Twitter and Elon Musk announced mid-afternoon yesterday that their bizarre mating dance had culminated in a signed merger agreement under the terms of which an entity controlled by Musk would acquire Twitter for $54.20 per share in cash. The parties didn’t file their merger agreement with last night’s 8-K filing, so I suppose we’ll have to wait a few days to see it, but here are some of the things I’ll be looking to see:
1. No-Shop & Other Deal Protections – How tightly drawn will they be? Media reports indicate that Twitter asked for – and was refused – a “go shop” clause. Given the global attention that’s been devoted to this deal (including from Ukrainian war correspondents with bigger fish to fry), it’s understandable why Musk’s team might push back against Twitter’s argument that it needed a go shop to smoke out potential bidders. But just how much room will the board have to respond to competing offers and terminate the deal to accept a superior proposal? My guess is that, like Twitter’s poison pill, the deal protections will be plain vanilla. As UCLA’s Stephen Bainbridge pointed out, this deal puts Twitter’s board in Revlon-land, with all the fiduciary baggage that goes with that status, so the board will need some room to maneuver – particularly since it wasn’t able to move the price a nickel from Musk’s original offer.
2. Specific Performance – Full or Limited? The press release says there are no financing conditions, but Musk’s l13D amendment originally disclosing his financing arrangements indicates that they are very much on the private equity model – everything depends on him satisfying his equity commitment, and the only parties who can enforce that commitment are Musk and the entities he controls. Typically, deals with private equity buyers include limited specific performance provisions entitling the target to compel the sponsor to fund the equity commitment, but only if buyer’s closing conditions are satisfied and the buyer’s financing is ready to be funded. Deals with strategic buyers typically have stronger specific performance provisions, but there is also some precedent for larger PE deals (especially in take privates) to include full specific performance.
Note that the 13D amendment Musk filed this morning contains new language in the equity commitment letter indicating that Musk has provided a limited guaranty of the buyer’s obligations under the merger agreement & Bloomberg is reporting that Twitter extracted a “higher than average” reverse breakup fee.
3. Regulatory approvals – On the surface, it appears that the deal wouldn’t raise concerns among antitrust regulators applying traditional criteria, and I guess that’s the conventional wisdom. But in today’s environment, who knows? Congress started poking around last week, and I’d be willing to bet we haven’t heard the last of their always helpful input yet either (and as if on cue, here’s Sen. Warren). What’s more, let’s just say that the buyer here comes with some regulatory baggage of his own, and we can probably add the circumstances surrounding Musk’s acquisition of his 9% ownership stake in Twitter & his rapid transition from a (late) 13G filer to a 13D filer to that baggage. All of that will make it interesting to see how the parties perceived and allocated the regulatory risk associated with this deal in the merger agreement.
I mentioned that Musk amended his 13D this morning, but it doesn’t have any information on any equity partners, so we’ll have to continue to see if any surface. Of course, even after we see the agreement, we’re still going to have to wait a bit longer to see the really interesting stuff – the back and forth about how this very strange deal unfolded that’s going to appear in the “Background of the Merger” section of the proxy statement.
Twitter being Twitter, we’re also seeing multiple tweets from insiders being filed as DEFA14A material. My guess is that’s likely to be a regular event as the deal moves forward. Boy, I’d hate to be a junior associate on this deal.
This Shearman blog discusses the 8th Circuit’s decision in Carpenters’ Pension Fund of Ill. v. Neidorff, (8th Cir.; 4/22). The case involved allegations that the buyer’s directors and officers concealed their knowledge of significant financial problems at the target from shareholders, and that as a result, the joint proxy statement was false and misleading.
The court dismissed those allegations and related breach of fiduciary duty claims, but the most interesting part of the decision to me is the Court’s response to claims that the buyer failed to update information in the proxy statement. The Court rejected those allegations out of hand. In fact, according to the Court, Section 14(a) of the Exchange Act imposes no duty to update information in a proxy statement:
As to Appellants’ argument that the failure to update the Proxy Statement rendered it materially misleading, Appellants have not cited, and we have not found, any authority supporting the proposition that § 14(a) requires a company to update its proxy statement. Moreover, this argument is inconsistent with the text of Rule 14a-9(a), which provides that a proxy statement may not contain “any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact,” 17 C.F.R. § 240.14a-9(a) (emphasis added), and the language of the Proxy Statement itself, which provides in all capital letters that neither Centene nor Health Net intends to update the Proxy Statement and that both companies disclaim any responsibility to do so.
Based on a quick look, there appears to be at least some 8th Cir. authority recognizing a duty to update under the federal securities laws, but as the Court noted in a footnote, none of the authority cited by the plaintiffs involved Section 14(a) claims. What about a 10b-5 claim? It turns out there wasn’t’ one, because it looks like the plaintiffs simply alleged that the directors and officers were negligent, and while that’s good enough to support a Rule 14a-9 claim, isn’t enough to establish the level of scienter required for a Rule 10b-5 claim.
Most corporate lawyers have a Delaware-centric view of the world and expect that most other U.S. jurisdictions will fall in line with Delaware when it comes to major corporate law doctrines. That’s often a safe bet, but as this Arendt Fox Schiff memo points out, it isn’t when it comes to whether minority shareholders owe fiduciary duties.
Delaware says that minority shareholders generally don’t owe fiduciary duties, unless they can be squeezed into the controlling shareholder box. But most states don’t agree with Delaware – at least in the case of close corporations. This excerpt from the memo discusses how the positions adopted by several of those states would apply in the case of hypothetical involving a minority shareholder of a shipping company who learns of an opportunity to contract with a trucking company for its own business at a discount to what the shipping company currently pays for its trucking contract:
In jurisdictions like Illinois that follow the majority approach, shareholders of closely held corporations typically owe each other fiduciary duties by virtue of their status as shareholders. But there are variations across jurisdictions.
Indiana: Indiana courts closely follow Illinois’s approach, where shareholders of closely held corporations owe fiduciary duties even if they are not directors or officers of the corporation. If Corporation is an Indiana closely held corporation, then Shareholder likely cannot pursue the discounted trucking contract for personal use without first disclosing the opportunity to Corporation and giving Corporation an opportunity to pursue it.
New York, Massachusetts, and D.C.: Minority shareholders of New York closely held corporations owe each other the duty of good faith and a high degree of fidelity. Similarly, shareholders of Massachusetts closely held corporations owe each other and their corporations the duty of utmost good faith and loyalty, and shareholders in D.C. closely held corporations owe each other the highest degree of good faith and must deal fairly, honestly, and openly with each other. These are heightened standards that closely resemble the duties that partners owe each other. If Corporation is a New York, Massachusetts, or D.C. closely held corporation, then it is unlikely that Shareholder can pursue the discounted trucking contract absent disclosure of the opportunity to and approval by Corporation.
Michigan: Under Michigan law, minority shareholders of close corporations owe fiduciary duties only in certain circumstances, such as when those shareholders also participate in company management. Whether minority shareholders of close corporations in Michigan owe fiduciary duties is a context-dependent analysis and will vary depending on the relationship of the shareholders to the company. It is possible that, under Michigan law, Shareholder could safely pursue the discounted trucking contract without disclosure to and approval from Corporation, because Shareholder may not owe fiduciary duties to Corporation.
Many states have “close corporation statutes,” and while states typically impose fiduciary duties only on minority holders in close corporations, the memo says that most states adopt a functional approach to deciding whether to classify an entity as a close corporation, and don’t require the entity to have been established in conformity with a close corporation statute.
Wachtell Lipton recently issued the 2023 edition of its “Spin-Off Guide.” This 83-page publication is a terrific resource for getting up to speed on the wide variety of issues associated with spin-off transactions. Tax issues loom large for spin-offs, and companies considering a spin-off must decide whether to move forward on the basis of legal opinions or seek a private letter ruling. One of the Guide’s 2022 updates relates to a new IRS pilot program for obtaining a private letter ruling on an accelerated basis. Here’s an excerpt:
Depending on the complexity of the request, the process of obtaining a ruling has, in recent years, taken approximately six months from the date of submission. However, in January 2022, the IRS established an 18-month pilot program (expiring July 2023) permitting taxpayers to request expedited handling of private letter ruling requests through a “fast-track” process. If the IRS grants a request for “fast-track” processing, it will generally endeavor to complete its review of the ruling request, and, if appropriate, issue the ruling, within 12 weeks after the request is assigned to an IRS review team.
A taxpayer can request that the IRS process its ruling request within a period shorter than 12 weeks if certain additional requirements are satisfied, including demonstrating that there is a business exigency outside the taxpayer’s control necessitating faster processing and there will be adverse consequences if the IRS does not accommodate the request. Ruling requests involving particularly complex transaction structures or legal issues, while eligible for “fast-track” processing, may be subject to a review period longer than 12 weeks.
Our new Deal Lawyers Download podcast features my interview with Lippes Mathias’ John Koeppel about current trends in private equity deals. Topics addressed in this 12-minute podcast include:
–How has the increasing competition for deals impacted the deal process?
– How are private equity buyers approaching deal financing in the current market?
– What trends are you seeing in deal terms?
– What’s the current market for RWI like?
– What are some effective tax mitigation strategies you’re seeing employed?
– What advice do you have for sellers considering a deal with a private equity buyer?
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 shareholder rights plan with the SEC yesterday and it’s pretty boring. There aren’t any aggressive twists on the definition of beneficial ownership or express “acting in concert” language. Also, because the pill has a 15% ownership threshold, there isn’t a “passive investor” exemption for 13G filers – that’s a feature that’s typically found in low threshold (e.g., 5% beneficial ownership) pills.
Twitter’s Form 8-A filing for the pill includes a description of the securities that makes it clear that the pill is very traditional in terms of its mechanics. It includes a flip-in and flip-over feature, as well as a “last look” provision allowing the board 10 business days after a bidder crosses the 15% beneficial ownership threshold to redeem the pill. The board also has the ability to exchange each preferred share purchase right for a share of Twitter stock.
This exchange right proved to be an important feature in the Selectica situation, which is still the only meaningful example of the intentional triggering of a poison pill. In that case, the board opted to exercise the exchange right, which although less dilutive to the bidder, eliminated the uncertainty about how many shareholders would be willing to actually exercise the rights, which would involve cutting checks for real money. After it exercised the exchange right, Selectica promptly adopted a new pill, so the difference in potential dilution between the exchange and full exercise of the rights under the initial pill didn’t amount to much in the grand scheme of things.
Elon was making weird allusions to a possible tender offer on his own Twitter account over the weekend. He could still do that, but he’d reach uncharted heights of recklessness if he launched one that wasn’t conditioned on the pill being pulled.
If you’re interested in finding out more on the terms of recent poison pills, check out our Poison Pills Practice Area. In particular, you should take a look at this CII report on 2020-21 pills, and this Morrison & Foerster report on 2020 pill adoptions.
On Friday, Twitter announced that it was adopting a shareholder rights plan in response to Elon Musk’s unsolicited buyout proposal. That document hasn’t been filed yet, but there are a few things to keep an eye out for when it is, because while Delaware courts have taken a dim view of some recent innovations in poison pill design targeting activists, they haven’t addressed those innovations in pills targeting old fashioned hostile bids.
Delaware courts have traditionally upheld a board’s decision to adopt a poison pill, but a couple of recent cases have taken a more skeptical approach to pills incorporating aggressive provisions aimed at shareholder activism. The most notable of these cases includes Vice Chancellor McCormick’s decision in The Williams Companies Stockholder Litigation, (Del. Ch.; 3/21), which invalidated the Williams board’s decision to implement a pill with a 5% trigger and several other aggressive provisions, including a very broad beneficial ownership definition & acting-in-concert (“wolfpack”) provision, and a very narrow exclusion for passive investors.
While the recent focus in the Delaware courts has been on pills targeting activists, Twitter’s pill was adopted in response to an unsolicited takeover bid, and it will be interesting to see how aggressive an approach Twitter takes to some of these provisions. This excerpt from its press release suggests that its pill is likely more mainstream:
The Rights Plan is similar to other plans adopted by publicly held companies in comparable circumstances. Under the Rights Plan, the rights will become exercisable if an entity, person or group acquires beneficial ownership of 15% or more of Twitter’s outstanding common stock in a transaction not approved by the Board. In the event that the rights become exercisable due to the triggering ownership threshold being crossed, each right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase, at the then-current exercise price, additional shares of common stock having a then-current market value of twice the exercise price of the right.
Despite the statement about the pill being “similar” to those put in place by companies in comparable circumstances, because Twitter’s plan was adopted in response to a hostile bid, it might decide to take a more aggressive approach to the pill’s definition of beneficial ownership, acting in concert provisions & passive investor exclusion. That’s because, as commentators observed after the Delaware Supreme Court’s affirmed The Williams Companies decision, it is unclear whether the same analysis used in that decision would apply to a pill adopted in response to a hostile bid, and whether a Delaware court would accept a pill with “extreme” terms in the face of an actual hostile bid.
Last week, I blogged about ESG due diligence, which has gone from a buzzword to a high priority item in M&A transactions in a short period of time. Privacy & cybersecurity concerns have followed a similar path. This Sidley memo (p. 10) provides an overview of privacy and cybersecurity diligence issues. This excerpt addresses the emerging issues of artificial intelligence and machine learning:
Artificial intelligence is a hot topic for privacy and cybersecurity laws. One of the biggest diligence risks related to artificial intelligence and machine learning (AI/ML) is not identifying that it’s being used. AI/ML is a technically advanced concept, but its use is far more prevalent than may be immediately understood when looking at the nature of an entity. Anything from assessing weather impacts on crop production to determining who is approved for certain medical benefits can involve AI/ML. The unlimited potential for AI/ML application creates a variety of diligence considerations.
Where AI/ML is trained or used on personal data, there can be significant legal risks. The origin of training data needs to be understood, and diligence should ensure that the legal support for using that data is sound. In fact, the legal ability to use all involved data should be assessed. Companies commonly treat all data as traditional proprietary information. But privacy laws complicate the traditional property-law concepts, and even if laws permit the use of data, contracts may prohibit it.
The memo highlights the magnitude of penalties a company can face for wrongly using data when developing AI/ML. It points out a 2021 FTC action in which the agency alleged that a company had wrongly used photos and videos for training facial recognition AI. As part of the settlement, the FTC ordered that all models and algorithms developed with the use of the photos and videos be deleted. If your company’s primary offering is an AI/ML tool, that kind of order could ruin your whole day.
Since tomorrow’s Good Friday and the first night of Passover, this blog will take the day off. Happy Easter and Happy Passover to those who celebrate the holidays, and Ramadan Mubarak to those observing the holy month. Enjoy the weekend and we’ll see you back here on Monday!
As I’m sure most readers are aware, JetBlue made a move last week to “deal jump” Frontier Airlines’ pending acquisition of Spirit Airlines. In February, the parties announced that Frontier would acquire Spirit in a stock & cash transaction valued at $25.83 per share, based on Frontier’s market price on the date of the announcement. On April 5, JetBlue announced its own all-cash $33 per share bid for Spirit. On Friday, Spirit announced that its board had determined that JetBlue’s offer could reasonably be expected to lead to a “Superior Proposal” and that it intends to “engage in discussions with JetBlue with respect to JetBlue’s proposal in accordance with the terms of the Company’s merger agreement with Frontier.”
I took a look at the language in the merger agreement surrounding Spirit’s ability to respond to an unsolicited overture, which appears as part of the deal’s no-shop clause in Section 5.4, and about the only thing that’s remarkable about it is how unremarkable it is. It’s pretty standard stuff. Still, there’s one aspect of these clauses that I’ve always found interesting, and that’s the underlined language laid out in this excerpt from Section 5.4(d), which permits Spirit to engage in negotiations with a prospective suitor if, among other things:
the Company Board determines in good faith, after consultation with its financial advisor and outside counsel, that such Acquisition Proposal constitutes or could reasonably be likely to lead to a Superior Proposal, (iv) after consultation with its outside counsel, the Company Board determines in good faith that the failure to take such actions would reasonably be expected to be inconsistent with the fiduciary duties owed by the directors of the Company to the stockholders of the Company under applicable Law. . .
When it comes to a decision to negotiate with someone who is putting forward a potentially superior proposal, the fiduciary duty hurdle imposed by the merger agreement seems pretty low. The deal protections cases of the late 1990s made it clear that while a board may under appropriate circumstances refuse to negotiate with a competing bidder, that decision must be an informed one, and refusing to talk with someone that’s submitted a potential Superior Proposal could well be inconsistent with the directors’ fiduciary duties. See, e.g., ACE Limited v. Capital Re, 747 A.2d 95 (Del. Ch. 1999).
But that same phrase is used in Section 5.4(f), which gives Spirit the right to terminate the agreement in order to accept a Superior Proposal. Again, this is a pretty standard formulation of what’s necessary to exercise a Superior Proposal out, but I think it involves a more complicated inquiry than the one involved in determining whether or not the board has an obligation to speak with another bidder.
Spirit’s deal with Frontier is primarily a stock-for-stock transaction and is unlikely to trigger an obligation to maximize immediate shareholder value under Revlon. In contrast, the deal that JetBlue has put on the table is all cash and would trigger Revlon. When Revlon applies, the board’s obligation to maximize immediate shareholder value means that it can’t consider the long-term value associated with an alternative transaction. That’s usually justified by an argument that a Revlon transaction involves a change in control, and that it represents the only chance that existing shareholders will have to extract a control premium for their ownership interest.
Since Spirit’s deal with Frontier doesn’t involve a change in control, under Delaware law the Spirit board was permitted to consider potential long-term value creation when it entered into it. Now, JetBlue is offering a competing all-cash transaction. Just because that cash deal is on the table, Spirit’s board isn’t automatically compelled to go into Revlon-mode and abandon its deal with Frontier, but under what circumstances might its fiduciary duties require it to do that?
It seems to me that the most straightforward way for the Spirit board to determine that failing to accept JetBlue’s proposal “would reasonably be expected to be inconsistent” with its fiduciary duties is if it concluded that the immediate value represented by JetBlue’s deal exceeds the long-term value likely to be created by the existing deal with Frontier. That’s not just a matter of doing the math, because the board could also consider the risks associated with achieving the long-term value associated with the Frontier transaction, as well as the execution risk associated with the JetBlue proposal, in making this assessment.
In any event, my point is that while both the clause permitting Spirit to negotiate and the one allowing it to terminate the deal use the same language, what the board has to do to exercise the merger agreement’s Superior Proposal out and accept JetBlue’s competing proposal involves a more complex analysis than the one involved with a decision to negotiate with JetBlue in the first place.
This Woodruff Sawyer blog discusses how the RWI industry is responding to Russia’s invasion of Ukraine. The blog says that if your deal is in the underwriting process, you should expect to be asked several questions concerning business activities in Ukraine or Russia. This excerpt lays out the kind of questions you’re likely to see:
– Does the company have customers, suppliers, partners, vendors, or other business dealings in Russia or the Crimea, Donetsk, and Luhansk Regions of Ukraine? Does the Company directly or indirectly export any products (including software and technology) to, or import any product from, any of these locations? If so, are any of these products on the Commerce Control List (CCL)?
– Does the company utilize any Russian banks or have any debt with any Russian banks?
– Is the company transacting with any foreign entities owned 50% or more, directly or indirectly, by one or more Russian/Ukraine designated Specially Designated Nationals and Blocked Persons (SDNs) subject to Office of Foreign Asset Control (OFAC) sanctions?
– Have you confirmed whether any exports are subject to the Expanded Military End Use/End-User Rule (MEU), and whether any exemptions apply?
Insurers are also going to want to hear about the due diligence investigation that you conducted to arrive at your answers to these questions. If you can answer these questions satisfactorily, the blog says you may not see any exclusion language in your policy (RWI policies typically don’t include war exclusions). If not, the blog walks through the kind of exclusion language that you can expect to see – and points out that it can vary in important ways.