Earlier this week, the Treasury Department issued proposed regulations that would implement the Foreign Investment Risk Review Modernization Act that President Trump signed into law last August. The proposed regulations address transactions that weren’t covered by the FIRRMA pilot program regulations that were put in place last October, and this Ropes & Gray memo says that they are a very big deal:
The draft regulations set forth in the Proposed Rules, if implemented in their current form, would mark a significant expansion of CFIUS’s jurisdiction to review foreign investments in the United States. Among other changes, the Proposed Rules would provide the Committee with the ability to review non-controlling investments by foreign persons in certain categories of U.S. businesses, including those dealing in critical infrastructure and sensitive data, and make certain filings by foreign government-affiliated investors mandatory for the first time.
The Proposed Rules also would alleviate existing CFIUS-related considerations for certain foreign investors, including by codifying exceptions to CFIUS’s jurisdiction, adjusting the procedures used to notify CFIUS of covered transactions, and potentially creating exclusions from the Committee’s jurisdiction for investors associated with certain countries.
The memo reviews the proposed regulations in detail. It notes that the comment period ends on October 17th, and that CFIUS has until February 13, 2020 to issue final rules.
– John Jenkins
This Proskauer memo walks through the various methods used by dealmakers to address antitrust risks in M&A documentation. Here’s an excerpt:
A number of tools are commonplace for addressing antitrust risk, including efforts clauses, end dates, break or termination fees, material adverse event clauses, and control of investigation strategy. These provisions govern the parties’ obligations in the period prior to closing, and set out parties’ obligations if the transaction is not completed.
Transactions can be terminated mutually, and often are. But when that does not happen, the parties’ actions leading up to termination will be scrutinized for compliance with the various agreement provisions. When uncovering a breach could make the difference in who takes on the cost of the failed deal, understanding and strictly complying with the provisions of the agreement becomes critically important.
The memo reviews common contractual provisions used to address antitrust concerns, provisions, addresses how to ensure compliance with them, and provides examples of how they’ve played out in real world situations.
– John Jenkins
This Wachtell Lipton article provides an overview of the issues involved in using a special committee of the board to oversee a conflict transaction. Here’s the intro:
Special committees often play a critical role in conflict transactions, such as transactions involving controlling stockholders, corporate insiders or affiliated entities, including “going private” transactions, or purchases or sales of assets or securities from or to a related party. Such “conflict transactions” raise complicated legal issues and, in today’s environment, a high likelihood of litigation. A well-functioning and well-advised committee can offer important protections to directors and managers in after-the-fact litigation.
The article also points out that special committees aren’t always the answer, and that forming one in the absence of a conflict transaction can hamper the company’s operations, create rifts within the board and even encourage litigation by creating the perception of a conflict where none actually exists.
– John Jenkins
Earlier this month, the DOJ announced that – for the first time – it had agreed to take a challenge to a proposed merger to binding arbitration. Here’s the intro from this Gibson Dunn memo discussing the DOJ’s action:
On September 4, 2019, the U.S. Department of Justice’s Antitrust Division filed a complaint in the Northern District of Ohio challenging Novelis Inc.’s proposed $2.6 billion acquisition of Aleris Corporation. In a first, the Antitrust Division has agreed to resolve the matter through binding arbitration under the Administrative Dispute Resolution Act of 1996, 5 U.S.C. § 571 et seq. Assistant Attorney General Makan Delrahim remarked that “[t]his new process could prove to be a model for future enforcement actions, where appropriate, to bring greater certainty for merging parties and to preserve taxpayer resources while staying true to the [Antitrust Division’s] enforcement mission.”
It remains to be seen whether this case portends a larger shift in the Antitrust Division’s approach to resolving merger investigations and negotiating remedies, or whether arbitration will be limited to the specific circumstances surrounding Novelis’ acquisition of Aleris. To the extent arbitration becomes a meaningful option for merging parties in future cases, however, the ramifications are significant.
The memo points out that the potential benefits for arbitration include greater certainty concerning the timing of a resolution and increased confidentiality for third-party customers and competitors who would otherwise be required to testify in open court during the proceeding.
– John Jenkins
It’s not often that you find a court rolling up its sleeves and digging into the mechanics of no-shop & termination fee clauses, but that’s what Vice Chancellor Slights did in his recent decision in Genuine Parts Co. v. Essendant, (Del. Ch.; 9/19). The Vice Chancellor refused to dismiss a buyer’s allegations that the seller had breached the terms of a merger agreement’s “no-shop” clause – and that the buyer could sue for damages, despite accepting a termination fee under contract terms that generally provided it would be the “exclusive remedy” for such a breach.
As this excerpt from Ropes & Gray’s recent memo on the decision highlights, Vice Chancellor Slights’ decision was premised on a close reading of the language of the termination fee provision:
In denying Essendant’s motion to dismiss, Vice Chancellor Slights focused on the exclusive remedy language in the termination fee provision. The Court emphasized that the provision providing that the termination fee was the exclusive remedy required a termination by Essendant “in accordance with” and “pursuant to” its right to terminate the merger agreement for a superior proposal. That right, in turn, depended on compliance with the conditions that (i) the superior proposal “did not arise from any material breach of” the no shop by Essendant and (ii) the Essendant board properly determined, in conformity with the no shop clause, that the Sycamore proposal constituted a superior proposal.
Accordingly, the Court found that the merger agreement left “room” for Genuine Parts to argue that the exclusive remedy provision did not apply. In doing so, the Court rejected Essendant’s argument that Genuine Parts’ acceptance of the termination fee precluded any argument that Essendant somehow failed to act “in accordance with” those provisions. According to the Court, absent express and unconditional contractual language making receipt of the termination fee exclusive of other legal or equitable remedies, acceptance of the termination fee did not by itself foreclose Genuine Parts’ right to sue Essendant for breach of contract. The Court then held that Genuine Parts’ complaint pled facts which plausibly alleged a material breach of conditions (i) and (ii) above.
At only 29 pages, this decision is much briefer than most important Chancery Court rulings, but there’s still a lot to unpack. In particular, VC Slights’ analysis of the issue of whether the no-shop clause was breached is worth a careful read. As Prof. Ann Lipton recently tweeted, there doesn’t appear to be any direct evidence of any violations of the no-shop, “just mysteriously timed offers and acceptances.”
– John Jenkins
This Sidley memo discusses how the nature of that buyer may influence the package of remedies that a seller may be able to negotiate to protect itself in the event of a breach. Here’s the intro:
In exploring a potential public company sale, target boards rightly focus on the amount and type of consideration offered by potential buyers and the level of deal certainty. However, when considering offers (including at early stages in the process), target boards should also take into account the risk of a buyer breach, including in connection with a financing failure, and the remedies that will be available to the target as a result. Although, as a matter of principle, the consequences to the target of a failed deal should not be different depending on the type of buyer, as discussed below, the remedies offered by strategic buyers often dramatically differ from the remedies offered by financial buyers.
In public M&A transactions, there are generally three potential remedies available to targets in the event of a buyer breach: (1) specific performance of the merger agreement (and the equity commitment letter, if any), (2) termination of the merger agreement with payment of a reverse termination fee and (3) termination of the merger agreement with the right to recover monetary damages for pre-termination breach.
The memo discusses the different approaches that strategic buyers and private equity buyers take to these potential remedies. I’ve touched on some aspects of this topic over on the “John Tales” blog, but the memo goes on to suggest some specific actions that the seller’s board can take to negotiate the best outcome when it comes to the package of remedies that will be available to it in the event of a breach.
– John Jenkins
This HBR article reviews recent research finding that companies that accompany their announcements of M&A transactions with other items of “good news” may not have a lot of confidence in their deal. Why? Here’s an excerpt:
In quarters following acquisitions, CEOs in the U.S. are 28% more likely to exercise options and 23.5% more likely to sell stock than they are in quarters not following acquisitions. This behavior implies that CEOs have low confidence in the value creation of their deals, and that the motivation for them may stem more from private interests or external pressures, than attempts to enhance shareholder wealth.
We wanted to ascertain CEO confidence in an acquisition’s value earlier—when the firm announces it. Acquisitions are strategic events in which the firm learns a wealth of non-public information about the target and the combined firm’s prospects, leading to a significant information asymmetry between managers and market investors. An indicator of low CEO confidence would offer investors an early clue about potential challenges with the deal that the firm anticipates.
We decided to look at firms’ communications around the time of an acquisition announcement, as this is one avenue for CEOs to manage impressions of the firm and its strategy. Specifically, we examined instances of “impression offsetting,” an impression management tactic in which firms issue unrelated positive news alongside strategic announcements, particularly those in which prospects for shareholder wealth creation are less certain. The general idea is to distract markets with good news. Prior research has shown that firms anticipate negative market reactions to acquisition announcements and successfully use impression offsetting as a way to reduce those negative responses.
The study found that the CEO of a company that bombarded the market with unrelated good news around the time of the deal announcement exercised 6.7% more options (on average, $220,000) in the next quarter than a CEO whose firm didn’t – which suggests that the release of unrelated good news may signal that a CEO has low confidence in the deal.
– John Jenkins
Many credit facilities include an “accordion” feature that allows a borrower to incrementally increase the amount of its availability under an existing credit facility. – which makes it a popular option for borrowers considering a potential acquisition. This Davis Polk memo discusses some of the key considerations associated with such incremental facilities from both the borrower’s and lender’s perspective. Here’s the intro:
One key feature of many modern credit agreements is the so-called “incremental” or “accordion” provision, which allows a borrower to increase the aggregate amount of financing available under a credit facility, assuming it can find a willing lender and subject to certain terms and conditions. A common use of these incremental facilities is to finance an acquisition.
Where it is available, an incremental facility allows the borrower to add financing neatly within its existing capital structure, without the need to refinance or “backstop” a required consent from other lenders under the existing loan agreement, or to develop separate credit or collateral documentation and enter into complicated intercreditor arrangements. It can therefore be a very quick and cost-effective way to structure an acquisition financing.
The use of incremental facilities to finance acquisitions by sponsor portfolio companies in particular has increased dramatically in recent years, and has been accompanied by further innovation in terms designed to maximize the flexibility and utility of these provisions. In this note we explore certain key features of incremental provisions, from the perspective of a borrower and lender looking to finance a potential acquisition.
– John Jenkins
A lot of private equity acquisitions involve “add-on” or “bolt-on” transactions involving targets in the same industries or markets as an existing portfolio company. These deals account for a large percentage of private equity M&A activity, and this Cooley video presentation walks through 3 key issues associated with them. It clocks in at under 4 minutes, so it won’t take a big bite out of your day. Give it a look.
– John Jenkins
I recenly blogged about the Chancery Court’s decision in In re Towers Watson & Co. Stockholder Litigation, (Del. Ch.; 7/19), in which Vice Chancellor McCormick determined that the business judgment rule applied to decision of the seller’s board to enter into a merger agreement despite the CEO’s non-disclosure of the post-closing comp negotiations with the buyer.
The plaintiffs in the Chancery Court alleged that the CEO’s potential post-closing compensation improperly incentivized him to seek nothing more than the bare minimum required to get the deal done – and that the undisclosed information about his comp discussions was therefore material to the seller’s directors. While VC McCormick was unmoved by those allegations, the plaintiffs in a federal merger objection lawsuit appear to have fared better with similar claims.
In In re Willis Towers Watson Proxy Litigation (4th. Cir.; 8/19), the 4th Circuit held that those undisclosed CEO comp discussions were sufficient support allegations that the company had omitted material facts in violation of Section 14(a) of the Exchange Act and Rule 14a-9. In reaching this conclusion, the court specifically rejected one of the arguments that VC McCormick found compelling in the fiduciary duty litigation – the fact that it was public knowledge that the CEO’s comp would be higher after the deal. Here’s an excerpt:
The defendants insist that disclosing the alleged compensation agreement wouldn’t have changed the total mix of information available to shareholders. In the defendants’ telling, the proxy statement and other publicly available information made it clear that Haley would be CEO of the combined company and that his compensation would increase after the merger.
It’s true that shareholders knew Haley would make more money after the merger. But they didn’t know that—before the merger had closed—Haley had entered secret discussions with Ubben, who was slated for a seat on WTW’s Compensation Committee, for a more than six-fold increase in his current compensation.
As alleged in the complaint, Haley had a powerful interest in closing the merger to get the compensation he’d discussed with Ubben, even if the terms were unfavorable for Towers shareholders. A jury could thus reasonably conclude that disclosing the secret compensation discussions between Haley and Ubben would have changed the total mix of information available to shareholders.
I don’t know that there are any broad conclusions to be drawn from this case about the differences between federal merger objection lawsuits & Delaware fiduciary duty litigation. While the Chancery Court did tangentially address shareholder-disclosure claims, they weren’t at the center of the breach of fiduciary duty lawsuit, which focused primarily on the extent to which the failure to disclose the information in question to the directors impacted the board’s fulfillment of its fiduciary duties. Still, the two courts’ different approaches illustrate the complicated realities of the post-Trulia deal litigation environment, where there’s not just a new sheriff in town, but often multiple sheriffs.
– John Jenkins