June 01, 2020

MONTH-IN-BRIEF: Mergers & Acquisitions

Chauncey Lane

M&A Law

New York Supreme Court Finds AT&T Offering Documents Not Misleading

By John Adgent

On May 5, 2020, the Supreme Court of New York (the “Court”) dismissed a securities class action suit on behalf of former shareholders of Time Warner Inc., a media and entertainment company (“Time Warner”), alleging several violations of the Securities Act of 1933 (the “Securities Act”) by AT&T, Inc., a communications holding company (“AT&T”), in connection with its June 2018 acquisition of Time Warner (the “Acquisition”).

To facilitate the Acquisition, AT&T issued approximately 1.185 billion shares of common stock to the former shareholders of Time Warner under a registration statement, which became effective on January 6, 2017 (the “Registration Statement”). Additionally, AT&T filed a prospectus on January 9, 2017, for the shares issued and exchanged in the Acquisition (the “Prospectus,” and together with the Registration Statement, the “Offering Documents”). The plaintiff alleged that the defendants made material misstatements regarding the Direct TV Now (“DTVN”) portion of its business in the Offering Documents and communications leading up to the Acquisition in violation of Sections 11, 12(a)(2) and 15 of the Securities Act. Specifically, the defendants allegedly misrepresented the DTVN business as an important source of strength that had added around 1.5 million subscribers when, in reality, DTVN had serious problems that directly undermined the positive representations made by AT&T.

To begin, the Court dismissed the Section 11 claim. The Court first found that the operating date for liability was the effective date, not the date of the Acquisition, because AT&T did not have a duty to update the Registration Statement in the absence of a fundamental change in the information contained therein. The Court then determined the Registration Statement was not misleading as of the effective date. Plaintiff claimed that AT&T misleadingly “touted” a “strong” launch and subscriber growth for DTVN when the subscribership was actually inflated by unsustainable practices that led to high cancellation rates. According to the Court, AT&T was not obligated to disclose its various subscription promotions even if they were unsustainable as alleged. Further, references to a “strong” launch were not actionable as puffery or legitimate optimism. Moreover, accepting plaintiff’s allegation that subscriptions fell leading up to the closing of the Acquisition, the Court found no basis to find any pre-vote disclosure misleading, as courts consistently reject this form of hindsight pleading.

Similarly, the Court also dismissed the Section 12(a)(2) and 15 claims. The Court dismissed the Section 12(a)(2) claim based on its prior determination that no material misstatements or omissions were made in the Offering Documents. Finally, because the Court did not find liability under Section 11 or 12, the plaintiff’s claim under Section 15 was dismissed.

Delaware Chancery Court Finds Private Equity Defendants Met Entire Fairness Burden

By John Adgent

On May 4, 2020, the Delaware Chancery Court (the “Court”) found that Oak Hill Capital Partners, a New York based private equity firm (“Oak Hill”), and its representatives did not breach their fiduciary duties as the controlling stockholder and members of the board of directors (the “Board”) of ODN Holding Corporation, a holding company for Oversee.net, a California technology company (collectively, “ODN”).

In this action, ODN’s co-founder and second largest common stock holder (the “Plaintiff”) alleged that Oak Hill and its representatives on the Board breached their fiduciary duties by causing ODN to accumulate cash in anticipation of a redemption (“Cash-Accumulation Strategy”), rather than investing it in ODN’s business to promote long-term growth. Because the Plaintiff proved that the Cash-Accumulation Strategy conferred a unique benefit on Oak Hill by creating a pool of funds that ODN would be required to use to redeem Oak Hill’s shares of preferred stock, the defendants had the burden of proving that the pursuit of the Cash-Accumulation Strategy was entirely fair.

Applying that standard, the Court determined that the defendants met their burden. According to the Court, the defendants first proved that ODN did not decline because of the Cash-Accumulation Strategy. Instead, the defendants established the cause of the decline to be “industry headwinds and relentless competition, most notably from Google, Inc.” Next, the defendants established that ODN would have been unable to generate a sufficient return to create value for the holders of common stock had it reinvested its net income. The Court noted that Oak Hill’s overall ownership position in ODN included all of ODN’s Series A Preferred Stock as well as a majority of the common stock. Due to its preferred stock ownership, the Court conceded that Oak Hill had an interest in achieving a return on capital. At the same time, however, its common stock ownership provided an incentive to create value for the common stock as well. Thus, the Court reasoned that while Oak Hill wanted a return of capital, it also wanted to grow ODN, which it tried to do.

The Court also commented on the “lottery-like possibility” that ODN could have created value for the common holders had it reinvested its cash. However, the defendants were not required to incur such a “long-shot bet” when they proved that the Cash-Accumulation Strategy maximized value.

Proposed Pandemic Anti-Monopoly Act Would Place Moratorium on Already-Chilled M&A Activity During COVID-19 Pandemic

By Mary Lindsey Hannahan

On May 8, 2020, over two dozen groups signed a letter urging Senate Minority Leader Chuck Schumer and House Speaker Nancy Pelosi to pass the Pandemic Anti-Monopoly Act (the “Proposed Act”). The Proposed Act, first put forth by Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez, aims to use federal authority to protect small businesses and leave them with viable alternatives—other than accepting acquisition offers—in the wake of the COVID-19 pandemic. The Proposed Act would place a moratorium on mergers and acquisitions activity by larger companies and investment funds in an effort to thwart predatory acquisitions of struggling business during the pandemic. The letter discusses the potential impact of increased concentration among U.S. industries, highlighting concerns that current “monopolies will use the public money provided by the Treasury Department and Federal Reserve to gain even more power by funding the rampant roll-up of struggling small and medium business” to the detriment of small businesses and the communities they support.

In line with the initial proposal, on May 13, 2020, Warren, Senator Amy Klobuchar and House Antitrust Subcommittee Chairman David Cicilline co-authored a letter to the Federal Reserve and the U.S. Treasury Department urging the respective offices to use their power under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to “restrict large corporations that receive bailout funds from engaging in potentially harmful mergers and acquisitions.”

As proposed, the Act’s moratorium would include all mergers and acquisitions that involve companies with over $100 million in revenue, financial institutions with over $100 million in market capitalization, private equity companies and hedge funds, companies with an exclusive patent that impacts the COVID-19 crisis, and transactions that are otherwise required to be reported to the Federal Trade Commission (the “FTC”) under existing law. The moratorium would extend until the FTC “determines that small businesses, workers, and consumers are no long under severe financial distress.” As the Proposed Act moves through the legislative process, key considerations will likely include: (1) the Proposed Act’s prohibition of potentially monopolistic mergers and acquisitions based on company revenue and type, instead of considering traditional federal economic analysis as to what constitutes a monopoly; and (2) whether the Proposed Act achieves its goal of protecting small businesses by only restricting companies with over $100 million in revenues or that were already required to file with the FTC.

International M&A

Deal Activity Shows Signs of Rebound After Virus-Related Pause

By Mary Lindsey Hannahan

Though the spring is typically a booming time for initial public offerings (“IPOs”) and deal-making activity was at a high prior to the COVID-19 pandemic, it is no secret that the pandemic has led to a stark drop-off in such transactions. However, several recent multimillion and multibillion dollar deal announcements provide glimmers of hope that the market is beginning a slow turnaround. On May 19, 2020, JDE Peet’s B.V., the world’s largest pure-play coffee and tea group (“JDE Peet’s”), confirmed that it will proceed with its planned Amsterdam IPO that may raise as much as $2.2 billion. The offer is expected to consist of a primary component of 700 million euro ($768 million), and JDE Peet’s plans to raise 1.3 billion euro ($1.4 billion) through the listing from existing shareholders. Also on May 19, 2020, Sony Corporation, a multinational, diversified conglomerate with businesses spanning the consumer and professional electronics, entertainment and financial services industries (“Sony”), announced a $3.7 billion tender offer for all shares of Sony Financial Holdings Inc., its insurance and financial services unit (“Sony Financial”), that it does not already own. Sony seeks to make Sony Financial its wholly-owned subsidiary via the transaction. Sony had the transaction in the works since March 2019, and after extensive COVID-19-related due diligence, Sony concluded that “the impact of COVID-19 would not harm the feasibility of the [t]ransaction” nor prevent the realization of synergies and pressed on with the offer.

In addition, Tronox Holdings PLC, a Connecticut-based leading integrated manufacturer of titanium dioxide pigment (“Tronox”), revealed on May 14, 2020 that it had inked a deal to purchase the TiZir Titanium and Iron (“TTI”) business of Eramet S.A., a publicly traded French metals manufacturer, in a deal totaling roughly $300 million. Tronox views the deal as the next step in advancing its vertical integration strategy, hoping to achieve a lower-cost, more secure supply source for its pigment through the TTI acquisition. While the deal is still subject to regulatory approvals and customary closing conditions, it has been approved by the boards of directors of both Tronox and Eramet.

Despite these recent transactions, as long as uncertainty over the pandemic’s duration and economic effects lingers, live transactions are in danger of indefinite postponement or collapse. ForeScout Technologies Inc., a publicly traded cybersecurity company (“ForeScout”), announced on May 18, 2020, that the pending $1.9 billion private equity takeover of the company by Advent International Corporation (“Advent”) was put on hold for the time being. Despite receiving all necessary approvals required to complete the transaction, Advent delayed the expected closing of the deal due to COVID 19-related challenges as the companies continue to discuss timing and terms.

M&A Law

L Brands, Inc. and Sycamore Partners Terminate “Transformative Transaction”

By Whitney Robinson

On May 4, 2020 L Brands, Inc., a retail company whose brands include Bath & Body Works, Victoria’s Secret, and PINK (“L Brands”), announced its mutual agreement with Sycamore Partners, a private equity firm that focuses on retail and consumer investments (“Sycamore”), to terminate what was previously announced as a “transformative transaction” that would bring “long-term value to L Brands [s]hareholders.”  The transaction, originally announced in February 2020, would have resulted in Bath & Body Works operating as a separate public company, and Sycamore purchasing, for $525 million, a 55% interest in Victoria’s Secret and turning it into a privately-held company. At the close of the transaction, Leslie Wexner, the founder of L Brands, would step down as CEO and Chairman of the L Brands board of directors, and there would be additional changes to the board of directors and executive officers. The transaction was touted as helping return the Victoria’s Secret brand to “historic levels of profitability and growth,” given the retailer’s struggles in recent years and Sycamore’s reputation for helping struggling retailers improve profitability and value.

Yet, the transaction ultimately failed when Sycamore, through its affiliate, terminated the deal and filed suit in Delaware Chancery Court, claiming that store closures, furloughs, and related actions because of COVID-19 were breaches of the transaction agreement. L Brands filed suit the next day seeking specific performance and claiming that Sycamore was using the pandemic’s effects to renegotiate the terms of the deal. The parties disagreed as to whether Sycamore’s consent was needed regarding the measures taken in response to COVID-19.  Specifically, whether these actions were outside the ordinary course of business, which could result in a breach of certain covenants under the transaction agreement.

The parties settled the litigation, terminating the agreement and releasing all pending claims with neither party owing a termination fee or other consideration for the settlement. Following the announcement, L Brands stated that it still plans to operate Bath & Body Works and Victoria’s Secret as separate companies and will move forward with the announced changes to its officers and board of directors. 

Joint Venture

JCPenney and Sephora Agree to Continue Joint Enterprise despite COVID-19 Store Closures and Furloughs

By Whitney Robinson

On May 7, 2020, J.C. Penney Company, Inc., an American department store (“JCPenney”), and Sephora USA, Inc., the U.S. subsidiary of Sephora, a French multinational cosmetics and skincare retailer (“Sephora”), announced the two entities would continue with their joint enterprise that began in 2006 and consists of over 600 Sephora “stores-within-a-store” in certain JCPenney’s retail locations. The venture between Sephora and JCPenney had recently turned sour as a result of COVID-19 store closures and furloughs of JCPenney’s employees. The parties disagreed on JCPenney’s actions in response to the COVID-19 pandemic, resulting in litigation.

JCPenney filed suit in a Texas state court in late April, seeking a temporary restraining order (“TRO”) against Sephora, claiming that Sephora sought to terminate the joint enterprise early in violation of the dispute resolution processes outlined in the agreement between the parties. JCPenney argued its decision to furlough employees at its stores, including those who worked at locations with Sephora mini-stores, was its right as it has “exclusive authority over employment decisions.”  Sephora thought this action was a breach of the agreement. The parties also disagreed on the type of disinfectant spray to use when JCPenney began reopening its stores, with JCPenney arguing it was still in compliance with a provision requiring that the mini-stores be operated “in substantial accordance with the standards and practices of Sephora retail stores.”  JCPenney noted that it did not believe these issues to be material breaches and argued that Sephora was not pursing the proper dispute resolution process agreed to by the parties. The court granted the TRO.  

Sephora removed the case to federal court and challenged the TRO, stating that JCPenney had presented a “fanciful, one-sided narrative” without giving Sephora proper notice of the hearing and “obtained its TRO under false pretenses.”  Sephora argued that JCPenney was in default under the agreement because it had taken “‘corporate or other action in furtherance of’ bankruptcy or liquidation,” and this default is not subject to the dispute resolution process JCPenney outlined in its TRO filing. Further, Sephora stated JCPenney breached the joint enterprise agreement when it furloughed its employees by “violat[ing] Sephora’s retail store practices and hurt[ing] Sephora’s carefully cultivated brand.”  Sephora had not utilized furloughs or layoffs for any of its employees. The two entities, however, came to a confidential settlement, dismissing the litigation, terminating the TRO, and continuing the joint enterprise. Several days following the announcement with Sephora, JCPenney voluntarily filed for Chapter 11 bankruptcy.

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.