Monthly Archives: June 2017

June 29, 2017

Post-Closing Adjustments: Chancery’s “Chicago Bridge” Decision Reversed

In Chicago Bridge & Iron v. Westinghouse (Del. Sup.; 6/17) the Delaware Supreme Court reversed the Chancery Court’s earlier decision holding that post-closing adjustment claims were subject to mandatory arbitration under the terms of the agreement. That’s the narrow holding in the case – but it’s about a lot more than whether a post-closing adjustment was subject to arbitration.

First of all, the stakes in this case were enormous – the working capital true up in the Chicago Bridge agreement called for the purchase price to be adjusted based upon the difference between closing net working capital and target net working capital amount. The seller’s calculations would have resulted in a $428 million payment from the buyer. The buyer’s true-up calculations – which were premised on its quarrel with the seller’s historical compliance with GAAP – would have resulted in a $2.15 billion payment from the seller to the buyer.  Since that claim was cast as merely being part of the true-up, its outcome would have been summarily decided by an independent accountant.

From the Supreme Court’s perspective, the case was really about whether a fairly standard working capital true up provision could be used as a “can opener” to permit the buyer to avoid contractual limitations on liability through a challenge to the seller’s historic accounting practices.

The Court said that the answer to that question was “no.”  It said that in concluding otherwise, the Chancery Court had given short-shrift to how the true up fit in to the structure of the purchase agreement – which had, in other places, provided that the seller would have no liability in damages to the buyer. Here’s an excerpt summarizing the Court’s position:

By reading the True Up as unlimited in scope and as allowing Westinghouse to challenge the historical accounting practices used in the represented financials,the Court of Chancery rendered meaningless the Purchase Agreement’s Liability Bar. The Court of Chancery also slighted the requirement in the text of the Purchase Agreement that Westinghouse indemnify Chicago Bridge for a broad set of claims related to Stone. Not only that, it then subjected Chicago Bridge to unlimited post-closing liability by way of an expedited proceeding before an accounting expert who was charged with delivering a rapid decision based solely on written submissions of the parties.

The Court also observed that the reason parties sign-up for this type of dispute resolution method when it comes to working capital adjustments is that the arbitrator is focusing on a “confined period of time between signing and closing using the same accounting principles that. . . formed the foundation for the parties’ agreement to sign up and close the transaction.”

This blog from Stinson Leonard Street’s Steve Quinlivan has some additional insights into the Court’s opinion.

John Jenkins

June 28, 2017

Transcript: “Public Company Carve-Outs – The Nuggets”

We have posted the transcript of our recent webcast: “Public Company Carve-Outs: The Nuggets.”

John Jenkins

June 27, 2017

Antitrust: 3rd Party Subpoenas in M&A Investigations

When a big deal’s brewing in your industry, it’s not unusual for other competitors to receive inquiries from antitrust regulators concerning the market impact of the potential deal.  Those inquiries sometimes turn into 3rd party subpoenas – and big headaches for the companies on the receiving end of them.

This Wilson Sonsini memo reviews Humana’s recent unsuccessful efforts to curb extensive discovery requests made by the FTC as part of its Walgreens/RiteAid investigation, and offers tips for companies in similar situations to effectively negotiate with regulators to lessen the burden.  Here’s an excerpt:

Be Prepared. Work with counsel to identify employees and shared files likely to have information covered by the subpoena. Having this information (and knowing what you do not have) at the outset can facilitate productive engagement with the antitrust agency.

Ask Questions About the Requests. Requests often appear to be duplicative, and engaging with the agency on their reasoning for specific requests may lend insight into additional ways the request can be narrowed or focused.

Offer a Counter ProposalOnce engaged in discussions with the agency, be proactive in identifying ways in which the subpoena that could be modified and/or reduced.

Specify the BurdenBe exact in describing the scope of the subpoena’s burden by specifying the number of employees’ records that would be impacted, whether any of the information requested is held in file storage, the volume of documents that would need to be collected, and the cost of reviewing the files.

While each investigation has its own unique circumstances, preparation & early discussions with the agency can help reduce the burden of 3rd party subpoenas and other discovery requests in antitrust investigations.

John Jenkins

June 26, 2017

Delaware: Not Material? Sometimes You Should Still Disclose

In a recent blog, Steve Quinlivan flagged a new Delaware Supreme Court decision in which Chief Justice Strine affirmed a Chancery Court’s decision to dismiss fiduciary duty & disclosure claims – but said that some additional disclosure would’ve made everybody’s life a little easier:

We affirm, although we note one troubling aspect of the record. The plaintiff’s complaint pointed out the failure of the target to the merger to disclose that the chairman of its special committee was considering joining the special committee’s outside counsel as a partner. That fact was disclosed within weeks after the merger’s closing by the law firm in a hiring announcement.

Although we, like the Court of Chancery, conclude that this fact was not material, one can understand why it caught the attention of the plaintiff, and prudence would seem to have counseled for bringing it to light earlier, especially given that the chairman’s intention to become a partner at that firm was going to become public in any event.

Although the information may not have been material, it had the potential to raise eyebrows – and thus gave the plaintiff something to throw against the wall in the hope that it might stick.  As the Chief Justice observed, not disclosing the chairman’s decision to join the firm  “raised needless questions, in a high-salience context in which both cynicism and costs tend to run high anyway.”  Disclosing the chairman’s new affiliation before the votes were counted would have taken those issues off the table.

John Jenkins

June 23, 2017

Anti-Corruption: Due Diligence & Risk Management

This Skadden memo provides an overview of key considerations in structuring and performing anti-corruption due diligence in an M&A transaction.  Here’s an excerpt from the intro:

A successful merger or acquisition requires careful consideration of many components and diligence in a number of specialties. Corruption issues, generally, and the global reach of the Foreign Corrupt Practices Act and the U.K. Bribery Act 2010, specifically, can present unique challenges to the structure of a deal and a party’s approach to diligence.

The memo identifies some innovative strategies for managing anti-corruption risk – such as a “phased investment” approach:

One novel approach to managing anti-corruption risk is a phased or staged investment in a target company. An acquirer that is not comfortable with a target’s corruption risk may consider an initial, limited investment, which should be well below the threshold at which regulators will impute control. The acquirer can invest further if the target company meets compliance bench-marks.

The memo highlights areas of emphasis for anti-corruption deal diligence and risk management at the pre-signing stage, during the process of structuring the deal, and after the closing.

John Jenkins

June 22, 2017

Private Deals: Rethinking “No 3rd Party Beneficiaries”

This recent blog from Weil Gotshal’s Glenn West takes issue with the idea that the standard “no 3rd party beneficiaries” boilerplate is the right approach for private company M&A. This excerpt explains that, in many private deals, a blanket disclaimer of intent to benefit non-parties is inappropriate:

The fact is that many merger or purchase and sale agreements do contain obligations that are intended to benefit persons who are not named parties. For example, it is not uncommon for a private company acquisition agreement to state that the seller’s indemnification obligations are in favor not only of the named buying entity, but also in favor of its affiliates, who may actually suffer the losses being indemnified.

Similarly, the nonrecourse provision that private equity buyers include to limit exposure beyond the specific named parties to the agreement is clearly intended to benefit (and be enforceable by) persons (affiliates) who, by definition, are not the named parties. But the provisions relating to continued employment for target company employees are specifically not intended to be enforceable by those employees, who are otherwise strangers to the contract.

Without careful drafting to identify which provisions are and are not intended to be excepted from the “no third-party beneficiary” clause, a conflict can be created that threatens the bargained-for benefits for nonparty affiliates (a sinking of a friendly ship if you will). After all, “where a provision in a contract expressly negates enforcement by third parties, that provision is controlling.”

Buyers & sellers need to carefully determine which contractual provisions are intended to benefit 3rd parties and add appropriate language carving those provisions out of the standard “no 3rd party beneficiaries” boilerplate.

John Jenkins

June 21, 2017

Study: Private Target Deal Terms

This SRS Acquiom study reviews the financial & other terms of 795 private target deals that closed during the period from 2013 through 2016. Here are some of the key findings about trends in last year’s deal terms:

– Earnouts in non-life sciences deals in 2016 remained steady at 14%, but they were much more often based on a specific metric other than revenue or earnings, 36% of 2016 deals using such other metrics compared to only 13% of 2015 deal.

– Use of a separate escrow for post-closing purchase price adjustments increased to 39% of 2016 deals that had purchase price adjustment mechanisms, up from just 27% in 2015.

– The median general survival period for representations and warranties dropped slightly to 16 months, compared to 18 months in recent years.

– Use of deductible baskets jumped to 42% of 2016 deals, from 30% in 2015.

– Pro-sandbagging clauses in agreements continued to grow, in 58% of 2016 deals, up from 52% in the prior 2 years; anti-sandbagging clauses dropped to 0% of 2016 deals.

– Inclusion of a materiality scrape for determining both breach and damages almost doubled from 19% in 2015 deals to 34% of 2016 deals.

– Use of a Material Adverse Effect standard for the accuracy of seller’s representations and warranties at closing jumped to 43% in 2016 deals from only 31% of 2015 deals.

The survey also notes that the Delaware Chancery Court’s decision in Cigna v. Audax continues to influence a number of deal terms, including the survival periods for “fundamental” reps & warranties and the structure of appraisal rights conditions.

John Jenkins

June 20, 2017

July-August Issue: Deal Lawyers Print Newsletter

This July-August Issue of the Deal Lawyers print newsletter includes (try a “Half-Price for Rest of ’17” no-risk trial):

– Special Considerations in California M&A Deals
– Alternatives to Traditional Working Capital True-Ups: The Locked Box Mechanism
– Chart: Delaware Standards of Review for Board Decisions

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. 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.

John Jenkins

June 19, 2017

Cross Border: Do You Speak IFRS?

This PwC memo addresses the need for cross-border buyers & sellers to be fluent in the differences between US GAAP and IFRS accounting standards. Here’s an excerpt from the intro:

While “numbers” may seem to be a universal language, the stories they tell can convey very different meanings. The “era of convergence” between US GAAP and IFRS has ended. While new accounting standards may be closer aligned, there remain potentially significant differences in both the bottom-line
impact of accounting conventions and disclosure requirements.

Understanding these differences and their impact on key deal metrics, as well as both short- and long-term financial reporting requirements, will lead to a more informed decisionmaking process. It can also help minimize last-minute surprises that can significantly impact deal value or completion.

The memo reviews some of the common differences between GAAP & IFRS and highlights areas of potential concern for dealmakers.

John Jenkins

June 16, 2017

Preferred Stock: Tips for Investors & Boards

Last month, I blogged about the Chancery Court’s decision in Hsu Living Trust v. ODN Holding (Del. Ch.; 5/17) – the latest Delaware decision to limit the rights of preferred stockholders & the board’s obligations to them.  In the wake of that decision, this Cleary blog provides tips to preferred investors on how to protect their interests – and to directors, on how to enhance their position in the event of a fiduciary challenge.

The blog notes that the ability of preferred stockholders to elect a majority of the board in the event of default may not adequately protect their interests after ODN Holding.  Here’s an excerpt with some alternative protections:

Investors should consider other protections—such as a penalty interest rate following a failure to effect a redemption or stockholder consent rights over company cash expenditures—to safeguard the benefits of the redemption right.  In addition, a preferred stock investor might seek to obtain a right —enforceable by specific performance—to foreclose on company assets or unilaterally cause a sale or liquidation of the company following the company’s failure to comply with a demand for redemption, which would eliminate board discretion and make a fiduciary challenge less likely.

The blog also suggests that an alternative process may have put the board in a better position:

The decision also highlights the Delaware courts’ recent emphasis on the stockholder franchise. Under the procedure set forth in the MFW shareholder litigation, the ODN board’s decision-making likely would have benefited from more deferential business judgment review had an uncoerced and informed majority-of-the-minority stockholder vote on the divestitures been combined with ODN’s use of a special board committee (assuming that committee was independent and adequately-empowered)

The biggest takeaway from the case for directors may be that the board’s compliance with its duties in authorizing a contract “does not mean that a company’s subsequent performance of the obligations in that contract will automatically pass fiduciary muster.”

John Jenkins