Last month, I blogged about the Chancery Court’s decision in Garfield v. Boxed, (Del. Ch.; 1/23), which indicated that a separate class vote was required to authorize a charter amendment increasing the number of outstanding shares of Class A Common Stock in a company with a dual class structure. This Locke Lord blog says that the decision has prompted many companies to pursue validation actions under Section 205 of the DGCL.
The blog says that those petitions are pending and the first hearing on some of them will be held next week. It also points out that the defective charter amendments fall into one of two categories:
There are two different situations to consider: (i) a majority vote of both Class A and Class B shares voting together and of Class A shares voting separately was obtained, although no separate Class A vote was held or its need disclosed; and (ii) a majority of Class A shares A and Class B shares voting together was obtained but not a majority of Class A shares.
It might be possible to conclude that the stockholder approval in the first situation was legally sufficient despite the failure to hold a separate Class A vote and disclose to stockholders the need for that separate vote, as well as to conclude that the increase in Class A shares and their issuance in the deSPAC transactions and otherwise are unlikely to be invalidated on equitable grounds in the absence of evidence of any real prejudice resulting from the deficient actions. However, that has not been judicially decided. Consequently, many companies, to avoid uncertainty, are pursuing validation under DGCL section 205, which is anticipated to be obtained in short order.
In the second situation, the alternative of concluding that the vote was legally sufficient is unavailable and therefore companies in that situation also are filing for relief under section 205. There is optimism that the Court of Chancery will use its broad authority under section 205 to validate those actions in that situation.
The blog notes that public companies that are seeking validation of these charter amendments are filing Form 8-Ks disclosing the issue and have suspended the use of outstanding registration statements until the matters are resolved. It also points out that the separate class vote issue isn’t limited to charter amendments increasing the number of shares, and has been raised in litigation challenging charter amendments authorizing exculpation of corporate officers as well.
In a statement accompanying the FTC’s annual report to Congress on the HSR Act, the Democratic commissioners again called for legislation extending the time periods for review of HSR filings:
We continue to recommend that Congress revisit statutory timelines imposed by the HSR Act on the agencies. The 30-day window provided for the agencies to assess whether a transaction warrants close investigation and the 30-day window in which we must decide whether to challenge a transaction after parties certify that they have “substantially complied” with our inquiries are no longer adequate.
Since the HSR Act was passed in 1976, the volume and complexity of information and data produced by merging parties have increased by several orders of magnitude. The fact that the FTC routinely resorts to voluntary timing agreements with merging parties to provide the necessary time for staff review is further evidence of the inadequacy of the enabling statutory timelines. We should not have to rely on permission from merging parties to have enough time to do the work required by law.”
In support of their position, the commissioners note that the FTC’s report confirms that the volume of notified transactions surged by 115% in 2021 to “historic levels,” and contend that the agency “simply [does] not have the capacity to keep up with the markets in terms of the scrutiny mergers should receive.”
The sole Republican commissioner, Christine Wilson, submitted a statement of her own in which she basically told her colleagues that it’s their own fault that the HSR review timeline is a problem:
For decades the timelines did not create problems for the agencies. Parties routinely entered timing agreements with staff that provided adequate time for investigations. But, early in the current administration, the Commission flouted a negotiated timing agreement after the parties voluntarily extended the review period several times. The Commission also took affirmative steps to increase the burden, heighten the risk, and increase the uncertainty attendant to the HSR process.
Commissioner Wilson punctuated her remarks by resigning from the FTC and publicly breaking a whole lot of furniture on her way out the door.
If you haven’t encountered the problem of an unlicensed “business broker” who expects to be paid for their role in bringing a buyer & seller together, you probably haven’t spent much time doing deals at the lower end of the M&A food chain. These folks show up with alarming regularity in small deals, and they can create all sorts of headaches, because paying them can quickly cause the parties to run afoul of federal or state securities law restrictions on payments to unlicensed brokers.
The SEC has tried to take a practical approach to this situation, and in 2014 the Staff issued a no-action letter indicating that it would not take action against “M&A Brokers” that met the conditions laid out in that letter. The problem is that positions expressed in a no-action letter are subject to change with little notices – and when it comes to no-action letters relating to broker-dealer licensing issues, the SEC has a history of being somewhat mercurial. However, this Stinson memo says that provisions of the Consolidated Appropriations Act signed into law by President Biden in late December now codify an exemption for M&A Brokers from federal broker-dealer licensing requirements:
The Exemption defines an “M&A Broker” as a broker and any associated person that is engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an “eligible privately held company” through the purchase, sale, exchange, issuance, repurchase or redemption of, or a business combination involving securities or assets of the eligible privately held company, if the broker reasonably believes that:
– Upon consummation of the transaction, any person acquiring securities or assets, acting alone or in concert (1) will control the eligible privately held company or the business conducted with the assets of the eligible privately held company (for example, by electing executive officers, approving the annual budget, or serving as an executive or other executive manager); and (2) directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company
– Any buyer, before becoming legally bound to consummate the transaction, has received or has reasonable access to various disclosure documents, including, among others, the company’s most recent fiscal year-end financial statements, as well as information pertaining to the management, business, results of operations, and material loss contingencies of the issuer.
The exemption is limited to “eligible privately held companies,” which is defined as a company that has, in the fiscal year ending prior to the one in which the M&A broker is initially engaged: (i) no class of securities registered or required to be registered under §12 of the Exchange Act and (ii) EBITDA less than $25 million and/or gross revenues less than $250 million.
The exemption largely tracks the Staff’s 2014 no-action letter, and includes a laundry list of potentially disqualifying activities that the M&A Broker must not engage in. The exemption also does not preempt state blue sky restrictions on unlicensed brokers, so the parties will still have to navigate those compliance hurdles.
White & Case recently published its 2022 US de-SPAC & SPAC Data & Statistics Roundup, and the numbers are every bit as ugly as you think they are. Here are some highlights:
– The total value of de-SPAC transactions completed last year was $59.9 billion. That’s a decrease of 84% versus the $368 billion of de-SPACs completed in 2021.
– De-SPAC deal count proved more resilient but also declined from 2021 levels, sliding 40% year-on-year. There were 119 de-SPAC M&A transactions in 2022, compared to 197 deals the previous year.
– The number of SPAC IPOs slid from 612 to just 83, and SPAC IPO proceeds fell 92 percent from $157 billion in 2021 to $13 billion in 2022.
– SPAC IPO activity has regressed throughout the year, with only seven listings securing proceeds of $540 million in Q4 2022. Q4 was the weakest quarter in 2022 and marked the third successive quarter where SPAC IPO deal count and IPO proceeds have fallen.
About the only good news for the SPAC biz is that de-SPAC M&A actually improved through the course of the year. Only 15 de-SPAC deals worth $8 billion were completed in the first quarter of 2021. In the fourth quarter, however, the deal count stood at 46, with deal value recovering to $22 billion.
We just uploaded another of our Deal Lawyers Download podcasts. This edition features my interview with our first return guest – Datasite’s Mark Williams. Mark first visited us last July to discuss Datasite’s mid-year M&A Outlook Survey and returned to updated us on some of the findings in Datasite’s 2023 Global M&A Outlook. This 8-minute podcast addressed the following topics:
– How Datasite’s business positions it to identify deal trends
– What Datasite is seeing that makes it optimistic about 2023 M&A?
– What the data says about M&A activity in specific industry sectors and regions?
– Key takeaways for dealmakers based on insights from the Datasite platform?
If you have something you’d like to talk about, please feel free to reach out to me via email at john@thecorporatecounsel.net. I’m wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
Andrew Abramowitz recently blogged about a really critical part of the deal process that lawyers overlook at their peril – making sure that clients understand the terms they’re agreeing to before they sign on the bottom line. Andy points out that it isn’t really the use of legalese that’s the problem, but many clients’ lack of experience with these agreements:
When people think of legalese, they primarily are concerned with arcane words such as “heretofore” or whatever. But a more significant factor in client incomprehension, I think, is that they don’t have the background knowledge with these agreements to know the purpose of various provisions and how they all interact. For example, in a typical agreement for acquisition of a business, there are provisions relating to the seller’s potential liability to buyer after the closing, including various defined terms such as Fundamental Representations, Cap, Basket and Survival Period.
These concepts are, needless to say, not experienced by the average person in their lifetime, even if it’s a well-educated lifetime. But the idea behind all of it is not terribly complex and is very important to the parties in an M&A deal: The buyer should be compensated for damage that occurs after closing if the seller misrepresents facts about the business being purchased when the agreement is signed, but assuming this misrepresentation is not intentional/fraudulent, there should be reasonable limits placed on the amount of compensation and the length of time after closing during which the buyer can bring this up.
So, while it’s unrealistic to expect clients to start using all of the contractual lingo in ordinary conversation, it is important for the lawyer to impress upon the client the importance of, to take the above example, ensuring that representations in the agreement are correct to avoid post-closing liability.
He suggests that lawyers remember how clueless they were about the intricacies of M&A agreements when they were law students or junior associates, and keep the need to ensure client comprehension of key deal terms in mind. Sure, this may not be terribly relevant if you’re working with a private equity fund that has half a dozen reformed deal lawyers on your deal team, but there are a lot of clients who don’t fit that mold – particularly on the sell side.
Debevoise recently published the latest edition of its Special Committee Report, which surveys transactions announced during the period from July through December 2022 that used special committees to manage conflicts & cases ruling on issues relating to the use of special committees. The report also reviews the continuing evolution of the MFW doctrine, and highlights the fact that it has utility well beyond the squeeze-out merger setting in which it arose.
The report notes that examples of the use of MFW outside this setting include the Chancery Court’s decisions in In re Martha Stewart Living Omnimedia S’holders Litig., (Del. Ch.; 8/17), which involved a 3rd party sale, and IRA Trust FBO Bobbi Ahmed v. Crane, (Del. Ch.; 12/17), which involved the recapitalization of NRG Yield, Inc. Both of those transactions required stockholder approval under Delaware law, but this excerpt notes that Delaware courts have made it clear that MFW can be used in situations where stockholder approval wasn’t necessary:
The Martha Stewart and NRG decisions involved transactions that were mandatorily subject to stockholder approval under Delaware corporate law, but the Delaware courts have held that the MFW protections can also be used in transactions that are not otherwise subject to stockholder approval. For example, in a challenge to an incentive compensation award by Tesla to its controller Elon Musk, the Court of Chancery found that the grant of the award—involving stock options with a potential value of over $50 billion—was subject to entire fairness review.
However, the court went out of its way to note that if the parties had utilized the protective provisions of MFW, the case might have been dismissed at the pleading stage: “Had the Board conditioned the consummation of the Award upon the approval of an independent, fully functioning committee of the Board and a statutorily compliant vote of a majority of the unaffiliated stockholders, the Court’s suspicions regarding the controller’s influence would have been assuaged and deference to the Board and stockholder decisions would have been justified.
The report also points out that the Chancery Court has recently applied MFW in the context of a challenge to a corporate charter amendment and says that controllers & their advisors should consider using the path to business judgment rule laid out in MFW in any transaction with the controlled company where entire fairness review is possible.
This Cleary memo discusses the outlook for shareholder activism in 2023. In addition to highlighting the potential implications of universal proxy, the growth of pass-through voting & the tug of war between ESG and anti-ESG activism, this excerpt from the memo points out that the DOJ’s renewed interest in the Clayton Act’s prohibition on director interlocks may also have a significant impact:
Activists may also find their directors under the microscope as a result of the DOJ’s stated intention to ramp up enforcement of the Clayton Act’s prohibition on interlocking directorates. This long-standing statutory provision, which bans competitive companies from having overlapping directors and officers in an effort to prevent collusion, has not been a primary focus of the U.S. antitrust agencies in the past.
This appears to be changing. In October 2022, seven directors from five companies resigned in response to an interlocking directorate probe from the DOJ, which also announced that its Antitrust Division would be “undertaking an extensive review of interlocking directorates across the entire economy and will enforce the law.”
The memo says that activist-nominated directors will need to be more closely assessed for antitrust and interlocking directorate concerns. These concerns will be particularly elevated when the nominee is an insider of the activist. The DOJ’s use of an agency or deputization theory of liability may present the greatest risk, because as the memo points out, even if one individual doesn’t sit on the boards of competing companies, the DOJ may find an interlocking directorate if different individuals representing the interests of the activist sit on the boards of competitors.
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Alexandra Higgins, Spotlight Advisors’ Damien Park and H/Advisors Abernathy’s Dan Scorpio discuss lessons from 2022’s activist campaigns & expectations for what the dawn of the universal proxy era may have in store!
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Over on the Delaware Corporate & Commercial Litigation Blog, Francis Pileggi and Sean Brennecke have posted a review of last year’s key Delaware corporate & commercial law decisions. The authors note that their focus is on the “unsung heroes” among these decisions – important cases that haven’t received a lot of attention from the media or trade publications. This excerpt provides an example of what they mean:
In the Chancery decision of Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. April 4, 2022), the court found that an irrevocable proxy was ambiguous and it did not state that it would “run with the shares” based on the “special principles of contract interpretation” applicable to proxy agreements. This 85-page opinion needs to be read by anyone who wants to know the latest Delaware law on enforceability of proxies.
There is a lot here – the article originally appeared in two installments in the Delaware Business Court Insider and ran a total of 34 pages.