Everyone knows that even the most elegantly drafted earnout provisions can generate some unintended consequences in their actual implementation. A common earnout scenario involves the requirement that (i) at least one of the target’s officers (the “TO”) be an officer of the buyer (usually in charge of running the post acquisition target) and (ii) an audit be conducted by the buyer’s independent public accounting firm (the “BIPA”) regarding some or all of the earnout period. What many TOs don’t contemplate is that, as an officer in charge of the target’s post acquisition operations, the BIPA is, in all likelihood, going to require the TO is sign the BIPA’s management representation letter (“MRL”) as a prerequisite to the BIPA releasing the audit. The problem here is that the buyer may take positions regarding certain accounting issues regarding the earnout that the target would like to dispute, but with the TO signing the MRL, the target has at least tacitly concurred with the BIPA’s and buyer’s accounting treatment, thereby leaving the target to argue “I know I signed the MRL saying that I concurred with everything in the MRL and that everything in the MRL was accurate but now that we’re having this earnout discussion I disagree with some of the items I previously said I agreed with in the MRL…” Of course, the parties can agree that the MRL isn’t going “to be used against the target in any dispute” but the optics are difficult and you have to deal with the issue of inherent bias created with the mere presence of the TO’s signature to the MRL. The real solution is to have the parties agree when the deal is signed up that the TO will not have to sign a MRL. Because the BIPA can be the real stumbling block here (i.e., refusing to release the audit without a fully executed MRL) it’s a good idea to get them onboard at the same time.
Today, May 10, 2005, R. Hewitt Pate, Assistant Attorney General of the U.S. Department of Justice (AAG), and the chief enforcer of the country’s antitrust laws, resigned after completing a nearly two-year stint as AAG. http://www.usdoj.gov/atr/public/press_releases/2005/208940.htm. Pate will leave his position at the end of June.
Under Pate’s stewardship, the DOJ primarily focused on prosecuting bid rigging and other cartel arrangements under the antitrust laws, and was quite successful in that area. In the area of merger enforcement, though, the record of the DOJ under Pate is decidedly more mixed. Although the DOJ successfully negotiated merger remedies in several high-profile transactions–including First Data / Concord, Nestle/Dreyers, and Connors/BumbleBee–the Division also lost a high-profile merger challenge under Pate’s watch (U.S. v. Oracle Corporation), and suffered another high-profile loss in its challenge to the consolidation of school milk producers in Kentucky and Tennessee (U.S. v. Dairy Farmers of America).
Pate also emphasized the importance of intellectual property. His strong belief in the importance of protecting IP rights (even when directly in conflict with the antitrust laws) was evidenced in several significant amicus appellate briefs (most notably in Trinko v. Verizon) and speeches that he gave during his tenure as AAG. It will be interesting to see whether his successor places such a high premium on IP rights.
Will antitrust enforcement change fundamentally after Pate leaves? Doubtful. During the period before a permanent successor is announced, any interim antitrust chief will likely not take a radically different approach to antitrust enforcement. Any successor likely will come either from the ranks of the current DOJ leadership (the WSJ mentions Makam Delrahim, current one of Pate’s deputies) or someone hand-picked by the President’s circle of advisors. Until the next election, we’re likely to see more of the same from the DOJ.
Good news for us American lawyers, U.S. M&A law and practices are taking over the world. This really runs the gamut from acquisition strategies to due diligence to documentation practice.
Now admittedly, the examples that I’m going to cite are Asian-related deals, but you’ve got to look at who is talking.
Japan’s clubby boardrooms are all buzzing lately with odd words like “poison pills,” “greenmail,” and “hostile takeovers.” Check out that crumpled Japanese newspaper in your next sushi takeout and you’ll see stories of a maverick Japanese internet company that’s shaking up the Tokyo, Inc.
How? Looks like this web portal called Livedoor used some stealthy off-hours trading to snatch up one-third of Nippon Broadcasting System. Only problem is that Nippon Broadcasting was in the process of being acquired by its affiliate, Fuji Television Network. After some nasty litigation, Livedoor sold its interest in the target after cutting a sweet deal with Fuji.
This high profile contested deal had Tokyo’s boardrooms wondering if a little “corporate fugu” and other takeover defenses should be on the menu (“fugu”, otherwise known to us burger bubbas as “blowfish”, is that fish that gets the last laugh by poisoning itself as a way to fend off predators; it’s a delicacy in Japan). In fact, Matsushita Electric (the Panasonic people) just adopted a poison pill last week.
But Japan, Inc.’s heartburn really started last year when two unprecedented, at least in Japan, and very American developments occurred in contested acquisition involving three Japanese banks (I’m referring to that $41B UFJ/Mitsubishi/Sumitomo cat fight to create the world’s biggest bank). One involved a no-shop clause and the other one involved a hostile bid. To keep things simple, I’ll refer to the parties as Target, Suitor Number 1 and Suitor Number 2.
Last July, a Tokyo court surprisingly granted an injunction in Suitor Number 1’s favor, enforcing a no-shop, actually a no-talk, clause that barred Target from pursuing its later-announced merger with Suitor Number 2. It was unprecedented – at least in Japan – that someone would sue to enforce a no-shop and even more unprecedented that a Japanese court would enforce it. Such a dispute sounds very American. What is even more interesting is that in the appeals process, one of the parties relied heavily on U.S. law on no-shops as well as related issues as authoritative precedent. Remember this is a purely Japanese deal. But because U.S. M&A law and practice is considered the best developed in the world, it was considered influential authority on how a Japanese court should rule.
As it turned out, Target prevailed in having the lower court’s injunction vacated. (The Tokyo Supreme Court held that the no-shop’s 2-year term was unenforceable, which would be the same conclusion in the US). In response to that move, Suitor Number 2 promptly announced that it was going to launch a hostile bid, yet another unprecedented U.S. oldie but goodie for Japanese banks.
One other example of American M&A tactics is the good old tortious interference claim. A couple years ago, the buyout group Texas Pacific Group sued a Taiwanese conglomerate for tortious interference with TPG’s proposed acquisition of a Chinese bank. It certainly got a lot of people’s attention, especially since TPG played its home town card by filing in Ft. Worth, Texas. As a Dallas lawyer, I can tell you that even we have concerns about being home-towned when we venturing the mere 30 miles to Ft. Worth. So how do you think the Taiwanese guys felt? You’ll also find high penetration of U.S. style M&A practice and documentation throughout the rest of Asia including, obviously, all the former British colonies, Korea and China.
One important caveat, sometimes the non-U.S. lawyers adopting our practice can turn things into a man-bites-dog situation. For example, in a recent deal with one of the top firms in China, I was presented with an opinion request by this Chinese lawyer that “The company’s financial statements are accurate.” So after picking myself off the floor, I did my best to explain no way, no how. To which the Chinese lawyer responded that he gets this requested of him all the time by U.S. lawyers, so why should I refuse? My reply was something along the lines of: if you see a toddler running with scissors, does it mean that it’s a good idea to let your kids do likewise?
Bottom line, globalization of American deal making is a beautiful thing. With any luck (at least for us American deal lawyers), our US M&A laws and practices will continue to follow a Starbucks-ian march around the world. Have passport – and Marty Lipton on Takeovers – in hand, will travel.