Monthly Archives: October 2016

October 17, 2016

Delaware: Control Means Never Having to Say “I’ll Sell”

This Cleary blog discusses a recent Delaware case – In re: Books-a-Million Stockholders Litigation – involving a sale of a company to its controlling stockholder (we’re posting memos on this case in our “Fiduciary Duties” Practice Area). The deal was structured to comply with MFW’s standard for business judgment rule review, but the plaintiffs contended that the special committee’s actions made MFW inapplicable. Here’s an excerpt describing the gist of the allegations:

The plaintiffs alleged that the committee’s decision to recommend the transaction was irrational and in bad faith because (i) a third party had indicated an interest in acquiring BAM at a price higher than that offered by the family, (ii) the committee determined that pursuing the third party offer was not feasible because the family (as is normal in these types of situations) indicated it was unwilling to sell its controlling interest in BAM and (iii) the committee nonetheless proceeded to negotiate with the family and ultimately recommend that the family’s offer be accepted even though the offered price was less than that proposed by the third party.

Vice Chancellor Laster rejected these arguments & applied MFW to the board’s decision.  He reiterated Delaware’s long-standing position that a controlling stockholder is under no obligation to sell – and doesn’t breach any duty by offering a buyout at a lower price than a third party might offer.

John Jenkins

October 14, 2016

Transcript: “Middle Market Deals – If I Had Only Known”

We have posted the transcript for our recent webcast: “Middle Market Deals: If I Had Only Known.”

John Jenkins

October 13, 2016

Court Won’t Dismiss CVR “Efforts Clause” Claim

This Cooley blog notes that a federal court recently refused to dismiss claims that a buyer breached its obligations to use “diligent efforts” to hit milestones for payment of “contingent value rights” issued to an acquired company’s shareholders. The blog also flags an important issue for sellers to keep in mind if earn-outs – or CVRs – are part of the deal:

According to recent case law in Delaware, buyers do not have an independent obligation under the implied covenant of good faith and fair dealing to try to maximize value or pay an earn-out if a contract’s plain language does not require it to do so, which suggests that well-advised sellers should include express efforts covenants in the acquisition agreement.

John Jenkins

October 12, 2016

What If Deal Protections Were Illegal? Ask the UK

The United Kingdom prohibited “deal protections” in M&A transactions in 2011. Before that time, termination fees of up to 1% of transaction value were permitted and there were no restrictions on other protection devices such as “no-shops” and “force the vote” clauses. A new study on the results of that prohibition comes to some interesting conclusions:

– M&A deal volumes in the UK declined significantly in the aftermath of the prohibition, relative to deal volumes in the European G-10 countries.

– There were no countervailing benefits to target shareholders in the form of higher deal premiums or more competing bids.

– Completion rates and deal jumping rates also remained unchanged.

– Before the prohibition on deal protections, approximately 50% of all deals in the sample involved targets from the UK. After the ban, this proportion fell to approximately 34%.

– In addition, the authors estimate $19.3 billion in lost deal volumes per quarter in the UK relative to the control group due to the prohibition on deal protections, implying a quarterly loss of $3.2 billion for shareholders of UK companies.

The results suggest that deal protections provide “an important social welfare benefit by facilitating the initiation of M&A deals.”

John Jenkins

October 11, 2016

Heads Up! Immediate Change to HSR Threshold Calculation

This Goodwin Procter memo notes that last week, the FTC announced an immediate change in the way debt is addressed in calculating whether the HSR filing threshold as been crossed.  As a result of this change, that deal you thought was exempt from filing may no longer be.  Here’s an excerpt:

Under the HSR Act, a pre-closing filing may be required if the deal value – or the “size of transaction” – is more than $78.2 million. A basic principle has always been that only debt which is taken on by a buyer (or any entity that is controlled by the buyer, such as a newly formed acquisition vehicle) to finance a transaction is included in the size of transaction.

Until yesterday, the FTC was of the view that new debt which is taken on by the target to help finance a transaction would be specifically excluded from the size of transaction. The FTC announced on October 6th that this old rule is no longer applicable – and the change in the treatment of debt is effective immediately.

Effective October 7, 2016, all new debt – whether it is taken on by the buyer or the target – must be taken into account in determining whether the $78.2 million size of transaction test is met.

John Jenkins

October 7, 2016

Canada: M&A Tips For Foreign Buyers (& Happy Turkey Day)

It looks like attendance at my Sunday morning hockey game this week is going to be pretty light – several of my fellow skaters are heading home for Canadian Thanksgiving, which takes place on Monday.  So I thought this might be a good time to wish a “Happy Thanksgiving” to North America’s designated driver & to point out this recent Blakes memo – which provides practical tips for foreign buyers looking to acquire a private company in Canada.

John Jenkins

October 6, 2016

Delaware: Revlon & Unocal in Decline?

This new article suggests that Revlon, Unocal & the other Delaware takeover standards we’ve all focused on for more than a generation are in decline, and that there’s good reason for that – the growing clout of institutional investors, investor activism & the rise of the corporate governance movement. Here’s a summary of the argument:

These standards were created by Delaware courts in the mid-1980s to rectify a perceived failure in the corporate governance system, principally the apparent failure of directors to act responsibly. These new standards encouraged the rise of private enforcement activities, initially by the raiders themselves, but once hostile transactions became a less significant force, through expanded shareholder litigation.

In this new environment, private litigation became increasingly unnecessary – a fact which became quite apparent with the rise in litigation rates to 96% of all takeovers. At the same time, the rise of institutional investors, coordinating bodies such as proxy solicitors, hedge fund activism & corporate governance movements, as well as the expansion of federal securities law into areas like executive compensation & board independence/monitoring, occurred. The consequence was a largely justifiable relaxation of these standards.

John Jenkins

October 5, 2016

Delaware: Bring Your M&A Disclosure Claims Pre-Closing

This Wachtell memo discusses the Delaware Chancery Court’s recent decision in Nguyen v. Barrett, which makes it clear that if a plaintiff has a disclosure claim, it better be brought before closing:

The court rejected the plaintiff’s suggestion that “Delaware has recently established a new regime,” under which a plaintiff can elect to bring disclosure claims before or after the stockholder vote: “To be clear, where a plaintiff has a claim, pre-close, that a disclosure is either misleading or incomplete in a way that is material to stockholders, that claim should be brought pre-close, not post-close.” Only that rule, the court explained, encourages litigants to seek a remedy for disclosure problems “pre-close, at a time when the Court can insure an informed vote.”

The court also addressed the differing standards that apply to pre-closing and post-closing litigation involving disclosure claims:

Dismissing the amended complaint, the court emphasized the contrast between a “pre-close disclosure claim, heard on a motion for preliminary injunctive relief,” and a “disclosure claim for damages against directors post-close.” A pre-close claim, the court explained, requires a plaintiff to show only “a reasonable likelihood . . . that the alleged omission or misrepresentation is material,” while a post-close damages claim carries substantial additional burdens, including the obligation to plead that the directors violated their disclosure duties “consciously,” “intentionally,” or in “bad faith.” Finding no allegations that demonstrated this “extreme set of facts,” the court ruled that the damages claims could not stand.

Applying the post-closing damages standard, the Chancery Court rejected claims premised on disclosure of projections used in the fairness opinion and the contingent nature of the financial advisor’s fee.

John Jenkins

October 3, 2016

HSR: Second Requests Down – But Deal Challenges Up

This Perkins Coie memo reviews the FTC & DOJ’s HSR Annual Report for fiscal 2015.  Here’s a summary of the key findings:

– The number of HSR filings increased 8.3% in fiscal 2015, compared to fiscal year 2014.  The percentage of transactions investigated decreased 13.1%.  The percentage of investigated transactions leading to second requests dropped 2.1%, but the percentage of challenges to reported deals increased 17.4%.

– The agencies continue to enforce the HSR Act’s notification and waiting period requirements in “failure to file” situations, as reflected in the $480,000 civil penalty to be paid by Caledonia Investments plc for its failure to make the required HSR filing prior to a 2014 acquisition of voting securities of Bristow Group Inc.

John Jenkins