Vice Chancellor Laster’s 2015 decision to tag Dole Food’s CEO & another executive with a $148 million judgment for breaching their fiduciary duties in connection with its going private transaction was one of that year’s most noteworthy Chancery Court rulings. While Dole’s CEO & 40% shareholder David Murdock ultimately agreed to a settlement calling for him to pay the entire amount of the judgment, he sought to recover under the company’s D&O policy. After all, you don’t get rich enough to write a check this big by writing checks this big. . .
As you might imagine, the insurers weren’t too excited about being asked to pick up the tab for this settlement & one in a related federal case – which brought the grand total to $222 million – and filed a lawsuit claiming that they weren’t liable for them. Earlier this month, the Delaware Superior Court ruled on competing motions for summary judgment by each of the parties. Here’s an excerpt from a recent Morris James blog summarizing each party’s position:
The defendants then were sued by six of their excess insurance carriers, seeking a declaratory judgment that they did not have to fund the settlement. Among other reasons, the insurers asserted that the settlement payment representing the actual fair value of the merger consideration did not constitute a “Loss” under the policy.
Defendants counterclaimed seeking declaratory judgment that the insurers breached the policies by refusing to pay for the Court of Chancery settlement as well as the settlement in San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-01140 (D. Del.).
The Court granted in part and denied in part the summary judgment motions. The Court applied the rules of interpretation applicable to insurance policies, and determined that the settlement payments constituted a “Loss” covered under the policy. But it also held that genuine issues of material fact remained as to whether the insureds breached their own obligations under the contract. For more details on the case, see this Hunton Andrews Kurth blog.
Last week, President Trump issued an Executive Order declaring that threats to IT & telecom supply chain posed by “foreign adversaries” are a national emergency & granting broad authority to the Secretary of Commerce to prohibit a wide variety of transactions that might pose risks to U.S. national security.
In general, the Order prohibits companies from acquiring, importing, or otherwise using any “information and communications technology or services” in which a foreign adversary has any interest. That prohibition only kicks in if the Secretary of Commerce (after consulting with other agencies) determines both that the deal involves persons who are controlled by or under the jurisdiction of the bad guys, & that it presents risks to critical infrastructure or raises other national security concerns.
This recent blog from Steve Quinlivan notes that given how sweeping the prohibition is, people involved in M&A transactions need to take it into account in due diligence, but also points out that – at least for now – answers about its implications for a potential deal may be hard to come by:
The broad prohibition on acquisitions indicates the Executive Order merits consideration in pending or newly initiated M&A transactions involving information and communications technology and related services from foreign governments and persons. Unfortunately, the Executive Order does not appear to include a mechanism where questions of the applicability of the Executive Order can be speedily resolved at this time.
Further to Steve’s point, this Winston & Strawn memo says that the Order doesn’t impose immediate restrictions, but instead represents the “beginning of a new regulatory framework to address these concerns.” In terms of guidance, the memo says that we’re likely going to have to wait to see the regulations issued under the Order. This excerpt suggests those aren’t likely to be rolled out for several months:
The key developments to watch following issuance of this Executive Order are the procedures developed by the Commerce Department (in consultation with other agencies and departments) to make these critical determinations. The Order directs the Secretary of Commerce, within 150 days, to issue implementing regulations that may, but need not, include:
– determining that particular countries or persons are foreign adversaries for the purposes of this order;
– identifying persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries for the purposes of this order;
– identifying particular technologies or countries with respect to which transactions involving information and communications technology or services warrant particular scrutiny under the provisions of this order;
– establishing procedures to license transactions otherwise prohibited pursuant to this order;
– establishing criteria by which particular technologies or particular participants in the market for information and communications technology or services may be recognized as categorically included in or as categorically excluded from the prohibitions established by this order; and
– identifying a mechanism and relevant factors for the negotiation of agreements to mitigate concerns raised in connection with the Order.
The memo also says it’s likely that a multi-agency review panel of some form will take on a role in reviewing IT & telecom transactions that may present concerns, and that this panel’s jurisdiction may overlap with that of the CFIUS. But then again, until we see something from Commerce, who knows what we’re dealing with? In any event, we’re posting memos in our “National Security” Practice Area.
– The Culture of Counterparties
– Cross-Border Carve-Out Transactions: Conditions & Staggered Closings
– California Consumer Privacy Act and Its Impact on M&A Transactions
– The Millenials Strike Back: 29 Tips for Older Deal Lawyers
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State and local tax (SALT) issues are sometimes below dealmakers’ radar screens – but they can pack quite a wallop if they aren’t properly taken into account. This Morrison & Foerster memo provides an overview of how state & local tax laws can impact a transaction.
One of the things that the memo points out is that when it comes to taxes, the feds & the states don’t always see eye-to-eye. For instance, this excerpt highlights the fact that state & local authorities take a different point of view than does the IRS when it comes to successor tax liability in an asset deal:
For asset deals, states do not typically follow the federal income tax rule that there is no successor liability for a buyer unless the transfer constituted a fraudulent conveyance under state law. State successor liability statutes typically apply more broadly, do not require a fraudulent conveyance in order for successor liability to apply and may apply to more taxes than just sales and use taxes. State liabilities can be for all taxes. Just because you found the sales and use tax bulk sale law does not mean that you found all the tax bulk sale laws in the state. The laws can be contained in other tax statutes.
The memo also addresses how state & local income tax, sales & use taxes, real estate transfer taxes and unclaimed property laws can create problems for dealmakers – and highlights the need to include lawyers with SALT expertise on deal teams early on in a transaction.
I remember my law school Property prof’s discussion of the dreaded “rule against perpetuities.” I didn’t get it, and neither did my classmates. Finally, the prof threw in the towel, and said something along the lines of “I’m going to give you the same advice I got – there’s a definitive 1938 Harvard Law Review article on the rule against perpetuities. If you read it carefully, you will know enough about the rule to give the wrong answer to the question they’ll ask about it on the bar exam.”
Anyway, I sort of think that the whole issue of what constitutes a sale of “all” or “substantially all” of a company’s assets is corporate law’s version of the Rule Against Perpetutities. When I taught law school, I used to tell my students that if they did this stuff for a living, they’d eventually be asked to write the same 20-page memo on whether a particular deal involves the sale of substantially all of the assets of a company that the lawyer assigning it to them wrote 25 years ago. And the answer will also be the same – some variation of “maybe, but then again, maybe not.
If you’ve already drafted this memo, I can’t be of much help to you. But if you haven’t, I can at least point you in the direction of this Greenberg Traurig memo that introduces the Nevada sale of assets statute, discusses its plain meaning, and reviews case law interpreting “all” and “substantially all” in the sale of assets statutes in various other jurisdictions including Delaware, California, Connecticut, and Illinois. If you read it carefully, you’ll know enough to give a more definitive tone to the “maybe, but then again, maybe not” answer you give in your memo.
This Fox Rothschild blog reviews the Delaware Supreme Court’s recent decision in Leaf Invenergy Co. v. Invenergy Renewables, LLC, in which it reversed the Chancery Court’s decision to award only nominal damages in connection with a company’s breach of an investor’s consent right. Instead, the Court determined that the plaintiff was entitled to $126 million in damages! This excerpt summarizes the Court’s reasoning:
The High Court found that Leaf had previously negotiated consent rights when investing $30 million into Invenergy, which required the investor’s permission in advance of any material sale. Per the opinion, the relevant contract provision reflected each side’s intention to either move forward with a such a sale only with Leaf’s consent, or to require Invenergy to buy out Leaf if it did not consent to the transaction. When the Court of Chancery determined that those rights had been breached, it should have upheld contractual provisions calling for a damages multiplier, per the Supreme Court.
Instead, Vice Chancellor Laster held that an “efficient breach” had occurred, because even though Invenergy did not seek Leaf’s consent prior to the sale, the trial court found that Leaf received more in the sale than it would have under the contract terms. Vice Chancellor Laster thus decided on the $1 nominal damages award because he determined that Leaf was left no worse off despite the breaches, in light of the efficient breach doctrine.
When assessing damages, the High Court found that the Court of Chancery erred by limiting its focus on the harm to Leaf in the context of the results of the sale, rather than considering the full effect of Invenergy’s contractual breach in failing to seek Leaf’s consent and then failing to pay the target multiple. The Supreme Court stated held the trial court should have taken a broader approach that “considered the combination of [all aspects of the contractual breaches] when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages would return Leaf to the position it would have been in had Invenergy not breached [the contract]”.
This decision may turn out to be good news for holders of preferred stock generally. That’s because recent Delaware precedent suggested that directors’ fiduciary duties to common holders might require them to use the “efficient breach” concept in order to avoid complying with preferred stock’s contract rights.
For example, in Hsu Living Trust v. ODN Holding, (Del. Ch.; 5/17), Vice Chancellor Laster held that a board’s fiduciary duty to common shareholders may obligate it to breach contractual obligations to preferred shareholders if it could do so through an “efficient breach.” The Supreme Court’s approach in Invenergy complicates the efficient breach analysis, and may increase the leverage of preferred holders when attempting to exercise or enforce those rights.
This SRS Acquiom study reviews the financial & other terms of 1,200 private target deals that closed during the period from 2014 through 2018. Here are some of the key findings about trends in last year’s deal terms:
– The median time from first investment round to exit increased to 7 years in 2019, up from 5 years in 2016
– Cash remained the preferred currency for private deals, with stock and cash/stock deals representing less than 15% of deals in 2018
– Post-closing purchase price adjustments are now guaranteed by separate escrows 56% of the time – compared to only 27% as recently as 2015. More than 2/3rds of 2018 deals used “GAAP, consistent with past practices” as the methodology for preparing purchase price adjustments.
– Earnouts in non-life sciences deals dropped significantly. Only 13% of those deals had earnouts last year, compared to 23% during 2017. The size of earnouts also declined, representing just 27% of deal value in 2018 compared to 43% in 2017.
– The median general survival period for indemnity escrows was 15 months in both 2018 & 2017. Median escrow size was 10% of transaction value. Over 90% of fundamental reps had a defined survival period, reflecting the continuing trend away from indefinite indemnities that began with the Cigna v. Audax decision.
– Nearly half of deals had “Big MAC” qualifiers for the accuracy of seller’s representations, up from 31% in 2015. The more traditional formulation requiring those reps to be accurate “in all material respects” appeared 51% of deals.
There’s plenty of other interesting stuff to review in this study, including more on financial terms, closing conditions, indemnification, dispute resolution and termination fee arrangements.
Here’s something I recently blogged over on TheCorporateCounsel.net:
This Bass Berry blog says that companies that have adopted exclusive forum provisions in their charter or bylaws shouldn’t be surprised to receive comments on their disclosures about them in SEC filings. The blog includes links to a handful of recent comment letters touching on various aspects of exclusive forum provisions. Check it out!
Vertical mergers traditionally haven’t been subject to the same regulatory scrutiny as those involving direct competitors. But this Jenner & Block memo suggests that recent FTC decisions involving merger challenges, as well as the FTC’s hearings on competition & consumer protection in the 21st century indicate that the climate is changing. Here’s an excerpt:
Traditionally, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) have reviewed vertical mergers with more leniency than horizontal mergers. With the Division’s challenge of the AT&T-Time Warner deal and the FTC’s settlement decree in the Staples-Essendant merger, some wonder if the traditional approach may be undergoing a change.
The FTC’s decision earlier this year by the set of all new commissioners on the Staples-Essendant merger, reflected its first bipartisan split. Although the majority decision emphasized the FTC’s continued commitment to mainstream antitrust policy, statements by the Commissioners, especially the dissenting Democratic Commissioners, indicated a possible divergence away from that policy and that vertical mergers may be facing heavier scrutiny going forward.
On April 12, 2019, in the FTC’s 13th hearing of a series of 14 on Competition and Consumer Protection in the 21st Century, FTC commissioners further opined on the benefits of heavier scrutiny, this time on both sides of the political aisle.
In a potentially ominous development, the memo also notes that several Commissioners extolled the potential benefits of “merger retrospectives” – which involve reviewing the effects of a transaction on competition following the closing, and potentially initiating post-closing challenges to the deal.
The memo also points out that the FTC remains relatively friendly to vertical mergers in comparison to the DOJ. So far, the FTC’s enforcement actions against non-horizontal mergers have been limited to behavioral remedies, while the DOJ has required structural remedies such as divestitures in some recent vertical mergers.
Buying distressed companies, whether through bankruptcy or otherwise, presents some unique challenges – as well as some unique opportunities. This 233-page Wachtell outline provides a comprehensive an overview of alternative methods for acquiring distressed businesses.
Topics addressed include typical corporate responses to debt crises, as well as the various issues associated with out-of-court, hybrid & bankruptcy acquisition strategies, and with acquiring & trading claims in distressed companies. Here’s an excerpt from the introduction:
Distressed companies can represent attractive acquisition targets. Their stock and their debt often trade at prices reflecting the difficulties they face, and they may be under pressure to sell assets or securities quickly to raise capital or pay down debt. Accordingly, prospective acquirors may have an opportunity to acquire attractive assets or securities at a favorable price. This outline considers how best to acquire a distressed company from every possible point of entry, whether that consists of buying existing or newly issued stock, merging with the target, buying assets, or buying existing debt in the hope that it converts into ownership.
For many M&A lawyers, the world of distressed acquisitions is much different from the one they’re used to operating in – and this outline is a very valuable resource to have at your side when trying to navigate it.