Thank you to the hundreds of attendees, as well as the speakers and panelists, at the 7th Annual Berkeley Spring Forum on M&A and Governance.
Below is a brief report of some of the highlights and takeaways.
— Ethan Klingsberg and Professor Steven Davidoff Solomon, Co-hosts
1. Reforms for the private markets and SPAC offerings, and a defense of Robinhood -- Dan Gallagher, Chief Legal Officer of Robinhood and former SEC Commissioner, and Scott Kupor, Managing Partner at Andreesen Horowitz.
The conference kicked off with a fascinating review of the last two decades of regulation of access to the capital markets. The discussion contributed actionable insights on how to continue the constructive trajectories of the JOBS Act and other reforms. The discussion then dove into the benefits of companies staying private longer, including permitting the average retail investor to have access to better investments, and the negative macro-economic effects that arise from denying the average retail investor access to private markets. They observed how investment by retail investors in SPACs, which are taking public many companies earlier than an IPO or direct listing necessarily would, may be indicative of a means to overcome these restrictions. Dan warned that he expects scrutiny from the SEC over SPAC fee disclosures and that the byproduct of this scrutiny will be requirements for bold-faced and clear disclosure about fees and sponsor benefits.
The discussion touched on other ways to permit broader access for retail investors into the private markets. In addition, Dan and Scott reviewed the benefits that Robinhood is providing to retail investors and how these benefits are able to be offered, and addressed head-on the criticisms of Robinhood with straightforward and reasoned refutations.
2. Officer and controlling stockholder liability -- Honorable J. Travis Laster of the Delaware Court of Chancery and Mary Eaton, Co-head of the Shareholder and Securities Litigation Practice at Freshfields.
Vice Chancellor Laster engaged in a candid and instructive discussion of officer liability and controlling stockholder liability.
Mary pointed out that plaintiffs’ lawyers increasingly focus their energy on claims that officers, ranging from general counsels to CEOs, have breached their duties in connection with mergers and do not have access to exculpatory provisions. The judge’s review of the framework for assessing these claims was welcome. He commenced the discussion by describing how the applicability of heightened standard of reviews does not govern the applicable standard for officer liability. In his view, the heightened standards of review, such as entire fairness and enhanced scrutiny, were designed to address injunctive relief rather than damages claims.
VC Laster explained that, when establishing a damages claim, the ultimate question is not the standard of review, but whether the officer has liability for a breach of his or her duties. He provided an example of how to state a damages claim against a CEO in a sale of control transaction: the plaintiff will need to show that (i) there was an action by the officer that fell outside the range of reasonableness (i.e., violated the Revlon standard of review) and (ii) the CEO acted on behalf of the corporation for his own personal interests, with bad faith, or gross negligence. Not all breaches of fiduciary duty that would be recognized for purposes of injunctive relief will constitute bases for damages claims against officers even though officers are not entitled to exculpation in the same manner as a director.
VC Laster noted further that a critical factor to determine whether a dual director-officer is acting in his or her capacity as an officer (where exculpation is not available), rather than as a director (where exculpation is available), is to look at the non-management directors to see whether they were participating in that same conduct.
The Vice Chancellor then reviewed recent cases addressing when a stockholder has “control” and therefore subjects its transactions with the corporation to the entire fairness standard absent the satisfaction of the MFW safe harbor criteria. He emphasized that the Delaware courts take a holistic approach and will not be looking at certain stock ownership or voting power thresholds as necessarily determinative. In addition to ownership levels, the role the stockholder plays at the company (i.e., is the stockholder a founder, chair, CEO, or corporate visionary?), indicia of the influence of the stockholder in the boardroom, and the governance regime of the company (such as veto rights).
In the extended version of the interview, he touches on other recent developments in the Court of Chancery.
3. The evolving scope of ‘national security” considerations in 2021 and implications for boards and CFIUS -- Bruce Andrews, SVP and Managing Partner at SoftBank and former Deputy Secretary of Commerce, Shannon Corless of the Office of the Director of National Intelligence, Brett Lambert, Managing Director of Densmore Group and formerly of the Department of Defense, and Aimen Mir of Freshfields and formerly of CFIUS
The speakers concurred that national security and national economic interests have become increasingly blended in recent years, in part because of the convergence of technologies, such as deep learning and artificial intelligence, that implicate both national security and national economic interest. The speakers illustrated this theory by noting that the U.S.’s primary national security concern is and should be China, a country that threatens the U.S. in a manner that is far more economic in nature than the U.S.’s traditional Cold War enemies. A consequence of this convergence is that many companies, even though they are not sellers of products or services to the U.S. government or in the national security industry, may still raise important national security concerns. The panelists urged boards to prioritize understanding how national security concerns apply to their company and how they impact the regulatory posture of the company.
The panelists stated that they generally expected to see the Biden administration return to an approach to CFIUS that takes positions in a way that helps the U.S. build alliances on issues with our international allies.
The panelists provided guidance on how to interact with CFIUS and other national security regulators, stressing the importance of being proactive, as opposed to the reactive mode which is appropriate for many regulatory relationships outside the national security space. The importance of shaping in advance the understandings of national security regulators was a pervasive theme of the guidance during this panel.
4. How the pandemic and enhanced ESG sensitivities have changed M&A objectives and processes – Garth Bossow of Airbnb, Diana Chiu of Agilent Technologies, Professor Steven Davidoff Solomon, Harry Demas of Cognizant, and Dan Vaughn of PayPal
The panelists delved into the pervasiveness of skyhigh valuations in the M&A market, despite and because of the pandemic. The panel paid particular attention to the dynamics involved in acquiring healthcare and fintech targets. The panel discussed how their respective teams were approaching valuation of targets in 2021 and related issues of capital allocation.
In terms of the actual logistics of doing deals in our new remote world, the panelists noted that a lot of the deal dynamics have not changed. Many parts of the deal process such as diligence and negotiations were performed remotely even before the pandemic in the Valley. However, technology and innovation will not make an all-remote M&A process the new normal, especially when international customs create expectations for in-person dialogue as a sign of respect.
The panelists discussed challenges that the pandemic has presented for integration, especially on HR matters, for new acquisitions.
The panel concluded with a revealing discussion about the extent to which there is an increasingly tangible interplay between environmental, social and diversity objectives of their corporations with M&A processes and objectives.
5. Momentum for Public Benefit Corporations -- Peter Gassner, the Founder and CEO of Veeva Systems, Brian Patterson of Gunderson Dettmer, Pamela Marcogliese of Freshfields, Tilli Dias, Managing Director at Morgan Stanley, Daniel Li, Head of Legal at Allbirds, and Josh Faddis, General Counsel of Veeva Systems
On the topic of Public Benefit Corporations (“PBCs”), we had two eye-opening events.
Shortly before the conference, Veeva Systems became the first company, while publicly listed, to convert to a PBC. Accordingly, the opportunity to sit down with Peter and reflect on his company’s PBC journey was especially worthwhile. Peter discussed how his board approached the uncertainty about how stockholders would react to the proposed conversion. He then explained that the overwhelming support (in the 99% range) from stockholders, including institutional holders unaffiliated with the company, stemmed from the consistency between his explanations to stockholders and analysts of the rationales for and consequences of conversion to a PBC and his previous presentations of the business model for Veeva over the years since Veeva’s IPO – that is, a company driven primarily by the needs of customers, the broader objective of facilitating advances in the life sciences, and the prioritization of employees. Peter provided guidance on how to handle the investor relations messaging involved with conversion to a PBC, as well as internal messaging and board deliberations. He conceded that there was a degree of education involved, but ultimately concluded that the authenticity for Veeva of the characteristics of a PBC made this initiative run smoothly.
Following Peter, we had a panel featuring views on PBCs from outside counsel, inhouse counsel and investment banker. The panelists unanimously agreed that many investors in both the private and public markets are affirmatively excited about PBCs. Tilli noted that, by leveraging the increasing pool of ESG-focused investors, PBC status gives companies the opportunity to have dedicated and supportive stockholder bases. Daniel echoed this sentiment, observing that many investors believe that PBC status gives a company a competitive edge.
Josh shared his experiences interacting with the SEC staff during the conversion process, and noted that the SEC focused on the quality of disclosure about: (i) how the tripartite balancing process called for the PBC statute will work in practice; (ii) what role, if any, Revlon duties will play in connection with any future change in control transaction; and (iii) a detailed mapping of each difference between a PBC and C-Corporation. Pam outlined the extent to which Veeva’s conversion process will set a precedent and challenges that future conversions to PBCs will face.
6. Ever-narrowing market definitions may be killing the availability of the efficiencies defense -- Commissioner Christine S. Wilson of the FTC.
Commissioner Wilson kicked off Friday’s events with an enlightening discussion on the primacy of market definitions in today’s Clayton Act cases. Specifically, the Commissioner noted the consistent narrowing of market definitions in recent years. She explained that as market definitions have narrowed, market shares have consequently expanded. This greatly increases the likelihood of a merger among the first and second largest companies in a given market – a fact that would likely trigger a structural presumption of unlawfulness. Furthermore, the Commissioner highlighted the significantly higher burden companies now face when attempting to prove out-of-market efficiencies due to the phenomenon of narrowing market definitions. According to the Commissioner, defendants must now prove extraordinary out-of-market efficiencies in cases where the market definition has narrowed. The approach to defining the market share of any given company may be reaching a point where we are putting an end to the availability of efficiencies defenses. The Commissioner ended her speech with a call for further research on the implications of this trend toward narrower definitions of markets, as she believes we may have changed the way we define markets to too great an extreme.
7. Implications of proposals to reform antitrust law – Renata Hessse of Sullivan & Cromwell, Mary Lehner of Freshfields, Professor Steven Tadelis of UC, Berkeley, and Mika Clark Tupy of United Airlines.
The panelists commenced the discussion by picking apart the draft legislation proposed by Senator Amy Klobuchar to reform the antitrust laws. The panel focused on the implications of the movement in the legislation away from the traditional focus on consumer protection toward a focus on competition protection. The panel discussed the implications for M&A, including an impassioned explanation by Professor Tadelis of why the calls for a war on acquisitions of nascent competitors is misplaced.
The panelists further discussed whether common ownership of competitors by the same small set of institutional stockholders conflicts with the antitrust laws. They debated the available empirical studies on this topic and how the new legislation would address this concern.
8. We face serious information gaps regarding platform access and influence, caused in part by a lack of a cohesive platform regulatory strategy -- Professor Amelia Miazad of Berkeley and Mitchell Baker, CEO of Mozilla and Chairwoman of Mozilla Foundation.
This panel addressed regulatory shortcomings created by the current technology infrastructure. Due to the absence of a unified regulatory regime, many of the internet platforms now self-regulate to prevent the spread of misinformation. One of the commonly employed solutions is the concept of de-platforming. However, Mitchell suggested, there are a variety of steps we can take before de-platforming, including addressing the monetization of content.
The U.S. currently lacks a regulatory regime for marketing algorithms and ad-targeting; the question of which content is magnified, why, and to whom creates power disparities within society. One of the key negative externalities from this system, Mitchell noted, is that information accessed through the internet has become monetized; companies are being forced, in a sense, to buy back their own brand goodwill in order to appear on search engines, thereby changing and driving consumer behavior in new ways. A greater understanding of how these systems work and interplay can drive creation of a more suitable regulatory regime.
