Monthly Archives: July 2016

July 28, 2016

Cybersecurity: M&A Due Diligence

In this report, there are a number of findings about cybersecurity due diligence in M&A, including:

– 80% say cybersecurity issues are highly important in due diligence
– 77% say importance of a target’s cybersecurity has increased significantly over the last two years
– 40% say not enough time was devoted to cybersecurity diligence for recent deals
– 30% say not enough qualified people were involved in the diligence process

July 25, 2016

How Many Companies Are Being Targeted By Hedge Fund Activists?

Here’s an excerpt from this PwC memo on hedge fund activism:

Neither size nor status is a defense. Nearly 1,300 unique companies were activated against from 2010 to 2015. In 2015 alone, 343 public US companies were targets; 113 have been targeted as of May 2016. But that’s not the full picture—most estimate that the numbers double when you add approaches that aren’t public.

July 21, 2016

Spinoffs: IRS Changes Course With “Active Trade or Business Requirement” Proposal

Here’s news via this summary of this memo (also see these memos in our “Spinoffs” Practice Area):

On July 14, 2016, the IRS and Treasury Department released proposed regulations regarding tax-free spinoffs by a parent corporation (the “distributing corporation”) of stock in a subsidiary corporation (the “controlled corporation”) in which the distributing corporation or the controlled corporation owns significant nonbusiness assets compared to its other assets. Under a previous IRS policy, a private ruling would not be issued if the assets comprising the active trade or business of the distributing corporation or the controlled corporation were less than 5% of such corporation’s total assets. The IRS later abandoned the unfavorable ruling policy and liberalized certain technical aspects of the active trade or business requirement for tax-free treatment.

In a course reversal, the new rules, if finalized, would implement the prior ruling policy in regulations. Accordingly, even a significant active business would no longer satisfy the active trade or business requirement if the business did not constitute at least 5% of the value of the corporation. The proposed regulations would also make tax-free treatment more difficult to achieve by adding a new per se “device” rule that would trump the longstanding weighing of facts and circumstances if the relative percentages of nonbusiness assets of the distributing corporation and the controlled corporation exceed certain ratios.

July 20, 2016

Halo’s Enhanced Patent Infringement Damages Bring Enhanced M&A Risks

Here’s the intro from this Cleary Gottlieb blog:

In a recent ruling (Halo Elecs., Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc.), the US Supreme Court adopted a relaxed and more plaintiff-friendly standard for determining whether to award enhanced damages in patent infringement litigation. This ruling should be taken into account when considering allocation of patent infringement risks in M&A transactions, including in connection with representations and warranties and associated indemnities.

July 19, 2016

ValueAct Pays Record Fine for “Passive” HSR Violation (Before Rates Go Way Up)

Last week, as noted in these memos, ValueAct agreed to pay a record fine of $11 million to settle allegations by the DOJ that it had violated the HSR reporting requirements by improperly relying on the passive “investment only” exemption. In an earlier case, ValueAct paid a $1.1 million fine. In addition, ValueAct agreed to not rely on the “investment-only” exemption to avoid future HSR filings. Here’s the settlement agreement.

This is the largest HSR fine ever – double the previous largest fine of $5.67 million. ValueAct settled this now because HSR fines will increase dramatically next month – when it could have become almost $50 million after the increase…

July 18, 2016

Tomorrow’s Webcast: “How to Apply Legal Project Management to Deals”

Tune in tomorrow for the webcast – “How to Apply Legal Project Management to Deals” – to hear the experts who are on the ABA M&A Task Force for Legal Project Management – Haynes and Boone’s Bill Kleinman, QLex Consulting’s Aileen Leventon and Verrill Dana’s Dennis White – that created a new “Legal Project Management Guidebook” which contains a variety of new tools for deal lawyers – including the “Deal Issues Negotiating Tool” that you can use to identify key deal points.

Please print out the “Course Materials” in advance (they’re also available in PowerPoint via a link near the top of this page).

July 15, 2016

Schedule 13G: Corp Fin Issues “HSR Passive Investment Exemption” CDI

Yesterday, Corp Fin issued a CDI – CDI 103.11 of the Regulation 13D-G CDIs – to clarify that just because someone is disqualified (due to efforts to influence management) from relying on HSR’s “passive investment” exemption doesn’t necessarily preclude that shareholder from being eligible to file a short-form Schedule 13G rather than the longer Schedule 13D. In other words, the HSR test is applied differently than the similar one for 13G/13D. The CDI notes that control intent – as analyzed through the relevant fact & circumstances – is key.

Before providing three examples of this analysis in operation, the CDI notes that the determination might hinge on the subject matter of the shareholder’s discussions with management – with the context in which the discussions occur being “highly relevant.”

Interestingly, this CDI came out on the same day that the DOJ – as noted in these memos – announced a record fine of $11 million that ValueAct paid to settle allegations that it had violated the HSR’s “passive investment exemption”…

July 14, 2016

More on the Dell Appraisal Saga

Here’s an excerpt from this report by Gary Lutin, who has been closely following the Dell appraisal case (and there’s a new court order today establishing a schedule for discovery):

Surprisingly little has been learned about the Dell settlement with T Rowe Price, which has in itself fueled speculation.

A transcript of the private Monday morning teleconference was obtained,[2] but actually raised more questions than it answered. Stuart Grant of Grant & Eisenhofer (“G&E”), the appointed Lead Counsel for eligible appraisal claimants, was in the teleconference acting as counsel for the ineligible T Rowe Price petitioners that had been dismissed from the appraisal case. He and Dell’s counsel verbally summarized an agreement they had negotiated to pay the ineligible “Settling Petitioners” $.88 per share simply to give up whatever rights they had to appeal, and Mr. Grant explained that it was urgent to get court approval quickly, without delays that might be involved in an open review by all claimants, “so that it could be accounted for in the second quarter for all of my clients, which, understanding that they are various funds, quarters matter to them.”[3] No mention was made of a written agreement during the teleconference, and there was no reference to any documented agreement in the Court’s subsequent Order approving what had been summarized.[4]

July 13, 2016

July-August Issue: Deal Lawyers Print Newsletter

This July-August issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a “Half-Price for Rest of ‘16” no-risk trial):

– How to Deal With Stock Options Between Signing & Closing
– The Examples
– Preliminary Considerations
– Economics of Option Treatment in Various Transaction Settings
– Section 409A Considerations
– Plan & Award Agreement Considerations
– Compensation Committees: Strategic Role in a Successful M&A Process

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of – 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 will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – 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.

July 12, 2016

SEC Approves Nasdaq Golden Leash Disclosure Rule: Effective in 30 Days!

As noted in this Steve Quinlivan blog and this Ning Chiu blog, the SEC approved Nasdaq’s golden leash disclosure rule last week – just before it’s July 4th extended deadline. Here’s the 14-page order from the SEC. Both of those blogs were written before Nasdaq released Amendment No. 2 yesterday. Amendment No. 2 contains the actual rule language (starting on page 30). The new rule will be effective in approximately 30 days. I’m posting memos in our “Executive Compensation Practices” Practice Area.

Here’s an excerpt from Cydney Posner’s blog, which she tweaked after Amendment No. 2 was released:

Rule 5250(b)(3) will require each listed company to disclose, by the date the company files its definitive proxy statement for its next annual meeting, the parties to and material terms of all arrangements between any director or nominee and any person or entity other than the company relating to compensation or other payment in connection with that person’s candidacy or service as a director. A company must make the required disclosure at least annually until the earlier of the resignation of the director or one year following the termination of the agreement or arrangement.

The accompanying interpretive material indicates that the terms “compensation” and “other payment” as used in the rule are not limited to cash payments and are intended to be construed broadly. The disclosure requirement encompasses non-cash compensation and other forms of payment obligation, such as indemnification or health insurance premiums. Note that the rule does not separately require the initial disclosure of newly entered arrangements so long as disclosure is made under the rule for the next annual meeting. The information must be disclosed either on or through the company’s website (in which case it must be continuously accessible) or in its definitive proxy statement.

Nasdaq also explicitly states that, if a company provides disclosure in a definitive proxy or information statement, including to satisfy the SEC’s proxy disclosure requirements, sufficient to comply with the proposed rule, the company’s obligation to satisfy the rule is fulfilled regardless of the reason that the disclosure was made.

No disclosure will be required for arrangements that:

– relate only to reimbursement of expenses in connection with candidacy as a director;
– existed prior to the nominee’s candidacy (including as an employee of the other person or entity) and the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or annual report (such as in the director or nominee’s biography); or
– have been disclosed under Item 5(b) of the proxy rules (interests of certain persons in connection with a proxy contest) or Item 5.02(d)(2) of Form 8-K (description of arrangements in connection with election of a new director) in the current fiscal year. (However, this disclosure would not obviate the need for the company to comply with its annual disclosure obligations under the rule.)

Nasdaq cites as an example of an agreement or arrangement falling under the exception for arrangements that existed prior to the nominee’s candidacy is a director or a nominee employed by a private equity or venture capital firm or a related fund, “where employees are expected to and routinely serve on the boards of the fund’s portfolio companies and their remuneration is not materially affected by such service. If such a director or a nominee’s remuneration is materially increased in connection with such person’s candidacy or service as a director of the company, only the difference between the new and the previous level of compensation needs to be disclosed under the proposed rule.”

So long as a company has undertaken reasonable efforts to identify all arrangements — including asking each director or nominee in a manner designed to allow timely disclosure — if the company then discovers an agreement or arrangement that should have been disclosed but was not, then the company can remedy the inadvertent failure to disclose by prompt disclosure after discovery of the error by filing a Form 8-K, where required by SEC rules, or by issuing a press release; in that event, the company will not be considered deficient with respect to the rule. However, remedial disclosure, regardless of its timing, would not satisfy the annual disclosure requirements. In all other cases, the company must submit a plan showing that the company has adopted processes and procedures designed to identify and disclose relevant agreements or arrangements, subject to approval by Nasdaq.

Nasdaq is also amending Rule 5615 to provide that the required disclosure of third-party payments to directors will be among the provisions allowing a foreign private issuer, upon satisfying specified conditions, to follow home country practice.