SPAC buyers have typically looked to the common equity PIPEs for funding to support de-SPAC transactions. But in recent months, that market has tightened, and some SPACs have opted for alternative financing structures. This Freshfields blog reviews recent de-SPACs in which alternative financing structures have been used, and describes the terms of those financings. This excerpt provides an overview of the alternative arrangements that have been used in recent deals:
Over the past few months, with the PIPE market becoming tighter but with 400 SPACs still seeking targets for business combinations, we have been seeing some de-SPAC deals being announced with alternative and even creative financing structures. Some SPACs have raised funds through the issuance of convertible debt or preferred stock, providing investors with fixed returns with additional upside through the convert features.
Others have utilized common equity PIPEs but also included warrants together with a lockup on the shares and warrants – again to increase potential PIPE return. Some deals have included sponsor and other backstops to cover potential shareholder redemptions, thus reducing execution uncertainty. In some cases there has been no PIPE or other financing at all.
There’s another tidbit in the blog that I’d like to highlight. Not too long ago, I received a question about whether there was any reason that common equity PIPEs had to be priced at the $10.00 SPAC IPO price. I said that I didn’t think there was, but I also didn’t know of any examples where the PIPE was priced below $10.00. Thanks to the blog, I do now:
Almost every common equity PIPE is sold at $10.00 a share – the same as the SPAC’s IPO price and close to the anticipated trust value of the shares in the event of redemptions. However, another way to improve the economics for PIPE investors is to sell them discounted shares. In the DPCM Capital, Inc. / Jam City, Inc. business combination, announced on May 19, 2021, the SPAC obtained commitments from PIPE investors to purchase 11,876,485 shares of SPAC common stock for approximately $100,000,000. This translates into a heavily discounted price of $8.42 per share.
Earlier this month I blogged about Harvard prof. Jesse Fried’s article calling into question the efficacy of rights offerings as “cleansing mechanisms” for insider transactions. A member reached out with a critique of the article. He didn’t take issue with Fried’s questioning the extent to which weight should be given to the right to participate in a financing, but thought that he gave short-shrift to current practice when it comes to rights offerings:
[Fried] does not adequately recognize that practice under existing law is to be skeptical about the weight to be given to rights to participate in establishing entire fairness. I can’t count how many times I have colleagues tell me that there is no problem because the offer is being made to all shareholders and I have to point out that it is not that simple because the shareholders other than the controller (e.g., the private equity firm) are not necessarily in the same position to participate, and so they still have to pay attention to the ability to justify the fairness of the price, with the right to participate just being one factor in overall fairness. I think Delaware law already makes that clear.
This CLS Blue Sky blog reviews some fairly recent Delaware case law addressing the limitations on the use of rights offerings to shift the standard of review from entire fairness to business judgment.
In recent years, U.S. buyers & sellers have become familiar with the strategy of “bumpitrage,” in which activists challenge announced transactions and press for a price increase. This Cleary Gottlieb blog says that this strategy has become increasingly prevalent in the U.K. Here’s an excerpt:
One of the most noticeable trends that has emerged in the current boom in UK public M&A activity is the heightened level of target shareholder opposition to bids. This is manifesting itself in a number of ways, including through increased and novel “bumpitrage” campaigns as well as through institutional investors becoming more vocal in expressing their discontent at proposed bids. There appears to be a general feeling among a number of the largest UK institutional investors that private equity are acquiring UK public companies “too cheaply”.
Historically, the key negotiating ground in UK public bids has been with the target board before the public announcement of a firm bid. Once the bidder has reached agreement on price with the target board and obtained its recommendation, this has typically been sufficient to deliver a successful deal in the vast majority of cases, absent an intervention from an activist shareholder or competing bidder.
The blog says that these tactics are paying off & have resulted in bidders increasing their offers in 3 deals in the last few weeks. It also advises that bidders should expect that shareholders will be prepared to actively resist bids that they believe undervalue the target, even if the target board supports the deal.
Social media platforms are frequently an afterthought in M&A transactions. According to this recent blog from Sue Serna, that’s a big mistake. Sue highlights the reputational, legal, compliance and other issues that can arise if companies don’t get their social media teams involved in the M&A process well in advance of the closing. This excerpt discusses some of the potential reputational & legal risks associated with failing to do that:
Reputational risk: It’s ideal to loop your social team in before the deal closes, and they can actually help in the M&A process if you do so. Ask your social team to review the other company’s social media accounts and the chatter online about that company. This exercise can unearth reputational risks and highlight any ongoing issues consumers have with the company before you close the deal. Lest you think this is a fruitless exercise, I have seen deals where this analysis surfaced things concerning enough to actually stop the deal from proceeding, so they are well worth the effort.
Legal risk: Many people involved in the M&A process don’t realize that the acquiring company is legally responsible for everything that goes out on all social media channels starting on legal day one (the first day of the deal being final). That means the time to loop in the social media team is NOT on the day before day one. It’s really unfair to them to tell them that they are suddenly responsible for X number of new channels starting tomorrow, and it honestly opens the company up to all kinds of legal risks until they can coordinate with the social team at the other company and get everything under control.
Delaware’s LLC statute does not have a provision granting appraisal rights to members who dissent from a merger, but as this Dorsey & Whitney blog points out, that doesn’t necessarily mean you won’t have to deal with them in a deal involving an LLC target:
Section 18-210 of the Delaware Limited Liability Company Act states that there are no statutory appraisal rights afforded to dissenting members in a merger of a Delaware LLC. Instead, the Delaware Limited Liability Company Act provides that dissenting members only have appraisal rights if those rights are specifically created by contract, most commonly in the limited liability company agreement or an agreement of merger.
Though a merger of a Delaware LLC does not involve mandatory, statutory appraisal rights, it is important for counsel to review the limited liability company agreement and any other agreements among members of the LLC to account for appraisal rights that may have been adopted by contract. The default appraisal rights rules for mergers of LLCs vary by state. For example, Florida, California, and New York do provide statutory appraisal rights for dissenting members in an LLC merger. Counsel should check the statutes of each state under which a constituent entity to the merger was formed.
If a Delaware LLC has significant operations in another state, it would also be prudent to confirm that the statutes of the applicable state do not apply to the LLC involved in the merger. For example, the California Corporations Code extends statutory appraisal rights to apply to foreign LLCs formed on or after January 1, 2014 or qualified to do business in California on or after January 1, 2014, if members holding more than 50% of the voting power of the LLC reside in California.
While the parties give a lot of attention to deciding which jurisdiction’s law will govern disputes arising out of an acquisition agreement, in many cases they treat the language of the choice of law clause itself as “boilerplate.” This Weil blog says that’s a big mistake. Here’s the intro:
Choice-of-law clauses are part of the much-maligned miscellany that are consigned to the back of a merger or acquisition agreement. As long as the clause purports to select the law of the state chosen by the parties, why worry about the details of the exact words used to select that chosen law? Indeed, with all of the complex issues requiring attention at the front of the agreement, many consider it the M&A equivalent of “bikeshedding” to spend any time on such trivial issues as the specific wording of a choice-of-law clause. But when disputes arise regarding the front part of that complex merger or acquisition agreement, the exact wording of that otherwise trivial choice-of-law clause can actually be outcome determinative.
And many deal professionals and their counsel remain blissfully unaware of the impact slight changes in the wording of a choice-of-law clause can have—i.e., does the chosen state’s law apply to only contract-based claims, or to all claims arising out of the parties dealings related to the agreement (whether based in contract or tort), and does the chosen state’s statute of limitations apply to the substantive cause of action (whether in contract or tort), or does the statute of limitations of the forum state (when different from the chosen state) apply, even when the forum court is otherwise applying the substantive law of the chosen state?
The blog reviews recent case law on these and other choice of law issues from Delaware and other jurisdictions, and offers suggested language for an updated version of a choice of law clause that addresses them.
The July-August issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer. It takes a deep dive into the growing business of M&A-related fiduciary duty claims against corporate officers. Topics include:
– What Claims are Being Brought Against Officers?
– Officer Liability: Beyond Motions to Dismiss
– Claims Against Persons Serving as Directors and Officers
– Pattern Energy: Officer Liability Leads to Unexculpated Director Liability
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Keith Bishop recently flagged an interesting Nevada Supreme Court decision in which the Court held that a minute book isn’t the only place you might find a board resolution. In Pope Investments v. China Yida Holdings, (Nev.; 7/21), the Court found that the board’s statement approving a merger set forth in the merger agreement itself was a “resolution” sufficient to confer appraisal rights on shareholders under Nevada law. This excerpt from Keith’s blog explains:
Nevada’s market-out exception provides that there is no right to dissent in favor of any class of securities that is a “covered security” as defined in Section 18(b)(1)(A) or (B) of the Securities Act of 1933, 15 U.S.C. § 77r(b)(1)(A) or (B), as amended., unlessthe articles of incorporation of the corporation issuing the class or series or the resolution of the board of directors approving the plan of merger, conversion or exchange expressly provide otherwise. CY’s articles did not provide otherwise. Thus, the only question was whether a board resolution expressly provided otherwise. The Nevada Supreme Court found such a resolution not in the minutes of a board meeting but in the introduction to the merger agreement:
What constitutes the board’s resolution is not limited by any particular formal requirements, and here, the statement of the board’s approving the merger agreement in the introduction to the merger agreement constitutes the relevant board resolution. The resolution here provided the shareholders with a right to dissent because the merger agreement envisioned that there was authority to dissent that could be validly exercised. In so doing, the resolution provided a right to dissent. This reading is supported by contemporaneous representations to shareholders that they had rights to dissent and by all of the directors that the transaction was fair because objecting shareholders had a right to dissent.
Oh yeah, about those “contemporaneous representations” – despite the company’s decision to object ot the dissenters’ assertion of appraisal rights, the proxy statement was apparently full of disclosure to the effect that appraisal rights would be available in connection with the merger.
On Friday, President Biden signed an “Executive Order on Promoting Competition in the American Economy.” The order represents a sweeping, “all government” effort to promote competition. It seeks to accomplish that objective by making it easier for workers to change jobs by banning or limiting the use of non-competes and unnecessary licensing requirements, by limiting the ability of employers to share information that might help suppress wages, and by reducing consolidation in multiple industries.
When it comes to reducing consolidation, the executive order & accompanying fact sheet make it clear that the President wants antitrust regulators to turn up the heat on enforcement & on merger reviews across a variety of industries. The executive order calls on the DOJ & FTC “to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines” in order to address concerns about consolidation, but that’s not the only aspect of the order that could impact M&A. According to these excerpts from the fact sheet, the order:
– Calls on the leading antitrust agencies, the Department of Justice (DOJ) and Federal Trade Commission (FTC), to enforce the antitrust laws vigorously and recognizes that the law allows them to challenge prior bad mergers that past Administrations did not previously challenge.
– Underscores that hospital mergers can be harmful to patients and encourages the Justice Department and FTC to review and revise their merger guidelines to ensure patients are not harmed by such mergers.
– Announces an Administration policy of greater scrutiny of [technology] mergers, especially by dominant internet platforms, with particular attention to the acquisition of nascent competitors, serial mergers, the accumulation of data, competition by “free” products, and the effect on user privacy.
– Encourages DOJ and the agencies responsible for banking (the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) to update guidelines on banking mergers to provide more robust scrutiny of mergers.
Wow. The President not only wants antitrust regulators to crack down on three giant sectors of deal economy – healthcare, tech & bank mergers – but he’s giving them a forceful reminder that they have the ability to challenge “bad” mergers that past Administrations let through. Like Bette Davis said in “All About Eve,” “fasten your seatbelts, it’s gonna be a bumpy night.” We’re posting memos in our “Antitrust” Practice Area.
FTC Chair Lina Khan isn’t wasting any time responding to the executive order’s directives. On Friday, she issued a joint statement with the head of the DOJ’s Antitrust Division in which the two pledged to “jointly launch a review of our merger guidelines with the goal of updating them to reflect a rigorous analytical approach consistent with applicable law.” She followed that up on Monday with an announcement that the agency will vote next week on whether to rescind its 1995 policy statement on pre-approval & prior notice remedies in merger cases.
If you saw Mike Tyson in his prime, you know just how devastating an uppercut from him could be. Yet in Bardy Diagnostics v. Hill-Rom, (Del. Ch.; 7/21), Vice Chancellor Slights declined to find that a contractual MAE had occurred despite characterizing an adverse development in a seller’s business as the equivalent of a “Tyson right uppercut.”
Just how adverse was the development in question? Try an 86% reduction in the price that the seller’s largest customer (Medicare) would pay for the only product the seller made. To make matters worse, when the parties entered into the merger agreement, both anticipated that Medicare would substantially increase the reimbursement rates for the seller’s ambulatory electrocardiogram device, known as a “long-term Holter” or LTH device.
In his opinion, Vice Chancellor Slights that this case didn’t involve the classic “buyer’s remorse” situation commonly found in MAE litigation. Instead, he acknowledged that the buyer acted in good faith throughout the process, and supported the seller’s efforts to reverse the decision on the price reduction. However, when no change in the pricing had been made, the buyer advised the seller that it believed a MAE had occurred and attempted to terminate the agreement. The seller promptly sued for specific performance, and the buyer counterclaimed, alleging that a MAE had occurred.
Despite the devastating short-term impact of Medicare’s decision on the seller’s business, the Vice Chancellor concluded that it didn’t rise to the level of a MAE under the contract. He found that the buyer hadn’t established that the impact was durationally significant. Moreover, he noted that an MAE resulting from a change in a “Healthcare Law,” was carved out of the MAE definition unless the change disproportionately impacted the seller’s business compared to “similarly situated” companies.
The agreement didn’t define the term “similarly situated,” and the buyer argued that it should encompass not only developmental stage, single product companies in the industry, but also more established businesses that competed in the cardiac ambulatory care market that were less reliant on LTH devices like the one marketed by the seller. In that regard, the buyer pointed out board documents demonstrating that it considered these companies to be competitive with the seller.
The Vice Chancellor disagreed. He concluded that where the “matter” or “event” that’s alleged to have triggered an MAE is a specific product’s Medicare reimbursement rate, the product mix is “patently the most important factor” in determining whether a company is in a similarly situated position with the seller:
Hillrom’s arguments show merely that each of these companies compete for customers and have a shared interest in getting paid as much as the market will bear for their products and services. The Agreement’s MAE clause, however, did not delimit the reach of its “disproportionate impact” exception to companies operating in the same “market.” Rather, it required an assessment of whether the impact caused by “such matter” was “materially disproportionate” relative to “similarly situated companies operating in the same industries.” In my view, that language calls for a more granular parsing of a company’s situation than mere participation in the LTH market.
VC Slights concluded that only one company – which also was a single LTH product business – was “similarly situated” with the seller. After analyzing the impact of the reimbursement change, the Vice Chancellor concluded that the buyer had failed to carry its burden to prove that the disproportionate-effect exception applies to the applicable MAE carve-out. As a result, the buyer’s refusal to close was a breach of the Agreement. While he rejected the seller’s claim for damages, VC Slights ordered the buyer to specifically perform its obligations under the agreement and awarded the seller prejudgment interest.
I’ve already entered tl;dr territory with this blog, but there are a couple of points I want to make before signing off. First, although I didn’t have room to address it here, be sure to check out the section of the Vice Chancellor’s opinion in which he marches through the disproportionate impact analysis. Second, I’m pretty sure that Marvis Frazier wishes that Vice Chancellor Slights was a ringside judge instead of just a Chancery Court judge.