Wall Street has mergers on the brain these days. In recent weeks, reports of corporate acquisitions have cascaded down like the autumn leaves in Central Park. Sirius XM is buying Pandora, Kors is splurging on Versace, Comcast won Sky at auction for $40 billion, and Coca-Cola snapped up Costa Coffee. All these purchases send a message that the deal environment is a hospitable one right now.
As it turns out, mergers are also on the mind of two of the key government bodies that police them: the Securities and Exchange Commission (SEC) and the federal judiciary. The message those bodies are sending, however, is decidedly more mixed.
Let’s begin with the SEC. Late last week, the agency settled an enforcement action it brought against Walgreens in an effort to ensure that disclosures in connection with mergers “are accurate and not misleading.” According to SEC enforcers, Walgreens failed to meet that standard in its merger with Alliance Boots. When Walgreens first announced the two-step merger in 2012, it projected combined operating income of $9 billion for 2016, but soon realized that number wasn’t realistic. Nonetheless, former CEO Gregory Wasson and CFO Wade Miquelon continued to stand behind the faulty projection in earnings calls throughout 2013-14.
The alleged misrepresentations finally caught up with Walgreens last week, when it settled the resulting SEC charges for $34.5 million. Wasson and Miquelon also faced personal penalties. The case was “intended to punish and deter” statements that give investors inaccurate information about mergers, said Stephanie Avakian, the co-director of the SEC’s enforcement division. And indeed, the penalties may cause companies and executives to think about the representations they make about mergers. On the other hand, Wasson and Miquelon made $16.73 million and $5.02 million in 2014, respectively, while the SEC penalized them $160,000 each. That’s not a big deterrent.
Meanwhile, some courts are raising the bar for lawsuits aimed at increasing disclosures around M&A transactions. Until a couple of years ago, companies in the middle of M&A deals would routinely face class action lawsuits in Delaware, where the plaintiff class would complain that the company had made insufficient disclosures about the transaction. Often, by agreeing to some minor additional disclosures – and paying attorneys’ fees – the defendant company could escape the suit and move on. But it felt like paying a ransom.
Now, Delaware courts are refusing to approve attorneys’ fees where the plaintiffs win only minor disclosures. Plaintiffs began filing cases in federal court, and now the federal judiciary is clamping down too. A 2016 decision involving the Walgreens-Alliance Boots merger adopted Delaware’s stringent standard in the nation’s Seventh Circuit, which covers Illinois and other states. And last month, a federal judge in Manhattan reluctantly approved a settlement in a case over disclosures in the $2.8 billion acquisition of Time Inc. by Meredith Corporation. The larger message to come out of the case, however, was its concern about “the dangers inherent” in class action lawsuits “challenging the adequacy of disclosures for an M&A transaction.”
Corporations that are taking part in the current M&A frenzy may find cause to celebrate (or at least exhale) in these decisions, as it appears the federal judiciary is increasingly hostile to so-called “deal litigation.” Meanwhile, the SEC’s public comments, if not its penalties, suggest that the securities watchdog will be tracking companies’ statements about their deals closely.