M&A was on fire around the world in the first half of 2018, largely characterized by mega-deals— transactions valued at $5 billion or more. The first six months saw $2.1 trillion worth of deals announced worldwide, reflecting the impact on business of continued, seemingly unlimited capital availability; competition among buyers; and the relentless pressure of technology.
In spite of a bullish outlook at the midway mark, third-quarter activity decreased more than 30 percent compared to the second quarter. Even though the first nine months set an all-time record for dealmaking, sentiment was unsettled and became even more so with the volatility in the equity capital markets in the fourth quarter.
Globally, the M&A market in 2018 saw an uptick in the number of transactions, as well as a 15.9 percent increase in volume. Worldwide, 45,218 deals were announced at an aggregate value of $3.9 trillion, compared to 42,259 deals worth $3.4 trillion in 2017. In the United States, the number of transactions increased—from 14,640 to 15,925—and the aggregate value of those transactions increased as well—from $1.3 trillion to $1.8 trillion.
M&A MARKET TRANSACTIONS
A number of factors precipitated the midyear slowdown: high equity valuations, the increase in borrowing costs (albeit still at significantly lower levels than historical norms), and the inherent lumpiness of big-ticket M&A. But geopolitics played the most significant role, with the Trump administration's reworking of the prevailing norms of global trade, uncertainty surrounding the exit of the United Kingdom from the European Union, and the slowing growth of the eurozone economy. An increased focus on inbound investment into the U.S.—as well as China's deleveraging policies—has impacted the role of Chinese buyers in the global M&A marketplace. More importantly, trade disputes have made due diligence and valuations more difficult and boards and private equity investment committees more cautious. For these reasons, while the overall M&A market remains robust, the level of activity in the second half of 2018 dropped below the record-breaking pace of the first half of the year.
Shareholder activism saw one of its most active years in 2018, with 185 companies publicly subjected to M&A-related demands. Along with the usual suspects, more than 25 "first timers," including traditionally passive investors, launched campaigns. In this period, the activists won more than 150 board seats at companies with market caps over $500 million, often pushing for breakups or sales and opposing deal terms (on the basis of low consideration, among other factors).
The unrelenting pace of dealmaking by technology companies—the focus of our "Sector Spotlight"— continued in 2018. Innovation, disruption, and consolidation define the technology industry as a whole. High levels of cash and low interest rates, evolving data ecosystems, and the need for better data security and continued innovation will drive technology M&A. However, negative trends such as trade tensions and stock market volatility may have an outsized effect on technology M&A in 2019. Tech M&A may encounter yet another headwind, with new limitations on foreign direct investment into the U.S., including a new pilot program targeting investments in "critical technology" businesses, and requiring mandatory filings with the Committee on Foreign Investment in the United States (CFIUS).
Along with the U.S., several European countries have recently strengthened or are about to strengthen their foreign investment control regulations, including France, the UK, and Germany. The European institutions are working on a European foreign investment regulation that is expected to come into force in the second quarter of this year and to become fully applicable 18 months thereafter. Australia has also heightened its scrutiny of foreign investments, with emphasis on the infrastructure and agriculture sectors, as well as health care, where access to personal data is the focus.
In 2018, the Akorn Inc. v. Fresenius Kabi AG et al. decision rocked the dealmaking community. The decision marked the first time a Delaware court found a material adverse effect (MAE) to have occurred, permitting a would-be buyer to abandon a merger. The circumstances of this case were extreme, including Akorn's considerable post-signing financial decline, coupled with intentional misconduct involving serious regulatory violations. Nevertheless, it underscores the importance of calibrating the MAE definition, interim covenants, and closing conditions in a merger agreement to the realities of, and potential risks in, a particular transaction, now that the oft-repeated maxim that "Delaware has never found an MAE" no longer holds.
Jones Day ranked No. 1 globally in 2018 in the Bloomberg M&A league tables, a ranking we have held for 19 years running. We are grateful for the opportunity to have advised our clients on 625 transactions announced or signed in 2018, representing a total value of more than $195 billion, including 41 transactions involving $1 billion or more.
The following pages highlight transactions that exemplify the breadth and scope of our clients' strategic focus, spanning the globe and every significant industry sector. Our goal is to provide our clients world-class legal advice in an attentive, efficient, and seamless manner, regardless of the size or complexity of the transaction. Our Firm's commitment to client service is reflected not just in industry recognitions but, more importantly, in the continued willingness of our clients to entrust us with their most critical and time-sensitive matters. Thank you for that trust and confidence.
CORPORATE GOVERNANCE
Trends in 2018
Board composition and refreshment issues remained a focal point for companies, their boards, and their investors in 2018. Much attention focused on whether the board's composition and leadership, and its directors' experience and skill sets, fit with the company's business, industry, size, geographic footprint, and other factors. Diversity, tenure, and independent leadership, emphasized through 2018, continue to be hot topics for the foreseeable future.
Board Diversity
Improving board diversity has become a priority for investors and companies alike. The Business Roundtable's Principles of Corporate Governance 2016 state that "[t]he composition of a board should reflect a diversity of thought, backgrounds, skills, experiences and expertise and a range of tenures that are appropriate given the company's current and anticipated circumstances and that, collectively, enable the board to perform its oversight function effectively." Companies have taken this to heart, and we have seen recent increases in board diversity. In 2018, 60 percent of incoming directors on S&P 500 boards were women or minorities, with women accounting for 24 percent of all S&P 500 directors and 40 percent of 2018 new directors.
Institutional investors and proxy advisory firms are increasingly scrutinizing boards that lack women and minorities—as well as their plans to improve diversity. Beginning in 2019, Glass Lewis will recommend votes against the nominating committee chairs of boards that have no women directors. ISS also adopted a new voting policy, to take effect in 2020, under which it would recommend votes against the chairs of the nominating committees (and possibly other directors responsible for the board nomination process) at companies with boards that have no women directors. California passed a law requiring publicly traded corporations headquartered in California to include at least one woman on their boards by the end of 2019, with additional requirements taking effect in July 2021.
Board Tenure
Limiting director tenure, a key issue for several years, rests on the belief that long-tenured directors may lack independence from management and that permitting directors to remain on boards for lengthy tenures impedes optimal board renewal and refreshment. In addition, increasing board turnover opens board seats for new directors, who may bring new skill sets and fresh perspectives, as well as diverse backgrounds and viewpoints. A significant majority (71 percent) of S&P 500 boards impose mandatory retirement ages for directors, with the most common retirement ages set at 72 (43 percent) and 75 and older (43.5 percent).
Board Leadership Split
Independent board leadership is a key concern for many investors, and many companies have responded by moving away from the traditional combined CEO / board chair structure. Currently, half of S&P 500 boards have separated those leadership roles, and more than 30 percent of S&P 500 boards have a truly independent chair—that is, one who meets the applicable NYSE or NASDAQ independence standards. Boards that do not have an independent chair often identify a lead or presiding independent director.
Shareholder Proposals
Both environmental and social shareholder proposals increased significantly in 2018, representing almost half of all shareholder proposals. The most frequently submitted proposals were for lobbying and political contributions (78 proposals), with climate change also standing out (71 proposals). These types of proposals also gained support from institutional investors, who want the board and management to consider and disclose how these issues may impact long-term value.
Special-meeting proposals were the most frequently submitted governance-related proposals in 2018, totaling 73. Traditionally, many companies permitted only the board or named C-suite officers to call special meetings of shareholders. Today, a substantial majority of S&P 500 companies permit shareholders to call special meetings, largely as a result of shareholder campaigns on the issue. The threshold for calling special meetings is often set at 10 percent, 25 percent, or a majority of the company's outstanding shares. In 2018, proposals to lower thresholds for shareholders to call special meetings rose sharply and garnered strong support (41 percent support on average).
While proxy access shareholder proposals were prevalent a few years ago, the incidence of these proposals has fallen off. "Proxy access"—the right of shareholders to nominate director candidates in a company's proxy materials and proxy card at the company's expense—has been widely adopted by many of the S&P 500 companies, thanks in part to a very successful multiyear campaign led by the New York City Public Pension Funds. Yet despite the widespread adoption of proxy access, these provisions are rarely used. To date, only one director candidate has been nominated by a shareholder using a proxy access bylaw, and the nomination was challenged by the company—represented by Jones Day, incidentally—and subsequently withdrawn by the nominating shareholder.
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