M&A Law
Delaware Supreme Court Applies the “Going-Concern” Standard in Deal Appraisal
By George Khoukaz
On April 16, 2019, the Delaware Supreme Court (the “Supreme Court”) rejected the appraisal method used by the Court of Chancery (the “Court”), holding that the going-concern appraisal method is the appropriate way to determine the fair value of a company sold to a third-party.
Verition Partners Master Fund Ltd. (“Verition”) filed an appraisal suit asking the Court to determine the fair value of one of Verition’s holdings, Aruba Networks Inc. (“Aruba”), in its acquisition by Hewlett-Packard Co. (“HP”). The Court, relying exclusively on Aruba’s average share price during the 30 days of trading before the deal became public, arrived at a per share value of $17.30, down from the $24.67 per share value paid in the sale.
On appeal, the Supreme Court reversed, and held that the Court “abused its discretion in using Aruba’s unaffected market price because it did so on the inapt theory that it needed to make an additional deduction from the deal price for unspecified ‘reduced agency costs.’” The Supreme Court applied the going-concern appraisal method that relies on the deal price less synergies realized in the transaction to determine the fair value of an acquisition target. Using this method, the Supreme Court reached a per share value of $19.10.
Altria Receives Second Request for Additional Information from FTC in Relation to JUUL Investment
By David Marshburn
On April 8, 2019, Altria Group, Inc. (“Altria”) announced that it received a request for additional information (“Second Request”) from the U.S. Federal Trade Commission (“FTC”) in connection with the company’s recent acquisition of a minority interest in JUUL Labs, Inc. (“JUUL”) that closed on December 20, 2018. Under the terms of the purchase agreement, Altria purchased $12.8 billion shares of JUUL’s non-voting capital stock that will automatically convert to voting shares once the deal receives antitrust clearance from the FTC. The transaction also provides Altria the right to designate one-third of the members of JUUL’s board of directors once the conversion is complete.
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the companies filed notification of the proposed conversion with the FTC and are required to observe a waiting and review period. As part of its review, the FTC issued the Second Request, extending the waiting and review period an additional 30 days after the companies have substantially complied with the Second Request. If the acquisition receives clearance from the FTC, Altria will own 35% of JUUL’s outstanding voting power.
International M&A
Substantial Decrease in Competition Leads to Prohibition of Merger
By Ericka Simpson Conner
On April 25, 2019, the United Kingdom’s Competition & Markets Authority (CMA), a government agency charged with protecting consumers from anti-competitive business practices, prohibited a merger between J Sainsbury and Asda Group Limited. The two companies represent the second and third largest grocery retailers in the UK, respectively, and are two of the four largest retailers of online delivered groceries.
The CMA began its investigation of the merger shortly after the companies announced their plan to merge in April 2018. The CMA’s provisional findings lead to a more in-depth investigation that began in early 2019. The CMA found that a merger between the companies would reduce competition, and lead consumers to experience a worsening of quality, range or service in the retail supply of groceries both in supermarkets and online delivery. The companies argued that the purpose of the merger was to lower company costs and pass those savings on to the consumers. In addition, to help ease the CMA’s concerns regarding competition, the companies offered to sell their supermarkets and convenience stores to increase competition. The CMA, however, was not persuaded, claiming that the merger would not decrease competitiveness and would lead to higher grocery prices for consumers.
U.S. FTC Announces Settlement with Tronox Over Purchase of Competitor
By Lora Wuerdeman
On April 10, 2019, the U.S. Federal Trade Commission (“FTC”) issued an Order and Decision announcing it reached a settlement with Tronox Ltd. (“Tronox”) that will allow Tronox to move forward with its acquisition of The National Titanium Dioxide Company Limited (“Cristal”). Under the settlement, Tronox must divest Cristal’s North American titanium dioxide business to IENOS Enterprises, a British chemical manufacturer.
In December 2017, the FTC filed an administrative complaint, arguing that Tronox’s acquisition of Cristal’s titanium dioxide business, for $1.67 billion in cash and a 24 percent stake in the combined entity, would violate antitrust laws by significantly reducing competition in the North American market since the companies are two of three top suppliers of chloride process titanium dioxide. The FTC argued that the acquisition would substantially lessen competition in the North American market in a couple of ways. First, the deal would increase the likelihood of coordination in an oligopoly market with a history of price-fixing litigation and settlements by removing one of only a few remaining competitors. Second, by doubling the size of Tronox’s North American chloride titanium dioxide business, the deal would increase the “incentive and ability of Tronox…to discipline its output to influence North American chloride titanium dioxide supply and increase prices.” The divestiture transaction is scheduled to close on May 1, 2019.