Takeaways Report from 9th Annual Spring Forum on M&A and the Boardroom

Thank you to the over 1,000 participants (including over 300 in person) at the 9th Annual Spring Forum on M&A and Boardroom, co-hosted by Freshfields and the Berkeley Center for Law & Business. Here’s our annual report-out and take-aways, along with some links to video highlights.

Opening Remarks – Freshfields Co-Head of US Corporate/M&A, Ethan Klingsberg

Freshfields Partner Ethan Klingsberg recalled how he had started this event 12 years ago in a small room with only 12 attendees, three-quarters of whom were from the Google legal department. He observed how the event has blossomed over the last decade thanks to the partnership with the Berkeley Center for Law & Business, which has emerged as a leader in drawing on insights from inhouse lawyers, corporate development and private capital professionals, private practitioners, bankers, pr personnel and proxy solicitors -- a collective group that is not only good for boosting donations to academia but also thoughtful and intellectual. He talked about how the confluence between the “real world” and academia has flourished over the last decade to the benefit of law schools and practitioners.  In addition, he observed how Freshfields has now grown deep roots in the Bay Area, New York and Washington DC, and understands that those doing business in the Bay Area and throughout the United States need to be in the forefront in understanding corporate, regulatory, and litigation not only locally and nationally, but internationally, and that is why active participation in this annual event by Freshfields is central to the firm’s mission and has made this event effective.

He then observed how we have reached a point where the tensions among three trends are reaching a point where gatherings like this conference are essential. The three trends are:

• Standardization and hyper-efficiency of transaction work has reached new levels and can be expected to continue to reach levels that those practicing law even a few years ago would never have imagined. Technology, the dissolution of the work/home separation, and demanding clients all contribute to this trend. 
   
• Clients are undaunted by complexity. They are willing to litigate against antitrust authorities. They are willing to obtain difficult tax rulings. They are willing to wait well over a year and even two years to get to closing. If the legal advice is that executing a transaction will be “hard,” then the response is “Okay, then work hard.” Execution risk, transaction costs, investor relations challenges, regulatory hurdles – these are all viewed as surmountable if an increased trading multiple or other shareholder value-enhancing indicia will be the ultimate result. Investor demands contribute to this trend.
   
• Gatekeepers of corporate conduct – including antitrust and foreign investment regulators, the Delaware Chancery Court, the Securities and Exchange Commission, and institutional investors – are more active than ever in setting ground rules for corporate activity.  This third trend is a consequence of the first two.

He concluded by explaining how the first two trends are not going to let up, but that those who understand how to navigate the third trend will be the ones who are most successful and that a premium will be placed on this capability.  With that, he turned the Forum over to the sessions to make everybody smarter and more agile when it comes to the managing the third trend and living with the first two trends.

Antitrust Policy: FTC Priorities in 2023, -- FTC Chair Lina Khan

FTC Chair Lina Khan elaborated on her foundational belief that greater levels of socio-economic inequality stem from lax antitrust enforcement and that the FTC’s objective is to promote innovation through internal growth and investment in R&D, rather than mergers and acquisitions.  She stressed that the antitrust laws exist not only to protect consumers, but to protect workers and multiple other constituencies in communities, and that it would be inappropriate for merger reviews to neglect to take into account the impacts of business combinations on each of these non-consumer constituencies.

She then discussed the FTC's January 2023 proposed rule to ban non-compete undertakings. She conveyed her belief that non-compete undertakings have become ubiquitous among all levels of the workforce and that many employers require them of low-level employees. She cited a chilling effect on innovation and worker pay arising from non-compete undertakings. She argued that empirical evidence suggests that eliminating non-compete clauses would boost worker earnings by $300 billion per year. Chair Khan praised states that limit the enforceability of non-compete undertakings but concluded that she believes we now need a broader federal rule to protect workers properly.  She added that the FTC is now reviewing the nearly 26,000 comments received on the proposed rule.

Chair Kahn then shifted to emphasizing the focus of the FTC on the healthcare and pharmaceutical sectors. She noted that the stakes for patients were high and that is why we should expect to see a very active FTC approach to these sectors. (NB: Shortly after the conference, the FTC announced that it would be stretching the antitrust laws to try to block the Amgen-Horizon merger.)

She concluded by stressing that there is no ESG exemption from the antitrust laws and that companies are naïve if they believe that having a solid ESG record will cleanse any actor or transaction from being scrutinized by the FTC.

How Are Boards and Their Advisors to Make Sense of and React to the Expectations of Institutional Investors?

Giuseppe Bivona, Partner and CIO at Bluebell Capital Partners (the activist fund calling for the resignation of Larry Fink at Blackrock and leading multiple other campaigns); Matt Cole, CEO at Strive (the anti-woke asset manager founded by Vivek Ramaswamy (now a candidate for President) and funded by Bill Ackman and Peter Thiel); Tariq Fancy, former global head of sustainable investing at BlackRock (and author of the provocative, Secret Diary of a Sustainable Investor); Ethan Klingsberg; and Anne Simpson, Global Head of Sustainability at Franklin Templeton and formerly of CalPERS, took the stage for a spirited and at times contentious exchange moderated by Professor Adam Badawi.

Giuseppe opened the session with an accusation that there has been an unacceptable breakdown of democracy in the corporate world. He explained how only a handful of mega-‘passive strategy’ asset managers and two proxy advisory firms control the outcomes of nearly all votes at shareholder meetings, but how none of these gatekeepers does their homework or votes in the best interests of the shareholders.  He called for a need to break up the current stranglehold that these passive strategy funds and proxy advisory firms have on shareholder votes.  

Anne agreed with Giuseppe’s point about the oligopoly that controls shareholder influence on corporate conduct.  She then built on this point to stress that the way to solve these problems is for governments more aggressively regulate corporations and for the market to focus on governance at investors. She stressed her support for requiring better governance at investors to ensure that they are more responsive to the objectives of those whose money they are holding, such as pension beneficiaries and families.  She explained how investor governance is the golden thread to lead to improved corporate conduct and solving societal ills. She emphasized that this did not mean focusing on ESG, but it does mean investing in sustainable companies.

Matt joined in the criticism of the mega-asset managers and shared Anne’s point that asset managers need to be more responsive to the needs of their investors.  Matt focused energetically on what he described as the problems that arise from investing with a social purpose and how misdirected that approach is when all the investors really want and need are returns. He expounded on the virtues of the shareholder primacy model and how he believes that it is a breach of fiduciary duty and a fast track to bankrupting pension funds for corporations to deviate from shareholder primacy and to give credence to stakeholder capitalism in any way. He then explained how Strive is focused exclusively on maximization of shareholder value and spends no time considering ESG issues.

Ethan conceded Giuseppe’s oligopoly point and acknowledged that many share Matt’s focus on returns as the only objective that really matters.  He then cited to last week’s announcement by S&P/Dow Jones that they would be repealing their rule that blocked high performing multi-class and dual class issuers from being in their indices.  He explained that this showed that returns mattered to the market more than governance. He drew a similar conclusion from the resolution of Trian’s activist campaign against Disney, which had purported to be about governance issues, but quickly resolved when Disney agreed to cost-cutting and other strategic initiatives that resulted in their trading multiple increasing. Ethan explained how this pressure to maximize returns is consistent with Matt’s philosophy.

Ethan then highlighted that a consequence of this overwhelming pressure on corporations to maximize returns is that corporations are now spending disproportionately, and much more than labor unions, on shaping our political system and the activities of our legislatures to facilitate the abilities of corporations to maximize value in the near term, and how this approach by corporations has emboldened our legislators to the point that the lawmakers have now entrenched themselves through gerrymandering and other mechanics. The result is that, while we all agree that it makes more sense for your legislator rather than your asset manager to be the one designing solutions to climate change and other general welfare concerns, that route has been largely cut off, and corporations are increasingly the ones controlling how public policy is made.  

Ethan concluded by explaining how professional independent directors – a class that has proliferated as a result of Sarbanes Oxley requirements -- are actually more vulnerable to outside influence than gerrymandered legislators beholden to corporations. The consequence, he proposed, is that societal forces, frustrated by their prospects of influencing legislators to act and realizing that corporations are the most powerful political actors, are now focusing on asset managers and corporations as the avenues for address societal problems.

Tariq explained, citing to his experience as a CIO at Blackrock, that asset managers are simply businesses and that all the focus on ESG is just a marketing pitch and that, at the same time, any resources dedicated toward monitoring ESG issues is a cost center. He predicted increased polarization in the asset manager market between pro- and anti- ESG forces that will leave the boards of corporations caught in an impossible position in the middle. He further explained how this approach has led corporations to have to greenwash themselves – market themselves as ESG champions while spending lots of money fighting legislation that would enhance ESG objectives.

Anne followed up by stressing the need for total transparency on political spending by corporations so that this “greenwashing” hypocrisy can be unveiled. 

Giuseppe then pivoted back to how, as a small but vocal shareholder, he has experienced fetters on shareholder democracy, including dual class share structures, that Blackrock, ISS and other members of the oligopoly permit to continue. He mocked Blackrock’s casting 170,000 votes with only 80 staffers reviewing how to cast those votes. He called for a requirement that the large asset managers permit their investors to vote directly – unbundling the vote from the passive managers. The panel then laughed at how such a development may render Larry Fink’s annual letter not meaningful because those investing in Blackrock funds, rather than Blackrock itself, would be deciding how to vote the shares owned by Blackrock.

Matt jumped in to stress that investor engagement with the corporation is just as important as casting proxy votes and that Larry Fink’s letter will always have an outsize influence until investors start moving their money to other asset managers whom they view as more responsive.

Anne and Giuseppe further debated the risks that come from removal of passive strategy funds as intermediaries.  Anne focused on the importance of investors working with each other to influence corporations, including by addressing systemic risk.  Matt and Anne then clashed on the appropriateness of investors addressing systemic risks, such as climate change, in their engagement with corporations.  Matt and Anne further debated Matt’s point that disclosures about systemic risk issues unjustifiably inhibit corporate conduct that would benefit shareholders.  

Tariq weighed in by explaining how ineffective Blackrock and other asset managers are at addressing societal issues and how boycotts and divestitures are ineffective in a capitalist society.  Ethan asked what can be done given the challenges facing our political system.  Anne answered that private markets may be a solution. Giuseppe countered that there will be no difference between public markets, where ESG is just a marketing strategy, and private markets. Anne disagreed, explaining that private markets have the potential to practice modern portfolio theory where investors responsibly force their portfolio of corporations to act responsibly in a holistic manner to address systemic risks.

What Boards Should Make of Recent Developments in the Delaware Court of Chancery  

Delaware Chancery Court Vice Chancellor Nathan Cook, the newest judge on the Delaware court, joined Meredith Kotler, the co-head of Freshfields shareholder and securities litigation practice, for a fireside chat about current developments in Delaware case law with an emphasis on Section 220 demands for inspections of books and records.

Meredith started the discussion by asking VC Cook about trends in shareholder demands to inspect corporate books and records under Section 220. VC Cook noted that there had been a significant increase in litigation stemming from Section 220 demands in the past five years. For example, in 2017, 73 Section 220 cases were filed in Delaware versus 158 in 2022. He explained that the Court is most interested in the appropriate scope of 220 demands (i.e., the extent of corporate records required to be produced pursuant to a legitimate demand) as opposed to whether the demand has a "proper purpose" under Delaware law, which is a relatively easy standard to satisfy. VC Cook stated that the Court expects that board materials, including minutes and board presentations, will be produced. He explained further that it will be the plaintiff's burden to establish that gaps exist in the produced documents necessitating the production of additional, “informal” materials, such as emails.

Meredith then discussed the Court's view on parties using Section 220 documents in litigation, particularly in the Caremark context. VC Cook explained that, under the motion to dismiss pleading standard, the Court would consider documents that are appropriately incorporated by reference into the complaint and whether plaintiffs are fairly characterizing those documents. He noted though that at some point, as more Section 220 documents are referenced, it raises the question of whether the motion to dismiss has been converted into a motion for summary judgment.

VC Cook then endorsed longer form minutes. He acknowledged that the drafter of board minutes has a demanding job and that senior lawyers must carefully review minutes. VC Cook discussed best practices for minute-taking, including timely preparation and ensuring that minutes clearly reflect complicated concepts and processes.

VC Cook then reflected on the recent McDonald's decision, in which VC Laster denied a motion to dismiss a Caremark claim against McDonald's Global Chief People Officer for violating his fiduciary duties by engaging in sexual misconduct at the company. VC Cook stated that, from his perspective, McDonald's confirms that corporate officers owe oversight duties under Caremark and that boards ought to use this lever to promote appropriate conduct by executives. He acknowledged that it will remain challenging to plead an officer-level Caremark claim and that he expects most Caremark claims to focus on director defendants.

Meredith then pivoted the discussion to the recent Mindbody decision, in which Chancellor McCormick held that the Mindbody CEO and Vista, the private equity acquiror, were jointly liable for flaws in the $1.9 billion sale of the company that arose from the CEO’s alleged favoritism of Vista over the other bidders. She and the judge discussed the risks of personal liability for executives and directors that arise from complacency in the board room during a process to sell the company. The Vice Chancellor proposed that having legal and financial advisors who are experienced and not intimidated by the need to regulate the activities of the executives and directors, including by enforcing internal protocols on communications and engagement with financial sponsor bidders, is the most valuable takeaway, as a practical matter, from this case.

Meredith ended the conversation by asking VC Cook for tips for parties appearing before him.  He explained that he loves reading deposition transcripts, and that it is important for lawyers to take substantive depositions. In addition, he warned against simultaneous briefing. Finally, he stressed the importance of parties engaging early to work out scheduling.

The Evolution of CFIUS and Regulation of Outbound Investment from the US

Berkeley's Irene Liu moderated an insightful discussion between Andrew Fair, CFIUS Staff Chair and Director, and Aimen Mir, partner at Freshfields and former chair of CFIUS, on the evolution of CFIUS review.

In a frank discussion, Aimen and Andrew covered:

• How CFIUS assesses risk and how this approach to assessment has evolved recently
• Factors that impact the timeline of the CFIUS review process and how to manage those factors
• The “facts and circumstances” nature of CFIUS reviews
• The interplay between reviews by CFIUS and by CFIUS’s counterparts in other jurisdictions
• How to approach the negotiation of mitigation agreements with CFIUS
• How CFIUS evaluates limited partnership interests in private equity funds, as well as side agreements by funds with LPs
• The interplay between CFIUS and export control regimes
• The prospects for a reverse-CFIUS regime that regulates outbound investment by US entities beyond existing sanctions and export controls

What’s Next for Europe’s Regulation of the Digital Economy?

Lucia Bonova, Head of Unit-Digital Platforms at DG Competition, European Commission, together with Berkeley Professor Prasad Krishnamurthy and Freshfields antitrust partner Jenn Mellott, who has worked extensively with clients on transactions and other matters being regulated by Lucia, addressed the statutory regime that Lucia oversees – the Digital Markets Act (DMA) – and other elements of European competition regulations.

Topics they covered included:

• How the DMA came into existence and its role relative to other European competition regulatory regimes
• The focus of the DMA’s enforcement team on the largest companies that act as “gatekeepers” to the digital economy
• The interplay between the DMA and the regulatory regimes outside Europe
• How enforcement of the DMA works
• How the DMA team distinguishes between acceptable and unlawful “self-preferencing” by internet companies
• Different perspectives on the rate of enforcement proceedings brought under the DMA
• How Article 22 of the EU Merger Regulation has evolved to change the landscape relating to which transactions are reviewed by the European Commission
• How companies have been adapting recently to the evolving requirements of the DMA and the European Commission

US SEC Associate Director Discusses Approach to Comments on Current Rule Proposals 

The final session featured Ted Yu, Associate Director of the SEC’s Division of Corporation Finance. Ted official area of focus is “Specialized Policy and Disclosure,” and he is responsible for much of the SEC staff’s work on rulemaking, ranging from the universal proxy rules to amendments to the rules governing Schedule 13D filings.  In addition, Ted plays an important role in overseeing M&A related matters at the Division of Corporation Finance, especially while the position of head of the Office of M&A remains vacant. The always insightful Professor Frank Partnoy moderated the discussion.

Ted shared:

• How the rulemaking process takes into account comments on proposed rules. He emphasized that the staff values comments not only to aid with the technical elements of the proposed rule, but, more fundamentally, to determine if there even is a problem in the market that needs to be solved by rulemaking. Ted explained that the Staff particularly values comment letters that convey data, specific experiences, and alternative approaches. In addition, he confirmed the staff’s openness to hosting in-person meetings as a follow-up to the submission of written comment letters.
   
• The staff’s commitment to a balanced approach to the reform of the rules governing Schedule 13D: 
  
  • He explained that he believes the proposed shift from 10 calendar days to 5 calendar days for the initial filing reflects this balance. He noted that this will be the first change to this timing since the passage of the Williams Act in 1968 and that the change is not intended to, and will not, suppress shareholder activism.
     
  • Ted then explained the proposed changes to the definition of beneficial ownership for Schedules 13D and 13G to include certain cash-settled non-swap derivative securities and how the roots for these changes go back the staff’s interpretive guidance in 2011 on how and when swaps may be included in the beneficial ownership calculation. 
     
  • Ted then discussed clarifications to when two or more persons have formed a "group" that would be subject to beneficial ownership reporting obligations. Ted argued that in the past, practitioners and courts may have overemphasized the need for there to be an actual agreement as a condition to there being a group. While an agreement is a factor in the analysis, Ted argued that this “agreement requirement” can be evaded too easily for it to be a necessary condition precedent to the existence of a group. He argued for an approach where the necessary predicate for a group to be “acting in concert” may be satisfied by acts that merely indicate an understanding between parties to achieve a common goal. Ted further underscored that this clarification to the "group" analysis is not intended to, and should not, chill shareholder engagement or shareholder communication – the vast majority of which would not constitute “acting in concert.” 
     
• Ted then reviewed the first several months of the SEC’s new universal proxy rules. Ted observed that the data to date indicates that the fears of rampant proxy contests and the election of unqualified directors, as voiced about this rule by some in the corporate community, have turned out to be unfounded. In addition, he cautioned against overly restrictive advance notice bylaws in response to the universal proxy rules. He noted that, while the SEC generally defers to a company's bylaws, restrictive bylaws that require more information than necessary to determine whether a nominee is qualified and independent and that are otherwise disproportionate in their demands may be problematic from the perspectives of both state and federal regimes.