By now, we’ve all heard about the plight of the falling US dollar (e.g., all-time low against the Euro and decades low against the Yen). With prospects for even higher budget deficits, a further decline in the dollar is looming.
Fear not, my fellow deal lawyers for there’s a silver-lining that may end up lining your pockets. The good news is that the weak dollar makes US goods – and assets – cheaper. So, for the acquisitive European or Asian business, for example, your friendly neighborhood central bankers have just stuck a great, big “ON SALE” sign on those prime US targets that you’ve been salivating over. Talk about “closing the gap” on valuation issues. Who needs an earnout if you have currency that just jumped 50% (psst, earlier this month, the Euro was up more than 50% against the US dollar since 2001)? So, if you’re Alcatel who just last month acquired Spatial Wireless, a US telecom equipment maker, for US$250M, you have a lot of Euros left over for a closing dinner filled with truffles by the bucket and Jeroboams of Cristal Rosé.
To make sure your year is filled with sushi and sake closing dinners, you may want to brush up on possible traps for the unwary foreign buyer (and even unwary US seller) including:
1. Export Controls. First-base for all acquisitions is information about the seller. Care must be taken not to violate US export controls, which includes “technical data.” Better think twice before including that R&D memo in that data room.
2. National Security Review. Under Exon-Florio, the US can block – and even more scary – unwind an acquisition by a foreigner on national security grounds. For example, recent news reports are that the proposed $1.25B sale of IBM’s PC business to China’s Lenovo may be stalled over regulators’ concerns over Chinese industrial espionage. By the way, there’s no definition of “national security” and if you don’t file proper notice, there’s no time limit on when the Government can step in to unwind a deal. (Lenovo/IBM and recent reports of China’s CNOOC attempted $13B takeover of Unocal should be a wake up call on the coming wave of foreign investment by an economic juggernaut called China).
3. Government Contractors. Any restrictions on foreign ownership?
4. Regulated Industries. Telecom, media, defense, insurance, banking, utilities, and airlines may be the source of “burdensome conditions” based on foreign ownership. For example, the FCC rules prohibit a company with more than 25% foreign ownership from holding certain radio licenses.
5. “Fat Lady” Issues. With the likes of Omnicare still looming, foreign buyers may surprised to hear that limitations on fully-locked deals and other deal protections hamper a buyer’s ability to “make that Fat Lady sang (yes, that’s a Texas accent thang).”
6. SOX Issues. If the foreign buyer is listed in the US or intends to list in the US, it’s not out of the SOX woods simple because the US target is private. In fact, a private target that’s woefully SOX non-compliant may be the source of many, many headaches. Foreign buyers whose daily lives don’t revolve around this post-Enron fallout should not have this false sense security for SOX simply because target is a privately-held US business.
So, cheer up! Your cars, toys, TVs and cups of latte on the Champs-Elysées may be more expensive, but a surge in weak dollar US M&A activity should beef (or is that boeuf?) up your partnership distributions. Thanks to the weak dollar, your dreams of shedding that mild-mannered M&A lawyer image to become an International Man (or Woman) of Mystery may soon come true. GROOVY BABY!
Recently, there have been several instances where Corporation Finance examiners have pushed beyond the line taken in the Staff’s long-standing policy of requesting the deletion of any inappropriate language indicating that shareholders may not rely on a financial advisor’s fairness opinion (e.g., seeking deletion of the “solely to the board” language), or alternatively to provide the basis, including citation to applicable case law, as to why the issuer and its financial advisor believe that shareholders can not rely on the advisor’s opinion.
Traditionally, most issuers and their financial advisors have responded to such comments by simply deleting the language that could be interpreted by the Staff as constituting a disclaimer of sorts on shareholders’ ability to rely on the advisor’s opinion and summary included in the SEC filing. Recently, however, several companies have received comments from the Staff essentially demanding that they state “whether shareholders may rely on the advisor’s fairness opinion”.
This can be viewed as a marked change in the Staff’s position on this issue in that it requires companies to affirmatively state whether shareholders may rely. This differs from the Staff’s longstanding position documented in articles and the Staff’s Current Issues Outline. See Section Task Force Meets with Staff of the SEC, Business Law Today, July/August 1996, at 64; Current Issues and Rulemaking Projects, Division of Corporation Finance, Securities and Exchange Commission, November 14, 2000, at 12.
Savvy legal counsel familiar with this issue, however, would be well-advised to push back on this comment because if they do they will find that the Staff’s position has not actually changed. Instead, the comments are merely the product of a handful of examiners who simply push the envelope with the standard comment by insisting that companies revise their disclosure to state “whether” shareholders may rely on the advisor’s opinions and the summary included in the filing. Special thanks to Erik Greupner of Gibson, Dunn & Crutcher for his assistance in providing this scoop.
On January 5, 2005, the Federal Trade Commission voted 5-0 to unwind the merger of Chicago Bridge & Iron, Inc., and Pitt-Des Moines, Inc., two companies engaged in the manufacture of steel water storage tanks and other steel-enforced structures, concluding that the merger was anticompetitive. This is an extremely important decision.
Interestingly, the deal was reported to the antitrust agencies under the HSR Act and was CLEARED by the FTC. After clearing the deal, and after it closed, the FTC opened a SECOND investigation into the deal, and ultimately required it to be unwound. The relief is expansive, and the portion of the Commission decision concerning relief is extraordinary, especially to those not familiar with the full breadth of the FTC’s power to order relief in merger investigations.
The Commission ordered expansive relief, requiring Chicago Bridge to reorganize its business unit related to the relevant products (water storage tanks) into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months (Imagine That!!). The opinion explains that CB&I is in the “best position to know how to create two viable entities from its current business,” and that this approach “will remedy the anticompetitive effects of the merger more quickly than would immediately appointing a divestiture trustee, who would have to learn the business before recommending a divestiture package.”
Among other things, the order requires Chicago Bridge:
* to divide its current customer contracts between the two newly-created subsidiaries (as far as I can tell, this is the first time the FTC required the division of customer contracts by the party being required to divest);
* to facilitate the transfer of employees so that each subsidiary has the technical expertise to complete the customer contracts assigned to it and to bid on and complete new customer contacts;
* to provide incentives for employees to accept offers of employment from the acquirer and remove contractual impediments that would prohibit employees from accepting such offers.
The FTC’s decision in Chicago Bridge was not a “one-off.” The agency has reviewed many closed deals over the last few years, and the recent focus on reviewing and challenging closed transactions raises a host of significant issues that antitrust lawyers have only just begun to consider (see, for example, the decisions regarding MSC.Software, AspenTech, and Evanston Illinois Hospital).
Undoubtedly, the FTC has the ability under section 7 to remedy any anticompetitive transaction, regardless of whether it has closed or is pending and whether it was below or above the HSR Act’s reporting thresholds. At any time, the antitrust agencies can intervene and remedy competitive problems that are caused by mergers unduly concentrating a market. Nevertheless, aggressive use of the post-close challenge raises serious legal and practical issues, and may serve to chill business activity, slow innovation, and ultimately harm customers.
There are strong considerations that militate against aggressive post-close review, especially in high-tech markets. First, high-technology industries develop rapidly; as a result, markets and market definitions frequently change. What was a market yesterday is an afterthought today—for example, no one is concerned about whether Wang will dominate the Electronic Word Processor market or IBM the 7.5 (or for that matter 5.25) inch disk drive market—because markets disappear in the blink of an eye.
Historically, regulatory review focused on a static view of relevant markets. Because high-tech markets change dynamically, it is imperative that the agencies carefully consider whether mergers that lead to apparent concentration truly are anticompetitive or instead represent a temporary concentration. As the Court of Appeals for the D.C. Circuit observed in United States v. Microsoft, “[r]apid technological change leads to markets in which firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.”
Post-close review can paralyze markets. If the FTC prevails in its post-close challenges, companies like Chicago Bridge not only stand to lose the valuable assets they acquired, but perhaps more importantly, those companies stand to lose years of independent product development that they would have engaged in but for the futile attempt to acquire a competitor. Especially in high-tech industries, the lost opportunities could be considerable: while they may find themselves in the position they were in prior to the consummation of a merger later challenged, all of their competitors or potential competitors presumably have moved on and continued to develop next-generation products during that time.
I’ll continue to explore these issues as time goes on…..
Todd Rolapp of Bass, Berry & Sims writes this guest blog: Many of our clients have been presented the following provision in lock-up agreements over the last year or so:
“Furthermore, the undersigned agrees that if (i) the Company issues an earnings release or material news or a material event relating to the Company occurs during the last 17 days of the lock-up period, or (ii) prior to the expiration of the lock-up period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the lock-up period, the restrictions imposed by this letter agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.”
Apparently, some underwriters and their counsel are telling companies that the paragraph is standard and that they believe it is also in the best interest of the company. The provision is obviously in response to NYSE Rule 472(f)(4) and NASD Rule 2711(f) which, roughly speaking, prohibit NASD members from publishing research or making recommendations w/in 15 days of the expiration of a lock-up agreement in an offering in which the member is a manager or co-manager.
The Rule has an exception for reports issued under Rule 139 (the report is distributed with reasonable regularity in the normal course of business, etc) if the issuer’s securities are “actively traded” as defined in Reg M ($150 million float and $1 million avg. daily trading volume).
However, in our experience, companies are having little success getting the paragraph removed or altered even if their stock is “actively traded” and the NASD member regularly distributes reports after earnings releases. From the company’s perspective this provision seems to go beyond what these Rules actually require and seems designed to make it so the underwriters do not have to do any hard Rule 139 analysis when they go to issue a report after an earnings release.
I am interested to hear whether anyone out there has had any success in dealing with this issue with underwriters (that is, narrowing or eliminating the provision) or have any ideas that might help companies and their legal advisors combat this provision before it gets “too standardized.” I can be reached at TRolapp@bassberry.com.