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Business Law Today

May 2024

May 2024 in Brief: Mergers & Acquisitions

Chauncey Lane and Yelena Dunaevsky

May 2024 in Brief: Mergers & Acquisitions

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States Seek to Tackle Antitrust Issues in the Healthcare Industry

By Malcolm Deisz, University of St. Thomas – School of Law

The healthcare industry in the United States is growing rapidly. Forecasts show the industry is estimated to generate over $800 billion annually by 2027. Given the substantial growth and increasing revenues, it’s unsurprising that businesses are increasingly seeking to invest. Private equity involvement in the industry has grown substantially in past years.

While mergers and acquisitions in the healthcare field are not exempted from the plethora of federal regulations and enforcement in the M&A industry, many private equity acquisitions fall below most federal thresholds. In 2024, the Federal Trade Commission (FTC) increased the minimum threshold for reporting proposed mergers and acquisitions under Section 7A of the Clayton Act from $111.4 million to $119.5 million. Studies indicate that a large percentage of healthcare mergers and acquisitions fall well below this reporting threshold; approximately 90 percent of private equity healthcare transactions are exempt from federal regulatory review because they fell below the mandatory reporting threshold. Concerns have been noted because these transactions, though smaller than some of the more massive deals occurring in the industry, can significantly impact the level of competition, particularly in smaller healthcare markets.

Some healthcare experts have pointed to the social impacts of private equity involvement, noting that hospitals purchased by private equity firms saw a significant decrease in Medicare and Medicaid patients being discharged, highlighting a reduction in services being provided to those patients. The potential for reduced access to healthcare has underscored the importance of ensuring a competitive healthcare industry.

Several states have sought to take action to maintain competitive healthcare industries. Minnesota has instituted notice requirements for both small ($10 million to $80 million) and large (over $80 million) transactions. These requirements are similar but require more extensive disclosures for qualifying “large” transactions.

California, Illinois, and Connecticut have also instituted notice requirements, requiring notice of applicable healthcare transactions to be submitted to the attorney general before closing. Notice periods range from thirty to forty-five days, depending on the state.

Indiana has taken a more comprehensive approach to healthcare transactions. A recently passed law (which will go into effect on July 1, 2024) will require that qualifying healthcare transactions be reported to the attorney general ninety days before closing. Healthcare entities are also required to report qualifying changes in both direct and indirect ownership.

The FTC and Department of Justice have also expressed interest in more closely monitoring and understanding how M&A activity in the healthcare industry impacts competition. While federal regulators may increase their involvement in healthcare transactions in the future, ten states have demonstrated both the desire and ability to monitor the competition in their respective healthcare environments more closely. With the growth in the healthcare industry and rising concerns about costs, more states may follow suit.

Del. Court of Chancery Orders near $200 Million Damages Award against Buyer Liable for Aiding and Abetting Sell-Side Officers in Breaching Fiduciary Duties

By Nastassia Merlino, NYU School of Law

On May 15, 2024, in In re Columbia Pipeline Group, Inc. Merger Litigation, Vice Chancellor Laster held a buyer liable for aiding and abetting two sell-side officers in breaching their fiduciary duties during a sale process, with damages totaling $199,218,290.

Columbia Pipeline Group, Inc. (“Columbia”) was a subsidiary of NiSource Inc., led by CEO Robert Skaggs, Jr., and CFO Stephen Smith. They had both planned retirement in 2016 and saw a spinoff of Columbia as a means to trigger their lucrative change-in-control agreements. Under these agreements, a sale of NiSource would cause all unvested equity to vest, and Skaggs and Smith would receive three times their base salary and target annual bonus if terminated following a change of control. A sale of the Columbia business unit alone would not suffice for a change of control, but a spinoff of Columbia would.

As such, the spinoff took place in July 2015, making Columbia an independent, publicly traded company led by Skaggs and six non-management directors. Skaggs and Smith hired Goldman Sachs & Co. and Lazard Frères & Co. in preparation for inbound acquisition proposals. The possible buyers identified included TransCanada Corporation, Dominion Energy Inc., Berkshire Hathaway Energy, Spectra Energy Corp., Enbridge Inc., and NextEra Energy Inc. In November 2015, Columbia conducted negotiations with multiple potential buyers, and it executed NDAs with a don’t-ask-don’t-waive standstill with Dominion, NextEra, TransCanada, and Berkshire. After providing due diligence to these bidders, Columbia favored deals with Berkshire or TransCanada and set a deadline for bids from these two bidders only, without informing other potential buyers. The two bidders made proposals, but Columbia’s board (“Board”) deemed them too low to pursue, leading to the termination of negotiations. Thus, Columbia sent “pencils down” letters to Dominion, NextEra, Berkshire, and TransCanada to emphasize that the standstills were still in effect.

Despite the “pencils down” letters ending the sale process, TransCanada persisted in contacting Columbia, with the help of Smith and Skaggs. Smith violated the standstill by providing Poirier, TransCanada’s Senior VP for Strategy and Corporate Development, with additional information concerning management’s intentions and the timing of a potential deal. TransCanada and its investment banker breached the standstill again by contacting Skaggs and Smith after an equity offering announcement by Columbia. Skaggs then began preparing the Board for a potential sale by scheduling one-on-one meetings with directors, emphasizing his retirement plans as a reason to support a sale. Smith continued to share information with Poirier in breach of the standstill and without Board approval. Meanwhile, Skaggs continued priming the directors for a sale, misrepresenting the extent of his interactions with TransCanada. Smith then opened a data room for TransCanada’s due diligence without Board authorization. TransCanada’s CEO eventually proposed an acquisition to Skaggs, who then informed the directors without disclosing the many standstill breaches or ongoing negotiations. In January 2016, the Board authorized Skaggs to grant TransCanada exclusivity based on their expression of interest. Exclusivity was not established until March 8, 2016, during which intense negotiations occurred. After offering $24 and then $26 per share, TransCanada settled on $25.50, which Columbia accepted after receiving a fairness opinion from financial advisors. The merger closed on July 1, 2016, shortly after which Skaggs and Smith retired, receiving significant retirement benefits amounting to $26.84 million and $10.89 million respectively.

Post-closing litigation ensued, leading to a court-approved settlement with Skaggs and Smith for $79 million on June 1, 2022. In its decision, the court affirmed that stockholder plaintiffs successfully demonstrated Skaggs and Smith’s breach of their fiduciary duty of loyalty, the Board’s breach of its duty of care, and TransCanada’s aiding and abetting of these breaches through a consistent and informed violation of the NDA and its standstill provision.

By examining factors like causation and conduct under the Delaware Uniform Contribution Among Tortfeasors Act, the court concluded that TransCanada bore 42 percent of responsibility for the disclosure violations and 50 percent of responsibility for the sale process claim, due to its conduct and knowledge. In its calculation of the settlement credit entitled to TransCanada, determined based on the greater of the settlement amount paid by Skaggs and Smith or their proportionate share of liability, the court concluded that TransCanada was liable for $199,218,290.50 for the Sales Process Claim and $83,671,682.01 for the Disclosure Claim.

For the Sales Process Claim, the class suffered total damages of $398,436,581, half of which TransCanada is responsible for, thus leading to a $199,218,290.50 damages award against TransCanada. For the Disclosure Claim, the class suffered total damages of $199,218,290.50, 42 percent of which TransCanada is responsible for, thus leading to a $83,671,682.01 damages award against TransCanada. As these two damages awards are noncumulative, the greater amount of $199,218,290.50 governed, resulting in a judgment against TransCanada for that amount.