We have posted the transcript for our recent webcast: “Evolution of the SEC’s OMA.”

– Broc Romanek

This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:

– Setting the Record Straight: Regulation G Doesn’t Apply to M&A Forecasts
– Structuring Asset Deals: “Traditional” vs. “Our Watch, Your Watch” Constructs
– Controlling Stockholders: Forging Ahead With “Entire Fairness” (Or Playing It Safer)
– PRC Acquirors: How M&A Agreements Handle Risks & Challenges

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.

– Broc Romanek

This Nixon Peabody blog says that in an increasingly competitive middle-market M&A environment, PE funds are looking at the little guys to provide big returns.  Here’s an excerpt:

As the private equity industry matures and competition for middle-market acquisition targets becomes super heated, some private equity firms are moving downstream into the lower brackets of the middle market in search of additional opportunities and higher returns. Though not without risks, the lower middle market provides opportunities for outsized returns to those private equity investors willing to roll up their sleeves and take a hands-on approach to operational improvements.

First and foremost, the lower middle market simply offers a greater number of potential targets. There are approximately 350,000 companies with annual revenues between $5 million and $100 million, while there are only 25,000 companies with annual revenues between $100 million and $500 million, and only a few thousand companies with annual revenues in excess of $500 million. The lower end of the middle market also has the most new entrants. New companies are constantly being formed, maturing, and looking for growth capital.

While the lower-middle market presents significant opportunities, the blog also notes that it presents some significant challenges as well.  Target companies often lack infrastructure, operational experience, and experienced management. That means PE investors in the lower end of the market have to be willing to roll up their sleeves and take on significant management & operational responsibilties.

– John Jenkins

This “Forbes” interview with Skadden’s Rich Grossman discusses the implications of an increasingly popular activist tactic – targeting CEOs for removal from the board through proxy contests. Here’s an excerpt from Rich’s comments:

I think most practitioners and governance experts would agree that one of the most important responsibilities of a board is the selection of the CEO, and the removal of the CEO from the board sends a very strong message, especially a board made up of a majority of independent directors.

While shareholders do not have the right to directly remove board-selected officers, if a CEO gets removed from the board in a contest, it’s a vote of no confidence. In those circumstances, I can’t imagine a board not looking at the situation and saying, “should we rethink our decision regarding the CEO?” It certainly makes for an awkward situation.

Why are CEOs being targeted?  The approach ISS takes toward proxy contests seeking minority board representation is a big part of the reason:

Under the current ISS analytical framework, recommendations are made depending on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. The ISS minority contest standard — what I’ll call the “what’s the harm” standard — for replacing directors seems to apply regardless of whether the CEO is targeted.

– John Jenkins

There’s a lot to chew on in the GOP’s tax reform legislation, but many dealmakers may choke on this morsel – in its current form, the legislation would limit the amount of interest that a business could deduct to 30% of its adjusted taxable income. This Bloomberg article discusses the potential consequences of that cap for M&A transactions.  Here’s an excerpt:

Private equity titans, beware: The tax bill House Republicans unveiled on Thursday could have seriously negative implications for buyout firms.

The legislation includes a provision that would cap interest deductibility at 30 percent of adjusted taxable income, a dramatic shift from the 100 percent allowed now. While the shift would be a concern for any company that issues loans and bonds, it would be particularly worrisome for private equity firms that rely on large levels of debt to finance their transactions. These borrowings — and the way they are treated for tax purposes — are crucial in helping firms achieve their targeted annual returns of 20 percent or more.

Many M&A professionals have anticipated that a reduction in corporate rates might prompt a boom in deals – but limiting the deductibility of interest on debt incurred to pay for those deals could dampen those expectations.

In the short term, the article notes that one potential consequence of the deductibility cap might be a shift in private equity investment toward more capital intensive businesses.  The proposed legislation would temporarily allow capital expenditures on machinery & equipment to be expensed immediately, instead of depreciated over time. That provision would be phased out after five years – but that coincides with many private equity funds’ typical investment horizon.

– John Jenkins

This Weil Gotshal blog gives a heads-up to US private fund sponsors – the EU’s new “General Data Protection Regulation” may well apply to you.  This excerpt explains:

One of the most significant changes under the GDPR is to extend the jurisdictional application of the new law to non-EU fund sponsors holding or using data about individuals located in the EU, even in the absence of any EU presence. Accordingly, non-EU based private fund sponsors which are not caught by the current regime would be well advised to consider whether the forthcoming changes in laws will bring them within the scope of the GDPR.

Where the extra-jurisdictional provisions do apply, non-EU based sponsors are required to comply with the entirety of the GDPR or face potential fines up to the greater of €20m and 4% of worldwide revenue for the most serious infractions.

The blog points out that full compliance with the GDPR is pretty burdensome.  Entities to which it applies will be required to rapidly report data breaches to EU authorities, provide disclosures about data usage to individual EU investors, comply with various rights granted to individuals, appoint an EU representative & maintain detailed internal records.

The blog also addresses the circumstances that may trigger the GDPR’s applicability to US sponsors, and also flags some of the practical impediments that EU regulators may face in attempting to enforce compliance against a non-EU sponsor.

– John Jenkins

Here’s an excerpt from this note by Glass Lewis’ Colin Ruegsegger:

The post-meeting tangle now shifts to a more granular vote certification process, with participants including Trian, P&G and P&G’s independent inspector of elections. The underlying effort—which will involve, among other things, an evaluation of whether proxies have been appropriately executed and whether the most recent proxy for each investor was counted—is expected to take roughly two months. In the interim, the remainder of P&G’s unaffiliated investors have few alternatives beyond simply waiting for the certification process to conclude.

It should be noted this razor’s-edge outcome is not unfamiliar territory for Trian. A similar campaign at E.I. Du Pont de Nemours in 2015 left Mr. Peltz narrowly short of election, with his candidacy grabbing 46% of votes cast at the meeting. This degree of support, combined with an expressed intention to acquire more Du Pont shares and remain engaged, arguably left Trian and Mr. Peltz in a position to continue pressing their agenda from outside the board room. It is noteworthy, then, that Du Pont CEO Ellen Kullman departed just five months after the contested meeting, with her replacement, Ed Breen, quickly pursuing a cost cutting campaign and, ultimately, a combination with The Dow Chemical Company.

Given the similarities between the Du Pont vote and the reported outcome at P&G, we consider it unlikely Trian will be compelled to walk back its position here. To the contrary, with a cogent set of arguments and a vote outcome that will certainly land at the very margins of P&G’s voting base, we expect Trian will leverage a patient approach and strong investor support to continue advocating— publicly or privately—for changes to the status quo.

– Broc Romanek

This recent Norton Rose Fulbright blog flags a UK study that says that a solid public relations strategy can increase the likelihood that a deal will close.  Here are some of the study’s conclusions:

– Proactive announcements count: 84% of deals announced as actual offers are completed, compared with just half of those which were announced in response to a leak

– Leadership matters: announcements with statements from both companies’ chairman/CEO are associated with significantly higher levels of success than those without

– Markets reward uncertainty – in the short-run: leaked M&A deals, or announcements lacking information about the underlying strategic rationale, are actually rewarded by the markets in the very short term

– PR firms earn their fees: deals involving PR firms have a higher chance of completion than those without

– Nail down the narrative: a clear message can be obscured in the process of crafting a deal announcement – it’s important to ensure key players are on board with the deal narrative from the start.

The blog says that a good public relations strategy can also help reduce the risk that opposition from consumers or other constituencies might cause regulatory problems for the deal:

The importance of a well thought-out public relations strategy can go beyond just getting the deal closed. Increasingly consumers are paying attention to combinations of large corporations and how such mergers or acquisitions may affect them in their day-to-day lives. In the past, consumers have been mobilized by corporations opposing a proposed merger between competitors by taking out advertisements and using social media campaigns that claimed the proposed transaction would lead to higher service fees or less choice for consumers.

Such campaigns have led to consumers protesting such mergers and writing to regulatory bodies in opposition of the proposed deal. Starting a public relations campaign early that shows the benefits of a proposed transaction can prevent such anti-merger campaigns from taking hold and creating regulatory and PR problems down the road.

– John Jenkins