Tag: Mergers & acquisitions

The Activism Vulnerability Report Q4 2020

Posted by Jason Frankl and Brian Kushner, FTI Consulting, on
Tuesday, April 20, 2021
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Jason Frankl and Brian Kushner are Senior Managing Directors at FTI Consulting Inc. This post is based on their FTI memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Introduction & Market Update

FTI Consulting’s Activism and M&A Solutions team welcomes our clients, friends and readers to our sixth quarterly Activism Vulnerability Report, documenting the results of our Activism Vulnerability Screener from the recent fourth quarter of 2020, as well as other notable trends and themes in the world of shareholder activism and engagement. Almost one year ago to the day, we sat down to write this report for the fourth quarter of 2019. Our team had just begun the shift to working from home offices and spare bedrooms, while still adjusting to full days of video conference calls due to the rapidly spreading COVID-19 coronavirus.

While it was not until the latter half of the fourth quarter of 2020, or even the start of 2021, that many of the pandemic’s biggest concerns began to subside, many areas of the market remained incredibly resilient throughout the year. The S&P 500 Index, the Dow Jones Industrial Average Index and the Nasdaq Composite Index rose 16.3%, 7.3% and 43.6%, respectively, in 2020. While the three leading indices all ended the year on solid ground, the incredible market voracity from the COVID-19 pandemic should not be overlooked. The S&P 500 Index reached an all-time peak of 3,386 on February 19, before it fell 33.9% in just 32 days to 2,237. As measured from March 23, 2020, however, the Index regained the previous high in less than five months on August 18 (an increase of 51.5%). For the S&P 500 Index and the Nasdaq Composite Index, the period of 2019 and 2020 represents the best two-year performance since 1998 and 1999, during the heart of the Dot-Com boom.

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Surge in SPACtivity Leads to Litigation and Regulatory Risks

Posted by Caitlyn Campbell, McDermott Will & Emery LLP, on
Monday, April 19, 2021
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Caitlyn Campbell is partner at McDermott Will & Emery LLP. This post is based on her McDermott Will & Emery memorandum.

Introduction

Not far behind the dramatic increase in the use of special purpose acquisition companies (SPACs) is a corresponding increase in the number of shareholder lawsuits and increased activity at the US Securities and Exchange Commission (SEC). In recent days, Reuters reported that the SEC opened an inquiry seeking information on how underwriters are managing the risks involved in SPACs, [1] and the SEC’s Division of Corporation Finance (Corp Fin) and acting chief accountant have issued two separate public statements on certain accounting, financial reporting and governance issues that should be considered in connection with SPAC-related mergers. [2] This increase in activity by SEC staff comes on the heels of nearly two dozen federal securities class action filings, several SEC investor alerts and earlier guidance from Corp Fin. [3] The surge in litigation and regulatory interest is likely to continue and expand throughout 2021 and beyond.

In Depth

A SPAC is a company with no operations that raises funds from public investors through an initial public offering (IPO). The proceeds from the IPO are placed in a trust or escrow account for future use in the acquisition of one or more companies. A SPAC will typically have a two-year period to identify and complete a business transaction. If the SPAC fails to do so during the specified period, then it must return the funds in the account to its public shareholders on a pro rata basis and then dissolve.

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Interest in SPACs is Booming…and So is the Risk of Litigation

Posted by Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper, Cadwalader, Wickersham & Taft LLP, on
Friday, April 16, 2021
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Stephen Fraidin, Gregory P. Patti, Jr. and Jason Halper are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Fraidin, Mr. Patti, Mr. Halper, Jared Stanisci, Sara Bussiere and Victor Bieger.

Following these ten steps will prepare SPAC boards, sponsors, and advisors for the likely shareholder suits and potential regulatory investigations that are increasingly becoming part of the SPAC landscape.

If 2020 was the “year of the SPAC,” 2021 may be the year of SPAC litigation. SPACs—Special Purpose Acquisition Companies—are publicly traded companies launched as vehicles to raise capital to acquire a target company. Often called blank-check companies, SPACs are companies in which shareholders buy shares without knowing which company the SPAC will target and acquire. Investors place their faith in the sponsor: the entity or management team that forms the SPAC. The SPAC generally has around twenty-four months to seek out and acquire a target, or else must liquidate and return the capital.

Hundreds of new SPACs were launched in 2020 alone. Booming M&A or other transactional activity in any sector can invite litigation driven by plaintiffs’ attorneys, and SPACs are no exception. In just the first three months of 2021, more than 40 suits targeting SPACs have been filed. The nature of these claims evidence growing sophistication, as lawyers used to challenging traditional M&A transactions begin to tailor their claims to the unique characteristics of the SPAC lifecycle. And with SPACs going mainstream—and attracting attention from outside the usual financial circles—regulators are closely examining transaction disclosures and other aspects of SPAC deals. [1]

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Statement on Accounting and Reporting Considerations for Warrants Issued by SPACs

Posted by John Coates and Paul Munter, U.S. Securities and Exchange Commission, on
Thursday, April 15, 2021
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John Coates is Acting Director of the Division of Corporation Finance, and Paul Munter is Acting Chief Accountant, Office of the Chief Accountant, at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Mr. Coates and Mr. Munter, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Introduction [1]

In a recent statement, Acting Chief Accountant Paul Munter highlighted a number of important financial reporting considerations for SPACs. [2] Among other things, that statement highlighted challenges associated with the accounting for complex financial instruments that may be common in SPACs. Additionally, CF staff also issued a recent statement [3] highlighting key filing considerations for SPACs.

We recently evaluated fact patterns relating to the accounting for warrants issued in connection with a SPAC’s formation and initial registered offering. While the specific terms of such warrants can vary, we understand that certain features of warrants issued in SPAC transactions may be common across many entities. We are issuing this statement to highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions and to discuss the financial reporting considerations that apply if a registrant and its auditors determine there is an error in any previously-filed financial statements.

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The Structure of the Board of Directors: Boards and Governance Strategies in the US, the UK and Germany

Posted by Klaus J. Hopt (Max Planck Institute) and Patrick C. Leyens (University of Bremen), on
Monday, April 12, 2021
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Klaus J. Hopt is former director at the Max Planck Institute for Comparative and International Private Law, Hamburg, Germany; and Patrick C. Leyens is Professor at the University of Bremen, and Professor (hon.) at the Erasmus University Rotterdam. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

The board of directors is the nucleus of internal corporate governance. The internationally predominant board model, as known from the US or the UK, reveals a one-tier structure. In a two-tier structure, as found in continental European countries like Germany, the management and the monitoring tasks are divided between two boards. Despite a trend of functional convergence in internal corporate governance, we observe persisting divergence in regard to board models. As known from major corporate governance reforms, most advances directly or indirectly target the board of directors. It hence appears a long overdue question whether the choice of a particular board model affects the operation of governance strategies. If it does not, private parties should be free to choose the board model that they expect to best suit their interests.

The Board Model as a Basic Governance Structure

In our recent paper on The Structure of the Board of Directors: Boards and Governance Strategies in the US, the UK and Germany we argue that a board model only provides a basic structure which serves to enable the use of more specific corporate governance strategies. The paper continues and advances our earlier research on Board Models in Europe in which we discussed convergence and divergence of internal corporate governance in the UK and Germany, as well as in France and Italy. In our earlier research, we advanced a plea for more flexibility and leaving the choice of the board model to private parties. Our recent paper supports this plea.

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Statement by Acting Director Coates on SPACs, IPOs and Liability Risk under the Securities Laws

Posted by John C. Coates, U.S. Securities & Exchange Commission, on
Friday, April 9, 2021
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John Coates is Acting Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Mr. Coates, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs). [1] [2] Shareholder advocates—as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves [3]—are sounding alarms about the surge. Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACs, each of which is designed to hunt for a private target to take public. [4] With the unprecedented surge has come unprecedented scrutiny, and new issues with both standard and innovative SPAC structures keep surfacing.

The staff at the Securities and Exchange Commission are continuing to look carefully at filings and disclosures by SPACs and their private targets. As customary, and in keeping with the Division of Corporation Finance’s ordinary practices, staff are reviewing these filings, seeking clearer disclosure, and providing guidance to registrants and the public. They will continue to be vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transactions.

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Fair Price for Delaware Fiduciary Actions Can Exceed Appraisal Fair Value

Posted by Gilbert E. Matthews, Sutter Securities Financial Services, Inc., and Matthew L. Miller, Abrams & Bayliss LLP, on
Wednesday, April 7, 2021
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Gilbert E. Matthews is Chairman and Senior Managing Director of Sutter Securities Financial Services, Inc., and Matthew L. Miller is an associate at Abrams & Bayliss LLP. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here); and Appraisal After Dell by Guhan Subramanian.

Can fiduciaries of Delaware corporations breach their duties and face damages for a merger that provides stockholders with the equivalent of fair value in a judicial appraisal? The answer, which may surprise some, is yes. On March 1, 2021, the Delaware Court of Chancery issued an opinion, In re Columbia Pipeline Group, Inc. Merger Litigation, 2021 WL 772562 (Del. Ch. Mar. 1, 2021) (the “2021 Decision”) that expressly stated that breaches of fiduciary duty can lead to damages that exceed appraisal fair value.

Background

It has long been accepted that Delaware courts use the same valuation methodologies to determine fair value in a judicial appraisal and fair price in a fiduciary duty action. [1] There is no real debate that, “in general, the techniques used to determine the fairness of price in a non-appraisal stockholder’s suit are the same as those used in appraisal proceedings.” Gesoff v. IIC Industries, Inc., 902 A.2d 1130, 1153, n.127 (Del. Ch. 2006). However, the precise relationship between fair price in a fiduciary duty action and fair value in a related appraisal action is often unclear.

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What Boards Need to Know About Shareholder Activism

Posted by Steve Klemash and David Hunker, EY, on
Saturday, April 3, 2021
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Steve Klemash is EY Americas Center for Board Matters Leader, and David Hunker is EY Americas Shareholder Activism Defense Leader. This post is based on their EY memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here), and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Shareholder activism has proved to be a permanent part of the global capital markets. In 2009, activist hedge funds had approximately $39b in assets under management. Today, that number is closer to $130b.

Considering assets under management for all hedge funds that pursue activism in at least one of their strategies, the total amount of capital available for deployment globally by activists is many multiples of that number.

The narrative around shareholder activism has also evolved from its early days as an offshoot of so-called corporate raiders, whose post-acquisition cost-cutting strategies were widely panned as lining their own pockets at the expense of the average worker. Shareholder activists now promote themselves as defenders of shareholder value, holding management teams and boards accountable for the destruction of (or alleged failure to maximize) shareholder value. With this carefully crafted shareholder-focused narrative, activism has steadily gained momentum with institutional investors. High-profile campaigns in recent years make clear that large institutional holders are willing to be vocal in both their criticism of targeted companies and their support for an activist’s agenda.

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Does Target Firm Insider Trading Signal the Target’s Synergy Potential in Mergers and Acquisitions?

Posted by Inho Suk (SUNY Buffalo) and Mengmeng Wang (UNC Greensboro), on
Friday, April 2, 2021
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Inho Suk is Associate Professor of Accounting and Law at the State University of New York at Buffalo School of Management; and Mengmeng Wang is Assistant Professor of Accounting and Finance at University of North Carolina at Greensboro Bryan School of Business and Economics. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

In our paper forthcoming in the Journal of Financial Economics, we raise a question: can a firm looking for a takeover target use a target firm’s net insider buying as a signal of the potential worthiness of this acquisition? Prior studies have not examined the implication of insider trading for the outcomes of corporate mergers and acquisitions (M&As), possibly due to target insiders’ uncertain foreknowledge about acquisition outcomes and the stringent insider trading regulations prior to M&As. Our study fills this void by investigating whether target firm insider trading helps to reduce the “lemons” problem in the M&A market.

Corporate insiders’ trading activities are often used as a way to sign various potential firm-level events (e.g., dividend policy changes, seasoned equity offerings, open market share repurchases, corporate disclosures, etc.) as good or bad. However, it is not ex ante clear whether target insider trading can be used to infer the success of future M&As because the informational implications of target insider trading for acquisition outcomes are quite different from those of insider trading for the outcomes of other corporate events. In particular, prior to M&As, (1) target insiders are often uncertain about the bidder’s synergy potential, sometimes even lacking the knowledge of a potential acquisition, and (2) the Short Swing rule (i.e., SEC rule Section 16b), which requires any profits earned by insiders on round trip trades within any six-month period to be paid back to the firm, curbs target insiders’ trading prior to takeovers more severely than insider trading prior to other corporate events because takeover completion forces the sale of the target stock. (Facing any upcoming corporate events other than M&As, however, insiders can avoid the violation of the Short Swing rule simply by holding the stock over six months. If the limited target insider trading prior to M&As is unlikely to reflect target insiders’ private information, it would not be informative of M&A outcomes.) Due to these dissimilarities in the information structure and the regulatory environment of insider trading between M&As and other firm-level events, it is a discrete and important empirical issue to test whether target firm insider trading helps to reduce the adverse selection problem in the M&A setting.

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Deals in the Time of Pandemic

Posted by Guhan Subramanian (Harvard Business School) and Caley Petrucci (Harvard Law School), on
Wednesday, March 31, 2021
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Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School and Caley Petrucci is a graduate of Harvard Law School. This post is based on their recent paper, forthcoming in the Columbia Law Review. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

The COVID-19 pandemic has brought new attention to the period between signing and closing in M&A transactions. Transactional planners heavily negotiate the provisions that govern the behavior of the parties during this window, not only to allocate risk between the buyer and seller, but also to manage moral hazard, opportunistic behavior, and other distortions in incentives. COVID-19, however, has exposed an important connection between the material adverse effect (MAE) clause and the obligation for the seller to act “in the ordinary course of business” between signing and closing. Our new paper, Deals in the Time of Pandemic, forthcoming in the Columbia Law Review (June 2021), is the first to examine the interaction between the MAE clause and the ordinary course covenant in M&A deals.

Methodology

We constructed a new database of 1,300 M&A transactions announced between 2005 and 2020 with a transaction value of at least $1.0 billion, along with their MAE and ordinary course covenants—by far the most comprehensive, accurate, and detailed database of such deal terms that currently exists.

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