In his “Private Equity Law Review” Blog, Geoffrey Parnass recently wrote:
The Institutional Limited Partners Association, a trade association that represents 220 institutional investors in private equity funds, recently published a set of Private Equity Principles, designed to guide future dealings between its members and the private equity sponsor community. The Association’s members include public and corporate pension funds, endowments, foundations, family offices and insurance companies with more than $1 trillion in private equity funds under management. The publication of the Principles is the first time that a group of influential limited partners has collectively published a set of core requirements for private equity fund documents.
The Principles were developed by the Association and its members to “correctly align” the interests of private equity sponsors and institutional investors in private equity funds. The concepts reflect “suggested best practices” that should shape the private equity industry in the future. Among the best practices endorsed by the group, it is significant to note that no change in the basic 80/20 profit split is recommended. The Principles say this split has “typically worked well to align interests”.
What comes up for scrutiny and criticism are provisions relating to carried interests, claw back liabilities and management fees. In particular, the Principles urge tougher provisions on carried interest escrow reserves (a 30% escrow), a 2-year repayment of claw back liabilities, tougher provisions on the size and application of management fees, and the payment of all transaction and monitoring fees to the fund rather than the GP or other sponsor affiliates.
See Geoff’s blog for a summary of these Principles…
An overwhelming majority of Canadian income trust executives expect reduced cash distributions to investors will follow the implementation of federal tax changes at the end of this year and two-thirds anticipate an increased level of merger and acquisition activity in the sector, a Harris/Decima survey indicates. The survey was conducted on behalf of BarnesMcInerney, Stikeman Elliott and Computershare/Georgeson.
With approximately 165 income trusts currently operating in Canada set to lose their tax advantage as new legislation comes into effect on January 1, 2011 – and conversion to a corporation a likely option for most trusts – Harris/Decima surveyed 82 C-level trust executives by telephone during late November and early December 2009.
Notable results from the survey include:
– 84 percent of trust executives expect that conversion to a corporation will trigger a reduction in distributions/dividends currently paid to investors
– Two-thirds (67 percent) of executives expect increased M&A activity in the trust sector leading up to January 1, 2011
– 59 percent believe that explaining distribution/dividend sustainability and demonstrating a clear strategy are the most significant communication challenges
– Half (49 percent) of respondents see no change in market valuations for converting trusts, with 65 percent expecting a modest turnover in their investor base and 29 percent expecting significant turnover.
2009 was a tumultuous year for acquisition financings. It began in the shadow of the credit crisis and ended with a promising uptick in LBO and other financing activity. In this memo, Davis Polk takes a look at the trends in acquisition financing documentation and negotiating dynamics that emerged from this dramatic year and attempt to draw some tentative conclusions about what 2010 may bring.
In this podcast, Rachel Posner of Georgeson digs into the intricacies of ordering a NOBO list, including analysis of the factors to consider when deciding whether to order one.
Below is analysis from Fenwick & West:
For the first time, the dollar thresholds for pre-acquisition filings under the Hart-Scott-Rodino Act will decrease near the end of February (exact date still pending), due to an annual adjustment mechanism that was created in the last round of amendments to the HSR Act. All transactions closing on or after the effective date will be governed by the new thresholds.
Under the new thresholds, the parties to an acquisition or merger will in most cases need to file pre-acquisition notifications with the FTC and the Department of Justice and observe the Act’s waiting periods before closing if the transaction will result in either of the following:
(a) The acquiring person will hold more than $63.4 million worth of voting securities and assets of the acquired person and the parties meet the “size-of-person” requirements below; or
(b) Regardless of the parties’ sizes, the acquiring person will hold more than $253.7 million worth of voting securities and assets of the acquired person.
Meeting any one of the following three subtests satisfies the “size-of-person” test:
(1) A person with $126.9 million or more of total assets (on its most recent regularly-prepared balance sheet) or annual net sales (from its most recently completed fiscal year) proposes to acquire voting securities or assets of a person engaged in manufacturing (note that software is not considered manufacturing) with $12.7 million or more of annual net sales or total assets;
(2) A person with $126.9 million or more of total assets or annual net sales proposes to acquire voting securities or assets of a person not engaged in manufacturing with $12.7 million or more of total assets (net sales test does not apply); or
(3) A person with $12.7 million or more of total assets or annual net sales proposes to acquire voting securities or assets of a person with $126.9 million or more of annual net sales or total assets.
For the purposes of applying the thresholds, “person” means the ultimate parent entity of the party engaged in the transaction.
Note that certain exemptions may apply depending on the nature of the transaction and the nature and location of the assets and entities involved. Consequently, additional analysis is often required before making a final determination regarding the need for a filing.
Filing fee thresholds also have been adjusted: (i) $45,000 for transactions below $126.9 million, (ii) $125,000 for transactions of $126.9 million or more but below $634.4 million, and (iii) $280,000 for transactions of $634.4 million or more.
Below is analysis of a recent decision from Brad Aronstam of Connolly Bove Lodge & Hutz:
Last week, Chancellor Chandler – in In re Dow Chemical Company Derivative Litigation – dismissed derivative claims that Dow’s officers and directors breached their fiduciary duties to the company in connection with Dow’s more than $18 billion acquisition of Rohm & Haas highlights the heavy deference afforded independent directors in the “Caremark” oversight setting and comprises the latest chapter in the Stone, Citigroup discourse.
Plaintiffs claimed, among other things, that Dow’s fiduciaries breached their duties by failing to detect and prevent a variety of alleged wrongs, including alleged bribes made by Dow to Kuwaiti officials in connection with a related – and failed – funding deal involving the Kuwaiti government. Relying on the standards adopted in Stone and Citigroup as to the duty of oversight, the Court went so far as to presume that bribery may have occurred, but still rejected plaintiffs’ argument that the Dow board of directors had cause for suspicion. Interestingly, the plaintiffs alleged that the board “should have known” because of similar bribery allegations that had arisen in the past in which Dow had paid a fine to the SEC. Noting that the previous bribery allegations occurred in a different country, involved different members of management, and concerned a different transaction, the Court found that there was no cause for suspicion (i.e., “red flags”) as to this particular issue vis-a-vis the Kuwaiti government.
Also of note is the reliance by the Court on Dow’s Code of Ethics. Specifically, the Court held that the plaintiffs failed to satisfy their heavy burden under Delaware law in light of Dow’s policies in dealing with third parties, expressly stating that the “[p]laintiffs cannot simultaneously argue that the Dow board ‘utterly failed’ to meet its oversight duties yet had ‘corporate governance procedures’ in place without alleging that the board deliberately failed to monitor its ethics policy or its internal procedures.” The decision thus provides yet another reason why clients should always have well-drafted policies in place — here, expressly linked to the standards of fiduciary liability under Delaware law.
The decision contains a number of helpful nuggets concerning other areas as well (including the demand futility calculus, independence standards, and the good faith inquiry post-Lyondell) and thus warrants careful review by M&A practitioners and those who counsel directors.
As he blogged on “The Conglomerate Blog” a while back, Professor JW Verret shares these corporate law limericks he forwarded to his class (JW is responsible for the first five):
1. In Re Oracle (on challenges to the independance of a Special Litigation Committee)
Some Stanford connections are fine,
But too many bother VC Strine.
SLC’s, like Ceasar’s wife,
must be without strife,
Otherwise dismissal is in a bind
2. Omnicare (challenge to deal protection measures)
Fiduciary-outs are required,
And Unocal/Revlon rewired.
Though, the test is unbent!
For heed the dissent,
In which Orman v. Cullman is sired.
3. In Re Disney
For Eisner, the Mouse House has only one king.
Ovitz is fired, but leaves with much bling.
But these suits win seldom,
Good Faith is a spectrum.
102(b)7 is a powerful thing!
4. AFSCME v. CA (on the legality of election bylaws)
SEC seeks Delaware advice on this bylaw,
Yet it suffers from a heroically fatal flaw.
Darn fiduciary out!
The contest is a route.
Yet, reimbursement otherwise allowed by law!
5. SEC v. O’Hagan (on the misappropriation theory of insider trading)
After I lost it all,
Thought I’d recoup trading calls.
But then, damnation,
Tender info was my downfall.
The Wachtell Lipton memo repeated below from Richard Kim and David Shapiro is one of many posted in our “Bank M&A” Practice Area on this development:
The FDIC issued revised guidance last week to private investors in connection with the acquisition of failed banks in the form of “Frequently Asked Questions” to its Statement of Policy on the Acquisition of Failed Insured Depository Institutions. These FAQs replace an earlier set of FAQs which were posted in December and subsequently withdrawn. The new FAQs provide helpful guidance and also potentially signal some important policy shifts. While the guidelines do not provide as much flexibility as many private equity investors will desire, they do suggest new interest by the regulator to attract private equity capital to financial institutions, albeit under certain constraints.
The Policy Statement imposed a number of restrictions on private investors seeking to invest in or acquire a failed bank from the FDIC, including:
– Capital Support. Investors are required to commit that an acquired bank be capitalized at a minimum 10% Tier 1 common equity ratio for at least three years following the acquisition.
– Minimum Holding Period. Investors are prohibited from selling or transferring securities that they hold in the failed bank or its holding company for a three-year period following the acquisition, unless the FDIC has approved the sale or transfer.
– Extensive Disclosure. Investors must submit to the FDIC detailed information about themselves, all entities in the proposed ownership chain, the size of the capital funds, their diversification, the return profile, the marketing documents, the management team and the business model.
By its terms, the Policy Statement does not apply to any investor that holds five percent or less of the voting power of an acquired failed bank if the investor is not acting in concert with other investors. The FAQs confirm that nonvoting shares will not count toward the five percent limit if the nonvoting shares are either not convertible into voting shares or are convertible only upon transfer to an unaffiliated third party. In addition, the FAQs provide that where an investment is made in a failed bank through a holding company, the FDIC will take into account the views of the primary regulator of the holding company – i.e., the Federal Reserve or the Office of Thrift Supervision – as to whether the investors are acting in concert.
In an important shift in policy, the FDIC also expresses a preference in the FAQs for ownership structures with at least some large shareholders, each with a greater than 5 percent voting stake. The FDIC noted concerns that ownership structures that fall outside the scope of the Policy Statement by limiting investors to less than 5 percent of the voting stock may raise the same capital and prudential concerns which prompted the development of the Policy Statement.
Consequently, the FDIC stated that it will presume concerted action among investors that hold less than 5 percent voting stakes where they hold more than two-thirds of the total voting power of the structure. The presumption may be rebutted if there is sufficient evidence that the investors are not in fact acting in concert. The FAQs also provide guidance as to how to this presumption may be rebutted.
The Policy Statement encourages investment structures where private equity investors acquire a failed bank in conjunction with a bank or thrift holding company with a successful track record where the bank/thrift holding company has a strong majority in the resulting bank or thrift. The FAQs add that where private investors co-invest with a bank/thrift holding company through a partnership or joint venture structure, the structure will not be subject to the Policy Statement as long as the private investors hold no more than one-third of its total equity and the voting equity. Where private investors are investing in the acquiring bank/thrift holding company rather than through a partnership or joint venture structure, the FAQs provide that the Policy Statement will not apply as long as the private investors in the bank/thrift holding company pre-dating the proposed acquisition have at least two-thirds of the total equity of the company post-acquisition.
The FDIC’s stated preference for ownership structures that consist of fewer rather than more investors may signal an opening for private equity structures which have suffered from negative regulatory perceptions. In designing potential structures, it will be important to also take into account Federal Reserve policies regarding noncontrolling investors.
In his “Delaware Corporate & Commercial Litigation” Blog, Francis Pileggi recently posted this interview with Delaware Chief Justice Myron Steele. Good stuff!
We have posted the transcript from our recent webcast: “Ask the Experts: Schedule 13D and Schedule 13G Issues.”