This recent piece from Forbes provides an interesting look into how Michael Dell scored a huge windfall by opportunistically taking Dell private while the stock was undervalued.  Although the Delaware trial court had acknowledged a valuation much higher than the take-private price, the Supreme Court reversed mainly on policy grounds, on the rationale that public M&A transactions deserved heavy deference to deal price.  As the article shows, Dell internal documents showed it was worth more.

The Delaware trial court had indeed recognized that Dell’s value exceed the merger price, by about 28%.  Michael Dell, along with financial sponsor Silver Lake, had acquired Dell in 2013 for $13.75 per share in cash.  In its decision, the trial found the fair value of Dell’s shares as of the merger date to be $17.62, thus implying the deal undervalued Dell by nearly $7 billion.  The Supreme Court reversed that award and reinstated merger price as a proxy for fair value, rejecting the trial court’s analysis that, among other things, “investor myopia” and a focus on short-term profit had caused a “valuation gap” between the market price for Dell’s shares and its intrinsic value.  Based on the deal terms, Michael Dell’s personal stake of 15.6% of the company was worth about $3.6 billion; as the Forbes article shows, he has managed to parlay that stake into a current value of $39 billion, after deploying other financial devices in related M&A activity by Dell.  As Forbes indicates, Michael Dell made a play with a buyout rather than “spending years trying rebuild enthusiasm for the stock.”

The Delaware trial court understood that Dell stock had been experiencing a short-term lull and was prepared to compensate shareholders for losing out on any chance to participate in a longer-term rebound.  Although it had been criticized for identifying a valuation gap as large as $7 billion, it appears that the gap was in fact much larger even than that amount, and yet this enormous transfer of wealth from shareholders to insiders nevertheless took place after the Delaware Supreme Court shut the door on the shareholders’ effort to recoup just some of that value.

 

Cannalaw Conference Wrap-up:  What’s Next for Marijuana?

The conference closed with a look ahead to the future of the cannabis industry, patent issues, and emerging psychedelic market.  What will we see with regards to patent enforcement?  Only two cannabis related lawsuits have been filed to date, one that died.  However, there is speculation that as the industry grows and federal regulation is introduced, there will be a rise in patent lawsuits.  Aside from a few large patent holders, most patents are owned by inventors and small companies which could lead to patent troll activity.  When is the FDA going to regulate hemp products, including consumables?  The FDA has approved certain hemp products, such as hulled hemp, but they are looking into the safety and efficacy of other hemp products.  Steps are being taken, including establishing a CBD working group, but it will be some time before the FDA issues regulations.   What about psychedelics?  Several states have introduced legislation to decriminalize and legalize psychedelics, with Oregon being the first state to pass legislation.  If the industry uses cannabis as a blueprint and learns from their successes and missteps, we could see legalization move quicker than expected.

 

Quickfire Questions:  What’s next?

The panel offered insight and predictions into the future of the cannabis industry, patent issues, and emerging psychedelic market.  When is the FDA going to regulate hemp products, including consumables?  The FDA has approved certain hemp products, such as hulled hemp, but they are looking into the safety and efficacy of other hemp products.  Steps are being taken, including establishing a CBD working group, but it will be some time before the FDA issues regulations.  What will we see with regards to patent enforcement?  Only two cannabis related lawsuits have been filed to date, one that died.  However, there is speculation that as the industry grows and federal regulation is introduced, there will be a rise in patent lawsuits.  Aside from a few large patent holders, most patents are owned by inventors and small companies which could lead to patent troll activity.  What about psychedelics?  Several states have introduced legislation to decriminalize and legalize psychedelics, with Oregon being the first state to pass legislation.  If the industry uses cannabis as a blueprint and learns from their successes and missteps, we could see legalization move quicker than expected.

The M&A panel at yesterday’s Cannalaw conference addressed what valuation techniques are being used to determine the purchase price of a marijuana company.  While in recent years the traditional valuation metrics would normally be utilized – whether multiples of sales, revenues or EBITDA, for instance – the current market is experiencing a supply/demand imbalance, as the scarcity of licensing allows sellers to be more aggressive in testing what the market can bear.  That phenomenon might not normalize any time soon, as legalization trends spur additional M&A activity, with buyers vying for a limited number of licensed operators.

 

Financial Inclusion:  Banking in the Legal Cannabis Industry

The panel focused on the challenges of cannabis banking, including availability, compliance issues and whether the proposed Safe Banking Act will pass.  The major problem that large banks face is not with the illegality of cannabis, but with the compliance costs.  Large banks must file a Suspicious Activity Report (SAR) with each deposit from cannabis companies since they are considered high risk deposits, leading to significant increases in administrative cost.   State-chartered banks are mostly regulated by state, but still must comply with federal law.  While the Safe Banking Act, introduced last year, is a step in the right direction, it does not address the SAR compliance issue, so banks will still be reluctant.  

 

Emerging Focusses in Cannabis Law: Fintech and Cannabis – An Evolving Industry Within an Evolving Industry

This discussion focused on the intersection between Fintech and the cannabis industry, which are both highly regulated and complicated.  Major credit card companies do not permit cards to be used for transaction purposes, so cannabis companies must rely on cash, which is inconvenient for the consumer and a burden for the retailer.  Fintech has stepped in to fill the void by helping to facilitate the transactions and provide compliance related services. The payment related companies provide processing and online ordering services,  allowing customers to pay using apps to withdrawal directly.  They also track spending, which helps tailor products and services to consumers.

RKS is covering the the Cannalaw Summit, a conference covering a range of topics including cannabis valuation.  Beyond the newest US states to legalize recreational cannabis use, Mexico is proceeding with legalization steps in what observers said could become “the world’s largest cannabis market.”  The summit kicked off yesterday covering an industry “with projections of $35 billion by 2024 for the US market, and upwards of $100 billion worldwide.”

Panels yesterday covered:

The Evolving Relationship Between IP Law and the Cannabis Supply Chain

The panel focused on a wide range of IP issues and risks associated facing cannabis companies, including legal requirements to protect IP of plants and interstate regulation issues.  Companies must take a strategic approach to determine the scope of protection needed for the plant: utility patents, plant patents or PVPC protection.  They can protect IP by filing state trademark applications, registering non-cannabis related goods, and file on an “intent to use” basis.  Once federal regulations are loosened, those who take steps to protect their IP will benefit the most. Other risks specific to this industry are the inability to transport the goods across state lines and dealing with state specific manufacturing/distribution.  To mitigate these risks, companies can create separate IP licensing companies, separate manufacturing in each state, and structure payment terms to comply with laws of all jurisdictions.

Collaboration in Cannabis Law: Utilizing Firm Resources to Provide Holistic Client Services

This discussion focused on challenges and strengths for both the boutique cannabis-driven firms and “big law”  firms, and how they can work together to maximize benefits for their clients.  Boutique cannabis firms have a unique understanding of the nuances of cannabis law and the risks associated with them, , while “big law”  can provide IP, M&A, federal and commercial advice.   Boutique law firms also understand the organizational structures of multi-state clients, while “big law” can handle unforeseen issues that could result in class action litigation, like unknown health or environmental issues.

A Review of Client Engagement, Intake and Risk Best Practices

The panel laid out issues surrounding the emerging cannabis industry – federal illegality, inconsistent state regulations, conflict issues, unsophisticated clients – and the need for law firms to protect themselves from ongoing risk management issues.  Conflict checks, waivers, retainers and scope of work must be written down in detail and define the end or your representation in writing.  To mitigate risks, firms can consider running background checks, offer flat fee arrangements, replenish retainer fees, and inform malpractice insurance carriers of cannabis representation.

We look forward to covering the next day’s events.

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The Governor of Delaware has nominated Vice Chancellor Kathaleen McCormick to the post of Chancellor (the ‘chief judge’ of the Delaware Chancery Court).  The nomination is to replace retiring Chancellor Andre Bouchard.

Steve Hecht of Rolnick Kramer Sadighi LLP said of the nomination “VC McCormick has been a welcome addition to the bench since her appointment in 2018.  This was a great choice and I am sure she will continue to transform the Delaware Chancery Court as Chancellor.”

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Like certain U.S. states, the country of Malaysia does not give dissenting shareholders any right to appraisal of the value of their shares. Instead, the Malaysian Capital Markets and Services Act of 2007 (“Act”) provides that in a “compulsory acquisition,” dissenting shareholders may seek what Americans might refer to as equitable relief.

Pursuant to the Act, a “compulsory acquisition” may occur when a person (i.e. the offeror) has made a take-over offer to the shareholders of a target company[1] and has acquired at least 90% of the target company’s shares. At that point, the offeror may compel the dissenting shareholders[3] to sell their shares on the same terms originally offered by issuing a notice to them.[5] The offeror’s right to compel is more commonly known as the “squeeze out” right.

Any dissatisfied dissenting shareholder may, within one month from the date of the offeror’s notice, make an application to a court of competent jurisdiction for an order either (a) stating that the offeror shall not be entitled to acquire the dissenter’s shares, or (b) requiring that different terms of acquisition shall apply to the dissenter’s shares.[6]

The statute does not prescribe a test the court is supposed to apply in deciding whether to grant the dissenter’s application or, if it is granted, on what terms—the statute instead leaves these decisions to the court’s discretion.

Case law, however, does provide some guidance. For instance, under the cases the court may consider if the dissenting shareholders are bona fide, if there is “patent unfairness” in the terms of the proposed compulsory acquisition, and whether there has been a breach of law or the Malaysian Code on Take-Overs and Mergers of 2016 by the offeror or the majority shareholders.[7] In practice, though, the court may be reluctant to impose its own view of the fairness of the terms of the compulsory acquisition, because by this point the offeror has already acquired at least 90% of the target company’s shares on the basis of the offer which now claimed to be unfair. That is, the court might treat reaching the 90% threshold as prima facie evidence of a fair offer.

That said, the Code on Take-Overs and Mergers provides that all shareholders (especially the minority shareholders) should not be subject to any oppression or disadvantage by the treatment or conduct of an acquirer, offeror, or the directors of the target company in a takeover or merger transaction.[8]

There are also additional remedies available to minority shareholders under the Malaysian Companies Act of 2016. In cases of oppression, the minority shareholder has the right to seek a court order for remedy on the grounds that his or her rights or interests have been affected. Such an aggrieved minority shareholder may also seek leave of the court[10] to initiate a derivative action on behalf of the company against any alleged wrongdoer directors or shareholders who are not acting in the best interest of the company.[11]

Author Information:  Wai Sum TEO & Jessica KEW of Lee Hishammuddin Allen & Gledhill, Kuala Lumpur, Malaysia

 

** Rolnick Kramer Sadighi LLP thanks these authors for their contribution.  Rolnick Kramer Sadighi LLP does not practice outside the United States.

 

[1] Based on Section 216 (1) of the Capital Markets and Services Act 2007 and the Rules on Take-Overs, Mergers and Compulsory Acquisitions (issued on 15 August 2016; Revised on 5 December 2017), a target company includes:

  • A listed corporation;
  • An unlisted public company with more than 50 shareholders and net assets of RM15 million or more;
  • A business trust listed in Malaysia; and
  • A real estate investment trust (REIT) listed in Malaysia.

[3] “Dissenting shareholders” includes any shareholder and convertible securities holder, who has not accepted a take-over offer and any shareholder who has failed or refused to transfer shares to an acquirer in accordance with a take-over offer as provided under Section 216(6) of the Capital Markets and Services Act 2007.

[5] Section 222 of the Capital Markets and Services Act 2007 .

[6] Section 224 of the Capital Markets and Services Act 2007.

[7] Amin Halim Rasip & Anor v Tenaga Nasional Bhd & Other Cases [2016] 1 LNS 591 at para 90.

[8] General principle 2 at para 4(2) of the Code on Take-Overs and Mergers 2016 .

[10] Sections 347 and 348 of the Companies Act 2016.

[11] Section 346 of the Companies Act 2016.

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A recent article from Law 360 [$$$]  broke down the important considerations from the 2020 appraisal decisions of the Delaware Supreme Court and Delaware Court of Chancery.   One of the takeaways from authors Lewis Lazarus and Bryan Townsend of Morris James LLP was statutory appraisal remains “an active area of litigation in Delaware,” notwithstanding legislation in 2016 designed to reduce appraisal arbitrage and judicial decisions that have relied on market based evidence.

 

IRS & Business Taxation of the Cannabis Industry

Given the rapid developments in the cannabis space — with 15 states having now legalized recreational marijuana and 21 states allowing medicinal use — approaches to the valuation of cannabis companies continues to evolve.  In this new piece by EisnerAmper, the firm makes the case for utilizing any combination of an Asset Approach, Income Approach or Market Approach to valuing a marijuana business while bearing in mind a litany of tax and regulatory considerations.