When I hear top 40, I can’t help but think of tuning in Sunday mornings to my local radio station that played Casey Kasem’s American Top 40. This is a very different top 40. Rather than the joy that only came with finally hearing your new favorite song after waiting and waiting by the radio — my kids will never understand — hearing some of these names can cause fear and apprehension (although see this interesting commentary from Bloomberg).
The latest quarterly ownership analysis from Morrow Sodali (available for download) outlines global trends in activist investor portfolios and lists the top 40 activists, split into two tiers based on propensity for active engagement. It also details the largest new positions by activists, analyzes sector exposures and breaks down activist ownership and penetration by region.
From an industry perspective, the report’s summary indicates — not surprisingly — that regional banks saw the largest sub-sector increase in activist positioning with 28 new positions, although it also had many liquidations. Technology also remained an activist focal point in the quarter, with Application Software and Semiconductor sub-sectors having significant new positions.
Deloitte just released its 2023 M&A Trends Survey, now in its ninth year. The survey polled 1,400 executives at US companies and PE firms between October 25 and November 11, 2022 regarding their expectations for M&A activity in the next 12 months and experiences with recent transactions. Here are a few of the key takeaways from the report:
– Given the uncertain times, dealmakers are seeking more certainty and risk mitigation. As such, the survey data uncovered two strategies private equity and corporate leaders are now pursuing with cross-border deals. First, acquirers are increasingly pursuing targets in areas geographically closer to home; and second, dealmakers are prioritizing developed nations more for stability.
– With financing costs higher and other risks ascendant, many companies and funds are behaving more judiciously: smaller M&A deals, more emphasis on restructuring (including spinoffs), and revisiting previous acquisitions and divestitures in search of greater returns. As such, there is a great deal of dry powder—undeployed capital—in the market. There may be attractive opportunities for some corporations and funds to get off the sidelines and invest the cash, as other targets rise in availability and value. Nearly 80% of our respondents expect this trend to continue across 2023.
– Technology is playing an ever-greater role in improving deal process efficiency and effectiveness, and there may be still more it can contribute. We found significant digital initiatives happening in the target identification and deal execution phases of the M&A lifecycle. Where else can digital add to dealmaking?
In a speech delivered earlier this week, DOJ Antitrust chief Jonathan Kanter announced that the DOJ will consider a wider range of potential competitive harms in its analysis of bank mergers than those set forth in its 1995 bank merger guidelines. Kanter indicated that the move is prompted by significant changes in the competitive environment for banking and in the needs of consumers for financial services. This excerpt provides an overview of the DOJ’s new approach:
The division is modernizing its approach to investigating and reporting on the full range of competitive factors involved in a bank merger to ensure that we are taking into account today’s market realities and the many dimensions of competition in the modern banking sector.
In preparing the competitive factors reports that we are required by law to submit to the banking agencies, the DOJ will assess the relevant competition in retail banking, small business banking, and large- and mid-size business banking in any given transaction. These analyses will include consideration of concentration levels across a wide range of appropriate metrics and not just local deposits and branch overlaps. Indeed, the division and the federal banking agencies are working together to augment the data sources we use when calculating market concentration to ensure we are relying on the best data possible and using state-of-the art tools to assess all relevant dimension of competition.
However, our competitive factors reports will not be limited to measuring concentration of bank deposits and branch overlaps. Rather, a competitive factors report should evaluate the many ways in which competition manifests itself in a particular banking market—including through fees, interest rates, branch locations, product variety, network effects, interoperability, and customer service. Our competitive factors reports will increasingly address these dimensions of competition that may not be observable simply by measuring market concentration based on deposits alone.
Simpson Thacher’s memo on the policy change notes that the DOJ’s updated approach represents a “significant shift” away from its approach under the 1995 guidelines, which assesses the competitive impact of a proposed deal at the local level and relies heavily on branch network overlaps and deposit shares.
The memo also points out that Kanter announced that the DOJ will be less willing to accept branch divestitures as a solution to competitive concerns and will no longer provide negotiated divestiture agreements to banking agencies – opting instead for non-binding advisory opinions. The memo says that this change in approach will increase the DOJ’s leverage:
DOJ’s revised approach of no longer providing negotiated divestiture agreements in advance of banking agency approval may also have significant timing implications. Unlike in other industries where to prevent a merger from closing DOJ must obtain a court ordered injunction, in the bank merger context the banking statutes provide that DOJ simply filing a complaint will stay the effectiveness of the bank regulatory approval indefinitely. This gives DOJ additional timing leverage and DOJ may have no incentive to move quickly in the litigation process.
The May-June issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Anatomy of a CVR: A Primer on the Key Components and Trends of CVRs in Life Sciences Public M&A Deals
– Chancery Ruling Highlights Important Role of Special Litigation Committees in Maintaining Board Control Over Derivative Litigation
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.
A recent Gibson Dunn memo provides an overview of the top tech sector due diligence issues in M&A transactions. This excerpt addresses some of the IP ownership issues that may arise as the result of a target’s receipt of government or university funding:
Funding from government or university sources such as grants, or even the use of university facilities, can often come with strings attached, including ownership or license rights in favor of the funding source. Applicable statutes, grant terms, faculty employment agreements and university policies should
be carefully reviewed to confirm whether a university or government funding source has any consent or intellectual property rights in, or with respect to, the transfer or use of any of the target company’s intellectual property. Further, while during recent years, universities have become more supportive of
their professors launching companies, not all universities have updated their policies regarding the same.
As a result, an acquiror may need to require a target to obtain certain consents or releases from a government or university funding source as a closing condition to a transaction. Outside the U.S., government funding can create tail liabilities that need to be allocated between the acquiror and seller – for example, in Israel, exporting IP developed using in part funds from the Israeli Ministry of Innovation, Science and Technology for development outside of Israel could likely trigger a non-trivial payment.
In addition to issues relating to the ownership of intellectual property, the memo addresses open source software, cybersecurity & cyber insurance, data privacy & data use, employee stock options & 409A valuations, trade secret protection, and trade & anti-corruption compliance.
In recent years, PE fund general partners have increasingly moved certain assets into continuation funds, which allow them to continue to hold the investments while offering limited partners the option to either roll-over their investments into the continuation fund, liquidate their investments or engage in some combination of both alternatives. However, a recent Institutional Investor article pointed out that LPs are concerned about the potential for abuse involved in these transactions, and that this has prompted the ILPA to issue new guidance for GPs and LPs on these transactions. Here’s the executive summary:
General Principles:
1. Continuation fund transactions should maximize value for existing LPs
2. Rolling LPs should be no worse off than if a transaction had not occurred
Rationale & Conflicts:
1. The GP should present the rationale for a continuation fund transaction to the Limited Partner Advisory Committee (LPAC), and should have explored alternative options for the selected asset
2. The LPAC should vote to waive conflicts of interest associated with the process of the transaction. GPs should bring all conflicts to the LPAC, whether or not conflicts are pre-cleared as per the LPA
3. A competitive process should be run to ensure a fair price was obtained; the process should include third party price validation
4. The GP should disclose the necessary information about the selected assets, the process, the rationale and the bids in a timely fashion to the LPAC when considering conflict waivers and to all existing LPs to facilitate roll or sell decisions
Process & Timing:
1. The continuation fund transaction process should conform with the relevant provisions of the existing fund LPA. GPs should avoid LPA terms that pre-clear conflicts of interest associated with these transactions
2. GPs should engage experienced advisors to facilitate the transaction. The GP should disclose any potential conflicts of interest with the advisor and the commercial arrangement. The advisor should be made accessible to the LPs
3. LPs should be afforded no less than 30 calendar days or 20 business days to make roll or sell decisions
Terms & Documentation:
1. Rolling LPs’ side letters should apply to the continuation fund where relevant. At a minimum, all relevant risk and governance terms agreed to in the existing fund side letter should apply
2. There should be no increase to the management fee basis or percentage for rolling LPs
3. There should be no increase to the carried interest rate or decrease to the preferred return hurdle
4. There should be no crystallization of carried interest for rolling LPs
5. All carried interest accruing to the GP related to interests from selling LPs should be rolled into the new continuation vehicle
Recommendations for LPs:
1. LPs should establish internal protocols to respond to these transactions, such as approval processes, underwriting processes and understanding statutory requirements
2. When transactions arise, LPs should work with GPs to set timing expectations around reviews, negotiations and approvals
3. When transactions arise, LPs should request that GPs provide documentation, models and materials necessary to be fully informed; there should be a symmetry of information between existing LPs and prospective new buyer
The ILPA document says that, in addition to the conflicted nature of these transactions, specific LP concerns giving rise to the need for guidance include the complexity of these transactions & the resulting time and attention required by LPs to evaluate them, the necessity for LPs to make decisions about individual assets in a fund, the speed at which these transactions are executed & the short period of time LPs have to make investment decisions about them.
For companies that elected to put off considering UPC bylaw amendments and officer exculpation proposals until after this proxy season, White & Case recently released the results of a survey of developments in both these areas through June 1st. Two hundred companies in the S&P 500 have recently amended their bylaws for UPC (and shareholder activism generally), and the survey included an in-depth review of 100 of those bylaw amendments. The UPC-focused amendments were meant to ensure that the bylaws properly address the process and mechanics in the event of a contested election using UPC. Here’s an excerpt:
In our in-depth survey of 100 S&P 500 companies that amended their bylaws, we found that 90 percent or more did so to:
– Provide that a nominating shareholder must satisfy all of the requirements of Rule 14a-19 in order to be eligible to nominate directors. If these requirements are not met, the company may disregard the shareholder’s nominees and not include them on a universal proxy card.
– Specifically require that the dissident shareholder’s notice include a statement of the shareholder’s intent to comply with Rule 14a-19, including referencing Rule 14a-19(a)(3) or specifically setting forth the requirement that the shareholder solicit the holders of shares representing at least 67% of the voting power of outstanding shares.
– Require that the nominating shareholder provide reasonable evidence of compliance with the requirements of Rule 14a-19 before the shareholders’ meeting.
Moreover, the surveyed amendments generally clarify that a shareholder nominating directors pursuant to the universal proxy rule is subject to the company’s existing advance notice deadline (typically at least 90 days before the one-year anniversary of the prior year’s annual meeting), rather than the 60-day minimum set forth in Rule 14a-19(b)(1).
What about other activism-related amendments? Here are stats from the survey:
– 45% added a requirement that a shareholder soliciting proxies in a proxy contest must use a proxy card color other than white, in order to distinguish its proxy card from that of the company.
– 17% added language to limit the number of directors that can be nominated by a shareholder to the number of directors up for re-election. This type of provision could block a dissident from first identifying a longer list in its notice and delaying the identification of which specific nominees it will choose to stand for election until it files its proxy statement.
– 5% added language to provide that if the company receives proxies for disqualified or withdrawn nominees, such votes will be treated as abstentions. This provision allows such abstention votes to be counted towards a quorum at a shareholders’ meeting.
In the most high-profile proxy contest of 2021, Engine No. 1 succeeded in electing three directors to ExxonMobil’s board. It seemed like a major shake-up at the time, to say the least, with some predicting that the activist’s success would embolden other investors to launch similar E&S-related director election contests in the future. In a recent article, the NYT DealBook looks at how things have progressed at Exxon since Engine No. 1.
According to the article, climate activists largely felt that Engine No. 1’s efforts did not produce meaningful results and say that Exxon is still committed to fossil fuels, investing aggressively in expanding oil and gas production and not doing enough to address climate change. On the other hand, Engine No. 1 cited Exxon’s recent net-zero targets for certain operations, early-stage carbon-capture and hydrogen projects, and investments in lithium mining, all of which, it says, were not on the company’s agenda prior to the proxy contest.
Either way, it seems we haven’t seen a surge of similar successful director election contests premised on E&S issues — even in this first year of universal proxy — and the article notes that Engine No. 1 hasn’t waged a similar fight since Exxon. This year, as reported by Reuters, Exxon faced a number of shareholder proposals related to climate change, which had relatively low levels of support.
John has blogged about the perils of emails & texts with books and records requests. Over on TheCorporateCounsel.net, Liz recently blogged about the quote that came out in connection with the SEC’s charges against Binance. Sidley’s Enhanced Scrutiny blog has another good reminder on the risk of business communications being made public — that Delaware courts “strongly favor public access to information, noting that ‘when parties seek the benefits of litigating in a public court, they also assume the responsibility to disclose previously non-public information in order to satisfy the public’s right of access to court documents.’”
The blog discusses a recent case, Sarwal v. Nephrosant, Inc., (Del Ch. 5/23), involving a former executive seeking advancement and indemnification from her prior employer. The plaintiff sought to designate certain information found in the defendant’s answer and counterclaims as confidential. The court rejected all of plaintiff’s arguments for confidentiality. Here’s an excerpt:
The Court of Chancery rejected Sarwal’s claim that the allegations would cause embarrassment to Sarwal, holding that this alone was not cause for confidential treatment, as well her argument that the underlying claims were not viable. And Sarwal’s argument that the factual allegations were “stale” because they occurred one year prior did not weigh in favor of confidential treatment because older information is less likely to cause harm, not more likely to do so.
Lastly, the Court discussed Sarwal’s argument that publicly disclosing the redacted information would harm Nephrosant because it would negatively affect its ability to gain funding. This was a peculiar argument, noted the Court, because Sarwal was claiming that public disclosure would harm Nephrosant, the very party advocating for public disclosure. Even assuming the harm was “sufficiently concrete to justify confidential treatment,” it still would not outweigh the public’s interest in understanding the nature of the dispute between the parties. The Court noted that nearly all actions involving allegations of fiduciary breaches involve at least some potential harm to the company, but this does not permit parties to conceal the nature of their claims and defenses.
The blog also highlights a case from February of this year involving arbitration that applied the same principles when the party who lost the arbitration proceeding sought to vacate the award.
Over on TheCorporateCounsel.net, we received a question on our Q&A Forum asking whether there’s a list of contested elections since the adoption of universal proxy. For those looking for precedent and wanting to see UPC “in the wild,” Michael Levin at The Activist Investor has compiled a list of seventeen proxy contests in 2023 that may go to a shareholder vote by the end of July. Given the format, I can’t excerpt the list here, so you’ll have to check it out yourself. It includes the company, ticker, investor and annual meeting date. The list doesn’t include contested situations where an activist has made public statements about a proxy contest but the proxy statements haven’t been filed yet.