Earlier this month, the SEC announced the adoption of final rules amending Regulation 13D-G. Here’s the 295-page adopting release, and here’s the 2-page fact sheet. Considering that the SEC had initially proposed a five calendar day deadline for Schedule 13D filings, this Diligent blog from Rebecca Sherratt notes that activist investors are breathing a collective sigh of relief since the final amendments give investors a little more leeway than as proposed. Although, Rebecca notes, “the jury is still out as to whether the rule amendments have the potential to shake up how activist investors build their stakes and kickstart their campaigns.”
We’ve shared some details on the final rule release on TheCorporateCounsel.net Blog. Below, I’m sharing our blog on the revised deadlines, but also check out our blog on the amendments & guidance related to derivatives and group formation.
Per the fact sheet, the amendments primarily:
– Shorten the deadlines for initial and amended Schedule 13D and 13G filings;
– Clarify the Schedule 13D disclosure requirements with respect to derivative securities; and
– Require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.
Here’s more on the new filing deadlines, which differ a bit from the proposed form:
For Schedule 13D, the amendments shorten the initial filing deadline from 10 days to five business days and require that amendments be filed within two business days.
For certain Schedule 13G filers (i.e., qualified institutional investors and exempt investors), the amendments shorten the initial filing deadline from 45 days after the end of a calendar year to 45 days after the end of the calendar quarter in which the investor beneficially owns more than 5 percent of the covered class.
For other Schedule 13G filers (i.e., passive investors), the amendments shorten the initial filing deadline from 10 days to five business days. In addition, for all Schedule 13G filers, the amendments generally require that an amendment be filed 45 days after the calendar quarter in which a material change occurred rather than 45 days after the calendar year in which any change occurred.
Finally, the amendments accelerate the Schedule 13G amendment obligations for qualified institutional investors and passive investors when their beneficial ownership exceeds 10 percent or increases or decreases by 5 percent.
To ease filers’ administrative burdens associated with these shortened deadlines, the amendments extend the filing “cut-off” times in Regulation S-T for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time.
As usual, the amendments will be effective 90 days after publication in the Federal Register, but reporting persons aren’t required to comply with the structured data requirements until December 18, 2024 (with voluntary compliance permitted beginning December 18, 2023) or the revised 13G deadlines (not 13D deadlines!) until September 30, 2024. As an example, the adopting release states “a Schedule 13G filer will be required to file an amendment within 45 days after September 30, 2024 if, as of end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G.” Check out our “Schedules 13D & 13G” Practice Area where we’ll post memos for more info.
If you’re wondering why we didn’t give a heads-up that this was on an upcoming open meeting agenda, that’s because it wasn’t. Here’s a blog from Broc from almost 10 years ago about the SEC’s ability to adopt rules by seriatim.
The September-October issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– The Importance of Future-Proofing the Board
– M&A Buyers Beware: Trend in Delaware Merits Heightened Attention by Acquirors
– HControl Holdings: In Delaware, “A Deal’s a Deal”
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.
Keith Bishop recently blogged about a new California statute that will require prospective buyers of the stock or assets of grocery or drug stores to provide advance notice to the California AG. This excerpt from the Legislative Counsel’s Digest’s summary of the legislation provides an overview of its requirements:
This bill would prohibit a person from acquiring any voting securities or assets of a retail grocery firm or retail drug firm, as those terms are defined, unless both parties give, or in the case of a tender offer, the acquiring party gives, specified notice to the Attorney General no less than 180 days before the acquisition is made effective.
The bill would require an acquiring party who is required to file notice pursuant to the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 to submit the form and documentary material required to be submitted under that federal act, and would specify information to be included in the notice for a party who is not required to file notice pursuant to that federal act, including information required to assess the competitive effects of the proposed acquisition and to assess the economic and community impact of any planned divestiture or store closures.
The statute gives the AG 180 days to evaluate a particular transaction. In addition to the availability of injunctive relief and other equitable remedies, the legislation entitles the AG to recover to recover attorney’s fees and costs and impose civil penalties of up to $20,000 for each day of noncompliance with its requirements.
Keith’s blog notes that, among its other odd provisions, the statute on its face applies to all acquisitions of grocery store assets, without an exclusion for ordinary course retail transactions, and also doesn’t require any California nexus. The statute does give the AG the authority to adopt implementing regulations, so hopefully those will sort some of this out.
Earlier this month, I blogged about comments made by Principal Deputy AG Marshall Miller on the relevance of the DOJ’s voluntary self-disclosure policy for companies engaged in M&A transactions. During the course of those comments, Deputy AG Miller promised further guidance on this topic in the near future. He was a man of his word, because just a day after my blog, Deputy AG Lisa Monaco announced the initiation of a “Mergers & Acquisitions Safe Harbor Policy” intended to incentive voluntary self-disclosure of wrongdoing uncovered during the M&A process. This excerpt from Cozen O’Connor’s recent memo on the announcement provides an overview of the new policy:
In her speech at the Society of Corporate Compliance and Ethics’ 22nd Annual Compliance & Ethics Institute, DAG Monaco touted the new policy as a way to “incentivize the acquiring company to timely disclose misconduct uncovered during the M&A process.” To obtain a presumption of a declination, the acquiring company must disclose the misconduct discovered at the acquired company within six months from the date of closing, whether the misconduct was discovered pre- or post-acquisition. The acquiring company must also fully remediate the misconduct within one year of the date of closing. DAG Monaco acknowledged that no transaction is the same, noting that these deadlines can be extended by prosecutors, subject to a reasonableness standard.
DAG Monaco also explained that aggravating factors (e.g., executive involvement, significant profit, egregiousness of the misconduct) will be treated differently in the context of mergers and acquisitions. Where aggravating factors are present at the acquired company, they will not affect the acquiring company’s ability to receive a declination. On the other hand, where aggravating factors are not present at the acquired company, the acquired company itself can also qualify for voluntary self-disclosure benefits, including a possible declination.
Finally, any misconduct disclosed under the policy will not be a factor in any future recidivism analysis for the acquiring company.
The memo notes that DAG Monaco was very clear about the bottom line of the DOJ’s new policy: “Good companies — those that invest in strong compliance programs — will not be penalized for lawfully acquiring companies when they do their due diligence and discover and self-disclose misconduct.” It says that this new, concrete policy puts companies in “entirely new territory” and provides them with guidance and predictability that had previously been lacking. We’re posting memos on the DOJ’s new safe harbor policy in our “Due Diligence” Practice Area.
In recent years, achieving synergies associated with a target’s ESG strengths to enhance the combined company’s revenues and profitability has become an increasingly important part of many M&A transactions. This Boston Consulting Group memo provides some insights into best practices for achieving ESG-related synergies. This excerpt discusses the need to move quickly to capitalize on synergy opportunities as soon as the deal closes:
After the deal closes, start implementing ESG synergies right away. To obtain comprehensive data about the acquired company, engage in open-book discussions, town hall meetings, or small group sessions. Use this detailed information to validate targets and plans developed in earlier phases, execute risk management and savings initiatives, and, if necessary, reprioritize longer-term opportunities.
The execution phase is also the time to fine-tune the new or renewed ESG priorities and ambitions for the combined entity, as well as to define a roadmap for capturing the value. Finally, create a culture of collaboration among teams from acquirer and acquiree so that they can pursue shared goals aimed at enhancing the combined entity’s ESG performance and unlocking further value.
The memo also discusses the nature of both quantifiable and non-quantifiable ESG-related synergies. It points out that those synergies go beyond risk mitigation and encompass the ways in which an acquirer can generate value for the combined entity by utilizing its own ESG practices and those of the target, as well as by implementing new operating models and generating scale effects.
The Delaware courts haven’t been too kind to poison pills in recent years, but Vice Chancellor Laster’s bench ruling in Building Trades Pension Fund of Western Pennsylvania v. Desktop Metal, (Del. Ch.; 7/23) (transcript)), upheld a rights plan in the face of a derivative action seeking to enjoin its application. At issue in the case was language in the plan providing that a person would be regarded as the beneficial owner of any shares held by another person with whom they had an “agreement, arrangement or understanding” with respect to the acquisition, holding, voting, or disposition such shares.
The plaintiff argued that this language – referred to as an “AAU provision” – prevented stockholders from sharing their views with each other on how to vote on a proposed merger. Vice Chancellor Laster disagreed, and this excerpt from a recent Richards Layton memo on the case explains his reasoning:
On July 5, Vice Chancellor J. Travis Laster, ruling from the bench on the motion to expedite, found that the plaintiff had failed to show a threat of irreparable harm and questioned whether the claims in the complaint were even colorable. The court characterized Desktop Metal’s rights plan as a whole, and the definition of beneficial ownership (including the AAU provision) in particular, as “absolutely standard,” noting that the language in the AAU provision was “not new” and that the exact same “agreement, arrangement or understanding” language has been used for years in Section 203 of the Delaware General Corporation Law, which is Delaware’s principal antitakeover statute, and in Section 13D of the Securities Exchange Act of 1934.
The court noted that the AAU provision included a standard exception for soliciting revocable proxies and also stated that “it doesn’t prohibit [stockholders from] talking about what they want to do” or from “voting down the deal if they want to do it.” In short, the court concluded that Desktop Metal’s rights plan was “a standard plain vanilla pill with a standard plain vanilla [AAU provision] in what is a standard plain vanilla buy-side deployment.” In finding there was no showing of irreparable harm, the court described the dispute as “academic,” given that the complaint was being brought by a stockholder “desirous of simply engaging in the academic question of whether, in this setting, standard [AAU provision] language creates some issue under enhanced scrutiny” rather than by a party who was being actively prevented from pursuing a course of action.
The memo says that Vice Chancellor Laster denied the plaintiff’s motion to expedite the proceedings, and the plaintiff voluntarily dismissed the complaint a few days later.
This recent Cooley blog provides guidance on how boards should approach assessments of multiple strategic alternatives and offers up 13 principles that directors should keep in mind when engaging in that process. This excerpt says that a sophisticated understanding of potential alternatives allows a board to create leverage when dealing with counterparties:
Challenges are presented when different types of available strategic alternatives would necessarily evolve on different execution timetables. Experienced advisers, especially if utilized early, can help companies manage timelines and processes to minimize situations where a decision needs to be made on one pathway before another potentially compelling pathway is ripe for consideration – and even create leverage by working to keep competing alternatives alive.
Transaction counterparties often try to use speed and a sense of urgency to drive outcomes (e.g., “accept my offer at a premium to your trading price now, or it’s off the table”). A board that proactively educates itself on a “clear day” regarding the company’s available strategic alternatives (and the time and key steps necessary to implement each) will be able to react more nimbly to unsolicited approaches, which can help mitigate the first mover advantage for the party making the unsolicited approach.
Other matters addressed in the blog include the importance of a sound process, duty of loyalty considerations, the appropriate use of board committees, and the need to understand stockholder approval requirements and the potential for stockholder challenges.
This LinkedIn newsletter from Swaney Group Advisors addresses the challenge of retaining key talent during an acquisition or merger — step 10 in their 11-step process for post-merger integration. Before addressing retention, the newsletter notes the importance of taking a nuanced approach to identifying key talent. It suggests gathering data and having conversations internally to identify anyone “instrumental in driving team cohesion, innovation, or client satisfaction” so that individuals who may be crucial to the integration process but may not be in top-tier roles aren’t overlooked in retention efforts.
When seeking to retain this broader group, the newsletter highlights important strategies beyond financial incentives, focused on communication, career development and culture:
– Regular town hall meetings, feedback sessions, and transparent communication channels are essential to quell anxieties and fortify trust. Moreover, leaders who actively engage in these dialogues signal commitment, fostering a culture of mutual respect and understanding.
– Offering clear career progression paths, continuous learning opportunities, and exposure to cross-functional projects can make employees see the merger as an avenue for enhanced career trajectory.
– Merging companies often means blending disparate corporate cultures. Ensuring that this blend is harmonious and inclusive can prevent potential fractures in the team. Celebrating cultural differences, organizing team integration events, and promoting mutual respect are steps that can foster a united, cohesive workforce.
In addition to these strategies, “financial acknowledgment remains crucial.” Periodic benchmarking can ensure competitive compensation packages for key employees.
To that end, the team at WTW asked us to share that they are currently conducting a survey of incentive structures and strategies companies use to retain key employees during an acquisition. The survey results should provide useful benchmarking information to shape retention programs more efficiently. WTW will provide a complimentary full report of the survey results to participants who complete the survey before October 27.
Earlier this week, in The Williams Companies v. Energy Transfer Equity, (Del.; 10/23), the Delaware Supreme Court affirmed a prior Chancery Court decision finding that ETE had breached its merger agreement with Williams and ordering it to pay a $410 million breakup fee. In doing so, it also affirmed the Chancery Court’s rejection of ETE’s argument that a carve-out contained in the merger agreement’s disclosure schedules permitting it to engage in a $1 billion securities offering applied to any potential violations of the agreement’s ordinary course and interim operating covenants arising out of the offering. The Court also affirmed the Chancery Court’s rejection of ETE’s claims that Williams breached the merger agreement.
Like the Chancery Court’s decision, this decision, which brought this long-running litigation to an end, is a must-read for lawyers involved in drafting and negotiating disclosure schedules and the related contract terms.
In a recent post for the CLS Blue Sky Blog, S&C’s Olivier Baum and Harvard Prof Guhan Subramanian discussed data on redemption mechanisms in shareholder rights plans based on 130 poison pills adopted by US companies from January 1, 2020 to March 31, 2023 (excluding NOL pills). Specifically, they considered the frequency and utility of the two main ways to structure the redemption provision:
Trip-Wire Feature: If the poison pill implements a “trip wire” concept, the rights granted thereunder are triggered if, and can no longer be redeemed by the board once, the acquirer exceeds the triggering threshold set in the shareholder rights plan.
Last-Look Feature: If the poison pill implements a “last look” concept, the board of the target company has a “last look” for a certain period after the poison pill has been triggered to decide whether to redeem the rights granted thereunder. If the board redeems the rights, the pill is thereby “defused,” and the bidder can continue buying shares of the target company.
The pills were almost evenly split between the two approaches, with the trip-wire feature being slightly more common. Supporting its claim with data that pills drafted by firms ranked Band 1, 2 or 3 in Corporate/M&A by Chambers tend to include the trip-wire feature, the blog argues that having a last-look feature diminishes the deterrent effect of a pill for the following reasons:
[T]he company installing a poison pill wants to be perceived as willing to dilute any bidder that acquires shares in excess of the threshold set in the shareholder rights agreement. However, if a bidder triggers a poison pill nonetheless, the company is likely to have multiple reasons for not wanting to follow through with the dilution. First, and as we show in our paper, only one-third of U.S. public companies have a sufficient number of authorized shares to effectuate a full exercise of a flip-in feature. Second, the triggering of a poison pill and the exercise of the flip-in feature result in the company receiving billions of dollars in cash on the balance sheet, which generally is way more than a company is reasonably able to use to finance its business. Third, if a bidder were to present an attractive offer contingent upon a redemption of a poison pill with a last-look feature, the board would have to comply with the fiduciary duties it owes to all shareholders and consider these alternatives.
If the board were to conclude that the offer is in the interest of all shareholders, it would have to negotiate with the bidder on the terms of a merger – however, not from a position of strength but rather a position of weakness due to (i) its failure to follow through with its threat to dilute the bidder, and (ii) the clock of – typically – 10 business days ticking until the board must decide on the redemption of a pill with a last-look feature.
All these points that may disincentivize a company’s board to follow through with the threatened dilution can be avoided under the trip-wire structure: In the case of a poison pill with a trip-wire feature, the responsibility for whether or not the dilution will be effected rests solely with the bidder’s decision (not) to trigger the poison pill. As the target company’s board has no possibility to “pull back” if and when the pill is triggered, it can effectively commit to the threatened dilution, thereby increasing the potency of such threat and thus enhancing its leverage and bargaining power.
For companies with on-the-shelf poison pills with a last-look feature, stow this away as something to discuss and consider for your next regular review. And, while on the topic of poison pills, there are a few being challenged in Delaware, as reported by Bloomberg, and we’ll be tracking how those cases play out.