Monthly Archives: October 2017

October 16, 2017

Golden Parachutes: Mitigating the Tax Bite

Payments to executives that are triggered by a change in control can involve a big tax bite if they exceed 3x an executive’s “base amount” of comp as determined under IRC Section 280G’s “Golden Parachute” provisions.  This Andrews Kurth Kenyon memo highlights mitigation strategies to address those tax issues for disqualified individuals.

This excerpt provides a summary of the alternatives involving cutbacks & gross-ups:

Straight cutback – compensation that equals or exceeds the 280G threshold is automatically forfeited. No 280G consequences.

“Better-off” cutback – the disqualified individual retains the greater, on an after-tax basis, of the amount resulting from (i) payment of the full amount (taking into account the 20% excise tax) and (ii) application of a straight cutback.

Full gross-up – the corporation pays the disqualified individual a gross-up payment sufficient to place him or her in the same after-tax position as if the 20% excise tax had not applied. Note that such a gross-up costs more than just the 20% excise tax because the gross-up payment is also subject income taxation (and, because it is connected compensation, also the 20% excise tax). Loss of deduction and the 20% excise tax will apply.

Modified gross-up – the full gross-up, described above, applies only if the connected compensation exceeds the 280G threshold by a particular amount (e.g., 110%), otherwise a straight cutback is applied.

Payments established by clear and convincing evidence to constitute reasonable compensation for services on or after the change in control (including refraining from performing services under a non-competition agreement) are exempt from 280G.

In addition, a disqualified individual or the corporation may take actions to increase the base amount in the years before a potential transaction – such as exercising vested options or paying bonuses earlier than usual.  These actions will have the effect of increasing the relevant “base amount” under 280G, thus reducing the chances of exceeding the 280G threshold.

The memo also notes that private companies may avoid application of 280G by obtaining shareholder approval of the compensation in question – subject to certain conditions.

John Jenkins

October 13, 2017

Revenue Recognition: Deal Terms Address New Standard

Steve Quinlivan has been closely following the impact of FASB’s new revenue recognition standard on the terms of M&A transactions.  Steve recently blogged about a public company acquisition – NYSE-listed Envestnet’s acquisition of privately held FolioDynamix – that addresses the new standard in its covenants & closing conditions.  Here’s an excerpt:

The heart of the provisions addressing revenue recognition are set forth in Section 7.11 of the merger agreement. From a high level, the target’s representative must provide certain information related to revenue recognition to Envestnet specified on a schedule by certain dates. Envestnet may comment on the information.  The information is to be provided to Envestnet’s and Actua’s audit committee by a specified date. In certain circumstances, delivery of the information is a condition to Envestnet’s obligation to close.  See Section 9.02(j).

As we recently blogged over on, implementation of the new revenue recognition standard is proving to be tough sledding for many companies, and we’re likely to see many more provisions in acquisition agreements zeroing in on information about the effect of the new standard on target companies as the deadline nears.

The blog points out that buyers’ emphasis on the new standard may create some challenges for private companies looking to sell to a public company buyer. Many of these companies haven’t focused on adoption of the new standard – and if they can’t provide a public company buyer with enough information to enable it to properly recognize revenue, they may disqualify themselves as a public company target.

John Jenkins

October 12, 2017

Survey: Private Companies Give “Thumbs Up” to M&A

This Harris Williams survey reports that interest in M&A among private companies continues to rise. The survey solicited input from more than 400 CEOs and senior business leaders of privately held, high growth companies.  Here are some of the key findings:

– 95% of survey respondents are interested in M&A over the next three years – up from 81% in 2015.

– 65% said they were interested in acquiring other companies, compared to only 38% in 2015.

– 52% said they would consider selling and 36% would consider a merger.

The survey highlights one characteristic that distinguishes private companies from many of their public peers when it comes to M&A – the priority they place on the interests of their employees:

Whether it’s through selling their company or making an acquisition, a matter of great importance to entrepreneurs during a transaction is the effect on their employees. While receiving the best possible price was respondents’ first concern in a transaction, employee stability was a strong second. Indeed, the share of business owners who cite stability for their employees during a transaction as their top concern has increased almost five points over the past year, to 19%. A similar share (18%) reported that maintaining their company’s culture is a top concern.

The rising interest in M&A is driven in part by CEOs positive views about their own businesses – 83% said that they’re performing at or above budget, and 58% said that they intend to expand hiring during 2017.

John Jenkins

October 11, 2017

Antitrust: DOJ Files Rare Post-Closing Challenge

For many deal makers, clearing HSR review is a milestone that means that the government has concluded that their deal doesn’t raise any antitrust issues.  A recent DOJ lawsuit challenging Parker-Hannifin’s acquisition of Clarcor is a reminder that this isn’t necessarily the case.

The $4.3 billion deal cleared HSR review without a second request, and closed in February 2017. Post-closing customer complaints led the DOJ to open an investigation, and that culminated in the lawsuit. This Wachtell memo says that these post-closing challenges to HSR-reportable deals are extremely rare – and since the DOJ hasn’t called into question any aspect of the HSR filing, this one may be almost one of a kind:

The Parker-Hannifin suit is only the third such challenge brought by the federal antitrust agencies in the past 25 years, and the first in more than 15 years. In at least one of those cases, the FTC claimed the merging parties had also violated the HSR Act by failing to include required deal-related documents in their notifications that would have revealed the transaction’s anticompetitive effects. Significantly, the DOJ made no such a claim in last week’s complaint.

The combined companies have revenues of more than $12 billion. However, the business that prompted customer complaints & the DOJ’s action represents less than $20 million in revenue. The memo points out that the relatively small size of the business may have hindered the DOJ’s ability to detect the overlap during the HSR waiting period.

This excerpt from the memo provides an assessment of the key takeaways from the DOJ’s action:

The Parker-Hannifin complaint highlights the important distinction between an antitrust clearance process (such as the HSR Act’s notification and waiting regime) and an antitrust approval process (such as that of the European Commission and other foreign jurisdictions). While clearance under the HSR Act nearly always conveys the antitrust agencies’ intent not to challenge a deal, it does not immunize the transaction from further investigation or challenge. Because of this unique legal feature, merged companies’ post-closing conduct may attract the unwanted scrutiny of customers and the antitrust agencies.

We’re posting memos in our “Antitrust” Practice Area.

John Jenkins

October 10, 2017

Tomorrow’s Webcast: “Evolution of the SEC’s OMA”

Tune in tomorrow for the webcast – “Evolution of the SEC’s OMA” – to hear Michele Andersen, Associate Director of the SEC’s Division of Corporation Finance & Ted Yu, Chief of Corp Fin’s Office of Mergers & Acquisitions, Skadden’s Brian Breheny, Weil Gotshal’s Cathy Dixon, Alston & Bird’s Dennis Garris and Morgan Lewis’ David Sirignano in a discussion of how the Corp Fin’s Office of Mergers & Acquisitions has evolved over the years…

John Jenkins

October 6, 2017

Universal Proxy Card? ADP Says “No Thanks” to Activist

Last month, Pershing Square Capital asked ADP to use universal proxy cards in connection with their ongoing proxy contest. ADP rejected the request – which apparently came after it had already distributed proxy materials to its shareholders. This recent blog from Davis Polk’s Ning Chiu discusses the reasons for ADP’s decision. Here’s an excerpt:

Since universal proxy cards are not widely used by U.S. public companies and have never been used by a large-cap, broadly held company, the risk for shareholder confusion is great.  While the SEC has proposed rules for universal proxy cards, the rules have not been adopted and no procedures have been enacted to govern a contest where shareholders vote using such a card.

Trying out a new process for a company with a significant retail investor base of approximately 310,000 individual shareholders is particularly risky, and the existing “street name” structure also may not support universal proxies at this time.  In addition, both sides have already distributed proxy materials.  The use of a universal proxy card would require sending out new replacement materials, the implementation of new mechanics for collection and educating shareholders on the changes in voting procedures.

ADP concluded that all of these issues could lead to a more disruptive and complicated process that confuses investors who well understand and have long exercised the existing voting structures for proxy contests, and could ultimately interfere with the conduct of a fair election.

John Jenkins

October 5, 2017

Corp Fin’s “Partial” Global Rule 13e-4 Relief

Whenever Corp Fin’s Office of Mergers & Acquisitions posts a new no-action response, I take a gander to see if it’s new or unusual. Typically, they aren’t – and this new response to CBS falls within that category. It’s basically one of the formula pricing variety (albeit in the Reverse Morris Trust exchange offer context).

The Staff’s relief allows for the bidder/issuer to offer a number of shares in exchange based on the dollar amount of securities tendered – and relies on “formula pricing” mechanisms going back to the old Lazard Frères no-action letter from the 1980’s while utilizing the “pricing goes hard at least two days prior to expiration.”

So nothing surprising here, except the last paragraph in the no-action letter which states the Staff will no longer be issuing no-action letters for parts of this area. The global relief is somewhat narrow – it covers only Day 18 VWAP pricing in a RMT. So issuers can go on their own if they fit within the letter’s facts. Be careful – the request doesn’t expressly give global relief for Day 20 VWAP pricing, which has a few more conditions under Staff precedents.

This is clearly a sign that Corp Fin is looking to get out of the business of issuing timing-consuming no-action letters in situations where there is a well-trodden path of letters…

Speaking of the Staff, don’t forget to tune in next Wednesday, October 11th for the webcast – “Evolution of the SEC’s OMA” – to hear current & former Chiefs of the SEC’s “Office of Mergers & Acquisitions” discuss what that job is all about. Join Corp Fin’s Michele Anderson and Ted Yu, as well as Skadden’s Brian Breheny, Weil Gotshal’s Cathy Dixon, Alston & Bird’s Dennis Garris and Morgan Lewis’ David Sirignano. This is a unique event!

Broc Romanek

October 4, 2017

Trian/P&G Proxy Contest: Lessons from ISS’ Report

In this memo, Marty Lipton & Sabastian Niles of Wachtell Lipton list bullets about ISS’ report on the heated Trian/P&G proxy contest. Check it out!

October 3, 2017

Due Diligence: Evaluating Privacy & Security Risks in “IoT” Deals

Call me a “Luddite” if you want, but I’m uncomfortable with the idea that my toaster may be telling Google or Vladimir Putin about my Pop-Tart preferences.  Despite my reservations, the market for Internet-connected devices – the “Internet of Things” (IoT) – is growing rapidly.  However, the security & privacy risks of these IoT devices are significant, and those risks are beginning to attract significant attention from state & federal lawmakers.

This Shearman & Sterling memo discusses the explosive growth in the IoT market & developments on the legislative front.  It also highlights key considerations & best practices for evaluating the privacy & security risks of IoT investments. Specific issues that an investor should consider when conducting due diligence on a potential acquisition target include:

– Do the target’s devices incorporate “reasonable security features?”
– How much and what types of data are collected by the target’s devices?
– Do the target’s devices provide reasonable notice to the consumer about the data being collected?
– Is the data collected by the target’s devices shared with any third parties?

The memo goes on to detail best practices in dealing with each of these specific issues that should be factored in to a buyer’s due diligence assessment.

John Jenkins

October 2, 2017

Activism: “Intent-to-Serve” Bylaws Tackle “Placeholder” Nominees

About this time last year, I blogged about activists’ use of “placeholder” nominees as an end-run around nomination deadlines in advance notice bylaws.  The tactic gained notoriety in 2016, when activist hedge fund Corvex Management used it in a proxy contest involving The Williams Companies.

This Skadden memo says that since that time, more than 50 public companies – including 19 in the S&P 500 – have amended their bylaws to address the potential for a “placeholder slate” of directors. Here’s an excerpt that addresses the features of those bylaws:

By our count, in the past year, 54 companies have amended their bylaws in the wake of the threatened Corvex-Williams proxy fight, including Williams itself. Our survey of the market shows:

– With minor variations, the language used in the amended bylaws is mostly standard: A director nominee must provide a written representation that he or she “intends to serve” as a director.

– The majority of the amendments (45) specify that the individual must intend to remain a director for the “full” or “entire” term, and two companies add that the director must intend to serve until a successor is elected and/or deemed qualified.

– 17 companies explicitly state that the nominee must “currently” intend to serve a full term (i.e., at the time of nomination); the remaining bylaws do not specify a particular time frame during which the intention must exist.

– One company’s bylaws take the intent-to-serve requirement a step further by requiring that it be “genuine.”

– Only a minority of companies make clear that the qualification applies to all directors and not just stockholder nominees.

The memo points out that neither the use of placeholder nominees nor these “intent-to-serve” bylaws has yet been tested in court. It reviews applicable provisions of Delaware law relating to director qualifications & says that case law would suggest that director qualifications that apply equally to all director nominees are more defensible than those aimed solely at shareholder nominees.

ISS policies generally frown on the board’s unilateral adoption of restrictive director qualification bylaws – but the memo says that ISS has not yet adjusted its corporate scorecard for these “intent-to-serve” bylaws or even addressed them publicly.

John Jenkins