September 27, 2022

Do Revlon Duties Have an Expiration Date?

There’s been an almost non-stop flow of opinions from Chancellor McCormick relating to discovery disputes in Twitter v. Musk.  If you’re a litigator, I’m sure those will be right up your alley and I’d refer you to The Chancery Daily’s Twitter feed, which is doing an awesome job providing blow-by-blow coverage of the lawsuit. But as a transactional lawyer, my eyes kind of glaze over when it comes to this kind of thing. On the other hand, a few weeks ago, Prof. Rob Anderson raised a hypothetical question involving the Twitter deal that I thought was pretty interesting:

In the Musk-Twitter transaction, one of the “conditions” of specific performance is that Twitter must have “confirmed” as shown below. Assuming that is intended to be legally binding, it’s an unconditional promise to close, with no fiduciary outs, in a Revlon mode deal? Suppose that Twitter “confirms” this and a topping bid for $64.20 materializes the next day? What happens?

In response, I pointed out that the merger agreement would tie Twitter’s hands pretty tightly to Musk’s deal in this scenario.  Why? Because Twitter’s stockholders have already approved that deal, and under Section 6.5 of the merger agreement, Twitter would no longer have the ability to discuss a potential superior proposal or to terminate the deal & accept one if it emerged.  Specifically, Section 6.5(c) and (d) provide that Twitter’s ability to do either of those things ends upon “receipt of the Company Stockholder Approval.”

That may be what the merger agreement says, but is that consistent with a board’s obligations under Revlon, which requires the board to maximize immediate stockholder value in a sale transaction?  Wouldn’t the board be breaching that obligation if it couldn’t accept that $64.20 offer – even it emerged at the very last minute?

The answer to that question appears to be “no,” because Delaware precedent indicates that a target board doesn’t have to retain the ability to consider alternative transactions after the deal’s been approved by target stockholders in order to satisfy Revlon. In that regard, a 2009 ABA Deal Points article on Delaware’s “sign & consent” procedure notes that this procedure is premised on the conclusion that “it generally is acceptable for any “outs” in a merger agreement to expire upon obtaining the stockholder vote, such that the board’s fiduciary duties in respect of alternative transactions are discharged at such point.”

The article cites the Chancery Court’s 1991 decision in In re Mobile Communications Corp. of Am. Inc., (Del. Ch.; 1/91), which concluded that the target had no contractual obligation, following stockholder approval, to consider alternative transactions, as support for this proposition, although that conclusion is also implicit in the Optima and Openlane decisions upholding sign & consent.

John Jenkins

September 26, 2022

R&W Insurance: A Claims Primer

RWI policies are different from other insurance policies in a number of ways, some of which can be very important to the claims process. Woodruff Sawyer recently began a series of blogs intended to serve as a primer on claims under these policies. This excerpt from the initial blog discusses some of the implications of the use of aggregate retentions in RWI policies:

Most insurance policies have either deductibles or self-insured retentions (SIRs), which work similarly. R&W policies have an aggregate SIR. Once the SIR has been exhausted by the insured’s payment of a covered loss, the policy will begin to pay out. An aggregate SIR means that all losses covered by the policy will serve to erode the retention that will apply to any future claims. If a retention is not aggregate but is instead a per-claim retention, the retention would separately apply to each claim noticed under the policy during the policy period. With aggregate retentions, there is no downside to reporting even the smallest claims.

Because of the aggregate nature of the retention, it is important to keep track of how much has been eroded by prior claims to carry it forward to any future claims. This practice is also very different from that of most other products — not only do most policies not have aggregate retentions, but the year-long effective period for most policies tends to eliminate the need to keep track of retention erosion.

John Jenkins

September 23, 2022

Antitrust: Sharing Competitively Sensitive Information in M&A

This Mintz blog provides some helpful insights on navigating the potential antitrust minefield associated with sharing competitively sensitive information with a potential merger partner.  The blog points out that antitrust regulators understand the need for due diligence & don’t view information sharing between competitors in this context as per se illegal. Instead, they take a holistic approach in which the scope of the information being exchanged, the purpose for its exchange, and the protections put in place to ensure that it is not misused prior to closing are all taken into account.  Here’s an excerpt from the blog’s discussion of how to mitigate antitrust risks when sharing information:

Be mindful of the stage of transaction negotiations. In the early stages, many firms may bid for the target. In these cases, sellers should consider sharing only general information on the target and reserving more detailed or competitively sensitive information for later in the process. Parties can wait until later-stage negotiations or an auction to assemble “clean teams” or utilize third-party consultants to undertake a “black box” analysis. Quite often, potential bidders/buyers have a very detailed information “wish list”; that list should be reviewed carefully with the seller’s antitrust counsel before responding or before anything is made available in a clean room.

Operational personnel may need to access information that is competitively sensitive to make important decisions on the transaction. As an example, if a substantial portion of the purchase price is allocable to the target’s innovative intellectual property, the buyer itself will want to get under the hood before it commits to the transaction. If so, access should be given as close as practical to signing, and thoughtful attention should be paid to the manner of disclosure. Presenters of this information should limit records and documentation as much as possible to insure that it is only the minimum information necessary to complete the objective. Again, the use of a third-party consultant is often appropriate here to stay on a solid antitrust footing.

The acquirer should consider where certain objectives can be met through personnel with no operations responsibility when seeking information to integrate customer information, pricing, and HR data into its IT systems — thereby avoiding problematic information exchange, such as in an IT integration. Aside from this, parties may be justified in adopting a pragmatic approach to the buyer’s access to the target’s competitively sensitive data on a need-to-know basis.

The blog notes that the parties can’t afford to relax restrictions on information exchanges as the closing draws near.  Instead, their businesses must be conducted as independent competitors until the deal actually closes.

John Jenkins

September 22, 2022

National Security: Executive Order Enhances CFIUS Review of Emerging Risks

Last week, President Biden signed an Executive Order intended to enhance CFIUS’s ability to address emerging national security risks in its review of transactions.  According to the Biden Administration’s fact sheet on the Order, it elaborates on existing statutory factors and adds several additional national security factors for CFIUS to consider during its review process. The Order directs CFIUS to consider five specific sets of factors in its review:

– A given transaction’s effect on the resilience of critical U.S. supply chains that may have national security implications, including those outside of the defense industrial base.

– A given transaction’s effect on U.S. technological leadership in areas affecting U.S. national security, including but not limited to microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies.

– Industry investment trends that may have consequences for a given transaction’s impact on U.S. national security.

– Cybersecurity risks that threaten to impair national security.

– Risks to U.S. persons’ sensitive data.

The law firm memos on the Order are starting to roll in and we’re posting them in our “National Security Considerations” Practice Area. This excerpt from Sullivan & Cromwell’s memo on the Executive Order summarizes its implications:

The EO adds an emphasis, already a topic of focus for the Biden Administration, on climate adaptation technologies, critical materials, and food security, to the enumerated factors to be considered by CFIUS. Fundamentally, however, other than this renewed emphasis, the content of the EO does not break new ground, as CFIUS already considers most, if not all, of these factors in its review of transactions.

The timing of CFIUS review generally should not be impacted, although it is possible that certain transactions that touch on the areas of focus specified in the EO could take longer to clear than they might have prior to the issuance of the EO. Even though the EO does not necessarily break new ground, the EO approach is novel in its recognition of the need to stay ahead of evolving risks and in its express and public recognition of these factors.

John Jenkins

September 21, 2022

Voting Agreements: Watch Out for Dual-Class Transfer Restrictions

Voting agreements from major shareholders are often a critical component of a merger agreement requiring shareholder approval. But this Cooley blog says that companies with dual-class structures need to ensure that their charter documents contain appropriate language permitting the holders of high-vote stock to enter into those agreements without inadvertently converting into low-vote shares.  It even cites this cautionary tale:

In October 2021, stockholders of Inovalon brought suit in the Delaware Court of Chancery claiming that, by executing the voting agreement, the founder’s high-vote shares automatically converted to low-vote shares, an event that was not described in the company’s proxy statement. The plaintiffs sought a declaration that the shares had been converted and an injunction enjoining the stockholder vote until an accurate proxy statement could be issued. In order to avoid having to delay Inovalon’s special meeting to approve the transaction to litigate the plaintiffs’ claims, the parties agreed with the plaintiffs that, unless the transaction was approved by holders of Inovalon shares sufficient to approve the transaction – assuming that the auto-conversion had in fact occurred – Inovalon would not close the transaction until the Delaware Court of Chancery had ruled on the plaintiffs’ complaint.

In other words, Inovalon and the acquirer were forced to agree to act as though the voting agreement had not been entered into. While Inovalon’s stockholders ultimately approved the transaction in sufficient numbers to satisfy this requirement, if they had not, the consummation of the transaction would have been subject to the resolution of the plaintiffs’ claims in the merits, which could have significantly delayed, or even prevented, closing. Ultimately, the plaintiffs’ firms were awarded $1.9 million in fees and expenses in connection with the disposition of the action, meaningfully in excess of the typical “mootness” fee for public M&A transactions, which one paper estimated as usually in the range of $50,000 to $300,000.

The blog says the best way to avoid this situation is to ensure that an appropriate carve-out is included in the restrictions on transfer of high-vote stock laid out in the certificate of incorporation.  It includes some suggested language and points out that although most modern dual-class charters contain carve-outs that address these concerns, the charters of dual-class companies that went public prior to 2017 may not.

If obtaining shareholder approval for a charter amendment isn’t a viable option, the blog suggests alternative strategies that the company may employ to provide some kind of commitment from a major shareholder that doesn’t run afoul of these restrictions.

John Jenkins

September 20, 2022

M&A Trends: 2022 Isn’t a Bad Year for Everyone

Most of the news about M&A trends during the current year has been kind of depressing, particularly when compared to recent years. But a recent analysis from Bloomberg Law’s Grace Maral Burnett says at least two sectors – Software & REITs – have a much more upbeat dealmaking story to tell. Grace says that the two sectors have both higher 2022 deal activity than other industries, and that they’ve already managed to surpass their own full year activity for 2021.  This excerpt summarizes activity in the REIT sector:

Year to date, over 4,700 controlling-stake deals involving REITs—which fall under the financial sector—with an aggregate value of $286.8 billion have been announced globally, and are currently pending or completed. The three largest of these deals announced this year have been the $12.8 billion acquisition of American Campus Communities Inc. by Blackstone Inc., announced in April, the $26.3 billion acquisition of Duke Realty Corp. by Prologis Inc., announced in June, and the $13.8 billion acquisition of STORE Capital Corp by a consortium led by GIC Pte. Ltd., which was announced today.

John Jenkins

September 19, 2022

M&A Agreements: “Hell or High-Water” Clauses

The efforts required to obtain antitrust or other regulatory approvals for a deal are often among the most heavily negotiated aspects of the merger agreement. In some situations where obtaining those approvals are a big concern, the seller may sometimes attempt to enhance deal certainty by negotiating for a so-called “hell or high-water” clause, obligating the buyer to take any and all actions necessary to obtain required approvals. This Quinn Emanuel memo takes a look at the issues associated with these clauses and how Delaware courts have looked at them in recent cases. Here’s an excerpt from the intro:

M&A “hell or high water” provisions mandate effort and require actions in furtherance of obtaining regulatory approvals, such as compliance with government demands for information, support for a particular strategy, or participation in litigation over regulatory challenges. But effort does not guarantee a desired outcome—either regulatory approval or a closing.

In disputes arising from the failure to obtain regulatory or other approvals, courts do not automatically conclude that a party failed to take “all necessary” steps. Rather, courts analogize to other “efforts” covenants that govern the parties’ pre-closing obligations. These disputes generally require a fact-intensive analysis, which means that they can be difficult to resolve without a trial.

As a result, disputes will continue to arise over antitrust and regulatory efforts clauses and affect the parties’ rights and remedies, including their ability to close or to seek damages for failed deals. As federal antitrust regulators engage in more stringent review, participants may see an uptick in lawsuits over these provisions.

The memo says that recent Delaware decisions suggest that a breach of a hell-or-high-water obligation won’t necessarily result in liability because that breach may be found to be either immaterial or not the “but for” cause of a merger’s failure. Furthermore, even if a court finds a breach, problems associated with establishing causation, contractual provisions limiting liability to “willful misconduct” or a court’s reluctance to sock a buyer with a huge damage judgment may limit a seller’s remedies for that breach.

John Jenkins

September 16, 2022

Antitrust: Push to Target Director Interlocks Raises Unresolved Issues

Antitrust regulators have made it clear that they intend to take a hard look at potential violations of Section 8 of the Clayton Act, which prohibits director interlocks, and that private equity firms may find themselves in the crosshairs of these actions.  But this WilmerHale memo says that any DOJ or FTC enforcement push will have to address a number of unanswered questions about the statute – and that the agencies are almost certain to take a hard line.  This excerpt addresses three key unresolved definitional issues:

Person: Even the most basic premise of Section 8—that a “person” cannot, in principle, serve on the board of competing corporations—is fraught with uncertainty. Does “person” mean “individual,” such that two separate designees of the same corporation could serve on competing boards without violating the statute? Or does “person” refer to the parent entity that has designated the two individuals, such that the interlock is captured by Section 8? The U.S. antitrust agencies have long favored the latter position, but the question remains unresolved in the courts.

Competition: Section 8 captures interlocks between corporations that are in competition with each other, but the definition of what constitutes competition remains a gray area. Some courts rely on the market definition analysis used by the Sherman and Clayton Acts generally, which would consider cross-elasticity of demand and whether the products are interchangeable. Other courts perform a broader analysis and analyze (1) the extent to which the industry and its customers recognize the products as separate or competing; (2) the extent to which production techniques for the products are similar; and (3) the extent to which the products can be said to have distinctive customers.

Corporations: Section 8 prohibits interlocks between “two corporations.” Does this mean that the same person could serve on the board of competing entities, if at least one of them is an unincorporated entity (such as an LLC)? It appears so. The Supreme Court in BankAmerica Corp. v. United States suggested that Congress deliberately chose statutory language that “selectively regulates interlocks with respect to … different classes of business organizations.” Other antitrust laws in close subject matter proximity to Section 8 also distinguish corporations from unincorporated entities. Nonetheless, an aggressive DOJ or Federal Trade Commission might attempt to use Section 8 to challenge interlocks involving non-corporate entities, such as LLC.

The memo recommends a number of actions that companies should in light of regulators likely aggressive enforcement approach. These include reviewing existing board memberships by company employees and reviewing board service policies – and assuming that a very broad definition of the term “competitor” will apply when conducting that analysis.

John Jenkins

September 15, 2022

Twitter v. Musk: When It Comes to Privilege, “It’s Good to be da King!”

Some days it isn’t easy to come up with content for this blog, and today is one of those days. It looks like my choices have come down to either blogging about another one of Vice Chancellor Laster’s 100+ page opinions or biting the bullet & blogging about Elon Musk and Twitter.  Despite my reluctance to blog about the preliminaries in this significant but goofy case, the fact that Chancellor McCormick’s opinion resolving a privilege dispute between Musk & Twitter was only19 pages long has made my decision a relatively easy one.

The case involved one of many discovery disputes between the parties.  This one arose because Musk apparently used email accounts at SpaceX and Tesla to communicate about the Twitter deal.  Twitter wanted those emails, and Musk responded by asserting that they were subject to attorney-client privilege. Twitter moved to compel production, and Chancellor McCormick ultimately denied that motion.

In reaching that conclusion, she first observed that in order to support a claim of attorney-client privilege, Musk had to demonstrate that he had an objectively reasonable expectation of confidentiality in the SpaceX and Tesla emails. This requirement created a problem for Musk, because as Twitter pointed out in its motion, both companies had email policies that made it clear that that employees have no privacy interest in their work emails and warn that the companies reserve the right to monitor those emails.

Now – as Mel Brooks once pointed out in a famous scene from his film “History of the World, Part I”  – “It’s good to be da King!”  With that in mind, it’s not surprising to learn that Musk was able to produce affidavits from his IT managers at SpaceX and Tesla attesting to Musk’s ‘unrestricted’ personal use of those accounts and the sharply limited the access that others had to them.

Chancellor McCormick noted that in determining whether an employee has a reasonable expectation of privacy in his or her emails, Delaware has looked to a four-factor test established in In re Asia Global Crossing (S.D.N.Y. BKR 2005). That test looks primarily to whether “company policies and historical practices made it reasonable for employees to expect privacy in company-sponsored email.” Although acknowledging that the Chancery Court had compelled production of emails under a nearly identical policy in the WeWork litigation, she concluded that two mitigating factors mandated a different conclusion in this case. The first mitigating factor was the fact that both Tesla and SpaceX had policies limiting the grounds for monitoring employee emails, while the second mitigating factor was the existence of Musk-specific rules:

As the second and perhaps most forceful mitigating consideration, Defendants argue that the “default” policies of SpaceX and Tesla do not apply to Musk, and that each company adopted “Musk-specific” rules. For this, Defendants rely exclusively on the affidavits of Musk, IT managers from SpaceX and Tesla, and the head of Tesla’s legal department. Those affidavits state, unequivocally, that Musk had “unrestricted” personal use of his Tesla email account, that “no one” at Tesla can access those emails without Musk’s consent except “to the extent legally necessary,” and that “nobody” at SpaceX can access his email account without Musk’s express consent.

Chancellor McCormick acknowledged that a cynic might doubt that these Musk-specific policies really exist, considering that they are supported only by the affidavits of Musk & his employees and that no corporate records support their existence. Yet she concluded that the evidence “rings true”:

The court has little doubt that neither SpaceX nor Tesla view him as on par with other employees, that he has the power to direct operational decisions, and that nobody at either company would access his information without first obtaining his approval. One can debate whether this corporate reality makes for good “corporate hygiene,” but it is difficult to discredit the recitation of the facts.

In other words, when it comes to protecting personal emails on corporate accounts from discovery, “It’s good to be da King!”

John Jenkins

September 14, 2022

Key Considerations for Buying a De-SPACed Company

The bursting of the SPAC bubble has left quite a few companies that went public via a de-SPAC looking for an exit.  The depressed valuations of these companies might make them tempting acquisition targets, but this Freshfields blog says that potential buyers of a recently de-SPACed business need to recognize that they come with a lot of baggage that needs to be addressed during the acquisition process.  The memo lays out some of these issues. This excerpt discusses some of the challenges created by the legacy SPAC capital structure:

As part of a de-SPAC transaction, de-SPACed companies typically inherit “public warrants,” which were issued to the public investors in the SPAC IPO, and “private placement warrants,” which were issued to the SPAC sponsor, as well as potentially PIPE investors, in putting together the financing for the deal. The terms of the public warrants and private placement warrants are usually identical, except that the de-SPACed company may redeem the public warrants if its stock price reaches or exceeds certain levels, whereas the private placement warrants are not redeemable.

Both public and private placement warrants may contain provisions that provide that in the case of a merger or other business combination transaction, the warrants become exercisable for the merger consideration. This means that the buyer cannot unilaterally take them out (subject to the redemption provisions of the public warrants based on the deal price) and—if some warrant holders do not exercise their warrants right away—may have ongoing obligations to pay the merger consideration for the life of the warrants.

As a separate matter, in a deal that involves less than a specified percentage (usually 70%) of listed stock as the deal consideration, the warrants often provide that the exercise price will be adjusted if the warrant is exercised within a specified period of time after the closing of the deal (usually 30 days) such that the warrant holder will be entitled to receive upon exercise, on a net basis, the Black-Scholes value of the warrant (calculated as of immediately prior to closing, based on certain assumptions specified in the warrant agreement).

This creates an added complication in that a buyer may not know the exact amount of consideration to be paid for the de-SPACed warrants at the time of signing. Buyers should, therefore, consider whether the warrant agreement terms may be amended and whether it would be feasible or desirable for the buyer to enter into agreements with the warrant holders that lock in the treatment of their warrants at the time of signing.

The memo points out that de-SPACed companies may also have inherited legacy target securities which may have bespoke provisions and may further complicate cleaning up the company’s capital structure post-acquisition.  The memo also covers the implications of fiduciary duty issues for the de-SPACed company’s board, the potential concentration of voting power, and the potentially divergent interests of its shareholders.

John Jenkins