Last week on TheCorporateCounsel.net, Liz blogged about the potential implications of the SCOTUS’s recent decision striking down affirmative action in college admissions on governance and securities lawyers. A recent BakerHostetler memo says that M&A lawyers also need to keep the decision in mind during their due diligence review of a potential target. This excerpt provides an overview of some things that will need to be reviewed & evaluated:
Potential acquirers of companies with a material number of U.S. employees should request that any target DE&I employment policies be provided for review, and they should work with employment law specialists to assess potential risk. In addition to DE&I policies, counsel should review DE&I communications and mission statements, as well as related initiatives, programs and resource groups. If necessary, counsel can assist with the design and implementation of an alternative approach to DE&I that meets the client’s objectives in a way that is compliant with law.
As we have previously discussed on July 5, 2023, DE&I hiring or promotion policies that rely on the use of group preferences or quotas based on protected categories (including race or ethnicity, among others) are already prohibited by federal law. However, the spotlight on such policies generated by the Supreme Court’s ruling makes it more likely that policies that are either noncompliant or susceptible to attack but may have escaped scrutiny in the past will be the subject of claims by private litigants.
The memo also highlights the importance of reviewing any provisions in the target’s material contracts that bind it to comply with the counterparty’s DEI policies. These can create financial and legal risks, particularly if the terms purport to bind the target’s affiliates. Any pending or historical litigation involving the target that contains DEI claims should also be reviewed and evaluated in light of the number of cases, the dollar amount of damages, and any equitable relief or other outstanding obligations under a settlement agreement.
Yesterday, the DOJ & FTC issued for public comment their long-awaited 2023 Draft Merger Guidelines. The draft was accompanied by a 4-page Fact Sheet highlighting their key provisions. This excerpt from the Fact Sheet discusses what the agencies refer to as the 13 “core” guidelines reflecting the most common issues in merger review:
Guideline 1: Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets. Concentration refers to the number and relative size of rivals competing to offer a product or service to a group of customers. The agencies examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. If so, the agencies presume that a merger may substantially lessen competition based on market structure alone.
Guideline 2: Mergers Should Not Eliminate Substantial Competition between Firms. The agencies examine whether competition between the merging parties is substantial, since their merger will necessarily eliminate competition between them.
Guideline 3: Mergers Should Not Increase the Risk of Coordination. The agencies examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is inherently vulnerable and the agencies will presume that the merger may substantially lessen competition. In a market that is not yet highly concentrated, the agencies investigate whether facts suggest a greater risk of coordination than market structure alone would suggest.
Guideline 4: Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market. The agencies examine whether, in a concentrated market, a merger would (a) eliminate a potential entrant or (b) eliminate current competitive pressure from a perceived potential entrant.
Guideline 5: Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete. When a merger involves products or services rivals use to compete, the agencies examine whether the merged firm can control access to those products or services to substantially lessen competition and whether they have the incentive to do so.
Guideline 6: Vertical Mergers Should Not Create Market Structures That Foreclose Competition. The agencies examine how a merger would restructure a vertical supply or distribution chain. At or near a 50% share, market structure alone indicates the merger may substantially lessen competition. Below that level, the agencies examine whether the merger would create a “clog on competition…which deprives rivals of a fair opportunity to compete.”
Guideline 7: Mergers Should Not Entrench or Extend a Dominant Position. The agencies examine whether one of the merging firms already has a dominant position that the merger may reinforce. They also examine whether the merger may extend that dominant position to substantially lessen competition or tend to create a monopoly in another market.
Guideline 8: Mergers Should Not Further a Trend Toward Concentration. If a merger occurs during a trend toward concentration, the agencies examine whether further consolidation may substantially lessen competition or tend to create a monopoly.
Guideline 9: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series. If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the agencies consider the cumulative effect of the pattern or strategy.
Guideline 10: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform. Multi-sided platforms have characteristics that can exacerbate or accelerate competition problems. The agencies consider the distinctive characteristics of multi-sided platforms carefully when applying the other guidelines.
Guideline 11: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers. Section 7 protects competition among buyers and prohibits mergers that may substantially lessen competition in any relevant market. The agencies therefore apply these guidelines to assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
Guideline 12: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition. Acquisitions of partial control or common ownership may in some situations substantially lessen competition.
Guideline 13: Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly. The guidelines are not exhaustive of the ways that a merger may substantially lessen competition or tend to create a monopoly.
The Draft Guidelines reflect several themes that have been priorities in the Biden administration’s antitrust policy, including heightened scrutiny of vertical mergers, transactions involving multi-sided platforms, transactions that result in the elimination of nascent competition, and transactions that may adversely affect labor markets. The comment period for the Draft Guidelines will close on September 18, 2023.
With the first anniversary of the effective date of the universal proxy rules fast approaching, commentators are starting to provide some thoughts on the extent to which the rules have – or haven’t – changed the activism landscape. This introduction to a recent Sidley article in Directors & Boards provides an overview of the changes resulting from the universal proxy rules:
The universal proxy rules, which went into effect on September 1, 2022, have shifted the landscape of shareholder activism by allowing shareholders to “mix and match” their votes across proxy cards in contested elections. Since September, the move to candidate-based (rather than slate-based) voting has encouraged activists to nominate smaller, more targeted slates, and the added leverage in settlement negotiations has ultimately resulted in activists winning a larger number of board seats.
In addition, mega-cap companies in the United States have been targeted more than ever before, despite a modest decline in total campaigns, with some companies becoming targets of the growing “swarming” phenomenon, whereby multiple activists target a vulnerable company concurrently or in rapid succession.
The article says that in this heightened threat environment, boards can benefit from an effort to “think like an activist” by thinking critically and objectively about their vulnerabilities and taking steps to address them. As I’ve previously blogged, that’s a strategy that seems to have paid dividends for companies.
By the way, Michael Levin at The Activist Investor is putting together a webcast called “Universal Proxy Card After One Year.” The program features Prof. Slava Fos of Boston College and Abbott Cooper, Managing Member of Driver Management Company LLC. It will be held on Wednesday, July 26th from 10:00 am to 11:15 am eastern. The webcast is free and you can register for it here. I attended Michael’s program on UPC last year and found it very informative. I plan on attending this one as well.
Mootness fees have become a popular alternative for plaintiffs asserting M&A disclosure claims post-Trulia. The traditional pattern for these cases has been for plaintiffs to file disclosure claims in federal court and then agree to a settlement involving the payment of a mootness fee after corrective disclosure has been made. Some federal courts have become very dubious of this practice & the Chancery Court’s recent decision in Anderson v. Magellan Health, (Del. Ch.; 7/23) indicates that Delaware remains pretty frosty toward mootness fees for disclosure claims as well.
In that case, the plaintiff sought a $1.1 million mootness fee award as part of the settlement of a disclosure claim. Chancellor McCormick rejected that request and awarded a mootness fee of only $75,000. This excerpt from Francis Pileggi’s blog on the case explains the policy considerations behind the Chancellor’s decision:
For the avoidance of doubt, the Court underscored that Delaware public policy does not encourage plaintiffs’ counsel to: “pursue weak disclosure claims with the expectation that defendants would rationally issue supplemental disclosures and pay a modest mootness fee as a cheaper alternative to defending the litigation.” Slip op. at 22.
Delaware courts have not had much opportunity to clarify Delaware policy and law on mootness fees based on supplemental disclosures because in the wake of Trulia, the “… deal-litigation diaspora spread mainly to federal courts, where plaintiffs’ attorneys repackaged their claims for breach of the fiduciary duty of disclosure as federal securities claims.” Id.
After careful reasoning and citation to scholarship on the topic and the case law developments, the Chancellor clarified that: ” At a minimum, mootness fees should be granted for the issuance of supplemental disclosures only where the additional information was legally required.” Slip op. at 23.
Going forward, the Court gave notice that it: “… will award mootness fees based on supplemental disclosures only when the information is material”. Slip op. at 24.
The FTC’s efforts to stop Microsoft’s pending acquisition of Activision/Blizzard can now be added to the agency’s loss column. Last week, a California federal district court denied the FTC’s bid to stop the deal, and the 9th Circuit quickly affirmed that decision. While the FTC’s lawsuit remains pending, this excerpt from Davis Polk’s memo on the case indicates that the agency has a mountain to climb if it wants to continue efforts to unwind the deal after closing, because the district court found that it was unlikely to succeed on the merits of its case:
Although it was “sharply dispute[d]” between the parties, Judge Corley found that the “likelihood of ultimate success” meant “the likelihood of the FTC’s success on the merits in the underlying administrative proceedings, as opposed to success following a Commission hearing, the development of an administrative record, and appeal before an unspecified Court of Appeals.”
The FTC argued that post-transaction, the combined Microsoft/Activision firm “may deprive rivals—primarily Sony —of a fair opportunity to compete . . . by foreclosing an essential supply—Call of Duty.” Citing the Commission’s decision in the Ilumina/Grail matter, the FTC argued that “it need only show the transaction is ‘likely to increase the ability and/or incentive of the merged firm to foreclose rivals.’” The court rejected that position, writing, “Illumina . . . provides no authority for this proposition, nor could it . . . . If there is no incentive to foreclose, then there is no probability of foreclosure and the alleged concomitant anticompetitive effect. Likewise, if there is no ability [to foreclose], then a party’s incentive to foreclose is irrelevant.”
The court likewise rejected the FTC’s claim that “it need only show the combined firm would have a greater ability and incentive to foreclose Call of Duty from its rivals than an independent Activision.” Judge Corley reasoned that this standard is inconsistent with Section 7 of the Clayton Act, which requires a substantial lessening of competition.
The district court concluded that to establish a likelihood of success on its ability and incentive foreclosure theory, the FTC must show that the combined firm has the ability and incentive to withhold Call of Duty from its rivals, and that competition would probably be substantially lessened as a result of the withholding. The court then found that while the combined firm would have the ability to foreclose competitive access to Call of Duty post-merger, it would not have the incentive to do so.
As a result of these federal court decisions, UK antitrust regulators represent the only remaining impediment to the deal’s closing, and recent media reports suggest that Microsoft may be able to satisfy their objections through a restructured deal more quickly than originally expected.
A recent Reuters article says that the antitrust agencies are struggling to get courts to see things their way when it comes to merger challenges. It points out that the agencies won approximately 65% of their litigated merger challenges between 2001 and 2020, while under the Biden administration the FTC & DOJ have won only 30% of its cases.
Here’s an interesting development on books & records requests that John blogged about last week on TheCorporateCounsel.net:
The Delaware Chancery Court recently dismissed a books & records action against The Walt Disney Company premised on alleged breaches of fiduciary duty by the company’s board arising out of its decision to publicly oppose Florida’s “Don’t Say Gay” legislation. The plaintiffs’ contended that the directors breached their duty of loyalty by placing their personal beliefs ahead of the company’s interest by taking positions that impaired its value.
This excerpt from a recent Wilson Sonsini memo on the decision summarizes Vice Chancellor Will’s reasoning:
The court conducted a trial on a paper record, and that record reflected an appropriately engaged and deliberative board. As the controversy first flared, the Disney board convened a special meeting and, shortly thereafter, held a regularly scheduled meeting to discuss the issues. Board minutes captured the board’s engagement. The record showed that Disney leadership took an increasingly public stance in the face of intensifying criticism from its employees and creative partners. Accordingly, the court noted, the board’s decision did not come “at the expense of stockholders.” Rather, the board was motivated by an understanding that “a positive relationship with employees and creative partners is crucial to Disney’s success.”
As such, the court determined that “[i]t is not for this court to question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value.” Meanwhile, no evidence supported the plaintiff’s allegation that the directors’ personal beliefs or their support of organizations that opposed HB 1557 swayed them to act contrary to the interests of the company and its stockholders.
Based on her analysis, Vice Chancellor Will ultimately concluded that the plaintiff did not establish a proper purpose for inspection because it did not sufficiently allege potential wrongdoing by the board. In an era where companies increasingly find themselves caught in the crossfire of contentious social issues, boards and their advisors are likely to find this excerpt from the Vice Chancellor’s opinion on the latitude that directors have under Delaware law exercise their business judgment to be of some comfort:
Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).
In an update to a prior alert (thanks to past John circa five years ago for this blog title!), Venable recently released a detailed memo providing an overview of when a person is acting as a so-called finder. As the memo notes, the term “finder” is not defined in federal securities laws but is limited by activities a person cannot perform lest they be deemed a “broker” or “dealer” and therefore subject to registration. As John noted, this is a murky and complex area, and it remains so even with the greater certainty provided by the recent legislative exemption for M&A brokers, which unfortunately is somewhat more limited than the withdrawn 2014 no-action letter that previously provided an exemption.
For anyone needing a summary of the legal issues, parameters of available exemptions and pitfalls of being classified as an unregistered broker, this is an excellent resource. Here’s an excerpt with an important reminder that, notwithstanding a federal exemption, state laws and regulations continue to apply:
Both the M&A Brokers No-Action Letter and the Federal Exemption do not affect state laws and regulations on the matter. While the Federal Exemption may motivate states to adopt corresponding exemptions, Congress’s decision not to preempt state law leaves unresolved the potential for conflicting requirements that would impair the usefulness of the Federal Exemption.
In response to the M&A Brokers No-Action Letter, the North American Securities Administrators Association adopted a uniform state model rule designed to provide an exemption for M&A Brokers from registration as brokers, dealers, and agents under state law. However, the model rule is not self-executing and must be adopted by a state before it becomes effective in a specific jurisdiction.
As a result, state-level broker registration remains an important consideration for M&A Brokers, even if an exemption exists at the federal level. Interestingly, New York has recently proposed, then failed to adopt, a state regulatory regime of business finders. Certain states, including California, Texas, and Michigan, have some form of a registration exemption for M&A Brokers. Therefore, finders should consult the applicable state broker-dealer regulations prior to engaging in activities in the particular state.
In light of the federal legislative exemption, states may be taking action on this front. Keith Bishop points out on his blog that Nevada recently announced updates to the Nevada Administrative Code, which include a new exemption for certain M&A brokers that is similar, but not exactly the same as, NASAA’s model exemption.
In the first week of July, Nasdaq published four FAQs focused on SPACs. The FAQs address the following topics:
– When a SPAC falls below the Publicly Held Shares, Market Value of Publicly Held Shares, Market Value of Listed Securities and/or the Shareholder requirements due to shareholder redemptions
– Information required when a SPAC holds a meeting to extend its deadline to complete a business combination
– How Nasdaq determines compliance with the price-based listing requirements in a de-SPAC where the target is publicly traded
– Whether SPACs must hold annual meetings
This Loeb & Loeb blog notes that one of the new FAQs will complicate transactions involving OTC-quoted target companies looking to use a SPAC to move to Nasdaq. Here’s the full FAQ (#1863):
How does Nasdaq determine compliance with the price-based listing requirements in the case of a SPAC business combination where the target company is a publicly traded company?
In the case of a transaction where a SPAC acquires 100% of a publicly-traded target company or is acquired by a publicly-traded target company, Nasdaq generally relies on the trading price of the publicly-traded target company (adjusted for any applicable exchange ratio and for the additional cash provided by the SPAC) to determine compliance with the price-based listing requirements.
The blog goes on to provide the following example and takeaway:
For example, under this FAQ, if a target’s stock is trading at $1.00 per share and it will be converted into the SPAC’s stock on a one-for-one basis, Nasdaq will assume that the trading price of the post de-SPAC company’s stock is $1.00 per share, regardless of valuation of the target, fairness opinions, or the trading price of the SPAC’s stock. In the scenario I just gave, the company would not be able to meet the minimum share price requirement under Nasdaq’s initial listing rules.
Companies looking to do a de-SPAC involving a publicly traded company will need to ensure that conversion ratios for the publicly traded company’s stock will result in the combined company meeting Nasdaq’s initial listing requirements.
In late June, I blogged about the significant changes proposed by the FTC and DOJ to the Hart-Scott-Rodino (HSR) Premerger Notification and Report Form. For more information on the substance of the proposal, this Mintz post excerpted below succinctly describes the changes:
The key proposed changes include expanded and new requirements to submit the following:
Transaction Information
– Details about transaction rationale and details surrounding investment vehicles or corporate relationships.
– Detailed transaction timeline.
– Existing agreements between the parties (including those that were in effect within the previous one year).
Competition Information
– Information and narratives related to products or services in both horizontal and non-horizontal business relationships such as supply agreements.
– More granular geographic information for certain overlaps.
– Expanded information on other acquisitions in the previous 10 years within the overlapping markets.
– Projected revenue streams.
Customer information.
– Document Submissions
– Expanded scope for “4c” and “4d” documents that analyze the competitive effects of the proposed transaction.
– Certain ordinary course documents.
Ultimate Parent and Controlled Entities Information
– Organizational charts for funds and limited partnerships.
– Identification of officers, directors, board observers, significant creditors, and holders of non-voting securities.
– Expanded minority shareholder information.
Labor Market Information
– Disclosure of information intended to identify labor market issues.
– Classification of employees by Standard Occupational Classification system categories.
– Workplace safety information.
Information on Subsidies from Foreign Governments or Entities of Concern
– Data required to fulfill the Merger Filing Fee Modernization Act of 2022.
We’re posting memos and other materials in our “Antitrust” Practice Area here on DealLawyers.com.
The DLA Piper Global Foreign Direct Investment team just released a 2023 edition of their Multi-jurisdiction Guide for Screening Foreign Investments. The intro to the guide explains that screening activities have expanded in many jurisdictions to cover considerations related to cybersecurity, consumer protection, data privacy, supply chain and strategic sectors, and governments are increasingly willing to intervene in offshore transactions on the basis of domestic impacts that are more indirect or limited. It gives the following examples:
The interagency Committee on Foreign Investment in the United States (CFIUS) has intensified its scrutiny of proposed transactions. The CFIUS has also expanded its retrospective reviews of consummated transactions in potentially sensitive sectors where the parties had not submitted a notification or declaration. The U.K. National Security and Investment Act 2021 (NSIA) took effect in January 2022, establishing new requirements for mandatory notification to the Investment Security Unit within the Department for Business, Energy and Industrial Strategy (BEIS) for certain acquisitions resulting in equity interests over 25% or material influence over businesses active in 17 specified sensitive sectors. In 2022 Canada also introduced a new National Security Review of Investments Modernization Act, which can substantially strengthen the existing national security review. And in the EU, Romania introduced its FDI regime in 2022 and new or enhanced regimes are expected in Belgium, Slovakia, Netherlands, Ireland, Estonia, Slovenia, Spain and Sweden in 2023.
The interactive guide reviews developments in foreign investment screening practices in 35 jurisdictions across the Americas, Europe, Africa, Asia, and Australia.