Saturday, March 7, 2020
On Thursday and Friday, Tulane hosted its 32nd Annual Corporate Law Institute. The CLI is a major conference focused on the latest developments in M&A and related topics, and features a variety of speakers drawn from the bench, the bar, and the SEC.
Now, obviously, it’s a tough time to host a large conference – the big question was whether we’d see cancelations – and I’m not in charge of administration so I can’t say what the final numbers were, but from what I could see, attendance looked just fine.
That said, I personally was not able to attend the whole event, but I did go to a few of the panels, and below are my notes from Hot Topics in M&A Practice and Chancellor William T. Allen and His Impact on Delaware Jurisprudence.
Hot Topics in M&A Practice
This panel was moderated by Rita O’Neill of S&C, and included Blair Effron (Centerview Partners), Howard Ellin (Skadden), Paul Shim (Cleary), Daniel Wolf (Kirkland), as well as Ted Yu of the SEC speaking via webcast (presumably due to virus-related travel-restrictions).
Yu spoke first, and tackled the SEC’s proposed changes to proxy advisor regulations. He admitted the proposals had drawn a lot of objections from various quarters, and he gave what I took to be hints on how the SEC is likely to respond.
First, he said the Commission is sensitive to investor complaints that if issuers are given a chance to review proxy advisor recommendations before they are distributed, investors won’t have sufficient time to digest those recommendations before they cast their ballots. He emphasized that the Commission does not want to increase the time pressures on investors and this is an issue they are taking seriously.
He then turned to the complaint that the regulations would create new liabilities for proxy advisors by explicitly designating their advice to be “solicitations” subject to Rule 14a-9. And on this point, he was not sympathetic at all – in his view, the Commission has treated proxy advisor recommendations as proxy solicitations for many years, and therefore Rule 14a-9 has always applied.
Finally, he noted that there are concerns that if issuers are permitted to review proxy advice before it is distributed, the advice will be biased or tainted. Again, he was emphatic that the rule would not have this effect. In his view, nothing requires proxy advisors to adjust their recommendations based on issuer feedback; they are perfectly free to ignore it and leave their recommendation unchanged.
So, based on Yu’s presentation – which, I should add, was prefaced by the usual “I speak for myself not for the Commission etc etc” verbiage – I’m guessing we can expect that the SEC is opening to modifying its proposed rules to address the timing issues, but is not planning to make any significant alterations in response to the latter complaints. Yu said the Commission hopes to get the rules finalized by the end of the year.
The other set of remarks that caught my attention came from Daniel Wolf (I think it was Daniel Wolf – if I have the names wrong someone correct me!)
Wolf started out by talking about how stock consideration in public company deals used to be rare, but today you see it maybe 50% of the time. And given today’s overheated market (well, ahem, perhaps the overheated market as of last week), that tends to raise a lot of concerns on both sides of the deal (obviously, all managers think their own stock is priced correctly, but worry the other party’s stock may be overvalued).
One particular issue that arises in stock deals, though, is that it often requires a shareholder vote on the buy side. And though once upon a time that might have been fait accompli, in today’s world of institutional shareholders and shareholder activism, those votes have been thrown into doubt. He mentioned, for example, shareholder opposition to Bristol-Myers’s acquisition of Celgene. And that not only impedes buyers’ flexibility, but also creates reluctance among targets because they can’t be assured of deal completion. As a result, some buyers are structuring deals so that the stock component is just under the 20% threshold that would require a shareholder vote (like Occidental and Anadarko).
He mentioned that one bright spot in this is that in most public company deals, there are overlapping shareholders: the same biggest shareholders hold stock in both the target and the acquirer. And if they want the premium on their target holdings, they’ll be willing to vote in favor of the deal on the buy side. Savvy boards are aware of this fact and develop their strategy around it even before they announce the deal.
Regular readers of this blog, of course, are aware that I’ve been talking about this phenomenon for years, and I discuss it at length in my article, Shareholder Divorce Court. Among other things, overlapping shareholders pose a serious challenge to Corwin and its ilk, because it’s not clear that shareholders with holdings on both sides of the deal should be treated as “disinterested” voters whose approval cleanses any fiduciary breaches. As I describe in my article, that argument was raised, but not reached, in the litigation over Tesla’s acquisition of SolarCity.
Finally, Wolf talked about how activist shareholders are focusing on M&A-like transactions these days because they’ve already grabbed the low-hanging fruit of levering up and paying a dividend – or companies, anticipating activist intervention, are doing that all on their own before an activist enters the scene. And while activists might intervene to encourage a deal (or even work in tandem with their own private equity arm, like Elliott), they’re also increasingly engaging in “bumpitrage,” where they buy stakes in the target and refuse to vote in favor unless the price is bumped up. That’s a tactic that works particularly well in companies with supermajority voting provisions, so he warns that companies need to think about the value of those provisions well in advance. (I’ll add that Ed Rock wrote about this problem in combination with majority-of-minority voting conditions here)
He also mentioned that while companies are very good at drafting deal protections aimed at deterring competing bidders, they haven’t come up with a way to draft deal protections aimed at deterring activists. One strategy has been to develop poison pills that are triggered when shareholders act in concert – which potentially bars the activist from soliciting the votes of other shareholders. Good luck, Wolf warned, justifying that kind of pill to proxy advisors like ISS. Meanwhile, other companies have experimented with no-shops that bar involvement with an activist suggesting alternative transactions, but no one’s come up with anything particularly effective. Parties need to also think about exit ramps – graceful ways of ending a deal when it’s clear that the shareholders will not vote in favor as a result of an activist intervention.
Chancellor William T. Allen and His Impact on Delaware Jurisprudence
This panel was moderated by the former Chief Justice of the Delaware Supreme Court Leo Strine, and featured for Delaware Justice Jack Jacobs, Ted Mirvis (Wachtell), and A. Gilchrist Sparks III (Morris Nichols).
A couple of particular things stood out for me on this panel.
First, all the panelists agreed that Allen did not think the duty of care was particularly important, and for that reason he objected to Van Gorkom. In particular, Strine pointed out, Allen viewed care as a subsidiary of loyalty; a director acting in good faith and with loyalty to shareholders would necessarily also act with (what the director believed was) the appropriate level of care. Allen wrote that philosophy into law with what Strine described as his “audacious” Caremark opinion, by making the level of care required contingent on the director acting in good faith. In so doing, Strine argued, Allen made Caremark duties “self-exculpating,” because liability could not be triggered by anything less than bad faith action.
Second, Strine talked about Allen’s opinion in Blasius, and urged that it be understood in the context of its time. Blasius was decided just after Unocal and Moran validated poison pills and defensive tactics that boards could use to entrench themselves against a hostile acquirer. Those cases left open only a single avenue for shareholders to rid themselves of a disfavored board: the proxy vote. Allen feared that if interference with the vote were subject to the same Unocal balancing test, whereby the board’s judgment of a threat to business policy was given deference by the courts, it would turn corporations into “Latin American dictatorships” (Strine’s phrasing, naturally). Strine interpreted Blasius to functionally have rejected the concept of “substantive coercion” that is accepted in the poison pill context, namely, the notion that shareholders may be “coerced” into accepting a bad offer by virtue of their own ignorance. Blasius holds that in the voting context, shareholders must be permitted to make their own choices, even if boards believe they are the wrong ones.
Another tidbit on this: Sparks pointed out that Allen had toyed with creating a per se rule barring interference with a shareholder vote, but ultimately concluded that as an equity judge, he needed to leave room to adjust the rule as circumstances required; hence, a “compelling justification” test.