November 30, 2017

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

Mergers & Acquisitions Law

Delaware Court of Chancery Dismisses Morgans Hotel Lawsuit against Alleged Controller          

By Elizabeth M. Hanus, Husch Blackwell

 On October 24, 2017, the Delaware Court of Chancery granted a motion to dismiss a lawsuit challenging SBE Entertainment Group’s (SBE) $805 million acquisition of Morgans Hotel Group Co. (Morgans), clarifying in what circumstances a minority stockholder will be treated as a “controller” that owes fiduciary duties to other stockholders. Former Morgans director Ron Burkle and the Yucaipa entities affiliated with Burkle (collectively, defendants), which owned 0.00064% of Morgans’ outstanding shares, held consent rights as a preferred stockholder and warrant-holder, giving defendants the ability to block an acquisition of Morgans. Plaintiffs argued that these contractual rights made defendants a controller with fiduciary duties, and that defendants had breached these duties by withholding consent for alterative transactions in order to force the SBE-Morgans merger. In attempting to distinguish the current case from precedent holding that contractual blocking rights alone are insufficient to make a minority stockholder a controller, plaintiffs pointed to historical events demonstrating defendants’ control. Vice Chancellor Laster, however, rejected plaintiffs’ argument, emphasizing that the analysis should focus on whether the minority stockholder exercised control over the transaction at issue, not historical events. The court concluded, “[t]he Complaint does not support a reasonable inference that [defendants] were fiduciaries during the period leading up to the Merger” and dismissed the breach of fiduciary duty claim.

Demand Required Where Majority of Directors Do Not Face Liability for Non-exculpated Claims

By Ericka Simpson Conner, Husch Blackwell

On November 7, 2017, the Delaware Court of Chancery granted a motion to dismiss a derivative and putative class action in Lenois v. Lawal, holding that where directors are protected from duty of care claims by an exculpatory charter provision pursuant to 8 Del. C. § 102(b)(7), “a plaintiff must allege that a majority of the board faces a substantial likelihood of liability for non-exculpated claims in order to raise a reason to doubt that the challenged decision was a valid exercise of business judgment under the second prong of Aronson [v. Lewis]” (emphasis added). To satisfy the second prong of Aronson, plaintiffs must create doubt that the transaction was based on a valid exercise of business judgment by alleging that a majority of the board of directors faces a substantial likelihood of liability for non-exculpated claims. Here, plaintiff failed to meet the Aronson test because (i) it failed to make a pre-suit demand on the board of directors to bring a derivative action on behalf of the corporation as required by Chancery Rule 23.1, and (ii) the board of directors took several steps to review the transaction, such as appointing a three-director special committee and hiring an independent reserve engineer, a legal advisor, and a financial advisor. In addition, other aspects of the transactions were approved by more than half of the minority stockholders. Ultimately, plaintiff was unable to allege particularized facts that any of the board of directors’ actions rose to the level of bad faith.

Justice Department Sues to Block AT&T’s Acquisition of Time Warner

By Arooj Nazir, Husch Blackwell

On November 20, 2017, the United States Department of Justice issued a press release announcing its filing of a civil antitrust lawsuit to block AT&T’s $108 billion proposed acquisition of Time Warner Inc. The Justice Department filed a complaint in the U.S. District Court for the District of Columbia, claiming that “the combined company would use its control over Time Warner’s valuable and highly popular networks to hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for the right to distribute those networks.” The lawsuit focused on whether the acquisition would decrease competition under Section 7 of the Clayton Act, which prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”

Joint Ventures

Senators Cornyn, Feinstein, and Burr Introduce Bipartisan Bill to Strengthen the CFIUS Review Process

By David R. Venturella, Bass, Berry & Sims PLC

On November 8, 2017, U.S. Senators John Cornyn (R-TX) and Dianne Feinstein (D-CA), along with the Chairman of the Senate Select Committee on Intelligence, Richard Burr (R-NC), introduced the Foreign Investment Risk Review Modernization Act (FIRRMA) to strengthen the process by which the Committee on Foreign Investment in the United States (CFIUS) reviews acquisitions, mergers, and other foreign investments in the United States for national security risks. FIRRMA seeks to expand CFIUS jurisdiction to include certain joint ventures, minority position investments, and real estate transactions near military bases or other sensitive national security facilities. FIRRMA also updates CFIUS’s definition of critical technologies to include certain emerging technologies. The bipartisan bill’s introduction follows the Trump Administration’s call to update and modernize CFIUS.

International Law

European Commission Announces In-Depth Review of $2.1B Acquisition of Italian Steel Manufacturer

By David R. Venturella, Bass, Berry & Sims PLC

On November 8, 2017, the European Commission announced it had opened an in-depth investigation to assess the proposed acquisition of Ilva by ArcelorMittal under the EU Merger Regulation. Both Ilva, headquartered in Italy, and ArcelorMittal, headquartered in Luxembourg, manufacture and sell flat carbon steel used in a wide variety of industries ranging from car manufacturing to household appliances. The Commission is concerned that customers would face higher prices for flat carbon steel products if the transaction proceeded and will also investigate whether the transaction could have an effect on the supply and prices of certain other products, such as metallic coated steel for packaging. The Commission has until March 23, 2018, to make a decision on the proposed transaction.

Qualcomm Spurns Takeover Bid by Broadcom, but Broadcom Remains Committed to the Transaction

By Tyler Huseman, Bass, Berry & Sims PLC

On November 13, 2017, San Diego, California–based Qualcomm Incorporated announced that its board of directors had unanimously rejected an unsolicited November 6, 2017, proposal by Broadcom Limited to acquire the technology company for $70 per share in cash and stock, for a total transaction value of $130 billion. Broadcom, which is currently domiciled in Singapore and has co-headquarters in Singapore and San Jose, California, announced earlier in the month that it plans on redomiciling in the United States.

Broadcom’s bid was not contingent on Qualcomm’s pending acquisition of NXP Semiconductors N.V., which is currently tied up in regulatory approval. Paul Jacobs, Executive Chairman and Chairman of the Board of Qualcomm, said the board believed the bid “significantly undervalues Qualcomm relative to the Company’s leadership position in mobile technology and our future growth prospects.” Qualcomm’s CEO, Steve Mollenkopf, stated, “No company is better positioned in mobile, IoT, automotive, edge computing and networking within the semiconductor industry. We are confident in our ability to create significant additional value for our stockholders as we continue our growth in these attractive segments and lead the transition to 5G.”

Following Qualcomm’s announcement, Broadcom issued a press release stating that it remained committed to pursuing its bid. Broadcom CEO Hock Tan said, “We continue to believe our proposal represents the most attractive, value-enhancing alternative available to Qualcomm stockholders. . . . It remains our strong preference to engage cooperatively with Qualcomm's Board of Directors and management team.”

Ryan Thomas

Counsel, Bass Berry & Sims PLC

As mergers and acquisitions (M&A) and securities counsel to numerous national companies and private equity firms, Ryan Thomas has closed more than $50 billion in M&A transactions, and more than $60 billion in overall transactions, including both the largest domestic LBO, and the largest private equity-backed IPO at the time. Ryan’s practice focuses on public and private companies within the healthcare, media, retail, government services, life sciences and technology industries, among others.

Chauncey Lane

Counsel; Husch Blackwell, LLP

Boards and senior executives of public and private companies and investment management firms call on Chauncey for his knowledge and experience in mergers and acquisitions and capital market transactions. In this role, Chauncey regularly assists domestic and international clients with buy-side and sell-side mergers, divestitures, asset acquisitions, going-private transactions, debt and equity offerings, corporate governance and corporate restructurings. Chauncey is an active member of the Business Law Section’s Mergers and Acquisitions Committee and Federal Regulation of Securities Committee.