– While 100% of Merger Agreements called for the reps & warranties to be accurate at the closing, only 80% called for them to be accurate at signing.
– 98% of deals surveyed gauged the accuracy of reps & warranties by reference to whether their failure to be accurate would result in a Material Adverse Effect, up from 93% in the prior year.
– 95% of deals surveyed had a “double materiality” carve out, that called for disregarding materiality qualifiers in individual reps & warranties when assessing their accuracy at closing.
– Only 1% of deals surveyed had language that included an adverse change in the seller’s “prospects” within the definition of an MAE, but 69% included any event that would create a prohibition, material impediment, or material delay in the consummation by the seller of the merger within the definition.
– Only 23% of the deals surveyed had language conditioning the deal on the absence of litigation challenging the transaction by a governmental authority. Not a single deal was conditioned on the absence of private litigation challenging the transaction.
There’s lots more where this came from. As always, the Deal Points Study will give you something to talk about aside from politics & the NFL playoffs at your next practice group lunch.
Sorting out all of the nuances in Delaware’s approach to transactions involving controlling stockholders can be a challenge. The courts apply different standards of review depending on whether the controller is the buyer, is cutting its own deal as a seller, is participating pro rata with all other stockholders in a sale, or is acquiring an ownership stake in the surviving corporation.
This K&E memo reviews case law addressing each of these situations, and notes that identifying that a controlling stockholder is involved in the deal is merely the first part of the analysis:
A finding that there is a controlling stockholder of a target company is just the first part of the analysis in determining the applicable standard of review that the court will use in assessing an M&A transaction involving that target. As a number of recent cases have shown, the contours and terms of the M&A transaction are as important as the question of whether the stockholder is “controlling” to the court’s determination of whether — and to what extent — heightened scrutiny will be applied.
Understanding how a court will approach a particular transaction allows dealmakers to implement appropriate procedural safeguards when necessary, while avoiding excessive and unnecessary procedural protections.
This Morris James blog reviews Delaware case law on disclaimers of reliance in acquisition agreements & raises an important practice point. As this excerpt notes, a clause that specifically disclaims reliance on any extra-contractual statements is preferable to one that simply states what the buyer relied upon:
IAC Search found that a disclaimer or anti-reliance clause that states affirmatively what the buyer relied upon in entering into a purchase agreement, together with a standard integration clause, is sufficient to bar a fraud claim based on extra-contractual representations. The safer course of action to preclude a claim for fraud, however, is to include both an integration clause and an anti-reliance clause that expressly states that the buyer did not rely upon any extra-contractual statements or information outside of the purchase agreement in its decision to enter into the agreement.
This Sheppard Mullin blog suggests that the SEC’s recent amendments increasing the amount that can be raised under Rule 504 of Regulation D to $5 million may have made the little-used exemption a viable alternative for funding smaller M&A deals.
Rule 506’s disclosure requirements when securities are offered to non-accredited investors have limited its usefulness in M&A – but this excerpt points out that Rule 504 takes a different approach:
Rule 504, however, does not require the issuer to provide any particular information to investors to establish the exemption. Accordingly, it may be used in transactions involving the offer and sale of smaller amounts of securities to non-accredited investors where the burden of preparing disclosures meeting the requirements of Rule 502(b)(2) would otherwise be cost prohibitive or take too much time.
While Rule 504 doesn’t prescribe specific disclosures, Rule 504 offerings remain subject to Rule 10b-5 & are not entitled to the benefits of NSMIA’s preemption of state “blue sky” requirements.
– The Disclosure of Material Relationships by Financial Advisors
– Small Company M&A: “Boy, Could This Deal Use a Few More 000s!”
– Proxy Access a’ la Private Ordering? Not So Fast!
– Tips for a Successful Working Capital Adjustment
– Questions Abound: FTC Antitrust Actions Under the New Administration
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 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 DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – 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.
This Cooley M&A blog discusses Corp Fin’s recent CDIs on disclosure of investment banker fees in tender offers – & suggests that some changes in market practice may be required. Here’s an excerpt:
A review of recent banker fee disclosure for transactions initiated by an unsolicited bid show that it is not current practice for the financial advisor fee disclosure to include a description of alternative fees payable in other contexts, such as in the context of an activist-initiated sale transaction where the target may have agreed to pay the financial advisor one fee for remaining independent and a different fee if the company is ultimately sold.
The new C&DIs appear to require additional transparency in this scenario by requiring narrative disclosure of multiple fee types that would be sufficient to “provide the primary financial incentives for the financial advisors in connection with their analyses and advice.”
In addition to this type of disclosure, New Tender Offers & Schedules CDI 159.02 specifically calls for disclosure relating to the type of fees payable (advisory fees, success fees, etc.), contingencies, milestones & fee triggers, and any other information about compensatory arrangements that would be material to security holders’ assessment of the bankers’ analyses or conclusions, including any material incentives or conflicts.
Last week, the SEC announced an enforcement action that is based on two big NYC firms being hacked by some Chinese traders who used the stolen information for insider trading. The SEC’s complaint doesn’t identify the firms – maybe because there’s a parallel criminal proceeding & the law firms are victims of a crime – but this American Lawyer article and WSJ article seem to identify them…
Wow! That was fast. I had a bunch of blogs ready to run leading up to President Trump selecting a SEC Chair. Just yesterday, I blogged about Carl Icahn providing input. And now Sullivan & Cromwell’s Jay Clayton has been tapped. Jay won’t likely need to clear much of a hurdle during his Senate confirmation hearings – but given Trump’s posturing during his campaign, he will need to sit through questions about his ties to Goldman Sachs – including his wife’s job there (as noted in this Reuters article).
Some of other candidates also were from big law firms – this article notes that Trump met with Gibson Dunn’s Debra Wong Yang. But Debra doesn’t do deals. Jay’s bio indicates he does more than deals, but he’s primarily a deal guy. You have to go a ways back to find the last SEC Chair who was a deal lawyer – Chris Cox (who was a deal lawyer before he became a Congressman).
And it’s been a long time – a real long time – since the last SEC Chair was plucked directly from a law firm. Of course, that background is quite common for a Division Director. Richard Breeden had been a law firm lawyer, but he had two gigs between firm life & becoming Chair. The closest comparison is Ray Garrett, Jr., who left a Chicago firm to become SEC Chair. Garrett had been head of Corp Fin a few years before he left his firm to lead the Commission in the early ’70s.
It’s also been a long time since someone was appointed who wasn’t previously publicly visible (this MarketWatch article notes that the wire services don’t even have Jay’s pic on file). Let me review the Chairs over my career: Shad, Breeden, Levitt, Pitt, Donaldson, Cox, Schapiro and White – all had been in the public eye before ascending to SEC Chair. Ruder is the exception here. But I’m not suggesting that visibility is some sort of SEC Chair qualification. It isn’t.
Some folks asked me yesterday what was “normal” for a SEC Chair. There really isn’t a standard for the job – the backgrounds of former SEC Chairs are all over the lot. A few have worked at the SEC before. Chair Levitt wasn’t a lawyer. Chair White was a prosecutor. Chair Ruder was an academic. Chair Cox was a Congressman. And it’s not the sort of appointment where you read tea leaves from past writings. Obviously, someone’s background plays a role – but the biggest indicator of what a Chair will do is looking at the general direction the President points to…
This K&L Gates memo highlights a DC federal court’s decision to reject claims that a joint defense privilege protected certain sensitive emails exchanged by the buyer and seller in connection with a proposed merger. The court found that the emails – which were sought by the Antitrust Division of the DOJ – did not satisfy the standards for the joint defense privilege.
The court found that documents expressing disagreements between the two companies about how the merged entities would operate were not privileged because they were not related to the parties’ common interest or made in furtherance of that interest. The memo points out that the case demonstrates the need for the parties to joint defense agreements to appreciate their limits. Here’s an excerpt:
The privilege not to disclose shared information between parties to a joint defense agreement is limited to communications: (1) on subjects about which the parties have a common interest; (2) relating to an actual or potential litigation; (3) related to the parties’ common interest; and (4) made in furtherance of that common interest. Shared communications that don’t meet these criteria are potentially subject to disclosure despite the existence of a joint defense agreement.
This Arnold & Porter memo suggests that the potential consequences of the US election, together with the fallout from the Brexit vote & political turbulence in Europe, may result in increased uncertainty in deal markets. Since that’s the case, it may be time to take a hard look at deal termination triggers – including MAC clauses. While acknowledging that a Delaware court has never found that a MAC clause was triggered, the memo reviews the case law and contends that parties claiming that a MAC has occurred have some arrows in their quiver:
But if nothing else, recent political events at home and abroad may perhaps remind us never to say never—the fact that there has never been a successful MAE claim does not mean that there never will be one, and a careful reading of IBP, Cooper, and Osram may provide M&A lawyers with useful arguments in uncertain times.
Just how impregnable a wall the Delaware judiciary has created when it comes to MAC clauses may soon be put to the test – with Abbott Laboratories filing a lawsuit in Chancery Court last month seeking to terminate its deal with Alere on the basis of a MAC, and Verizon saber-rattling with Yahoo! over potential MAC issues.