February 16, 2018

Disclosure-Only Settlements: Is New York Warming to Trulia?

About this time last year, we blogged about a New York appellate court’s refusal to adopt Delaware’s hard line approach to disclosure-only settlements.  However, this Paul Weiss memo says a recent trial court decision suggests that the Empire State’s position may be evolving.  Here’s the intro:

The New York Supreme Court, New York County recently declined to approve what the court described as a “peppercorn and a fee” disclosure-only settlement in a public company M&A litigation, noting that while until recently most courts would routinely approve such settlements, “that is no longer the case.”

Applying New York’s Gordon standard for approving such settlements—which only requires “some benefit for the shareholders” and is less exacting than standards applied in many other jurisdictions, most notably Delaware’s “plainly material” standard under In re Trulia—the court’s decision in City Trading Fund v. Nye demonstrates that even under the New York approach, disclosure-only settlements will not be approved simply as a matter of course, as the court will still analyze the benefits of the added disclosures under the circumstances.

The opinion also advocates for the adoption in New York of Delaware’s stricter Trulia standard, perhaps indicating a position among some New York jurists that appellate courts should revisit the issue. In any event, the decision adds to a nationwide trend of courts acting to discourage the plaintiffs’ bar from bringing frivolous claims in public company M&A situations.

While we’ve recently blogged about contentions that plaintiffs are fleeing Delaware as a venue in part because of Trulia, Delaware’s approach appears to be gaining traction in some important jurisdictions. In addition to the potential evolution in New York’s approach, this Pillsbury Winthrop memo says that at least one California court has decided to toe the Trulia line on disclosure-only settlements.

John Jenkins

February 15, 2018

Activism: Recap of ’17’s Second Half Campaigns

This Gibson Dunn memo reviews the state-of-play in shareholder activism during the second half of 2017.  The firm surveyed activist campaigns targeting NYSE & Nasdaq companies with a market cap of at least $1 billion from July 1, 2017 to year end. Here’s a summary of some of the key findings:

– Activists most frequently sought to influence target companies’ business strategies, with this being an objective in 63% of campaigns
– Changes to board composition and M&A-related issues were targeted in 41% and 35% of campaigns, respectively.
– Changes to corporate governance practices (including de-staggering boards and amending bylaws) were the subject of 24% of campaigns
– Changes in management and requests for returns of capital were each the subject of 11% of campaigns.

For the full year, changing business strategies remained the top activist priority – it was an objective in 61% of campaigns. Changes in board composition were an objective in 57% of campaigns, while M&A issues were targeted in 40% of campaigns.  Activists targeted governance practices in 27% of campaigns, and sought management changes in 21%.  Demands for returns of capital were included in 9% of campaigns for the full year.

During the second half of 2017, 39 companies were targeted by activists.   Seven campaigns involved proxy solicitations, and five of those reached a vote.  Smaller companies were targeted more frequently, with 64% of activist targets having market caps of less than $5 billion.

John Jenkins

February 14, 2018

Your Deal’s the One You Sign, Not the One You Shake On

This Weil blog says that the worst words ever spoken by a deal professional are ““We have a deal, let’s let the lawyers work out the details.”  With that as a jumping-off point, the blog reviews  LSVC Holdings v. Vestcom Parent Holdings (Del. Ch.; 12/17), where both sides supposedly agreed to share equally the benefits of the seller’s transaction-related tax deductions (or TTDs) and then left the lawyers to work out the details.

Unfortunately, that’s once again where the devil proved to be:

LSVC Holdings involved a dispute over whether the final stock purchase agreement (“SPA”) between the parties to a corporate acquisition contemplated a 50-50 split between Buyer and Seller of all TTDs in all respects, pre- and post-closing, or merely required Buyer to share 50% of the benefit of any TTDs utilized to offset post-closing taxes with the Seller.

The executed letter of intent between the parties (the “LOI”) merely provided that the Buyer “would pay over to the seller 50% of the benefit of any transaction tax deductions on an ‘as and when realized’ basis.” (emphasis added).  The final SPA only stated that the Buyer would be entitled “to retain 50% of” the post-closing TTD-related refunds or tax savings.

Nevertheless, the Buyer filed suit alleging a breach of contract after learning that no TTDs would be available to it in the post-closing period because the Seller, anticipating the close of the transaction by year-end, accounted for the TTDs when making its fourth quarter tax payment to the IRS (i.e., claimed the deductions in the pre-closing period). The Buyer argued that doing so was both inconsistent with the deal and explicitly precluded by a provision in the SPA requiring the Buyer to include all TTDs on the post-closing tax returns.

The Chancery Court decided that it was necessary to review extrinsic evidence to address the apparent tension in the stock purchase agreement.  In so doing, Vice Chancellor Montgomery-Reeves noted that the Buyer tried but failed to incorporate language specifically entitling it to share equally in pre-closing TTDs.  That sealed the deal for the Vice Chancellor, who said that under Delaware law, “a party may not come to court to enforce a contractual right that it did not obtain for itself at the negotiating table.”

The blog says one of the key takeaways from the case is the importance of continued involvement by deal professionals during the documentation process:

Because the “deal” is typically reflected only in the four corners of the written agreement, deal professionals must stay involved and ask hard questions about the drafting—do not simply leave the details to the lawyers.

As the LSVC Holdings court highlighted, the Buyer’s counsel could have potentially foreclosed the issue had it pushed to include language explicitly proposed during the drafting process but omitted in the final SPA (i.e., explicitly prohibiting the target from accounting for TTDs in its pre-closing returns). And, of course, the Seller’s counsel could have avoided a trial involving the introduction of extrinsic evidence if the written agreement did not contain language that created the need for such extrinsic evidence.

So, just keep in mind that whatever the principals might think the deal was when they shook on it, they’re going to have to live with the one they sign – and it’s too important to just “leave it to the lawyers.”

John Jenkins 

February 12, 2018

M&A Trends: The Good, The Bad & The Ugly

This Morrison & Foerster memo highlights some key M&A trends for 2018.  These include continued high levels of “big ticket” M&A and private equity deals, new opportunities resulting from tax reform, and growth in the UK M&A market.

It’s not expected to be all good news for deals in the upcoming year.  On the bad news front, CFIUS issues are expected to continue to cause problems for Chinese buyers – and this excerpt says the number of “dead horse” deals will likely remain high:

As the mega-merger spree continues, so has a spike in abandoned deals. A number of high-profile blockbuster transactions, including Aetna’s $37 billion tie-up with Humana and Anthem’s $54 billion deal with Cigna, were canceled in 2017, following a 2016 spike that saw 1,009 cancelled deals worth $797.2 billion and a failure rate of 7.2 percent, the highest rate since 2008.

The reasons behind the rise in failed tie-ups can vary. One major factor for deal cancellations in 2017 was the regulatory environment. U.S. national security review by CFIUS, which is explored in the next section, had an increasing impact on cross-border deal activity in 2017, particularly as it relates to Chinese investment in U.S. technology companies. CFIUS could have an even greater impact on 2018, should lawmakers pass legislation to expand CFIUS’ authority.

Antitrust regulations also continue to be in the spotlight, with deals such as Aetna/Humana falling to antitrust concerns. As 2018 opens, much attention is being given to the DOJ and the Trump Administration, as the DOJ challenges the proposed $85 billion merger between AT&T and Time Warner. Dealmakers will follow the case closely, as it is expected to have major implications for the future of mega-merger deal activity.

I promised you ugly in my title, didn’t I? Okay, if you’re a Delaware lawyer, the news doesn’t get much uglier than this:

What a difference a year makes. As of October 2017, only 9 percent of the 108 lawsuits that had been brought to challenge public-company mergers had been filed in Delaware. That represents a considerable drop from 2016, when 34 percent of the nation’s merger-objection suits were filed in Delaware, and 2015, when 60 percent of the nation’s merger-objection suits were filed in the Diamond State. The trend is clear: M&A litigation is moving away from Delaware.

The memo blames the usual suspects – Trulia & Corwin – and points out that during the first 10 months of 2017, a whopping 87% of merger lawsuits were filed in federal court.

John Jenkins

February 9, 2018

M&A Tax: IRS Adopts New “Safe Harbor” for Valuing Stock Consideration

Companies have to jump through quite a few hoops in order for an acquisition to qualify as a tax-free reorganization. One of these is the “continuity of interest” (COI) requirement. The IRS says that in order for a deal to qualify for tax free treatment, there must be sufficient continuity of the target’s pre-deal shareholders’ proprietary interest in the corporation – and that’s been interpreted to mean that at least 40% of the deal’s value must be in the form of the buyer’s stock.

Determining the value of a buyer’s stock issued as consideration for a merger can sometimes get a little dicey. The IRS used to look to the closing date values in order to determine whether the COI test was met – and fluctuations in the market price sometimes made for a wild ride. In 2005, it changed its approach for fixed price deals, and looked at the signing date value in making the COI call.

That made things easier for deals with a fixed price – but can still make the pre-signing period a bumpy ride for deals that are close to the line. What’s more, deals in which the consideration isn’t fixed – i.e., those where the number of shares delivered or the value of the cash will be adjusted to offset changes in value between signing and closing – are still evaluated at the closing date.

Now, this King & Spalding memo reports that the IRS has adopted a “safe harbor” that will allow companies to determine compliance with COI by reference to the average trading price of the buyer’s shares over a measuring period, which should help smooth out some of the effects of short-term market volatility on the COI calculation. Here’s an excerpt:

Under the Revenue Procedure, if taxpayers use one of three safe harbor valuation methods (a “Safe Harbor Valuation”) to determine the value of acquirer stock for purposes of setting “the number of shares of each class of [acquirer] stock, the amount of money, and any other property” to be included in the consideration mix, then the Safe Harbor Valuation can also be used to value the stock for COI purposes in lieu of the value that would normally apply under the Signing Date Rule or the Closing Date Rule.

The three permitted Safe Harbor Valuation methods are: (1) the average of the daily volume weighted average prices of a stock, (2) the average of the daily average high-low trading prices for a stock, or (3) the average of the daily closing prices of a stock. Each of these three methods must be applied over a “Measuring Period” of between five and 35 consecutive trading days. If the Signing Date Rule applies, the Measuring Period must end no earlier than three trading days before the day prior to signing and no later than the day prior to signing (or, if earlier, the last pre-signing trading day). Similarly, if the Closing Date Rule applies, the Measuring Period must end no earlier than three trading days before closing and no later than the closing date (or the last pre-closing trading day).

John Jenkins

February 8, 2018

Antitrust: Is the Pace of M&A Investigations Picking Up?

We’ve previously blogged about the increasing length of antitrust merger investigations – and the DOJ’s recent efforts to pick up the pace.  According to this Dechert memo, there’s good news and bad news when it comes to the length of these investigations.  Here’s an excerpt:

Significant U.S. antitrust merger investigations resolved in 2017 took longer than ever recorded—an average of 10.8 months from announcement to agency action—according to DAMITT, the Dechert Antitrust Merger Investigation Timing Tracker. The duration grew despite the number of significant U.S. merger investigations falling to 27, the lowest level since 2013. Yet there were signs that the Trump administration might be reversing what has been a trend toward longer antitrust merger investigations in the United States. The average duration of the 10 significant merger U.S. investigations related to transactions announced after 2016’s Presidential election, but resolved in 2017, was only 7.3 months.

Here’s where the EU stands on the timing of merger investigations:

New DAMITT analysis of European Union data found that the duration of significant EU antitrust merger investigations resolved in 2017 also grew, while their number decreased to 21, the lowest level since 2014. EU merger investigations that went to Phase II took an average of 15.1 months from announcement to clearance, also the longest on record in DAMITT’s analysis. The average duration of investigations cleared with remedies in Phase I was 7.0 months. These average durations, calculated to include the time taken for pre-filing discussions, tell a radically different story from the theoretically fixed schedule of EU investigations.

The memo goes on to provide details on 2017 merger investigations, their resolution, and the impact of their duration on the terms of acquisition agreements.

John Jenkins

February 7, 2018

Tomorrow’s Webcast: “Auctions – The Art of the Non-Price Bid Sweetener”

Tune in tomorrow for the webcast – “Auctions: The Art of the Non-Price Bid Sweetener” – to hear McDermott Will’s Diego Gómez-Cornejo, Alston & Bird’s Soren Lindstrom and Western Reserve Partners’ Chuck Aquino discuss how non-price bid sweeteners move the needle with private sellers in competitively bid deals.

John Jenkins

February 6, 2018

Private Equity: Carried Interest’s Status? It’s Complicated. . .

“Carried interest” is the name given to a general partner’s right to receive a special profits interest in a fund – typically 20% of net profits – that is disproportionate to its capital. Historically, a general partner’s carried interest was taxed at capital gains rates, and not as ordinary income. Many thought that this tax preference was unfair, & some reform proposals called for its elimination.

That didn’t happen under the new tax act, but as this Nixon Peabody blog explains, the treatment of carried interest did become more complicated. Here’s an excerpt:

Congress settled on a provision that largely maintains the historical approach to carried interest tax treatment, and does not seek to re-characterize carried interest distributions to the general partner and its individual owners from capital transactions as ordinary income, so long as a new 3 year holding period is satisfied. The new law is unclear whether the new holding period applies to the investment assets of the partnership and/or to the carried interest held by the general partner and its individual owners.

In order to implement this new treatment, the Act introduces the concept of an “applicable partnership interest” (API) which includes partnership interests that are acquired or held by a taxpayer in connection with a trade or business that consists of the raising or returning of capital and either investment in or development of “specified assets.” Specified assets include investment assets, including securities, debt instruments, commodities, real estate held for rental or investment, cash, and options, among others.

Effective for gain recognized in taxable years beginning after December 31, 2017, the Act provides that carried interest allocated by a partnership to an individual partner will be characterized as short-term capital gain (and therefore effectively taxed at ordinary income rates) to the extent the gain is from the disposition of property in which the partnership’s holding period is less than three years in such property.

There remains much uncertainty about how this new carried interest regime will be implemented – and it is unclear as to whether state and local governments will fall in line with this approach.

Speaking of the states, this Jenner & Block memo says that at least some of them are fighting mad about the continued federal tax preference for carried interests, and are touting the idea of imposing their own “coordinated punitive taxes” on it.  Stay tuned.

John Jenkins

February 5, 2018

Survival Clauses: Delaware Chancery Okays Contractual Limitations Period

Survival clauses setting forth a date on which a parties contractual obligations under a purchase agreement will expire are pretty standard fare in M&A transactions.  Dealmakers take their enforceability for granted, but it’s unusual to see a Delaware Chancery Court decision on this topic.

Francis Pileggi recently blogged about a decision from late last year – HBMA Holdings v. LSF9 Stardust Holdings, (Del. Ch.; 12/17) – in which Vice Chancellor Montgomery-Reeves was called upon to address the issue in the context of a dispute over an earnout. Fortunately, there were no surprises.  Here’s an excerpt:

The facts of this case involved indemnification claims that were based on a contract.  That contract provided that a notice of claims for indemnification needed to be made within 30 days of the matter giving rise to such a claim.  The court found that the notice of claim was not given within that 30-day period.

The court explained that Delaware enforces shortened statute of limitations based on contracts if the period is considered reasonable.  See footnotes 53 and 54.  The court found that a provision in the contract in this case that notice of claims for indemnification needed to be made within 30 days was enforceable.

Referring to these types of contract provisions as “survival clauses,” the court explained that Delaware courts uphold unambiguous survival clauses that, in effect, serve as shortened statutes of limitations. The claim in this case was barred because the applicable 30-day period passed, and therefore the claim was barred. This decision and the explanation of the law it applies, has great relevance to many similar contractual provisions.

Another reason that the case is worth reading is for the insight it provides into how Delaware courts interpret a contract’s dispute resolution, indemnification, and notice requirements – all of which were at issue here.

John Jenkins