Ethan A. Klingsberg

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Standardization can be a virtue and one that M&A lawyers, likely due to self-interest and ego, sometimes resist.  If venture financing and derivatives practices can have widely accepted forms of legal documentation as a starting point, why should M&A be an exception?  Ironically, agreements for takeovers of publicly traded companies – once revered as a rarified realm that only an elite group huddled in skyscrapers in Manhattan could navigate – has evolved considerably toward standard forms thanks to enhanced attention to these publicly filed agreements and an effort by Delaware courts to draw clearer guidelines about precisely what will and will not fly in the world of “public M&A.” 
Continue Reading Guidance on Navigating the Atlassian Term Sheet: Understanding the Substantive Implications Behind the Virtues of Standardization in M&A

On August 21, the Securities and Exchange Commission (“SEC”) adopted (1) guidance on the proxy voting responsibilities of investment advisers under the Investment Advisers Act and related rules (the “Advisers Guidance”) and (2) interpretation and guidance on the applicability to proxy voting advice of the rules on proxy solicitation under the Securities Exchange Act (the “Solicitation Guidance”).
Continue Reading In its Highly Anticipated Guidance on Proxy Advisory Firms, the SEC Proceeds With Caution

Many clients are now turning from their annual meeting to plans for off-cycle engagements with their institutional investors, including the passive strategy behemoths (Blackrock, State Street and Vanguard which tend to own, in the aggregate, around 20% of many of our mid- and large-cap clients), traditional actively managed funds, pension funds, and hedge funds.[1]  The rationale for these meetings is that postponement of outreach until a threat of a contested situation (such as a short-slate proxy contest or aggressive shareholder proposal) may be “too little, too late” and that these one-on-one meetings on “sunny days” (and even “partly cloudy days”) are critical, if not for locking up support, at least for establishing a foundation for obtaining support if and when the storm clouds arrive.
Continue Reading How to Avoid Bungling Off-Cycle Engagements With Stockholders

Over the past couple of years, we have seen traditional, actively managed funds, such as Neuberger Berman, borrow activist tactics and push for changes to accelerate increases in share prices.  In parallel with this arguable trend toward convergence between actively managed funds and activist funds, a chasm appeared to be developing elsewhere in the investor landscape as pension and passive strategy funds increasingly focused on “social good” issues, while brand name activist funds remained primarily focused on nearer term financial performance and returns.  But the activists desperately need the support of the pension and passive strategy funds, as evidenced by the proxy contests over the past year where support from these funds was neither predictable nor easily locked up.  The announcement on January 6, 2018 by JANA Partners, a high profile activist fund, and CalSTRs, an outspoken pension fund, that they have teamed up to accumulate a $2 billion equity position in Apple for the purpose of launching a specific “social good” campaign is the strongest indication to date that the magnitude of assets under management focused on social good matters cannot be ignored and that even a successful activist fund like JANA needs to burnish its reputation in this area. 
Continue Reading The Schizophrenic Investor Landscape: The Significance for Boards and Managements of the JANA/CalSTRs Letter to Apple

Last month, we published a blog post explaining the basis for our view that Regulation G does not require a GAAP reconciliation when M&A disclosure documents present the management projections used by financial advisors to opine on the financial fairness of merger consideration.  We argued that these projections are not the type of information that Regulation G was adopted to police and that, in view of the bases in Delaware case law and Regulation M-A for including disclosure of these projections, they should be considered exempt from the reconciliation requirements of Regulation G and Item 10(e) of Regulation S-K.  Accordingly, we urged the SEC staff to provide guidance confirming our view.  
Continue Reading New SEC Interpretation Helps Limit Reg G as an Enabler of Merger Litigation

Last year Cleary Gottlieb published a blog post and an alert memorandum highlighting the SEC staff’s renewed focus on whether the use of non-GAAP financial measures (NGFMs) by domestic registrants complies with the requirements of Regulation G.  Recently, a number of plaintiff-stockholders of target companies in M&A transactions have brought purported class actions in federal court alleging that the “Forecasts” section in M&A disclosure documents violates Regulation G.  In support of these M&A disclosure related claims, plaintiffs have been citing our post and memo about these SEC staff initiatives, which relate to earnings releases and periodic reports, even though our prior publications did not address the application of Regulation G to M&A disclosure documents.
Continue Reading Setting the Record Straight: Regulation G Does Not Apply to Non-GAAP Financial Projections in M&A Transactions

U.S. and European companies continue to receive bids to sell themselves and their significant assets to companies based in the People’s Republic of China.  Evaluation of these proposals requires due diligence of the acquiror’s ownership structure, assets, cash position, and financing sources.  Moreover, even if this due diligence exercise gives rise to satisfactory results, the continued unpredictability of the PRC government (including its recently enhanced foreign exchange control measures), coupled with the ties of some of these buyers and financing sources to governmental entities in the PRC, as well as the challenges that a non-PRC counterparty faces when seeking to enforce contractual obligations and non-PRC judgments in PRC courts, merit the implementation of an array of innovative provisions in M&A Agreements to protect the seller/target.  Several months ago, we reviewed these provisions in a popular post.  This new post updates that earlier post to reflect recent regulatory developments and the evolution of market practice.
Continue Reading An Updated Look at How M&A Agreements Handle the Risks and Challenges of PRC Acquirors

  • The Impact of New Trends in Asset Management and Investor Expectations
  • The Relationship between the CEO and an Activist Director

The keynote presentation at the 2017 Tulane Corporate Law Institute featured a discussion among

  • Gerald Hassell, Chair and CEO of Bank of New York Mellon;
  • Ed Garden, CIO and Founding Partner of Trian Partners; and

…

As passive investing via funds that track market indices continues to grow, the terrain where investors are fighting battles over governance reform is now expanding beyond contested stockholder meetings and into debates over the criteria for eligibility of issuers for inclusion in these indices.  Indeed, in this era of index fund investing, a company focused on the future trading price of its shares should be much more concerned about gaining entry into and maintaining eligibility for indices than whether there will be a withhold vote recommendation on the members of its governance committee.  If this direction continues to gain traction, we could end up with a market dominated by passive strategy investing where the current importance of familiarity with the hot button governance concerns of proxy advisory firms and institutional investors becomes subsidiary to understanding how to navigate new, governance-related eligibility requirements of major equity indices.
Continue Reading Index Eligibility as Governance Battlefield: Why the System is Not Broken and We Can Live With Dual Class Issuers

As the Delaware Supreme Court narrows the avenues for post-closing challenges to mergers (see our discussions of the implications of the Corwin and Cornerstone decisions here, here, here and here), we expect that plaintiffs’ lawyers will increasingly seek to base their merger suits on specific allegations of conflicts that may have tainted the oversight of processes to sell companies in hopes of supporting claims for breaches of the duty of loyalty and the applicability of the enhanced scrutiny of the entire fairness doctrine.  Given that virtually every merger includes some special merger benefits for directors that may be susceptible to an attempt at such a claim, it is timely that the Delaware Court of Chancery issued a decision over the summer of 2016 that provides useful guidance on how to evaluate the most common of special merger benefits to insiders:  protection against exposure to pre-merger claims.
Continue Reading When Do Merger Benefits to Directors Constitute Disabling Conflicts?