April 02, 2018

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

Mergers & Acquisitions Law

FTC Challenges CDK Global’s Proposed Acquisition of Auto/Mate

By Ben Tarpley, Bass, Berry & Sims

 On March 20, 2018, the United States’ Federal Trade Commission (FTC) filed an administrative complaint against CDK Global, Inc., the largest global provider of information technology and digital marketing solutions to automotive retailers, and Auto/Mate, Inc., CDK’s Albany, New York–based rival, charging that CDK’s proposed acquisition of Auto/Mate would violate federal antitrust laws. According to the FTC, CDK’s acquisition of Auto/Mate would substantially reduce competition in the already concentrated market for the provision of dealer management systems (DMS). DMS are management information systems developed specifically to help automotive retailers manage the many facets of their businesses. Despite having a smaller market share than CDK and its next-largest competitor, Auto/Mate had been winning a significant amount of business from CDK, leading the FTC to conclude that Auto/Mate was a strong competitor to CDK and was poised to become even stronger in the future. Following the FTC’s complaint, CDK and Auto/Mate abandoned the proposed transaction.

Delaware Court of Chancery Holds Unaffected Market Price Constitutes Fair Value in Appraisal Litigation

By Nick West, Husch Blackwell

On February 15, 2018, the Delaware Court of Chancery issued an opinion significantly decreasing the attractiveness of a dissenting shareholder’s seeking appraisal for a public company’s shares following an acquisition deal. In Veriton Partners Master Fund Ltd. v. Aruba Networks, Inc., the Delaware court determined that Aruba Networks, Inc.’s fair value was its 30-day average unaffected market price of $17.13 per share, which is 30 percent lower than the merger price of $24.67 per share. The court concluded that the unaffected market price—the price of a public company’s stock prior to the announcement of a merger—is a more reliable measure of fair value than its merger price, because the merger price is calculated in part using value estimations on merger synergies that are susceptible to human error. This opinion reflects a shift from recent Delaware Supreme Court decisions (DFC Global Corporation v. Muirfield Value Partners, L.P. and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd.) that relied on merger price in determining the fair value of each company’s stock in the appraisal proceedings. However, the court in Aruba Networks limited its opinion by not holding that the unaffected market price is the new standard for calculating fair value in appraisal proceedings for public companies. Instead, the court emphasized that the governing standard for fair value under 8 Del. C. § 262(a) remains the entity’s value as a going concern, which requires an examination of all relevant factors, including the court’s use of different measures of stock price.

Joint Ventures

Cronos Group and MedMen to Take on Canada

By Ben Tarpley, Bass, Berry & Sims

On March 19, 2018, Cronos Group Inc., a publicly traded Toronto, Ontario–based producer, manufacturer, and distributor of marijuana (Cronos), and MM Enterprises USA, LLC, a Los Angeles, California–based marijuana retailer (MedMen), announced the formation of MedMen Canada Inc., combining MedMen’s renowned retail experience with Cronos’s existing Canadian footprint. The announcement comes as Canada, which federally legalized the medicinal use of marijuana in 2013 and is home to several of the largest marijuana-related companies in the world, plans to federally legalize recreational adult use of the plant later this year, making it the first G7 country to do so. According to Adam Bierman, MedMen’s chief executive officer and co-founder, MedMen Canada will provide MedMen with access to “an important emerging market for adult use” of marijuana, a market that has had a regulatory framework in place for several years. With MedMen Canada, as well as generally, MedMen and Cronos hope to “chang[e] the perception of cannabis on an international scale” and perhaps prompt the United States, where the use of marijuana remains federally illegal, to take note of the thriving Canadian market. MedMen and Cronos will each have a 50 percent stake in MedMen Canada.

International Law

European Commission and FTC Approve Essilor-Luxottica Merger

By David R. Venturella, Bass, Berry & Sims

On March 1, 2018, the Federal Trade Commission (FTC) and the European Commission closed investigations on the proposed merger between Essilor and Luxottica. Essilor is the largest supplier of ophthalmic lenses worldwide. Luxottica is the largest supplier of eyewear worldwide and supplies brands such as Ray-Ban and Oakley. Essilor and Luxottica both sell their products to opticians. During the investigation, the FTC assessed whether the company resulting from the merger would have the ability and incentive to foreclose or raise the costs of independent eye-care professionals. Based on reports from Essilor’s customers, the FTC concluded that Essilor would not have the ability to raise the costs of independent eye care professionals, since such professionals had other lens suppliers available. Further, Luxottica’s national market share of less than 10 percent was not high enough to raise significant concerns. Similarly, the European Commission, having received feedback from nearly 4,000 opticians throughout Europe, concluded, among other things, that the merged company would not be able to exclude rival eyewear suppliers from the market, since Essilor has insufficient market power to shut out Luxottica’s competitors.

European Commission Conditionally Approves Bayer’s Plans to Buy Monsanto

By David R. Venturella, Bass, Berry & Sims

On March 21, 2018, Commissioner Margethe Vestager of the European Commission announced conditional approval of Bayer AG’s proposed acquisition of Monsanto Company following an in-depth review of the acquisition. Monsanto is the world’s largest supplier of seeds and also sells glyphosate herbicide under the “Roundup” brand, while Bayer is the second-largest supplier of pesticides, selling glufosinate herbicides under its “Liberty” and “Basta” brands. The Commission was concerned that the transaction would remove important competition on seeds and leave farmers with fewer alternatives, due to Bayer and Monsanto’s current competition in global markets for the development and licensing of genetically modified seeds. The Commission was also concerned that the transaction would eliminate competition between Bayer’s and Monsanto’s respective herbicide brands. Accordingly, the Commission conditionally approved the transaction subject to Bayer’s divestiture of certain of its European seed and herbicide businesses that overlap with those of Monsanto. Bayer proposed BASF, the German chemical company, as a potential acquirer of the divested businesses, but the proposed divestment is subject to further review and approval by the Commission.

President Trump Blocks Broadcom’s Hostile Takeover of Qualcomm Following Recommendation from CFIUS

By Nick West, Husch Blackwell

On March 12, 2018, the Trump Administration issued an Executive Order stalling the potential hostile takeover of Qualcomm Inc. by the Singapore-based Broadcom Limited on national security grounds. Based on Section 721 of the Defense Production Act of 1950, as amended, the President has authority to review any transaction that results in the control of a United States business by a foreign entity if the President determines that such transaction threatens U.S. national security. In a report by the Committee on Foreign Investment in the United States (CFIUS), CFIUS cited concerns that a weakening of Qualcomm’s competitiveness from Broadcom’s takeover could result in China expanding its influence over the U.S. telecommunications infrastructure. While litigation challenging the Executive Order is expected to follow, a challenge would ultimately have to overcome federal courts’ deference to the President’s national security powers and a provision in the Defense Production Act explicitly stating that actions made pursuant to the Act are not subject to judicial review. The Executive Order reiterates the importance of being aware of the government’s ability to review transactions involving foreign investment in certain key industries and the few remedies available to a party challenging an unfavorable recommendation by CFIUS.

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.