CURRENT MONTH (January 2024)
Surge or Stagnation: Looking Ahead to 2024
By Malcolm Deisz, University of St. Thomas – School of Law
2023 was, by most accounts, a notably slow year for mergers & acquisitions. While the volume of deals has stayed consistent, the value of M&A-related transactions is down approximately 25 percent. With the total value of deals sitting at $2.7 billion heading into December, the year is poised to be the lowest in M&A transaction value since 2013. There are plenty of reasons identified by practitioners, ranging from geopolitical conflict to a decrease in private equity activity in the sector. Despite this downturn in activity, some signs indicate 2024 may see activity pick back up.
The costs for high-grade issuers have decreased significantly in the past two months. Additionally, signs indicate that inflation rates are slowing down, with the Federal Reserve indicating that it will likely implement several rate cuts in 2024 as it approaches its 2 percent inflation target. Lowering costs to finance deals could spur the appetites of companies previously deterred by the conditions in 2023.
While promising signs exist for the M&A market, many companies are still struggling with the ramifications of utilizing cheap credit to finance large deals. According to a Bloomberg News Study, over half of the companies involved in debt-financed acquisitions have managed to cut their leverage ratios in the time since their acquisitions. Inability to realize profits, or worse, suffering significant losses on debt-financed deals may have a chilling effect on companies looking to engage in leveraged acquisitions in 2024.
Not to be overlooked is the increased scrutiny deals have received from the Federal Trade Commission throughout 2023. Increased litigation activity has been apparent, particularly among more significant deals. On December 18, the FTC, alongside the Department of Justice, released the final 2023 Merger Guidelines. These guidelines reflect a more aggressive approach to merger review and seem to indicate that the government agencies tasked with regulating and reviewing mergers and acquisitions will continue at the increased pace that we have seen in 2023.
From the staggering numbers seen following the pandemic to the relative lull of 2023, the mergers and acquisitions market has proven that it can change quickly. While many optimists hope to see their predictions of renewed activity fulfilled, it remains to be seen whether the dip in activity characterized by 2023 will continue into the new year.
By Nastassia Merlino, NYU School of Law
On January 24, the Delaware Court of Chancery ordered billionaire Eddie Lampert to pay $18.3 million to minority investors in Sears Hometown and Outlet Stores, Inc. in a decision that finds majority shareholders to owe a duty of good faith and care to a company and its minority shareholders.
Vice Chancellor J. Travis Laster determined that Lampert abused his power as a majority shareholder when he bought Sears Hometown and Outlet Stores for a cheaper price after preventing the company plan from liquidating the poorly performing Hometown enterprise to focus on the better-performing Sears Outlet stores. The liquidation plan offered an estimated value of $9.58 per share and depended on the successful liquidation of Hometown’s inventory and Sears Outlet stores’ ability to meet high expectations. However, Lampert did not support the liquidation plan as he believed it would destroy value and trigger additional third-party liabilities. Therefore, Lampert used his voting power as a controlling shareholder to adopt a bylaw amendment requiring two separate approvals within thirty business days of each other for the liquidation plan and removed two committee members who insisted on moving forward with the liquidation plan. Although he did not personally know the two replacements, they were affiliated with one of Lampert’s financial backers.
While Delaware law does not have a clear standard of review regarding a controlling shareholder’s exercise of voting power, Vice Chancellor Laster held that “when exercising stockholder-level voting power, a controller owes a duty of good faith that demands the controller not harm the corporation or its minority stockholders intentionally . . . [and] a duty of care that demands the controller not harm the corporation or its minority stockholders through grossly negligent action.” Vice Chancellor Laster found that Lampert did not intentionally harm the corporation and its stockholders or act in a grossly negligent manner, thus not violating his fiduciary duties. The court also found that the liquidation plan was not able to achieve the committee’s high expectations due to the third-party liabilities it would trigger.
The sole remaining special committee member and Lampert subsequently agreed on an end-stage transaction that would eliminate the minority shareholders’ interests in the company. Under the agreement, Lampert would pay a base consideration of $2.25 per share and the company could shop Sears Outlet stores to third parties. Should the company find a price higher than the negotiated floor, minority shareholders would share the additional consideration pro rata, thus generating a market-tested price for Sears Outlet stores. Despite the existence of a market-tested price, the parties moved forward with a valuation of the company that included the net proceeds from a liquidation of Hometown’s inventory. The court found that Lampert did not successfully prove the transaction met the entire fairness test as Lampert paid below average for Hometown’s inventory and thus did not meet the fair price requirement of the test. Lampert also failed to meet the fair dealing requirement, as the remaining committee member and Lampert failed to bargain over the value of Hometown, and the committee member was unable to get a fair price for the company.
Vice Chancellor Laster’s decision awarded damages of $1.78 per share, which is the difference between what the minority shareholders initially received from Lampert and the fair value of the company, for a total of over $18.3 million.