Last week, PwC released its Mid-Year M&A Outlook, noting that while uncertainty over the global economic environment and volatile equity markets significantly slowed US deal volume earlier in the year, an uptick in activity during the end of the second quarter, in conjunction with an active pipeline, indicates the M&A market is regaining momentum.
Some key highlights from the release include:
– Overall, there were a total of 3,870 transactions and $350 billion in disclosed deal value during the first half of 2012, compared to 4,606 deals and $592 billion in the same period of 2011
– In June alone, total deal value reached $76 billion, the best month for M&A value since October 2011 when deal value totaled $88 billion
– Divestiture activity is on the rise, accounting for nearly 28% of overall deal volume in the first half of 2012
– Private equity buyers accounted for 17% of activity and $46 billion in the first half of 2012
This July-August issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Proxy Access Proposals: 2012 Review & 2013 Outlook
– M&A Indemnification Provisions: What Drafters May Be Critically Missing
– Private Equity Clubs Today: Keeping It In The Family
– Boilerplate Matters: Severability Clauses
As noted in this Davis Polk memo, the Board of Governors of the Federal Reserve System recently issued supervisory guidance describing a new, optional process for pre-filing staff review of specific aspects of proposed acquisitions or other proposals prior to the formal submission of an application or notice. Here is an excerpt from that memo:
The pre-filing review process is designed particularly for the benefit of infrequent filers, such as individuals, family trusts, private equity firms new to banking investments and community banking organizations, and filers with novel proposals, and is expected to facilitate speedier review of and Board action on final submissions.
The guidance introduces a formal process, including guidelines for appropriate subjects of inquiry and a review period of up to 60 days, for pre-filing feedback from Board and Federal Reserve Bank staff on potential issues raised by a proposed acquisition or other proposal. Although the guidance indicates that brief phone conversations and “limited e-mail correspondence” will not be deemed to trigger this pre-filing process, it suggests that any request for review of substantive written materials related to a proposal (other than individuals’ biographical and financial information for the purposes of background checks) would do so.
On May 31st, the Delaware Supreme Court entered an order affirming the May 4, 2012 decision of the Delaware Court of Chancery to temporarily enjoin Martin Marietta Materials from pursuing a hostile bid against Vulcan Materials Co. due to its use of confidential information in launching its hostile bid and its disclosure of confidential information in public filings and communications with the press and investors, all in breach of two confidentiality agreements between the parties. On July 10th, the Delaware Supreme Court issued a formal opinion explaining its decision. Notably, unlike the Court of Chancery, the Supreme Court based its decision entirely on the textual provisions of the confidentiality agreements at issue and did not resort to extrinsic evidence. Read more in this memo…
Here are some interesting thoughts from Kevin Miller of Alston & Bird:
Recently, the NY Times published a provocative article regarding pending litigation against Goldman Sachs arising out of GS’s role as financial advisor to Dragon Systems in connection with the sale of Dragon Systems to Lernout & Hauspie in a stock for stock transaction in June 2000. The alleged facts as described in the NY Times article and a federal court decision on a motion to dismiss plaintiffs’ claims are taken from plaintiffs’ complaint – which for purposes of defendant’s motion to dismiss, are generally assumed to be true – and do not reflect judicial determinations of fact after a full trial.
Here are selected slides summarizing a 2009 decision – Baker v. Goldman Sachs – on a motion to dismiss plaintiffs’ claims as well as certain takeaways from that decision (see also John Jenkins’ blog about this case).
Questions to consider include:
1. If L&H’s auditors were fooled after expending substantially greater time and resources auditing L&H’s financial statements, should a third party’s financial advisor with more limited access have liability for failing to uncover financial fraud?
2. If two years earlier GS (or according to the 2009 decision, it’s client GE) had signed a CA in connection with its evaluation of a potential principal investment in L&H and that CA prohibited GS (or GE and its representatives) from using the information it obtained for any purpose other than their evaluation of a potential principal investment in L&H, was that GS team legally permitted to disclose the confidential information it obtained and the views it formed thereon to the GS M&A team advising Dragon Systems or, directly or indirectly, to Dragon Systems itself two years later?
In addition to the takeaways in the slides, some financial advisors have added language along the lines of the underlined last sentence below following more typical language in their engagement letters to emphasize that their financial advisory services do not include performing financial diligence on behalf of their clients:
“[Financial advisor] will rely upon and assume the accuracy and completeness of all financial and other information furnished by or discussed with the Company, any other party to the proposed Transaction and their respective representatives, or available from public sources, and [financial advisor] does not assume responsibility for the accuracy or completeness of any such information. It is understood and agreed that [financial advisor] will not and will have no obligation to verify such information or to conduct any independent evaluation or appraisal of the assets or liabilities of the Company, any other party to the proposed Transaction or any other party and [financial advisor] will assume that any financial projections or forecasts (including cost savings and synergies) that may be furnished by or discussed with the Company or any other party to the proposed Transaction or their respective representatives have been reasonably prepared and reflect the best then currently available estimates and judgments of the Company’s or such other party’s management. The Company understands that [financial advisor] is not a legal, accounting or tax expert and is not undertaking to provide any legal, accounting or tax advice in connection with the proposed Transaction. [Financial advisor]’s role in reviewing any information is limited solely to such review as it deems necessary for purposes of its analysis and advice and shall not be on behalf of the Company.“
See also the 7th Circuit’s 2008 decision in HA-LO:
“CSFB followed the norm in this business–more to the point, it followed the rules in its contract with HA-LO–and relied on management’s numbers. It told HA-LO to hire someone to check those numbers. Separating number-creation from number-evaluation is not illegal and may make business sense. The division of labor between number verifiers (Ernst & Young) and number crunchers (CSFB) is not to be sneezed at; the division of labor has large benefits for an economy, as it allows specialists to do what they are best at . . . . This suit is nothing but an attempt to find a deep pocket to reimburse Investors for the costs of managers’ blunders. But CSFB did not write an insurance policy against managers’ errors of business judgment. Compelling investment banks to provide business-risks insurance as part of a fairness opinion would just make investors worse off, as that would increase the price of each opinion. Investors would pay ex ante for any benefit received ex post–and the bar would pocket a substantial portion of the transfer payments.” HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, 517 F.3d 454 (7th Cir. 2008)
In the distant past, agreements were reached and performed contemporaneously. Our ancestors would meet, negotiate an exchange of meat for hides, and be on their way. Without writing, most deal making was necessarily consigned to exist only in the eternal present. Of course, it was possible to make oral promises, but these created significant problems of proof. Did the other party make a promise? If so, what exactly did she promise? Writing allowed for agreements to be memorialized and thus to have future effect. While the law continued to recognize oral agreements, statutes of fraud typically allowed for the enforcement of only inconsequential agreements. Sir William Blackstone in his Commentaries on the Laws of England distinguished between covenants and promises: “A promise is in the nature of a verbal covenant, and wants nothing but the solemnity of writing and sealing to make it absolutely the same.” (Book III, ch. 9).
Times have changed. As the California Court of Appeal has observed:
Today the stakes are much higher and negotiations are much more complex. Deals are rarely made in a single negotiating session. Rather, they are the product of a gradual process in which agreements are reached piecemeal on a variety of issues in a series of face-to-face meetings, telephone calls, e-mails and letters involving corporate officers, lawyers, bankers, accountants, architects, engineers and others.
Copeland v. Baskin Robbins U.S.A., 96 Cal. App. 4th 1251, 1262 (2002). As deal making has become more complex, parties often create term sheets and letters of intent as both a memorial and guide. As a memorial, a letter of intent evidences the terms on which the parties have agreed so far. As a guide, it identifies lacunae that must be filled by future agreement. Because parties can expend considerable resources in a negotiation, the enforceability of letters of intent has become a subject of litigation.
In some situations, a party may sue for breach of contract. However, the incomplete nature of letters of intent is likely to lead to grief because it is “still the general rule that where any of the essential elements of a promise are reserved for the future agreement of both parties, no legal obligation arises ‘until such future agreement is made.'” Copeland at 1256 (quoting City of Los Angeles v. Superior Court, 51 Cal.2d 423, 433 (1959). A party may also try to sue on the basis that the letter of intent constitutes an “agreement to agree”. These attempts are likely to be unavailing because numerous California courts have held that there is no remedy for breach of an agreement to agree. Copeland at 1256.
In Copeland, the Court of Appeal identified a third way by holding that parties could enter into an enforceable agreement to negotiate a contract. In doing so, the court distinguished agreements to agree by explaining that a contract to negotiate is performed even though the parties do not ultimately reach an agreement. A party doesn’t breach a contract to negotiate by failing to agree but by failing to negotiate or to negotiate in good faith.
On July 5th, the Code Committee of the Takeover Panel published three consultation papers inviting comments on proposed amendments to the Takeover Code. The first paper sets out the Code Committee’s proposals for amendments to the provisions of the Code which relate to profit forecasts, merger benefits statements and material changes in information previously published during an offer period. The second paper examines certain issues relating to pension scheme trustees and sets out the Code Committee’s proposals to extend the provisions of the Code that apply to employee representatives to apply also to the trustees of the offeree company’s pension schemes. The third paper is concerned with the companies to which the Code applies and principally deals with the Code Committee’s proposal to remove the residency test from the rules that determine the application of the Code.
We have posted the survey results regarding typical practices for company executives and HSR filing fees, repeated below:
1. Does your company require executives to comply with HSR filing requirements upon acquiring company shares:
– Yes, and they have been for a while – 39%
– Yes, but only recently because of this enforcement action – 16%
– No – 45%
2. If the answer to #1 above is “yes,” who pays the HSR filing fee:
– Executive with no reimbursement by the company – 40%
– Executive with full reimbursement by the company – 20%
– Executive with partial reimbursement by the company – 0%
– Company – 40%
3. If the executive pays HSR filing fee but is partially reimbursed by the company, in what manner is the reimbursement:
– Specified percentage – 0%
– Specified dollar amount – 50%
– Specified Formula – 50%
Although Section 8 of the Clayton Act, 15 U.S.C. § 19, which prohibits competing corporations from sharing directors or officers, is an important concern for the business community, the statute has received surprisingly little attention from government enforcers or judicial opinions in recent years. Therefore, when two of the leading antitrust voices on the federal bench – Judges Easterbrook and Posner of the U.S. Court of Appeals for the Seventh Circuit – offer a perspective on Section 8, it is worth noting.
On June 13, 2012, in a unanimous opinion – Robert F. Booth v. Crowley, No. 10-3285 (7th Cir. June 13, 2012) – authored by Judge Easterbrook (joined by Judges Posner and Bauer), the Seventh Circuit reversed and remanded with instructions to enter judgment for defendants a shareholders’ derivative suit alleging that Sears Roebuck & Co. violated Section 8 by having on its Board of Directors two individuals who also served on the boards of Sears competitors. Specifically, the suit asserted that William C. Crowley served on the boards of AutoNation, Inc. and Auto Zone, Inc. and that Ann N. Reese was a member of the board of Jones Apparel Group, Inc., businesses that allegedly competed with Sears, such that the resulting director interlocks violated Section 8.
In denying a motion to dismiss, the district court had concluded that Section 8 could be enforced through a shareholders’ derivative action even though the alleged coordination with a competitor presumably benefits, rather than harms, the corporation involved. Following this ruling, the shareholder plaintiffs and Sears proposed a settlement under which one of the two contested directors would resign and the plaintiffs’ lawyers would receive up to $925,000 in attorneys’ fees. (As Judge Easterbrook noted, it is not clear how this settlement could resolve the Section 8 issue since one of the director interlocks would remain.) Another Sears investor, Mr. Frank, sought leave to intervene to oppose the settlement and to seek dismissal of the lawsuit.
In ordering dismissal of the derivative suit, Judge Easterbrook reversed the district court and found that neither the plaintiffs (nor any other investor) had suffered the necessary antitrust injury as a result of the alleged Section 8 violation. He also was not persuaded by the argument that the plaintiff shareholders and Sears benefitted from the lawsuit, rejecting their claim that removing the interlocking director from the board eliminated any chance the federal antitrust authorities would file a Section 8 complaint to break up the interlock:
We don’t get it. In order to avoid a risk of antitrust litigation, the company should be put through the litigation wringer (this suit) with certainty? How can replacing a 1% or even a 20% chance of a bad thing with a 100% chance of the same bad thing make investors better off?
Judge Easterbrook then goes on to offer some interesting perspectives about the current state of Section 8 enforcement:
Actually, the chance of a suit by the United States or the FTC is not even 1%. The national government rarely sues under §8. Borg-Warner Corp. v. FTC, 746 F.2d 108 (2d Cir. 1984), which began in 1978, may be the most recent contested case. See ABA Section of Antitrust Law, I Antitrust Law Developments 425-31 (6th ed. 2007). When the Antitrust Division or the FTC concludes that directorships improperly overlap, it notifies the firm and gives it a chance to avoid litigation (or to convince the enforcers that the interlock is lawful). For more than 30 years, this process has enabled antitrust enforcers to resolve §8 issues amicably – either avoiding litigation or entering consent decrees contemporaneous with a suit’s initiation.
Whether the federal antitrust agencies would agree with this assessment is unclear, but Judge Easterbrook’s summary certainly reflects the advice most experienced antitrust attorneys would provide their clients on the risks of Section 8 liability.
Judge Easterbrook summed up his view of the merits of the derivative suit as follows:
The suit serves no goal other than to move money from the corporate treasury to the attorneys’ coffers, while depriving Sears of directors whom its investors freely elected. Directors other than Crowley and Reese would not have violated their fiduciary duty of loyalty by concluding that these two directors benefit the firm. Usually serving on multiple boards demonstrates breadth of experience, which promotes competent and profitable management. If the Antitrust Division or the FTC sees a problem, there will be time enough to work it out. Derivative litigation in the teeth of the demand requirement and the antitrust-injury doctrine is not the way to handle this subject.
In addition to its perspectives on Section 8, this opinion also merits attention for its focus on the role of antitrust injury as a predicate for establishing antitrust liability. It provides a useful reminder of the scrutiny that reviewing courts will apply to antitrust claims and their reluctance to allow such claims to go forward in the absence of a showing that plaintiffs have, in fact, been injured by conduct forbidden by the antitrust laws. In the Section 8 context, this focus on antitrust injury should lower the risk of future derivative actions being brought to challenge direct interlocks.