Thank you to the in-person attendees who packed the “sold-out” ballroom and the hundreds who joined virtually at 10th 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 takeaways, along with a link to video highlights.
Learning from 10 Years of Agendas
Ethan Klingsberg, who has hosted this conference since its inception ten years ago and has been a leader of Freshfields US corporate and M&A practices for the last five years, shared insights from a review of the agendas for this event over the last decade.
He observed how the agendas reflect the value we place on both the “process” strain of our practice – characterized by volume, reliance on precedent structures and documents, and standardization – and the “solution” strain of our practice – characterized by modification, deviation and evolution of tactics, structures, and strategies.
He then reviewed how these two strains have interplayed over the years in key areas:
1. Delaware Corporate Law and Courts
Over the last decade, the Delaware courts have engaged in effective, “solution”-oriented activity by adopting relatively easily understandable doctrines:
- MFW (providing a safe harbor for conflict transactions so that dismissal on the pleadings would be available)
- Corwin (providing for cleansing of a broad spectrum of M&A fiduciary duty alleged missteps if there is a fully informed approval of the merger by the disinterested shareholders)
- Trulia (leading the charge to eviscerate the market for plaintiffs’ lawyers to recover for disclosure-oriented, non-monetary settlements to merger suits)
Thanks to these doctrines, we entered a phase where plaintiffs’ challenges to mergers waned, and players pivoted to “process” mode.
More recently, the Delaware courts have been dealing with allegations that corporate gatekeepers have “pushed the envelope” at least from an optics perspective and have issued a number of decisions that some market actors have claimed will result in inefficiencies and disrupt elements of the “process” playbook. At the same time, proposed amendments to the DGCL will likely go into effect this August, and constructive public debate and appeals for Delaware Supreme Court review are ongoing.
2. Shareholder Landscape
In past years, this conference has featured heated discussions about:
- how best to do battle with activists;
- how to balance ESG and anti-ESG; and
- how to navigate ISS, Glass Lewis, sustainability rating and auditing agencies, and all the different types of institutional investors from actively managed funds to passive strategy funds.
It seemed like, just when the framework for Delaware fiduciary duties had become highly rationalized and easier to comply with, the shareholder landscape had become a minefield. This year, none of these shareholder landscape issues are on the agenda. Why?
- Although there are still activists regularly writing nasty letters to boards and threatening proxy contests, the overwhelming number of actual and threatened activist campaigns back ideas and directions that boards are already in the process of embracing and therefore end with quick settlements.
- Boards are increasingly finding a workable balance between the competing concerns of impact investors vs. anti-woke investors.
- Boards have largely made peace with which guidelines and recommendations from ISS, Glass Lewis, and institutional investors matter and which are okay to ignore.
In short, we have evolved into a realm where standardized approaches to managing shareholders is now on the rise, and the sense of the shareholder landscape as an area where chaos may break out at any minute is way down.
3. Antitrust and Foreign Investment Regulatory
Two and three years ago, fear and paranoia about this topic hung over this forum. Now, strategies have evolved for managing these anxieties and uncertainties, including:
- Largely doing away with timing agreements;
- Complying with second requests at record speed;
- Fixing it first and litigating the fix;
- Making litigation against the antitrust agencies in the US something that is not intimidating for merger parties;
- Understanding the ways to cut creative and acceptable remedy deals with regulators outside the US;
- Understanding with more precision the often significantly different thinking and vulnerabilities of the CMA, the EC, and DOJ/FTC and;
- Using creative methods in definitive agreements to compensate targets for a buyer’s antitrust risks.
Indeed, antitrust regulators, especially in the US, appear to have been overly ambitious, and now practitioners have come up with solutions to turn the trajectory back to “process” on antitrust.
4. Acquisition Financing
The syndicated bank loan market for acquisition financing reached a level of efficient “process” in 2021, but by the end of 2022 we had some very significant “hung” acquisition financing debt and regulatory impediments to bank lending. The “solution” players responded by evolving an amazing private credit/direct loan market for acquisition financing. It took a while to hone aspects of this direct lending market, but this private credit market has now become nimble and is fueling a lot of M&A.
5. Globalism/Multi-jurisdictionalism
The large migration to the US capital markets of companies organized under non-US laws or with principal operations or HQs outside the US has led to tensions about whether to structure transactions US-style (and if we are doing US-style, is it the Silicon Valley-way or the NY-way?), UK-style, or European-style. These types of tensions can get in the way of process and standardization. Ethan’s take, from the vantage point of a law firm that is equally strong across the globe – in the Bay Area, NY, DC, London, Asia, Western Europe, and the Middle East – was that there are two trends that are resolving this tension:
- Convergence – the differences between the approaches of different jurisdictions to transactions are getting smaller faster; and
- Indifference – the core group of global dealmaking professionals is increasingly familiar with, tolerant of, and agile in implementing any of the different approaches associated with different geographies, including hybrid approaches.
6. Data
Ethan concluded by declaring that data is the one element that has driven the most M&A and strategic direction shifts in all sectors (not just tech) over the last decade, and that, if we don’t solve the security challenges that data faces, then many of these strategic directions will be at risk of becoming dead ends.
Keynote Address by EC Director-General Olivier Guersent, DG Competition
Director-General Olivier Guersent provided the M&A community with insights into the European Commission’s priorities for and approaches to merger control.
Director-General Guersent argued that, despite the buzz about novel theories of harm, the majority of the EC’s interventions have been and will continue to be based on traditional horizontal theories that are not bespoke to the tech sector.
However, he was clear that the novel non-horizontal theories of harm are here to stay. He emphasized that the EC remains focused on preventing “killer acquisitions” (i.e., where the target has only the potential to turn into a competitive threat to the acquiror). In addition, he discussed how the EC would be closely investigating transactions that could be used either to expand a company’s ecosystem as a way of marginalizing rivals or to protect an existing market position by reinforcing an ecosystem as a whole. He concluded that parties to transactions with an ecosystem element will therefore need to be ready for the EC to consider potential impacts on competition both inside and outside traditional product markets.
Director-General Guersent then sought to rebut the narrative that tech platforms will be blocked from any sizeable acquisitions, pointing to recent unconditional clearances for Amazon’s acquisition of AGM and Google’s acquisition of Photomath. He explained how the EC determined that acquisitions by big tech of these targets would not impact competition.
In contrast to the narrative from other antitrust authorities, in particular in the US, Guersent explicitly stated that the EC is very much open to remedies and settlements, including in tech acquisitions and pointed to cases such as Meta/Kustomer and Google/Fitbit, which were both cleared with commitments. However, he did warn parties that there are deals where remedies are not sufficient to remedy competition concerns, such as Booking/eTraveli where he explained that the EC concluded that the transaction would entrench Booking’s dominant position in its core market (hotel bookings) by strengthening its position in a neighboring market (flight bookings).
Fireside Chat with FTC Director Henry Liu
Henry Liu, Director of the Bureau of Competition at the FTC, discussed with Freshfields partner and former DOJ Antitrust Division lead trial counsel, Julie Elmer, the FTC’s current priorities.
He started off by emphasizing that the FTC is seeking to be forward-looking with a focus on the future evolution of technology and business practices, as opposed to limiting its vision only to how markets exist today. He explained further the FTC’s focus on the root causes of market inefficiencies.
He then focused on two topics:
- the new merger guidelines; and
- the proposed changes to the HSR form and process.
Director Liu explained that he did not see the new merger guidelines as a step change in the way that the agencies are approaching deals, but instead a reflection of how the agencies have been assessing deals for some time. He highlighted the agency’s increasing focus on non-price factors of competition as well as what he described as a more “common sense” approach to market definition. Liu was clear that the FTC would scrutinize the closeness of competition rather than the more structured approach under traditional market definitions.
In response to questions about the proposed changes to the HSR forms and process, Liu conveyed that the FTC has taken a significant amount to time to digest the large number of comments received and that he expects the publication of a final proposal in a matter of “weeks, not months.”
Director Liu noted an uptick in collaboration between government agencies under the Biden administration and referenced in particular collaboration of the FTC with the Department of Labor. On the topic of labor, Liu highlighted the benefits that he sees arising from the FTC’s proposed ban on non-competes, which has since been announced (see Freshfields’ blog on the ban here).
In contrast to Director-General Guersent earlier in the afternoon, Director Liu explained that the FTC is presumptively skeptical of remedies, concluding that the “the agency is not in the business of fixing deals.”
The Impact of Antitrust on M&A – Discussion among Salesforce, Google, and the Former Senior Director of Mergers at the UK CMA
Moderated by Freshfields antitrust partner Jenn Mellott and featuring Salesforce’s David Altschuler, Google’s Kevin Yingling, and Freshfields partner and until very recently Senior Director of Mergers at the UK CMA, Colin Raftery, the panel critiqued the refreshed US merger guidelines, the proposed new HSR form, the EC’s Article 22 referrals and Illumina/Grail, and shifts in antitrust agencies’ approaches to remedies.
David explained that, while the core of the US agencies’ approach to investigating mergers remains similar to the pre-Biden era, he sees two principal areas of departure: vertical mergers and “potential” competition/entry.
The panelists agreed that the guidelines demonstrate an increasing level of skepticism of vertical mergers and, given the emphasis on preventing “killer acquisitions,” show that the agencies are increasingly willing to take a view on the future of a company for the purpose of their competitive assessment. Colin added that the UK had likewise refreshed its own guidelines in 2021 to similarly focus on vertical enforcement and killer acquisitions.
The panel discussed reforms to the HSR form and whether changes would really create efficiencies on either side. The panelists explained how merger parties will have to meet the demands of a significant increase in the volume of document production, as well as provide narrative responses, while the agencies will remain capacity constrained to review this amount of information in a 30-day period. The panel concluded that the proposed changes may create a form that is more effective at identifying anticompetitive concerns, but that they doubted that the new form would create any efficiencies. The panel noted that the costs of the proposed changes will likely be disproportionately felt by the transactions that do not merit close scrutiny.
Colin then led a discussion of how there are lessons that the US agencies will be able to draw from the UK CMA when they are working to reconcile a new, more burdensome notification process with the objective of keeping timelines from growing too long.
Colin then addressed the sense in the market that the CMA is committed to positioning itself as a leading antitrust authority. Colin was clear that the CMA is definitely willing to be “the last man standing” after the EC and US agencies have approved a transaction and to use its very broad powers to block transactions and permit closings subject to hold separate requirements while investigations continue post-closing for months.
The panel discussed the uncertainty caused by Article 22 referrals to the EC and Illumina/Grail. The overall consensus was that most transactions involving tech, data, AI, or life sciences are simply not going to pass under the radar even if the turnover in Europe is relatively low.
The panel then discussed the nuances and recent success of resorting to “fix it first” and “litigating the fix” in response to the opposition of the US agencies to remedies, settlements and consent decrees.
Fireside Chat with The Honorable Collins J. Seitz, Jr., Chief Justice, Delaware Supreme Court
The Honorable Collins J. Seitz, Chief Justice of the Delaware Supreme Court, facilitated by questions from Freshfields’ Co-Head of Securities and Shareholder Litigation Mary Eaton and Berkeley Law Professor Adam Badawi, provided useful guidance and insights in view of recent developments in the Delaware courts.
Chief Justice Seitz elaborated on the Supreme Court’s recent decision in In re Match Group, Inc. Derivative Litigation to refrain from carving out a type of “conflict” transaction that would be per se exempt from entire fairness review in the absence of adherence to the procedural safeguards specified in Kahn v. M&F Worldwide Corp. The Chief Justice provided a useful history of entire fairness, explained why being subject to entire fairness is not a death sentence, and alluded to the numerous trials where defendants have prevailed even though entire fairness applied and the safe harbor of MFW was not available. In addition, he discussed how defendants can prevail in the face of derivative suits involving alleged conflicts and related party transactions.
The Chief Justice then addressed the recent criticism in the media of Delaware law and courts. This criticism has stemmed from much-discussed decisions involving Elon Musk’s compensation package, Ken Moelis’ shareholder agreements, the controlling shareholder obligations of Eddie Lampert, and technical aspects of process at Activision to approve its merger agreement with Microsoft. The Chief Justice stressed, as a general matter, that, by definition, someone will always be unhappy with the results of every decision by the courts and that constructive recalibration by the Delaware legislature is often on the horizon. He stressed that the Delaware court system has always prided itself on making decisions that strictly follow the DGCL and that this approach, rather than being responsive to “which way the wind is blowing,” is ultimately the foundation for credibility and the success of Delaware corporate law and courts.
In response to a note about the proposals by companies to move their jurisdiction of organization from Delaware to Texas or Nevada, he noted that Delaware has maintained its dominance as the center of corporate law for a century, and that not only other states, but numerous other countries, including Israel, Taiwan, and Egypt, look to Delaware statutes and case law for guidance.
Mary then turned the conversation to the Delaware Supreme Court’s recent decision in City of Dearborn Police and Fire Revised Retirement System, et al. v. Brookfield Asset Management Inc. in which the Court reversed Chancery’s dismissal of a lawsuit challenging a squeeze-out merger by Brookfield. Chief Justice Seitz explained the seriousness of any decision to overturn the Delaware Court of Chancery, and how, in Brookfield, the Court felt that the alleged conflicts at issue were so stark that it was necessary to do so. He warned those advising boards who were in the audience, including in-house and outside counsel, to consider their personal conflicts closely and disclose them up front to the board.
The Future of LBOs – Discussion Among Blackstone, TPG, Sixth Street, and Morgan Stanley
Blackstone’s Natasha Gopaul, TPG Growth’s Michael Guo, Sixth Street’s Joshua Peck and Morgan Stanley’s Mike Wyatt took the stage for a discussion about the future of LBOs moderated by Freshfields partner Ethan Klingsberg.
Ethan opened the panel by reflecting on the preceding discussion with the Chief Justice about the responsibilities of gatekeepers to ensure best practices in M&A processes and the scrutiny that applies when the courts believe there may be a conflict. He noted that, during waves of private equity buyouts, the Delaware courts typically increase their skepticism about the integrity of sale processes and plaintiffs’ lawyers increase their aggressiveness in attempting to poke holes in such process.
Natasha responded by acknowledging that, despite some recent cases finding flaws in LBO sale processes, there has not been a seismic shift in case law. She explained that recent cases serve as a good reminder of the importance of process. She stressed the need for care in managing interactions between private equity professionals and a target’s management team and the benefits that arise from early involvement by external and inhouse counsel. She and Mike Guo then reflected on their experiences successfully balancing the rules of the road with the premium that private equity places on being nimble and developing trusted relationships with executives of the companies they are targeting for acquisition.
Mike Wyatt, as a banker overseeing numerous sales of publicly listed targets to private equity in the last couple of years, then addressed the risk that senior executives become too attached to a specific private equity bidder and how he manages this risk while still permitting private equity to engage with executives in a manner that will generate as high a bid as possible for the benefit of all shareholders. He explained his approach of proactively ensuring transparency with the target’s advisory team about what communications are occurring with executives and the substance thereof, while always making sure that the board or board committee to which he is reporting is regularly and fully engaged and informed. He noted the opportunity for executives to become tempted by individual compensation packages and emphasized the need for ongoing dialogue with advisors to navigate these moments of pressure effectively.
Ethan then steered the conversation to the evolution of direct lending. Josh discussed the evolving landscape and explained how and why we are experiencing a trend toward larger commitments by the private credit market to finance LBOs. He conveyed that today, with two or three direct lenders, a leveraged acquiror can now get to a billion plus in commitments. Josh explained the lending processes by private credit in some recent, sizeable LBOs of public companies, such as Coupa and Maxar, and how that process has evolved over the last year.
In response to Ethan’s questions about the future of federal regulation of private credit, including pending proposals by the US Financial Stability Oversight Council, Josh explained how private credit is already regulated and how the differences between the characteristics of private credit and traditional banking merit different approaches to regulation. He focused in particular on the following characteristics: capital base, leverage, cross-collateralization and systemic risk. He argued that the characteristics of private credit, including its long-dated liabilities, lack of cross-collateralization and isolated structure, make it inappropriate to regulate private credit in the same manner as banks. Josh underscored the complexity of regulating private credit and suggested that any regulatory changes would need to consider the unique characteristics and risk profiles of these markets, rather than apply blanket regulations akin to those governing traditional banking institutions.
Mike Wyatt reflected on the resilience of the private credit and direct lending market over the past four years, particularly amid the disruptions caused by the COVID-19 pandemic. He noted that private credit filled a crucial void when traditional syndicated loan markets dried up, providing liquidity and enabling take-privates to occur even during challenging times. He noted that, as a target company advisor, he wants sponsor bidders to have access to the best credit terms possible so they can put the best price on the table. He emphasized the value of having multiple high-functioning debt markets to facilitate optimal terms for sponsors and ensure competitive proposals.
Ethan then shifted the conversation toward the equity side, noting the influx of capital from family offices and sovereign wealth funds, many of which are now seeking more active roles in deals rather than remaining passive co-investors. Mike Guo discussed the ramifications of this significant shift over the past five years, where co-investment opportunities have transitioned from being a "nice to have" to a "must have" for LPs, as well as the more active role in governance that LPs want to have. He explained that LPs are increasingly interested in co-investing alongside trusted GPs, driven by economic incentives and a desire to build out direct investment arms.
Ethan asked about potential tensions arising from co-investment arrangements, particularly regarding governance and deal execution risks under regulations such as CFIUS. Mike Guo distinguished between passive co-investments, where LPs lack governance rights, and co-underwriting, where LPs conduct their own due diligence and underwrite. He acknowledged the tension between providing LPs with the governance rights they deserve while ensuring deal funding and closing certainty. Mike Guo also highlighted the complexities associated with CFIUS considerations, especially when dealing with sovereign wealth funds and their potential impact on closing certainty. He noted, however, that a lot of large LPs are becoming sophisticated in navigating these concerns.
Natasha elaborated on Mike Guo’s sentiments to emphasize the sophistication of LPs engaged in co-underwriting and their awareness of regulatory implications, including regimes outside the United States, such as Australia where filings have become a more protracted process. She stressed the importance of transparent dialogues with LPs and counterparties to acknowledge that what may be feasible in one deal might not be in another due to evolving regulatory landscapes. Natasha also highlighted the increasing complexity and burdens associated with addressing regulatory filings and highlighted the need for alignment and collaboration among all parties involved in the deal-making process.
Ethan then directed the conversation to Mike Wyatt to discuss the dynamics of building out competitive “consortium investment stacks” in larger transactions. Mike Wyatt explained that, while smaller transactions can typically be handled by a single party or with the support of an individual fund's equity backstop, larger deals, especially those in the range of $5-10 billion, require multiple parties to join together. He noted that five or more years ago it was a little easier to do free agent matchmaking with LPs, but now there is a preference by LPs to co-underwrite, conduct their own due diligence and select their own partners. This change has led to challenges in matchmaking and maximizing competition as LPs come to the table with inflexible views on the GPs with which they are willing to partner. The so-called “free agent pool” to round out consortia has become much more difficult to coordinate. Despite this friction, Mike Wyatt observed that groups interested in deals have become more prepared to move quickly, join consortia efficiently, and reach signing in record time.
Ethan then highlighted what he described as what may be the most important variable in private equity today – the rise of secondary market solutions, especially NAV loans to funds, where the fund itself takes on debt lent against its entire portfolio, and other means for LPs to receive some liquidity while sales of portfolio companies remain stalled. Mike Guo responded by pondering whether NAV loans have become a four-letter word. He reviewed the growing controversies around the use of NAV loans and allegations that they can distort performance metrics and the concerns that LPs have about their impact on reporting and actual fund performance.
Josh reviewed the evolving considerations relating to demand for private credit to make debt commitments to support M&A transactions with outside dates as long as 18 or even 24 months.
Natasha addressed antitrust considerations that private equity is facing. The panel discussed the fall-out from:
- recent sale processes where the targets ended up going with the second highest bidders because the highest bidders were private equity funds with antitrust risks arising from the tendency by private equity to invest repeatedly in the same or adjacent sub-sectors;
- recent “second requests” by the DOJ/FTC that included specific requests for documents of not just the private equity fund buyer but also many of the GP’s portfolio companies, even though they were owned by different funds of the GP than the fund that was the buyer;
- the FTC’s bringing suit against Welsh Carson and its portfolio company for rolling up local anesthesiology practices; and
- the DOJ’s scrutiny of competitors for antitrust violations arising from having overlapping board members, which can happen when private equity invests in the same industry.
Insights on Cybersecurity
Freshfields partner Beth George (former acting General Counsel of the Department of Defense) moderated a panel with Spencer Fisher (Department of Homeland Security, Cybersecurity and Infrastructure Security Agency), Sean Newell (DOJ, Chief of the National Security and Cybersecurity Section), and Jorge Tenreiro (SEC’s Cypto Asset and Cyber Unit).
The conversation kicked off with a discussion about cybersecurity risks facing the United States. Sean explained the entirely new level of sophistication that cyberattackers have developed, and potential risks posed to US companies that are unable to maintain sufficient levels of preparedness to effectively anticipate and respond to such attacks.
The panel discussed how M&A can make companies vulnerable to cyberattacks as a result of weaknesses at the target company and the pressure for systems to be decrypted and otherwise compromised to facilitate integration. Cyberattackers take advantage of the transition period that M&A integration presents.
The panelists then discussed the fact that the threat of cyberattack comes from not only individual criminal actors, but also nation-states. Cybercriminals have developed a synthesized ecosystem of “ransomware-as-a-service,” in which they pool diverse expertise to launch intricate attacks against US companies. Nation-states find cyberattacks can be a low-cost way to advance their regime goals. Partly as a result of this phenomenon, preventing cyberattacks is not only essential to protect US information systems, but key to maintaining the physical security of US critical infrastructure. Cyberattacks have also posed threats to US democracy in more abstract ways; for example, in 2020, Iran attempted to disrupt the presidential election through cybersecurity breaches. Partly because both individual cybercriminals and nation-state cyberattackers usually operate from safe havens that US justice systems can’t reach, the traditional law enforcement model does not translate well to cybersecurity. Instead, rather than building a case over a long time that eventually goes to court and/or trial, the DOJ has pivoted to attempting to “disrupt” cyberattacks by anticipating them and buying time to dismantle the hackers’ operations, a more preemptive model than traditional prosecution.
Finally, the panel addressed the intersection of cybersecurity and public company disclosure requirements relating to cyber risk, through a case study of a hack of a company called Solarwinds. Beth described Solarwinds as an “exquisite hack” because of how Russia managed to target the US government through a cyberattack on a cybersecurity company, manipulating source code in a software update in order to target the users of the software, including several government agencies. Spencer discussed the steps the DOJ has taken in light of Solarwinds to improve its ability to protect US critical infrastructure from cyberattacks on US companies with access to government infrastructure.
As a result of the attack, the SEC charged not only the company itself but also its Chief Information Security Officer with fraud and internal controls failure. The panel discussed how the SEC’s case against and the SEC’s new rule requiring public companies to disclose cybersecurity breaches within a matter of days significantly increases exposure for public companies for disclosure violations on top of any liability that results from the underlying security breach. Jorge highlighted that the new rule reflects the view that information about cyber risks is material to investors.
The panel closed with a very helpful discussion of practical steps that CISOs can take to avoid liability for cybersecurity breaches and related disclosure obligations. These takeaways included steps relating to internal education and engagement within one’s company, as well as monitoring and internal implementation of proper systems and disciplinary actions for non-compliance.
Book Talk – The Everything War: Amazon’s Ruthless Quest to Own the World and Remake Corporate Power
Dana Mattioli, Author & Pulitzer Prize Finalist and Wall Street Journal reporter, and Diana Henriques, Pulitzer Prize Finalist and New York Times reporter, wrapped up the day with a discussion of Mattioli’s new book about Amazon. Dana and Diana discussed the current case by the FTC against Amazon and how it relies on allegations of traditional theories of harm. Dana expounded on her view that this FTC action is too little, too late. She explained the bases for her position that, even if the courts ultimately order the break-up of Amazon, the bulk of the harm to competition, consumers, competitors, and the economy has already occurred and is no longer remediable.
