I OVERVIEW OF M&A ACTIVITY
After a record year in 2015, followed by substantial declines in 2016, US M&A activity continued its downward trajectory in 2017 in terms of deal value, while reversing the trend in terms of the number of transactions. With US$1.37 trillion in M&A activity during 2017, deals for US targets declined by 15.6 per cent compared to 2016.2 However, the number of deals for US targets increased by 13.6 per cent, from 11,027 in 2016 to 13,069 in 2017.3 These figures demonstrate the continuation in 2017 of 2016's trend towards more, but less valuable, deals. Narrowing in on acquisitions of US public reporting companies valued at US$100 million or more, 172 such deals were announced in 2017, a decrease of 8 per cent from 2016 (187 deals).4 However, looking historically beyond 2016 and 2015, as tracked by What's Market, the 172 deals signed in 2017 constitute an increase of 14 per cent (151 deals), 23 per cent (140 deals) and 19 per cent (144 deals) over 2014, 2013 and 2012, respectively.5 As such, US M&A activity in 2017, as in 2016, still compares relatively well to other recent years.
Consistent with the trend in overall US M&A value versus volume, there was a marked decline in large-cap US M&A in 2017. As tracked by What's Market, only 26 deals valued over US$5 billion were announced in 2017 and 56 valued between US$1 billion and US$5 billion, compared to 34 and 68, respectively, in 2016.6 In contrast, 2017 saw an increase in announced US public M&A deals valued between US$100 million and US$500 million, from 50 in 2016 to 57 in 2017.7 M&A activity in 2017 varied substantially throughout the year, with a particularly active second quarter followed by a quieter second half of the year. There were 55 announced deals for public US companies valued over US$100 million in the second quarter of 2017, compared to 40, 38 and 39 in the first, third and fourth quarters, respectively.8
Like US M&A overall, US cross-border activity declined in value but increased in volume in 2017. There was a 27 per cent decline in the value of US cross-border M&A from 2016, largely attributable to a 46 per cent decline in the value of US-inbound transactions year over year.9 In contrast to deal value, 2017 saw a 10-year high for the number of US cross-border deals.10 As a percentage of all US M&A, US inbound cross-border deals had a relatively smaller presence in 2017. As tracked by What's Market, compared to total deals, only 33, or 19.2 per cent, were reached with foreign buyers, compared to 44, or 23.5 per cent, in 2016.11 A key factor in the decline in US cross-border M&A in 2017 was US foreign policy, including national security concerns, particularly with regard to China (see Sections II and IV, for further discussion of relevant US foreign policy tied to national security).
US public M&A was dominated by strategic, rather than financial, acquirers in 2017, as was the case in 2016. Approximately 141 US public M&A deals valued over US$100 million, or 81 per cent, involved strategic acquirers.12 This represents a slight increase compared to 2016, in which there were 149 deals involving strategic acquirers, constituting 80 per cent of US public M&A deals valued over US$100 million.13 However, financial sponsors, including private equity buyers, have become well-established players in the US M&A landscape with relatively stable participation for the last several years. For example, the percentage of US public M&A transactions valued over US$100 million that involved private equity buyers has ranged between 9 per cent and 14 per cent over the last four years.14 These numbers remain stable, among other reasons, because private equity activity is constrained by a cycle of low supply of quality targets, increasing levels of 'dry powder', and resultant competition among private equity buyers that contributes to high prices. Meanwhile, robust debt financing and stable equity markets have offered viable financing options to strategic buyers. Strategic buyers are even more dominant among large-cap deals. Of the 26 large-cap deals for US public targets entered into in 2017 (valued at US$5 billion or more), 22 were strategic (85 per cent), in line with 2016 (91 per cent).15
US antitrust regulators entered the first year of a new administration and made headlines with high-profile challenges to major private and public M&A deals in 2017. For example, the Department of Justice (DOJ) sued to block the US$86 billion deal between AT&T Inc (AT&T) and Time Warner Inc (Time Warner), leading to what has been called 'one of the most important antitrust trials in years' in March 2018.16 In another example, General Electric Company (GE) agreed to divestitures to gain regulatory approval for its US$30 billion acquisition of Baker Hughes Inc (Baker Hughes).17 When GE was unable to meet its divestitures requirements on time, it further agreed to daily incentive payments and a fine to the DOJ for the cost of ongoing regulatory oversight.18 In another prominent deal, a divided Federal Trade Commission (FTC) declined to pursue an investigation into the acquisition by Walgreens Boots Alliance Inc (Walgreens) of a number of Rite Aid Corporation (Rite Aid) stores, allowing the deal to move forward after two years and several changes to the structure of the transaction (see Section IX for further discussion of AT&T/Time Warner, GE/Baker Hughes, Walgreens/Rite Aid and other recent antitrust cases).19
Unlike US M&A, global M&A was steady in both value and volume in 2017. Global M&A activity reached US$3.60 trillion in 2017, compared to US$3.61 trillion in 2016, featuring 49,448 deals, compared to 48,250 in 2016.20 However, global cross-border M&A saw a 10 per cent decline in value in 2017, reaching a three-year low of US$1.3 trillion.21 China's outbound M&A dropped a steep 35 per cent after a record year in 2016, in part as a result of US government policies inhibiting US-inbound deals.22
To date, 2018 has seen a decrease in both the volume and the value of announced US M&A from the fourth quarter of 2017. There were 2,784 deals announced in the first quarter of 2018, a slight decrease of 4.7 per cent from the 2,922 deals announced in the fourth quarter of 2017.23 Deals announced in the first quarter of 2018 had a value of US$503.5 billion, a decrease of 9.6 per cent from US$557 billion in the fourth quarter of 2018.24 US M&A activity in the first quarter of 2018 fares better against the first quarter of 2017 than against the fourth, with a 52.3 per cent increase in value from US$330.5 billion to US$503.5 billion, though transaction numbers fell by 13.8 per cent from 3,231 to 2,784.25 Meanwhile, global M&A activity reached a record high of US$1.2 trillion in value during the first quarter of 2018, though transaction numbers decreased 10 per cent relative to the first quarter of 2017.26 While 2017 brought increased certainty on the tax reform front, 2018 has seen new uncertainty related to US policies regarding trade tariffs on Chinese imports, national security (including President Trump's executive order blocking the US$128.5 billion proposed acquisition of Qualcomm Inc (Qualcomm) by Singapore-based Broadcom Ltd (Broadcom) in March), and antitrust (including the impending outcome of the AT&T/Time Warner trial).27 It remains to be seen how M&A activity, globally and in the United States, will progress for the remainder of 2018.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
US M&A is governed by a dual regulatory regime, consisting of state corporation laws (e.g., the Delaware General Corporation Law (DGCL)) and federal securities laws (primarily, the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934).28 The Securities and Exchange Commission (SEC) is the regulatory agency responsible for administering the federal securities laws. Federal securities laws apply in the context of a merger, including federal proxy rules governing solicitation of target shareholder approval and federal securities laws relating to tender offers in the context of an offer to purchase shares of a publicly held target company. Furthermore, an acquisition or merger will imply fiduciary duties, as developed and applied in the target company's state of incorporation.
Unlike most other jurisdictions, the US patchwork of federal and state acquisition regulation is not focused on substantively regulating changes of control of target companies. Rather, US regulation focuses on disclosure, ensuring that target company shareholders have the time and information required to make a fully informed decision as to whether to accept a tender offer or vote in favour of a merger.
Under the Hart–Scott–Rodino Antitrust Improvements Act of 1976 (the HSR Act), an acquirer is normally required to make a filing with US antitrust authorities prior to completing an acquisition if the transaction size exceeds US$84.4 million (adjusted annually for inflation); the requirement was increased in early 2018 from US$80.8 million in 2017.29
There is no general statutory review process governing foreign investment in the United States. Under the Exon-Florio Amendment to the Defense Production Act of 1950, however, the President, through the Committee on Foreign Investment in the United States (CFIUS), has the power to review, investigate, prohibit or unwind transactions involving investments by non-US entities that threaten to impair national security.30 The 1992 Byrd Amendment requires the CFIUS to conduct a full Exon-Florio investigation whenever the CFIUS receives notice of a foreign government-led takeover of a US business that may affect national security.31 CFIUS review is formally a three-step process. The initial informal review step has evolved over time to give both transaction parties and the CFIUS additional time to resolve any national security concerns without the time constraints imposed by the formal review process.32 Historically, parties would file a draft notice, address any initial comments and questions from the CFIUS, and then formally file their notice approximately one week later. However, the CFIUS now regularly conducts detailed pre-filing reviews, asking extensive questions that must be answered before the formal filing is made, which often takes several weeks.33 The formal review process is usually (although not exclusively) initiated based on voluntary notice filings, with an initial 30-day period during which the CFIUS reviews the transaction to consider its effects on US national security. If the CFIUS still has national security concerns after the initial period, a second 45-day investigation is launched. Few transactions have ever progressed to the third step: presidential review and final determination, which determination is not subject to judicial review.34 Filing a notice to the CFIUS is a voluntary measure, but the CFIUS may review a transaction at its discretion, even after it is completed, which may affect the parties to an M&A transaction's anticipated benefits, and the rise in CFIUS reviews is pushing parties to address this possibility early on in the transaction process.
In November 2017, Congress proposed the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) to 'modernize and strengthen [CFIUS]'.35 If passed, the legislation will expand both the scope of activities subject to CFIUS review and the level of scrutiny directed towards transactions involving certain 'countries of special concern'.36 In a presidential memorandum on 22 March 2018, President Trump asked Treasury Secretary Mnuchin to recommend, within 60 days, executive actions to address concerns about US inbound investment from China in certain sensitive industries and technologies, which suggests that President Trump may step in with an executive order to try to exert pressure on Congress to pass some version of FIRRMA.37 After playing an active role in 2017 and early 2018, it seems likely that the CFIUS will continue to be a substantial player in the US M&A landscape moving forward (see Section IV for discussion of recent executive action and CFIUS review).
There are also additional industry-specific statutes that may require advance notification of an acquisition to a governmental authority. Examples of regulated industries include airlines, broadcasters and electric and gas utilities.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Fair value in appraisal actions
In the wake of the 2013 Dole Food Company, Inc management buyout, hedge funds added the battle for appraisal rights to their activist repertoires.38 As hedge funds sit on large reserves of cash, they continue to seek ways to earn returns. In today's low-interest-rate environment, shareholders seeking appraisal rights can obtain a meaningful return, as they are generally entitled to the fair value of their shares plus statutory interest compounded quarterly from the effectiveness of the merger until the appraisal judgment is paid.39 Delaware's statutory interest rate is generally the Federal Reserve discount rate plus 5 per cent and is higher than any rate available in the market.40 While appraisal rights are generally not a lucrative pursuit for the average shareholder, activist funds have the resources to make it worth their while and the values involved in so-called appraisal arbitrage rose substantially in recent years. Appraisal arbitrage claims were valued at US$1.5 billion in 2013.41 Claims continued to rise through 2016, with 77 petitions challenging 48 deals.42 However, after years of steady increases, there were only 62 petitions challenging 34 deals in 2017, representing decreases of 19 per cent and 29 per cent, respectively.43
Developments in the law governing appraisal actions in recent years, both legislative and judicial, have had a substantial impact on the upside of appraisal and therefore on the incentive to bring appraisal actions in Delaware. In 2016, the Delaware legislature passed two amendments to Section 262 of the DGCL aimed at curbing appraisal arbitrage. The first imposed a de minimis exception for certain appraisal claims, requiring that more than 1 per cent of the outstanding shares entitled to appraisal perfect their appraisal rights or that the merger consideration for shares with perfected appraisal rights exceed US$1 million.44 The second allows a corporation to prepay the claimant any portion of the transaction price, limiting the principal on which interest accrues while the claim is disputed.45
Delaware judicial decisions have also significantly undermined appraisal arbitrage. In several 2015 decisions, the Delaware Court of Chancery relied entirely upon, or gave substantial weight to, the merger price in determining fair value in shareholder appraisal actions where there was a robust, conflicts-free sales process. In Merlin Partners LP v. AutoInfo, Inc, the Delaware Court of Chancery criticised the proffered discounted cash flow (DCF) analysis, since the underlying cash flows were a first attempt and aimed at painting the rosiest possible picture, and relied instead on the merger price, which resulted from a competitive and fair auction process.46 In In re LongPath Capital, LLC v. Ramtron International Corporation, the Delaware Court of Chancery again rejected the DCF analysis put forth, this time because it relied on management projections prepared out of the ordinary course of business, by newer employees and using a new methodology, and the Court found fair value to be the merger price minus the merger's net synergies.47 Finally, in Merion Capital LP v. BMC Software, Inc, the Delaware Court of Chancery cited a competitive sales process and again found the merger price to be the best evidence of fair value.48
Subsequently, three important 2016 Delaware Court of Chancery decisions cut back on what had appeared in 2015 to be strong deference to valuations based on per-share merger price minus any merger-related synergies, suggesting that other financial analyses would still be used.49 The Delaware Court of Chancery in In re Appraisal of Dell Inc used a DCF analysis to find the fair value of Dell Inc (Dell) was 28 per cent higher than the deal price, despite a well-run public sale process.50 The Court cited a limited pre-signing market check, the structure of the post-signing go-shop, pricing anomalies and the fact that the sales process was centred around a private equity group and the company's founder (Michael Dell), with bids determined partly on a leveraged buyout (LBO) model.51 Then, in In re ISN Software Corp Appraisal Litigation, the Delaware Court of Chancery used a DCF analysis to find that the fair value of ISN Software Corp (ISN) was approximately 158 per cent higher than the deal price because the buyer was a controlling shareholder whose valuation was unreliable.52 Finally, in In re Appraisal of DFC Global Corp, the Delaware Court of Chancery again declined to find the merger price dispositive.53 Despite arm's-length negotiations and a robust market check, the Court found that 'significant company turmoil and regulatory uncertainty' undermined the deal price and management's projections and again pointed to the private equity buyer's focus on internal rates of return and financing constraints.54 Ultimately, the Court gave equal weight to a DCF analysis, a comparable company analysis and the deal price, finding fair value to be US$10.21 per share (well below the US$19.50 per share deal price).55
In 2017, however, Delaware courts reinvoked 2015's deference to deal price. First, in May 2017, the Delaware Court of Chancery in In re Appraisal of PetSmart, Inc gave zero weight to the proffered DCF analyses, finding them speculative and that the claimants had not shown they were reliable, whereas the deal price resulted from a robust pre-signing auction with well-informed, appropriately incentivised bidders.56
In August 2017, the Delaware Supreme Court reversed the Court of Chancery's decision in DFC, disagreeing that future uncertainty or the private equity buyer undermined the deal price and finding that the Court of Chancery was not justified in giving deal price equal, rather than substantially more, weight relative to the other valuation methods proffered.57 With regard to future uncertainty, the Court stated that absent any academic or empirical evidence to the contrary, there was no reason to think market participants would be incapable of factoring regulatory uncertainty into their analysis, and that the market's collective judgement would more likely be accurate in assessing the related risk than any individual's estimate.58 The Court also found no logical basis for the notion that the deal price deserves less weight in the context of a private equity buyer, stating that all buyers take the potential return on equity into account to justify the costs and risks of an acquisition and the fact that a private equity buyer may demand a certain rate of return does not mean that the price it is willing to pay is not a meaningful indication of fair value.59
Similarly, in December 2017, the Delaware Supreme Court reversed the Court of Chancery's decision in Dell on the basis that the Court of Chancery did not afford the deal price any weight, stating that the deal price need not be shown to be the 'most reliable' indicator of fair value for it to receive any weight at all and that '[t]he issue in an appraisal is not whether a negotiator has extracted the highest possible bid. Rather, the key inquiry is whether the dissenters got fair value and were not exploited'.60 The Court criticised several components of the trial court's reasoning. First, the Court found that any perceived 'valuation gap' based on investor 'myopia' was contrary to the proffered evidence, which indicated that analysts considered the Company's long-range outlook, and to the efficient market theory, which suggests that for widely traded companies lacking a controlling shareholder, the market is well-informed and able to digest available information to adjust its valuation for a long-range outlook.61 As in DFC, the Court rejected that the absence of strategic bidders undermined the deal price, seeing no rational connection between status as a financial sponsor and fair price.62 The Court also rejected that the 'go-shop' was fatally flawed, due to the alleged 'winner's curse' in management buyouts, because bidders had full access to requested data and affirmative steps were taken to remedy the inherent information asymmetry.63 Furthermore, the Court rejected the proposition that Michael Dell's alignment with one bidder had meaningfully deterred rival bidders absent evidence that he would not participate with the rival bidders.64
Further undermining appraisal prospects, when Delaware courts have found flaws in the sale process, they have increasingly found fair value below rather than above the deal price, emphasising the statutory mandate to exclude synergies. In May 2017, the Delaware Court of Chancery in In re Appraisal of SWS Group, Inc found the US$6.92 per share merger price unreliable in light of a number of factors, including that the buyer, Hilltop Holdings, Inc, was a major creditor of the target and informed the target board that it would not waive its credit agreement's merger covenant for any alternative transaction.65 The Court also found flaws with the proffered company comparables due to substantial differences in size, business lines and performance. The Court instead relied on its own DCF analysis to reach a value of US$6.38 per share.66 Similarly, in ACP Master, Ltd et al v. Sprint Corp et al, Clearwire Corp was purchased by Sprint Corp (Sprint), its majority shareholder, for US$5 per share, but the Delaware Court of Chancery came to a valuation of US$2.13 per share.67 The parties had not argued for use of the transaction price for fair value, and the Court acknowledged that while Sprint had in some ways controlled the sales process, Sprint's DCF analysis provided a better proxy for fair value than the dissenting shareholders' because it was prepared by management in the ordinary course of business and pertained to the stand-alone company, without synergies.68
Finally, regardless of the soundness of the sales process, early 2018 has seen Delaware courts articulating a preference for unaffected market price over deal price as a means to exclude synergies, at least where the target's stock is widely traded and absent evidence that the market was not well-informed at the time. In February 2018, the Delaware Court of Chancery in Verition Partners Master Fund Ltd v. Aruba Networks found fair value equal to the 30-day unaffected market price of US$17.13 per share, well below the US$24.67 per share deal price. The Court found that the deal price was reliable, even though, unlike Dell and DFC, there was only one bidder, but, citing the statutory mandate to exclude synergies, instead utilised the 30-day average unaffected market price.69 Absent expert testimony against the efficient market theory, and given that the company was widely traded and lacked a controlling shareholder, the Court found unaffected market price to be more direct and less speculative than deal price less synergies.70 The Court's decision in Aruba both undermines appraisal prospects for public targets and encourages expert testimony challenging market efficiency.
Appraisal will continue to be one of the most important areas of Delaware corporate law because the number of appraisal cases remains substantial and courts will continue to address which methods produce the best indication of a company's fair value, particularly merger price (with the potential subtraction of synergies) and unaffected market price rather than DCF analysis. As courts delineate the circumstances in which different valuation methods should be used, they will alter the appraisal landscape, deterring appraisal actions in circumstances where merger price or unaffected market price appear likely to win the day. Based on Delaware rulings in 2017 and early 2018, the territory in which appraisal remains profitable is shrinking, and may well ultimately be confined to private company transactions and controller squeeze-outs, for which neither unaffected market price nor deal price may be deemed reliable.71
ii Standard of review in fiduciary duty actions
The success of a claim that the members of a board of directors have breached their fiduciary duties, or that a financial adviser has aided and abetted such breach, is largely dependent upon the standard of review applied to the relevant directors' actions. In recent years, Delaware courts have expanded the territory in which the business judgement rule, requiring gross negligence, applies, thereby drastically increasing deference to boards of directors and discouraging fiduciary duty actions. In 2015, the Delaware Supreme Court in Corwin v. KKR Financial Holdings LLC clarified that the voluntary approval of a merger (other than with a controlling shareholder) by fully informed, disinterested shareholders invoked the business judgement rule standard of review in post-closing damages actions, even where Revlon-enhanced scrutiny would otherwise apply.72 According to the Court, Unocal and Revlon were designed as tools of injunctive relief to address important M&A decisions in real time and not as tools for obtaining post-closing money damages.73
Subsequently, in 2016 and early 2017, Delaware courts continued to apply Corwin to fiduciary duty cases in a manner that clarified and extended the application of the decision.74 For example, in Singh v. Attenborough, the Delaware Supreme Court clarified the Corwin ruling by holding that the business judgement rule applies irrebuttably to any post-closing judicial review of a merger that received the uncoerced, fully informed vote of disinterested shareholders.75 Then, in In re Volcano Corporation Stockholder Litigation, the Delaware Supreme Court affirmed the Court of Chancery's holding that if the fully informed, uncoerced and disinterested stockholders tender their shares to approve a merger under Section 251(h) of the DGCL, such approval has the same effect as a vote under Corwin and the business judgement rule applies irrebuttably to the transaction.76 In In re Columbia Pipeline Group, Inc Stockholder Litigation, the Delaware Court of Chancery applied Corwin broadly, rejecting claims that the shareholder approval at issue was not adequately informed such that Corwin did not apply.77 The plaintiffs claimed that there were material omissions in the proxy soliciting shareholder approval of TransCanada Corporation's acquisition of Columbia Pipeline Group, Inc because the directors did not explicitly disclose their self-interest in the spin-off's change of control benefits.78 The Court held that Corwin requires only disclosure of the underlying facts such that shareholders can reach their own conclusions regarding director self-interest, and not fiduciary 'self-flagellation', so applied the business judgement rule.79
However, in subsequent 2017 cases, Delaware courts applied Corwin more narrowly, demonstrating the limits of its reach. In In re Saba Software, Inc Stockholder Litigation, the Delaware Court of Chancery found the shareholder vote to be both less than fully informed and coerced. Following the revelation of financial fraud and the de-registration of Saba Software, Inc's securities, the company failed to restate its financial statements.80 The Court found the proxy submitted to shareholders to approve the company's acquisition by Vector Capital Management, LP to be inadequate to inform shareholders for two reasons. First, it did not provide any explanation as to why the company had failed to restate its financial statements so as to enable shareholders to assess the likelihood that management would be able to do so in the near future.81 Second, given the dramatic impact of deregistration on merger prospects and the likely unfamiliarity of shareholders with deregistered territory, the board inadequately informed shareholders of the alternate options available to them.82 Furthermore, the Court found that the shareholder vote approving the transaction was coerced, largely because of the lack of information in the proxy, since the shareholders held illiquid stock at the time and were not provided with any viable alternatives to approving the merger.83 As such, Corwin did not apply, and the Court applied Revlon-enhanced scrutiny.84
Similarly, in Sciabacucchi v. Liberty Broadband Corporation, the Delaware Court of Chancery held that the shareholder vote to approve the merger of Charter Communications, Inc (Charter) with Time Warner Cable Inc was 'structurally coercive'.85 The plaintiffs challenged the Charter board's approval of the issuance of additional equity to Liberty Broadband Corporation (Liberty Broadband), Charter's largest shareholder, and entry into a voting proxy agreement to afford Liberty Broadband additional voting power, alongside the board's approval of the merger.86 While each transaction was subject to a separate shareholder vote, the board informed shareholders that the merger was expressly conditioned on approving the other two transactions.87 Because shareholders were not able to evaluate the merit of the issuance or voting proxy agreement on their own, and shareholders were forced to accept them in order to get the benefits of the merger, the Court held that the shareholder vote with regard to those two transactions was structurally coerced for reasons unrelated to economic merit, and so the Corwin business judgement rule did not apply.88
Further limiting Corwin's reach in 2017, in In re Massey Energy Company Securities Litigation, the Delaware Court of Chancery made clear that Corwin's invocation of the business judgement rule applies only to fiduciary conduct that is closely related to the transaction that shareholders voted to approve.89 In Massey Energy, the plaintiffs alleged Caremark oversight failures related to a deadly mine explosion, which occurred prior to Massey Energy Company's acquisition by Alpha Natural Resources Inc (Alpha). The director defendants claimed that because shareholders had approved the company's subsequent acquisition by Alpha, Corwin applied to subject the directors' pre-merger conduct to mere business judgement review. The Court rejected this argument, claiming that Corwin only applies to conduct 'proximately related' to the transaction approved by shareholder vote and does not act as a 'massive eraser' to cleanse director conduct prior to an acquisition.90
Finally, the Delaware Court of Chancery clarified that plaintiffs may still pursue DGCL Section 220 books and records demands notwithstanding the application of Corwin and the business judgement rule to the director conduct supporting the demand. Section 220 of the DGCL affords stockholders the right to inspect certain corporate books and records for 'any proper purpose'.91 A stockholder may utilise a books-and-records demand as a valuable tool to investigate allegations of corporate wrongdoing. However, Delaware courts police use of such demands to avoid 'fishing expeditions' without a credible basis to infer there has been any such wrongdoing, because such demands impose substantial costs and production burdens upon the subject company.92 After the defendant argued that the application of Corwin to the fiduciary action forming the basis of the plaintiff's Section 220 demand precluded such demand, the Delaware Court of Chancery in Lavin v. West Corporation held that asserting a Corwin defence is not a bar to an otherwise properly asserted Section 220 demand.93 The Court held that in the context of a summary proceeding for a Section 220 demand, which by definition precedes the fact-gathering essential to assessing such defences, merits-based defences are premature.94 As such, plaintiffs wishing to challenge a merger that was approved by a fully informed, uncoerced vote of disinterested shareholders may still impose a substantial burden on defendant companies by demanding inspection of books and records, even if they are unlikely to succeed in post-closing litigation for damages on the basis of fiduciary duties claims due to Corwin.
After Delaware courts' 2015 and 2016 decisions seemed to nearly sound the death knell for post-closing fiduciary duties actions challenging transactions that had been approved by disinterested shareholders, Saba Software, Liberty and Massey Energy suggest at least some continued vitality. One could argue that the facts in Saba Software and Liberty were extreme, with the former involving illiquid stock and financial fraud and the latter involving perhaps at least a whiff of impropriety with regard to side benefits granted to one of the target's major (albeit non-controlling) shareholders. It remains to be seen how willing Delaware courts will be to find shareholder votes uninformed or coerced in other contexts to preclude the application of Corwin.
iii Shifts in merger litigation to federal courts
Increasing deference towards boards of directors, exemplified by the above-mentioned legal developments in appraisal and post-closing fiduciary duty actions for damages, have in part led to another trend of shifting litigation away from appraisal and fiduciary duty claims in Delaware in favour of challenges in federal courts through federal securities claims alleging proxy fraud under Rule 14a-9 under the Securities Act of 1933.95 Also fuelling the migration to federal courts has been Delaware's disdain towards disclosure-only settlements (see Section V.iii for a discussion of Delaware courts' increasing disdain towards such settlements). In the first 10 months of 2017, only 9 per cent of challenges to US public M&A deals were brought in the Delaware Court of Chancery, as compared to 39 per cent in 2016. Of the cases that settled, in 2009, 0 per cent were settled in federal courts. By 2017, that figure had risen to 44 per cent, comprised entirely of disclosure settlements.96
The Supreme Court of the United States held in March 2018 that plaintiffs may bring class actions under federal securities laws in state court, even where such lawsuits are comprised entirely of federal securities law claims, and companies may not then remove such claims to federal court.97 However, companies may circumvent that outcome contractually, at least for now. Supporting the shift towards pursuit of disclosure settlements in federal courts has been companies' use of forum selection clauses in the companies' by-laws, selecting federal district courts as the exclusive forum for asserting claims under the Securities Act. While Delaware companies happily subject themselves to state forums for substantive claims such as fiduciary challenges, in light of increasingly deferential outcomes described above, they have looked to federal courts for relief from the harsh scrutiny towards disclosure-only settlements to resolve Securities Act claims. However, in late December 2017, a class action complaint by stockholders of Blue Apron Holdings, Inc, Stitch Fix, Inc, and Roku, Inc (three of several companies that recently included forum selection by-laws requiring that federal securities cases be heard in federal district court), was filed in the Delaware Court of Chancery challenging such provisions under the DGCL.98 The case is ongoing, but should the plaintiffs prevail, their victory could significantly undermine the shift in litigation from Delaware to federal courts.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
While 2016 saw US inbound M&A deal value reach an all-time high of US$519.1 billion, there was a marked decline in 2017.99 US inbound cross-border deal value decreased by 27 per cent in 2017, driven largely by drastic shifts in Chinese-outbound M&A, particularly for US targets. In fact, China's outbound M&A decreased by 35 per cent in 2017, after it had been a key driver of lively US inbound cross-border M&A in 2016.100 In 2017, acquisitions of US targets by Chinese buyers fell by 46 per cent.101 This shift was driven in large part by risks pertaining to deal certainty due to potential failures to receive regulatory approvals from Chinese regulators or the CFIUS, which parties typically address through the use of reverse break-up fees.102
i Acquisition inversions and earnings stripping
Acquisition inversions, whereby US corporations reincorporate in low-tax jurisdictions via cross-border M&A (hereinafter, inversions), have in previous years been fundamental to foreign involvement in US M&A. Historically, US tax rates were some of the highest globally, and US-based companies consistently looked for ways to shield their international earnings from those rates. In the past, US-based companies could accomplish this by reincorporating in a foreign jurisdiction, or by moving to a country in which it was already doing a substantial amount of business in order to benefit from that country's lower tax rate.103 For this to work, 25 per cent of the company's sales, assets and employees had to be domiciled in the new jurisdiction.104 This was a difficult burden for most companies to meet and, as a result, inversions became popular.105 Under the rules governing inversions, a foreign target company and acquirer can be combined under a new holding company formed under the laws of a lower-tax foreign jurisdiction, whether or not it is the target company's jurisdiction of organisation, if less than 80 per cent of the combined entity's stock is owned by the former shareholders of the US company.106 By 2015, acquisition inversions accounted for 66 per cent of all proposed US outbound deals, up from 1 per cent in 2011.107
Recent statutory and regulatory changes, however, have made inversion transactions substantially less attractive. In April 2016, the US$152 billion merger of Pfizer Inc with Allergan Plc was abandoned after the Internal Revenue Service (IRS) issued regulations that formalised Notices 2014-52 (issued in late 2014) and 2015-79 (issued in late 2015) and targeted serial inverters and post-inversion asset dilution.108 Then, in October 2016, the US Treasury finalised regulations to combat an important tax-reduction strategy known as earnings stripping, which involves having a US subsidiary of an inverted company issue intercompany debt to its parent.109 The interest payments create deductions for the US subsidiary, thereby shielding its profits from US tax, and transfer cash to the inverted parent in a manner exempt from withholding tax. The new regulations eliminate the benefits associated with earning stripping by reclassifying this intercompany debt as equity.110 In January 2017, the IRS issued rules governing inversion transactions that finalised a series of proposed and temporary rules issued in 2015 and 2016 and made it more difficult for transactions to reap the benefits of inversions.
In December 2017, massive US tax reform through the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) further undercut the advantages of inversions and earnings stripping.111 On the one hand, the lower corporate tax and the dividend exemption reduced the tax benefits associated with inverting by excluding foreign earnings from US tax or taxing them at a lower rate. On the other hand, the legislation contains a number of provisions that specifically penalise inverters. These include further limitations on the deductibility of interest expense, increased transition taxes and the BEAT tax (as defined below), a minimum tax that is calculated without taking into account certain deductions from related party transactions (such as earnings stripping) (see Section VIII for a detailed discussion of the TCJA and its implications for US M&A).
ii CFIUS review
The CFIUS plays a key gatekeeping role when it comes to foreign involvement in US M&A. In 2017 and early 2018, CFIUS review has presented an increasingly significant obstacle, as the CFIUS continues to interpret its jurisdiction broadly. Evidence suggests the CFIUS received more than 235 filings in 2017, compared to 172 in 2016 and 143 in 2015.112 The CFIUS has interpreted its jurisdiction to include deals between non-US companies with a US nexus. For example, in 2016, the proposed acquisition of Lumileds by a Chinese consortium from Philips NV (a Dutch company) was abandoned by the parties at the CFIUS' request. The CFIUS also requested that the parties abandon the acquisition of Aixtron SE (a German company) by a Chinese investor because of national security concerns. The parties refused to abandon the deal and opted to submit the matter to President Obama for review, which led to the first-ever presidential order proactively blocking an acquisition. Additionally, the parties abandoned the sale of Global Communications Semiconductors, LLC to San'an Optoelectronics Co, Ltd (a Chinese semiconductor company) because of CFIUS concerns. In September 2017, President Trump issued an executive order to block the acquisition of Lattice Semiconductor Corporation by Chinese private equity fund Canyon Bridge Capital Partners (Canyon Bridge).113 Finally, on 12 March 2018, President Trump again stepped in with an executive order following CFIUS review, blocking Broadcom's US$128.6 billion proposed acquisition of Qualcomm on the basis that it threatened US national security.114 Though Broadcom is a Singapore-based company, the order came amid a period of intense technological competition between the United States and China, and the CFIUS expressed concerns that Broadcom would undergo its typical cost-cutting measures to stymie research and development and therefore undermine Qualcomm's ability to compete with Chinese and other foreign rivals in the domain of wireless technology.115
The CFIUS' recent history of enforcement demonstrates a focus on national security concerns, and increasingly general competition concerns, implicated in the context of Chinese buyers. In addition to Canyon Bridge, the Trump administration opposed takeovers of US targets by Hubei Xinyan Equity Investment, Ant Financial Services Group, China Energy Company Limited, Zhongwang USA, NavInfo, HNA Group and TCL Industries, with a total aggregate deal value of approximately US$5.08 billion, between February 2017 and March 2018.116 Failure to obtain regulatory approvals can trigger break-up fees for acquirers, and the rise in CFIUS reviews could push more M&A parties to address it in termination fee provisions. In particular, Chinese buyers may have to offer a higher bid to overcome a perceived increased CFIUS risk.117 Parties may also want to consider carving off any sensitive portions of the US businesses, which recently has included, among others, finance and technology.118
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
In 2017, the leading industry sector in the United States on the basis of announced deal value data provided by Thomson Reuters was the high technology (high-tech) sector.119 Deal value in the high-tech sector reached US$240.2 billion in 2017, which was a 16.9 per cent market share.120 The energy and power sector fell from first to second with US$228.6 billion (16.1 per cent) and healthcare was third with US$211.4 billion (14.9 per cent).121 The top five deals signed in 2017 for a US target were Broadcom's proposed acquisition of Qualcomm (US$128.6 billion), CVS Health Corporation's acquisition of Aetna Inc (US$67.8 billion), The Walt Disney Company's acquisition of Twenty-First Century Fox, Inc (US$67.7 billion), British American Tobacco plc's acquisition of Reynold American Inc (US$49.0 billion) and Brookfield Property Partners LP's acquisition of GGP Inc.122
i High technology
High tech's leading position among other US industry sectors in 2017 was largely attributable to the announcement of the industry's largest-ever deal – Broadcom's US$128.6 billion proposed acquisition of Qualcomm – although the deal was subsequently blocked in 2018 by the Trump administration. Looking beyond that mega-deal, technology has become the number one strategic driver of M&A transactions globally.123 In Deloitte's 2017 annual survey of global dealmakers, 19 per cent of respondents cited technology acquisition as the principal motivation for pursuing acquisitions, and an additional 16 per cent of respondents cited building out a digital platform.124 One significant trend driving high-tech M&A is the increased use of digital technologies outside the technology sector.125 From 2013 to 2016, this phenomenon, known as 'convergence', skyrocketed in terms of deal value from US$13 billion to US$128 billion. In one notable 2017 example, Wal-Mart Stores, Inc acquired the e-commerce business of Bonobos, Inc (Bonobos), in part to capitalise on Bonobos' platform rather than develop one in-house.126 Another notable combination of a technology company with a company outside the sector was the acquisition by Amazon.com, Inc (Amazon) of Whole Foods Market Inc (Whole Foods).127
Another key trend driving technology acquisitions is the expansion of technology companies into new operating segments.128 In part due to these trends, many expect that 2018 will see a high level of US technology M&A activity.129 However, the potential for increasing activity should be considered alongside the threat posed by trends in CFIUS review, including the CFIUS' focus on competition in technological development and on cybersecurity threats, particularly with regard to Chinese buyers.130
ii Shareholder activism and engagement
Like 2016, 2017 was a busy year for shareholder activists in the United States, and shareholder activism is becoming increasingly concentrated among established activist players. In 2017, there were 341 total activist campaigns announced against US companies (excluding campaigns focused other than on value creation, public short (bear raid), pursuit of board seats, and director and officer removal).131 There were 78 proxy fights in 2017, down 26 per cent from 105 in 2016, 71 of which were for board seats, down 30 per cent from 101 in 2016.132 The year 2017 saw a resurgence in activity from frequent activists, which also attracted the most capital, while the formation of new activist funds declined.133 Another notable trend in 2017 was the focus by such activists on large-cap companies such as Proctor & Gamble Co (P&G), GE, General Motors Company, Nestlé SA and Automatic Data Processing, Inc.134 Globally, 21 per cent of all activist campaigns focused on large-cap companies, increasing from approximately 19 per cent in 2016.135 Activists also went after less troubled companies in 2017.136 Nelson Peltz' fight against P&G was the most expensive contest ever, as low end estimates suggest the two sides spent at least US$60 million and several weeks campaigning, and ended in a draw.137 P&G was the largest-ever target of a proxy fight at the time, with a market value of US$223 billion.138
In connection with US M&A, activists continue to play a key role by arguing for alternatives to proposed mergers or by demanding a higher price, undermining target shareholder approval of a proposed transaction. Activism and M&A often overlap. When activist investors buy up company stock and engage in various campaigns, they produce disruption and uncertainty, which acquirers can leverage to garner support for the transaction, as occurred at Buffalo Wild Wings, Inc, BroadSoft, Inc, Parexel International Corp and Whole Foods.139 Activists may also advocate in favour of a sale of the target company in order to benefit from short-term increases in value. So-called pro-M&A activism was prominent in 2017.140 One high-profile example was the role of activist investor Jana Partners LLC in Amazon's US$13.7 billion acquisition of Whole Foods in April 2017.141 As institutional investors continue to concentrate ownership, activist investors benefit from having to convince fewer fellow investors to pursue their agenda. BlackRock Inc (BlackRock), State Street Corporation and Vanguard Group (Vanguard) owned approximately 18.6 per cent of the S&P 500 as of March 2018, compared to 14.7 per cent in 2013, whereas retail holders held less than 30 per cent.142
With the rise in shareholder activism, companies have increased their level of shareholder engagement with both activists and institutional investors.143 In 2015, 56 per cent of S&P 500 companies disclosed information regarding their shareholder engagement activities in their SEC filings, compared to only 6 per cent in 2010.144 According to PricewaterhouseCoopers LLP's annual survey of US corporate directors, 42 per cent of directors of US companies say someone on their board engaged directly with shareholders in the past year, suggesting that what could be the next chapter in shareholder engagement will occur at the board level rather than through top executives or investor relations teams.145 Since 2015, a number of large institutional investors have turned their attention to the potential consequences of board reactions to shareholder activism for long-term value.146 For example, consistent with previous years, in his most recent annual letter to fellow chief executive officers (CEOs), BlackRock's Larry Fink urged companies to create a strategic framework for long-term value creation to serve as a counterargument to activist demands for actions with short-term benefits.147 Additionally, Vanguard's letters often highlight the importance of engaging with long-term investors.148
Activist investors have been able to extend their reach this far due to the steady erosion of structural defences. However, while activist investors have enjoyed increased activity and success in resolving their demands, activist fund performance and market reaction have been down in recent years. The Activist Insight Index, compiled from more than 30 activist funds operating in different markets, was on a three-year losing streak against the S&P 500 Index from 2013 to 2015.149 While 2016 reversed this trend, giving activist investors hope for 2017, the Activist Insight Index returned 10.7 per cent net of fees as of the end of the third quarter of 2017, falling short of the S&P 500 Index by 357 basis points.150 Moreover, the average annualised return from stock owned by activist shareholders was unimpressive at 13.2 per cent in 2017, compared to the S&P 500 Index, which produced a 21.8 per cent total return.151 It remains to be seen whether activist funds will again reverse the trend in performance against the S&P 500 in 2018.
iii Disclosure-only settlements
In 2014, 93 per cent of US M&A deals over US$100 million resulted in shareholder litigation, with the first lawsuit in a challenged deal being filed an average of 14 days after announcement of the deal and 59 per cent of all such litigation being resolved before deal closing.152 Of the litigation resolved before closing, close to 90 per cent settled, with the remainder being withdrawn or dismissed.153 Of the 78 settlements reached in 2014, only six settlements, or 8 per cent, provided monetary consideration to shareholders, nearly 80 per cent only provided disclosure and 9 per cent included changes to deal protection provisions in the merger agreements.154 However, after years of building criticism of routine disclosure-only settlements within the Delaware Court of Chancery, the Court was particularly critical in 2015, resulting in the rejection of two such proposed settlements in key cases: Acevedo v. Aeroflex Holding Corporation and In re Aruba Networks, Inc Stockholder Litigation.155 Similarly, in its January 2016 decision in In re Trulia, Inc Stockholder Litigation, the Delaware Court of Chancery reaffirmed its disfavour of disclosure-only settlements in class action M&A litigation on the basis that such settlements fail to create meaningful value for the class while providing defendants with broad releases.156
Such rulings have led to fewer M&A challenges in Delaware and increasing challenges in federal courts under federal securities laws (see Section III.ii for further discussion of trends in litigation away from Delaware courts due in part to Trulia). However, after Trulia, the Seventh Circuit Court of Appeals overturned a lower court order approving a disclosure-only settlement using the same rationale as Trulia.157 Judge Posner's endorsement of Trulia is binding on all federal courts in the Seventh Circuit and is likely to convince other federal courts outside the Seventh Circuit to apply Trulia as well.158 It remains to be seen whether other federal circuits will follow suit, but this development does not bode well for litigants who wish to use forum shopping to find a court that will rubber stamp a disclosure-only settlement.159
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
In US financing markets, 2008, 2009 and 2010 were difficult years, plagued by tumult and recession.160 The years from 2011 to 2015 were characterised by recovery and growth, with record-setting financing activity and ever-lower yields.161 However, 2016 marked a turning point as interest rates experienced a sustained rise after hitting record lows in the first half of the year.162 For the sixth consecutive year, investment-grade corporate bond deal values reached record highs.163 In 2017, borrowers continued to fare well, with low corporate debt yields, record highs for gross issuance of syndicated loans and investment grade bonds and a strong year for high-yield bond issuance.164 In fact, annual proceeds from US investment grade debt issuance totalled US$1.3 trillion from 1,167 deals in 2017, remaining steady in value but increasing by 4.9 per cent in volume from 2016 and representing the highest volume on record.165 US high-yield corporate bond deal values reached US$281.4 billion (up 22.9 per cent from 2016).166 US investment grade deal value was driven by several mega-deals, with seven having a principal amount over US$10 billion, down from 10 in 2016.167 The largest such deal was AT&T's US$22.5 billion bond issuance, which was the third-largest corporate bond deal on record.168 The bond proceeds were used to fund the proposed acquisition of Time Warner.169
Several other notable deals demonstrated that borrowers were able to achieve successful results at various credit levels in 2017. Permanent financings and major financing commitments included:
- CenturyLink, Inc's procurement of approximately US$10 billion of acquisition financing, including a US$6 billion term loan B, to acquire Level 3 Communications, Inc;
- Abbott Laboratories' procurement of US$17.2 billion of financing commitments to acquire St Jude Medical, Inc and a US$2 billion term loan A to acquire Alere Inc;
- United Technology Corporation's procurement of US$6.5 billion of financing commitments to acquire Rockwell Collins, Inc;
- Thermo Fisher Scientific Inc's procurement of US$7.3 billion of financing commitments to acquire Patheon NV;
- Amazon's procurement of US$13.7 billion of financing commitments to acquire Whole Foods; and
- Penn National Gaming, Inc's procurement of US$2 billion of financing commitments to acquire Pinnacle Entertainment, Inc.170
In light of strong financial markets, one trend to watch for in 2018 will be potential reliance by investment grade borrowers on revolvers or best-efforts financings to fund acquisitions, relying less on expensive bridge commitments.171
Overall, US-syndicated lending reached an all-time high of US$2.5 trillion in 2017, fuelled by year-end merger activity and pervasive refinancing.172 Leveraged lending reached US$1.4 trillion, a new high for the market.173 M&A syndicated lending reached US$537 billion in 2017, the second-highest on record behind 2015.174 In 2017, there were 79 leveraged acquisitions of US reporting companies valued at US$100 million or more, compared to 88 in 2016, but the percentages of overall M&A activity were steadier at 46 per cent and 47 per cent in 2017 and 2016, respectively.175 Financing of private equity buyouts reached a 10-year high of US$126 billion.176 Some arrangers do not believe the regulatory framework and leverage-capping have been major deterrents to leveraged M&A financings.177 Average debt to EBITDA multiples for large US LBO transactions increased in 2017, climbing close to six times.178 Of LBOs completed in 2017, 72 per cent were levered six times or more, compared to 62 per cent in 2016.179 Globally, leverage on middle market institutional deals increased to 5.51 times debt to EBITDA, up 10 per cent from 4.95 times in 2016.180
Consistent with US M&A overall, US private equity deal activity went up in volume but down in value in 2017. There were 4,053 consummated US private equity transactions in 2017, valued at US$538.2 billion, compared to 3,538 transactions valued at US$649 billion in 2016.181 The median debt percentage in private equity-led buyouts in 2017 was 53 per cent, up approximately 3 per cent from 2016.182 The amount of dry powder that private equity firms were able to obtain and accumulate continued to increase, driving high demand. Globally, private equity dry powder climbed to approximately US$1.7 trillion in 2017, up from US$1.5 trillion in 2016.183 Furthermore, the number of private equity-backed US companies continued to increase, reaching a total of 7,250 in 2017.184 Increases in the number of private equity-funded companies in the United States has outpaced economic growth over the past few years by a significant margin.185 As such, private equity firms continue to cite a lack of quality targets, or low supply.186 This, coupled with high demand resulting from more dry powder and more private equity players, has driven a high-price environment. As a result of competition among financial sponsors, the median EV/EBITDA multiple in private equity transactions was 10.5 times in 2017, holding steady from 2016.187 Strategic buyers have been able to better compete with private equity buyers because of cheap debt and a willingness to pay a higher premium as a result of longer term strategies and the desire for synergies.188 In 2017, 81 per cent of acquisitions of US reporting companies valued at over US$100 million involved strategic buyers only and an additional 2 per cent involved a collaboration between financial and strategic buyers, compared to 80 per cent and 0.5 per cent in 2016, respectively.189
As discussed below, US tax reform will have a significant impact on M&A financing moving forward. Its limitation on interest deductibility, together with the reduction in the corporate tax rate and changes to the international tax system, will tend to free up cash for acquisitions while reducing the tax benefit of interest deductions (see Section VIII for a detailed discussion of the TCJA and its implications for US M&A).190 However, it remains to be seen how the TCJA's various provisions will interact to affect the dynamics of acquisition finance in 2018.
VII EMPLOYMENT LAW
At its best, executive compensation can incentivise corporate performance by aligning the interests of shareholders and management. At its worst, as seen in the bankruptcy of Enron Corporation, executives' pay can come at the direct expense of a company's shareholders and stakeholders.191 Executive compensation has come under increased scrutiny from all directions – institutional and retail investors, proxy advisers, courts and legislators – in efforts to minimise the agency problem that arises when directors and management are permitted to set their own compensation. As certain management-friendly pay practices are phased out in response to shareholder activism and proxy adviser recommendations, companies are crafting increasingly complex pay-for-performance programmes to better respond to shareholder and institutional investor concerns.
i Shareholder engagement and institutional adviser influence
In 2017, shareholders continued to remain engaged with executive compensation issues through say-on-pay (SOP) advisory votes and the approval of both new and amended equity plans. Although SOP votes are non-binding, public companies are generally concerned with their outcomes given the ability of SOP votes to influence director elections.192 In 2017, only 35 Russell 3000 companies 'failed' SOP votes, which is the lowest number of 'failed' SOP votes since 2011.193 The 2017 failure rate marks a continued decline from the number of 'failed' SOP votes in 2016 and a sharp decline from the number of 'failed' SOP votes in the three years preceding 2016.194
Proxy advisory services such as Institutional Shareholder Services (ISS) and Glass, Lewis & Co continue to play a role in the increasingly complex landscape of executive compensation and equity programmes. However, data suggests that the connection between an 'against' recommendation from ISS and the shareholder vote to approve a company's compensation programme is tenuous. While just 1.5 per cent of companies 'failed' SOP votes in 2017, ISS issued 'against' recommendations on approximately 12 per cent of SOP votes in 2017, the same percentage of 'against' recommendations that ISS issued in 2016 and 2015.195 Therefore, only 12.5 per cent of companies that received 'against' recommendations from ISS failed their SOP vote in 2017.196 By comparison, 14 per cent of companies that received 'against' recommendations from ISS 'failed' their SOP vote in 2016.197
Although the extent of ISS and other proxy advisers' influence on the corporate governance landscape is unclear, data shows that ISS recommendations do carry some weight. In 2017, ISS recommended 'against' SOP votes at 12 per cent of the companies it assessed; shareholder support was approximately 26 per cent lower at those companies.198 However, proxy advisers' influence is not absolute, and not all US publicly traded companies engage with proxy advisers. Many of the major institutional investors, including BlackRock and Vanguard, maintain in-house proxy analysis and governance groups to inform their own voting decisions in lieu of engaging proxy advisory firms.199
Criticism of proxy advisers has also increased in recent years. Some critics have argued that proxy advisers serve a quasi-governmental role without the necessary regulatory safeguards.200 For example, lawmakers have argued that ISS is inherently conflicted because it provides both proxy voting recommendations to shareholders and consulting services to public companies.201 As a result, in October 2017, H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, was introduced with the purpose of regulating proxy advisory firms.202 Under H.R. 4015, proxy advisers would be required to register with the Securities and Exchange Commission, disclose any potential or actual conflicts of interest relating to the provision of proxy advisory services and provide an opportunity for companies to comment on draft recommendations. H.R. 4015 passed the House of Representatives and was referred to the Senate on 21 December 2017.203
ii Golden parachutes and executive severance developments
ISS has singled out certain change in control (CIC) benefits historically provided to executives in connection with M&A transactions (such as 'single-trigger' acceleration of equity-based awards and gross-ups of the excise tax imposed under Section 280G of the US Internal Revenue Code of 1986 (the Code)) as problematic.204 ISS' published policy guidance states that it is 'likely' to render an 'against' or 'withhold' vote recommendation when single-trigger acceleration or a Section 280G gross-up is included in a new CIC agreement.205 In addition, ISS considers whether a company's plans and agreements that were in place prior to a transaction contain excise tax gross-up and single-trigger equity acceleration provisions in determining its recommendation on 'say on golden parachute' (SOGP) proposals.206
Given the range of shareholder responses to SOGP proposals and pressure from proxy advisers to limit excessive compensation package strategies, it is likely that companies will continue to review and restructure CIC benefits and may shift increasingly towards a transaction-based gross-up model.207 Although many companies have eliminated Section 280G gross-ups from their CIC and employment agreements to avoid negative recommendations from proxy advisory firms, recent data suggests that companies are increasingly providing for Section 280G gross-ups in the context of acquisitions.208 However, regardless of whether golden parachute payments are provided under the terms of companies' existing benefit plans or are granted in connection with a transaction, shareholder dissatisfaction with outsized golden parachute payments continues to increase. At the same time that the total number of M&A transactions increased in 2017, average CEO golden parachute payments increased by US$3.8 million and average shareholder support for SOGP proposals fell to an all-time low of 79 per cent.209
iii Pay-ratio rule
The SEC adopted the final rule for Section 953(b) of the Dodd–Frank Wall Street Reform and Consumer Protection Act, referred to as the pay-ratio rule, in 2017.210 Beginning on 1 January 2018, all public companies are required to disclose in the proxy statement the median annual total compensation of all company employees, the annual total compensation of the CEO and the ratio of the two amounts. Additional disclosure is required about the selection of the median employee, the calculations involved in determining total compensation and narratives discussing the ratio.
As of 11 April 2018, 1,042 public companies have reported their pay ratio. Of those, 647 (62 per cent) have a pay ratio below 100:1. The median ratio of companies in the S&P 500 (154:1) is approximately twice the median ratio of companies in the Russell 3000 (76:1).211 The total annual compensation of the median employee of companies in the S&P 500 is US$70,000, compared to US$61,000 for companies in the Russell 3000.212 Large companies and companies with many seasonal or part-time employees are more likely to have high pay ratios.213 Furthermore, company revenue, a primary determinant of CEO pay, often has a direct correlation with the pay ratio.214 As more companies disclose pay ratios for the first time in 2018, the compensation of companies' CEOs and median employees will continue to be in the spotlight.
iv Director compensation
In recent years, director compensation has come under scrutiny after a series of shareholder lawsuits alleging excessive director pay.215 Until recently, the Delaware Court of Chancery reasoned that potential conflicts of interest that occur when directors set their own compensation are nonetheless subject to 'business judgement' deference whereby stockholders approve a plan that contains 'meaningful limits' on director compensation.216
However, the Delaware Supreme Court held in In re Investors Bancorp, Inc Stockholder Litigation in December 2017 that certain awards to directors are subject to 'entire fairness' review rather than 'business judgement' deference.217 Following Investors Bancorp, the business judgement rule will apply to judicial review of director compensation in Delaware only when (1) directors submit specific compensation decisions for approval by fully informed and disinterested stockholders or (2) the stockholder-approved plan is self-executing and does not permit director discretion.218 Otherwise, directors must prove that their compensation is 'entirely fair' to the company, which may require the support of peer-group data and analysis by independent consultants.219 However, if a shareholder-approved plan limit is reasonable, and the directors receive board approval to make grants to themselves within that limit, then it is possible that the board's decision will continue to receive business judgement deference.220 Therefore, maintaining restrictive plan share limits that minimise director discretion will reduce the threat of shareholder litigation and maximise the chances of receiving business judgement review.221
Notably, ISS has recently turned its focus to director compensation and revised its proxy voting guidelines for 2017 and 2018 to specifically address non-employee director compensation.222 Under its 2017 and 2018 guidelines, ISS will make recommendations on a case-by-case basis and take into consideration qualitative factors, such as the existence of a meaningful limit on director compensation and ownership as well as ownership and holding requirements for equity awards.223
v Code Section 162(m) and Code Section 83(i)
The TCJA made sweeping changes to Section 162(m) of the Code.224 Previously, a public company was limited to a US$1 million annual deduction for compensation paid to each of the CEO and the next three highest-paid executive officers (excluding the chief financial officer (CFO)) (collectively, 'covered employees') but was permitted to deduct compensation greater than US$1 million paid to any 'covered employee' to the extent that such compensation constituted performance-based compensation. The TCJA expanded the limitation on deductibility by including compensation paid to the CFO and eliminating the performance-based compensation exception. Furthermore, under the TCJA, an individual previously classified as a 'covered employee' will forever retain 'covered employee' status, meaning that such individual's compensation will always be subject to the deductibility limits of Section 162(m).
The TCJA provides transitional relief under Section 162(m) for any 'written binding contract' that was in existence on 2 November 2017, provided that such arrangement was not 'modified in any material respect' after 2 November 2017. Performance-based compensation granted to 'covered employees' under such 'grandfathered' plans will remain deductible within the applicable US$1 million limit. However, the Department of the Treasury has yet to issue guidance on the meaning of 'material modification' under the TCJA. Based on prior guidance under the old Section 162(m), it is likely that a plan will be deemed to be 'materially modified' as of the date that it could be unilaterally amended or terminated by the employer, or as of the date of renewal if either the employer or the employee can elect not to renew the contract.
In addition, the new Code Section 83(i) under the TCJA permits certain deferral elections for stock options and restricted stock units exercised or settled after 31 December 2017. Under Section 83(i), a 'qualified employee' may elect to defer the recognition of taxable income under Section 83(a) for up to five years.225 A 'qualified employee' excludes 1 per cent owners of the corporation granting the equity awards, the CEO, the CFO and the four highest compensated officers for any of the preceding 10 years. The deferral election under Section 83(i) is limited to private companies with a written plan covering at least 80 per cent of full-time employees who are granted stock options or restricted stock units. Section 83(i) is likely to promote broad-based employee stock ownership at private companies and to mitigate the liquidity problem faced by employees of private companies upon the exercise of stock options or settlement of restricted stock units.
vi Looking ahead
High levels of shareholder and proxy adviser involvement with SOP and SOGP votes indicate that boards of directors are increasingly restricted in their ability to set executives' compensation. In addition, Delaware directors will now have their own compensation analysed under the more rigorous standard of In re Investors Bancorp, which aims to mitigate the conflicts of interest that arise when directors set their own pay. Companies should continue to review their compensation and equity programmes (including those for directors) and carefully document compensation decisions, particularly in the context of acquisitions, given the continuing impact of the SOP vote and the enhanced focus on director compensation.
Shareholders are also likely to continue exploring other avenues for influencing the pay practices of companies that are unresponsive to SOP votes and SOGP votes. Thus far, director re-election generally has been affected but not swayed by 'failed' SOP votes, although shareholders increasingly expressed frustration about compensation practices by voting against the re-election of directors, particularly those involved in compensation decisions.226 The practices identified as most troublesome by ISS and other proxy advisory firms are likely to continue to disappear, and compensation, even with respect to perquisites and other fringe benefits, is expected to continue to shift away from cash-to-equity and performance-based awards under increasingly complex pay-for-performance programmes. It is unclear what effect the migration to equity and performance-based pay, coupled with the elimination of the performance-based compensation exception under Section 162(m) of the Code, will have on future M&A transactions. Given the market uncertainty surrounding recent changes in law and practice, investors should engage with management and boards of directors in the early stages of the acquisition process to maximise both executive retention and shareholder value.
VIII TAX LAW
On 22 December 2017, Congress passed the TCJA, a piece of transformational tax legislation that significantly affects the US and cross-border M&A landscape. Certain aspects of the TCJA, such as the new 21 per cent corporate tax rate and the immediate expensing of investment in tangible property, have rightly received attention as having a clear effect on investment. But many of the TCJA's changes affect the structuring and negotiation of M&A transactions in unexpected ways. We discuss the critical provisions of the TCJA below, focusing on its changes to the international tax system. We also note the uncertainty surrounding future regulatory guidance and potential tax reform in the coming year.
i The expected – lower rates, limits on interest deductibility and other changes
Lower corporate rate
The headline feature of the TCJA is the permanent reduction in the corporate tax rate to 21 per cent (from 35 per cent) for taxable years beginning after 31 December 2017.227 In instituting the lower rate, described by President Trump as the 'probably the biggest factor' in the TCJA, Congress sought to increase the competitiveness of US corporations by easing their tax burden.228 In terms of M&A, lower taxes means higher liquidity for potential acquirers, and US targets may be more attractive given the lower rate's effect on after-tax earnings.229 It also reduces the tax cost associated with divestitures in connection with larger acquisitions (for instance, when an acquirer purchases the stock of a target and thereafter causes it to dispose of unwanted assets).230 These types of transactions should become more common given the lower corporate tax rate.
Under pre-TCJA law, taxpayers could immediately deduct some of the cost of certain purchased tangible property. The amount of the deduction varied (it was 50 per cent in 2017) but it was generally limited to 'new' property in the hands of the taxpayer. The TCJA significantly extends these rules to allow taxpayers to deduct 100 per cent of, or 'fully expense', the cost of such purchased tangible property, without regard to whether it is new or used. The 100 per cent deduction is phased out over a five-year period beginning in 2023. These new rules are essentially a matter of timing: relative to pre-TCJA law, taxes will be lower in earlier years and higher in later years.
Nevertheless, full expensing is a powerful incentive for taxpayers to invest in tangible property. M&A transactions, in particular, are more likely to be structured as pure asset deals or as deemed asset sales for tax purposes through an election under Section 338 of the Code. These rules will also enhance the importance of the purchase price allocation in many asset deals. Because full expensing is generally available only for purchases of tangible assets (and not for intangible assets such as goodwill), acquirers have the incentive to allocate as much purchase price to the tangible assets of a transaction as possible. Sellers may or may not have a similar incentive depending on the situation.
Limitation on interest deductibility
The TCJA limits the ability of taxpayers to deduct interest payments when calculating taxable income. The new Section 163(j) of the Code caps the taxpayer's net interest expense at 30 per cent of the taxpayer's 'adjusted taxable income', which approximates EBITDA for tax years beginning before 1 January 2022, and EBIT thereafter. Disallowed interest deductions can be carried forward indefinitely in a manner comparable to net operating loss (NOL) carryforwards. Certain businesses and taxpayers with annual gross receipts of US$15 million or less are generally exempt from the interest limitation.
The limitation significantly affects the financing of large M&A transactions. Highly levered acquirers are more likely to shift acquisition debt from the United States, where interest deductions may be limited, to other jurisdictions. Acquirers may also limit their debt financing of acquisitions altogether in favour of equity financing (the lower corporate tax rate has this effect as well). And, because the limitation applies even to existing debt, financing for past acquisitions may be compromised.
Net operating losses
The TCJA also significantly reduces the value of NOL carryforwards. Some of this reduction relates directly to the lower corporate tax rate. NOLs offset less tax than they did prior to tax reform; for example, a US$100 NOL sheltering income in the current taxable year is worth US$21 post-reform (as compared to US$35 pre-reform). In addition, taxpayers have less flexibility to use NOLs that accrue after tax reform. The TCJA replaces prior law's two-year carryback/20-year carryforward regime with an indefinite carryforward and no carryback; moreover, NOLs can only be used to offset 80 per cent of taxable income (instead of 100 per cent prior to tax reform). Both of these factors will be important for acquirers valuing targets with significant NOL carryforwards, including NOLs generated as a result of deductions accruing at the closing of an M&A transaction.
ii The unexpected – the new international tax rules
Prior to the implementation of the TCJA, the United States subjected domestic companies to tax on income earned both within and outside its borders. This was known as a system of 'worldwide' taxation because income was taxed in the United States no matter where in the world it was earned. The effect of the tax on non-US income was mitigated in two ways: first, companies were allowed a credit for foreign taxes paid with respect to that income up to the amount of the US tax liability (to ensure that this income was subject to tax at the US rate, but no higher). And second, to the extent that income was earned by a foreign corporate subsidiary of a US company (a CFC), recognition of the income would generally be deferred until the US company received it in the form of a dividend. The US approach stood in contrast to the vast majority of other countries, which generally do not tax their residents' income to the extent that income is earned outside the country. This was known as a system of 'territorial' taxation because income is taxed only when it is earned in the territory imposing the tax.
Many observers viewed the US 'worldwide' system of corporate taxation as broken.231 US-parented companies were at a significant disadvantage to foreign competitors because their entire income base was subject to tax at the high US rate. Moreover, US companies had a significant incentive to delay repatriating foreign earnings because repatriation would trigger taxation. Indeed, companies chose not to repatriate the money because they wanted to avoid the US tax cost (and the related cost on their financial statements). Over time, trillions of dollars of this 'trapped cash' piled up offshore.232
The TCJA seeks to address these issues through a dividend-exemption system. The new Section 245A of the Code allows US corporate shareholders that own 10 per cent or more of a CFC a 100 per cent deduction for the foreign-source portion of dividends received from the CFC, if the US shareholder satisfies a one-year holding period. Effectively, this eliminates the US tax cost of accessing the trapped cash of CFCs.
To transition to this dividend-exemption system, the TCJA imposed a one-time tax on 10 per cent US shareholders of CFCs based on the CFCs' untaxed foreign earnings. The tax is imposed at a rate of 15.5 per cent for cash and liquid assets and 8 per cent for all other earnings, with the aggregate amount of earnings set as of 2 November 2017 or 31 December 2017 (whichever is higher). This tax liability can be offset by foreign tax credits. Although the transition tax is imposed during the last taxable year beginning before 1 January 2018, taxpayers can elect to pay it in instalments over eight years. In essence, the instalment tax payments become a fixed deferred tax liability. Accordingly, transition tax exposure will be a critical area of diligence for acquirers of both US and non-US entities and, in private deals, acquirers should consider how transition-tax liability should be allocated between the parties contractually.
Despite the shift towards a territorial system of taxation, the TCJA adopts a number of new taxes that are intended to backstop the dividend exemption. First, the new Section 951A of the Code imposes a minimum tax on 10 per cent US shareholders of CFCs, which is calculated based on their share of the CFCs' 'global intangible low-taxed income' (GILTI). The definition of GILTI is significantly more expansive than its name suggests; it is equal to the entirety of the CFC's income, minus a fixed 10 per cent return on its tangible asset basis. As such, in situations where a CFC has little-to-no asset basis, its 10 per cent US shareholders will be current taxed on all of the CFC's income, regardless of whether it is derived from intangible assets. The tax is imposed at a rate of 10.5 per cent for taxable years prior to 2025 and a rate of 13.125 per cent thereafter, but can be offset by an 80 per cent credit for foreign taxes. Going forward, the GILTI regime will have a subtle impact on acquisition structure; acquirers will, on the margin, have an incentive to structure foreign acquisitions as asset purchases or deemed asset purchases for tax purposes (through a Section 338 election) to increase tax basis and therefore decrease their GILTI inclusions. US sellers may be affected by asset purchases (including deemed asset purchases arising from Section 338 elections), and so contractual negotiations around these points will become increasingly important.
Base Erosion and Anti-Abuse Tax
In addition, the new Section 59A of the Code, commonly referred to as the Base Erosion and Anti-Abuse Tax (BEAT), imposes a separate 10 per cent minimum tax on US corporate taxpayers with more than US$500 million in gross receipts if those taxpayers make significant 'base-eroding payments'.233 Base-eroding payments are related-party payments to foreign related parties that create a US-source deduction but do not create US-source income; the minimum tax is calculated based on the US taxpayer's taxable income determined without taking into account the tax benefits associated with these base-eroding payments. Effectively, then, the BEAT targets taxpayers that rely on these arrangements to shift income offshore; the possible impact of the BEAT is a critical diligence issue for potential acquirers of targets in industries where these arrangements are common (e.g., the insurance reinsurance industry).
iii The uncertain – looming regulatory guidance and tax reform 2.0
Notwithstanding the significance of the TCJA's changes, the process behind it was rushed and chaotic. Congress voted on some versions of the bill with handwritten changes in the margin.234 Perhaps not surprisingly, the final legislation contains significant ambiguities and glitches, some of which require subsequent legislation to address.235 Although the IRS has announced that it will issue regulations to clarify the application of a number of the rules discussed above (including the transition tax and limitation on interest deductibility), significant uncertainty remains.
There is even the possibility of Congress passing a second tax reform package later in 2018. President Trump and Republican members of Congress have indicated that a second tax reform bill might make the TCJA's temporary tax cuts for individuals permanent, in addition to addressing the technical glitches within the TCJA.236 Of course, there is no certainty that any new tax legislation could be passed given the current political climate.
IX COMPETITION LAW
In 2017, the Antitrust Division of the DOJ and the FTC (together, the 'agencies') continued to carefully examine transactions in a variety of industries, including consumer goods, manufacturing and technology. The agencies entered their first year of a new administration, undergoing personnel changes and indicating a shifting approach to certain areas of merger review. In particular, the DOJ's enforcement actions and public statements by its officials indicated a new heightened scrutiny for vertical mergers and scepticism of behavioural remedies in consent decrees.
The agencies' enforcement actions throughout the year have shown a continued emphasis on enforcing divestiture requirements in consent decrees, including a willingness to impose penalties on parties who are unable to meet divestiture requirements by the agreed date.237 The agencies have also, as in previous years, shown a willingness to litigate when the merging parties are unable to propose divestitures that satisfactorily restore pre-merger competition.238
In 2017, the FTC concluded 22 merger actions in second request or compulsory process investigations, and the DOJ initiated 10 merger actions in federal court – nine resulted in divestitures or other remedies via consent decrees and one is still pending.239 The DOJ has also initiated another merger action in the first half of 2018, which resulted in divestitures.240 As in previous years, the FTC increased the filing thresholds under the HSR Act. Under the new thresholds, the 'size of transaction' test is satisfied for most transactions valued over US$84.4 million (increased from US$80.8 million).241
The most significant changes at the agencies were to personnel. During 2017 and into 2018, the FTC had only two sitting commissioners, Acting Chairman Maureen Ohlhausen and Commissioner Terrell McSweeny. A full slate of FTC commissioners – including Joseph Simons as chairman and Noah Phillips, Christine Wilson, Rohit Chopra and Rebecca Slaughter as commissioners – were confirmed by the Senate in late April 2018.242 At the DOJ, Makan Delrahim was confirmed as head of the Antitrust Division on 27 September 2017.243 Soon after his confirmation, Delrahim made several high-profile speeches expressing doubt about using behavioural remedies in consent decrees, particularly in vertical transactions.244 He stated that the DOJ will reduce its number of long-term consent decrees, in favour of 'return[ing] to the preferred focus on structural relief to remedy mergers that violate the law and harm the American consumer'.245 Days after Delrahim's speech, the DOJ sued to block the proposed merger between AT&T and Time Warner, a rare challenge to a vertical merger.246 How this shifting approach to merger enforcement will affect other companies and industries remains to be seen.
There follow some examples of recent significant DOJ and FTC actions.
In December 2016, Parker-Hannifin Corporation (Parker-Hannifin) and CLARCOR Inc (CLARCOR) announced an agreement for Parker-Hannifin to acquire CLARCOR for approximately US$4.3 billion in cash.247 The HSR waiting period expired in January 2017 without the DOJ issuing a Second Request, and the parties consummated the deal on 28 February 2017.248 In September 2017, the DOJ filed suit to partially unwind the transaction, alleging that Parker-Hannifin's acquisition of CLARCOR's ground aviation fuel filtration systems created a monopoly.249 The DOJ alleged that Parker-Hannifin and CLARCOR were the only two domestic manufacturers of Energy Institute-qualified aviation fuel filtration and filter elements, and the transaction eliminated their previously intense competition.250 Moreover, the DOJ stated that its initial investigation was hampered by Parker-Hannifin's failure to provide significant document or data productions in response to DOJ requests.251 The parties ultimately agreed to a consent decree, which required Parker-Hannifin to divest CLARCOR's filtration business.252
EnergySolutions/Waste Control Specialists
In late 2015, EnergySolutions, Inc (EnergySolutions) entered into an agreement to acquire Waste Control Specialists LLC (Waste Control Specialists) in a US$367 million combined cash-and-stock deal.253 The DOJ filed suit to block the merger in November 2016, alleging that the proposed acquisition was a merger to monopoly and would harm competition by combining the two most significant competitors for the commercial disposal of low-level radioactive waste. During trial in the US District Court for the District of Delaware, Waste Control Specialists asserted a 'failing firm defence', arguing that its revenues had declined over the past decade and EnergySolutions had been the only buyer to make an offer.254 Waste Control Specialists argued that its losses were such that it would 'exit the market' if the transaction with EnergySolutions was not approved, leaving only one firm.255 The Court rejected this argument, finding that Waste Control Specialists had not shown that it 'made good faith efforts to elicit reasonable offers that would pose a less severe danger to competition'.256 Finding for the DOJ, the Court enjoined the merger in July 2017.
General Electric Co/Baker Hughes Inc
In October 2016, Baker Hughes and GE, two of four leading providers of refinery process chemicals, announced an agreement for GE to acquire Baker Hughes in a deal valued at approximately US$30 billion.257 This announcement came months after Baker Hughes and Halliburton Co (Halliburton) abandoned a planned merger, originally valued at US$34 billion, when the DOJ sued to block the deal and rejected Halliburton's proposed divestitures.258 Anticipating similar antitrust scrutiny, GE and Baker Hughes agreed to a consent decree with the DOJ that required GE to divest its Water & Process Technologies unit.259 The terms of the consent decree required GE to complete its divestitures to SUEZ, SA (Suez) by the end of September 2017.260 GE and Baker Hughes completed their deal in July 2017.261
Though GE divested approximately 90 per cent of its Water & Process Technologies assets, GE notified the DOJ in September 2017 that it had not yet transferred legal title of some assets to Suez in certain international jurisdictions, and that delays caused by administrative challenges would likely push the full divestiture into 2018.262 As a result of this delay, GE and the DOJ agreed to a modified consent decree that added two provisions, requiring that (1) GE make daily incentive payments, starting on 1 January 2018 and continuing until the divestiture is completed and (2) GE reimburse the DOJ for attorney's fees and costs incurred in reviewing the divestiture and decree conditions for an extended period.263
As discussed above, in October 2016, AT&T and Time Warner announced an agreement for AT&T to acquire Time Warner in a cash-and-stock deal valued at US$85 billion at the time of the announcement.264 The proposed vertical merger would combine AT&T's video distribution business, also operated through DirecTV, with Time Warner's video content properties, which include HBO, CNN, Cartoon Network and Warner Bros Entertainment Inc. After a one-year investigation, the DOJ sued to block the proposed merger on 20 November 2017, alleging that AT&T would have the incentive to withhold Time Warner's content from AT&T's video distribution competitors.265
The case went to trial in the District Court for the District of Columbia in March 2018, focusing in part on the popularity of Time Warner's content, which the DOJ argued AT&T could 'weaponize' after the merger by threatening to withhold it from other companies unless they agreed to higher prices.266 The DOJ also contended that the combined deal would raise prices for subscription television.267 AT&T and Time Warner challenged this model, arguing that it relied on unrealistic figures and did not take into account a binding arbitration offer made to all other distributors.268 The offer, modelled on the arbitration mechanism contained in the consent decree used in Comcast Corp/NBC Universal Inc,269 would constrain AT&T's ability to withhold networks from distributors who invoked arbitration. The trial concluded at the end of April 2018, and in June, the Court ruled in favour of AT&T and Time Warner.270 The merger closed on 14 June 2018.271
Walgreens Boots Alliance/Rite Aid
In 2015, Walgreens announced its intention to acquire Rite Aid, a chain of pharmacy stores, for US$17.2 billion in an all-cash transaction.272 Over the course of a two-year investigation, Walgreens and Rite Aid reworked the deal several times, including abandoning the outright acquisition of Rite Aid, to allay the FTC's concerns that the combination would harm competition. In early 2017, Walgreens offered to divest 865 drugstores.273 This approach also failed to receive clearance from the FTC. In a third try, Walgreens offered to pay US$5.18 billion to acquire 2,186 Rite Aid stores, allowing Rite Aid to remain as an independent, albeit slimmed down, company.274 This proposal failed to receive FTC clearance. Ultimately, Walgreens proposed to buy 1,932 Rite Aid stores for US$4.38 billion, leaving Rite Aid with approximately 2,600 stores across the United States.275 This revised proposal was cleared without further investigation by the FTC.
The effect of the FTC commissioner vacancies was particularly apparent in the Walgreens/Rite Aid transaction, in which the only two sitting FTC commissioners openly disagreed. Commissioner McSweeny issued a statement expressing disappointment in allowing the acquisition to move forward without the agency issuing a Second Request.276 In response, Acting Chairman Ohlhausen issued a statement that Commissioner McSweeny's concerns were 'unfounded'.277 While unusual, this public disagreement ultimately did not make a difference because the FTC staff did not recommend further investigation, and thus it was not necessary for the commissioners to vote.278
DaVita, Inc/Renal Ventures Management LLC
The FTC also successfully required divestitures in the proposed merger between two outpatient dialysis services. DaVita, Inc (DaVita), the second-largest provider of such services in the United States, sought to acquire Renal Ventures Management, LLC, the seventh-largest provider.279 The FTC issued a complaint alleging that the acquisition would lead to anticompetitive effects in seven markets in New Jersey and the outskirts of Dallas, Texas.280 According to the complaint, 'the merger would represent either a merger to monopoly or a reduction of competitors from three to two', resulting in 'reduced quality and higher prices for dialysis patients'.281 Following a public comment period, the FTC approved a final order for divestitures, requiring DaVita to divest seven of its clinics to PDA-GMF Holdco, LLC.282
Despite personnel changes, the DOJ and the FTC have continued active enforcement and willingness to challenge transactions, with a shifting approach to behavioural remedies and increased scrutiny of vertical mergers. As these changes coalesce, parties seeking mergers in significant and complex deals should be aware of these new approaches to remedies.
In 2017, US M&A activity declined in value but increased in volume, coming down from a record year in 2015. Delaware courts continued to be deferential to corporate boards of directors, finding fair value below that which dissenting shareholders put forth and, at least in post-closing damages actions, by and large, respecting boards' decisions with regard to acquisitions. In terms of cross-border M&A, CFIUS review and executive action presented increasingly significant obstacles, particularly for Chinese acquirers. High tech was the leading US M&A sector, driven in part by the increasing prevalence of combinations of technology companies with non-technology companies. Shareholder activism continued to exert significant influence, increasingly through attacks on large-cap companies. As in 2016, all-cash transactions by strategic buyers were the norm, supported by robust financing opportunities. Antitrust enforcement, particularly by the DOJ, continued to be aggressive, as all eyes are now on the AT&T/Time Warner trial. Finally, and perhaps most significantly, after much uncertainty in 2016, 2017's tax reform fundamentally altered the calculus for M&A activity, though it is not yet clear how the TCJA's various provisions will interplay or what net effects on the M&A landscape will result. In light of the TCJA, and the myriad of other dynamic forces that shape the US M&A landscape, it remains to be seen how M&A activity will progress for the remainder of 2018.
1 Richard Hall and Mark Greene are corporate partners at Cravath, Swaine & Moore LLP. The authors would like to acknowledge the contributions of fellow partners Eric Hilfers, Len Teti, Christine Varney and Margaret D'Amico, and associates Eliza Marshall, Alison Beskin, Andrew Davis and Maya Khan.
2 Mergers & Acquisitions Review, Full Year 2017, Financial Advisors, Thomson Reuters (2017), http://dmi.thomsonreuters.com/Content/Files/Global%20MNA_Financial_Advisors%202017.pdf.
3 What's Market tracks and summarises agreement for acquisitions of US reporting companies valued at US$100 million or more. Practical Law Company, 'What's Market: 2017 Year-End Public M&A Wrap-Up', 25 January 2018.
6 Daniel Rubin, 'Public M&A Year in Review: Trends and Highlights from 2017', Practical Law (2018).
8 'What's Market: 2017 Year-End Public M&A Wrap-up' (see footnote 3).
9 'Public M&A Year in Review: Trends and Highlights from 2017' (see footnote 6).
11 'What's Market: 2017 Year-End Public M&A Wrap-up' (see footnote 3).
12 Percentage excludes deals involving collaboration between strategic and financial buyers. 'Public M&A Year in Review: Trends and Highlights from 2017' (see footnote 6).
13 Practical Law Company, 'What's Market: 2016 Year-End Public M&A Wrap-up', 26 January 2017.
14 Practical Law Company, 'What's Market: 2014 Year-End Public M&A Wrap-Up', 28 January 2015; Practical Law Company, 'What's Market: 2015 Year-End Public M&A Wrap-Up', 28 January 2016; 'What's Market: 2016 Year-End Public M&A Wrap-Up' (see footnote 13); 'What's Market: 2017 Year-End Public M&A Wrap-up' (see footnote 3).
15 'What's Market: 2017 Year-End Public M&A Wrap-up' (see footnote 3).
16 See Cecilia Kang, 'AT&T-Time Warner Case: How the Biggest Antitrust Trial in Years Could Play Out', The New York Times, 20 March 2018, https://www.nytimes.com/2018/03/20/technology/att-time-warner-trial-explained.html.
17 Press release, Department of Justice (DOJ), 'Justice Department Requires General Electric Company to Make Incentive Payments to Encourage Completion of Divestitures Agreed to as a Condition of Baker Hughes Merger', https://www.justice.gov/opa/pr/justice-department-requires-general-electric-company- make-incentive-payments-encourage.
19 Robert Langreth and David McLaughlin, 'Walgreens Wins U.S. Approval for Rite Aid Deal on Fourth Try', Bloomberg, 19 September 2017, https://www.bloomberg.com/news/articles/2017-09-19/walgreens-pact- to-buy-fewer-rite-aid-stores-wins-u-s-approval.
20 'Mergers & Acquisitions Review, Full Year 2017, Financial Advisors' (see footnote 2).
21 'Public M&A Year in Review: Trends and Highlights from 2017' (see footnote 6).
23 'US M&A News and Trends', FactSet, April 2018, https://www.factset.com/mergerstat_em/monthly/US_Flashwire_Monthly.pdf.
26 'Global Mergers and Acquisitions Reach Record High in First Quarter', Reuters, 30 March 2019, https://www.reuters.com/article/us-deals-review/global-mergers-and-acquisitions-reach-record-high-in-first-quarter-idUSKBN1H60EC.
27 'U.S. M&A News and Trends' (see footnote 23).
28 Securities Act of 1933, 15 U.S.C. Section 77a (amended 2015); Securities Exchange Act of 1934, 15 U.S.C. Section 78a (amended 2018).
29 'HSR Threshold Adjustments and Reportability for 2018', Federal Trade Commission, 29 January 2018, https://www.ftc.gov/news-events/blogs/ competition-matters/2018/02/hsr-threshold- adjustments-reportability-2018.
30 50 U.S.C. Section 4565 (2015).
31 Pub. L. No. 102-484 (1992).
33 Farhad Jalinous et al of White & Case, 'CFIUS: Recent Developments and Trends', February 2017, www.whitecase.com/publications/alert/cfius-recent-developments-and-trends; Michael Gershberg and Justin Schenck, 'CFIUS Takeaways from Blocked Aixtron Deal', Law 360, 16 December 2016, www.law360.com/articles/873348/cfius-takeaways-from-blocked-aixtron-deal.
34 Nicholas Spiliotes, Aki Bayz and Betre Gizaw of Morrison & Foerster, 'Getting the Deal Done: China, Semiconductors, and CFIUS', The M&A Journal, Vol. 16 No. 5, www.mofo.com/~/media/Files/Articles/2016/04/160400ChinaSemiconductorsCFIUS.pdf.
35 S. 2098, 115th Cong. (2017), (Congress.gov); H.R. 4311, 115th Congress (2017), (Congress.gov).
36 S. 2098, 115th Cong. (2017); H.R. 4311, 115th Congress (2017).
37 'Trump May Bolster CFIUS With Executive Order: Attorneys', The Deal, 25 April 2018 https://pipeline. thedeal.com/article/14568245/index.dl.
38 Steven M Davidoff, 'A New Form of Shareholder Activism Gains Momentum', The New York Times, 4 March 2014, dealbook.nytimes.com/2014/03/04/a-new-form-of-shareholder-activism-gains- momentum/?_php=true&_type=blogs&_r=0.
39 William Savitt, 'Dissenters Pose Bigger Risks to Corporate Deals', National Law Journal, 10 February 2014, www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.23132.14.pdf.
41 Liz Hoffman, 'Hedge Funds Wield Risky Legal Ploy to Milk Buyouts', The Wall Street Journal, 13 April 2014, online.wsj.com/news/articles/ SB10001424052702303887804579500013770163966.
42 'Investor Appraisal Suits Face Rocky Future After Del. Rulings', Bloomberg Law, 31 January 2018.
44 Ronald Brown III and Keenan Lynch, 'Key 2016 Appraisal Decisions that Rejected Merger Price', Law 360, 6 December 2016, www.law360.com/ articles/868758/key-2016-appraisal-decisions-that-rejected-merg.
46 Merlin Partners LP v. AutoInfo, Inc, 2015 WL 2069417 (Del. Ch. 30 Apr 2015); 'Delaware Corporate Law and Litigation: What Happened in 2015 and What It Means for You in 2016', DLA Piper, www.dlapiper.com.
47 LongPath Capital, LLC v. Ramtron Int'l Corp, CA No. 8094-VCP (Del. Ch. 30 Jun 2015); 'Delaware Corporate Law and Litigation' (see footnote 46).
48 Merion Capital LP v. BMC Software, Inc, No. 8900VCG (Del. Ch. 21 Oct 2015); 'M&A Update: Highlights from 2015 and Implications for 2016', Cadwalader, Wickersham & Taft LLP, 19 January 2016, www.cadwalader.com.
49 'M&A Update: Highlights from 2015 and Implications for 2016' (see footnote 48).
50 In re Appraisal of Dell Inc, CA No. 9322-VCL (Del. Ch. 31 May 2016).
52 'Key 2016 Appraisal Decisions that Rejected Merger Price' (see footnote 44).
54 In re Appraisal of DFC Global Corp, CA No. 10107-CB (Del. Ch. 8 Jul 2016).
55 'Key 2016 Appraisal Decisions that Rejected Merger Price' (see footnote 44).
56 In re Appraisal of PetSmart, Inc, WL 2303599 (Del. Ch. 26 May 2017).
57 DFC Global Corporation v. Muirfield Value Partners, LP, 172 A.3d 346 (Del. 2017).
58 Id. at 349.
59 Id. at 349 and 350.
60 Dell, Inc v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1, 33 (Del. 2017).
61 Id. at 24 and 25.
62 Id. at 28.
63 Id. at 32.
64 Id. at 34 and 35.
65 In re Appraisal of SWS Group, Inc, WL 2334852 (Del. Ch. 30 May 2017).
66 Id. at 30.
67 ACP Master, Ltd v. Sprint Corporation, WL 3421142 (Del. Ch. 8 Aug 2017).
68 Id. at 48 and 49.
69 Verition Partners Master Fund Ltd, et al. v. Aruba Networks, Inc, WL 922139 (Del. Ch. 15 Feb 2018).
70 Id. at 30.
71 'The New Regime in Delaware Appraisal Law', Harvard Law School Forum, 1 March 2018, https://corpgov.law.harvard.edu/2018/03/01/the-new-new-regime-in-delaware-appraisal-law/.
72 'Delaware Corporate Law and Litigation' (see footnote 46); Corwin v. KKR Fin Holdings LLC, 125 A.3d 304, 309-11 (Del. 2015).
73 Corwin v. KKR Fin Holdings LLC at 312 (see footnote 72).
74 Lisa A Schmidt, 'Recent Developments in Delaware Corporate Law', Tulane University Law School 29th Annual Corporate Law Institute, 30 March 2017.
75 Singh v. Attenborough, 137 A.3d 151 (Del. 2016).
76 'Recent Developments in Delaware Corporate Law' (see footnote 74).
77 Order Granting Motion to Dismiss, In Re Columbia Pipeline Group, Inc Stockholder Litigation, C.A. No. 12152-VCL (Del. Ch. 7 Mar 2017).
79 Id. at 5.
80 In re Saba Software, Inc Stockholder Litigation, WL 1201108 (Del. Ch. 11 Apr 2017).
81 Id. at 12.
82 Id. at 6.
83 Id. at 12 and 13.
85 Sciabacucchi v. Liberty Broadband Corporation, WL 2352152, 3 (Del. Ch. 31 May 2017).
88 Id. at 3 and 4.
89 In re Massey Energy Company Derivative and Class Action Litigation, 160 A.3d 484 (Del. Ch. 4 May 2017).
90 Id. at 18.
91 'The Shifting Ties of Merger Litigation', Harvard Law School Forum, 1 March 2017, https://corpgov.law. harvard.edu/2017/03/01/the-shifting-tides-of-merger-litigation/.
92 Security First Corp v. U.S. Die Casting and Development Co, 687 A.2d 563 (1997).
93 Lavin v. West Corporation, WL 6728702 (Del. Ch. 29 Dec 2017).
95 Securities Act of 1933 (see footnote 28); False or Misleading Statements, 17 CFR 240.14a-9 (2000).
96 All percentages are based on a sample comprised of transactions for which (1) the target is a US entity publicly traded on the NYSE, (2) the transaction size is US$100 million or more, (3) the offer price is at least US$5 per share, (4) a merger agreement is signed and disclosed in an SEC filing and (5) the transaction was completed as of 20 October 2017. Matthew D Cain, Jill E Fisch, Steven Davidoff Solomon and Randall S Thomas, 'The Shifting Tides of Merger Litigation', University of Pennsylvania Law School, 2018.
97 'Supreme Court Clarifies State Court Jurisdiction for Securities Claims and Opens Door to Plaintiff Forum Shopping' Lexology, 23 March 2018, https://www.lexology.com/library/detail.aspx?g=6de86471-6e96-4ca7-808d-ddabe1daec06.
98 Complaint, Matthew Sciabacucchi v. Matthew B Salzberg, No. 2017-0931-JTL (Del. Ch. 29 Dec 2017).
99 'What's Market: 2016 Year-End Public M&A Wrap-up' (see footnote 13).
100 'Public M&A Year in Review: Trends and Highlights from 2017' (see footnote 6).
102 'How M&A Agreements Handle the Risks and Challenges of PRC Acquirors' Harvard Law School Forum, 8 September 2017, https://corpgov.law. harvard.edu/2017/09/08/how-ma-agreements-handle-the-risks-and-challenges-of-prc-acquirors/.
103 David Gelles, 'New Corporate Tax Shelter: A Merger Abroad', The New York Times, 8 October 2013, dealbook.nytimes.com/2013/10/08/to-cut-corporate-taxes-a-merger-abroad-and-a-new-home.
104 David Gelles, 'Obama Budget Seeks to Eliminate Inversions', The New York Times, 5 March 2014, dealbook.nytimes.com/2014/03/05/obama-budget-seeks-to-eliminate-inversions.
106 Press release, Department of the Treasury, 'Fact Sheet: Treasury Actions to Rein in Corporate Tax Inversions', 22 September 2014, www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx.
107 'The continuing appeal of inversions', Financier Worldwide, November 2015, www.financierworldwide.com/the-continuing-appeal-of-inversions/#.V0S9fmcUVaR.
109 'The U.S. is Cracking Down on Corporate Tax Inversions', Reuters, 14 October 2016, fortune.com/2016/10/14/tax-inversions-regulations/.
111 Tax Cuts and Jobs Act of 2017, Pub. L. 115–97, 131 Stat. 2054 (2017).
112 'CFIUS: Recent Developments and Trends' (see footnote 33); 'Presidential Order – Regarding the Proposed Acquisition of a Controlling Interest in Aixtron SE by Grand Chip Investment GMBH', The White House, Office of the Press Secretary, 2 December 2016, https://obamawhitehouse.archives.gov/the-press-office/2016/12/02/presidential-order-regarding-proposed-acquisition-controlling-interest.
114 'Presidential Order Regarding the Proposed Takeover of Qualcomm Incorporated by Broadcom Limited', The White House, 12 March 2018, https://www.whitehouse.gov/presidential-actions/presidential-order- regarding-proposed-takeover-qualcomm-incorporated-broadcom-limited/.
115 'Trump Orders Broadcom to Cease Attempt to Buy Qualcomm', The Wall Street Journal, 13 March 2018, https://www.wsj.com/articles/in-letter-cfius-suggests-it-may-soon-recommend-against-broadcom-bid-for-qualcomm-1520869867.
116 David McLaughlin and Kristy Westgard, 'All About CFIUS, Trump's Watchdog on China Dealmaking: Quick Take', Bloomberg, 23 Mar. 2018, https://www.bloomberg.com/news/articles/2018-03-23/all-about-cfius-trump-s-watchdog-on-china-dealmaking-quicktake.
117 Shayndi Raice, 'Europe-China Deals Get More U.S. Scrutiny', The Wall Street Journal, 24 January 2016, www.wsj.com/articles/europe-china-deals-get-more-u-s-scrutiny-1453680070.
118 'Chinese Investments and the Committee on Foreign Investment in the United States', Lexology, 15 January 2018, https://www.lexology.com/library /detail.aspx?g=6889957f-16e2-4e24-bbe7-db382a66c0d6.
119 'Mergers & Acquisitions Review, Full Year 2017, Financial Advisors' (see footnote 2).
122 'What's Market: 2017 Year-End Public M&A Wrap-up' (see footnote 3).
123 'The state of the deal: M&A trends 2018', Deloitte, 2018, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-mergers-acquisitions-2018-trends-report.pdf.
125 'Mergers and Acquisitions: 2018 With a Brief Look Back', Harvard Law School Forum, 29 January 2018, https://corpgov.law.harvard.edu/2018 /01/29/mergers-and-acquisitions-2018-with-a-brief-look-back/.
129 'Tech M&A Is Going to Pick Up in 2018' Business Insider, 22 February 2018, www.businessinsider.com/tech-ma-is-going-to-pick-up-in-2018-2018-2.
130 'Mergers and Acquisitions: 2018 With a Brief Look Back' (see footnote 125).
131 'Activist Investors: 2001-Present', Shark Repellent: FactSet, 2017.
132 'Proxy Fight Trend Analysis: 2001-Present', Shark Repellent: FactSet, 2018; Proxy Fight Trend Analysis: 2001-Present', Shark Repellent: FactSet, 2018.
133 'Review and Analysis of 2017 U.S. Shareholder Activism', Harvard Law School Forum, 10 April 2018, https://corpgov.law.harvard.edu/2018/04/10 /review-and-analysis-of-2017-u-s-shareholder-activism/.
135 The vast majority of activist activity occurs in the United States. 'The Activist Investing Annual Review 2018', Activist Insight, 2018, https://www.srz.com/ images/content/1/5/v2/155375/The-Activist-Investing-Annual-Review-2018-HiRes.pdf.
137 'P&G Concedes Proxy Fight, Adds Nelson Peltz to Its Board', The Wall Street Journal, 15 December 2017, https://www.wsj.com/articles/p-g-concedes-proxy-fight-adds-nelson-peltz-to-its-board-1513377485.
138 '2017 Proxy Fights: High Cost, Low Volume', FactSet Insight, 6 November 2017, https://insight.factset.com/2017-proxy-fights-high-cost-low-volume.
139 'Review and Analysis of 2017 U.S. Shareholder Activism', Sullivan & Cromwell LLP, 26 March 2018, https://www.sullcrom.com/siteFiles/Publications /SC_Publication_Review_and_Analysis_of_2017_US_Shareholder_Activism.pdf.
140 'The Activist Investing Annual Review ۲۰۱۸', Activist Insight, ۲۰۱۸, https://www.srz.com/images/content/۱/۵/v۲/۱۵۵۳۷۵/The-Activist-Investing-Annual-Review-۲۰۱۸-HiRes.pdf.
141 'Activist investor Jana cashes out of Whole Foods in wake of Amazon deal', CNBC, 19 July 2017, https://www.cnbc.com/2017/07/19/jana-sheds-entire-stake-in-whole-foods.html.
142 'Review and Analysis of 2017 U.S. Shareholder Activism' (see footnote 139).
143 'M&A Update: Highlights from 2015 and Implications for 2016' (see footnote 48).
145 'Top 6 findings from PwC's 2017 Annual Corporate Directors Survey', PwC, 2017, https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey/top-6-findings.html.
146 '2016 U.S. Shareholder Activism Review and Analysis', Sullivan & Cromwell LLP, 28 November 2016, sullcrom.com/siteFiles/Publications /SC_Publication_2016_U.S._Shareholder_Activism_Review_and_Analysis.pdf.
147 'A Sense of Purpose', BlackRock, 2018, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.
148 '2016 U.S. Shareholder Activism Review and Analysis' (see footnote 146).
149 '2016 Shareholder Activism Review', FactSet Insight, 1 February 2017, insight.factset.com/hubfs/Resources/Research%20Desk/Market%20Insight/FactSet%27s%202016%20Year-End%20Activism%20Review_2.1.17.pdf.
156 In re Trulia, Inc Stockholder Litig, 129 A.3d 884, 895 (Del. Ch. 22 Jan 2016).
157 The Seventh Circuit Court of Appeals is based in Chicago, Illinois. Its jurisdiction covers the states of Illinois, Indiana and Wisconsin. In re Walgreen Co Stockholder Litigation, 832 F.3d 718 (2016).
158 'The End of Disclosure-Only Settlements in Securities Class Actions?' BakerHostetler, 11 November 2016, www.bakerlaw.com/alerts/-the-end-of-disclosure-only-settlements-in-securities-class-actions.
160 Eric M Rosof et al, 'Acquisition Financing: the Year Behind and the Year Ahead', Harvard Law School Forum on Corporate Governance and Financial Regulation, 17 January 2017.
164 'Wachtell Lipton Looks at Acquisition Financing in 2017 and the Year Ahead', The CLS Blue Sky Blog, 17 January 2018, http://clsbluesky.law.columbia.edu/2018/01/17/wachtell-lipton-looks-at-acquisition-financing-in-2017-and-the-year-ahead/.
165 'U.S. Leveraged Lending Sags, High-Grade Rises In First Quarter' Reuters, 29 March 2018, https://www.reuters.com/article/us-loans-firstquarter/u-s-leveraged-lending-sags-high-grade-rises-in-first-quarter-idUSKBN1H5344.
169 'AT&T Banks US$22.5bn In Corporate Bond Sale', Financial Times, 27 July 2017, https://www.ft.com/content/7400e208-72fe-11e7-aca6-c6bd07df1a3c.
170 'Wachtell Lipton Looks at Acquisition Financing in 2017 and the Year Ahead' (see footnote 164).
172 'U.S. Leveraged Lending Sags, High-Grade Rises In First Quarter' (see footnote 165).
173 Adnan Abidi, '2018 Annual Forward Through the Fog: Volume 24', Thomson Reuters LPC, (2018).
175 'Public M&A Year in Review: Trends and Highlights from 2017' (see footnote 6).
176 '2018 Annual Forward Through the Fog: Volume 24' (see footnote 173).
177 'U.S. Leveraged Lending up 12% to USUS$875bn in 2016; Investment Grade flat at USUS$861bn', Loan Connector, Thomson Reuters, 29 December 2016.
178 'Global Private Equity Report 2018', Bain & Company (2018), www.bain.com/publications/articles/global-private-equity-report-2018.aspx.
179 '2018 Annual Forward Through the Fog: Volume 24' (see footnote 173).
180 'U.S. Mid-Market Lenders Concerned About Leverage, Loan Docs: Report', Reuters, 9 January 2018, https://www.reuters.com/article/us-mmsurvey-carlmarks/u-s-mid-market-lenders-concerned-about-leverage- loan-docs-report-idUSKBN1EY1LO.
181 '2017 Annual US PE Breakdown', PitchBook (2017), https://pitchbook.com/news/reports/2017-annual-us-pe-breakdown; '2016 Annual US PE Breakdown', PitchBook (2016), https://pitchbook.com/news/reports/2016-annual-us-pe-breakdown.
182 '2017 Annual US PE Breakdown' (see footnote 181).
183 'Global Private Equity Report 2018' (see footnote 178).
184 '2017 Annual US PE Breakdown' (see footnote 181).
185 'A Review of U.S. Private Equity M&A Trends from 2016 and Expectations for 2017', Private Equity Digest, February 2017, www.lexology.com/ library/detail.aspx?g=92f4713c-5422-410d-86de-0ac952bc2eb1.
186 '2017 Annual US PE Breakdown' (see footnote 181).
189 'Public M&A Year in Review: Trends and Highlights from 2017' (see footnote 6).
190 'Mergers and Acquisitions: 2018 With a Brief Look Back' (see footnote 125).
191 Jerry W Markham, A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform 87–88 (Routledge, 1st ed. 2006) (comparing the severance payments of Enron executives to those of non-executive employees).
192 15 U.S.C. Section 78n-1(a).
193 '2017 Say on Pay Results – End of Year Report', Semler Brossy, 25 January 2018, https://www.semlerbrossy.com/wp-content/uploads/SBCG-2017-Year-End-Say-on-Pay-Report-01-24-2018.pdf. Compare to 2014, 2015 and 2016, in which 60, 61 and 36 (respectively) Russell 3000 companies received failed SOP votes, many after an institutional investor proxy adviser such as Institutional Shareholder Services (ISS) or Glass, Lewis & Co had recommended an 'against' vote; 'Say on Pay Vote Results (S&P) 500)', Compensation Advisory Partners, 25 January 2018, https://www.capartners.com/wp-content/uploads/2017/11/2017-SoP_Update_2-1-18.pdf.
194 Robert Newbury and Henry Mbom, 'Executive Compensation Bulletin', Willis Towers Watson, 13 February 2018, https://www.towerswatson.com/ en/Insights/Newsletters/Global/executive-pay-matters/2018/02/Executive-Compensation-Bulletin-2017-say-on-pay-summary.
195 '2017 Say on Pay Results – End of Year Report' (see footnote 193).
197 '2016 Say on Pay Results – End of Year Report', Semler Brossy, 1 February 2017, www.semlerbrossy.com/wp-content/uploads/SBCG-2016-Year-End-Say-on-Pay-Report-02-01-2017.pdf.
199 'Proxy voting guidelines for U.S. securities', BlackRock, February 2018, https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf; 'Vanguard's proxy voting guidelines', Vanguard (accessed 21 April 2018), https://about.vanguard.com/investment-stewardship/policies-and-guidelines/.
200 'A Long/Short Incentive Scheme for Proxy Advisory Firms, Asaf Eckstein and Sharon Hannes', Wake Forest L. Rev. (forthcoming 2018).
201 Id.; see also 'Examining the Market Power and Impact of Proxy Advisory Firms: Hearing Before the Subcommittee on Capital Markets & Government Sponsored Enterprises of the Committee on Financial Services', 113th Cong. 2 (2013), https://financialservices.house.gov/uploadedfiles/113-27.pdf.
202 H.R. 4015, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/house-bill/4015/all-info?r=13.
204 'United States Proxy Voting Guidelines', ISS, 4 January 2018, https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf.
208 '280G Tax Gross-Ups Make a Comeback During Merger Negotiations', Equilar, 15 September 2017, www.equilar.com/blogs/307-tax-gross-ups-make-a-comeback.html.
209 '2017: Proxy Season Review Compensation', Sydney Carlock et al., 7 September 2017, https://gx.isscorporatesolutions.com/docViewer/ViewDoc/3237. The number of failed SOGP votes totalled 15 per cent in 2017, during which time the median CEO golden parachute payment equalled US$9 million. By comparison, the total number of failed SOGP votes was only 7 per cent in 2016, during which time the median CEO golden parachute payment equalled US$5.2 million. Id.
210 United States Securities and Exchange Commission, Statement, 'Reconsideration of Pay Ratio Rule Implementation', US Securities Exchange Commission, 6 February, 2017, www.sec.gov/news/statement/reconsideration-of-pay-ratio-rule-implementation.html; 17 C.F.R. 229.402(u).
211 '2018 Say on Pay and Proxy Results', Semler Brossy, 11 April 2018, https://www.semlerbrossy.com/wp-content/uploads/SBCG-2018-SOP-Report-04-11-2018.pdf; 'Say on Pay Failure Rate Drops Below 1%', Semler Brossy, 11 May 2017, https://www.semlerbrossy.com/say-on-pay/say-on-pay-failure-rate- drops-below-1/.
213 'CEO Pay Ratio Survey Results: The Bigger the Company, the Larger the Pay Gap', Equilar, 1 February 2018, www.equilar.com/blogs/355-equilar-ceo-pay-ratio-survey-results.html; '2018 Say on Pay and Proxy Results' (see footnote 211).
214 '2018 Say on Pay and Proxy Results' (see footnote 211).
215 See, e.g., Calma v. Templeton, C.A. No. 9579-CB (Del. Ch. 30 Apr 2015); Seinfeld v. Slager, C.A. No. 6462-VCG (Del. Ch. 29 Jun 2012); In re 3COM Corp, C.A. No. 16721-VC (Del. Ch. 25 Oct 1999).
216 Seinfeld v. Slager, at *40.
217 In re Investors Bancorp Stockholder Litigation, C.A. No. 12327-VCS (Del. 19 Dec 2017).
218 Id. at 3.
219 'Delaware Supreme Court Heightens the Review Standard for Discretionary Equity Awards to Directors', John Spidi, 22 February 2018, https://www.natlawreview.com/article/delaware-supreme-court-heightens- review-standard-discretionary-equity-awards-to.
220 'New Year's Resolutions For Director Compensation From Investors Bancorp', Jennifer Conway et al., Cravath, Swaine & Moore LLP, 23 January 2018, https://www.cravath.com/files/Uploads/Documents/Publications/3699393_1.pdf.
222 Brian Myers and Alex Pattillo, 'ISS policy updates for 2017: Focus on director compensation', Willis Towers Watson, 23 November 2016, www.towerswatson.com/en/Insights/Newsletters/Global/executive-pay-matters/2016/ISS-policy-updates-for-2017-Focus-on-director-compensation.
223 ISS 2018 US Compensation Policy FAQ, Q&A 67, https://www.issgovernance.com/file/policy/active/americas/US-Compensation-Policies-FAQ.pdf ('A policy for 2018 has been implemented by which ISS may issue adverse vote recommendations for those board members responsible for approving/setting NED pay when there is a recurring pattern of excessive NED pay magnitude without a compelling rationale'); ISS 2017 US Compensation Policy FAQ, Q&A 67, www.issgovernance.com/file/policy/1_u.s.-executive- compensation-policies-faq-dec-2016.pdf.
224 Tax Cuts and Jobs Act of 2017 (see footnote 111).
225 'The Use of Restricted Stock', 1 Tax Planning for Corporations and Shareholders, Section 5.04, 2018.
226 'Is Say on Pay All About Pay? The Impact of Firm Performance', Jill E Fisch, Darius Palia and Steven Davidoff Solomon, Harvard Law School Forum on Corporate Governance and Financial Regulation, 30 October 2017, https://corpgov.law.harvard.edu/2017/10/30/is-say-on-pay-all-about-pay-the-impact-of-firm-performance/.
227 Individuals who conduct certain businesses through an entity taxable on a pass-through basis (such as partnership or S corporation) benefit from a lower effective tax rate as well. The Tax Cuts and Jobs Act of 2017 provides these individuals with a 20 per cent deduction against the income of these entities attributable to the conduct of a US trade or business, excluding investment and compensation income. The deduction also applies to qualified dividends from REITs and qualified publicly traded partnership income.
228 Jacob Pramuk, 'Trump: Slashing Taxes on Corporations is “Probably the Biggest Factor” in GOP Tax Plan', CNBC, December 20, 2017, www.cnbc.com/2017/12/20/trump-says-corporate-tax-cut- is-biggest-factor-in-gop-tax-plan.html.
229 Boston Consulting Group, 'The Impact of US Tax Reform on Corporate Strategy and M&A', 21 February 2018, www.bcg.com/publications/2018/impact-us-tax-reform-corporate-strategy-m-and-a.aspx.
231 Robert C Pozen, 'How to Fix the Corporate Tax System', Brookings Institute, 11 July 2016, www.brookings.edu/opinions/how-to-fix-the-corporate-tax-system.
232 Matthew Townsend and Laurie Meisler, 'These Are the Biggest Overseas Cash Hoards Congress Wants to Tax', Bloomberg, 2 November 2017, www.bloomberg.com/graphics/2017-overseas-profits-tax/.
233 The rate is 5 per cent in 2018 and then 12.5 per cent after 2022.
234 Jim Tankersley and Alan Rappeport, 'A Hasty, Hand-Scribbled Tax Bill Sets Off an Outcry', The New York Times, 1 December 2017, www.nytimes.com/2017/12/01/us/politics/hand-scribbled-tax-bill-outcry.html.
235 Jim Tankersley and Alan Rappeport, 'G.O.P. Rushed to Pass Tax Overhaul. Now It May Need to be Altered.', The New York Times, 11 March 2018, www.nytimes.com/2018/03/11/us/politics/tax-cut-law-problems.html.
236 Toluse Olorunnipa, 'Americans May Get Permanent Tax Cut in “Phase Two”, Kudlow Says', Bloomberg, 14 March 2018, www.bloomberg.com/news/articles/2018-03-14/americans-may-get-permanent-tax- cut-in-phase-two-kudlow-says.
237 'Justice Department Requires General Electric Company to Make Incentive Payments to Encourage Completion of Divestitures Agreed to as a Condition of Baker Hughes Merger' (see footnote 17).
238 Press release, Federal Trade Commission, 'FTC and State Attorney General Challenge Physician Group Acquisition in North Dakota', 22 June 2017, https://www.ftc.gov/news-events/press-releases/2017/06/ftc-state-attorney-general-challenge-physician-group-acquisition.
239 Federal Trade Commission Fiscal Year 2017 Performance Report and Annual Performance Plan for Fiscal Years 2018 and 2019, https://www.ftc.gov/system/files/documents/reports/fy-2018-19-performance-plan-fy-2017-performance-report/apr-app_fy17-19.pdf; DOJ, Antitrust Case Filings, www.justice.gov/atr/antitrust-case-filings.
241 'HSR threshold adjustments and reportability for 2018' (see footnote 29).
242 David McLaughlin, 'Senate Confirms Trump's Nominee to Lead the FTC', Bloomberg, 26 April 2018, https://www.bloomberg.com/news/articles/2018-04-26/trump-pick-to-lead-ftc-confirmed-by-senate- amid-facebook-probe.
243 Brian Fung, 'The Senate has confirmed Trump's antitrust chief', Washington Post, 27 September 2017, https://www.washingtonpost.com/news/the-switch/wp/2017/09/27/the-senate-has-confirmed-trumps- antitrust-chief.
244 DOJ, 'Assistant Attorney Makan Delrahim Delivers Keynote Address at American Bar Association's Antitrust Fall Forum', 16 November 2017, https://www.justice.gov/opa/speech/assistant- attorney-general-makan-delrahim-delivers-keynote-address-american-bar.
246 Cecilia Kang, 'How to Make Sense of the U.S. Case Against AT&T-Time Warner', The New York Times, 22 November 2017, https://www.nytimes.com/2017/11/22/business/the-att-antitrust-case-questions-and-answers.html.
249 Press release, DOJ, 'Justice Department Files Antitrust Lawsuit Against Parker-Hannifin Regarding the Company's Acquisition of CLARCOR's Aviation Fuel Filtration Business', https://www.justice.gov/opa/pr/justice-department-files-antitrust-lawsuit-against-parker-hannifin-regarding-company-s.
252 Press release, DOJ, 'Justice Department Reaches Settlement with Parker-Hannifin', https://www.justice.gov/opa/pr/justice-department-reaches-settlement-parker-hannifin.
253 Press release, EnergySolutions, 'EnergySolutions Signs Definitive Agreement to Acquire Waste Control Specialists LLC', 19 November 2015, www.energysolutions.com/energysolutions-signs- definitive-agreement-to-acquire-waste-control-specialists-llc.
254 See Liz Crampton, '“Failing Firm” Viability Under Scrutiny in Nuclear Waste Antitrust Case', Bloomberg Law, 12 June 2017, https://www.bna.com/failing-firm-viability-n73014453120/.
256 United States v. Energy Solutions Inc, 265 F. Supp. 3d 415, 446 (D. Del. 2017).
257 See Jon Chesto, 'General Electric to combine energy unit with Baker Hughes', Boston Globe, 31 October 2016, https://www.bostonglobe.com/business/2016/10/31/general-electric-baker-hughes- announce-billion-deal/fJYeU0wuFIBKVYKCCnHbJM/story.html.
258 Press release, DOJ, 'Halliburton and Baker Hughes Abandon Merger After Department of Justice Sued to Block Deal', https://www.justice.gov/opa/pr/halliburton-and-baker-hughes-abandon-merger-after-department-justice-sued-block-deal.
259 Press release, DOJ, 'Justice Department Requires Divestiture of General Electric Company's Water & Process Technologies Business Before Merger with Baker Hughes Incorporated', https://www.justice.gov/opa/pr/justice-department-requires-divestiture-general-electric-company-s-water-process-technologies.
260 Press release, DOJ, 'Justice Department Requires General Electric Company to Make Incentive Payments to Encourage Completion of Divestitures Agreed to as a Condition of Baker Hughes Merger', https://www.justice.gov/opa/pr/justice-department-requires-general-electric-company-make-incentive-payments-encourage.
261 Press release, Baker Hughes, 'Baker Hughes and GE Oil & Gas Complete Combination, Creating the World's First and Only Fullstream Oil and Gas Company', https://www.bakerhughes.com/news-and-media/press-center/press-releases/baker-hughes-and-ge-oil-and-gas-complete-combination-july3-2017.
262 'Justice Department Requires General Electric Company to Make Incentive Payments to Encourage Completion of Divestitures Agreed to as a Condition of Baker Hughes Merger' (see footnote 260).
264 Press release, AT&T, 'AT&T to Acquire Time Warner', 22 October 2016, http://about.att.com/story/att_to_acquire_time_warner.html.
265 Press release, DOJ, 'Justice Department Challenges AT&T/DirecTV's Acquisition of Time Warner', https://www.justice.gov/opa/pr/justice-department-challenges-attdirectv-s-acquisition-time-warner.
266 Brian Fung, '6 key themes emerging from AT&T's landmark antitrust trial', Washington Post, 6 April 2018, https://www.washingtonpost.com/news/the-switch/wp/2018/04/06/everything-you-need-to-get-caught-up-on-the-landmark-att-time-warner-trial.
269 Press release, DOJ, 'Justice Department Allows Comcast-NBCU Joint Venture to Proceed with Conditions', https://www.justice.gov/opa/pr/justice-department-allows-comcast-nbcu-joint-venture- proceed-conditions.
270 Cecilia Kang, Edmund Lee and Emily Cochrane, 'AT&T Wins Approval for $85.4 Billion Time Warner Deal in Defeat for Justice Dept', The New York Times, https://www.nytimes.com/2018/06/12/business/dealbook/att-time-warner-ruling-antitrust-case.html.
271 Edmund Lee and Cecilia Kang, 'AT&T Closes Acquisition of Time Warner', The New York Times, https://www.nytimes.com/2018/06/14/business/media/att-time-warner-injunction.html.
272 Press release, Walgreens Boots Alliance, 'Walgreens Boots Alliance to Acquire Rite Aid for US$17.2 Billion in All-Cash Transaction', 27 October 2015, www.walgreensbootsalliance.com/newsroom/news/walgreens-boots-alliance-to-acquire-rite-aid-for-172-billion-in-all-cash-transaction.htm.
273 David McLaughlin et al., 'Walgreens Faces U.S. Antitrust Concerns Over Rite Aid Fix', Bloomberg, 20 January 2017, www.bloomberg.com/ news/articles/2017-01-20/walgreens-said-to-face-u-s-antitrust-concerns-over-rite-aid-fix.
274 Robert Langreth and David McLaughlin, 'Walgreens Wins U.S. Approval for Rite Aid Deal on Fourth Try', Bloomberg, 19 September 2017, https://www.bloomberg.com/news/articles/2017-09-19/walgreens-pact-to-buy-fewer-rite-aid-stores-wins-u-s-approval.
276 Statement of Commissioner Terrell McSweeny, In re Walgreens/Rite Aid Transaction, 19 September 2017, https://www.ftc.gov/system/files/documents/ public_statements/1255043/1710181_walgreens_rite_aid_statement_of_commissioner_mcsweeny.pdf.
277 Statement of Acting Chairman Maureen K Ohlhausen, In re Walgreens/Rite Aid Transaction, 19 September 2017, https://www.ftc.gov/system/files/ documents/public_statements/1255033/1710181_walgreens_rite_aid_statement_of_acting_chairman_ohlhausen.pdf.
278 Eleanor Tyler, 'Walgreens, Rite Aid Got Past Regulators With No Vote', Bloomberg Law, 19 September 2017, https://www.bna.com/walgreens-rite-aid-n57982088177/.
279 Press release, Federal Trade Commission, 'FTC Requires Kidney Dialysis Chain DaVita, Inc to Divest Assets as a Condition of Acquiring Competitor Renal Ventures Management LLC', 28 March 2017, https://www.ftc.gov/news-events/press-releases/2017/03/ftc-requires-kidney-dialysis-chain-davita-inc-divest-assets.
282 Press release, Federal Trade Commission, 'FTC Approves Final Order with Kidney Dialysis Chain DaVita, Inc that Preserves Competition to Provide Outpatient Dialysis Services in New Jersey and greater Dallas area', 14 June 2017, https://www.ftc.gov/news-events/press-releases/2017/06/ftc-approves-final-order-kidney-dialysis-chain-davita-inc.