Delaware law requires a court dealing with an appraisal action to determine the fair value of a share as of the effective time of a merger. In BCIM Strategic Value Master Fund LP v. HFF, Inc., (Del. Ch.; 2/22), Vice Chancellor Laster focused on how to adjust for an increase in the target’s value between signing and closing that resulted from improved performance when the deal price effectively capped the market’s reaction to that improvement.
After an extended discussion of the background of the transaction and the process by which it was approved, the Vice Chancellor held that the adjusted deal price (i.e., deal price minus synergies) was the appropriate reference point for determining the fair value of the deal at signing. However, he concluded that the improvement in the target’s performance as evidenced by, among other things, a surprisingly positive earnings announcement between signing and closing, increased its value.
Because the upside market price of the target’s shares between signing and closing was limited by the price specified in the merger agreement, the Vice Chancellor could not look directly at a metric like the target’s unadjusted trading price. Instead, he applied an “earnings surprise regression analysis” suggested by the parties’ experts to assess the impact that the target’s improved performance would have had on the unadjusted trading price of its stock in order to generate an implied stock price on the closing date. In adopting this approach, Vice Chancellor Laster acknowledged that it was imperfect:
For one thing, it only provides an indication of the change in the Company’s value as of the Earnings Beat on April 24, 2019. The Merger closed on July 1, 2019. Using the Company’s value as of the Earnings Beat gets closer to the closing date, but does not reflect a value as of the closing date. It is nevertheless a closer measure than the adjusted deal price at signing. It is also likely to be conservative, as the Company’s operating performance continued to improve during 2019. The method is not perfect, but the perfect should not be the enemy of the good.
The court’s approach also includes an element of mixing and matching. To derive the indication of fair value at the time of signing, the court is using the adjusted deal price. To derive a measure of the post-signing change in fair value between signing and closing, the court is using metrics derived from trading prices.
There haven’t been many cases addressing changes in value between signing and closing (I blogged about one last year), but if you read this decision, I think you’re likely to agree that attempting to do that will often be a challenging and messy process.
According to the latest edition of Dechert’s merger investigation timing tracker, while the number of deals subject to significant investigations by the DOJ & FTC last year fell slightly below Trump administration averages, those investigations killed a higher percentage of deals than in years past:
Of note, the combined number of transactions that ended in either a complaint or an abandoned transaction in 2021 matched 2020. With fewer significant investigations concluding in 2021 than 2020, however, the 10 investigations that ended in a complaint or an abandoned transaction in 2021 represented 37 percent of all significant investigations – the highest proportion observed since DAMITT first launched in 2011. As shown below, deals abandoned without a complaint represented 40 percent of these transactions that did not result in a consent decree, the highest proportion since 2014.
Dechert’s report says that these outcomes indicate that the agencies very public skepticism of merger remedies is reducing the number of deals that end in consent decrees, and that the increasing willingness to challenge deals highlights the importance of the language of the antitrust provisions contained in merger agreements.
Wachtell Lipton recently published a memo previewing M&A in 2022. One of the interesting points raised in the memo is the possible return of “club deals,” which were popular prior to the financial crisis but have been less common since then. Here’s what the memo has to say about club deals in 2022:
Looking ahead, one trend to watch for is a possible resurgence of PE club deals (where two or more firms band together to buy a company), which had fallen out of favor following the 2008 financial crisis, but which may be coming back as PE firms look for opportunities to deploy significant capital in transactions involving large targets while strategic buyers face potential regulatory constraints. Indeed, 2021 witnessed the largest buyout involving a club of PE firms since the financial crisis, with the acquisition of Medline by Blackstone, Carlyle and Hellman & Friedman.
Further, major PE players are planning additional capital raises projected to result in record-size funds and unprecedented levels of dry powder. Among many others, Blackstone and Apollo are reportedly preparing for major fundraising efforts (with Blackstone reportedly planning to target as much as $30 billion). We expect that sponsors will continue to pursue acquisitions and actively look for creative opportunities, with PE activity boosted by access to
financing, as well as by a greater availability of potential targets as regulatory concerns cause hesitation among strategics and activists continue to prod companies to become more focused on just their core businesses.
The memo covers a lot of ground. In addition to this nugget on private equity, it addresses M&A trends across a variety of industries, cross-border deals, the impact of the evolving antitrust environment, ESG activism and M&A, and acquisition financing, among other topics.
In Galindo v. Stover, (Del. Ch.; 1/22), the Chancery Court held that Noble Energy’s failure to disclose a prior unsolicited acquisition overture and the reasons for amending its change-in-control severance plan were not material omissions precluding application of Delaware’s Corwin doctrine to fiduciary duty claims arising out of the company’s 2020 sale to Chevron.
Noble Energy’s proxy statement for the Chevron sale did not disclose an unsolicited 2018 proposal from Cynergy to acquire certain of the company’s Mediterranean assets. The plaintiffs alleged that the company’s failure to address this prior overture meant that stockholders lacked “full disclosure of the potential superior offers in the market” when they approved the Chevron transaction. Vice Chancellor Glasscock rejected this argument, and this excerpt from his opinion summarizes his reasoning:
The Cynergy proposal was unsolicited, made in mid-2018, and predated important contextual developments, such as the commercialization of the Leviathan field and the onset of the COVID-19 pandemic. Further, the Cynergy proposal contemplated an entirely different transaction structure than the one achieved in the Merger with Chevron. Additionally, the Cynergy proposal was never entertained by management or the Board. Even drawing all reasonable inferences in favor of the Plaintiffs, the alleged failure to fully inform stockholders with respect to the Cynergy proposal cannot survive.
The Vice Chancellor also rejected claims that the company should have disclosed the timing and rationale for the board’s decision to amend a company severance plan to provide its officers – who took a cut in pay due to the pandemic – with change-in-control benefits that reflected their pre-pandemic salaries. In doing so, he noted that the amended plan & the benefits payable under its terms were both disclosed in the proxy statement, and that the additional information the plaintiffs sought would not have altered the total mix of information available to Noble’s shareholders.
In a recent speech, Jonathan Kanter, the head of the DOJ’s Antitrust Division discussed his approach to merger remedies. What did he have to say? Well, how can I put this – remember the scene in the movie “Diner” where Tim Daly’s character threatens someone trying to pick a fight by saying “I’ll hit you so hard I’ll kill your whole family?” Kanter’s approach appears very similar to that. Check out this excerpt from Paul Weiss’s memo on the speech:
The head of the Antitrust Division of the Department of Justice (DOJ) said that when it “concludes that a merger is likely to lessen competition, in most situations” the division “should seek a simple injunction to block the transaction,” rather than agree to a remedy. He went on to add that while divestitures will be an option in certain circumstances, in his view “those circumstances are the exception, not the rule.” Mr. Kanter delivered his remarks at a virtual meeting of the Antitrust Section of the New York State Bar Association.
According to Mr. Kanter, divestitures may be viable solutions where “business units are sufficiently discrete and complete that disentangling them from the parent company in a non-dynamic market is a straightforward exercise.” However, Mr. Kanter suggested that companies with “evolving business models” operating in “innovative markets” may find increased resistance to a remedy if the DOJ determines that their deal presents competitive concerns.
This stance may lead to more merger challenges in the courts. Indeed, AAG Kanter welcomed the prospect of more litigation, saying that “settlements do not move the law forward.” Mr. Kanter went on to say that “we need new published opinions from courts that apply the law in modern markets in order to provide clarity to businesses” and that “this requires litigation that sets out the boundaries of the law as applied to current markets.” He said that the DOJ “need[s] to be willing to take risks and ask the courts to reconsider the application of old precedents to those markets.”
Whether the DOJ’s bite will match its bark over the long term remains to be seen – but there’s no denying that that’s quite a bark.
On Wednesday, the SEC announced proposed amendments to Form PF, the confidential reporting form used by certain SEC-registered investment advisers to private funds to make reports upon the occurrence of key events. Here’s the 236-page proposing release and here’s the 2-page fact sheet. Davis Polk came out with this memo yesterday summarizing the proposed changes. This excerpt addresses the potential new obligations of advisers to large PE funds:
The proposed amendments would reduce the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management. In addition, the proposals seek to expand the information gathered from large private equity advisers by amending section 4 of Form PF to require disclosure of information regarding fund strategies, use of leverage and portfolio company financings, controlled portfolio companies (CPCs) and CPC borrowings, fund investments in different levels of a single portfolio company’s capital structure, and portfolio company restructurings or recapitalizations.
Comments are due 30 days after publication of the proposal in the Federal Register. But Cadwalader’s Steven Lofchie already won the comment period with his commentary the end of the firm’s memo on the proposal. After characterizing Form PF as “worthless,” he went on to say exactly why he thinks that’s the case:
In the decade since Form PF was required, there has not been a single public report analyzing the data and demonstrating its value. That is not because the data must be kept a secret. Any lawyer knowledgeable about the issues as to which Form PF is intended to elicit information can tell, without seeing the responses, that the questions asked by the report are completely ambiguous and badly stated. There is no way that the responses to the Form PF questions could yield significant results across the industry.
Responses to badly drafted and ambiguous questions do not provide useful information. Rather than insisting upon the collection of more useless information, the SEC should take some time and really revisit the Form, and either get it right or throw it away.
Check out our new Deal Lawyers Download podcast, featuring my interview with Woodruff Sawyer’s Yelena Dunaevsky about her recent article on trends in SPAC litigation. Topics addressed in this 23- minute podcast include:
– The six kinds of lawsuits SPACs are facing
– Unique aspects of SPAC litigation
– Investment Company Act claims
– Delaware’s MultiPlan decision
– Where SPAC lawsuits may be heading
– Tips for insurance and risk management
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.
Over on The Activist Insight Blog, Josh Black recently discussed Mercury Systems’ decision to adopt a shareholder rights plan with a 7.5% threshold in response to an activist campaign by Starboard Value and Jana Partners, whch own 7.3% and 6.6% of the company, respectively. Josh wasn’t too impressed:
Poison pills are little to no deterrent for activists. Starboard and Jana have little incentive to halt their campaigns now and sell the stock and are in no way hindered from nominating directors or winning a proxy fight. Indeed, irritating institutional investors by pushing the boundaries of acceptable practice might put Mercury itself at a disadvantage. Mercury already has an advance notice bylaw, forcing the activists to make their intentions known well in advance of a shareholder meeting. Takeover bids by tender offer are vanishingly rare, and a board should be equipped to deal with standard proposals. The most practical effect is to limit the upside activists can earn by limiting the amount of capital they can invest.
While Mercury’s management offered the standard claim that the pill would allow its board to make informed decisions, Starboard wrote a measured letter to the board asking for the threshold to be raised to 15%.
But the real question is not so much how the pill will affect these campaigns or the ultimate future of Mercury but about the future of poison pills themselves. Perhaps the only reason a lawsuit has not yet been forthcoming is that Mercury is incorporated in Massachusetts, rather than Delaware, and thus benefits from a much more management-friendly legal regime.
Regarding the potential for irritating institutions by pushing the envelope, the blog notes that only five of the 55 non-NOL pills adopted at Russell 3000 companies in 2020 had a threshold of less than 10%, while Mercury’s was the only one adopted in 2021.
The blog alludes to the fact that pills targeting activism have recently taken it on the chin in Delaware, but even before the Delaware courts weighed in, some commentators were calling into question the relevance of pills to respond to shareholder activism. Pills may still have a role to play, but in the current environment, a defensive strategy that puts undue faith in a rights plan at the expense of a more comprehensive approach to the challenges of activism is one with a decidedly limited upside.
The FTC recently announced the new HSR thresholds for 2022. Here’s an excerpt from this Shearman memo with the details:
Generally, HSR notifications are required for an acquisition of voting securities, non-corporate interests or assets when the transaction reaches a certain threshold (the “size of transaction” test) and the parties are of sufficient size (the “size of parties” test). The size of transaction test is adjusted annually based on changes in the gross national product for the preceding year. The new size of transaction threshold will be $101 million, an approximate 10 percent increase from the previous threshold of $92 million.
Under the new thresholds that will be in effect next month:
– Transactions valued up to and including $101 million are not reportable;
– Transactions valued at more than $101 million but not more than $403.9 million are reportable only if one party has assets or annual net sales of at least $20.2 million and the other party has assets or annual net sales of at least $202 million (unless an exemption applies); and
– Transactions valued at more than $403.9 million are reportable, regardless of the parties’ size (unless an exemption applies).
The memo reports that notification thresholds for acquisitions of voting securities were also increased. Notifications are now required for acquisitions of additional voting securities at each of the following thresholds: $101 million, $202 million, $1.0098 billion, 25% of the voting securities if their value exceeds $2.0196 billion; and 50% of the voting securities if their value exceeds $101 million. Remember, you overlook these voting securities filing requirements at your peril.
No changes were made to the amount of filing fees payable for HSR filings, although the breakpoints for the different fee levels have been revised to reflect the changes in the thresholds.
Last week, I blogged about the Microsoft-Activision Blizzard deal, which has a nearly $70 billion price tag and is a “mega deal” by any definition. Deals this big don’t happen every day, but this analysis from Bloomberg Law’s Grace Maral Burnett says that both “mega deals” with valuations in excess of $10 billion and “mega mega” deals with valuations of more than $50 billion happen more frequently than you might think. Here’s an excerpt:
The past decade has seen the announcements of 301 mega deals, each valued at $10 billion or greater, that are either completed or are currently pending with definitive agreements in place. Counting the number of days between these announcements reveals an impressive frequency of one deal every 12 days. Meanwhile, the average period between mega mega deals—the 26 of these deals valued at $50 billion-plus—was 122 days. That’s a huge deal announced roughly every four months.
In fact, the Microsoft-Activision deal broke the decade’s longest mega mega deal drought. Grace says nearly two and a half years separated the announcement of that deal and the 2019 announcement of the $84 billion Allergan-AbbVie deal.
If you go to Grace’s Twitter feed, you’ll find a cool interactive graphic that plots the date and size of each M&A deal over $10 billion since 2012. While you’re there, you should give her a follow if you’re not following her already.