A peculiar appeal is currently before the Delaware Supreme Court. The case involves the judicial appraisal of DFC Global, a company acquired by a private equity firm in 2014. Approximately 12 percent of DFC stockholders dissented, and the Court of Chancery found that the fair value of the company was $10.30 per share, slightly higher than the $9.50 transaction price that the board had negotiated. On appeal, DFC Global has asked the Delaware Supreme Court for a rule of law that the Court of Chancery must defer to the merger price in an arm’s length transaction where there was a … Read more
In re Appraisal of PetSmart, Inc.[i]
Under Delaware law, “the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger.”[ii] As the statute places the duty to determine fair value on the court, the burden of proof is not specifically allocated to either of the litigating parties, and so “the burden to establish fair value by a preponderance of evidence rests on both” the petitioners and the company.[iii] This construct presents what Vice Chancellor Slights described in In re Appraisal of PetSmart, Inc.… Read more
M&A activity showed mixed results in May 2017, with similar trends to April’s figures, both in terms of deal volume and number of deals.
Globally, total deal volume, as measured by dollar value, increased by 6.9% to $274.05 billion and the number of deals increased by 7.9%
to 3,145. In the U.S., although the number of deals increased by 9.4% to 816, a decrease in average deal size led to a 6.0% decrease in total
deal volume to $102.13 billion.
Strategic vs. Sponsor Activity
Sponsor-related activity rebounded in May (with all metrics nearing or marking their 12-month high), but strategic … Read more
Congress, the U.S. Department of the Treasury (“Treasury”), and countless legislators have criticized corporate inversions — mergers designed to help American companies lower their tax bills by moving overseas — since McDermott International completed the first one in 1982. Nearly 59 percent of registered voters across the country believe it is Congress’ duty to stop such deals, according to a 2015 study, but about 35 years after the first one, little progress has been made. Every law against these transactions is met with a creative way around it. In other words, when Congress and the Treasury close one loophole, another … Read more
Although still a minority of M&A transactions, appraisal actions are on the rise. In 2012, 20 transactions involving Delaware-incorporated target companies were challenged, but in 2016, this number increased to 48, representing a 240% bump in four years. Further, these figures do not include transactions where appraisal demands were settled before the 120-day deadline for filing an appraisal petition.
With this recent uptick in appraisal litigation, private equity firms should understand the associated risks for, including some that may be unique to PE deals. Recent Delaware decisions and anecdotal perceptions (real or otherwise) have suggested that private equity-led buyouts may … Read more
Uncertainty about government economic policy reduces corporate investment and increases financing costs, as prior research has shown. In our new paper, we examine the relationship between policy uncertainty and M&A and the implications for shareholder value. We use the BBD policy uncertainty index developed by Baker, Bloom, and Davis (2016) as a proxy to examine how policy-related economic uncertainty affects firm acquisitiveness, the time it takes to complete a deal, the method of payment, and acquirer and target shareholder value. The BBD index is based on the weighted average of three components: the frequency of newspaper articles containing key terms … Read more
Tax regulators and acquisition sponsors have long been embroiled in a cat and mouse game in the context of corporate inversions—cross-border transactions in which a U.S.-incorporated public corporation is “acquired” by a foreign entity, and the survivor’s locus of incorporation moved out of the United States. If done in compliance with applicable tax regulations, inversions typically allow American targets to avoid high U.S. corporate tax rates on worldwide income, and make use instead of far lower tax rates applied only to income generated within the survivor’s destination jurisdiction.
As tax inversions grew in popularity, federal authorities responded with a gauntlet … Read more
Global M&A activity in April 2017 declined by most measures from its March 2017 level, while the U.S. showed more mixed results. Globally, total deal volume, as measured by dollar value, decreased by 16.6% to $253.91 billion, whereas in the U.S., a large increase in average deal size led to a 58.4% increase in total dollar volume to $108.11 billion. The increase in U.S. volume came despite a 27.1% decrease in number of deals to 669, similar to the global decrease of 25.3% to 2,708 (a new 12-month low for number of deals globally).
Strategic vs. Sponsor Activity
Strategic activity … Read more
While all acquisitions require approval from target shareholders, the necessary level of shareholder support varies across jurisdictions and deal structures. Some transactions can be approved by a simple majority of target shareholders, while others require super-majority approval. In our paper, Shareholder Decision Rights in Acquisitions: Evidence from Tender Offers, we investigate the impact of such variation on deal outcomes, particularly on the choice between a tender offer and merger structure.
To isolate variation in approval thresholds, we use the 2013 enactment of Delaware General Corporation Law § 251(h), which reduced the shareholder support threshold to close out a two-step … Read more
Insider trading law may be headed for even more disruption, as federal and state watchdogs press broad theories that include hacking and so-called Insider Trading 2.0, the early release of information for a fee, a panel of legal experts said on April 20.
Speaking at the M&A and Corporate Governance Conference in New York, the panel of lawyers and regulators tested the bounds of rules against insider trading in response to a series of hypotheticals posed by Professor John C. Coffee, Jr. of Columbia Law School. An attorney with the U.S. Securities and Exchange Commission said, for example, that the … Read more
The prescription drug industry has undergone a significant transformation in recent decades. The intensifying competition from generic drugs, the expanding power of entities that pay for drugs and negotiate drug prices, the increasing costs of drug development and gaining approval from the Food and Drug Administration, and the growing risks of commercial failure have strained the finances of many traditional drug companies. Many companies have responded by consolidating to either reduce costs or create new sources of revenue. As a result, the number of mergers and acquisitions (M&A) in the pharmaceutical industry recently hit an all-time high.
As pharmaceutical M&A … Read more
In a series of decisions that began with Corwin v. KKR Financial Holdings LLC, it is now clear under Delaware law that boards of directors will receive the protection of the business judgment rule “when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”[i] On March 31, 2017, in In re Saba Software, Inc. Stockholder Litigation, the Delaware Chancery Court determined, for the first time, that a transaction did not satisfy the Corwin standard.[ii] Although Saba addresses unique facts, … Read more
Global M&A activity in March 2017 was generally stronger than in February and also outperformed U.S. activity, where a decline in average deal size overshadowed an increase in the number of deals. Globally, total deal volume, as measured by dollar value, increased by 47.3% to $299.58 billion, whereas in the U.S., a decrease in average deal size led to a 38.7% decrease in total dollar volume to $65.91 billion. The decrease in U.S. volume came despite a 2.9% increase in number of deals to 886, which was not as strong as globally, where the number of deals increased by 15.6% … Read more
The legal advisory market for major corporate transactions is dominated by a relatively small number of elite law firms. What value do these law firms provide? Regulatory expertise, innovative drafting, speed of execution, and reputational cachet have all been offered as likely candidates. In Market Information and the Elite Law Firm, I argue that a considerable share of the profits earned by these firms also derives from selling their information about current “market” transaction terms.
Indeed, corporate transactions such as mergers and acquisitions or financings are characterized by several salient facts that lack a complete theoretical account. First, they … Read more
On March 7, 2017, the Delaware Chancery Court granted a motion to dismiss in In re Columbia Pipeline Group, Inc. Shareholder Litigation, which capped a line of cases starting with Corwin v. KKR Financial Holdings LLC and continued with In re Volcano Corporation Shareholder Litigation that clarified that the business judgment rule applies to tender offers and to mergers that are approved by a “fully informed, uncoerced vote” of disinterested stockholders in which the merger counterparty is a non-controlling stockholder or a non-conflicted controlling stockholder.[i] Read together, these cases provide a roadmap for practitioners to limit post-closing stockholder … Read more
M&A activity generally declined in February 2017, both globally and in the U.S. Total deal volume, as measured by dollar value, decreased globally by 30.1% to $202.45 billion, and in the U.S. by 3.7% to $106.47 billion. The number of deals followed similar trends, decreasing globally by 8.4% to 2,858 and decreasing in the U.S. by 10.2% to 828. These declines were primarily driven by declines in strategic M&A activity. Globally, strategic deal volume decreased by 40.6% to $144.56 billion and the number of deals decreased by 10.4% to 2,520. In the U.S., strategic deal volume decreased by 2.7% to … Read more
Of the nearly 6,000 U.S. firms that conducted initial public offerings between 1980 and 2008, 38 percent became merger bidders within three years after the IPO and 12 percent became takeover targets. It is important that investors understand these developments, given how often post-IPO M&A activity occurs and how much it can affect the value of companies.
Take for instance First Solar and Paypal. First Solar, the second largest maker of solar panels worldwide, explicitly disclosed that a primary use of its 2006 IPO proceeds would be to engage in acquisitions to achieve vertical integration. Not surprisingly, First Solar acquired … Read more
The practice of nominal shareholder plaintiffs challenging virtually every sizable corporate merger with a lawsuit alleging a fiduciary breach has been a scandal for some time. At least when brought by the “bottom fishers” of the plaintiff’s bar, these suits result invariably in a nonmonetary, “disclosure only” settlement that benefits no shareholder, but does justify an award of fees to the plaintiff’s attorney (the only party with an economic interest in the suit).
The near inevitability of M&A litigation is a relatively recent phenomenon, as the rate soared after 2000. One study finds that only 12 percent of M&A transactions … Read more
It has long been a policy of corporate law1 that the informed business decisions of independent and disinterested directors are protected by the presumption of the business judgment rule.2 Courts are reluctant to second-guess decisions that are made by directors in good faith and with the requisite degree of care. This reluctance remains evident in the recent decisions of Delaware courts, holding, in two lines of cases, that the presumption of the business judgment rule should apply both to certain transactions involving conflicted controlling stockholders and to transactions not involving conflicted controlling stockholders, that would otherwise be subject … Read more
On February 3, 2017, the Federal Trade Commission (“FTC”) released a report on an internal staff study examining the success of the Commission’s merger remedies from 2006 to 2012. The report, which also focuses on the remedy process more generally, is a follow up to the Commission’s first remedy study, released in 1999.
The FTC has received some criticism in the recent past about the perceived lack of success of a few of its merger consent decree remedies. But the report found that the remedy process was generally effective and that most remedies proposed by the FTC succeeded in … Read more