This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– How the Type of Buyer May Affect the Target’s Remedies in a Public M&A Deal
– The Risks of Not Strictly Complying with a “No Shop” Clause
– When Passive Investors Drift into Activist Status
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Dechert’s most recent quarterly review of merger investigations during the current year provides several data points supporting the view that companies are facing a more challenging environment when it comes to antitrust review of proposed acquisitions. Here are some of the highlights:
– The Trump administration’s efforts to block mergers are at near record levels, with 5 significant investigations resulting in complaints in 2019 YTD. That’s on-pace with the Obama adminstration’s record of 7 complaints during 2015.
– The number of significant antitrust merger investigations is up, with 20 resolved in 2019 YTD compared to 15 for the same period in 2018.
– The average duration of significant investigations continues its climb, reaching 12.6 months for 2019 YTD, up from 9.8 months for the same period in 2018.
– Merger review reforms at DOJ are having an impact, with DOJ significant investigations taking 3.9 months less on average than FTC significant investigations.
Companies expecting to confront significant antitrust issues may delay HSR filings or “pull & refile” in the hope that providing regulators more time at the front end will avoid or streamline a second request. The memo says that this isn’t usually a successful strategy:
Despite the increasing use of this pre-second request strategy over the past several years, merging companies might not be making a wise investment of their time if their goal is to achieve shorter overall investigations. For 2019 YTD, when companies subject to a significant investigation allotted more than the median time (73 days) for pre-second request discussions, the average duration of the significant investigation was 14.2 months. By contrast, merging companies allotting less than the median time endured significant investigations lasting an average of 10.9 months. DAMITT shows a similar trend for the 2011–2018 period.
The memo also says that U.S. regulators’ insistence on identification of upfront buyers as a condition to approving a deal based on divestitures has become nearly a universal practice. During the first 3 quarters of 2019, 80% of divestiture consents requiring upfront buyers. For the rolling 12 months ended Q3 2019, 88% of consents required an upfront buyer, compared to 73% of consents requiring an upfront buyer in the rolling 12 months ended Q3 2018.
This Weil blog reviews the Delaware Chancery Court’s recent bench ruling in Brown Robin Capital v. The Anschutz Corp. (Del. Ch.; 8/19) (transcript) and says that it demonstrates the “need for vigilance” when it comes to drafting forum selection clauses. Here’s an excerpt:
The sell-side of a Delaware law governed business acquisition agreement sought an injunction to prevent the buy-side from pursuing a suit they had filed in Texas based on allegations that the sell-side had made fraudulent representations. Vice Chancellor Slights noted that “[u]nder binding Delaware Supreme Court precedent, a party suffers irreparable harm when forced to litigate in a jurisdiction other than the one selected by a valid forum selection clause.” But the issue was whether the particular forum selection clause in the parties’ business acquisition agreement mandated suit in Delaware for claims premised upon fraud. The forum selection clause (which was combined with the choice of law clause) read as follows:
This Agreement, and the Transaction Documents, shall be exclusively construed and interpreted according to the Laws of the State of Delaware, without regard to its conflict of law provisions which would require the application of the Laws of a state other than Delaware, and each Party irrevocably consents to the exclusive personal jurisdiction and venue of the Chancery Court of the State of Delaware (or if such a court shall not have jurisdiction, any other state or federal court sitting in such State).
Because the choice of law component of this clause limited itself to the construction and interpretation of the agreement, and did not include broad language making the governing law apply to other matters “arising from,” “relating to,” or “in connection with,” the agreement, and because the choice of forum clause was part of that limited regime, Vice Chancellor Slights interpreted the choice of forum clause as only mandating a Delaware forum for claims directly related to the construction and interpretation of the agreement.
However, despite VC Slights’ conclusion, he granted an injunction against the Texas action because the fraud claims would require construction and interpretation of the agreement. Although the case ultimately had a happy ending for the seller, the blog notes that this result came only after costly briefing & analysis, which could have been avoided “with the use of broad language, rather than the narrow language that it is often found in favored older templates.”
The blog recommends that parties drafting forum selection clauses consult the chart appearing at the end of Prof. John Coyle’s recent Iowa Law Review article, “Interpreting Forum Selection Clauses,” in order to ensure that the clause they draft means what they want it to mean.
This Sullivan & Cromwell memo reviews U.S. shareholder activism during 2019. Here are some of the key themes identified in the memo:
– Board seats obtained per announced campaign remain at elevated levels, as activists on average obtained 0.7 board seats per 2019 campaign (a 35% increase from 2017)
– Despite the recent focus in shareholder discourse on “purpose” and maximizing value for all stakeholders, institutional investors appear to give activists a pass on ESP topics
– Active managers are increasingly adopting activist tactics, highlighted by Neuberger Berman’s proxy contest at Verint Systems
– Activists are focused on M&A in record numbers, either by agitating for sales or divestitures or by intervening to break up previously announced transactions
– Almost 50% of issuers that added activist designees to their boards in 2017 or 2018 have since either sold themselves or engaged in a meaningful divesture
– Activists continue to hone in on issuers without a permanent CEO or with impending CEO retirements, evidenced by several prominent 2019 campaigns.
The memo says that activism levels in 2019 have been consistent with prior years. There were 205 new campaigns launched through the end of August and activists won 76 board seats. During the comparable period in 2018, there were 203 new campaigns and activists won 113 board seats. Starboard has been the most active investor this year, launching 10 new campaigns, while Icahn launched 4 & Elliott launched 3.
This Winston & Strawn memo reviews 9 ways in which European transactions differ from what buyers are accustomed to in U.S. deals. This excerpt addresses the European approach to funding arrangements:
Like in the U.S, the typical leveraged buyout will involve both acquisition funding and working capital financing. Term funding may be provided in the form of a bond or a loan. There are different regulatory and tax consequences depending on the jurisdiction of the borrower. So, the private equity sponsor should be careful to ensure that the proposed lender or arranger confirms that they can actually comply with the structuring requirements for the transaction before agreeing to terms.
Since there are more deal variables to be worked out on a typical European term loan and documentation is less standardised than U.S. documentation, term sheets for term debt in Europe are considerably more detailed than those in the U.S. U.S. sponsors should be wary of agreeing short form term sheets with U.S. lenders without obtaining advice, since this typically exposes them to worse terms than are generally obtained in the European market and the possibility that the lender has not worked out whether it can meet all of the relevant withholding tax and regulatory requirements.
Increasingly, the working capital financing is provided by a different funding source than the term debt. Non-bank lenders typically won’t be able to provide banks accounts, let alone the efficient overdrafts, cheque facilities, letters of credit or credit cards that a business needs. Also, the business may need intra-day payment lines, currency exchange facilities or interest or currency hedging. Typically, a local bank, perhaps one with a track record with the business, is needed to provide these services.
Other topics addressed in the memo include, among other things, transaction structuring, employee issues, the role and expectations of advisors, accounting principles, and currency issues.
Earlier this month, the FTC unanimously ordered the unwinding of a merger involving two microprocessor prosthetic knee (MPK) companies that was completed in 2017. (h/t Prof. Brian Quinn). The transaction, which was not subject to the HSR Act’s pre-merger notification requirements, involved the acquisition of Freedom Innovations by Otto Block. Here’s an excerpt from the FTC’s press release announcing the Commission’s order:
The Commission’s Opinion and Final Order states, “Based on our de novo review of the facts and law in this matter, we find that the Acquisition is likely to, and indeed already has, substantially lessened competition in the relevant market for MPKs… We hold that, to fully restore the competition lost from the Acquisition, [Otto Bock] must divest Freedom’s entire business with the limited exceptions granted by the [Administrative Law Judge].”
The Commission’s order represents the first time that the current Commission ordered that a consummated acquisition be unwound.
“The Commission is committed to ensuring competitive markets for the benefit of consumers, and there will be times when it has to act after a merger has been consummated,” said FTC Chairman Joseph J Simons. “The goal is always to restore the lost competition.”
This deal may be the first that the current Commission has ordered to be completely unwound, but post-closing challenges seeking structural remedies such as partial divestitures have become more common, and demands from regulators to unwind entire deals are not unprecedented. For example, in 2017, the DOJ required TransDigm to agree to unwind its acquisition of Schroth Safety Products as part of a negotiated settlement of the Antitrust Division’s challenge to that transaction.
Being required to “unscramble the eggs” in a completed merger is one of those nightmare scenarios that nobody wants to have to deal with. The parties did enter into a “hold separate agreement” with the FTC at the time the agency initiated its challenge in 2017, which may make the deal at least a little easier to unwind.
It’s worth noting that both the Otto Block & TransDigm cases involved deals that were below the HSR radar screen, and they once again illustrate the point that just because your deal may be on the smaller side, it’s not going to get a free pass when it comes to antitrust concerns.
I’ve previously blogged merger arbitrage and the impact that it can have on the parties’ stock prices after the announcement of a deal. But a new study says that the potential for post-signing shenanigans by arbs can play a significant role in the buyer’s initial decision concerning the type of consideration to use in the transaction. Here’s an excerpt from the abstract:
Announcements of stock-financed mergers and acquisitions (M&As) may attract short selling of bidder shares by merger arbitrageurs. We hypothesize that bidders that face higher short selling potential include a higher proportion of cash in their M&A payments in order to reduce the negative price pressure resulting from merger arbitrage short sales. Consistent with this prediction, we find a positive impact of the ex-ante lending supply of bidder shares on the percentage of cash in M&A payments.
A high supply of bidder shares available for lending means that arbs will have easier access to those shares for borrowing and fewer constraints on their ability to sell short. So, checking out the level of supply could provide helpful insights for sellers about potential buyers’ pain thresholds when it comes to the mix of stock and cash consideration when they’re negotiating a deal.
EY recently published the latest edition of its “Global Capital Confidence Barometer”, which surveyed more than 2,900 executives in 45 countries about a variety of macroeconomic & business topics, including their thoughts on the climate for M&A in the upcoming year. Here are some of the highlights:
– 68% of executives surveyed believe the global M&A market will improve over the next 12 months, 26% believe it will remain the same, while only 6% expect a decline.
– 52% expect their companies to be active participants in the M&A market during the upcoming year.
– 94% expect their deal pipeline to increase (49%) or remain the same (45%), and the same percentage expect to do the same (45%) or a greater number (49%) of deals during next 12 months.
The survey notes that one of the reasons for continued optimism is that companies can’t transform their portfolios as quickly as they need to without M&A. What’s more, it isn’t only the buy side that’s driving activity – companies are using divestments to find the capital they need for new acqusitions. When you add in the record levels of dry power in private capital, EY says that “all the components of sustained momentum remain in place.”
When it comes to the U.S., EY reports that executives are even more optimistic – with 83% expecting that the market will improve. But this Pitchbook article identifies a potential yellow light:
But there’s another side to the story: deal intentions slipped below the 50% mark for the first time in two years, with just 46% of US respondents saying they intend to actively pursue M&A in the next 12 months. Yet, given market conditions—56% of US executives deem regulatory impacts as their greatest external business threat—that’s still “pretty incredible,” according to Bill Casey, EY Americas Vice Chair of Transaction Advisory Services.
Overall, the survey suggests that we should look for another robust year when it comes to M&A activity, despite concerns about recession, trade wars, impeachment & the U.S. election – if for no other reason than that, in the current environment, businesses don’t seem to have viable alternatives to provide the growth that investors demand.
Nearly every acquisition agreement has numerous “belt & suspenders” type provisions – one topic might be the subject of a detailed contractual provision, but also encompassed by one or more contractual “catch-all” provisions. This Kirkland & Ellis memo reviews a recent Delaware Chancery Court decision that illustrates the perils of not addressing the hierarchy of these specific & general provisions in the acquisition agreement.
In ITG Brands v. Reynolds American, (Del. Ch. 9/19), Chancellor Bouchard was confronted with an asset purchase agreement that contained broad general descriptions of liabilities assumed by the buyer, as well as detailed descriptions of specific liabilities that would be the buyer’s responsibility.
The case involved the interplay between a general agreement to assume all liabilities for actions arising out of post-closing operations and specific language addressing the assumption of obligations under a tobacco settlement agreement with four states. The problem was that, after the closing, another state showed up to the party. This excerpt discusses how Chancellor Bouchard addressed the interpretive issues under the contract:
In simplified form, the question before the court was which party was responsible in the event of a fifth state investigation that generates liability from the post-closing conduct of the acquired business. The seller argued that the buyer is responsible as this clearly fell under the “general” post-closing Actions category. The buyer argued that the listing of only the four state investigations in the “specific” subsection showed an express intent to not assume responsibility for the fifth state investigation.
In the Reynolds decision, Chancellor Bouchard rejected both parties’ claims for judgment on the pleadings, finding that each reading was at least reasonable and therefore extrinsic evidence to determine the intent of the parties was required.
In support of the buyer’s reading, Chancellor Bouchard pointed to a 2005 Delaware Supreme Court decision (DCV) that addressed the overlapping representation question described in the first paragraph above. In DCV, the Supreme Court applied the contract interpretation principle that the specific takes precedence over the general and held that indemnification could only be sought by the buyer under the specific knowledge-qualified compliance representation.
Chancellor Bouchard did not accept the seller’s attempt to distinguish the DCV case, rejecting the seller’s argument that in DCV the two contradictory representations were in different sections while here the two “conflicting” sections were within the same list of seven assumed liabilities and therefore should be viewed as supplemental to each other.
The memo notes that the key takeaway from the Chancellor’s decision is not to put all of your faith in a “catch-all” provision, but to instead consider specifying a hierarchy among provisions that could be construed to cover the same matter or expressly indicate whether or not the specific terms “are intended as ‘including but not limited to’ examples of the general provision.”