DealLawyers.com Blog

December 13, 2018

M&A Finance: Dealing with Volatile Credit Markets

It seemed like easy terms for M&A financing would last forever, didn’t it?  But this Wachtell memo points out that the credit markets have recently tightened considerably, and that companies seeking financing for their deals are facing more challenging conditions. The memo offers tips on navigating the current environment – including this one on the importance of keeping potential lenders’ differing risk tolerances in mind when seeking financing:

When markets are volatile, different financing sources may have markedly different views of the risk that any particular financing transaction presents—and as a result, may offer vastly different terms. Of course it is always the case that different financial institutions(and particularly different types of financial institutions—money-center commercial banks, investment banks or alternative lenders) have different risk tolerances, but recent volatility and unpredictability in the financing markets have resulted in greater differentiation in the terms that individual financing sources are willing to offer potential borrowers.

Therefore, borrowers seeking to finance a transaction should test (and should ensure that engagement letters with their investment bankers provide them with sufficient flexibility to test) the market with multiple financial institutions of varied types to ensure that they are partnering with the lender(s) best suited to their transaction given the specific market conditions. Disclosing an M&A transaction to more potential financing providers prior to signing may expose a deal to greater leak risk, but a borrower can mitigate this risk and achieve substantial and offsetting benefits by properly managing and calibrating this process.

Other topics include strategies for dealing with rapidly changing deal terms from proposed lenders, managing the broader “flex terms” that lenders are likely to seek in financing commitments, and managing the impact of risks associated with the political environment.

John Jenkins

December 11, 2018

Activism: Overview of Proxy Contests

Activist investors can use a variety of tactics to bring pressure on corporate boards, but it’s ultimately their willingness to “go to the mattresses” & launch a proxy contest that ensures that they’ll get the board and management’s attention. This Fried Frank memo provides a helpful overview of the proxy contest process. Here’s an excerpt:

Today the most common types of proxy contests are contests by activist stockholders seeking board representation or control, generally with the objective of maximizing return on the activist’sinvestment in the short-term. The proxy contest serves as a tool to drive change, including:

– Adding directors who are sympathetic to the activist’s goals or who bring fresh perspectives to the board, orchestrating a change in executive management or corporate policy, or securing other changes in corporate governance.

„- Catalyzing changes in strategy, changes in capital allocation, a sale or break-up of the company or other value-enhancing transactions—changes that the activist may instigate or accelerate even if itsefforts to change composition of the board are unsuccessful.

Besides traditional proxy contests, investors today have other tools available to express dissatisfaction and drive change, including solicitations exempt from the proxy rules such as “withhold the vote” campaignsand, in the case of companies that have adopted proxy access bylaws, rights of eligible stockholders to nominate a minority of candidates for director in the company’s proxy statement.

The memo addresses a wide range of topics, including the market environment, advance preparation, timing and strategic issues, key legal considerations, as well as the process of conducting the fight & negotiating a settlement.

John Jenkins

December 10, 2018

That’s a Wrap – It’s a MAC: Delaware High Court Rejects Akorn’s Appeal

On Friday, the Delaware Supreme Court issued an order affirming the Chancery Court’s milestone decision in Akorn v. Fresenius, which was the first Delaware decision to hold that deterioration in a seller’s business resulted in a material adverse change entitling a buyer to terminate its merger agreement.

The Supreme Court’s 3-page order – which came only 2 days after oral argument – is as laconic as the Chancery’s 246-page opinion is loquacious.  The Court upheld the Chancery Court’s conclusion that Akorn had suffered a MAE under the Merger Agreement that excused any obligation on Fresenius’s part to close, and that Akorn’s breach of its regulatory reps & warranties gave rise to an MAE termination right.

Copies of the briefs and a video of the oral argument in the case are available on the Delaware Supreme Court’s website. We’re posting memos in our “MAC Clauses” Practice Area.

John Jenkins

December 7, 2018

M&A Trends: The Need for Speed

In today’s highly competitive M&A market, potential buyers look to differentiate themselves in a number of ways – and this William Blair memo says that many buyers are using their ability to move quickly and provide a high certainty of closing to separate themselves from the pack. This excerpt highlights some of the ways buyers are working to shorten the time of their deals:

Securing financing earlier in the process: Potential buyers are talking to lenders and lining up financing much earlier in the sale process. A decade ago, buyers would typically wait to secure financing until they had won the bid and gained exclusivity. Starting a few years ago, however, it became common to see this work being completed by all of the final bidders. But today, it’s not unusual to see several bidders begin working with lenders in earnest during management presentations and then have their financing nearly completed by the time final bids are due.

Growing adoption of reps and warranties insurance: Once viewed as an optional tool to enhance a bid, representations and warranties insurance has become table stakes in today’s M&A environment. By shifting risk from the seller to an insurer, reps and warranties insurance allows for faster, smoother negotiations. While the popularity of this insurance has been driven by financial sponsors, many strategic buyers have begun using it as well—an acknowledgment of their need to move quickly, especially when private equity firms are involved in the bidding.

Front-loading the diligence work: Buyers today are completing much of their diligence work well before a formal process officially launches and spending large sums on third-party legal and accounting fees early in the process. Not only does this signal to the seller that the buyer is serious and well-positioned to move quickly, these up-front investments also allow buyers to be more selective in identifying targets for which they have a unique angle to winning the bidding process.

Buyers in public company deals sometimes look to expedite the transaction process by structuring their transactions to incorporate a front-end tender offer, and efforts to complete integration plans prior to winning a bid can permit buyers to provide transparency concerning their plans for the company following the deal.

John Jenkins

December 6, 2018

Indemnity: Shareholder Liability Cap Applies Despite CEO’s Fraud

How should a court apply an indemnity carve-out that provides for uncapped damages for fraud to selling shareholders who weren’t participants in the fraud?  That’s the question the Delaware Chancery Court was recently called upon to answer in Great Hill Equity Partners v. SIG Growth Equity Fund, (Del. Ch.; 11/18).

In a 153-page opinion, Vice Chancellor Glasscock held that the former CEO of e-commerce firm Plimus was liable for fraud in connection with its 2011 sale, and that he & the selling PE investors also made several knowing, but immaterial misrepresentations, during the due diligence process. The Vice Chancellor found that the CEO’s misconduct resulted in breaches of the purchase agreement, but as this Goodwin memo explains, he limited the selling shareholders’ liability to the indemnity cap established in the agreement:

With respect to the indemnification liability, the Court found breaches of the merger agreement’s representations and warranties that Plimus had complied with operating rules of the major credit card associations and that no payment-processing supplier had notified Plimus that it intended to terminate its business relationship. As a result, the Court concluded that Great Hill is entitled to indemnification up to the sellers’ pro rata share of the escrow amount provided for in the merger agreement.

The Court also held that, even though there was fraud in the transaction and the merger agreement limited the sellers’ indemnification obligations “except . . . in the case of fraud or intentional misrepresentation (for which no limitations set forth herein shall be applicable),” the limitation on liability protected the selling stockholders – who themselves were not liable for fraud – from indemnification beyond the escrow.

The selling shareholders aren’t out of the woods yet – the case also includes an unjust enrichment claim against them upon which the court deferred judgment until the parties briefed the amount of damages at issue.

John Jenkins

December 5, 2018

Private Deals: M&A Holdback Escrows

This Norton Rose Fulbright blog reviews J.P. Morgan’s 2018 M&A Holdback Escrow Study. Here’s an excerpt with some of the key findings:

– Amount in escrow: The amount of the consideration put into escrow can be significant, with a median of 8.6% of the purchase price. However, this decreased to a median of 6.1% for deals closed in the last 12 months of the Study. This decrease may partially reflect the recent trend toward larger deals, which tend to have a smaller percentage of the purchase price placed into escrow. The amount in escrow also varies by industry. The information technology sector had the highest average percentage of purchase price in escrow (10.8%) while the energy sector had the lowest (6.9%).

– Indemnity Claims on the Escrow Amount: The most common type of indemnity claim on the escrow amount was for taxes (27%). Litigation claims (25%) and financial statement claims (23%) were the next most common claim types, although many claims contained multiple claim types. Although reasons for litigation claims were usually not provided, commonly stated reasons were for patent infringement and employee-related claims. Financial statement claims were split between misstated assets and misstated liabilities. The industrial sector had the lowest frequency of indemnity claims (10%), while the consumer sector had the highest (22%). There was also a significant reduction in environmental claims over the course of the study.

– Amount of Escrow Paid: Estimating potential liabilities can be difficult, but the publicly-available data for escrow payouts can help parties estimate costs when issues arise. In the 3.5 years of the study, the average percent of the escrow paid for individual claims increased from 51% to 70%. However, as noted above, the amount of the purchase price that was put into escrow also decreased in that time. The average indemnity claim amount was 43% of the value of the escrow.

John Jenkins

December 4, 2018

Universal Proxy: The Fundamentals

This Latham & Watkins memo provides an overview of the basics of the “universal proxy” – and its implications for public companies. This excerpt explains why a company might want to consider using a universal proxy in a contested election:

Since 2014, there has been an average of 88 proxy contests for board seats each year, and activists sought board control in an average of 32% of those contests. In proxy contests for control of the board, a company could consider using a universal proxy that allows stockholders to mix-and-match candidates as an alternative to the current binary choice between the company’s slate or the activist’s control slate. In the context of majority- or full-board contests in particular, Hirst’s study of proxy contests found that removing the binary proxy voting mechanism would likely result in stockholders electing more management nominees and fewer activist nominees.

In addition, companies facing a proxy contest for control of the board should consider the influence and practices of proxy advisory firms. If the proxy advisory firms wish to see any degree of change at a company, they are typically willing to support some activist nominees. As activist nominees are typically not included on a company’s proxy card under the binary regime, activists can transform an advisory firm’s support for “some change” at a company into a real threat of a change of control of the board.

With a universal proxy card, proxy advisory firms can recommend less than all of the nominees proposed by an activist’s change in control slate, rather than being forced into the binary “all or none” recommendation. However, if the various proxy advisory firms recommended for different nominees it may ultimately facilitate the election of more activist nominees than any one proxy advisory firm recommends.

As I recently blogged, activists have also figured out that in some situations, the universal proxy they’ve long sought may actually work to management’s benefit. But the Latham memo makes it clear that this is a complex calculus – and it may not work out as either party expects.

John Jenkins

December 3, 2018

Default Activism: More Fun & Profit from Covenant Defaults

We’ve previously blogged about the “net short debt activism” phenomenon. Now, the folks who tipped us off to that say there’s a new variation on that theme. According to this Wachtell memo, activists have found a new potential profit opportunity – scouring public company indentures for defaults on outstanding debt, & then diving in. Here’s the intro:

We have recently seen an increase in contentious disputes, some public and many not, between companies and their debt investors. Clashes between borrowers and their lenders are as old as debt itself, but what we are seeing now is something different.

In these situations, debt investors are not merely seeking to enforce their contractual entitlement to payment, or to challenge transactions that will impair the borrower’s ability to pay. Rather, they are purchasing debt on the theory that the borrower is already in default and then actively seeking to enforce that default in a manner by which they stand to profit. Call it Default Activism: default as opportunity rather than risk.

The memo says that with debt funds growing in size and number, competition for above-market returns is making this alternative investment strategy increasingly attractive – along with increasingly complex financing terms. The bottom line is that in today’s environment, there’s no part of a company’s balance sheet that’s immune from activism.

John Jenkins