Just about 16 months after Kroger’s proposed acquisition of Albertsons was announced, the deal finally ended up where almost everybody assumed it would – being challenged in court by the FTC. Yesterday, the FTC announced that it had issued an administrative complaint and authorized a lawsuit in federal court to block the deal pending the FTC’s administrative proceedings.
Kroger & Albertson’s highlighted a proposed divestiture plan intended to address antitrust concerns in their initial announcement of the deal. Since then, they’ve continued to tout the virtues of that divestiture plan, but this excerpt from the FTC’s press release on its decision to authorize the lawsuit indicates that the agency isn’t impressed:
To try to secure antitrust approval of their merger, Kroger and Albertsons have proposed to divest several hundred stores and select other assets to C&S Wholesale Grocers (C&S), which today operates just 23 supermarkets and a single retail pharmacy. The FTC’s administrative complaint alleges that Kroger and Albertsons’s inadequate divestiture proposal is a hodgepodge of unconnected stores, banners, brands, and other assets that Kroger’s antitrust lawyers have cobbled together and falls far short of mitigating the lost competition between Kroger and Albertsons.
The FTC says the proposed divestitures are not a standalone business, and C&S would face significant obstacles stitching together the various parts and pieces from Kroger and Albertsons into a functioning business—let alone a successful competitor against a combined Kroger and Albertsons. The proposal completely ignores many affected regional and local markets where Kroger and Albertsons compete today. In areas where there are divestitures, the proposal fails to include all of the assets, resources, and capabilities that C&S would need to replicate the competitive intensity that exists today between Kroger and Albertsons. Even if C&S were to survive as an operator, Kroger and Albertsons’s proposed divestitures still do not solve the multitude of competitive issues created by the proposed acquisition, according to the complaint.
Whether a federal court will share the FTC’s skepticism toward Kroger & Albertsons divestiture plan remains to be seen. Courts have been more sympathetic to the kind of “fix-it -first” strategies embodied by the proposed divestiture plan than the DOJ & FTC have been. Maybe the most notable example of that came last summer, when a California federal court refused to block Microsoft’s acquisition of Activision/Blizzard based in part on the strength of commitments made by Microsoft to assure that competing platforms would continue to have access to its “Call of Duty” video game franchise.
We’ve posted the transcript for our latest “Activist Profiles & Playbooks” webcast. Our panelists — Juan Bonifacino of Spotlight Advisors, Anne Chapman of Joele Frank, Sydney Isaacs of H/Advisors Abernathy and Geoffrey Weinberg of Morrow Sodali — discussed lessons from 2023, the evolution of activist strategies, UPC, what to expect from activists in 2024 and how to prepare.
Here’s a snippet of Juan’s comments on the flip side of UPC for activists:
It may be harder for dissidents to get larger slates elected because each candidate needs to be differentiated. Before, an activist could put up a slate of four or five people and because someone’s voting on your card, that ends up depriving the management slate from getting votes. Now people are saying, “Why did you nominate three instead of two? What does this third person add?”
In terms of whether that’s a higher bar, it requires a more nuanced argument that the dissident needs to make to say, “This solution to this problem I’ve identified needs these three people and this is why” in a way that maybe wasn’t as central historically. It was getting there, if you look over the last 10 years, but again, universal proxy accelerates that trend.
Members of this site can access the transcript of this program. If you are not a member of DealLawyers.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
After we shared Disney’s How to Vote video in early February, Tulane Law Prof Ann Lipton noted an interesting aspect of the video — the focus of Disney’s message isn’t just to vote for its nominees, but specifically that shareholders use Disney’s white proxy card. And this isn’t limited to this video. Disney’s proxy statement, Trian’s proxy statement and plenty of other parties in post-UPC proxy contests have done this.
But, Ann asks, why STILL do this after UPC? I think reasonable minds can differ on how valuable it is to stress that a particular proxy card be returned, but there seem to be some reasons to continue encouraging that. Here are a few we’ve heard or come up with, in no particular order:
– The SEC’s permitted treatment of signed but unmarked proxy cards. After Trian’s aborted contest last year, we shared their treatment of overvoted, partially marked and unmarked but signed proxies. Then the SEC came out with these three CDIs. While that changed the approach to overvoted proxy cards this year (discretionary authority cannot be used for overvoted or undervoted proxy cards), a soliciting party can use discretionary authority to vote shares represented by a signed but unmarked proxy card as long as the form of proxy states in bold-faced type how the proxy holder will vote where no choice is specified.
– Vote visibility. Each party only has visibility into registered holder votes when registered holders return their proxy card. Although, later dated proxy cards revoke previously submitted proxy cards, so some of those votes might be revoked by shareholders later sending in the other party’s proxy card, and parties don’t have visibility into those revocations.
– There’s something valuable about the actual card, even if it’s psychological.
Each party lists their nominees first on their own card and highlights their recommendations. The power of suggestion may be at play.
In the contest at Exxon, Engine No. 1 snagged the white proxy card — the color that’s traditionally been used by management — before the company could and that may have helped its chances.
As John shared, some companies are concerned enough about dissidents grabbing the white card to increase the likelihood that investors return it that they have amended their bylaws to say the white proxy card is reserved exclusively for board use.
“Vote the white card; discard the blue card” might be an easier message for retail holders who aren’t as familiar with the nominees and players.
– Change is scary. We cared about this before UPC, and it’s hard to let go.
Michael Levin at The Activist Investor pointed out that the biggest benefit may be the opportunity for electioneering but also noted that many shareholders vote electronically, so the color of the card and how it’s returned is becoming less relevant.
Perhaps this goes beyond monitoring which shareholders vote. Maybe each wants the opportunity to persuade shareholders to change votes. An activist can do that only if they have the proxy card. […] Before UPC, a solicitor would monitor which shareholders already voted, and which ones to pester. Solicitation became a process of follow-up on the delinquent ones.
Now, an activist will collect many proxy cards with votes for both activist and company nominees. The solicitor will know, real-time, how shareholders vote, in addition to whether they vote. Importantly, they’ll see which ones are skeptical or wavering and split votes between activist and company candidates. And, they’ll see them at a time they can do something about it.
If you have thoughts on other reasons, please share. We’d happily supplement this post with more.
Presumably, the proxy advisors’ mostly unchanged approach to analyzing contested elections was one factor that dulled UPC’s impact in 2023. Both ISS and Glass Lewis continue to require that an activist first demonstrate a compelling case for change before considering activist candidates.
Michael Levin at The Activist Investor says this prong used to make sense before, but, he argues, with the precision allowed with UPC, contested elections should be about credentials, and while a thesis for the company is relevant, it should be a consideration — not table stakes.
Before UPC, shareholders had only a binary choice in a proxy contest. They would choose between the BoD plan and nominees and the activist plan and nominees. The directors would derive automatically from there. Even though shareholders technically vote on directors, they in effect would vote on the company or activist vision for the company. So, proxy advisors would first assess those plans. If an activist had a better plan, then and only then would proxy advisors assess whether the activist’s director nominees improve on the company incumbents.
UPC transformed a binary election into a continuous vote on directors. Shareholders now express preferences with more precision than before. Around the time the SEC implemented the new UPC, ISS and Glass Lewis said UPC would not change their approach. Yet, it should.
Under UPC, the “case for change” has become much less relevant as director credentials become more relevant. To compare and vote for company or activist candidates, shareholders do not necessarily also need to assess their respective plans. Even successful companies can use new directors. Under UPC, an activist can nominate a single superb candidate to replace an obviously less qualified incumbent. The obsolete “case for change” thinking precludes proxy advisors from supporting that superb challenger. […]
Sure, each of the company and activist can describe a vision, thesis, or plan for the company. ISS or Glass Lewis can evaluate each and decide which one will serve shareholders better. Next, shareholders can ask, which directors are best suited to implementing the preferred plan? Importantly, would one or more of the activist nominees support the plan better than one or more of the incumbents? If so, the proxy advisor would recommend a challenger even though it prefers the company plan. Similarly, the proxy advisor could also recommend an incumbent to implement the activist plan. In this way, we address the point of the proxy contest, directors.
Just the more subtle shift we saw in 2023 — with the proxy advisors placing greater emphasis on individual director qualifications — caused contested elections to feel much more personal. Even companies not faced with a contested election found themselves revisiting their approach to describing individual director qualifications and explaining what each candidate brings to the table.
The January-February Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This issue includes the following articles:
– The SEC’s New SPAC Rules: Regulatory Day of Reckoning Arrives
– Delaware Chancery Upholds Rejection of Advance Notice, Strikes Down Certain Bylaw Amendments
– Comment Letter Trends: Contested Election Disclosures
– New Year, New Merger Guidelines: What Dealmakers Need to Know
– Top Data Privacy and Cybersecurity Issues to Think About in M&A Deals
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
At the beginning of the year, John blogged about a charter amendment contemplated in a merger agreement to fix the Con Ed clause enforceability issues highlighted by Chancellor McCormick’s latest decision in Crispo v. Musk. We followed up with the proposed language and promised to alert you about disclosures in the proxy statement.
The proxy has been filed, and Proposal 3 seeks approval of the adoption of “an amendment to the Amended and Restated Certificate of Incorporation of PGTI […] designating PGTI as the agent of PGTI stockholders to pursue damages in the event that specific performance is not sought or granted as a remedy for MITER’s fraud or material and willful breach of the merger agreement.” Here’s how PGTI explained the reasons for the proposal:
The certificate of incorporation amendment is intended to address recent case law from the Delaware Chancery Court that could be construed to, in effect, limit the remedies available to PGTI and its stockholders under the merger agreement absent the certificate of incorporation amendment.
Under the merger agreement, PGTI and MITER agreed that, in the event of MITER’s fraud or material and willful breach of the merger agreement, PGTI’s damages would not be limited by the terms of the merger agreement and may include the premium reflected in the merger consideration.
In the event that the certificate of incorporation amendment is approved and adopted by the PGTI stockholders and PGTI, acting as agent of the PGTI stockholders, were to recover damages in the event of MITER’s fraud or material and willful breach of the merger agreement, whether through judgment, settlement or otherwise, the certificate of incorporation amendment provides that the PGTI board of directors shall, in its sole discretion and subject to its fiduciary duties, distribute such damages to PGTI stockholders by dividend, stock repurchase or buyback or in any other manner.
If the certificate of amendment looks a little different, it is a little different (but no substantive changes were made). The language we previously shared was appended to a merger agreement that PGTI terminated after receiving a superior proposal.
As we’ve shared previously, a charter amendment isn’t a perfect solution and, today, Keith Bishop of Allen Matkins blogged about questions of agency law. We also shared the possibility of amending the DGCL to address these Con Ed clause enforceability issues, which, of course, doesn’t address the problem confronting practitioners doing deals today.
PitchBook recently published its 2023 Venture Capital Valuations Report, and not surprisingly, the news is pretty grim. VC valuations continued to head south from their 2021-22 levels. Not surprisingly, exit prospects weren’t great either. IPOs were practical non-existent and the valuations for deals that did get done were pretty dismal, but this excerpt says there’s one bright spot – while M&A activity was down, valuations actually increased over the prior year:
The median exit valuation for startups making their public debut in 2023 declined $117.0 million YoY to $110.6 million, the lowest in over a decade, despite the strong performance of public markets during the year. Alternatively, acquisitions emerged as a seemingly more viable route for liquidity given the more resilient valuations attached to many M&A transactions. The median acquisition valuation in 2023 reached $61.4 million, a 25.1% increase from 2022. Despite this bright spot, the median M&A step-up in 2023 was just 1.33x, the lowest since 2016, suggesting that value creation upon acquisition still lagged prior years.
Although the report notes that people are optimistic that an improved interest rate environment may help create a more favorable deal environment, economic & geopolitical uncertainties may keep a lid on things for at least the first half of the year.
Cooley recently blogged about the highlights of 2023 activist campaigns. This excerpt addresses the companies’ experience with activist “wolf packs” in the past year:
In 2023, activists often turned to “wolf pack” tactics (multiple activists pursuing a target with some level of express or implicit coordination) or “swarming” behavior (multiple activists pursuing a target without any express or implicit coordination) to de-risk campaigns. Examples include Salesforce, Disney, Exelixis, Berry Global and Enhabit, among others.
Wolf pack campaigns can significantly ratchet up the pressure on target companies. Wolf packs tend to collectively hold a significant percentage of the company’s voting power, which affords a higher likelihood of success in a proxy contest or “vote no” campaign.
The presence of multiple activists also can lend greater credibility to claims made to key stakeholders (institutional investors, retail investors, media) and result in greater media coverage of the campaign, which can itself be destabilizing to the company and its stakeholders. Further, ISS and Glass Lewis tend to give greater credence to activist theories and claims if they are held by multiple investors.
The blog notes that dealing with multiple activists can be particularly challenging, but offers recommendations on defensive actions that companies facing wolf packs should consider. These include proactively refreshing the board with high-quality candidates early in the campaign, alignment with a “friendly activist” who will support the company, adoption of policy changes called for by the activists, and adoption of a limited duration pill to deter rapid open market accumulations by members of the wolf pack.
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.
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.