Joint Venture
European Commission States Steel Joint Venture Could Fall Within the Scope of the Merger Regulation
By Chris Johnson
On October 3, 2018, the European Commission commented in the Official Journal of the European Union that the proposed joint venture between Tata Steel Limited, a diversified steel producer, manufacturer, and mineral miner (“Tata Steel”), and thyssenkrupp AG, a diversified industrial group active in steel production, material services, elevator technology, industrial solutions, and components technology (“thyssenkrupp”), could fall within the scope of the European Union Merger Regulation.
The joint venture, which was originally announced in July of 2018, would be a 50/50 contribution from both companies to form a new entity named thyssenkrupp Tata Steel B.V. The joint venture entity “will be positioned as a leading pan-European high-quality flat steel producer with a strong focus on performance and technology leadership.” Dr. Deinrich Hiesinger, CEO of thyssenkrupp, believes the joint venture can create upwards of an additional 5 billion euros in value that the companies could not possibly attain alone, and will also create nearly 4,000 jobs. However, based on the European Commission’s recent comments, Tata Steel and thyssenkrupp will need to pass regulatory merger approval before two of Europe’s largest steel producers and manufacturers can begin their new venture.
M&A Law
Material Adverse Effect Recognized in Delaware
By Cooper Overcash
For the first time in history, the Delaware Court of Chancery (“Court”) permitted the acquiring company in a merger transaction to terminate a signed merger agreement on the basis of the target company suffering a material adverse effect. The Court found that following the parties’ execution of the merger agreement, Akorn, Inc.’s (“Akorn) financial health and regulatory compliance deviated so significantly from historical practice and past performance, permitting Frensenius Kabi AG (“Acquirer”) to terminate the merger agreement on the basis of the merger agreement’s material adverse effect clause.
In holding that a material adverse effect had occurred, the Court also found both the magnitude and duration of Akorn’s financial distress relevant. Specifically, the Court noted that for the year of 2017 (with the merger agreement signed in Q1 of 2017), Akorn’s revenues, operating-income, and EBITDA fell by 25%, 105%, and 86%, respectively. Additionally, because the financial decline persisted over a year, the Court did not see this as a temporary issue. Although this is just the first case in Delaware to reach this conclusion, the Court’s analysis presents helpful sightlines as to what Delaware courts will consider when analyzing similar cases moving forward.
K2M Shareholders Move to Block Stryker Merger
By Lora Wuerdeman
On October 11, 2018, a pair of investors in K2M Group Holdings, a global leader of complex spine and minimally invasive solutions (“K2M”), filed separate class action lawsuits in the United States District Court for the District of Delaware seeking to enjoin K2M from holding a shareholder vote, scheduled for November 7, 2018, on the merger between K2M and Stryker Corporation, one of the world’s leading medical technology companies (“Stryker”). The complaint alleges that the Board authorized the filing of a materially incomplete and misleading proxy statement in order to convince K2M shareholders to vote in favor of the proposed transaction. On August 30, 2018, K2M announced a definitive merger agreement with Stryker, pursuant to which Stryker agreed to acquire all of the issued and outstanding shares of common stock of K2M in an all cash transaction for $27.50 per share, or a total equity value of approximately $1.4 billion. The proposed transaction was expected to close late in the fourth quarter in 2018, subject to customary closing conditions, including approval by K2M’s stockholders. One of the investors, Charles Brown, said in his complaint, “It appears that K2M is well-positioned for financial growth, and that the merger consideration fails to adequately compensate the company's shareholders. It is imperative that defendants disclose the material information they have omitted from the proxy . . . so that the company’s shareholders can properly assess the fairness of the merger consideration for themselves and make an informed decision concerning whether or not to vote in favor of the proposed transaction.”
FCC Refuses to Hold-Up CBS/Entercom Merger
By Cooper Overcash
On October 25, 2018, the Federal Communications Commission (the “FCC”) again denied petitions challenging the merger between CBS Radio and Entercom Communications Corp (the “Merger”). The FCC previously rejected petitions from both Edward Stolz and Deborah Naima (the “Petitioners”) challenging the Merger. Almost a year since their original petition was denied, the Petitioners, citing claims on new developments, filed a new petition with the FCC challenging the Merger (the “Petition”).
The Petition asserted: (i) the FCC should follow its own precedent, as set forth in Sinclair-Tribune (a case that came after the FCC’s initial denial of the Petitioners’ challenge, in which the FCC designated a merger for hearing), and (ii) studies by the Media Research Center charge CBS with “intentional news distortion” and such studies should be taken into consideration.
The FCC denied the Petition asserting the Sinclair-Tribune case differed significantly from the merger at issue, and therefore, the FCC’s hearing designation in such case, should not, and does not create any precedent for such action in the case at hand. In addressing the claims of “intentional news distortion” the FCC stated that the Petitioners did not “identify any substantial and material questions of fact warranting further inquiry.”
Delaware Supreme Court Affirms Lower Court’s Decision on Business Judgement Rule Standard of Review
By Michael Caine
On October 9, 2018, the Delaware Supreme Court (the “Court”) affirmed the Delaware Court of Chancery’s (“Court of Chancery”) decision in Arthur Flood v. Syntura International, Inc., clarifying the business judgement rule review, and not the more rigorous entire fairness standard review, applies to a merger proposed by a controlling shareholder when, prior to the start of any economic negotiations, the controlling shareholder conditions its bid on both the approval of: (1) an independent, adequately-empowered special committee that fulfills its duty of care, and (2) the uncoerced, informed vote of a majority of the minority stakeholders (the “Conditions”).
The controlling shareholder (“Controlling Shareholder”) of Syntura International, Inc. (“Syntura”) sent an initial proposal that failed to specify that his proposal was contingent on the Conditions. However, two weeks after the initial proposal and before the special committee was formed, the Controlling Shareholder sent a second letter indicating that he would not proceed with the transaction until the Conditions were satisfied. Plaintiffs argued the business judgment rule standard of review did not apply because the initial proposal was not dependent on satisfaction of the Conditions. The Court affirmed the Court of Chancery decision ruling the Controlling Shareholder announced the Conditions before any negotiations took place since the second letter was sent before the special committee hired counsel, which according to the Court of Chancery, “before the [s]pecial [c]ommittee began substantive deliberations, it knew that any merger was conditioned on both its approval and approval of a majority of the disinterested stockholders.”