Here’s an interesting analysis from Bloomberg Law that says despite the handful of high-profile deal termination disputes that we’ve seen since the pandemic upended things, the number of Covid-19-related deal terminations that have ended up in court is actually pretty small. Here’s an excerpt:
A few high-profile mergers—like LVMH‘s pending purchase of Tiffany & Co., and Sycamore Partners’ terminated purchase of Victoria’s Secret from L Brands Inc.—have spawned lawsuits between the parties that have received much attention. But an analysis of Bloomberg Law dockets indicates that only a very small number of M&A deals terminated since March 12, 2020 (the date the World Health Organization declared the pandemic) resulted in lawsuits between the parties.
The same is true for the larger category of currently pending M&A deals larger than $500 million that were announced in the year prior to the pandemic. In fact, upon our review of a total of 255 deals fitting either description, we found only six in which the parties sued each other regarding the transaction in U.S. courts.
Of course, while the parties may not be suing each other, the same can’t necessarily be said for their shareholders. Bloomberg Law found that 26 out of the 255 deals it reviewed have faced or are currently facing shareholder suits premised on securities law violations associated with the transaction.
We’ve seen a lot of insightful commentary on earnouts during the pandemic, and I’ve blogged about the topic quite a bit (here’s a recent one). The need to bridge valuation gaps is more pressing than ever in the current environment, so it’s not surprising that people are taking a hard look at earnouts & how to make them work better. This recent “Business Law Today” article is the latest article on earnouts to hit my inbox. Its focus is on best practices for designing earnouts with a view to minimizing the risk of disputes. This excerpt discusses how to select the right metric:
Determining the right earnout metric begins with an analysis of the methodology used by the buyer to value the target business, and whether that methodology is appropriate to measure the business during an earnout period. Three common ways to value target companies are:
– multiple of prior 12 months of EBITDA, which is used for companies with earnings (this is the most common valuation methodology);
– multiple of revenues, most commonly used for software and other technology companies that have been able to build significant sales but are not at the stage of having earnings; and
– a “build versus buy” analysis, in which the buyer assesses the cost to duplicate the functionality of the seller’s product or technology from scratch, versus the cost to buy the seller and its entire workforce (this measure is most commonly used for early-stage software and other technology companies prior to achieving significant sales revenues).
The article says that, in general, the valuation methodology used to value the business is the right starting point for discussions about the earnout metric. For example, if an EBIDTA or revenue multiple was used to value the business, then an increase in EBITDA or revenue is the logical place to begin when it comes to designing an earnout metric. But the article stresses the choice of the metric requires a much deeper analysis of both the value that the buyer is trying to create post-closing & its business plan to create this value.
For most people and businesses, 2020 has been a lousy year, but that’s definitely not the case for SPACs. This PitchBook article explains how the events of 2020 have combined to make SPACs the investment vehicle of the moment from the perspective of sponsors, institutional investors & private company sellers. Here’s an excerpt about why SPACs have become a more attractive alternatives for many private company sellers than they have been in the past:
For at least the past three years, the lack of IPOs and shrinking number of public companies in general has been a hot button issue in the financial markets. The cost and arduous process of becoming a publicly traded business represents a huge burden to private companies that could otherwise find massive amounts of capital in the private markets. In our eyes, the reduced time commitment is the main advantage of SPACs for companies pursuing a path to the public markets.
Since the SPAC transaction functions more like an acquisition, the private company has to negotiate with only one party rather than a host of investors on a road show, which will typically smoothen the deal pricing process. A company can transition from identification to completion in around four to six months as opposed to the year or more it takes for an IPO. This reverse merger path also allows for more creative deal structuring and will likely result in a price closer to its true market value. SPACs offer the option to raise more capital than might be available in a traditional IPO by selling a larger proportion of equity either from the SPAC itself or a concurrent PIPE.
PitchBook expects that the current SPAC frenzy will fade once more certainty returns to the financial markets, but also expects that SPACs will remain a potentially attractive alternative for capital-intensive businesses and those with a complicated or long-term story.
Here’s another datapoint on the rise of SPACs – the NYSE recently proposed a rule change that would waive initial listing fees & the first partial year annual fee for any non-NYSE listed company that is the survivor of a de-SPACing transaction involving an NYSE listed SPAC. The change is intended to put these transactions on an equal footing when it comes to fees with those in which the already listed SPAC is the surviving entity.
This September-October Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– The Road to Global Closing: Drafting Local Transfer Agreements in Cross-Border Carve-Outs
– Third Circuit Clarifies Requirements for Risk Factor Disclosures in Merger Proxies
– M&A Purchase Price Considerations in the Context of COVID-19
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 – 2nd 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.
Delaware’s Corwin doctrine has become the first line of defense against many M&A fiduciary duty claims. But the Chancery Court’s recent decision in In re: USG Corp. Stockholders Litigation, (Del. Ch.; 8/20), demonstrates that even if Corwin doesn’t apply, directors may still be able to prevail on a motion to dismiss, thanks to charter provisions that exculpate them from liability for breach of the duty of care. Here’s the intro to this Cleary Gottlieb blog on the decision:
In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing” did not apply. Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision.
This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement. It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage. In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.”
The blog notes that one of the key takeaways from the case is that in order to avoid dismissal of a claim on the basis of a Section 102(b)(7) provision, the plaintiff must plead facts showing that the directors were interested in the transaction, were not independent of an interested party, or acted in bad faith. When it comes to pleading bad faith, it isn’t enough to allege that the directors didn’t comply with their obligations under Revlon. Instead, the plaintiff “must plead facts showing that the directors intentionally or consciously breached their fiduciary duties.”
Yesterday’s NYT DealBook had a nice write-up on the battle brewing between LVMH and Tiffany & Co. over the French luxury giant’s efforts to back out of its deal to acquire one of America’s most iconic luxury brands.
The deal is the latest high-profile transaction to fall victim to the annus horribilis that is 2020. It has been in trouble for some time, with media reports suggesting that LVMH was squishy about moving forward at the deal price even before Tiffany posted disappointing Q1 numbers reflecting the pandemic’s impact. But the fight formally started on Wednesday, when LVMH issued a somewhat elliiptical statement backing out of the deal. That decision was supposedly prompted by a letter that LVMH received from the French government “directing” it to defer the closing of the deal until after the drop dead date set forth in Section 9.2(a) of the Merger Agreement. Here’s an excerpt from the English version of LVMH’s statement:
The Board learned of a letter from the French European and Foreign Affairs Minister which, in reaction to the threat of taxes on French products by the US, directed the Group to differ the acquisition of Tiffany until after January 6th, 2021. Furthermore, the Board noted Tiffany & Co.’s requested to extend the “Outside Date” in the Merger Agreement from November 24th to December 31st, 2020.
As a results of these elements, and knowledge of the first legal analysis led by the advisors and the LVMH teams, the Board decided to comply with the Merger Agreement signed in November 2019 which provides, in any event for a closing deadline no later than November 24th, 2020 and officially records that, as it stands, the Group LVMH will therefore not be able to complete the acquisition of Tiffany & Co.
Obviously, this loses something in the translation, but you get the gist of it – and so did Tiffany, which responded by filing this 114-page complaint in Delaware Chancery Court. Tiffany is seeking specific performance & a declaratory judgment that, among other things, LMVH breached the Merger Agreement by allegedly dragging its feet in obtaining necessary antitrust approvals, that Tiffany has not experienced an MAE & that it validly extended the Merger Agreement’s drop dead date.
Tiffany also wants the Court to hold that the French government’s letter to LVMH isn’t an “order” entitling LVMH to terminate the Merger Agreement. Here’s an excerpt from the complaint:
Section 8.1(c) of the Merger Agreement sets forth the limited circumstances in which action by a governmental entity can excuse a party’s obligation to complete the transaction. That section provides, in relevant part, that a party need not close if a governmental entity has issued an “Order . . . that is in effect and enjoins, prevents or otherwise prohibits, materially restrains or materially impairs or makes unlawful consummation of the transactions contemplated by this Agreement.”
Tiffany also cites Section 9.2 of the Merger Agreement, which it contends prohibits a party from terminating the agreement unless a particular legal restraint is “in effect and shall have permanently restrained, enjoined or otherwise prohibited the consummation of the Merger and such Legal Restraint shall have become final and non-appealable.” It contends that the French government’s letter doesn’t come close to qualifying as the kind of legal restraint that would prevent LVMH from completing the transaction.
LVMH issued a statement to the effect that Tiffany’s claims are “unfounded” and says that it’s also going file a lawsuit against Tiffany. As always is the case in situations like this, the question is – does LVMH really want out, or is it just looking to renegotiate the price? Tiffany sure seems to think it’s the latter, and said so in its public statement announcing the lawsuit.
I have no idea how this will play out, but I hope the deal comes together in the end. What can I say? I’m a sucker for happy endings.
Even before the disruptions caused by the Covid-19 pandemic, private equity sponsors were increasingly on the receiving end of claims seeking to hold them responsible for liabilities of their portfolio companies. This Proskauer blog identifies the following 10 steps that sponsors can take to help mitigate their liability risk:
– Create a list of companies with sponsor board members.
– Sensitize directors to fiduciary duties to company and shareholders as a whole and fund, and potential conflicts between them.
– Scrutinize corporate transactions, particularly in distressed situations, and document decision making.
– Consider use of special committees to resolve conflicts; retain fund counsel where fund receives a benefit that not all shareholders receive.
– Consider the risk of portfolio company employee claims, including claims arising out of COVID-19.
– Sensitize directors to insolvency issues and be mindful of duties to creditors of an insolvent corporation.
– Observe best practices: participate in deliberations, adhere to formalities, retain good minutes, exercise care in communications.
– Train directors on attorney-client privilege, including distinction between fund counsel and company counsel.
– Expect scrutiny of valuation practices and financial records.
– Assess relevant contracts and rights (investment agreement, shareholder agreement, insurance contracts, and indemnification rights and obligations).
This McDermott Will memo provides a “snapshot” of US and EU antirust regulatory activity during the second quarter of 2020. Here’s the intro:
In the United States, despite requesting additional time to review pending mergers, the US antitrust agencies have continued their work through the COVID-19 pandemic. The Department of Justice (DOJ) and Federal Trade Commission (FTC) reached settlements with a number of merging parties during Q2 2020, and the FTC is proceeding to trial in several merger cases.
Both the FTC and the DOJ are conducting investigational hearings and depositions via remote videoconferencing technology such as Zoom. The FTC also announced it prevented 12 deals from closing in 2020 despite the COVID-19 pandemic. Five of the transactions were blocked and another seven were abandoned due to antitrust concerns, putting the FTC on pace for one of its busiest years for merger enforcement in the past 20 years.
In Europe, in light of the COVID-19 outbreak, the European Commission (EC) warned that merger control filings would likely not be processed as swiftly as usual. The EC encouraged parties to postpone merger notifications because the EC envisaged difficulties, within the statutory deadlines imposed by the EU Merger Regulation, to elicit relevant information from third parties, such as customers, competitors and suppliers. In addition, the EC foresaw limitations in accessing information on a remote basis. This period thus saw a drop in merger notifications to the EC; however, notifications increased in June and July.
In addition to highlighting regulatory initiatives, the memo addresses the timing of resolution of selected merger review enforcement actions in the U.S. and Europe, the status of significant pending litigation and the terms of selected consent orders, and a summary of significant challenged or abandoned transactions.
When I was a young lawyer, a senior labor partner in my my firm kept what he called a “Pontius Pilate Kit” on prominent display in his office. It consisted of a bottle of water, a towel & a basin, which he used to symbolically “wash his hands” of some of the more unsavory tactics used by the contending parties in labor disputes.
It’s probably unfair, but I can’t help thinking about that guy’s Pontius Pilate Kit whenever the idea of addressing director conflicts through recusal has come up. There are all sorts of good reasons for conflicted directors to recuse themselves & abstain from voting on a deal in which the director has a direct or indirect interest – but the Delaware Chancery Court’s recent decision inIn re Coty, Inc. Stockholder Litigation, (Del. Ch.; 8/20), makes it clear that the abstention defense has its limits.
The case involved allegations that the controller and the director defendants breached their fiduciary duties in connection with tender offer in which the controller increased its holdings from 40% to 60% allegedly at an unfair price and through an unfair process. Four of the nine director defendants had ties to the controlling stockholder & recused themselves from the board vote to authorize the transaction.
Chancellor Bouchard reviewed Delaware precedent on the abstention defense, and noted that it required a director to completely avoid any participation in the transaction:
Over twenty-five years ago, then Vice Chancellor Jacobs explained in In re Tri-Star Pictures, Inc. that “Delaware law clearly prescribes that a director who plays no role in the process of deciding whether to approve a challenged transaction cannot be held liable on a claim that the board’s decision to approve that transaction was wrongful.” As this court more recently stated the principle, a “director can avoid liability for an interested transaction by totally abstaining from any participation in the transaction.”
The Chancellor noted that determining whether a director totally abstained can be a difficult determination to make at the motion to dismiss stage, since there are often factual nuances that need to be developed through discovery. In this case, he pointed out the fact that the disclosure document provided to shareholders indicated that the conflicted directors attended the key board meeting at which the transaction was approved, and expressed their support for it before they recused themselves from the vote and left the meeting.
Yesterday, the DOJ released its 38-page Merger Remedies Manual, which updates its 2004 Policy Guide and provides a framework for the Antitrust Division to structure and implement appropriate remedies in merger cases. The DOJ’s press release announcing the new manual notes that it explains the Antitrust Division’s approach to consummated transactions and upfront buyers, outlines certain “red flags” that increase the risk that a remedy will not preserve competition effectively, and reflects important principles implemented in recent Antitrust Division consent decrees.
This excerpt from DOJ’s announcement highlights key elements of its approach to merger remedies that are embodied in the new manual:
Commitment to Effective Structural Relief. The Merger Remedies Manual emphasizes that structural remedies are strongly preferred in horizontal and vertical merger cases because they are clean and certain, effective, and avoid ongoing government regulation of the market. The manual also describes the limited circumstances in which conduct remedies may be appropriate: (1) to facilitate structural relief, or (2) if there are significant efficiencies that would be lost through a structural divestiture, if the conduct remedy would completely cure the competitive harm, and if it can be enforced effectively.
Renewed Focus on Enforcing Consent Decree Obligations. The principles outlined in the Merger Remedies Manual describe how the Antitrust Division will ensure that consent decrees are fully implemented. The manual describes several standard consent decree provisions designed to improve the effectiveness of consent decrees and the Antitrust Division’s ability to enforce them. In addition, the Manual highlights the role of the newly created Office of Decree Enforcement and Compliance, which oversees the Antitrust Division’s decree compliance efforts.