This recent SRS Acquiom paper suggests that M&A lawyers are still sorting out the privilege issues raised by the Delaware Chancery Court’s 2013 decision in the Great Hill Equity Partners case – which held that the seller’s attorney-client privilege transferred to the buyer following the closing of a merger. According to the paper, here’s how dealmakers have addressed the decision in their merger agreements:
– One-third of the merger agreements surveyed don’t address the privilege issue at all.
– More than half of the remaining agreements assign the privilege to the target shareholders as a group, or to the shareholder group and their representative.
– One-third of the agreements that address privilege assign it to a single shareholder representative.
Assigning ownership and control of the privilege to a single representative avoids the potential for inadvertent waiver and uncertainties about who can assert the privilege. The white paper also notes that approximately one-third of all of the agreements surveyed included language prohibiting the buyer from using privileged communications to assert claims against the target’s shareholders. We’ve calendared a webcast on this topic: “Privilege Issues in M&A.”
This Cleary blog speculates on what the future of M&A litigation in a post-Corwin environment might look like:
As the Delaware Supreme Court narrows the avenues for post-closing challenges to mergers, we expect that plaintiffs’ lawyers will increasingly seek to base their merger suits on specific allegations of conflicts that may have tainted the oversight of processes to sell companies in hopes of supporting claims for breaches of the duty of loyalty and the applicability of the enhanced scrutiny of the entire fairness doctrine.
Public company merger agreements routinely contain provisions – such as indemnification covenants – protecting directors from pre-merger claims. If director conflicts become fertile ground for litigation, will these arrangements be subjected to greater scrutiny? Probably not:
Although these protections constitute a special benefit for these insiders that is not shared with the other stockholders, they are not generally viewed as grounds for claims of disabling conflicts. These merger agreement benefits are typically redundant assurances to comply with pre-existing, ordinary course commitments to these insiders and therefore, except for the incremental outlay for the customary purchase of a six-year D&O tail policy, do not increase costs.
Other contractual provisions protecting directors from pre-deal claims may be subject to closer scrutiny. The Delaware Chancery Court’s recent decision in In re Riverstone National provides a framework for evaluating when arrangements like this may present an issue:
– The personal benefit to the directors must be real, as opposed to highly contingent. Thus, the potential claims from which the directors are being protected by the merger agreement must not be hypothetical claims, but ones that appear to be claims that would have survived motions to dismiss by the defendant directors.
– At the time of the negotiation of the merger agreement, the defendant directors benefitting from these merger agreement provisions must be aware of both these imminent exposures to pre-merger claims and the beneficial provisions in the merger agreement.
– The potential liability against which these director are being insulated must be of a magnitude that is material to the directors in question.
Tune in tomorrow for the webcast – “Middle Market Deals: If I Had Only Known” – to hear Joe Feldman of Joseph Feldman Associates talk about how to best avoid post-closing deal surprises for a mid-market deal. Please print these “Course Materials” in advance.
This blog from Anthony Rickey of Margrave Law reports on his survey of post-Trulia disclosure-only settlements in Delaware and other jurisdictions – and the results may come as a bit of a surprise:
The Walgreen decision has led at least one academic to suggest that “[I]t appears Trulia is on its way to general acceptance in the context of merger litigation.” Yet decisions endorsing Trulia appear to be less common than approvals of disclosure settlements.
Courts in California, Delaware, Indiana, Michigan, New York, Ohio and Virginia have approved a total of 14 disclosure-only settlements in M&A litigation subsequent to the Trulia decision. Not all of these cases involved Delaware companies – but eight of them did, including three settlements approved by the Delaware Chancery Court itself.
This Davis Wright memo reminds buyers not to overlook FCC licenses in their due diligence investigations – even in deals that don’t involve telecom companies:
All sorts of non-telecommunications companies – energy providers, railroads, interstate trucking lines, toll-road operators, airlines, manufacturers, retailers, and numerous others — rely upon radio and telecommunications facilities in the operation of their businesses. Those facilities may be used for voice communications, equipment and systems monitoring, or data collection, transport and analytics. Eschewing third party and common carrier services, many companies instead utilize their own private radio and telecom facilities to support their mainstay businesses.
Ownership or control of licensed facilities can’t be transferred without FCC approval – and applications need to be filed well in advance. Big problems can result if this approval requirement isn’t addressed:
Failure to obtain advance FCC approval can delay closing, expose the parties to an acquisition to stiff FCC penalties, result in license conditions or denial, and give rise to disputes between the parties that may lead to post-closing adjustments or even litigation.
The memo relates a cautionary tale involving a large Canadian railway that completed two deals in 2008 without knowing that the sellers had FCC licenses:
Seven years later, the buyer discovered not only that the prior transactions were consummated without securing FCC approval of transfer of the licenses, but that the buyer subsequently had constructed, operated, modified and relocated other wireless facilities without FCC approval – leading to it having more than 100 unauthorized facilities by the time of its disclosure to the FCC.
The buyer voluntarily disclosed its violations and cooperated with the FCC’s investigation. Nevertheless, it was fined $1.2 million – even though the FCC found that the company’s actions were taken in support of the safe operation of its facilities and that its facilities caused no harmful interference.
In this memo, Goodwin Procter reviews recent FTC & DOJ enforcement activity dealing with the Clayton Act’s prohibition on director interlocks – and offers some practical compliance advice:
– Be sure to include a component on the antitrust laws in your corporate compliance policies. This will ensure that all Board members, officers, and employees are well aware of the law.
– Perform a compliance check at least yearly by asking your Board members, officers, and employees if they serve on other Boards.
– Know who you are from top to bottom; be aware if any subsidiaries or affiliates compete with any other entities in which the company is also invested – whether directly or indirectly
– Be conscious of your firm’s identity. As a firm’s mission shifts or it acquires or expands into new product lines, it may become newly competitive with other firms. Director interlocks violations certainly can emerge as these shifts take place.
– In any transaction where Board seats may shift, be sure to add a interlocks check to the closing checklist.
– Be mindful that even if there isn’t a technical violation, there could be conflict of interests implicated by dual-Board service.
This memo from Philip Giordano of Kaye Scholer weighs in on the implications of the DOJ’s enforcement activity on taking board seats & minority ownership stakes in a competitor.
Last month, the Federal Trade Commission adopted amendments to its HSR Premerger Notification Rules, streamlining the instructions to the HSR form & making it easier to file by allowing parties to submit the HSR form (and all accompanying documents) on a DVD. The FTC will continue to accept paper filings – but will not accept filings submitted partially on DVD and partially on paper…
Here’s an excerpt from this piece about what current practices exist for non-disclosure agreements:
To understand current market practice on these issues, we surveyed agreements dated between January 1, 2014 and December 31, 2015. We found 66 examples in Securities and Exchange Commission filings, including 31 mutual and 35 unilateral NDAs. Delaware law governed sixty-two percent of the agreements, and an additional 20% were written under New York law. The most common agreement term was two years (40%). One agreement remained in effect for five years, (the longest term), and two for only six months (the shortest). Ten agreements (15%) did not specify a termination date, implying a perpetual term, and six others provided for presumptively perpetual survival of the agreement’s confidentiality provisions.
While I was on vaca, Tesla filed this Form S-4 for its acquisition of Solar City. The “Background” section contains this disclosure – which appears to be an attempt to ensure that approval by a majority of SolarCity’s disinterested stockholders is fully informed resulting in the irrebutable presumption of the business judgment rule:
On August 18, 2016, Lazard became aware of a computational error, which double-counted certain amounts of SolarCity’s projected outstanding indebtedness, in certain SolarCity spreadsheets setting forth SolarCity’s financial information that Lazard used in its discounted cash flow valuation analyses, more fully described in the section entitled “-Opinion of Financial Advisor to the SolarCity Special Committee” beginning on page 86. Tesla and Evercore subsequently confirmed that the computational error was not included in Tesla’s or Evercore’s valuation analysis. At the Special Committee’s request, Lazard recalculated its discounted cash flow analyses after correcting the computational error. On August 24, 2016 and August 26, 2016, the Special Committee and SolarCity Board, with Mr. Gracias absent, respectively, met with representatives of Lazard in attendance. Representatives of Lazard reviewed with the Special Committee and the SolarCity board, respectively, its recalculated discounted cash flow analyses as of July 29, 2016, and the differences in Lazard’s discounted cash flow analyses that resulted from the computational error described above.
Representatives of Lazard confirmed to the Special Committee and the SolarCity Board, respectively, that, based upon economic, monetary, market and other conditions as in effect on, and the information made available to Lazard (other than with respect to the computational error noted above) as of, July 29, 2016, and subject to the assumptions, limitations, qualifications and conditions set forth in Lazard’s opinion dated as of July 29, 2016, the recalculated discounted cash flow analyses would not have changed the conclusion set forth in Lazard’s opinion as of the date it was delivered. Following receipt of Lazard’s confirmation, the Special Committee on August 24, 2016 and those SolarCity Board members present on August 26, 2016 unanimously affirmed their recommendations that the stockholders of SolarCity vote to approve the merger proposal.
On August 25, 2016, the Tesla Board held a special meeting with Messrs. Elon Musk and Antonio Gracias absent, having recused themselves, at which members of Tesla management, Evercore and Wachtell Lipton were present. Evercore and Tesla management discussed new information that it had received relating to Lazard’s valuation of SolarCity, including the computational error discussed above, as well as additional projections that SolarCity management had prepared prior to the execution of the Merger Agreement (as described in the section entitled “The Merger-Certain Tesla and SolarCity Unaudited Prospective Financial Information” beginning on page 97) but had not previously shared with Tesla or its representatives. Evercore explained why none of these factors changed its prior valuation analysis, and after discussion, the Tesla Board determined that none of the factors changed its view as to the value of SolarCity.
House lawmakers on Friday approved a bill to ease regulatory requirements on private-equity managers, legislation that the White House has threatened to veto. The House voted 261 to 145 to advance the bill sponsored by Rep. Robert Hurt (R., Va.), largely along party lines. The measure exempts private-equity firms from having to provide regulators with certain information, such as the debt levels of their portfolio companies and the countries where investments were made.
The legislation, which lacks a companion bill in the Senate and is opposed by the Obama administration, faces long odds of becoming law. Its likelihood of enactment hangs on the possibility of its provisions being added to a must-pass spending bill Congress often advances at the end of the year. The bill comes after years of failed attempts by the industry to exempt most managers of private-equity funds from having to register with the Securities and Exchange Commission. Instead, Friday’s legislation aims to roll back regulatory provisions that supporters say are unduly burdensome and crimp funds’ investment in companies that create jobs. Thirty-five Democrats supported the measure. Managers of private-equity funds pool their money alongside institutional investors such as pension funds and university endowments to buy equity stakes in companies or pieces of them.
Before Friday’s vote, the House agreed to modify some provisions that opponents found objectionable, approving by voice vote an amendment sponsored by Rep. Bill Foster, an Illinois Democrat. The amendment has the effect of preserving investor-protection rules set up in the wake of the Bernard Madoff Ponzi scheme. Those rules require that funds undergo a third-party audit or a surprise SEC examination to verify they actually own the assets they say they do.