January 2016 ▪ Volume 20 ▪ Issue 1

THE FORCE AWAKENS: A were signs of choppiness. The Dow plunged RESURGENCE OF M&A IN in September and the IPO markets have been

LAWYER slow to gather steam, with very few successful 2015 IPOs in the fourth quarter. We hate to say it, but the current exuberant pace of M&A deals By Frank Aquila and Melissa Sawyer may not be sustainable unless the capital Frank Aquila and Melissa Sawyer are markets can continue to deliver new, up and partners in the Mergers & Acquisitions Group of Sullivan & Cromwell LLP. The coming companies into the mix of potential views and opinions expressed in this article buyers and targets. Meanwhile, the Fed’s de- are those of the authors and do not necessar- cision to raise interest rates will also surely ily represent those of Sullivan & Cromwell LLP or its clients. have an impact on the M&A environment as Contact: [email protected] or well. [email protected]. After close to a decade of anemic M&A, Best of Enemies: Activism 2015 was “the big year” that dealmakers have Developments been expecting for the last several years. Sig- Activism was somewhat old news in 2015 nicant deals took place across a wide range because activism has largely matured into be- The M&A of sectors and geographies. Dealmaking in ing the “new normal.” The level of engage- health care and life sciences continued to be ment between issuers, activists and institu- very active, but we also saw a lot of deals in tional investors has risen to dizzying heights, consumer and retail (Kraft/Heinz, AB InBev/ with all the attendant professionalization of SABMiller), media (Cablevision/Altice, Charter/Time Warner) and chemicals (Dow/ DuPont, Cytec/Solvay), to name a few IN THIS ISSUE: industries. Many of the deals were huge. The Force Awakens: A Resurgence of Before the ball dropped in Times Square, we M&A in 2015 1 saw more than 50 deals that exceeded $10 Solving the Valuation Puzzle in Life Sciences Transactions: The Pros and billion. Cons of the CVR 4 Rural Metro Goes to Dover: Delaware Notably, almost all of 2015’s big deals Supreme Court Arms 7 involved only strategic buyers. Industrial A Return To Evanston: FTC Revisits acquirors, rather than nancial sponsors, led Old Ground In Yet Another Hospital Merger Challenge 11 the surge in M&A activity. With acquisition From the Editor 13 leverage still essentially capped at six times EBITDA, sponsors are nding it hard to com- pete with the frothy synergy-driven pricing of- fered by strategic bidders. Some strategic buy- ers are also borrowing sponsor strategies by levering up their deals or nancing them with equity oerings. In fact, 2015 saw an increas- ing number of in-bound acquisitions by Euro- pean buyers nanced with rights oerings.

Even amidst this strong M&A market, there

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the eld that one would expect in the form of investor Setting aside the excitement around Pep Boys and relations advisors of various stripes. Hiring share- DuPont, many companies have already adapted to the holder engagement professionals is even more neces- activist playbook and are even defensively initiating sary given the dispersion of decision-making from ISS internal discussions about issues like capital alloca- to a large swathe of in-house governance tion strategies and board refreshment before an activ- professionals. The largest institutions now have re- ist appears. For that reason, some short-term activists may be nding it hard to identify “easy” targets for sources to perform a lot of independent analytics, rely- leveraged recap or M&A strategies. Instead, more ing less on ISS and other intermediaries to guide their activists may be nding themselves actually govern- voting decisions. Pension funds are also doing more ing operations over the longer term. We anticipate that direct investing, channeling fewer investments more patient operators like Starboard Value will through hedge funds and PE funds and pulling back continue to rise to the top of the heap in the activist from having to pay management fees and carry to landscape. Perhaps this trend will help to quell the ac- third-party money managers. ademic debate about the public policy implications of short-termism in activist investing. Of course, there were a few exciting moments on the activism front in 2015, like when DuPont defeated Spotlight: Pressure on Private Equity Nelson Peltz in a hard-fought proxy battle. But Du- Private equity funds continue to feel the heat on a Pont’s victory was bittersweet in a sense, since it was number of fronts. They have been subjected to en- followed in a matter of months by the resignation of forcement actions related to charging back monitoring DuPont’s CEO and, a few months later, by an agree- fees and broken deal costs to their limited partners. ment to sell the whole company to Dow. More re- There have been a number of changes adopted, and cently, Carl Icahn’s pledge to top any counteroer even more proposed, to limit the upside for fund from Bridgestone to acquire Pep Boys, up to $1 bil- managers in the form of carried interest. More strik- lion, set a oor on the price of the company, and set ingly in the pure M&A context, we see very few large the stage for a dramatic and very public end to the bid- leveraged buy-outs of public companies these days. ding war for Pep Boys. No doubt the economics of those deals simply are not

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2 K 2016 Thomson Reuters The M&A Lawyer January 2016 | Volume 20 | Issue 1 that attractive at the moment due to leverage limits, incremental and will not immediately accelerate among other things, but the omnipresent specter of change-in-control dynamics. club deal litigation and “entire fairness” review certainly acts as an additional deterrent. Trainwreck: The Regulatory Environment for M&A Inside Out: Proxy Access Developments Regulatory approvals continued to be a sticking It is no surprise that 2015 proved to be the year of point for many large transactions, as evidenced by the proxy access proposals. The SEC made clear early in government blocking the Staples/Oce Depot deal the year that it would take a hands-o approach when and the GE/Electrolux deal. In a sense, the blockage it comes to proxy access proposals. This approach is of announced deals is a worst-case scenario for M&A allowing proxy access to ourish through private ac- practitioners that tests all of their plans to deal with tion after the SEC’s proposed proxy access rule, Rule the unpredictable. If the transaction agreements work 14a-11, failed to get lift-o. Specically, the SEC as they should, the parties can walk away and move initially indicated that it was reviewing issuers’ eorts on to other things without a protracted dispute. Be- to exclude proxy access proposals on the basis that cause the recent large transactions that got blocked they conict with management proposals. In a follow- ended with a zzle, with the agreements working as up, the SEC conrmed that issuers can only exclude a expected, the market absorbed the news relatively shareholder proposal on the basis that it conicts with quickly and the parties were able to move on with life. a management proposal if shareholders could not rea- Many deals never rise to that level, however, and sonably vote on both proposals. In practice, when ap- simply collapse under the weight of antitrust or other plied to proxy access, for example, there are very few, regulatory complexity. Rarely an issue in private if any, proxy access proposals that could ever be equity buy-outs, antitrust approvals can be the death excluded on the basis that they are conicting. of many large strategic combinations. The uncertainty these approvals can generate will probably only get Since issuers cannot readily exclude proxy access worse in 2016 since it is an election year in the U.S., proposals, the New York State Comptroller and regu- and to some degree this may quell the current M&A lar proponents like James McRitchie and John Chev- fervor amongst strategics. edden, among others, have started sending proposals to issuers of all dierent sizes and industries. Those Appropriate Behavior: Developments in issuers are now wrestling with whether to adopt their Delaware Law own competing proposal before they mail their proxy Delaware gave a little and took a little this year, so statement, to take two alternative proposals to a vote to speak. On the one hand, it became very clear that or just to take the shareholder proposal to a vote. exclusive forum bylaws would be enforceable in Del- Of particular relevance to M&A, most issuers who aware so that companies could avoid the expense of implement their own competing proposals appear to multi-forum shareholder litigation. On the other hand, be adopting bylaws that do not allow proxy access however, Delaware has also eectively scuttled the nominations if the issuer is also simultaneously the ability to get an intergalactic release of “any and all subject of a proxy contest or short-slate contest with claims” in exchange for a disclosure-only settlement, an activist or hostile acquiror. Accordingly, while the leaving buyers with a question mark as to whether a move towards proxy access will undoubtedly have an plainti could have a successful damages suit post- impact on corporate governance over the longer term, closing. The eective chilling of disclosure-only we expect the impact will be relatively slow and settlements, coupled with the fact that Delaware also

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bolstered companies’ ability to fend o eorts to SOLVING THE VALUATION enjoin M&A deals if the shareholder vote was fully PUZZLE IN LIFE SCIENCES informed, is likely to result in even more lengthy proxy statements. At some point, perhaps the courts TRANSACTIONS: THE PROS will have occasion to consider whether 200-page-long AND CONS OF THE CVR disclosure documents are of value to anybody other By David Shine and Samuel Waxman than the vendors who print and mail them. David Shine is chair of the New York Mergers and Happily for buyers, Delaware has tamped down a Acquisitions practice at Paul Hastings LLP and Sam- uel Waxman is a partner in Paul Hastings’ M&A and little bit on appraisal arbitrage in two respects. First, Technology Transactions groups. Delaware amended its appraisal legislation to allow Contact: [email protected] or [email protected]. companies to pay the undisputed portion of appraisal claims (the merger consideration amount) up front so Earnout provisions of all stripes have long popu- lated the private company M&A landscape. But the that Delaware’s statutory interest only applies to the public company equivalent, contingent value rights disputed portion of the claim. Second, in a couple of (CVRs), has been a much rarer bird. Over the past ve recent cases, the Chancery Court has found that the years, in the thousands of announced public company appraised value is actually the same or less than the M&A transactions, CVRs were a component of the merger consideration amount, reinforcing that seeking transaction consideration in fewer than 1%. In 2015, appraisal is not always a win-win proposition. only ve public company transactions included a CVR and in 2014, there were only nine. Though rare, CVRs Joy: What to Expect in 2016 are, however, far from extinct and can be a powerful We think that while M&A activity will inevitably tool for bridging valuation gaps in public company slow down a little in 2016, we will continue to see a M&A transactions. steady stream of high prole, public company deals. CVRs come in two basic varieties: price-protection Specically, we predict there will be more M&A CVRs and events (or milestone)-triggered CVRs. activity involving tech companies, especially as more Price-protection CVRs promise target shareholders of the recent “unicorns” try to cash in on their billion- additional consideration if the acquirer securities fail dollar valuations. We also expect there will be contin- to meet certain trading price thresholds over time and ued activity among pharmaceutical companies. Al- are typically used where the acquirer’s securities are a though regulators have started to shine a brighter key component of the transaction consideration. spotlight on drug pricing and inversions, there are still Events-triggered CVRs, which are much more typi- a lot of assets in the pharma sector that are poised to cal, promise target shareholders additional consider- trade at high valuations. The big question in our minds ation if, after the transaction closes, certain events is whether we will see any more historic Fortune 100 occur. American corporations go the way of Kraft and Du- Pont in a widening trend of consolidation and Events-triggered CVRs have most frequently ap- restructuring. peared in life science/pharmaceutical (LS/Pharma)

4 K 2016 Thomson Reuters The M&A Lawyer January 2016 | Volume 20 | Issue 1 transactions where targets’ pipeline products are seen CVR Pros to have great potential value but also carry signicant CVRs provide sucient benets to warrant a place uncertainty as to when and whether that value can be at the top of the M&A toolkit in LS/Pharma realized. This uncertainty may arise due to the com- transactions. One of the main benets is exibility. plex nature of the science involved, FDA or non-U.S. The terms of a CVR can be crafted to t a transaction regulatory approval requirements, the strength (or based on the parties’ business expectations and weakness) of patent exclusivity, or the unpredict- desires. Event triggers can include a large variety of ability of future sales or prot margins. And this external events (such as the commencement of initial uncertainty around pipeline products often leads to a patient testing), receipt of regulatory approvals (such valuation gap between the acquirer and the target as FDA or EMA approvals) and meeting of nancial company. Events-triggered CVRs are a way to bridge milestones (which can include not only specic thresh- that gap. olds but also include customized nancial denitions). Some of the other principal benets of CVRs are cer- Shire Plc’s November 2015 announced acquisition tainty, liquidity and rationality. of Dyax Corporation is the most recent example of such a transaction. The Shire CVRs provide Dyax’s Certainty shareholders with the right to receive a cash payment A CVR can help increase certainty in at least two of $4 per share (an approximate premium of 10% of ways: certainty of value and certainty of closing. With the total consideration paid at closing) if, prior to respect to certainty of value, although more art than December 31, 2019, the FDA grants approval to mar- science, using a CVR to ll a valuation gap dependent ket and sell in the United States a specic product in on meeting certain triggers may result in greater preci- the Dyax pipeline. The CVR provides that Shire is sion than trying to attribute current value in highly required to make “Diligent Eorts” to seek and obtain speculative circumstances. This is particularly true in such FDA approval, with “Diligent Eorts” dened as LS/Pharma transactions, where early stage products using such eorts and resources normally used by may be meaningful valuation drivers. With respect to persons of comparable size within the pharmaceutical certainty of closing, using a CVR can eliminate the industry for the development and seeking of regula- need to wait for certain key value events (such as FDA tory approval for a pharmaceutical product having approvals) to take place before a transaction can be similar market potential as the specied product at a consummated. similar stage of its development or product life, taking Liquidity into account all relevant factors including issues of market exclusivity, product prole, other product Cash is king but sometimes paper is prince. When candidates, the launch or sales of a generic or biosimi- an acquirer has limited ability to pay cash, a CVR can lar product, the regulatory environment and the ex- help complete transactions without the dilutive eect pected protability of the applicable product. of issuing stock as part of the consideration. CVRs are, in eect, a nancing mechanism which delays Because events-triggered CVRs are the most com- payment of a portion of the purchase price until the mon, and because they are so well suited to LS/ specied events are achieved. As U.S. interest rates Pharma M&A transactions, this article will focus on begin to rise over the next few years and borrowing the pros and cons of utilizing events-triggered CVRs becomes relatively more expensive, this liquidity in that context. function will likely become of greater relevance. Even

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if the ability of an acquirer to borrow is not an issue, Liability the current utility of cash in the hands of the acquirer As with private company earnouts, CVRs can pres- may be of greater value than the potential long-term ent an acquirer with a litigation risk where CVR trig- cost of a CVR. gers are not met and shareholders are unhappy. Most recently, shareholders of Genzyme have brought Rationality claims against Sano arising from the CVR issued in A target company in an LS/Pharma M&A transac- Sano’s $20 billion acquisition of Genzyme in 2011. tion will almost always need shareholder buy-in to In that transaction, the Sano CVR promised Gen- obtain the necessary level of tenders in a two-step zyme shareholders an additional potential $3.4 billion transaction or the necessary merger vote in a one-step in consideration in the event that Genzyme’s drug transaction. And, if a stock component is also included Lemtrada received certain FDA approvals by March in the consideration, the acquirer may need to hold a 31, 2014. Now, four years after the transaction closed, shareholder vote if it intends to issue shares exceeding Genzyme’s CVR holders have brought a claim against the 19.9% threshold. In both circumstances, the abil- Sano alleging that, in order to avoid the $3.4 billion ity to tell a rational story as to how an early stage prod- payment under the CVR, Sano has failed to exercise “Diligent Eorts,” as required pursuant to the agree- uct was valued can be important. And the use of a ment, to obtain FDA approval for Lemtrada. In sup- CVR, which pays if and only if certain key value port of their claim, the Genzyme CVR holders have events occur, can make that story a more rational one sought to introduce evidence that Sano has been to tell. developing its own competing drug that, if successful, CVR Cons would provide them with the same economic prot without the cost of the $3.4 billion payment under the Most deal professionals in the LS/Pharma M&A CVR. space will attest that CVRs are often considered but not often utilized. The limited historical usage of Mitigating the Cons CVRs is due primarily to two meaningful perceived Although it is not possible to eliminate all the risks risks: complexity and liability. that a CVR may pose to an acquirer, the perfect does not have to be the enemy of the good. There are ways Complexity to structure an events-triggered CVR that may miti- While, as discussed above, exibility may be one gate many of the disadvantages discussed above. of the CVRs primary benets, that exibility may also spawn considerable complexity. CVRs can include First, keep it simple. Employing straightforward events triggers will reduce the complexity of negotia- multiple layers of events triggers and numerous tions and will also reduce the complexity of the neces- customized nancial denitions. In addition, CVRs sary CVR documentation. Straightforward events trig- are sometimes (though not often) SEC registered and gers should also reduce risks of liability. The less exchange traded. The rationale for registering a CVR uncertainty as to triggers, the less fodder will be avail- is that the greater liquidity may provide a value able for creative legal claims by shareholders. The enhancer. However, many acquirers ultimately decide Shire/Dyax CVR discussed above, is a good example that the complexity of the registration, listing and of a CVR that takes this approach. maintenance process is too complicated (and expen- sive) to pursue. Second, keep it nontransferable. Although register-

6 K 2016 Thomson Reuters The M&A Lawyer January 2016 | Volume 20 | Issue 1 ing and listing a CVR may theoretically enhance an article1 about the Delaware Court of Chancery’s value, a CVR which is nontransferable reduces com- March 7, 2014 post-trial decision in In re Rural Metro plexity since it eliminates the time and expense of Corp. Stockholders Litigation.2 The article summa- SEC registration, exchange listing, and reporting rized the Court’s detailed factual ndings and nuanced requirements. A nontransferable CVR may also reduce legal rulings. It also discussed some potential deal- liability risk since such a CVR could then be structured making implications of the decision, the rst of its to not constitute a “security” for federal law purposes. kind, in which a Delaware court held a sell-side If a CVR is not a “security,” claims (if any) that an nancial advisor liable for aiding and abetting its acquirer could be subject to would likely be limited to clients’ breaches of duciary duty. After discussing state law contractual claims and not federal securities the Court of Chancery decision and its lessons for law claims. State law contractual claims often have market participants, the article observed in conclusion restrictions on liability (e.g., no “lost prots” dam- that the Delaware Supreme Court would have the nal ages) as well as limitations on the availability of class word. action status for classes encompassing out-of-state parties. The Supreme Court has now spoken. On November 30, 2015, the Court armed the Court of Chancery in Third, keep it transparent. Clear and full disclosure a meticulous, 105-page opinion. As a result, although about the uncertainty of triggering events and the the Court of Chancery decisions in the case remain uncertainty of valuation is critical in the CVR context. Such disclosure should help substantially reduce li- instructive, the language of the Supreme Court’s 3 ability risks. opinion will become the case’s precedential legacy, giving denitive guidance to market participants, their Fourth, keep it collective. To the extent permissible advisors, and their advisors’ advisors, about how to by law, any actions regarding the enforceability of, or stay out of the stockholder plaintis’ lawyers’ “target claims under, a CVR should require the consent of at zone.”4 least a majority of the CVR holders. If individual ac- tions by CVR holders are not permitted, and if share- Accordingly, after a brief primer of facts for rele- holders knowingly waive their rights to bring such ac- vant context,5 this article highlights some of the key tions and agree to be bound by whatever decisions or points that emerge from the Supreme Court’s Appel- settlements are entered into by the majority, the li- late Decision for all deal-makers, and particularly for ability risk of the CVR may be reduced. sell-side nancial advisors and their counsel.

Background Facts RURAL METRO GOES TO In December 2010, a special committee of the DOVER: DELAWARE SUPREME board of Rural/Metro Corporation was empowered to COURT AFFIRMS explore strategic alternatives, including: (1) continu- ing to operate as a standalone company according to By S. Michael Sirkin the company’s business plan; (2) selling the company; S. Michael Sirkin is a partner at Ross Aronstam & and (3) pursuing a synergistic transaction with a Moritz LLP in Wilmington, Delaware. Before entering 6 private practice, Mr. Sirkin was a law clerk for Vice company called EMS, Rural’s largest competitor. Chancellor J. Travis Laster of the Delaware Court of Shortly thereafter, EMS publicly put itself up for auc- Chancery. Contact: [email protected]. tion, and the Rural special committee scrambled to The April 2014 issue of The M&A Lawyer featured hire a nancial advisor.7

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Following interviews with potential nancial advi- erred in applying Revlon’s enhanced scrutiny to as- sors, the special committee engaged RBC. “[U]nlike sess the conduct of the sell-side directors while they the other rms,” RBC “devoted the bulk of its presen- were supposedly “exploring strategic alternatives,” tation to a sale” as opposed to the broader exploration including but not limited to a sale, long before a cash- of alternatives that the committee was charged with.8 out merger became inevitable.18 RBC pushed for a sale of the company from its pitch because it “hoped to oer staple nancing to the The Supreme Court rejected that argument as a potential buyers,”9 and RBC’s engagement letter matter of fact and law. As a matter of fact, the Court permitted it to do so at the request of Rural’s board or held that the special committee initiated an active bid- special committee.10 But RBC also secretly hoped that ding process seeking to sell the company, and thereby a sell-side engagement with Rural would give it pole triggered Revlon scrutiny, “without genuinely explor- position in the race for a lucrative buy-side nancing ing other strategic alternatives” during the period in 19 role in the pending sale of EMS.11 Although this pros- question. As a matter of law, the Court held that if pect never bore fruit, it created a conict of interest Revlon only applied to the very endpoint of a sale pro- that RBC never disclosed to its client.12 cess as the nancial advisor argued, the law would “aord the [b]oard the benet of a more lenient stan- As the Rural sale process unfolded, RBC redoubled dard of review where the sale process went awry, its eorts to provide staple nancing to bidders for partially due to the [b]oard’s lack of oversight,” and Rural.13 At the same time, RBC manipulated its would therefore “potentially incentivize a board to nancial analyses to make the high bid look more at- avoid active engagement until the very end of a sale tractive from Rural’s perspective. RBC needed the process by delegating the process to a subset of direc- merger to close, both to obtain payment of the “Sale tors, ocers, and/or advisors.”20 Unsurprisingly, the Transaction Fee,” and also to keep alive the possibil- Supreme Court refused to adopt such a rule. ity of buy-side nancing fees.14 RBC never disclosed to its client that it continued to pursue buy-side nanc- As a result, the Appellate Decision makes it more ing fees up until the signing of the merger agreement.15 important going forward for a nancial advisor to understand and document its mandate. The nancial The Appellate Decision advisor’s assignment should be congruent with the By arming the Court of Chancery on appeal, the mandate of its client, whether it be a special commit- Supreme Court preserved the lower court’s two post- tee or the full board. To avoid one of the pitfalls of trial decisions on liability16 and on remedies and con- Rural Metro, a committee charged with exploring stra- tribution,17 and those opinions merit careful study. tegic alternatives, broadly dened, should be careful But the Supreme Court also thoroughly addressed the to engage a nancial advisor to explore strategic facts and issues presented by this headline-making alternatives, broadly dened, and both advisor and cli- case, and the Appellate Decision, of course, merits ent should ensure that their activities match their re- careful study as well. spective mandates. To the extent that business condi- tions change or a course correction requires a Below is a brief discussion that highlights some of committee or its advisor to shift its focus, they would the key points addressed by the Supreme Court, as be well-suited to update their formal mandates as well. framed by the parties’ arguments on appeal. Doing so will help to clearly delineate the beginning of the enhanced scrutiny period and protect the explo- When Does Revlon Scrutiny Begin? ration of strategic alternatives that often serves as the RBC argued on appeal that the Court of Chancery precursor to a sale process, at least to the extent a sale

8 K 2016 Thomson Reuters The M&A Lawyer January 2016 | Volume 20 | Issue 1 is not viewed as the inevitable outcome at the start of opinion and generally “cleanse” the process of RBC’s a nancial advisor’s engagement. conicts.27

What Is the Value of a Passive Market Check The Supreme Court rejected that argument, and in M&A Litigation Defense? took little comfort from the presence of a cleansing bank in this case, given how they were engaged and RBC argued on appeal that the Court of Chancery’s treated by the Rural special committee.28 In particular, decision gave insucient weight to the board’s “pas- the Court observed that the second bank’s compensa- sive market check” of the merger, in the form of a tion was, like RBC’s, contingent on a successful clos- post-signing window in which interested bidders ing, thereby incentivizing even the “cleansing bank” could have come forward with topping bids.21 to guide towards closing of a transaction. The Court The Supreme Court rejected that argument, despite also observed that the nancial analysis done by the acknowledging the importance of a passive market second bank was always treated as secondary to that 29 check in most cases.22 Specically, the Court was of RBC. careful to note that aws in the sale process under- As a result, where circumstances warrant the pres- mined the condence the Court would otherwise place ence of a second sell-side nancial advisor, the sell- 23 in a passive market check. Most critically, the Court side directors and nancial advisors should consider was concerned by the functional exclusion of several whether to structure the second bank’s engagement likely bidders who were concurrently bidding on a such that it’s compensation is substantially non- competitor in the industry, and by the RBC’s undis- contingent on a deal being done. The sell-side direc- 24 closed conicts of interest. The Court had little faith tors and nancial advisors should also ensure that both that the possibility of a post-signing topping bid could bankers’ analyses are given equal attention, and that cure these ills. both bankers are given equal access to company infor- mation and key personnel. One lesson that emerges, particularly for M&A liti- gation counsel, is that a passive market check can be a In short, the second bank should be treated as a full- powerful litigation defense tool, but it begins to lose edged nancial advisor rather than a litigation insur- its potency once “discovery disturb[s] the patina of ance policy. Ironically, only if the second bank is not 25 normalcy surrounding the transaction.” Although a treated as an insurance policy can it eectively func- passive market check can provide a potent defense to tion as one. a preliminary injunction and help bolster an early dis- positive motion,26 once serious process aws are Are Financial Advisors “Gatekeepers”? And detected by plaintis, established by record evidence, What Must They Disclose to Their Clients? and proven to the court’s satisfaction, the value of the RBC argued on appeal that the Court of Chancery “window shop” can vanish. mischaracterized the role of a nancial advisor in a legally signicant way by labeling nancial advisors What is the Value of a “Cleansing Bank”? “gatekeepers.” At oral argument before the Supreme RBC argued on appeal that its alleged misconduct Court, Plainti’s counsel argued that the “gatekeep- and conicts of interest could not have been the ers” descriptor, however controversial, had no legal proximate cause of any damages suered by Rural signicance in the Court of Chancery’s decision, and stockholders because the special committee engaged a could be excised from the opinion without second nancial advisor to provide a second fairness consequence.

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The Supreme Court accepted Plainti’s argument. courts. But it also will stand as a shining example of Indeed, in perhaps the only area of departure from the Delaware’s willingness, in the right case, to award Court of Chancery, the Supreme Court made clear that signicant damages even in the context of what ap- nancial advisors are not gatekeepers, but rather pears to be a third-party, market-checked deal. contract counterparties.30 As the Court described, “the role of a nancial advisor is primarily contractual in nature, is typically negotiated between sophisticated ENDNOTES:

parties, and can vary based upon a myriad of 1 31 S. Michael Sirkin, Banker Conicts, Redux: factors.” As a result, “it is for the board, in manag- Court of Chancery Tags Financial Advisor With Aid- ing the business and aairs of the corporation, to ing and Abetting Liability Following Trial, THE determine what services, and on what terms, it will M&A LAWYER, Thomson Reuters, Apr. 2013, at 13- hire a nancial advisor to perform in assisting the 19. board in carrying out its oversight function.”32 22014 WL 971718 (Del. Ch. Mar. 7, 2014). 3 See generally RBC Capital Markets, LLC v. Jer- But at the same time, the Court reminded that vis, —- A.3d —-, 2015 WL 7721882 (Del. Nov. 30, “directors need to be active and reasonably informed 2015) (the “Appellate Decision”). when overseeing the sale process, including identify- 4 See generally Leo E. Strine, Jr., Documenting ing and responding to actual or potential conicts of the Deal: How Quality Control and Candor Can interest.”33 To that end, the Court suggested that Improve Boardroom Decision-Making and Reduce the Litigation Target Zone, 70 Bus. Law. 679, 679 (2015) “[b]ecause the conicted advisor may, alone, possess (“[T]he focus of my remarks is on what you can do as information relating to a conict, the board should legal and nancial advisors to conduct an M&A pro- require disclosure of, on an ongoing basis, material cess in a manner that: i) promotes making better deci- information that might impact the board’s process.”34 sions; ii) reduces conicts of interests and addresses those that exist more eectively; iii) more accurately In short, it appears that a nancial advisor may be records what happened so that you and your clients will be able to recount events in approximately the liable for causing a breach of duciary duty, but same way; and iv) as a result, reduces the target zone should not be liable for failing to prevent one. One for your favorite plaintis’ lawyers.”). way for a nancial advisor to stay on the right side of 5 The April 2014 article contains a more fulsome that line is to disclose promptly any information that recitation of the facts as found at trial by the Court of could be seen as material to sell-side directors, even if Chancery. See Sirkin, supra note 1, at 13-14. 6 this means requiring periodic updates to conicts Appellate Decision,at*5. disclosures made at the outset of an engagement. A 7 Id. at *6. fully disclosed conict is less likely to lead to a pri- 8 Id. at *5. mary breach, and less likely to lead to secondary li- 9 Id. ability because it is less likely to satisfy the knowing 10 Id. participation element. As a result, increased disclosure 11 Id. at *7. from nancial advisors to their clients serves both par- 12 Id. ties well, at least in the context of resulting litigation. 13 Id. at *12-16. 14 Conclusion Id. at *13-19. 15 Id. at *20-21. In time, Rural Metro will likely be remembered as 16 In re Rural Metro Corp. S’holders Litig.,88 the result of settled legal principles applied to a set of A.3d 54 (Del. Ch. 2014); see generally Sirkin, supra historically bad facts, as found by the reviewing note 1.

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17 In re Rural/Metro Corp. S’holders Litig., 102 Ferris, Glovsky and Popeo PC. A.3d 205 (Del. Ch. 2014). Contact: [email protected]. 18 Appellate Decision, at *23-26. In late 2015, the Federal Trade Commission 19 Id. at *25. (“FTC” or “Commission”) authorized sta to le an 20 Id. at *26 n.121. administrative complaint to seek in federal court a 21 Id. at *28. temporary restraining order and a preliminary injunc- 22 Id. (“ ‘When a board exercises its judgment in tion to block the proposed merger of Advocate Health good faith, tests the transaction through a viable pas- Care Network (Advocate) and NorthShore University sive market check, and gives its stockholders a fully HealthSystem (NorthShore) in the Chicago area.1 The informed, uncoerced opportunity to vote to accept the FTC alleged that the combined entity would operate deal,’ a court will have diculty determining that such board violated its Revlon duties.”) (quoting C&J the majority of the hospitals in the North Shore area Energy Servs., Inc. v. City of Miami Gen. Emps.’ & of Chicago, and control more than 50% of the general Sanitation Emps.’ Ret. Trust, 107 A.3d 1049, 1053 acute care inpatient hospital services. (Del. 2014)). 23 Appellate Decision, at *28. Health care antitrust enthusiasts may recognize 24 Id. some of the hospitals in this new case. In 2004, as a 25 In re Del Monte Foods Co. S’holders Litig.,25 result of the FTC hospital merger retrospective, the A.3d 813, 817 (Del. Ch. 2011). FTC sued NorthShore (then known as Evanston 26 See generallyC&JEnergy Servs., 107 A.3d Northwestern Healthcare), alleging that its 2000 1049. acquisition of Highland Park Hospital had resulted in 27 Appellate Decision, at *34. higher prices. In 2007, the full Commission found the 28 Id. at *35. transaction to be anticompetitive and ordered a con- 29 Id. duct remedy requiring the parties to negotiate separate 30 Id. at *35 n.191. contracts with managed care plans. 31 Id. This new matter stems from the September 2014 32 Id. aliation agreement between Advocate and North- 33 Id. at *27. Shore—a transaction valued at $2.2 billion. Advocate, 34 Id.; see also id. at *27 n.130 (“For instance, the a not-for-prot health system, is the largest hospital board could, when faced with a conicted advisor, as system in the Chicago metropolitan area with 11 gen- a contractual matter, treat the conicted advisor at eral acute care hospitals and a children’s hospital. Five arm’s-length, and insist on protections to ensure that conicts that might impact the board’s process are of its general acute care hospitals are located in Cook disclosed at the outset and throughout the sale pro- County, Illinois, and two are in Lake County, Illinois. cess.”). NorthShore is a not-for-prot health system with four general acute care hospitals—three in Cook County A RETURN TO EVANSTON: and one in Lake County.

FTC REVISITS OLD GROUND This is the FTC’s third hospital merger challenge IN YET ANOTHER HOSPITAL in recent weeks, following the agency’s actions seek- MERGER CHALLENGE ing to block proposed transactions in Pennsylvania and West Virginia. As with those two challenges, the By Dionne Lomax FTC here alleged that the proposed merger would Dionne Lomax is a member at Mintz, Levin, Cohn, result in increased bargaining leverage against health

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plans for the combined entity, allowing it to raise are close—if not each other’s closest—competitors, rates. Consistent with its position in other hospital based on price as well as various non-price merger challenges, the FTC also questioned whether dimensions. Highlighting the quality and service com- the hospitals’ eciency claims were cognizable or petition between the parties, the FTC noted that they merger specic, noting that the eciency claims are “track each other’s quality and brand recognition” and “not nearly of the magnitude necessary to justify the “have substantially invested in improving and expand- Transaction in light of its potential to harm ing their services and facilities to compete against one competition.” Pointing to Illinois’s Certicate of Need another.” Thus, the Commission contends, the trans- (“CON”) regulations as an additional barrier to entry, action will not only increase the cost of health care, the Commission also contended that entry or expan- but will also diminish the health systems’ incentive to sion by other competing hospitals would not be timely increase service oerings and improve the quality of or sucient. healthcare. Just as the FTC did in its recent hospital merger actions in Pennsylvania and West Virginia, As is common in antitrust merger cases, the central the agency here also pointed to party documents that dispute here will likely focus on the market denition. suggest the two health systems view each other as The FTC dened the relevant geographic market as close competitors. For example, the Complaint men- the “North Shore Area,” dened as “the area bounded tions NorthShore ordinary course business documents by six general acute care inpatient hospitals: North- that “identify Advocate’s ‘approach to risk’ and ‘ACO Shore Evanston, Swedish Covenant Hospital, Pres- strategy’ as signicant competitive threats.” ence Resurrection Medical Center, Northwest Com- munity Healthcare Hospital, Advocate Condell, and The FTC’s near back-to-back hospital merger chal- Vista Medical Center East.” According to the Com- lenges over the past 45 days illustrate the agency’s plaint, this area comprises the “main area of competi- continued intense scrutiny of provider consolidation. tion between NorthShore’s four hospitals and the two Hospitals considering merging should take note of the Advocate hospitals with which NorthShore most FTC’s signicant requirements for an eciencies directly competes.” By the FTC’s calculations, ap- defense, close attention to and use of statements in proximately 73% of patients residing within the North ordinary course documents that demonstrate head-to- Shore Area stay there to receive inpatient hospital head competition, sensitivity to the existence of CON regulations as a potential barrier to entry, and the services. “Based on commercial [general acute care] FTC’s consistent challenge of transactions deemed inpatient admissions of patients residing within the presumptively anticompetitive based on market share six-county Chicagoland metropolitan area [which and market concentration levels under the Merger includes Cook, DuPage, Kane, Lake, McHenry, and Guidelines. Will Counties] and seeking care in the North Shore Area,” the FTC alleged that the hospitals will collec- The 2007 Evanston Northwestern win is widely tively control 55% of the market, with the next largest recognized as the FTC’s rst victory in a litigated hospital only having 15% of the market. Based on hospital merger case after a rather long string of losses HHI market concentration levels (post-Transaction in the 1990s. The FTC has been on a hospital merger HHI of 3,517 representing an increase of 1,423 winning streak ever since. Whether or not past is points), the FTC further alleged that the transaction is prologue in the current Chicagoland matter remains to presumptively unlawful under the 2010 Merger be seen. Guidelines. The evidentiary hearing before the administrative The FTC contends that Advocate and NorthShore law judge is set for May 24, 2016.

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ENDNOTES: Yet 2016 may not oer a repeat of the same story. Aquila and Sullivan noted there already were some 1 In the Matter of Advocate Health Care Network, Advocate Health and Hospitals Corporation, and warning signs visible late in the past year, from the NorthShore University HealthSystem, FTC Docket Dow’s plunge in September to the weak pace of the No. 9369 (December 17, 2015). IPO market in the fourth quarter. “We hate to say it, but the current exuberant pace of M&A deals may not FROM THE EDITOR be sustainable unless the capital markets can continue to deliver new, up and coming companies into the mix New Year, New Climate? of potential buyers and targets,” they write. Here’s hoping that all readers had a ne holiday season and happy new year. This issue features our The Federal Reserve’s decision to nally raise annual look back at the previous year. It’s authored, interest rates in December will almost certainly have as usual, by Sullivan & Cromwell’s Frank Aquila and an impact on M&A in the new year. A source who Melissa Sawyer. Along with showcasing their skill of works in New York real estate told me that the Fed’s using current movie titles as inspired headlines, the move sent deal closings and renancings skyrocketing authors dig into the many forces that fueled 2015, one in the last weeks of 2015. Could a similar spike hit of the biggest years for M&A volume in market M&A in early 2016, with buyers and sellers looking history. to lock in deals before more potential rate hikes oc- cur? It was a year notable not just for its $4.7 trillion in deal volume, but for the complexity of its transactions, There’s also the stock market’s potential impact. whether it was Pzer and Allergan’s tax inversion deal Thomson Reuters found that while in the rst half of or the long-term play by DuPont and Dow Chemical: 2015, 68% of deal announcements lifted the acquirer’s rst merge, then break up into three dierent compa- stock price, it was only the case for 36% of deal an- nies in the future. nouncements in second-half 2015. Is it a sign of temporary market wariness about M&A, or portents And as the authors note, it was a year dominated by of a more conservative environment for deals in the strategic buyers. “Industrial acquirors, rather than upcoming years? If 2015 showed anything, it’s that nancial sponsors, led the surge in M&A activity. it’s impossible to predict in early January how a year With acquisition leverage still essentially capped at will turn out. That said, The M&A Lawyer will be six times EBITDA, sponsors are nding it hard to there to chronicle all happenings, positive or negative, compete with the frothy synergy-driven pricing of- for the M&A market in 2016. fered by strategic bidders,” they write. “Some strate- gic buyers are also borrowing sponsor strategies by Chris O’Leary levering up their deals or nancing them with equity Managing Editor oerings. In fact, 2015 saw an increasing number of in-bound acquisitions by European buyers nanced with rights oerings.”

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EDITORIAL BOARD

CHAIRMAN: EDWARD D. HERLIHY PAUL S. RYKOWSKI PAUL T. SCHNELL Wachtell, Lipton, Rosen & Katz Ernst & Young Skadden, Arps, Slate, Meagher & New York, NY New York, NY Flom LLP New York, NY VICTOR I. LEWKOW FAIZA J. SAEED Cleary Gottlieb Steen & Hamilton LLP Cravath, Swaine & Moore LLP MANAGING EDITOR: New York, NY New York, NY CHRIS O'LEARY PETER D. LYONS BOARD OF EDITORS: CAROLE SCHIFFMAN Freshelds Bruckhaus Deringer LLP BERNARD S. BLACK Davis Polk & Wardwell New York, NY University of Texas Law School New York, NY Austin, TX DIDIER MARTIN Bredin Prat ROBERT E. SPATT FRANCI J. BLASSBERG Paris, France Simpson Thacher & Bartlett Debevoise & Plimpton New York, NY New York, NY FRANCISCO ANTUNES MACIEL MUSSNICH ECKART WILCKE DENNIS J. BLOCK Barbosa, Mussnich & Aragão Hogan Lovells Greenberg Traurig Advogados, Frankfurt, Germany New York, NY Rio de Janeiro, Brasil

GREGORY P. WILLIAMS ANDREW E. BOGEN PHILLIP A. PROGER Richards, Layton & Finger Gibson, Dunn & Crutcher LLP Jones Day Wilmington, DE Los Angeles, CA Washington, DC

WILLIAM F. WYNNE, JR H. RODGIN COHEN PHILIP RICHTER Sullivan & Cromwell Fried Frank Harris Shriver & Jacobson White & Case New York, NY New York, NY New York, NY

STEPHEN I. GLOVER MICHAEL S. RINGLER Gibson, Dunn & Crutcher LLP Wilson Sonsini Goodrich & Rosati Washington, DC San Francisco, CA

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