For their latest report on Best Practices in M&A Due Diligence, SRS Acquiom, together with Mergermarket, surveyed 150 senior executives at US investment banks. Here are some of their key findings:
Due diligence is taking longer: Almost two-thirds of respondents (64%) report that, compared to their pre-pandemic experience, it takes more time now to complete due diligence in a typical M&A transaction, with over half of those respondents (58%) saying it takes on average another 1-3 months to complete due diligence. Almost half of respondents (44%) indicate that a typical M&A deal now takes between 5-6 months from initial information sharing to closing.
Vetting information presents greatest hurdle: The greatest challenge faced by our respondents in the latest buy-side deal in which they participated was vetting the information received, with 31% of top-two votes, weighted largely toward the largest IBs surveyed (48%). Another key challenge raised consistently across IBs of all sizes is unreliable/unclear data, cited by 25% overall.
Not surprisingly, another complicating factor is regulatory concerns:
Regulatory scrutiny will weigh on M&A: Almost half of respondents expect rising regulatory scrutiny in relation to U.S. antitrust rules and foreign direct investment (FDI) (46% and 45%, respectively) to significantly complicate due diligence over the next 12-24 months.
In early December, I blogged about the Starbucks proxy contest led by the Strategic Organizing Center. Michael Levin at The Activist Investor called this “the first ESG proxy contest under UPC” and this Paul Hastings alert noted that this contest might be early evidence that some of the corporate world’s concerns about UPC are coming to fruition. That alert highlighted the importance of proactive engagement in advance, including on issues that were the topic of a shareholder proposal that garnered significant support.
In another development highlighting the importance of engagement and responsiveness, the SOC announced yesterday that it is withdrawing its director nominations, citing the announcement by Starbucks and Workers United last week “to work together on a path forward to reach collective bargaining agreements for represented stores and partners, the resolution of litigation, and a fair process for workers to organize.” On the governance side, Starbucks also established an Environmental, Partner and Community Impact Board Committee, which the SOC hopes “will increase board oversight and performance on Starbucks’ partner-related issues.” The SOC’s announcement also notes that it met with a number of other shareholders after these developments were made public and those shareholders seem optimistic that the company is on a path “to repair its relationship with its workers.” Starbucks shared this short response.
This outcome continues the post-UPC trend of negotiating settlements and, notably, the contest ended with no activist nominees joining the board, but with significant developments in the social issues raised by the activist and governance improvements with the creation of a new board-level committee.
Last Friday, the SEC announced settled charges against a hedge fund for beneficial ownership reporting failures. The fund agreed to a $950,000 civil penalty. Here’s more from the press release:
According to the SEC’s order, on Feb. 14, 2022, HG Vora disclosed that it owned 5.6 percent of Ryder’s common stock as of Dec. 31, 2021, and certified that it did not have a control purpose. The order states that HG Vora then built up its position to 9.9 percent of Ryder’s stock and formed a control purpose no later than April 26, 2022. The federal securities laws therefore required it to report its control purpose and its current ownership position by May 6, 2022, but it did not report this information until May 13.
On that same day, HG Vora sent a letter to Ryder proposing to buy all Ryder shares for $86 a share, a sizeable premium over the trading price. Before the letter to Ryder and its filing, and after forming a control purpose, HG Vora purchased swap agreements that gave it economic exposure to the equivalent of 450,000 more shares of Ryder common stock. After HG Vora’s public announcement of its bid on May 13, 2022, Ryder’s stock price increased significantly.
As evidence of the control purpose on April 26, the SEC’s order notes that it was the date the adviser began drafting an offer letter:
On April 26, 2022, HG Vora Capital Management first considered making its own acquisition bid for Ryder, with financing to be provided by a private-equity firm. Later that day, HG Vora Capital Management began drafting an offer letter to Ryder, with a “placeholder” offer price of $85 per share.
The SEC’s press release notes that a 10-day filing deadline was in effect at the time of the conduct; under the amended rules, that deadline would be 5 business days.
Last week, John blogged about the FTC’s challenge of Kroger’s proposed acquisition of Albertsons — and specifically, the FTC’s criticism of the divestiture plan the parties devised to address antitrust concerns. As John noted, courts are sometimes more sympathetic to these plans.
This Freshfields blog on the lawsuit notes that the lawsuit also gives some insight into the FTC’s enforcement strategy under the 2023 Merger Guidelines — since this is the agency’s first attempt to block a merger since their publication. Specifically, the lawsuit “relies on the new thresholds to allege that the Kroger/Albertsons transaction is presumptively unlawful.” It also points to the reduction of competition in the labor market and “is the first challenge that does not allege that workers need to be highly specialized in a particular field but instead puts the focus on union membership.” Here’s more from the blog:
The FTC’s approach to the labor theory of harm is a novel one in modern merger enforcement under Section 7 of the Clayton Act. One likely issue to resolve is whether the markets are appropriately defined for antitrust purposes. For example, in an area where workers may not need to have highly specialized training or experience, there is a question whether businesses operating in different industries compete for the same workers—that is, could a clothing retailer or a restaurant hire a worker from a grocery store?
The complaint attempts to define the labor market by arguing that union grocery workers have incentives to keep their pension and healthcare benefits by staying within the union. Regardless of any potential judicial outcome, these allegations demonstrate that the FTC remains focused on labor markets, including in merger control.
The blog suggests that “merging parties should consider whether there are any potential labor-focused competitive concerns in a given transaction, especially in circumstances where there are stakeholders that may complain, such as unions.”
Yesterday, in Sjunde AP-fonden v. Activision Blizzard, Inc., (Del. Ch.; 2/24), Chancellor McCormick refused to dismiss a plaintiff’s claims that the Activision Blizzard board of directors “violated multiple provisions of the Delaware General Corporation Law (the “DGCL”) governing board negotiation and board and stockholder approval of merger agreements” when it authorized the company’s merger agreement with Microsoft. In doing so, she also called into question decades of market practice surrounding the process of obtaining board approval of merger agreements.
The plaintiff alleged that the board violated various provisions of Section 251 and Section 141 of the DGCL by, among other things, approving a late-stage draft of the merger agreement instead of a final execution copy, by delegating authority to a board committee to finalize a key term of the merger agreement, and by failing to provide a summary of the merger agreement in the notice of the stockholders’ meeting called to approve it.
The plaintiffs argued that Section 251(b) of the DGCL requires the board to approve the final execution copy of the merger agreement. The defendants countered that asking the board to approve a near final draft of the agreement is standard market practice, and that adopting an interpretation of Section 251(b) contrary to that practice would create uncertainty about the validity of mergers generally as well as uncertainty for third parties who deal with Delaware corporations.
Chancellor McCormick noted that the plaintiff’s position was supported by Delaware’s statutory scheme, but also acknowledged that it was not consistent with market practice. However, she also observed that the version of the merger agreement submitted to the board for approval was missing several key provisions, including the merger price, disclosure schedules and the surviving corporation’s charter. As a result, she concluded that she didn’t need to resolve the tension between the plaintiff’s and defendants’ positions to resolve the motion to dismiss:
At bare minimum, Section 251(b) requires a board to approve an essentially complete version of the merger agreement (the “essentially complete interpretation”). This is so because, absent an essentially complete draft, the board approval requirement of Section 251(b) would make no sense. What good would board approval of a merger agreement serve if the ultimate merger agreement was altered in essential ways? And how could a board declare the advisability of the merger absent a review of essential terms?
Under the essentially complete interpretation, Defendants’ market-practice gripe falls away. There is no straight-faced argument that requiring a board to approve an essentially complete version of a merger agreement is commercially unreasonable. That’s just the basic exercise of fiduciary duties, not to mention good corporate hygiene.
Citing Vice Chancellor Laster’s decision in Moelis, she also observed that the Court couldn’t disregard the public policy reflected in the statute and that “there is no reasonable argument that requiring a board to approve and declare the advisability of an essentially complete merger agreement would inject uncertainty into transactional practice or stifle mergers generally.”
The Chancellor refused to dismiss the plaintiff’s claims that the board’s delegation of authority to a board committee to finalize a key term of the agreement without final approval of the whole board violated the Delaware statute:
Section 251(b) imposes a statutory duty on the Board to approve the terms of an agreement of merger. Where a board has a specific statutory duty, it may not delegate that duty to a committee unless Section 141(c) permits it to do so. Under Section 141(c)(2), “a committee does not have any power with respect to” approving an agreement of merger or its terms.
Chancellor McCormick also refused to dismiss the plaintiff’s claims that the notice of the stockholders meeting was deficient because it did not comply with Section 251(c)’s requirement that the notice set forth either a copy of the merger agreement or a brief summary of it. She reached this conclusion despite the fact that the notice was attached to a proxy statement that contained both an extensive description of the merger agreement and a copy of the agreement itself as an annex.
There’s a lot to digest in Chancellor McCormick’s decision, which, remarkably, is only 23 pages long. But it’s worth noting that the opinion suggests that most of the key financial terms of the deal had been worked out long before the board acted on the merger agreement, and that its financial advisor was present at the meeting at which the merger agreement was approved. It seems likely that the agreed upon deal terms were addressed extensively at this meeting, and that the resolutions approving the merger agreement also covered them – as well as any remaining loose ends – in some fashion.
If so, then when the case moves beyond the pleading stage, maybe there’s room for a more flexible approach toward what Section 251(b) requires when it says that the board “shall adopt a resolution approving an agreement of merger or consolidation” as well as toward the board’s ability to delegate its authority to finalize a merger agreement consistent with that resolution. Perhaps the same is true for the claim regarding the alleged deficiencies in the notice, which plainly fly in the face of market practice when it comes to public company mergers.
If not, then this decision may ultimately be known as “the case that launched a thousand Section 220 requests”, because plaintiffs are likely to find a target rich environment if they get a chance to flyspeck the way most public company deals get approved and finalized.
Stockholders’ agreements are a common feature in a variety of transactional settings, and the rights and obligations they impose are often an essential part of the deal. That’s why the Delaware Chancery Court’s recent decision in West Palm Beach Firefighters v. Moelis & Company, (Del. Ch.; 2/24) voiding key provisions of a “new-wave” stockholders’ agreement merits close review by everyone involved in the dealmaking process.
The case focused on pre-approval rights for key corporate decisions and director designation rights granted by Moelis to the company’s founder in a stockholder agreement. The transactions requiring the founder’s prior approval included stock issuances, financings, dividend payments and senior officer appointments. The director designation rights & related governance provisions were intended to ensure that the founder could designate a majority of the members of the board and, among other things, required the company to recommend shareholders vote for any candidate designated by the founder.
Vice Chancellor Laster concluded that the pre-approval and governance rights contained in the agreement ran afoul of Section 141(a) of the DGCL, which says that “the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” This excerpt from Goodwin’s memo on the decision summarizes the basis for the Vice Chancellor’s decision:
[P]laintiff argued that the challenged provisions in the Stockholder Agreement violate Delaware law because they effectively remove from directors “in a very substantial way” their duty to use their own best judgment on matters of management. Meanwhile, the Company argued that Delaware corporations possess the power to contract, including contracts that may constrain a board’s freedom of action, and the Stockholder Agreement should not be treated any differently.
After a painstaking analysis of applicable Delaware cases, the court found that several of the Board Composition Provisions, and all of the Pre-Approval Requirements, were facially invalid under Delaware law. The court decided that each of the Pre-Approval Requirements went “too far” because they forced the Board to obtain Moelis’s prior written consent before taking “virtually any meaningful action” and, thus, “the Board is not really a board.”
The Goodwin memo also points out that the key problem here was that the rights at issue weren’t contained in the company’s certificate of incorporation. It also contends that the biggest takeaway from the case is that investors are likely to insist on including these provisions in charter documents, rather than in the agreement itself.
Importantly, VC Laster did not hold that all of the contractual investor rights challenged by the plaintiff were invalid on their face. For example, he said that a director designation right didn’t necessarily violate Section 141(a) of the DGCL. Instead, the problem in this case was that it was coupled a recommendation requirement compelling the board to support the designated candidate no matter what:
“The Designation Right does not violate Section 141(a) because it only permits Moelis to identify a number of candidates for director equal to a majority of the Board. The Company can agree to let Moelis identify a number of candidates. What the Board or the Company does with those candidates is what matters. The Recommendation Requirement improperly compels the Board to support Moelis’ candidates, whomever they might be. But there is nothing wrong with a provision that lets Moelis identify candidates.”
Traditionally, I think companies haven’t been completely insensitive to this issue, and many stockholders’ agreements include some sort of a fiduciary out when it comes to a recommendation requirement. But as Meredith blogged last summer, when it comes to activist settlements, boards haven’t always been cognizant of the limitations imposed by their fiduciary duties when negotiating the terms of those agreements. Moelis should serve as a reminder that those agreements don’t just have to satisfy Unocal, they also need to avoid running afoul of the limitations imposed by Section 141(a).
Here’s something that Liz blogged earlier this week on TheCorporateCounsel.net:
The SEC’s final rules on SPACs (and de-SPACs) – which were adopted almost exactly a month ago – have been published in the Federal Register. That means that the compliance date for most of the rules is July 1st of this year, and the compliance date for iXBRL tagging is June 30, 2025. The final rules will require additional disclosures in SPAC IPOs and de-SPAC transactions and heighten liability risks for those involved.
Of course, the rule also included guidance on “investment company” status, which is already in play. As I blogged last month, that aspect of the release – and the part about projections – is something that all companies should care about.
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.