Friday, March 16, 2018
It’s that time of year again! Tulane is hosting its 30th Annual Corporate Law Institute, a 2-day conference devoted to developments in corporate law, particularly mergers & acquisitions.
I was only able to attend some of the panels on the first day, but I very much enjoyed getting a sense of what lawyers – and judges – are thinking about these days. Below is a summary of some of the highlights that I found most intriguing:
[More after the jump]
M&A Practice in 2018. Panelists: Eileen Nugent (Skadden, moderator), Chief Justice Leo Strine (Delaware Supreme Court), Michael Carr (Goldman Sachs), Victor Lewkow (Cleary Gottlieb), and Ted Yu (SEC)
This was a wide ranging discussion about how lawyers counsel boards in the merger context, but I was particularly interested in one point of concern raised by Chief Justice Strine. He mentioned that in his experience, it was common for M&A financial advisors to offer advice to boards – whether they should exclusively negotiate with one party or auction the company, whether they should accept a bid or search for another offer, etc – but that this advice is not reflected in the board minutes. As a result, if the deal is challenged in litigation, there is little in the minutes that reflects the board’s reasoning. When board members testify about their recollections regarding the advice they received, plaintiffs seize upon the apparent inconsistency with meeting minutes.
Strine suggested that counsel are being overzealous in excising meeting minutes of anything that could later pose a liability problem for the bank; he argued that it is not credible that boards are hiring advisors to, for example, do little more than offer anodyne fairness opinions. He warned that boards are taking a risk if they do not document the advice they receive.
Strine also warned that attorneys who counsel special committees need to take extra care to ensure that the directors are independent of any other directors who may have an interest in the matter. He pointed out that when directors serve on multiple boards together, or serve on the same board for many years, they are likely to have social ties that could call their independence into question; he pointed out that while attorneys have long recognized the importance of independence from management, they have been less attentive to the issue of director independence from other directors. In so doing, I take it that Strine is indicating that Delaware does not intend to let up on its new attention to social bonds as a ground to question director independence.
The panelists turned to the issue of merger agreements conditioned on regulatory approvals or legal opinions, a discussion naturally inspired by the recent decision in Williams v. ETE. Strine – unsurprisingly, given his dissent – warned against conditioning closing on opinions or approvals that are not tied to changes in the facts or the law. He also referenced the recent dispute between Broadcom, Qualcomm, and CFIUS : though he disclaimed expressing an opinion on that particular case, he explained that judges often have to make difficult decisions– as in Williams – about the interpretation of closing conditions that involve regulatory approvals. In the past, judges could at least be confident that, whether you agree with the regulator or not, regulation was not being done “sideways.” If, however, regulation is going to be used for other than its original purposes – such as for protectionist purposes – that will affect how courts address after-the-fact disputes about why deals fell through.
Panelists also generally warned against conditions that require the target to operate business in the ordinary course, or not to make significant changes, when the deal is subject to prolonged regulatory review. As more time passes, those conditions become more difficult to satisfy; therefore, counsel need to draft these kinds of conditions with a view to the target’s need for flexibility.
Ted Yu of the SEC discussed some issues regarding federal regulation of merger disclosures. First, he remarked upon the movement of merger disclosure cases from Delaware courts to federal court (attributable to decisions like Corwin and Trulia). It was that trend, he explained, that partly inspired the SEC to issue its new guidance regarding non-GAAP financial measures in the merger context. He also made clear that the SEC’s new policy of permitting even non-emerging growth companies to file confidential draft registration statements has been extended to S-4 filings, especially for nonreporting companies. Even reporting companies may in some circumstances be permitted to file confidential draft S-4s, if they have a particular need to do so, such as complex questions regarding proper financial reporting, or issues concerning foreign reporting requirements or regulatory approvals.
Yu also stated that the SEC is still considering whether to adopt universal proxy regulations, and that Chair Clayton is particularly interested in the “proxy plumbing” issues identified in the 2010 release. The dispute between Trian and P&G made it clear that the tabulation system is very much in need of an update. He also mentioned that the SEC is focused on compliance with 13D; the Commission has received many complaints about compliance, and he warned that there are cases in the pipeline.
Practice After Corwin. Panelists: Mark Morton (Potter Anderson, moderator), Justice Collins Seitz (Delaware Supreme Court), Mike Hanrahan (Prickett Jones), Ted Mirvis (Wachtell), and Patricia Vella (Morris Nichols).
Unsurprisingly, much of this panel involved fairly stark disagreements between Mike Hanrahan and Ted Mirvis. Citing data from The Shifting Tides of Merger Litigation, Mirvis bemoaned the migration of frivolous cases from Delaware to federal court, and quoted a cheer – that he attributed to a plaintiff-side attorney – “It’s all right, it’s okay, we’ll just sue under 14(a).” Hanrahan, by contrast (and obliquely referencing Joel Friedlander’s paper), argued that while some plaintiffs’ firms have a business model of bringing nuisance lawsuits for fees, better firms focus on truly suspicious deals, and Corwin will have the effect of blocking meritorious claims.
Most of Hanrahan’s criticism of Corwin was focused not on the rule itself (namely, that a fully-informed shareholder vote will cleanse fiduciary breaches – though he objected to that as well), but on the procedural consequence that, with the elimination of expedited discovery, plaintiffs will not be able to to determine whether the vote was, in fact, fully informed in the first place (another issue that Joel Friedlander has explored). He scoffed at the notion that a Section 220 request could substitute for expedited discovery, arguing that the process takes too long and yields too little. Mirvis countered with the argument that discovery is intended to support an existing claim, not to identify whether a claim exists; plaintiffs are not special prosecutors charged with investigating every deal, and Delaware courts should not serve as a regulatory machine that every deal must march through.
The panelists agreed that after Corwin, there remain open questions about what kinds of deal terms might be found to be structurally coercive, thus eliminating Corwin’s protections. Patricia Vella observed that deal protections that once might have been examined solely to determine if they precluded topping bids must now also be examined with a view to whether they coerce stockholders. She commented, for example, that termination fees based on a “naked no” stockholder vote need to be kept in check; she would counsel that 1% is reasonable, but more than that presents a risk that a court would later find the terms coercive. She defended Corwin on the ground that it has provided additional incentives for directors to be entirely candid with shareholders, and because boards know that – they recognize that their entire process will be fully disclosed – the Corwin rule prevents them from engaging in behavior that would pose a “reputational risk.” She stated that she has a deal in progress where the mantra has become “sunlight is the best disinfectant.”
The Continuing Impact of Appraisal Rights. Panelists: Bill Lafferty (Morris Nichols, moderator), Chancellor Andre Bouchard (Delaware Chancery Court), Patricia Enerio (Heyman Enerio), John Hendershot (Richards Layton), Jennifer Muller (Houlihan Lokey), Jeff Rosen (Debevoise), and Rob Saunders (Skadden).
The main topic of discussion in the appraisal panel was what elements of value, precisely, are – or should be – available to dissenters.
DGCL 262 provides that dissenting stockholders are entitled to receive the “fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger.”
In Aruba (which I previously discussed here), VC Laster concluded that this measure not only excluded any element of value attributable to synergies arising out of the deal, but also any reduction in agency costs, or costs associated with being a public company, that are attributable to a private buyout. In so doing, he relied on the work of Lawrence A. Hamermesh & Michael L. Wachter (see, e.g., Rationalizing Appraisal Standards in Compulsory Buyouts; The Short and Puzzling Life of the “Implicit Minority Discount” in Delaware Appraisal Law; The Fair Value of Cornfields in Delaware Appraisal). As a result, VC Laster determined that the proper appraised value is simply unaffected market value, at least when companies trade efficiently and there is no material information of which the market is unaware.
As Chancellor Bouchard recognized, this is a debatable proposition. He expects that it will receive further judicial scrutiny (if for no other reason than the Aruba parties are likely to appeal).
Chancellor Bouchard also opined that the Delaware Supreme Court’s recent appraisal jurisprudence is a welcome correction, because courts ultimately are not well-equipped to perform DCF calculations based on wildly divergent expert opinions. (At this point, Jennifer Muller explained that expert opinions tend to be extreme because courts will pick and choose inputs from different experts; this gives experts an incentive to be aggressive on every element of their analysis.) Though Bouchard recognized such calculations will continue to be necessary – in private deals, or possibly deals involving a controlling stockholder – he welcomed the move toward greater reliance on deal price and/or market price. At the same time, he noted the irony that appraisal is supposed to be a “nonliability,” financial calculation, but the new jurisprudence requires courts to examine process in a manner that was previously limited to claims for breach of fiduciary duty.
Bouchard also floated the possibility that Delaware will make greater use of court-appointed experts in the future. He admitted that there were serious questions about how to go about doing so administratively – one concern being that it adds a new layer of litigation to the litigation, as both parties will seek to depose and challenge the court expert – but he said that discussions about the issue are underway.
Finally, Chancellor Bouchard identified what he believed to be a critical passage of Strine’s opinion in DFC. That passage is: “until the General Assembly wishes to narrow the prism through which the Court of Chancery looks at appraisal value in specific classes of mergers, this Court must give deference to the Court of Chancery …” In other words, he seemed to be expressing the hope – if not the expectation – that the Delaware legislature will modify the appraisal statute, perhaps to give clearer guidance as to how these calculations are to be made, and perhaps even to single out specific types of mergers for special scrutiny or treatment. He did not say more on the topic but I can't help but notice that, if that were to occur, Delaware could – unusually – find itself following rather than leading other states in the corporate space, as many states limit appraisal rights to controlling stockholder mergers or mergers involving private companies.