This Gibson Dunn memo says that the FTC is contemplating potentially significant changes to the information required to be filed under the HSR Act. Here’s the intro:
According to recent statements of agency officials, the Federal Trade Commission (FTC) is looking to revise the Premerger Notification and Report Form (the “HSR Form”) “to conform to changing market realities and global standards.” The FTC has not released details of the proposed changes, but recent statements from agency leadership provide some indication as to how the agency may expand the filing requirements.
FTC Chair Lina Khan recently announced that the agency is exploring “ways to collect on the front-end information that is more probative of whether parties are proposing an unlawful deal.” And FTC Bureau of Competition Director Holly Vedova explained that the FTC wants, as part of the HSR filing, “overlap information, customers, things like that.” The Bureau Director amplified that, under the proposed changes, the parties would “do that work ahead of time, and come in with that information, so that we don’t spend ten, twenty, thirty days trying to collect all that information.
The memo says that while the proposed changes won’t affect filing thresholds, they would affect the information & documents that companies have to provide in connection with an HSR filing. If the changes ultimately require the type of detailed information often required in other jurisdictions, they could substantially increase the cost and time involved in making HSR filings, even those for deals that don’t raise competition concerns.
The most common structure for acquiring a U.K. public company in a friendly transaction is a “scheme of arrangement,” in which the target company seeks a court order permitting it to put a deal up to a shareholder vote. If a sufficient majority of each shareholder “class” approves the transaction and the conditions to it are satisfied, the scheme will be sanctioned by the court and the deal will close. In addition to being the structure of choice for public company deals with U.K. targets, a scheme of arrangement also provides a way to acquire a private company without the need for all of thee target’s shareholders to sign-off on deal documents.
This Cooley blog provides an overview of how these transactions work and addresses a number of questions about their mechanics. This excerpt discusses what a “class” of shareholders means when dealing with a scheme of arrangement:
In the context of a scheme, a class is essentially a grouping of shareholders. This is not the same as the classes of shares in a company’s share capital (i.e., common stock vs. preferred stock) – a company may have several issued share classes, but the shareholders can all form a single class for the purposes of the scheme. The key here is to assess what rights are being given up and what rights are being granted in return, and whether the treatment differs amongst shareholders to such an extent that it would be impossible for them to have a common interest and consider the scheme together in a single class.
For example, if all common stock shareholders receive the same consideration, then they are all likely to be deemed members of the same class. If, however, some shareholders receive a different mix of consideration or another benefit as a result of the transaction (such as a transaction bonus, repayment of shareholder debt, etc.), they may be deemed to form a separate class and be excluded from the class vote of the other common stock shareholders. Similarly, if the proceeds are flowing through a liquidation waterfall without any element of discretion being applied by the target, you may be able to take the position that the shareholders’ interests are sufficiently aligned, and they can form a single class.
The memo also addresses the vote required to approve a scheme, the use of stock as consideration, and the process and timing of the transaction.
Wachtell Lipton recently published the 2022 edition of its 245-page “Takeover Law and Practice” outline. The outline addresses directors’ fiduciary duties in the M&A context, key aspects of the deal-making process, deal protections and methods to enhance deal certainty, takeover preparedness, responding to hostile offers, structural alternatives and cross-border deals. It’s full of both high-level analysis and real-world examples. For example, check out this excerpt on unsolicited M&A:
The volume of unsolicited deals increased globally both in absolute terms, from $166 billion in 2020 to $421 billion in 2021, and in terms of share of overall deal volume, from 3% in 2020 to 7.5% in 2021. 2021 also saw an increase in the number of topping bids compared to 2020. As markets returned to normalcy after the early days of the COVID-19 pandemic, there arose greater opportunities for unsolicited acquirors to pursue targets that lagged behind their peers in recovering. At the same time, competition for targets intensified, as more potential acquirors entered the market, including a plethora of SPACs that have time limits on making acquisitions (as discussed in Section I.B.5), leading to more competition in some cases for certain targets.
As an example of competition in unsolicited M&A, both Cannae and Senator submitted a joint bid for Corelogic, which then adopted a poison pill and increased its stock buyback program in response. Ultimately, however, neither Cannae nor Senator was successful in acquiring Corelogic, who agreed to a deal with Stone Point at a higher price, showing that the competitive unsolicited deal environment can lead to deals with an acquiror other than the original unsolicited acquiror. Overall, it remains challenging to successfully complete an unsolicited acquisition, and a thoughtfully executed defense may in certain instances enable a target to retain its independence.
Last October, the FTC announced that it was reinstating its policy requiring M&A divestiture orders to include provisions mandating that respondents seek the agency’s prior approval for future acquisitions within certain markets for a period of 10 years. More than six months have passed since that announcement, and this Gibson Dunn memo takes a look at how that policy has been applied in real world settings.
The memo reviews the prior approval terms set forth in the seven consent agreements that the FTC has entered into since reintroducing the prior approval policy, and also offers up some key takeaways for parties considering deals that may be subject to FTC consent orders. This one highlights the fact that the parties may not be out of the woods if they decide to abandon a transaction:
The 2021 Policy Statement put merging parties on notice that even if they abandon a proposed merger after litigation commences, the Commission may subsequently pursue an order incorporating a prior approval provision. To obtain such an order the FTC would have to pursue an enforcement action in its administrative court seeking injunctive relief to prevent a potential recurrence of the alleged violation, which would likely require significant resources.
Since the 2021 Policy Statement was issued, the FTC has yet to pursue such an order against merging parties who have abandoned post-complaint but before fully litigating the challenged transaction. There have been indications, however, that the FTC is exploring the possibility of seeking an order against Hackensack Meridian Health and Englewood Healthcare—who abandoned their proposed merger after the Third Circuit upheld a preliminary injunction entered by the U.S. District Court for the District of New Jersey enjoining the merger—that would require the two hospital systems to provide prior notice should they attempt the same merger in the future.
The memo also points out that the DOJ doesn’t have a prior approval policy, so it remains to be seen whether it will follow the FTC’s lead in consent decrees that it enters into. Of course, the DOJ is currently breathing fire about its desire to litigate antitrust cases, so it may be some time before we have an answer to that question.
Last summer, the Delaware Supreme Court overruled a Chancery Court decision upholding a disputed share issuance used by an incumbent board to resolve a stockholder deadlock. The case arose out of failed negotiations to repurchase the plaintiff’s 50% ownership stake in the company. In response to the breakdown of those negotiations, she filed a lawsuit seeking to have a custodian appointed for the company in order to resolve the deadlock. The board responded by authorizing the issuance of shares to a key employee of the company in order to moot that custodianship proceeding, which led to this lawsuit.
The Chancery Court held that the transaction satisfied the entire fairness standard, but the Supreme Court said that because the case raised concerns about stockholder disenfranchisement, that was only the first step in the analysis. The Supreme Court pointed the Chancery in the direction of two prior decisions. The first, Schnell v. Chris-Craft Industries, held that actions taken by an interested board with the intent of interfering with a stockholder’s voting rights are a breach of the directors’ fiduciary duty. The second, Blasius v. Atlas Industries, held that even good faith actions by the board that have the effect of interfering with voting rights require a “compelling justification.”
On remand, Chancellor McCormick held in Coster v. UIP Companies, (Del. Ch.; 5/22), that the board did not act with an inequitable intent and that it had a compelling justification for its decision to issue the shares. At only 31 pages, Chancellor McCormick’s opinion is brief by Chancery standards, but it nevertheless devotes a lot of attention to the interpretive challenges presented by Schnell and Blasius. After wrestling with those challenges, the Chancellor ultimately concluded that at least in the context of stockholder-franchise challenges, Schnell applies “in the limited scenario wherein the directors have no good faith basis for approving the disenfranchising action.”
In the present case, she concluded that while the board may have been partially motivated by a desire to interfere with the plaintiff’s voting rights, but they were also motivated by a desire to act in the best interests of the company and prevent the harm to its business that would result from the appointment of a custodian. Accordingly, the board’s actions were not completely devoid of a good faith basis, and therefore should be evaluated under Blasius. The Chancellor then concluded that the board’s actions passed muster under the “compelling justification” test:
In the exceptionally unique circumstances of this case, Defendants have met the onerous burden of demonstrating a compelling justification. Defendants proved that the broad relief sought by Plaintiff in the Custodian Action rose to the level of an existential crisis for UIP. Defendants demonstrated that the appointment of a custodian could trigger broad termination provisions in key contracts and threaten a substantial portion of UIP’s revenue. Defendants also proved, more generally, that UIP was a services business dependent on personal relationships; thus, displacing oversight and managerial powers would defeat the founders’ purpose in forming UIP.
Chancellor McCormick also held that the share issuance was appropriately tailored to achieve the goal of mooting the custodian action while also achieving other important goals, including the implementation of a corporate succession plan and rewarding a key employee. She acknowledged that the share issuance eliminated the plaintiff’s ability to use her 50% interest to block stockholder action, but observed that it had the same effect on the other 50% owner by making the new employee-shareholder the swing vote.
As Broc used to so colorfully put it, we’re posting “oodles” of memos on the SEC’s SPAC proposal in our “SPACs” Practice Area. This recent one from Debevoise caught my eye, because it focuses on the proposal’s significant implications for investment banks involved in SPAC transactions. If adopted in their current form, the rules will expose a bank that served as an underwriter of a SPAC’s IPO to liability as an underwriter for its de-SPAC transaction if the bank “facilitates” that transaction or participates directly or indirectly in it. This excerpt from the memo says that this proposed rule could have a significant impact on market practice:
The proposed rules, if adopted, will likely lead to significant changes to current market practice. As noted above, an underwriter of the SPAC IPO often serves in additional roles that could be caught up in the rule. De-SPAC transactions, funded with a substantial new equity placement (through a PIPE), are often larger than the original SPAC IPO, and banks would understandably like to participate in that larger transaction. But under the new rules, participation may trigger underwriter liability for the bank with respect to the de-SPAC registration statement.
It is not always obvious whether a bank will be subject to backend underwriter liability. If the bank plays no role other than as underwriter in the original SPAC IPO, then we believe that the fact that a portion of its compensation is payable only if the de-SPAC transaction is consummated should not, by itself, trigger underwriter liability regarding the de-SPAC disclosure. On the other hand, if an underwriter acts as financial advisor to the target company, under the plain language of the proposed rules, the underwriter could be deemed to be “facilitating” the de-SPAC transaction and thus be subject to underwriter liability on the de-SPAC registration statement.
The memo points out that absent major changes in current market practice, the standard protections that would apply to an IPO underwriter would not apply to the de-SPAC transaction. There would be no underwriting agreement, indemnification rights, due diligence process (including legal opinions and auditor “comfort” letters), and no control over the timing of the closing. Furthermore, once a bank that underwrote the SPAC’s IPO decides to cross the Rubicon and serve as its financial advisor for the de-SPAC, it’s unclear if the bank can avoid liability as an underwriter by withdrawing and foregoing its success fee.
Tesla’s 2016 acquisition of Solar City has been a deal blogger’s paradise for the last 6 years, and I had high hopes that Vice Chancellor Slights’ post-trial opinion in In re Tesla Motors Stockholders Litigation, (Del. Ch.; 4/22), might be a real blockbuster. Alas, it was not to be. Instead of addressing all of the potentially juicy issues associated with the transaction, the Vice Chancellor found that the deal was “entirely fair,” and therefore ruled in favor of the Tesla board & Elon Musk.
Vice Chancellor Slights will soon retire from the Chancery Court, and I bet he would have liked to pen another landmark opinion in this litigation before his departure. This somewhat rueful excerpt from his opinion – which immediately follows his summary of the case’s provocative factual background – suggests that’s probably a good bet:
Against this factual backdrop, the plaintiffs’ claims against Elon, and Elon’s defenses, call out like a carnival barker, beckoning the Court to explore a wide range of interesting and arguably unsettled legal issues, including, among others, the contours and nuances of Delaware’s controlling stockholder law, the extent to which personal and business relationships among fiduciaries will result in disabling conflicts of interest, the appropriate means by which a corporation’s board of directors can disable fiduciary conflicts, the applicability and effect of an eleventh-hour “fraud on the board” theory of fiduciary liability, the applicability and effect of stockholder ratification of fiduciary conduct as a defense to various breach of fiduciary duty claims, the triggers and effects of shifting burdens of proof when litigating claims of fiduciary misconduct under the entire fairness standard of review, and the interaction between fair process and fair price when reviewing a transaction for entire fairness.
To be sure, in answer to the barker’s call, it is tempting to venture into each tent and confront the legal enigmas that await there. Given the clarity provided by compelling trial evidence, however, there is no need to take on the challenge of discerning the appropriate standard of review by which to decide the
plaintiffs’ claims. Even assuming (without deciding) that Elon was Tesla’s controlling stockholder, the Tesla Board was conflicted, and the vote of the majority Tesla’s minority stockholders approving the Acquisition did not trigger business judgment review, such that entire fairness is the standard of review, the persuasive evidence reveals that the Acquisition was entirely fair.
Musk & the Tesla board prevailed in the end, but this Goodwin memo points out that the Vice Chancellor thought they could’ve made their lives a lot easier by paying closer attention to the deal process:
The court went out of its way to explain that Musk and Tesla’s board had incurred unnecessary risk and expense by failing to form a special committee and otherwise remove Musk from the process: “There was a right way to structure the deal process within Tesla that likely would have obviated the need for litigation and judicial second guessing of fiduciary conduct.” Tesla’s directors likely could have prevailed on a motion to dismiss or summary judgment, without the need for an expensive and disruptive trial, had the appropriate measures been followed.
The court not only denied Musk’s requests for attorney’s fees, but also took the unusual step of denying him prevailing party costs — which are routinely awarded in most cases — because he “likely could have avoided the need for judicial review of his conduct as a Tesla fiduciary had he simply followed the ground rules of good corporate governance in conflict transactions.” Accordingly, the decision should serve as a reminder that failing to handle conflicts appropriately can lead to significant risk and expense even when mergers and acquisitions are in the best interest of the company and its shareholders.
The bottom line is despite the deal’s procedural shortcomings, unless the Delaware Supreme Court resurrects the case, we’ll have to bid a fond farewell to the Tesla/Solar City litigation. But we can take consolation in the fact that Elon Musk seems to churn out fiduciary duty claims at a faster rate than Tesla churns out electric vehicles. This means that although we’ll have to bide our time for now, we can move forward with confidence that, in the haunting words of Vera Lynn:
We’ll meet again Don’t know where, Don’t know when, But I know we’ll meet again some sunny day!
Dissident stockholders that have nominees rejected based on the terms of an advance notice bylaw often argue that the board’s rejection of the nomination notice was an action designed to interfere with the effectiveness of the company’s stockholder vote. As a result, they argue that the board’s decision should be evaluated under the Blasius“compelling justification” standard. This Cooley blog reviews recent case law involving advance notice bylaws and concludes that courts generally reject arguments that Blasius should apply. Instead, they apply an intermediate level of scrutiny to board actions:
Recent Delaware cases addressing board use of advance notice bylaws to defeat proxy fights illustrate the growing recognition by the Delaware judiciary that the outcome-determinative nature of the compelling justification standard limits its applicability in legal analysis. Advance notice bylaws provide the procedural steps that need to be followed for directors to be nominated for election to a board.
Even with relatively high stakes – after all, the enforcement of advance notice bylaws has the potential to cut off the opportunity for stockholders to decide elections, and there is the specter of directors acting in their own self-interest – Delaware courts have applied an intermediate level of review in favor of strict scrutiny. As long as stockholders had fair notice of the rules, and the rules were not enforced in a contrived manner to preclude a dissident from having a fair opportunity to launch a proxy fight, the board’s action would not be overturned.
The blog says that while the Delaware courts’ decision not to apply Blasius in this context is helpful to boards, the case law demonstrates that courts are willing to consider the board’s motives, procedures and interests when evaluating actions concerning director nominations. Accordingly, it is essential for companies to prepare and adhere to clear guidelines concerning the adoption and operation of their advance notice bylaws, and the blog shares some specific practice pointers on these topics.
Our new Deal Lawyers Download podcast features my interview with K&L Gates’ Jessica Pearlman & Bass Berry’s Tatjana Paterno about the new ABA Private Targets Deal Points Study. Topics addressed in this 15-minute podcast include:
– Universe of transactions & methodology for the Private Targets Deal Points Study
– Noteworthy trends in deal terms
– Trends in insured v. uninsured deals
– Results that were a little surprising
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.
Twitter filed its merger agreement last night. The 8-K filing has a fairly detailed description of the agreement and based on the description and a quick flip through the merger agreement it looks fairly standard issue. The merger agreement includes a limited specific performance clause compelling Elon Musk to fund his equity commitment if the other financing is set to go and the closing conditions are met. It also gives Twitter the ability to respond to unsolicited proposals and allows it to terminate the deal to accept a superior proposal.
The deal has both termination and reverse termination fees in the amount of $1 billion. That’s about 2.3% of the deal’s value, but reverse termination fees can get fairly large so this one doesn’t appear to be “higher than average” as some media reports suggested it would be. For example, the $70 billion Activision Blizzard deal has a reverse termination fee that could be as much as $3 billion, or 4.3%, and the most recent Houlihan Lokey data doesn’t make the size of the fee look outsized either.
Based on the terms of the regulatory cooperation covenant, it also doesn’t look like the parties anticipate any significant regulatory hurdles. I’ll read it in more depth over the next couple of days and blog about it if I find some interesting tidbits (or if somebody else does). Speaking of interesting tidbits, there are a couple worth noting, and not surprisingly, they relate to Elon Musk himself.
– The definition of a “Company Material Adverse Effect” on p. 5 includes a customary carve-out for an MAE arising out of the negotiation and execution of the agreement, but what’s unusual about it is that it specifically says that the carve-out extends to any MAE arising “by reason of the identity of Elon Musk.” Although carves from MAE clauses based on the identity of the buyer are common, I don’t think I’ve ever seen one that calls out an individual by name.
– Section 6.8 of the agreement contains the customary covenant obligating both parties to coordinate communications about the transaction and generally prohibits public statements that aren’t required by law unless one party obtains the other’s consent. But there’s a one of a kind carve out in this section that says the following: “Notwithstanding the foregoing, [Elon Musk] shall be permitted to issue Tweets about the Merger or the transactions contemplated hereby so long as such Tweets do not disparage the Company or any of its Representatives.”
While we’re on the topic of tweets, Twitter also filed a handful from its founder yesterday as DEFA14A material. I suspect the deal team will be chasing tweets down until this thing closes. Like I said yesterday, being the junior associate on this deal (or the low person on Twitter’s law department team) has got to be no fun.