In its 2023 M&A Report, WilmerHale recently reported on some pretty unusual trends in adoption rates of common takeover defenses by newly public companies in 2022. Here are some stats, which appear even more unusual in the charts included in the report since they show the consistency in adoption of these takeover defenses in earlier years:
– Classified board – adopted by 83% of IPO companies in 2021 and 46% in 2022
– Supermajority voting for mergers and changes to org documents – adopted by 81% of IPO companies in 2021 and 54% in 2022
– Prohibition on stockholder written consents – adopted by 90% of IPO companies in 2021 and 46% in 2022
– Limitation on stockholder rights to call special meetings – adopted by 95% of IPO companies in 2021 and 76% in 2022
What do they attribute this to? The rough IPO market. Here’s an excerpt:
Despite the decline in takeover defenses among established public companies, most IPO companies continue to implement anti-takeover provisions (understanding that such measures may in the future need to be dismantled). In 2022, however, adoption rates by IPO companies for many takeover defenses declined markedly from historical norms, likely due in part to the unusual characteristics of the IPO market that year—deal flow fell by more than two-thirds compared to the preceding three years; offering sizes were much smaller, and IPO companies had far less annual revenue.
If the depressed IPO market is creating these anomalies, they may continue into 2023. John recently blogged that it’s not looking up for IPOs.
Fox’s staggering $787.5 million defamation settlement with Dominion Voting Systems raises all sorts of profound questions about the 1st Amendment, the role of the press and the impact of increasingly partisan media voices on the future of our democracy. Those are questions that will undoubtedly be pondered by lots of big brains – but hey, this is an M&A blog, so the big question for me is the one addressed by this Axios report – did the Fox settlement just make Staple Street Capital’s 2018 acquisition of Dominion the best PE deal of all time?
The answer to that question just might be yes. Axios says that Staple Street paid $38 million for the company and that this settlement is a pretty staggering windfall for it based on its financial results since the closing of that deal:
Denver-based Dominion will be required to pay taxes on its windfall, plus give a hearty portion to attorneys. But this is still a massive amount of cash for a company of its size.
– Dominion currently generates around $45 million in annual EBITDA, up from $10 million in 2018, according to comments this morning from Staple Street co-founder Hootan Yaghoobzadeh on CNBC.
– In terms of revenue, Forbes once reported that Dominion generated $118.3 million for the three-year period between 2017 and 2019.
That’s nice EBIDTA growth, but it’s a rounding error compared to the impact of the Fox settlement, which on its own represents a 1,972% return on the original $38 million purchase price. So, what’s Dominion going to do with that money? According to the company’s founder, it’s going right out the door to the shareholders. Nice.
While Fox licks its wounds, it can take some consolation in the knowledge that its settlement payment is tax deductible, which according to media reports could result in a tax break for the company of up to $213 million.
It appears that global antitrust regulators are singing from the same hymnal when it comes to the potential for post-closing scrutiny of deals that aren’t subject to pre-merger notification regimes. This Cooley memo discusses a recent decision from the EU’s highest court holding that the absence of a pre-merger notification requirement doesn’t necessarily mean a deal doesn’t raise antitrust concerns. Here’s an excerpt summarizing the Court’s ruling:
The Towercast case involved an acquisition by Télédiffusion de France (TDF), a French provider of digital terrestrial broadcasting services, of one of its rivals, Itas. The deal was not reportable for merger review to the European Commission (EC) or the French Competition Authority (FCA). After the TDF/Itas deal closed, Towercast, a competitor, complained to the FCA that TDF had abused its dominant position by the acquisition. The FCA dismissed the complaint on the basis that it lacked competence to review the transaction retrospectively, because it was not reportable under the merger control rules. Towercast appealed the FCA’s decision, and the Court of Appeal of Paris requested guidance from the Court of Justice of the European Union (CJEU) on the relationship between the rules on abuse of dominance and merger review.
The CJEU noted that merger control rules assume that acquisitions that satisfy certain thresholds can have harmful effects on the market structure and competition – and so, must be notified for pre-merger review. The CJEU clarified, however, that this does not mean that acquisitions that do not meet the thresholds for review should never be subject to post-merger investigation under the abuse of dominance rules, which apply generally and independently of the merger control rules. The CJEU ruled in 1973, in Continental Can, that a firm holding a dominant position, in certain circumstances, may abuse that position contrary to Article 102 TFEU by way of an acquisition. In the decades since, specific merger control rules were adopted, but those rules did not affect the applicability of Article 102 TFEU.
On that basis, mergers & acquisitions that are subject to mandatory pre-merger review (under the EU Merger Regulation or corresponding member state laws) are immune from abuse of dominance claims under Article 102 TFEU. But where pre-merger reviews are not triggered, competition authorities and courts remain free to investigate whether an acquirer that holds a dominant position on a relevant market has abused that dominant position by acquiring a competitor. In that analysis, a finding of abuse presupposes that the acquisition strengthened the acquirer’s dominant position to such a degree that competition is ‘substantially’ impeded in the sense that the behavior of all remaining rivals ‘depends’ on the acquirer.
The memo says that the Towercast decision isn’t expected to open the floodgates to post-closing enforcement actions in the EU. It notes that those actions present significant challenges when it comes to effective remedies, particularly because of the problems associated with attempting to “unscramble the eggs” of a closed deal. It also points out that the standard for post-closing intervention under Article 102 is much higher than the standard that applies in the case of pre-merger review.
In a recent letter ruling in D. Jackson Milhollan v. Live Ventures, Inc., (Del. Ch.; 4/24), Vice Chancellor Fioravanti rejected a plaintiff’s efforts to convey jurisdiction on the Chancery Court for a post-closing breach of contract claim arising out of a merger agreement. The case arose out of a buyer’s alleged failure to make timely payment of the balance of an indemnity holdback to the target’s stockholders. In support of its claim that the Chancery had jurisdiction over the lawsuit, the plaintiff cited the merger agreement’s exclusive forum clause, but the Vice Chancellor said that wasn’t enough to get the case into Chancery Court:
The Complaint alleges that the Merger Agreement itself establishes exclusive jurisdiction in this court. Section 11.12 of the Merger Agreement provides that any claims, actions, and proceedings that arise from or relate to the Merger Agreement “shall be heard and determined exclusively in the Court of Chancery of Delaware” and that the parties submit to the exclusive jurisdiction of this court. This provision does not establish subject matter jurisdiction in this court. “It is . . . well-established Delaware law that parties cannot confer subject matter jurisdiction upon a court.” Butler v. Grant, 714 A.2d 747, 749–50 (Del. 1998); see also Bruno v. W. Pac. R.R. Co., 498 A.2d 171, 172 (Del. Ch. 1985) (“The parties to an action may not confer subject matter jurisdiction by agreement.”), aff’d, 508 A.2d 72 (Del. 1986).
The Vice Chancellor rejected the plaintiff’s efforts to kick up enough equitable dust to convey jurisdiction, and concluded that the complaint “asserts a claim for breach of contract and seeks money damages, a classic legal claim where there exists an adequate remedy at law.”
By now, many of you may be wondering why Section 111 of the DGCL didn’t give the Chancery Court jurisdiction over this action. Although that statutory provision conveys jurisdiction upon the Chancery Court over any civil action seeking interpretation or enforcement of, among other things, any agreement “by which a corporation creates or sells, or offers to create or sell, any of its stock, or any rights or options respecting its stock, or (ii) to which a corporation and 1 or more holders of its stock are parties, and pursuant to which any such holder or holders sell or offer to sell any of such stock. . .”, the Vice Chancellor held that because neither the plaintiff nor the defendant corporation were Delaware entities, Section 111 didn’t apply.
Yesterday, I blogged about how buyers and sellers in private equity deals are addressing valuation gaps. Today, it’s time for the litigators’ perspective. This Proskauer blog says that the turbulent market conditions that create valuation gaps also create litigation over valuation issues. Here’s an excerpt:
Valuation disputes tend to be centered on disagreements about accounting practices, dates of assessed value, and valuation methodology. In times of financial uncertainty or distress, economic actors may gravitate toward less conservative accounting practices, which may be in tension with historical accounting practices. Market volatility is also a breeding ground for valuation disputes based on the date on which the valuation was determined, as rapidly shifting market conditions can have significant impacts on value.
Valuation claims can also arise from differences of opinion regarding the valuation bases or methodology. While the market value of most sponsor-owned portfolio companies would involve only an objective measure of an asset’s value without regard to identity of the buyer or seller, plaintiffs sometimes argue that the portfolio company or asset had synergistic value, or value that is enhanced by the presence of other assets.
Typical valuation methodologies include proposed and precedent transactions, discounted cash flow analyses, comparable companies and net asset value. Increased volatility usually brings these valuation methodologies to the forefront of disputes. Importantly, complex valuation claims often involve multiple valuation methodologies with a range of resulting valuations.
The blog goes on to note that “we are seeing one specific subcategory of valuation disputes – earnout disputes – growing in frequency.” Wow, who’d a thunk it? Anyway, the blog advises parties thinking about an earnout to focus on the areas that frequently give rise to post-closing disputes – methodology, obligations concerning the information required to calculate the earnout, the form of consideration, and jurisdiction & dispute resolution.
The macroeconomic headwinds that dealmakers faced in 2022 have carried over into this year, and the recent unpleasantness in the banking sector threatens to make deal financing terms even tighter. Not surprisingly, this environment has caused private equity firms to find ways to bridge valuation gaps in order to get deals done. According to this PitchBook article, those efforts have included on our old frenemy the earnout as well as increased use of seller notes.
The article cites the results of an upcoming SRS/Acquiom survey, which found that 21% of non-life sciences private deals in the US contained earnout provisions, up from 17% in 2021. In 23% of those deals, the parties agreed to use the more buyer-friendly EBITDA performance metric instead of the revenue metric favored by sellers – an increase from 16% during the prior year. This excerpt from the article addresses the increase in the use of seller paper:
Another structure appearing more frequently is the so-called seller note: a form of financing where the seller agrees to receive a portion of the acquisition proceeds as a series of debt payments. A seller note ranks below the senior debt provided by banks or nonbank lenders to fund the acquisition. While the note is a form of subordinated debt, and hence carries more risk, it typically carries a lower interest rate—in the range of 5% to 8%—than mezzanine debt, said Reed Van Gorden, managing director and the head of origination at Deerpath Capital, a lower-middle-market private debt firm.
The article points to Emerson Electric’s recent sale of a majority stake in its climate tech unit to Blackstone as an example of seller financing. That $14 billion deal includes a $2.25 billion seller note that pays interest at 5%.
Like a lot of other investors, traditional activist hedge funds had a tough year last year. This Morrison & Foerster memo says that the sector was down 17% 2022, after posting positive returns of 16% and 10% during the prior two years. Activists also struggled at the ballot box, winning less than half of the proxy contests that went to a vote last year. The memo doesn’t suggest that these setbacks will result in activist hedge funds abandoning their strategy, but it does speculate that so-called “occasional activists” may play a more prominent role in future activist campaigns. This excerpt explains:
Taking the place of these dedicated activists are “occasional activists” like institutional investors and individuals, including company insiders. As institutional investors have grown in size, they have become major shareholders in many companies, giving them a significant voice in corporate decision-making and greater leverage to push for changes they believe will benefit both the company and its shareholders.
At the same time, the rise of online trading platforms and social media has made it easier for individuals to organize and advocate for changes in the companies they invest in. Directors and officers of publicly traded companies who are typically seen as being aligned with the interests of the company’s management, have also become more vocal in their efforts to push for changes that they believe will benefit the company and its shareholders.
The memo goes on to list some campaigns undertaken over the past 3 years in which institutional investors or individuals played a prominent role. Last year’s list includes the unusual proxy contest between the CEO of Aerojet Rocketdyne and the company’s Executive Chairman, which saw the CEO’s slate of directors prevail with 75% of the vote.
As those of you who are readers of TheCorporateCounsel.net blogs already know, we’ve been changing over from our traditional practice of having our blogs come from the email address of one of our editors. We’ve already implemented that for TheCorporateCounsel.net blog – and now it’s our turn. Beginning on Monday, May 15th, all of our DealLawyers.com blogs will be sent from Editorial@DealLawyers.com.
We know that whitelisting is kind of a pain in the neck, so we’ve put together this whitelisting instruction page to help you and your IT department understand what actions you may need to take in order to ensure there’s no disruption in delivery.
There are a couple of things that I also want to mention about this change. First, the name of the author of a blog will always appear in the email, so if you want to respond to the author, you can just click on the author’s name and their email address will pop up. Second, Editorial@DealLawyers.com isn’t a black hole. If you hit reply, your message will go to a folder that I’ll have access to. I’ll check that every few days and forward your email to the appropriate editor. Finally, thanks for your patience and cooperation.
Last year, I blogged about how proposals to implement national security reviews of outbound investments were bouncing around Congress. While specific legislation wasn’t enacted, the possibility of a requirement for screening of outbound investments is very much alive, and this Dorsey & Whitney blog says that national security reviews of certain outbound investments may be mandated very soon.
How did we get to this point? Well, language in explanatory statements accompanying the Consolidated Appropriations Act passed last December encouraged the Treasury & Commerce to “consider establishing a program to address the national security threats emanating from outbound investments from the United States in certain sectors that are critical for U.S. national security.” The departments were also directed to “submit a report describing such a program including the resources required over the next three years to establish and implement it” not less than 60 days after the enactment of the legislation.
That report appears to have been submitted, and this excerpt from the blog summarizes its conclusions:
Press reports suggest that both Treasury and Commerce delivered the required reports to Congress in early March. These reports detailed a proposal that would establish a mechanism to review outbound investments in to-be identified countries and sectors. Almost certainly any program will focus on investments with connections to China and Russia initially, and likely include sectors such as semiconductors, artificial intelligence, and quantum computing, which are viewed as sensitive sectors essential to U.S. national security.
The U.S. Government has long held the view that Chinese investments in these sectors may raise national security concerns because the investment could potentially be used to advance Chinese military capabilities. The Committee on Foreign Investment in the United States (“CFIUS”) has exercised repeatedly its authority to prohibit in-bound investments in U.S. businesses that operate within these sectors.
The blog says that President Biden may issue an executive order implementing the recommendations contained in these reports as soon as this month, and that companies in any of the identified sectors should be aware of the potential impact of such an order on their future business operations.
Buyers and sellers frequently find plenty to fight about post-closing, but it’s unusual to see a seller claim that obligations that were spelled out as being “retained liabilities” in the contract should pass to the buyer after a period of time. Nevertheless, that’s the kind of claim that the Chancery Court recently addressed in Merck & Co. v. Bayer AG, (Del. Ch.; 4/23).
The case arose of out Bayer’s 2014 acquisition of Merck’s s Claritin, Coppertone, and Dr. Scholl’s product lines. Bayer paid $14 billion in a combined stock & asset deal, and the purchase agreement detailed the liabilities that would be assumed by Bayer and those that would be retained by Merck. After the deal closed, the parties became defendants in numerous lawsuits alleging injuries arising from consumers’ use of talc-based products. These product liability claims concerned allegedly asbestos-contaminated talcum powder that Merck used in certain Dr. Scholl’s foot powder product lines sold to Bayer.
Under the terms of Section 2.7 of the purchase agreement, Merck agreed to “absolutely and irrevocably” retain “all obligations and liabilities” for product liability claims related to the product lines acquired by Bayer, including the Dr. Scholl’s product line, to the extent such claims arise out of or relate to periods prior to the Closing Date. Accordingly, Bayer tendered all of the talc claims that it received to Merck, which conditionally accepted them while reserving its rights.
In January 2021, Merck notified Bayer that it would cease accepting tenders of all product-related claims from Bayer on October 21, 2021, which was the seventh anniversary of the closing date. In support of its position, Merck cited Section 10.1 of the purchase agreement, which provided that “[a]ll liability and indemnification obligations with respect to the Section 2.7(d) Liabilities shall survive until 5:00 P.M. (Eastern time) on the date that is the seventh (7th) anniversary of the Closing Date.” Based on this language, Merck contended that responsibility fo all product-related liabilities transferred to Bayer on October 1, 2021.
Bayer argued that the language of Section 2.7 unambiguously provided that Merck retained the liabilities at issue forever and that the language Merck relied upon in Section 10.1 dealt only with separate indemnification rights. Vice Chancellor Cook began his analysis of the parties claims by observing that that the purchase agreement dealt with two distinct forms of liability. The first was potential substantive damages liability to third-party consumers, while the second was costs incidental to litigation, even if Bayer wasn’t substantively liable for these third-party claims. This excerpt from the opinion addresses the implications of the way the contract approached those two distinct forms of liability:
While substantive third-party liability was apportioned in Sections 2.6 and 2.7, Article X addresses the separate and distinct issue of various, limited contractual indemnification rights belonging to Merck and Bayer vis-à-vis each other. In addition, Article X sets forth time limits on these contractual indemnification rights, as well as the [purchase agreement’s] representations and warranties. What Article X does not do is extinguish the underlying liability for third-party claims. Indeed, Article X cannot do this, since it addresses purely contractual rights between Merck and Bayer and has no bearing on the tort claims of third-party consumers who are not party to the [purchase agreement].
Merck argued that language in Section 10.1 providing that “all liability” for the liabilities retained under Section 2.7 would expire on October 21, 2021, but the Vice Chancellor concluded that this interpretation would lead to an absurd result:
Indeed, if I were to adopt Merck’s advocated interpretation of Section 10.1, that approach would lead, at most, only to the absurd conclusion that, after seven years, the pool of Section 2.7(d) Liabilities retained by Merck simply “expires.” Merck avers that upon this “expiration” the Section 2.7(d) Liabilities become Bayer’s, but there is no mechanism in the [purchase agreement] by which these liabilities would be transferred upon expiration. And it does not make sense to say that the third-party tort claims that comprise the Section 2.7(d) Liabilities would “expire” after seven years. As highlighted by Bayer, Merck and Bayer have no power to extinguish liability for the Product Claims, which are tort claims brought by third parties that were not parties to the [purchase agreement].
As a result, the Vice Chancellor concluded that Bayer’s interpretation of the agreement was the only reasonable one and granted its motion to dismiss the complaint.