Monthly Archives: October 2017

October 31, 2017

SPACs: Nasdaq Proposes Changes to Listing Rules

This Akin Gump blog describes Nasdaq’s proposal for changes in its listing rules for Special Purpose Acquisition Companies.  Here’s an excerpt highlighting the proposed changes:

Initial Listing Requirements in Connection with Initial Public Offering

Round Lot*
– Existing: 300 round lot holders
– Proposed: 150 round lot holders
* A round lot means 100 shares of a security.

Net Tangible Assets Requirement
– Existing: no net tangible assets requirement
– Proposed: $5 million in net tangible assets

Proposed Continued Listing Requirements and Post-Business Combination Requirements

Continued Listing
– Existing: 300 public holders
– Proposed: No holder requirement

Net Tangible Assets Requirement
– Existing: no net tangible assets requirement
– Proposed: $5 million in net tangible assets

Post-Business Combination Requirement
– Existing: Meet all initial listing requirements following the business combination
– Proposed: Meet all initial listing requirements within 30-day transition period following the business combination

SPACs that are already listed would not be required to satisfy the $5 million net tangible assets requirement, so long as they continued to meet the public holders requirement.  If the rule proposal is approved, Nasdaq will publish a daily list of SPACs that don’t meet the net tangible assets requirement and don’t satisfy any other criteria for exclusion from the penny stock rules.

John Jenkins

October 30, 2017

Non-GAAP: What the New CDI Might Not Cover

recently blogged about Corp Fin’s new “M&A Forecasts” CDI – which says that forecasts provided for the purpose of rending a fairness opinion & disclosed in order to comply with Item 1015 of Reg M&A or state law disclosure requirements would not be regarded as “non-GAAP measures” subject to Reg G.

The blog noted that the new CDI didn’t cover the entire waterfront of situations that might prompt disclosure of forecasts in connection with a deal.  Along those lines, here are some thoughts I received from a member about one scenario where the CDI’s applicability may be unclear:

Commentators have pointed out that historically, the Staff has taken the position that projections provided by the target company to the buyer in connection with tender offers need to be disclosed because they “crossed the table” raising 10b-5 concerns. Because the buyer is seeking to purchase shares directly from stockholders via a tender offer while in possession of material non-pubic information (e.g., target management’s projections), a summary of those projections must be disclosed to the target’s stockholders as well so that they are on an equal informational footing as the buyer.

The Staff takes the view that the same 10b-5 issue exists in long form mergers and generally requires the disclosure of a summary of the projections that have crossed the table in connection with the negotiation of long form mergers.  By way of example, the lead-in to the section disclosing a summary of the target’s projections in a merger proxy statement or a Schedule 14D-9 typically explains that the summary is being provided because, in addition to having been provided to the target’s board and the target’s financial advisor, the projections were provided to the counterparty to the transaction.

But the interpretive exemption provided by the new C&DI doesn’t on its face provide an exemption from Reg G if the non-GAAP measures disclosed in a proxy statement or Schedule 14D-9 are being disclosed in part in order to address a 10b-5 issue and not solely because of Item 1015 (which the Staff interprets to require the disclosure of a material input underlying the opinion of the target’s financial advisor) or state law disclosure requirements (which the Delaware courts have have often (but not always) interpreted to require the disclosure of reliable projections in the possession of the target board and/or that the target board has authorized the target’s financial advisor to rely upon for purposes of its opinion). In contrast to the Staff of the SEC, neither Item 1015 nor state law require the disclosure of projections because they crossed the table and potentially raise a 10b-5 issue.

John Jenkins

October 27, 2017

ISS Issues Draft Policies: Unratified, Long-Term Poison Pills

Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).

These are the three main areas up for consideration in the US:

1. Director Elections – Non-Employee Director Pay
2. Gender Pay Gap Proposals
3. Director Elections – Poison Pills

For the poison pills draft policy, here’s how Wachtell Lipton describes it: “ISS’s current policy provides that if a company maintains a long-term (>1 year) shareholder rights plan that has not been approved by shareholders, ISS will recommend voting against all nominees every year if the company’s board is classified. However, if the board is annually elected, ISS will recommend voting against the entire board once every three years.

ISS proposes changing its policy to recommend voting against all directors of such companies at every annual meeting. In addition, commitments to put a long-term rights plan to a vote the following year would no longer be considered a mitigating factor by ISS (but may still be relevant to individual shareholder voting decisions). ISS would also eliminate the exemption for 10-year rights plans adopted prior to November 2009, which would affect approximately 90 companies. ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”

Broc Romanek

October 26, 2017

P&G Proxy Fight: ESOP’s Proportionate Voting Plays a Key Role

In this note, Carl Hagberg – independent tabulator & editor of “Shareholder Service Optimizer” – writes plenty on the Procter & Gamble proxy fight. Here’s an interesting excerpt:

AN ACE IN THE HOLE FOR P&G – OR RATHER, A BIG WILD-CARD IN THE DECK – APPEARS TO BE THE EMPLOYEE OWNERSHIP PLAN VOTING, which reportedly comprises 7 ½% of the outstanding shares, and where the Plan Trustee appears to have voted the entire position “proportionately.” This surely gave management a huge edge in what is, apparently, a dead heat – even after the big boost.

As close observers of proxy fights, the OPTIMIZER has repeatedly pointed out the “wild-card aspect” of proportional voting, and why, as a result – and also because one cannot cite a sensible rationale for having it, other than to give management an added edge most times – we hate it and feel it should be abandoned: In this case, as is normally the case, it seems to have worked to skew the vote very much in P&G’s favor. But before you look to have proportional voting in your own employee plans, please remember the Walt Disney election a few years back, when the small number of employee owners who bothered to vote, voted against Michael Eisner – and where proportional voting took him down.

We would not be at all surprised to see Peltz challenge the propriety of the Plan Trustee voting proportionately in such a close election – even though they may have had the right to do so. One could argue, of course, that the non-voters were, ipso facto, “indifferent” – but that, in our opinion, is a very different thing than having a significant number of them being automatically recorded as voting for the management slate by a Plan Trustee – especially in an election where the overall vote seems close to a 50:50 split. A very bad governance provision say we.

Broc Romanek

October 25, 2017

Our New “Deal U. Workshop” Is On!

Our new “Deal U. Workshop” is the perfect way to train those less-experienced in working with M&A. Each attendee receives these three critical – and practical – resources:

1. Deal U. Podcasts – Access to nearly 60 podcasts about M&A activities – tailored to those new to this area. Each podcast ranges between 5-10 minutes – for a total of 7 hours in content. Here’s a list of the podcast topics.

2. Deal U. Situational Scenarios – Our 30+ situational scenarios – with detailed analyses – will help you fully comprehend many different aspects of deal practice.

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This is a great way to outsource your training – our resources are practical (and entertaining at the same time). Call Albert Chen at 512.960.4823 for a flat firmwide rate or sliding scale rates – or register now.

Broc Romanek

October 23, 2017

Private Equity: Fund Manager Investments

Private equity fund managers are increasingly interested in outside investment at the sponsor level. We’ve previously blogged about some of the reasons for that interest. This Davis Polk memo approaches fund manager investments from the investor’s perspective – and highlights some issues to keep in mind. Here’s an excerpt discussing the potential need for consents from the funds managed by the sponsor:

Depending on the size of the stake sold to the investor and the investor’s degree of control, consent may be required from each fund’s investors on a fund-by-fund basis (usually by reference to a stated percentage in the fund documents that may be required to approve a sale of the manager or, by analogy,the amendment of the underlying fund documents).

The negotiation will focus on risk allocation in several respects: is positive or negative consent required or deemed necessary on a business level; should obtaining consents with respect to all or a certain percentage of AUM (or specific clients) be a condition to closing or should the investor have to close regardless; and should the failure of any fund consent and any resulting loss in AUM lead to a price adjustment and, if so, on what basis (e.g., dollar-for-dollar, with a deductible or tipping basket, or with a deductible and a catch-up mechanism)?

The memo covers a variety of other topics, including post-closing governance, seller indemnification, retention issues, restrictive covenants, fund investment commitments & liquidity alternatives for the investor.

John Jenkins

October 20, 2017

Transcript: “Cybersecurity Due Diligence in M&A”

We have posted the transcript for our recent webcast: “Cybersecurity Due Diligence in M&A.”

John Jenkins

October 19, 2017

Efforts Clauses: The Delaware Chancery Court Speaks!

Lawyers like to fight over whether a party to a contract has to exercise “best efforts,” “commercially reasonable efforts” or some other level of efforts – but as we’ve noted in the past, courts either don’t seem to distinguish between different versions of “efforts clauses,” or provide little guidance on how those versions might be different.

The bottom line is that there’s not a whole lot of helpful case law on “efforts clauses,” so when the Delaware Chancery Court weighs in on one of them, it’s big news.  This recent blog from Francis Pileggi reviews BTG International v. Wellstat Therapeutics Corporation, (Del. Ch.; 9/17), where the court interpreted a clause requiring a party to use “diligent efforts” to fulfill its contractual obligations.  Here’s an excerpt:

This case involved a distribution agreement between two pharmaceutical companies. BTG was the larger company and agreed to promote, distribute and sell a drug called Vistogard, that the smaller Wellstat did not have the resources to promote, distribute and sell.  After extensive negotiations, the parties agreed to a contractual definition of “diligent efforts” which BTG was required to employ in order to reach various sales goals for Vistogard.  In addition, the parties were required to work together to formulate and finalize a business plan that would describe the details for promoting, distributing and selling Vistogard.

The court found that BTG failed to hire a sufficient number of sales representatives and failed to devote other resources to sell Vistogard, but instead focused most of its efforts and resources on a completely different product in a different division of the company – – with instructions from the CEO to keep the costs flat related to Vistogard and not to increase the resources that were necessary to implement the business plan.

The court concluded that BTG did not meet the “diligent efforts” standard & breached the agreement by failing to comply with the agreed-upon business plan.

What makes this case different from many others is that the parties to this transaction negotiated a detailed definition of what the contract’s efforts clause was intended to require.  Here’s what they came up with:

Diligent Efforts means, with respect to a Party, the carrying out of obligations specified in this Agreement in a diligent, expeditious and sustained manner using efforts and resources, including reasonably necessary personnel and financial resources, that specialty pharmaceutical companies typically devote to their own internally discovered compounds or products of most closely comparable market potential at a most closely comparable stage in their development or product life, taking into account the following factors to the extent reasonable and relevant: issues of safety and efficacy, product profile, competitiveness of alternative products in the marketplace, the patent or other proprietary position of the Subject Product, and the potential profitability of the Subject Product. Diligent Efforts shall be determined without regard to any payments owed by a Party to the other Party (excluding the transfer price for supply of such Subject Product).

The court was able to latch on to that definition and use it in interpreting the scope of the obligations required under the contract – and the real takeaway from this case may be that if you want a court to take your efforts clause seriously, then you need make the effort to define exactly what it means in your contract.

Icahn Enterprises’ Jesse Lynn points out that his company still holds the record for the most amusing defined efforts clause out there. I think the man has a point. Check out Sections 7.1 & 7.6 of this purchase agreement – which say that “in determining whether such parties acted reasonably or in a commercially reasonable manner, such parties shall not be required to ‘drop everything’ or ignore their existing responsibilities to conduct their business. . .”

John Jenkins    

October 18, 2017

Non-GAAP: New CDI Clarifies Exemption for M&A Forecasts

Last month, I blogged about the uncertainty surrounding the scope of Reg G’s exemption for disclosure of non-GAAP information contained in projections provided to financial advisors.  Yesterday, Corp Fin issued a new CDI that helps address some of that uncertainty.

New Non-GAAP CDI 101.01 provides that financial measures included in forecasts provided to a financial advisor and used in connection with a business combination transaction won’t be regarded as non-GAAP financial measures if & to the extent that:

– The financial measures are included in forecasts provided to the financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction; and

– The forecasts are being disclosed in order to comply with Item 1015 of Regulation M-A or requirements under state or foreign law, including case law, regarding disclosure of the financial advisor’s analyses or substantive work.

Because the tender offer rules don’t specifically reference the relevant provisions of Item 1015 of Reg M-A, some have contended that the exemption from Reg G’s requirements shouldn’t extend to disclosures contained in tender offer materials. By referring to both the requirements of Item 1015 of Reg M-A and state law, the new CDI clarifies that the availability of the exemption does not depend on whether the disclosure appears in a tender offer document, a proxy statement or a registration statement.

Forecasts may be included in disclosure documents for a variety of reasons, and since the new CDI clarifies that the exemption only applies “if and to the extent” forecasts were provided for the purposes of rendering an opinion, it doesn’t necessarily cover the waterfront.

In connection with the adoption of the new CDI, the Staff renumbered the existing CDIs and deleted references to Item 1015 that previously appeared in what is now Non-GAAP CDI 101.02.

A tip of the hat to the folks at Cleary Gottlieb – our blog on this topic last month was prompted by a Cleary blog that made strong arguments about the need for additional Staff guidance on the applicability of Reg G to M&A forecasts.  A lot of factors may have played a role in the Staff’s decision to issue the new CDI – but I don’t think it’s a bold leap to suggest that Cleary’s arguments may have been one of them. In any event, here’s a new blog from Cleary discussing yesterday’s CDI.

John Jenkins

October 17, 2017

National Security: Takeaways from the CFIUS Annual Report

CFIUS recently released its “Annual Report to Congress for 2015.”  That’s not a typo – the report was issued much later than in prior years. The report provides an overview of the notices that CFIUS received during the calendar year covered by the report, & includes statistical data on those transactions.

This Latham memo addresses the key takeaways from the report.  They include:

– The delayed release of the Report likely reflects the increased resource constraints under which CFIUS has been operating
– The number of voluntary notices filed with CFIUS has increased in the past few years, with significant increases in 2016 and expected in 2017
– Chinese investment continues to generate the largest number of transactions subject to CFIUS review
– CFIUS has been increasingly more likely to extend initial 30-day “reviews” into longer “investigations”
– Parties withdrew filings at a rate similar to previous years, but re-filed a much higher percentage of those notices
– CFIUS rejected one filed notice based on the parties’ failure to provide information consistent with that available to CFIUS
– Certain foreign governments are engaging in coordinated strategies and espionage aimed at obtaining “critical technologies” from US companies
– 2015 saw a sustained increase in notices involving manufacturing businesses – particularly businesses in the semiconductor industry
– CFIUS continues to use traditional mitigation techniques to address national security concerns, and to adopt new ones as well

The memo also notes that the Report identifies new factors that might give rise to national security concerns – including US businesses that “hold substantial pools of potentially sensitive data about US persons and business” in sectors of national security importance. CFIUS also identified as a factor those US businesses “in a field with significant national security implications in which there are few alternative suppliers or in which a loss in U.S. technological competitiveness would be detrimental to national security.”

John Jenkins