knowledge-qualified).
The alert also highlights some general design upgrades to the study to improve usability, including gray text “for prior study data to help current year data stand out more” and new data points and correlations identified with “new data” flags.
Yesterday, the SEC announced an open meeting to be held at 10:00 am Eastern on Wednesday, January 24th. This excerpt from the meeting’s Sunshine Act notice indicates that the SEC is ready to act on the SPAC rule proposals that it teed up nearly two years ago:
The Commission will consider whether to adopt new rules and amendments to enhance disclosures and provide additional investor protections in initial public offerings by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions), and to address investor protection concerns more broadly with respect to shell companies.
SPACs were red hot during the first few years of this decade, but they haven’t exactly covered themselves in glory in terms of public investor outcomes, and the proposed rules are intended to rein them in by leveling the playing field between SPACs and other IPOs. That being said, I think many industry participants would argue that the rules as proposed wouldn’t just rein SPACs in – they would likely do them in. It will be interesting to see what next Wednesday brings.
Lazard recently released its annual report on shareholder activism for 2023. Here are some of the highlights:
– There were 252 new campaigns globally in 2023, representing a 7% increase YoY and the busiest year on record. North America activity pulled back slightly after the robust 2022 post-COVID surge of new campaigns.
– 2023 saw a record number of activists launching campaigns (183), a 21% YoY increase from 2022 and well above the five-year average of 141. A record 77 first timers initiated campaigns in 2023 vs. 55 first timers in 2022 and above the five-year average of 44.
– Europe drove the increase in “first-timer” activity with 31 new activists launching campaigns (more than double the number in 2022), and North America and APAC “first-timers” also contributing 35 (up 6% Y-o-Y) and 8 (down 20% Y-o-Y) new names to the list of agitators, respectively.
– Consistent with the slowdown in campaign activity in North America, the number of Board seats won (88 seats) was down 12% relative to the five-year average.
Organized labor has scored some impressive victories in the past year, and unions’ increasing leverage in collective bargaining and enhanced organizing efforts have complicated the labor due diligence picture for prospective buyers in M&A transaction. This excerpt from a recent LegalDive.com article addresses the implications of the current environment on labor due diligence at companies with unionized workforces:
Buyers already look at union issues in their due diligence reviews when the target company has a unionized workforce. They typically look at the terms of the collective bargaining agreement, whether taking over a company would require them to become successors to the CBA and whether the relationship between the target company and its unionized workforce has been contentious.
In cases where the target company is bound to a multi-employer pension plan — a fund to which a group of employers contribute at a rate determined through collective bargaining with a union — a buyer will also look at the penalties the target company could incur for leaving the plan.
But buyers’ concerns have expanded, Foster said, driven in part by news of contentious collective bargaining negotiations or resulting contracts that seem unfavorable to employers.
“In the past, you might have been able to look at a mature union company’s collective bargaining relationship and see that it’s been pretty steady,” Foster said. “But now, when you look at the UAW [United Auto Workers] collective bargaining agreements, or the AMPTP [Alliance of Motion Picture and Television Producers] … you’re seeing much higher increases in overall compensation costs under those collective bargaining agreements and restraints on operations.”
Potential increases in costs such as these resulting from prospective changes in collective bargaining agreements may affect valuation and need to be identified and quantified during the due diligence process. However, the article points out that while most buyers of companies with unionized workforces are comfortable dealing with these issues, the impact on valuation of potential organizing efforts at non-unionized businesses is of greater concern during the due diligence process.
Last March, the DOJ filed a lawsuit in federal court seeking to block the proposed merger between JetBlue & Spirit Airlines. As we blogged at the time, although the DOJ & FTC have peddled some novel theories in merger challenges, this challenge was more conventional. Yesterday, in a 109-page opinion, Judge William Young agreed with the DOJ’s position that the deal would substantially lessen competition and permanently enjoined it. Here’s an excerpt from his decision:
The Clayton Act was designed to prevent anticompetitive harms for consumers by preventing mergers or acquisitions the effect of which “may be substantially to lessen competition, or tend to create a monopoly.” 15 U.S.C. § 18. Summing it up, if JetBlue were permitted to gobble up Spirit -– at least as proposed — it would eliminate one of the airline industry’s few primary competitors that provides unique innovation and price discipline. It would further consolidate an oligopoly by immediately doubling JetBlue’s stakeholder size in the industry.
Worse yet, the merger would likely incentivize JetBlue further to abandon its roots as a maverick, low-cost carrier. While it is understandable that JetBlue seeks inorganic growth through acquisition of aircraft that would eliminate one of its primary competitors, the proposed acquisition, in this Court’s attempt to predict the future in murky times, does violence to the core principle of antitrust law: to protect the United States’ markets –- and its market participants — from anticompetitive harm.
The opinion included one small consolation prize for the two airlines. In its amended complaint, the DOJ sought an injunction that would have applied to “this acquisition, or any other transaction in any form that would combine JetBlue and Spirit.” The Court wasn’t willing to go that far, and Judge Young made it clear that his ruling applied only to the proposed combination on the terms set forth in the July 2022 merger agreement.
Judge Young’s opinion is well written and engaging, but it ends with a somewhat odd coda that I’ll repeat here in the same format in which it appears in the original:
Spirit is a small airline.
But there are those who love it.
To those dedicated customers of Spirit, this one’s for you.
Why?
Because the Clayton Act, a 109-year-old statute requires this result –- a statute that continues to deliver for the American people.
Spirit’s customers may be heartened by the ruling and appreciate the judge’s ode to the Clayton Act, but let’s spare a thought for Spirit’s stockholders, because they got annihilated after the judge’s decision was announced.
In City of Hialeah Employees Retirement System v. Insight Venture Partners, (Del. Ch.; 12/23), the Chancery Court rejected breach of fiduciary duty allegations against the directors of an acquiring company and its purported controlling stockholder arising out of the buyer’s purchase of the controller’s portfolio company. When the deal was announced, the buyer’s stock price declined by nearly 30%. The plaintiff pointed to the market’s reaction to the deal as support for its claim that the buyer overpaid for the portfolio company target, which benefited the controller at the buyer’s expense.
The buyer’s charter included a Section 102(b)(7) provision eliminating the directors’ liability in damages for breach of the duty of care, so the plaintiff sought to establish breaches of the duty of loyalty by contending that the directors approved the deal in bad faith and that a majority of the board was not independent of the controller. Vice Chancellor Zurn rejected those claims. This excerpt from Shearman’s blog on the case discusses her analysis of the bad faith claim:
Plaintiff focused on aspects of the approval process, including an alleged lack of price negotiations, reliance on the financial advisor’s fairness opinion, and the alleged failure to consider a valuation of the Target based on the alleged controller’s prior investment in the Target.
As to plaintiff’s price-related contention, the Court found that the complaint’s own allegations showed that the board reasonably relied on the assessment of management regarding the “floor” that the Target would accept for the deal and the fairness opinion of the financial advisor. The court also noted that the board negotiated the cash portion of the cash/stock deal down from 50% to 20%, which enabled the Corporation to avoid having to raise funds for the deal.
Regarding the analysis of the Corporation’s financial advisor, plaintiff alleged that there were several flaws, including in the financial projections the advisor used. The Court, however, concluded: “Even if [p]laintiff’s criticisms are well-founded, quibbling with or criticizing a financial analysis falls far short of showing it was so facially flawed as to rebut the presumption that the directors relied on it in good faith.”
With respect to plaintiff’s allegation that the board was “unaware” of a relevant valuation of the Target based on a prior investment, the Court explained that the allegation assumed that the Target’s valuation was the same in 2018 as in 2021 and this “assumption is unreasonable.” The Court also noted that the allegation “sounds in the duty of care” and, therefore, does not present a substantial likelihood of liability for an exculpated board.
The Vice Chancellor also highlighted several aspects of the board’s process that undermined the plaintiff’s bad faith claims. These included the discussion of the transaction and updates from management at multiple board meetings, the board’s retention of reputable advisors, and efforts to exclude the controller’s designated director from the process.
Vice Chancellor Zurn also rejected the plaintiff’s allegations that a majority of the board lacked independence. In doing so, she noted that the Delaware Supreme Court had previously held that a controlling stockholder’s ability to elect and remove directors does not in itself establish a lack of independence.
The Vice Chancellor went on to reject claims that individual directors lacked independence based on, in the case of the CEO, alleged dependence on the controller for his salary, and in the case of the other directors, both the compensation they received for their service and their ties to the controller through service on boards of other companies in which the controller had investments.
In last year’s memo, we discussed creative strategies that acquirers could use to keep low-rate debt of target companies in place following an acquisition. But just as a rising interest rate environment makes existing low-rate debt more valuable to borrowers, it also makes such debt more of a burden to lenders. 2023 resultantly saw a meaningful increase in “debt default activism”—previously discussed in our memos The Rise of the Net-Short Debt Activist, Default Activism in the Debt Market and Debt Default Activism: After Windstream, the Winds of Change—as debtholders deployed legal arguments and maneuvers to seek to force borrowers to refinance existing low-rate debt on new market-rate terms.
In light of this trend, the memo makes this suggestion:
In the current sharp-elbowed financing markets, we encourage sponsors structuring corporate transactions that leave low-rate debt in place to build a record with defense in mind and carefully review not only obviously applicable provisions in debt documentation, but also those that might seem like insignificant “boilerplate.”
Programming Note: There will be no blog on Monday as our offices will be closed in observance of Martin Luther King day. We’ll return Tuesday.