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.
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.
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.