Shortly after the Inflation Reduction Act was signed into law, a number of tricky interpretive issues regarding the stock repurchase excise tax were identified, and the IRS published temporary interim guidance in Notice 2023-2. John blogged about the application of that interim guidance to SPACs in early 2023. Earlier this month, the Treasury Department and IRS jointly announced proposed regulations with new guidance on the excise tax.
This Greenberg Traurig alert notes that the regulations, if adopted as proposed, would generally follow the approach in the interim guidance, with some modifications and clarifications. The memo summarizes the application of the proposed rules to SPACs as follows:
– The Treasury Department and IRS decided it was neither necessary nor appropriate to adopt special rules for SPACs in the Proposed Regulations. Thus, SPACs are generally subject to the rules of the Proposed Regulations in the same manner as other taxpayers.
– The Proposed Regulations do not provide transition relief from the stock repurchase excise tax for payments in connection with merger and acquisition (M&A) transactions pursuant to a binding commitment entered into prior to the enactment date of the tax. Similarly, no transition relief is provided for redemptions by SPACs formed prior to the enactment date.
– The Proposed Regulations do not provide an exception for redemptions of stock subject to a mandatory redemption provision or unilateral put option, which is a type of stock commonly issued by SPACs.
– The Proposed Regulations do not expand the netting rule to apply to de-SPAC transactions in which the SPAC is not the acquiring corporation, such as “double dummy” transactions.
– SPACs generally will not be required to pay stock repurchase excise taxes in respect of 2023 repurchases until after the final regulations are published.
For a discussion of the application of the proposed regulations more broadly to other M&A/restructuring, capital markets, and compensatory transactions, see this memo from Wilson Sonsini. We’re posting related resources in our “Tax” Practice Area.
Late last week, the Treasury Department announced the issuance of a Notice of Proposed Rulemaking “to enhance certain CFIUS procedures and sharpen its penalty and enforcement authorities.” This Covington alert explains that the rulemaking “proposes revisions to CFIUS’s existing authorities in the context of non-notified transactions, mitigation agreement negotiations, and the imposition of civil monetary penalties.” While in some respects the changes would “largely codify existing practice” the alert says:
Nevertheless, the rulemaking is notable insofar as it reflects a continued evolution of CFIUS, under current leadership, toward emphasizing enforcement and monitoring compliance. This evolution marks a material departure from CFIUS’s historical emphasis, which prioritized applying the Committee’s authorities surgically to address national security risks that were not addressable through other authorities, promoting open investment, and operating at a speed so as not to disrupt M&A activity unnecessarily. Parties who interact with the Committee—in the context of transactions under review, transactions that were not filed, and compliance with mitigation conditions—would be well advised to track that continued evolution closely.
Specifically, the proposed amendments would:
(1) expand CFIUS’s authority to request (and require) information from parties, including outside the context of a transaction that is under review by the Committee;
(2) require parties who are negotiating mitigation terms with CFIUS to “substantively respond” to mitigation proposals within three business days; and
(3) expand CFIUS’s authority to issue larger civil monetary penalties in more contexts for violations of Parts 800 and 802 or mitigation agreements with CFIUS.
The alert discusses each of these proposals in detail. We’re posting resources in our “National Security Considerations” Practice Area.
You read that right! This Cleary blog addresses a late February Delaware Chancery opinion confirming an arbitration award. SM Buyer LLC v. RMP Seller Holdings, LLC (Del. Ch.; 2/24) involved an equity purchase agreement with a standard purchase price adjustment mechanism, but a post-signing amendment complicated the process:
After signing, at Buyer’s request, Buyer and Seller agreed to an amendment intended to protect Buyer from potential creditor claims against a separate grocery store joint venture (the “Joint Venture”), of which Save Mart owned a one-third general partner interest (the “GP Interest”). The amendment provided that at closing Seller would transfer its GP Interest in the Joint Venture to an affiliate, and that affiliate would transfer the GP Interest to one of Buyer’s affiliates for $90 million at closing. As a result of these transactions, the GP Interest was held by a subsidiary of the Seller at the closing.
While it was clear that the target’s indebtedness reduced the purchase price dollar for dollar, the parties disagreed on how to treat the joint venture’s debt. Buyer’s closing statement included the JV’s debt, and reflected a negative purchase price — meaning that the seller would have to pay the buyer for acquiring the target. Accordingly:
[T]he parties entered into a dispute resolution agreement, which appointed an arbitrator to resolve the dispute over treatment of the Joint Venture’s debt, and an accounting referee to resolve a different dispute. […]
The accounting referee did not propose a purchase price adjustment based on the Joint Venture’s debt, but the arbitrator ruled in favor of Buyer, awarding it an $87 million refund to be paid by Seller, based on a strict interpretation of the Agreement’s definition of “Closing Date Indebtedness.” […] Buyer filed suit with the Delaware Court of Chancery to confirm the arbitration award.
The Chancery Court confirmed, but the blog concludes that this was mostly due to the standard of review for arbitration awards and cautions parties about the unintended consequences of arbitrating disputes:
The court did not seem to agree with the outcome but confirmed the arbitrator’s decision because there were no available legal grounds for it to overturn the decision. It seems that the court would have reached a different outcome than the arbitrator based on language in the opinion, but with such a narrow standard for reviewing arbitration awards, it is important to consider the standard of review of arbitration awards before entering into an arbitration agreement.
Equally, in purchase agreements where a closing statement dispute resolution mechanism is provided for in the agreement, choosing to appoint an accounting firm to resolve the dispute as “an expert” rather than “an arbitrator” can take on substantial importance, as can the limitations on scope of any post-closing court review that are frequently included in M&A agreements.
In a recent blog about UPC, we discussed the language from corporates and dissidents stressing that their proxy card be returned — despite the fact that all sides’ nominees are presented on all cards. We noted that vote visibility limitations were one of the reasons for preferring which proxy card is used.
This HLS blog from Paul Washington of The Conference Board and Broadridge discusses this vote visibility issue.
[S]ystems for processing and reporting votes of shares held “beneficially” in accounts at custodian banks and broker-dealers, are accurate, transparent, and fair. This is critical: When it comes to the largest proxy contests, the votes of beneficial shareholders can represent upwards of 95% of the total shares voted. In most contests, the outcome is known at the close of the polls.
However, when it comes to the remaining 5% of the votes, those held in “registered” form directly on the books of companies (or their transfer agents), the process is largely manual and opaque. Opposing sides count their own votes without providing the daily status reports that all sides receive for votes of beneficial shareholders. Therefore, in the closest cases, final tabulations by election inspectors can be delayed for weeks while attorneys for each side examine the votes of registered shareholders in a “snake pit.” Moreover, in contrast to systems for processing beneficial shares, there are no independent audits of the process or votes by an internationally recognized certified public accountant firm.
In terms of best practices for avoiding vote counting issues in contested elections, the post discusses Broadridge’s Standard Operating Procedures for Contested Meetings. In addition to those standard procedures, the blog notes that Broadridge implements additional steps in certain contested meetings, such as the recent contest at Disney.
For example, for the first time since the universal proxy rule went into effect, a pending contest (at The Walt Disney Company) involves three soliciting parties – one, management, and two soliciting persons other than management — with each providing its slate of director nominees. The very large size of the company and its shareholder base—and the potential additional and novel complexity of three slates—led Broadridge to undertake certain enhanced procedures:
First, for the Disney proxy contest, Broadridge is performing early reconciliation by comparing its custodian banks’ and broker-dealers’ reported positions to entitlements assigned either by the DTCC or by omnibus proxy.
Second, the Broadridge Vote Audit and Control Department is auditing each voting instruction form representing 250 shares or more, so that there is a “100% confidence level in a projected vote accuracy of 100%” for these votes. Sampling will be used to audit voting instructions representing less than 250 shares to achieve a projected vote accuracy rate of at least 99.9%.
Third, Broadridge has engaged an additional, internationally recognized, independent audit firm to undertake a real-time audit as votes are received and processed. The results of this review will be available shortly after the meeting date.
In our latest Deal Lawyers Download Podcast, Michael Heinz, co-head of Sidley’s SPAC practice, joined me to discuss the SEC’s new SPAC rules. We addressed the following topics in this 12 minute podcast:
– Overview of the SEC’s new SPAC rules
– Elimination of safe harbor for projections and enhanced liability for deSPAC targets
– SEC’s guidance on underwriter status and application of Investment Company Act
– Advice for sponsors, potential targets and advisors about managing SPAC deals
We’re always looking for new podcast content, so if you have something you’d like to talk about, please reach out to me at john@thecorporatecounsel.net or Meredith at mervine@ccrcorp.com. We’re wide open when it comes to topics – an interesting new judicial decision, other legal or market developments, best practices, war stories, tips on handling deal issues, interesting side gigs, or anything else you think might be of interest to the members of our community are all fair game.
A recent memo from H/Advisors Abernathy’s Dan Scorpio highlights some of the early lessons to be drawn from this year’s proxy season. One of those lessons is despite the lull in M&A activity in recent periods, M&A demands still feature prominently in activist campaigns:
A vocal push for (or against) M&A has been a core component of the activist playbook over the last several years, accounting for about 50% of activist campaigns. M&A demands were popular among activists even through 2023, when U.S. M&A activity fell by approximately 40%, but these demands evolved to calls for divestitures of non-core assets or breakups. Amid mixed messages in the M&A market so far this year – $725 billion of M&A was announced in Q1 2024, but a lower volume of deals, according to Dealogic – M&A accounted for about one-third of activist demands.
Dan says that if the M&A rebound continues, companies should expect activists to ramp up their demands for companies to sell themselves.
Yesterday, the SEC posted this notice & request for comment for a proposed NYSE rule change that would amend Section 102.06 of the NYSE Listed Company Manual to extend the period for which a SPAC can remain listed if it has signed a definitive agreement with respect to a Business Combination. As described below, this would better align NYSE’s approach with Nasdaq’s:
Section 102.06e of the Manual provides that the Exchange will promptly commence delisting procedures with respect to any listed SPAC that fails to consummate its Business Combination within (i) the time period specified by its constitutive documents or by contract or (ii) three years, whichever is shorter.
Section 102.06e requires the Exchange to promptly commence delisting procedures even for listed SPACs that have entered into a definitive agreement with respect to a Business Combination within three years of their listing date, but that are unable to complete the transaction before the three-year deadline established by 102.06e. As a practical matter, any such NYSE-listed SPAC would need to liquidate, transfer to a market that provides a longer period of time to complete the Business Combination, or face delisting.
The Exchange notes that Nasdaq’s SPAC listing requirements include a three-year limitation that is substantially similar to that included in the Exchange’s SPAC listing standard. However, Nasdaq appeal panels have granted additional time to SPACs that appeal their delisting for failure to consummate a Business Combination within three years in circumstances where the SPAC has a definitive agreement and requests additional time beyond the three years provided by the applicable rule to enable it to consummate its merger.
Accordingly, the amendment would provide that NYSE will commence delisting procedures with respect to any SPAC that fails to:
(i) enter into a definitive agreement with respect to its Business Combination within (A) the time period specified by its constitutive documents or by contract or (B) three years, whichever is shorter or
(ii) consummate its Business Combination within the time period specified by its constitutive documents or by contract or forty-two months, whichever is shorter.
A recent S&P Market Intelligence blog says that the first quarter of 2024 may see the highest number of big deal announcements in two years. Four global M&A deals with transaction values greater than $10 billion were announced in February, and with eight deals of this size through the first two months of the year, S&P says likely we’re likely to see the highest number of these megadeals since the second quarter of 2022, when 11 were announced.
This excerpt from the blog suggests that one reason for this is that dealmakers are more confident that they can manage their way through the current regulatory environment:
Even though some deals are expected to face reviews, the transaction announcements are a positive sign for activity. Bill Curtin, global head of the M&A practice at law firm Hogan Lovells, said the recent uptick in large deals indicates that companies are getting used to the more restrictive antitrust guidelines. Curtin said the transactions might face litigation, longer closing times and increased costs. Pursuing the transactions shows that companies view the positives of M&A as outweighing the negatives.
“Confidence with respect to how to work constructively with the regulators means M&A rises in 2024,” Curtin said on the latest edition of the Pipeline podcast. “And … $10 billion-plus, $20 billion transactions, those start to return, as you’ve seen.”
Without a doubt, the most complicated transaction that I was participated in during my years of practice involved a Reverse Morris Trust structure. While the deal team cornered the market on Excedrin trying to sort the mechanics of that transaction out, it proved to be a terrific deal for all parties involved. This Sidley memo (p.2) discusses the RMT structure and points out that it can solve some of the major problems associated with a spin-off, including the need to build a new management and governance infrastructure and the risk that post-deal acquisitions of stock could taint the tax-free nature of the deal. This excerpt provides an overview of the advantages of an RMT:
In a Reverse Morris Trust, a publicly traded company(Remainco) separates the non-core business by a tax-free spin-off of the entities that ownthat business (Spinco) to the stockholders of Remainco and then immediately combines Spinco with another publicly traded company (which we refer to as Merger Partner) in a stock-for-stock merger. As in a traditional spin-off, prior to the spin-off, Spinco typically incurs debt and uses the proceeds to fund a cash dividend to Remainco. When the transactions have closed, the stockholders of Remainco own 100% of the stock of Remainco and a portion of the stock of Merger Partner, Remainco has the cash proceeds of the dividend paid by Spinco, and Merger Partner owns Spinco. As with both a carve-out cash sale and a spin-off, the Reverse Morris Trust provides the opportunity for a “re-rating” of the Remainco stock following the transaction.
A Reverse Morris Trust also provides all the tax-efficient benefits of a spin-off that are not present in a carve-out sale for cash. That is, the separation from Spinco is tax-free to Remainco, and the receipt of the Spinco stock and subsequent exchange for Merger Partner stock is tax-free to the Remainco/Spinco stockholders. At the same time, the combination of Spinco and Merger Partner both reduces the dyssynergies that are present in a spin-off and creates opportunities for synergies and economies of scale that are often present in strategic combinations.
Moreover, the restrictions on subsequent M&A transactions involving the stock of Remainco and Spinco are often less of a concern following a Reverse Morris Trust. This is principally because Spinco/Reverse Morris Trust Partner (RMT Partner) will have just engaged in a transformative M&A transaction and will therefore be focused on integrating the operations of the combined company and less likely to be in a position or have the desire to engage in a subsequent transformative M&A transaction in the near-to-medium term.
The memo goes on to discuss the considerations that need to be taken into account when seeking the right RMT partner, as well as the complex mechanics associated with an RMT transaction. It’s a really good overview of the transaction process, although I do wish they’d mentioned the Excedrin issue!
At the risk of sounding like we have absolutely no lives, John and I have been eagerly awaiting the Delaware Supreme Court’s decision in the In Re Match Group Inc. Derivative Litigation for quite some time — at least since the December oral arguments. Yesterday, the comparatively short, 52-page opinion In Re Match Group Inc. Derivative Litigation (Del.; 4/24) was posted.
For background, in September 2022, the Chancery Court held in In Re Match Group Inc. Derivative Litigation (Del. Ch.; 9/22) that IAC/InterActive’s 2019 reverse spinoff of its Match.com dating business satisfied the MFW framework and was subject to review under the business judgment standard, rejecting the plaintiffs’ allegations that the special committee and/or the stockholder approval were insufficient under MFW. On appeal, the Delaware Supreme Court did something unusual, requesting “supplemental briefing to answer the following question: for a controlling stockholder transaction that does not involve a freeze out merger, like the transaction here, does the entire fairness standard of review change to business judgment if a defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote.”
Per this Morgan Lewis memo, the company took this opportunity to argue “against ‘MFW creep,’ or the expansion of the MFW Doctrine outside of the squeeze-out merger context”:
Specifically, the company reasoned that Delaware courts have historically required companies to use only one of three so-called “cleansing mechanisms” to invoke the protections of the business judgment rule for a conflicted transaction: (1) approval by a majority of independent directors, (2) approval by a special committee of independent directors, or (3) approval by a majority of disinterested stockholders. Accordingly, the company argued that MFW’sholding should be cabined to apply only to squeeze-out mergers, and other controlling stockholder transactions should be entitled to deference under the business judgment rule so long as the company meets one of the three traditional cleansing mechanisms.
The Delaware Supreme Court disagreed — finding that multiple procedural protections are required to change the standard of review — and overturned the Chancery Court’s decision to apply the business judgment rule since the approving committee member was not independent of the controlling stockholder and, therefore, defendants failed to satisfy MFW’s multiple prongs.
[W]e conclude, based on long-standing Supreme Court precedent, that in a suit claiming that a controlling stockholder stood on both sides of a transaction with the controlled corporation and received a non-ratable benefit, entire fairness is the presumptive standard of review. The controlling stockholder can shift the burden of proof to the plaintiff by properly employing a special committee or an unaffiliated stockholder vote. But the use of just one of these procedural devices does not change the standard of review. If the controlling stockholder wants to secure the benefits of business judgment review, it must follow all MFW’s requirements.
Tulane Prof. Ann Lipton points out that the opinion also seemed to apply a tighter independence standard, saying the court wasn’t having the “oh, well, one turned out to be conflicted but it didn’t matter much business,” which had been persuasive to the Chancery Court. My kid would call this argument “sus” — because she uses that word about everything. In a conversation this morning she told me, “only old people use the full word suspicious.” Follow for legal updates; stay for tips on how to be cool to a 10-year-old.