MONTH-IN-BRIEF: Mergers & Acquisitions

M&A Law

District of Arizona Court Finds Some Statements Actionable in Suit Over Microsemi Acquisition

By John Adgent

On March 11, 2020, the United States District Court for the District of Arizona (the “Court”) granted in part and denied in part Microchip Technology Inc.’s, a manufacturer of computer chips (“Microchip”), and certain directors and officers (collectively, “Defendants”), motion to dismiss a federal securities fraud class action suit brought by a stockholder (“Plaintiff”) on behalf of the putative class.

Plaintiff alleged that Defendants made 52 materially false statements or omissions in their communications with the public related to Microchip’s acquisition of Microsemi Corp., another chip manufacturer (“Microsemi”), for $10.15 billion, financed by $8.6 billion in new debt. Plaintiff contended that Defendants knowingly misrepresented the amount of inventory in Microsemi’s distribution channel and thus the net free cash flow available to pay the substantial debt incurred in the acquisition. According to Plaintiff, Defendants announced after the closing that Microsemi had four plus months of inventory in its distribution channel, which caused Microchip to have $110 million less of net free cash flow and higher debt leverage. As a result, Microchip was unable to pay down its debt, and Microchip common stock fell $10.67 a share.

The Court dismissed most of the 52 statements as non-actionable, but found that Plaintiff sufficiently alleged some statements as false or misleading. The Court stated that Defendant’s actionable statements regarding Microsemi’s historical performance were more specific and tied to Microchip’s performance, which plausibly created a false impression. For example, Defendants did not have historical revenue figures calculated on a non-GAAP basis for Microsemi, but Microchip’s CEO reported Microsemi’s historical revenue performance figures on a non-GAAP basis during a conference call with stockholders, reported GAAP revenue figures as non-GAAP figures and ultimately added figures calculated on different bases to get a sum non-GAAP revenue figure.

Additionally, the Court found that the Plaintiff adequately alleged false or misleading statements in Microchip’s Current Report on Form 8-K. Plaintiff alleged the Current Report on Form 8-K “contained pro forma financial statements combining the historical financial statements of Microchip and Microsemi,” but “failed to disclose the known or knowable fact of what Microsemi’s non-GAAP net sales were,” and if Defendants had disclosed the “true facts” regarding those numbers, “investors would have learned that after [Microchip] adopted its same business practices for Microsemi’s business,” Microsemi’s net sales and cash flow generation after the acquisition would be materially below Microsemi’s prior quarters’ numbers. The Court stated that this omission, as framed by Plaintiff, created an impression of a materially different state of affairs than the one that actually existed.

Cannabis SPACs: A Promising Trend?

By Yelena Dunaevsky

On March 2, 2020, Collective Growth Corporation (“Collective Growth”), a SPAC that intends to invest in companies operating in the Federally permissible cannabinoid industry, filed an S-1 registration statement to raise $150 million. The company’s CEO is Bruce Linton, a former co-founder and CEO of Canadian-based Canopy Growth, which was the first publicly traded cannabis company in North America.

Collective Growth is not the only SPAC looking at the precarious, but at times promising, North American cannabis market. According to data collected by SPACInsider.com, five cannabis-focused SPACs went public in 2019 and one, so far, in 2020. These six SPACs are all still looking for business combinations. They raised a combined $1.17 billion and, by conservative estimates, will likely produce combinations totaling around $3.5 billion.

EarlyBirdCapital, Inc. was the left lead underwriter for three of these deals, likely establishing an expertise level in this area. All of these SPACs are listed on Nasdaq except for Merida Merger Corp. (“Merida”), which is dual listed on the Canadian NEO and Nasdaq. NYSE has thus far failed to attract this particular strain of SPACs.

To date, according to SPACInsider.com, only one of the cannabis-focused SPACs, MTech Acquisition Corp., has gone through a business combination. MTech Acquisition Corp., which completed its $50 million IPO in January 2018 and its business combination with MJ Freeway LLC in June 2019, has not done very well in the market. Its questionable market performance paints a sobering picture for the current cannabis SPACs that are looking for a target. If Merida’s price does better as a result of its dual listing and expanded access to both the U.S. and Canadian markets, future cannabis-oriented SPACs may push harder for dual listings.

Companies that are considering U.S. listings only may want to keep a close watch on recent and proposed updates to Nasdaq’s and NYSE’s listing rules. Nasdaq has historically been a more popular listing venue for SPACs than NYSE because of Nasdaq’s slightly less rigorous listing requirements. According to Nasdaq, it has listed 82% of all SPAC IPOs since 2010. In 2017 NYSE tried to attract more SPACs by matching Nasdaq’s listing rules and managed to achieve some traction, especially with larger SPACs like Social Capital Hedosophia, which raised $600 million in September of 2019 and later merged with Virgin Galactic in a much-publicized deal.

On March 2, 2020 NYSE filed a proposed rule with the SEC to amend Section 902.02 of the NYSE Listed Company Manual (the “Manual”) to waive initial listing fees and the first partial year annual fee for any company listing upon closing of its acquisition of a SPAC listed on another national securities exchange. However, NYSE still requires the minimum market value of publicly held shares at time of listing to be $80 million, while Nasdaq’s minimum requirement is $50 million.

On March 9, 2020 Nasdaq held a webinar to discuss its recent and proposed updates to SPAC listing rules. Nasdaq now has a SPAC analyst dedicated exclusively to SPAC listings and is reevaluating its fee listing structure for SPACs.

As for cannabis-related SPACs, neither NSYE nor Nasdaq can list any companies whose activities violate federal law. During the webinar, Nasdaq’s representatives mentioned that cannabis-related companies will need to conduct additional analysis on the applicability of all state and federal laws and that Nasdaq may require an opinion from the company’s legal advisors as to applicability of federal law requirements.

Southern District of California Finds Qualcomm’s Statements About CFIUS Review Plausibly Misleading

By John Adgent

On March 10, 2018, the U.S. District Court for the Southern District of California (the “Court”) denied in part and granted in part defendant Qualcomm Inc.’s, a U.S. wireless technology company that manufactures chips and other technologies for mobile devices (“Defendant”), motion to dismiss a class action brought by Defendant’s stockholders (“Plaintiffs”), who brought suit under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Securities and Exchange Commission Rule 10b-5.

Plaintiffs filed the action in connection with Broadcom Inc.’s, a Singapore chipmaker (“Broadcom”), attempted hostile takeover of Defendant in 2017. Plaintiffs alleged that Defendant “secretly filed a voluntary request” for The Committee on Foreign Investment in the United States (“CFIUS”) to investigate Broadcom after Defendant rejected Broadcom’s unsolicited initial bid and subsequent proxy fight. Defendant countered that Plaintiffs failed to state a claim under Section 10(b) due to a failure to (1) identify any actionable misstatement or omission, (2) adequately plead scienter and 3) adequately plead loss causation. Defendant also asserted that Plaintiffs failed to state a claim under Section 20(a). The Court granted Defendant’s motion except, in part, on the issue of actionable misstatements or omissions because Plaintiffs alleged two assertions that may have been misleading.

First, Plaintiffs claimed that the market was misled when Defendant repeatedly stated that it was ready to meet with Broadcom in an attempt to reach a negotiated deal, but instead Defendant was engaged in discussions with CFIUS. According to Plaintiffs, by not disclosing this fact, Plaintiffs could not evaluate the appropriate risk of the transaction being blocked by CFIUS. Defendant argued that the statements were not misleading because it disclosed before the class period that the transaction “may well result in significant national security concerns” and “approval by CFIUS is far from assured.” However, the Court noted it was not in dispute that Defendant did not disclose that it actively engaged in discussion with CFIUS. The Court found that this failure to disclose could have resulted in the market placing more weight on the risk of CFIUS blocking the transaction.

Second, Plaintiffs argued that Defendant engaged in a scheme to mislead by creating the impression that it was genuinely open to the merger negotiation and publicly focusing on price and antitrust risks while it had initiated a CFIUS review. Typically, CFIUS reviews a transaction when the parties jointly file a voluntary notice to notify CFIUS of the transaction, and usually after the parties have come to an agreement on the terms. Here, Defendant filed a CFIUS notice unilaterally, which the Court remarked was unusual. Thus, by filing the notice unilaterally and failing to disclose this action to investors, Plaintiffs adequately pled a theory of a scheme to mislead.

Centene Agrees to $7.5 Million Settlement Deal Over Alleged Misrepresentation in $6.8 Billion Acquisition of Health Net

By Mary Lindsey Hannahan

On March 12, 2020, shareholders of Centene Corporation, a publicly-traded managed care enterprise that serves as an intermediary for governmental and private insured health care programs (“Centene”) asked the U.S. District Court for the Eastern District of Missouri (the “Court”) for preliminary approval of a settlement agreement over claims related to its 2016 acquisition of Health Net, Inc., a health care insurance provider (“Health Net”). The parties engaged in mediation to reach the settlement agreement. The settlement contemplates a $7.5 million cash payment by Centene to its shareholders to resolve claims that Centene misrepresented the financial security of Health Net prior to acquiring it in the $6.8 billion merger. Centene specifically does not admit any wrongdoing or validate the merits of any of the plaintiffs’ claims in the settlement.

The plaintiffs’ suit arose from allegations that Centene hid a sharp increase in Health Net’s liabilities prior to the merger. Health Net primarily provided insurance in California and Arizona, and Centene advertised the acquisition as way for the company to expand into those markets. However, as later disclosed in Centene’s filings with the Securities and Exchange Commission months after the merger, Centene incurred $390 million in liabilities when it acquired Health Net, much more than it had previously reported. The sharp increase in Health Net’s, and thus Centene’s, liabilities was due to dramatic increases in claims on Health Net’s policies related to substance abuse in California in the two years prior to the acquisition. This increase in claims, allegedly hidden by Centene from investors, simultaneously caused Health Net’s profitability to plummet. The settlement agreement for these claims comes after two years of litigation, including the Court’s reduction of the scope of the case to a class of stockholders for only a two-month period. The agreement represents a balancing of the obstacles facing the plaintiffs to prove their claims and the ability to obtain monetary recovery. According to the agreement, the parties “had a well-developed understanding of the strengths, weaknesses, and risks of the [derivative suit], all of which informed their determination that the [s]ettlement is fair, reasonable, and adequate” for all involved.

As the COVID-19 Outbreak Spreads, the Market Responds Resulting in Delayed Deals

By Whitney Robinson

As the world reacts to the novel coronavirus, or COVID-19, pandemic, the effects of the virus can be felt across multiple industries. With schools, restaurants, and stores closing, and many Americans working from home, the outbreak has led to market instability, and several companies have delayed previously announced deals.

Xerox Corporation, a document management and digital printing technologies company (“Xerox”), announced on March 13 it is postponing its tender offer acquisition of Hewlett-Packard Company, an information technology company (“HP”). Illustrating the rapidly changing nature of the outbreak, Xerox had filed deal-related documentation with the SEC just the day before the postponement announcement. Xerox said it is “prioritiz[ing] the health and safety of its employees, customers, partners and affiliates over and above all other considerations, including its proposal to acquire HP,” because “it is prudent . . . [to] focus our time and resources on protecting Xerox’s various stakeholders from the pandemic.”  While the deal is still in process, Xerox provided no specific timeline. Additionally, Troutman Sanders LLP and Pepper Hamilton LLP, both large law firms, announced on March 18 that their planned merger for April 1, 2020 would be postponed to July 1, 2020.  The firms cited COVID-19 and the “rapidly changing situation” of the outbreak as the reason for the postponement.

The outbreak is not only delaying deals, but also ending some. National Storage REIT, an Australian self-storage company (“National Storage”), announced on March 18 that Public Storage, an American self-storage company, was no longer pursuing its earlier proposed bid to acquire National Storage. National Storage stated that “in light of the current environment following the onset of COVID-19,” Public Storage would no longer pursue its offer. With the continued uncertainties surrounding the COVID-19 outbreak, this trend is likely to continue.

Jury Verdict Upheld by Massachusetts Supreme Judicial Court in Dispute over a Consulting Contract’s Language

By Whitney Robinson

One March 5, 2020, the Supreme Judicial Court of Massachusetts (the “Court”) upheld a jury verdict, finding a contract enforceable between NTV Management Inc., a consulting company (“NTV”), and Lightship Global Ventures LLC, a company founded for the transaction described below (“Lightship”). Lightship engaged NTV as a consultant and advisor for Lightship’s acquisition of Salary.com, then owned by International Business Machines Corporation, a multinational technology company (“IBM”). When Lightship hired NTV, Lightship was already in negotiations with IBM to purchase Salary.com, but did not have adequate funding and needed NTV’s assistance to help secure financing for the transaction. Pursuant to the contract between Lightship and NTV, Lightship would either pay NTV a commission based on the amount of capital secured or a $330,000 fee if NTV did not secure the financing. The contract stated that NTV would “source capital and structure financing transactions from agreed-upon target investors and/or lenders,” and “introduce and facilitate investment from third party sources collectively able to finance all levels of the transactions (i.e., both equity and debt).”

But the relationship between the parties did not go as planned, causing Lightship to terminate the contract and resulting in the lawsuit by NTV for breach of contract, breach of implied covenant of good faith and fair dealing, and violations of Massachusetts consumer protection laws. After a jury awarded NTV treble damages and the $330,000 fee, Lightship moved to “invalidate the verdict” because NTV had not registered as a broker-dealer under both Federal and Massachusetts securities law. This would mean the contract was unenforceable. A trial judge agreed with Lightship and set aside the award.

At issue on this appeal was if the contract required NTV to register as a securities broker-dealer because NTV was to “source capital and structure financing transactions from agreed-upon target investors and/or lenders.”  The Court found the contract did not require such registration as a securities broker-dealer and reinstated the jury verdict because the language of the contract “did not require NTV to ‘effect’ transactions in ‘securities.’”  The Court noted that the precedent cases were not helpful because the contract’s language did not identify a type of instrument that NTV would use to secure financing, like notes or stock. The Court also analyzed whether the contract’s reference to transactions in equity and debt were transactions in securities. Based on the lack of specificity in the contract regarding the structure of the transaction and the control an investor might have, the Court found it could not determine if an equity transaction was a transaction in securities. Because the language of the contract did not require a transaction in securities, the Court did not need to determine whether NTV was required to effect a transaction, and NTV was awarded $990,000 in damages plus attorney’s fees and costs.

International M&A

Court Approves $30 Million Settlement for Akorn, Inc. Shareholders to Resolve Claims Arising From Multi-Billion Dollar Failed Merger

By Mary Lindsey Hannahan

On March 13, 2020, the U.S. District Court for the Northern District of Illinois (the “Court”) approved a settlement agreement granting the stockholders of Akorn, Inc., a generic pharmaceuticals manufacturer (“Akorn”), $30 million in cash to settle claims that Akorn’s misconduct caused a $4.3 billion dollar merger with Fresenius Kabi AG, a global healthcare company headquartered in Germany (“Fresenius”), to fail in April 2018. The settlement cash, less $2.5 million in defense costs, will be distributed to the class of stockholders who purchased or otherwise acquired shares of Akorn’s stock between November 3, 2016 and January 8, 2019. This timeframe represents the time during which Akorn allegedly lied about submissions to the U.S. Food and Drug Administration (the “FDA”) that hid extensive data integrity problems within the company. The stockholders will also receive 8.7 million shares of Akorn’s common stock under the agreement. The Court found the settlement “fair, reasonable, and adequate,” taking into account that of roughly 65,000 notices sent out, only one stockholder filed an objection and subsequently withdrew it before the settlement hearing. 

The basis for the derivate suit and ensuing settlement arose when Fresenius, who was poised to merge with Akorn via a $4.3 billion takeover bid, led an investigation regarding FDA compliance at Akorn. The investigation was announced in March 2018, and the initial announcement resulted in a 38% decline in Akorn’s stock value. Fresenius terminated the proposed merger shortly thereafter in April 2018. These events led to the stockholders’ filing a derivative suit claiming that Fresenius terminated the merger after discovering Akorn’s mismanagement and data integrity issues. Another stock drop followed the termination of the merger. Roughly one year after the FDA investigation was announced, Akorn’s stock value had dropped 90%. This settlement resolves the derivative suit.