Earlier this year, I blogged about Totta v. CCSB Financial, (Del. Ch.; 6/22), in which Chancellor McCormick held, among other things, that a charter provision prohibiting a stockholder from exercising more than 10% of its voting power interfered with stockholders’ exercise of the franchise. In a subsequent letter decision, Chancellor McCormick concluded that the insurgent stockholders conveyed a substantial benefit upon the company and granted their request for attorneys’ fees.
The company argued that the insurgents gained an exclusively personal benefit, because only their votes were positively impacted by the Court’s interpretation of the antitakeover provision in the charter document, and because their actions advanced the interests of their affiliate in obtaining control of the company. Chancellor McCormick disagreed:
I do not view the benefit conferred in this case so narrowly. While in a strict sense the Post-Trial Opinion only affected Plaintiffs’ votes, the judgment fortifies the Company’s stockholder franchise generally. By bringing this litigation, Plaintiffs vindicated not only their own votes, but also the majority vote of the unaffiliated stockholders who properly elected the insurgent nominees.
The result obtained by this litigation prevents future stockholders from being similarly harmed by an erroneous application of the Voting Limitation. Plaintiffs’ success in this case confers a substantial benefit on CCSB by retroactively correcting the incumbent board’s interpretation of the Voting Limitation and, in effect, proactively setting the interpretation for future elections. The corporation is better off for a rectified election process.
The Chancellor ultimately concluded that the substantial benefits conferred on the company justified the insurgents request for reimbursement of approximately $385,000 in fees and expenses.
Intralinks recently published its M&A Leaks Report, which analyzes deal leaks over the period from 2009-2021, and breaks them down by world region, country & business sector. The report also looks into the effect of leaks on the premiums paid, emergence of rival bidders & time to closing. Here are some of the highlights:
– 8.8% of all deals announced during 2021 involved a leak compared to 8.2% during 2020. These were both above the 7.8% average for all years dating back to 2009.
– The total value of leaked deals was up 105% in 2021 ($142 billion) vs. 2020 ($69 billion). The average dollar value of leaked deals was also up 60% in 2021 ($1.7 billion) vs. 2020 ($1.1 billion).
– The three sectors with the highest amount of pre-announcement abnormal trading activity in 2021 vs. 2020 were Healthcare (12.5%), Retail (11.9%) and Industrials (11.3%). None of these cracked the top three on average over the last several years, and their prominence may reflect the challenges and opportunities that companies in these sectors faced during the pandemic.
As always, one of the most interesting findings was the extent to which takeover premiums for target companies involved in leaked deals exceeded those paid in more stealthy transactions. In 2021, the median premium for leaked deals was 54.3%, which was nearly twice the 27.7% premium paid in non-leaked deals. Deals with leaks also closed over a week faster than those that didn’t leak. The median time to closing for a leaked deal was 92 days, compared with approximately 100 days for non-leaked deals.
Last week, the FTC issued a policy statement setting forth a sweeping new claim to enforcement authority under Section 5 of the Federal Trade Commission Act. Up until now, that statutory provision has been a rarely used tool to address “unfair methods of competition” arising in situations where other major antitrust statutes didn’t apply. The policy statement is premised on the FTC’s position that Section 5 wasn’t just intended to protect consumers, but also to “protect the smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals.”
What are the implications of this new policy statement? Well, as this Goodwin memo explains, the FTC is likely to try to wield that authority in merger enforcement cases targeting acquisitions of nascent competitors – exactly the kind of transactions it’s been having a hard time persuading the courts are prohibited under Section 7 of the Clayton Act:
The 2022 Policy Statement goes on to provide a “non-exclusive set of examples” of the type of business conduct that may violate Section 5. While this list covers a broad range of business activities, most striking among these activities are references to M&A deal activity that the FTC has now declared could be prohibited under the FTC Act:
– Mergers or acquisitions, or joint ventures that have the tendency to ripen into violation of the antitrust laws.
– A series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.
– Mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition.
Taking an unprecedented interpretive position on one federal antitrust statute to avoid getting clobbered in court for taking that same position on another more directly applicable statute is. . . well . . . let’s just say it’s “a bold strategy”. But according to this Wilson Sonsini memo, that’s far from the limit of what the FTC’s new policy statement might mean. As this excerpt says, it could also substantially broaden the risks of enforcement actions targeting director interlocks:
The FTC’s policy statement lists “interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act” as one example of a “violation” of Section 5. Under this new interpretation, the FTC appears to be asserting the authority to obtain injunctive relief against “interlocks” not prohibited by the terms of the Clayton Act.
This likely includes, at minimum, “interlocks” involving board observers. This would include a situation in which:
– an individual serves as a board observer at two competing corporations,
– an individual serves as a board observer at one corporation and a director or officer of its competitor, or
– an entity such as a private equity or venture capital fund is represented by a board observer at one corporation and is represented by a board observer or director at another corporation.
It is possible that the FTC would also use this authority to challenge interlocks that fall within the safe harbor exemptions of Section 8 of the Clayton Act.
I’m not usually impressed by overheated claims about the “Regulatory State,” but holy cow! This statement is about as aggressive an attempt to rewrite important provisions of federal law as I’ve ever seen an agency undertake – and I can’t imagine it’s going to fare well in the federal courts as they’re currently configured.
According to Dykema’s “18th Annual M&A Outlook Survey,” dealmakers aren’t quite as downbeat about the M&A climate over the next 12 months as you might expect given the gloomy 2023 forecasts we’ve seen. In fact, 65% of the executives and financial advisors surveyed expect the U.S. M&A market to strengthen in the next 12 months. But this excerpt from the survey says that in the current environment, buyers with plenty of dry powder are likely to be the ones getting deals done:
Dealmakers named rising interest rates, economic conditions, and growing inflationary pressure as the top deterrents to M&A activity—while citing the financial markets, economic conditions, and rising interest rates as its biggest drivers. This suggests we may be entering a market of haves and have-nots, in which buyers with a large amount of liquidity—and consequently, no need to borrow at high interest rates—expect to take advantage of buying opportunities and close more deals in the coming year. In contrast, buyers who have routinely relied on banks to finance a large percentage of their acquisitions are anticipating greater roadblocks to funding their deals.
As regulators in the U.S. and abroad ramp up their scrutiny of potential M&A transactions, this Skadden memo addresses the need for directors to take on a bigger role in assessing and mitigating the regulatory risks associated with a deal. This excerpt discusses the board’s role in ensuring that the risk of a blocked or abandoned transaction is appropriately evaluated:
To ensure that the fundamental risk of non-approval is properly assessed and mitigated, boards should focus on pre-signing preparation, careful negotiation of contractual risk-sharing provisions and a flexible post-signing strategy to obtain approvals.
First, the board must insist that management, with the help of outside advisers, conducts a probing analysis that goes well beyond traditional competition measures such as horizontal overlaps and combined market shares, which might have sufficed in the past. The analysis should consider the parties’ documents and the expected reactions of customers, suppliers, employees, industry groups and competitors, because those could factor into regulators’ decisions.
The parties need to fully understand the relevant authorities’ current enforcement priorities, and any novel antitrust doctrines that key officials espouse. In cross-border deals, they will also need to evaluate the impact on national “industrial policy.” That will include any connection to highly sensitive or favored industries and other policy goals that regulators may pursue as part of their review. Today those could include climate change, data privacy, employment and even wealth distribution.
The memo says that this is the time when the board and management also need to consider the circumstances in which it will make sense to litigate with regulators. The results of the analysis should be summarized & presented to the board a sufficient time in advance to permit the directors to raise questions and request appropriate follow-up work. The memo also says that the board should continue to be updated as more is learned during the deal process and as regulatory risk is allocated in the negotiation process.
This Dechert memo provides an overview of third quarter merger investigations and indicates that regulators are “walking the walk” when it comes to their stated hard line on merger enforcement. Here’s an excerpt:
In both our DAMITT 2021 Report and our Q1 2022 Report, we warned that parties to transactions subject to significant merger investigations were more likely to see the FTC or DOJ sue to block their deal or push them to abandon it prior to being sued. Despite a temporary reprieve last quarter—when just under 50 percent of significant investigations resulted in a settlement—the Biden administration’s aversion to settlements returned in Q3, when all concluded significant U.S. merger investigations resulted in either a complaint or an abandoned transaction.
That is not to say that the agencies will not accept any settlements. For the first three quarters of 2022, nearly 40 percent of significant investigations resulted in a settlement. Of note, however, the DOJ has not entered into a single settlement to resolve a significant investigation since DOJ Assistant Attorney General Jonathan Kanter began warning, shortly after taking office in November 2021, that investigations resolved with merger remedies should be the “exception, not the rule.” The FTC is responsible for all merger settlements since that time.
Antitrust regulators concluded only three investigations during the third quarter, and all of them ended with either a complaint or an abandoned deal. The memo says that for the first time in more than a decade, there were no settlements or closing statements.
In a down M&A market, it’s not surprising that PE and VC firms would be taking a close look at their legal fees, and a recent survey of 300 in-house lawyers at those firms confirms that the amount of their legal spend is a source of growing concern. Here are some of the key findings:
– Pressure to control legal costs builds. Nearly nine in 10 respondents (86%) say their organization feels some pressure to control legal costs. That pressure has been building over time as well: 62% say the level of pressure to control legal costs has increased compared to last year.
– LPs are scrutinizing legal expenses. 84% of respondents say LPs are scrutinizing legal expenses. More than half (62%) said the level of scrutiny LPs have exhibited over legal expenses has increased over the last three years.
– Legal expenses are a material concern for investment firms. More than two-thirds of respondents (71%) say their organizations are at least moderately concerned about overall legal costs. Nearly half say legal costs around “house spend,” which is often tied to bonuses, is a significant concern.
– Top three challenges in controlling legal costs. 57% said legal work, and therefore costs, are unpredictable; 46% pointed to a lack of transparency around time, billing and invoices; 40% said they sometimes get billed for unnecessary legal services.
If you’re a law firm with PE and VC clients, the survey responses provide some hints about the things that you should and shouldn’t be doing in the current environment. For example, in-house lawyers prioritize timely (66%), transparent (55%) and predictable (47%) invoices from their law firms over lower legal fees (32%). The survey also highlights some law firm “own goals” to avoid – like exceeding fixed fee agreements and initiating matters without the law department’s knowledge.
I know that Chancellor McCormick has been absolutely swamped over the last several months dealing with the Twitter litigation, but spare a thought for Vice Chancellor Laster too, because he’s been dealing with quite a plateful himself. In fact, just since Labor Day, the Vice Chancellor has issued 10 opinions addressing motions to dismiss in litigation arising out of the de-SPAC merger of P3 Health Group LLC.
The litigation essentially involves a dispute between two PE sponsors, Chicago Pacific, which was the lead investor, and Hudson Vegas Investments, which was brought in later as an investor. Some of the motions to dismiss opinions that VC Laster issued dealt with jurisdictional issues, but this excerpt from Fried Frank’s memo on the case highlights all of the substantive issues that the Court has addressed so far. It’s quite a list :
– A Chicago Pacific principal faces potential liability with respect to the merger—because, based on the allegedly significant role he played as part of the Chicago Pacific team that engineered the merger, he was an “acting manager” of the Company, even though he had no formal role at (i.e., was not a named manager, nor a director, officer or employee of) the Company. (This decision was issued Oct. 26, 2022.)
– The Company’s General Counsel faces potential liability with respect to the merger—because, based solely on her title, she was an “acting manager” of the Company, although she had asserted that despite her title her actual role had been merely “ministerial.” (This decision was issued Sept. 12, 2022.)
– The Company faces potential liability for alleged breaches of its contractual obligations to Hudson—because (i) effecting the merger without Hudson’s consent may have violated Hudson’s right under the Company’s LLC operating agreement to veto affiliated transactions, given that (a) after the merger, Chicago Pacific designated members of the surviving company’s board and (b) Chicago Pacific contemplated a follow-on transaction involving another of its portcos; and (ii) the distribution to Hudson may not have fulfilled Hudson’s priority distribution right, given that the Company deemed the fair market value of the distributed SPAC shares to be the nominal $10 per share when the actual value likely was significantly less. (This decision was issued Oct. 31, 2022.)
– Chicago Pacific and the Company (and their key managers) face potential liability for alleged fraudulent inducement of Hudson’s initial investment in the Company—because the near-term Company projections provided to Hudson at that time were significantly higher than the actual results turned out to be, under circumstances that supported a reasonable inference of fraud based on the Company’s small size and the large spread between the projected and actual results. (This decision was issued Oct. 28, 2022.)
I blogged about the fraudulent inducement claims a couple of weeks back, and the memo addresses some of the key takeaways from that decision and the Vice Chancellor’s other substantive rulings. For example, this excerpt addresses how the terms of a relatively standard contractual consent right created problems for the PE sponsor when it designated post-merger directors:
The court found, based on the (relatively standard) language of the consent right provision in the Company’s LLC operating agreement, that the Company’s post-merger designation of Chicago Pacific principals to the surviving company’s board may have breached Hudson’s affiliated transactions consent right. The decision underscores the broad interpretive effect from use of the phrases “series of related transactions” and “entry into an agreement” in a provision granting an affiliated transactions consent right.
I’ve previously blogged about how the Kroger & Albertsons’s merger agreement dealt with the potentially significant antitrust issues associated with their deal, but I’m not sure that they anticipated the kind of legal challenge that a group of State AGs launched yesterday. In a complaint filed in DC federal court, the AGs of California, Illinois & DC have asked the court to enjoin Albertson’s payment of a $4 billion special dividend contemplated by the deal until regulatory review has been completed.
According to Albertsons’ press release announcing the deal, payment of this special dividend will be made on November 7, 2022, well in advance of the receipt of any regulatory clearances. The plaintiffs allege that the payment of the special dividend would impair Albertsons’ ability to compete against other supermarkets, including Kroger. As a result, they allege that the merger agreement involves an agreement in restraint of trade in violation of Section 1 of the Sherman Act and applicable state antitrust statutes. Here’s an excerpt from the complaint:
The Merger Agreement, and specifically the payment of the Special Dividend together with other terms limiting Albertson’s ability to finance its operations, will significantly reduce Albertsons’ ability to compete during the pendency of regulatory review of the merger, and possibly beyond. By stripping Albertsons of necessary cash at a time when its deteriorating bond ratings will make access to capital harder for Albertsons, this agreement between Kroger and Albertsons curtails Albertsons’ ability to compete on price, services, other quality metrics, and innovation. Because it increases Albertsons’ leverage, empirical economics suggests this reduction in Albertsons’ competitiveness will reduce the intensity of price competition market-wide.
Albertsons’ creditworthiness plays a central role in the complaint, with the plaintiffs noting that the company’s lack of an investment grade rating means that it may find it difficult to obtain financing necessary to support its post-dividend operations. The complaint also raises the possibility that the provisions of the merger permitting the payment of the special dividend before the deal received regulatory approval might involve some strategic behavior by the parties:
Discovery may reveal that the “Special Dividend” reflects a calculated effort to leave Albertsons just battered enough for Defendants to argue later (to regulators or a court) that it is a “flailing” or “failing” firm that Kroger should be allowed to acquire lest it go out of business anyway, but still worth its hard assets and Kroger’s gain from neutralizing a competitor.
In Kodiak Building Partners, LLC v. Philip D. Adams, (Del. Ch.; 10/22), the Chancery Court invalidated a non-compete covenant agreed to by a target’s former employee stockholder in connection with the sale of the target’s business. Vice Chancellor Zurn first concluded that a purported waiver of the stockholder’s right to contest the reasonableness of the covenant’s restrictions violated public policy. She then determined that the covenant itself was unenforceable. This excerpt from a Hunton Andrews Kurth memo on the decision explains her reasoning:
The court ultimately found that the restrictive covenants were overbroad in relation to the legitimate business interests they were intended to protect. The court stated that, in the context of a sale of a business, those legitimate business interests are limited to protecting “the assets and information [the buyer] acquired in the sale.”
Among other things, the restrictive covenants in question (i) restricted competition with Kodiak’s other portfolio companies, beyond merely the business of Northwest, (ii) restricted solicitation of any current or prospective client or customer of Kodiak’s other portfolio companies, beyond merely the clients and customers of Northwest, and (iii) defined Confidential Information to include information relating to Kodiak’s other portfolio companies.
The court noted that, while Delaware law recognizes Kodiak’s legitimate economic interest in protecting what it purchased when it acquired Northwest, it has not affirmatively recognized a legitimate interest in protecting all of the buyer’s preexisting goodwill that predated the buyer’s purchase of the target company. After a fact specific analysis, the court held that “[t]he acquiring company’s valid concerns about monetizing its purchase do not support restricting the target’s employees from competing in other industries in which the acquirer also happened to invest.”
Vice Chancellor Zurn also declined to “blue pencil” the terms of the non-compete, even though the agreement gave her the authority to do that. Instead, she cited the Court’s decision in Delaware Elevator v. Williams, (Del. Ch.; 3/11), for the proposition that disparities in bargaining power between an employee and employer make it inappropriate to blue pencil non-compete provisions in these situations. Doing so would provide an incentive to employers to overreach, since they would be in a position to compel agreement with unenforceable terms and, in the event of a challenge, rely on the court to provide them with the maximum level of protection permissible.
The Hunton Andrews Kurth memo says that one of the decision’s key implications for private equity sponsors and other buyers with existing businesses in different industries or geographic locations is that they won’t be able to rely on sale of business non-competes to protect those interests. That’s because, in the Court’s view, when it comes to non-competes, “a buyer’s legitimate business interests are limited to the assets/goodwill and information that the buyer obtained in the acquisition.”