Joint ventures can be very complex enterprises with a host of legal & business issues to be sorted out. But among the first decisions that must be made is whether the parties will conduct the venture through a new entity, or whether they’ll just rely on contractual arrangements.
This Gibson Dunn memo lays out some of the questions that parties need to ask when deciding how to structure the joint venture. Here’s an excerpt discussing how the role of intellectual property in the joint venture might tip the scales:
Will the joint venture develop intellectual property to be used primarily in its business, such as new product designs or trademarks, and/or will the parties contribute certain existing intellectual property to the joint venture? If yes, the parties may wish to form a JV Company to control these intellectual property assets, maintain applicable intellectual property registrations and otherwise protect the joint venture’s intellectual property rights. However, a JV Company may not be required if new intellectual property is not needed for the joint venture business, or if the intellectual property to be used in the joint venture will be owned and controlled solely by one party.
The memo reviews a laundry list of other factors that should be considered, including the scope of the joint venture, the need for a dedicated management team and employee base, liability concerns, regulatory issues and strategic considerations.
Lawsuits under the Americans with Disabilities Act premised on the inaccessibility of websites & apps have exploded in recent years – and their potential settlement & remediation costs can be significant. This recent blog from Fredrikson & Byron’s Steve Helland has some due diligence tips for prospective buyers to help identify a seller’s websites & apps that might be vulnerable to ADA litigation.
This excerpt identifies questions that a buyer should ask as part of the diligence process:
– Has the company received any complaints regarding the accessibility, inaccessibility, or difficulty of use of its website(s), app(s) or other communication technologies (collectively “Websites and Apps”) from any disabled person or their attorney?
– Has the company obtained a third party audit or report regarding the accessibility of the company’s Websites and Apps, including but not limited to an audit regarding ADA compliance and/or Web Content Accessibility Guidelines (WCAG) compliance?
– Does the company have an accessibility policy?
– Does the company require by contract that its technology vendors provide Websites and Apps and similar items that are accessible to disabled users using assistive technology, comply with applicable accessibility law, and meet or exceed the WCAG2.[X]AA standards? Version 2.1 is on its way.
The blog also suggests potential language addressing website accessibility for inclusion in a purchase agreement, and lays out steps that can be taken to mitigate litigation risk post-closing.
This Wachtell memo highlights the continuing maturation of the R&W insurance market and its growing role in the deal ecosystem. While only a few hundred policies were written annually as recently as 5 years ago, the memo estimates that more than 1,500 were written last year. The memo lays out a number of reasons underlying the growth in R&W insurance. These include:
– More than twenty insurance carriers are now writing R&W insurance. At least ten of these carriers are capable of writing primary policies, up from just a handful of carriers even five years ago.
– The increase in insurance markets writing R&W insurance has led to a competitive marketplace for both policy pricing and terms. Policy terms have become somewhat more standardized across the industry.
– The market has evolved beyond private equity firms, and public companies are using it in their own acquisitions & dispositions. R&W insurance has even been purchased in public company deals, although this remains a less common approach.
– Carriers have become more receptive to writing policies that don’t require the seller to have some “skin in the game” in the form of some indemnity obligation.
– As the use of policies has increased & terms have become standardized, the time necessary to put a policy in place has decreased.
– As the market has grown, the number of claims made – and paid – has increased, and the number of brokers placing R&W insurance has grown.
The memo also says that increasing underwriter familiarity with M&A transactions has also contributed to the growth of related insurance products, such as coverage for “regulatory approval risks, break-up fees & certain tax-related risks,” and that continued expansion in these areas is anticipated.
Last week, in First Citizens Bancshares v. KS Bancorp (NCBC; 3/18), the North Carolina Business Court preliminarily enjoined the target of a hostile takeover attempt from using its recently adopted “poison pill” rights plan to thwart a bidder’s ongoing efforts to accumulate the target’s stock.
KS is privately-held, and its board adopted the rights plan in February 2018 in response to First Citizens’ purchases of shares from existing shareholders. Shortly after the company announced the pill’s adoption, First Citizens sought to enjoin it, arguing that under North Carolina’s Business Corporations Act, only public companies may adopt poison pills that discriminate against shares of the same class.
KS responded by contending that the statute permits all companies to enact pills – and that in any event, the statute only prohibits discrimination between shares, not between shareholders. It argued that the pill didn’t treat shares of the same class differently, just certain shareholders.
The Court concluded that First Citizens had the better of the argument when it came to interpreting the North Carolina statute:
The Court concludes that the plain meaning of the relevant statutes cited above, when read together, is that only public corporations as defined by the NCBCA are authorized to adopt poison pill shareholder plans that “preclude or limit,” “invalidate or void,” or otherwise discriminate between the rights attached to shares within the same class of stock. See G.S.§55-6-24. In other words, Section 55-6-24, permitting public corporations to discriminate between the rights attached to shares within the same class of stock, functions as an exception to the general rule in Section 55-6-01(a) that “[a]ll shares of a class must have preferences, limitations, and relative rights identical with those of other shares of the same class” unless divided into series.
The Court likewise rejected KS’s argument that its pill discriminated between shareholders, not shares – noting that other provisions of the North Carolina statute “support the notion that shares cannot be practically separated from shareholders’ rights arising out of those shares.”
While North Carolina’s statutory language loomed large in this decision, it’s worth remembering that even in Delaware, the status of poison pills adopted by privately-held companies seems less well-settled than it is for those adopted by their publicly-held peers. As Broc blogged at the time, it wasn’t all that long ago that the Chancery Court invalidated a poison pill adopted by the founders of privately-held Craigslist in response to a challenge from eBay.
Antitrust regulators recognize that companies considering an M&A transaction have a legitimate need to share detailed business information during the due diligence and negotiation process. But information about prices, costs, strategies and certain other matters may be competitively sensitive – and “oversharing” can get companies into hot water with the DOJ & FTC.
In order to help companies stay onside, the FTC recently blogged guidance – I love that they blog guidance – about how to avoid potential problems with information sharing during a transaction. This excerpt addresses setting up and managing the information sharing process:
Antitrust counsel can undertake several steps to help prevent problematic information sharing. First, companies should be reminded that designing, maintaining, and auditing effective protocols to prevent anticompetitive information sharing are extremely important during pre-merger negotiations and due diligence. If competitively sensitive information must be exchanged for diligence and integration planning purposes, parties should employ third-party consultants, clean teams, and other safeguards that limit the dissemination and use of that information within the parties’ businesses. Clean teams should not include any personnel responsible for competitive planning, pricing, or strategy.
Second, antitrust counsel should ensure that merging parties follow whatever protocols they establish. Merging parties’ adherence to established protocols should be monitored with an eye towards identifying potentially problematic information sharing or sloppy information sharing practices.
Finally, if antitrust counsel discovers any problematic document sharing or coordination of business activities between the merging parties during the HSR waiting period, counsel should instruct the parties to stop the activity or document exchange immediately (because that is what the FTC staff will insist upon). For any problematic documentary information exchange uncovered, antitrust counsel should determine whether and how the information was used as well as the extent of the information exchanged, and would be well advised to inform FTC staff about this before staff discovers the documents in the merger investigation.
The FTC also provides suggestions that both providers and recipients of information as to how they can properly safeguard competitively sensitive information shared during due diligence and negotiation. It also reminds parties that the issues about information sharing don’t end until the deal is closed.
In today’s highly-competitive M&A market, private company buyers are sometimes faced with a choice – either pay the price for an R&W insurance policy, or live with no post-closing recourse for breaches of reps and warranties.
This Weil Gotshal blog lays out some of the factors that buyers should keep in mind in making this decision – and says that, despite the rapid growth in the use of R&W insurance, it might not always be the right choice for every buyer. Here’s an excerpt:
Repeat buyers such as private equity sponsors may question the value of obtaining R&W insurance in a particular transaction, particularly if they have done so frequently in past transactions but have not submitted (or received payment for) many claims. The initial outlay of premium and costs required to procure the insurance, coupled with the retention and potential exclusions may cause buyers (particularly those with large, diversified acquisition portfolios) to prefer to retain the risk of losses resulting from seller rep breaches by self-insuring.
An obvious risk of self-insuring is an unexpected, catastrophic loss that materially diminishes the value of the buyer’s investment – the type of loss that R&W insurance is essentially designed to cover. Ultimately, the question devolves into a commercial, risk-tolerance and cost-benefit-analysis that each buyer must perform on a case-by case basis.
So the business marriage that you hoped would be like Paul Newman & Joanne Woodward’s turned out to be more like Kris Humphries & Kim Kardashian’s? This recent blog from Francis Pileggi says if you’re a Delaware corporation, there’s no need to go to Vegas to quickly untie the knot – just head to the Chancery Court. Here’s the intro:
Delaware law allows for a summary proceeding to seek a quick business divorce in certain circumstances. Section 273 of the Delaware General Corporation Law allows for, in essence, a no-fault business divorce if the criteria of the statute are met. Those requirements are that: (i) there are two 50/50 stockholders; (ii) they must be engaged in a joint venture; and (iii) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets.
If those prerequisites are met, one of the 50% stockholders can file a petition to dissolve the corporation and request the appointment of a receiver. If the opposing party cannot agree within three months to a plan of dissolution, the court may then take action to appoint a receiver to oversee the dissolution.
The blog points to the Chancery Court’s recent decision in Feldman v. YIDL Trust, (Del. Ch.; 3/18) as providing a good example of the set of circumstances that will satisfy the statutory prerequisites for this type of business divorce.
This WSJ article says that when it comes to settling with companies, activists don’t just want board seats. They want to make sure they’re represented on key committees – and when they say “key committees,” they usually mean the compensation committee.
When activist shareholders land in a boardroom, they often jockey for the committee seat with the most control over the top brass.
As activists increasingly wrangle with directors over board appointments, the most popular pick is the compensation committee, according to a Wall Street Journal analysis of significant settlements involving companies and activists between 2015 and 2017.
Because pay drives executive behavior, says longtime activist David Batchelder, a compensation committee role “is the only one that really counts.”
The WSJ analyzed 82 activist settlements at companies with $1 billion plus market caps, and found that 51 of them included specific committee assignments. Compensation committee assignments represented more than half of those 51 examples. Not surprisingly, committees responsible for reviewing strategic alternatives are another sought after committee assignment among activists.
Earlier this year, I blogged about recent post-closing lawsuits brought by the DOJ & FTC alleging that the deals in question violated the antitrust laws. This Perkins Coie memo notes the rise in post-closing challenges to deals that flew under the HSR Act’s radar, and provides some tips on how companies can mitigate the risk of being on the receiving end of a lawsuit.
The memo lists several actions that buyers should take to mitigate the risk of a post-closing challenge to a deal – and this excerpt addresses the most important of those actions:
Finally, and most importantly, cultivate positive relationships with the acquired firm’s key customers. Post-closing investigations are typically a response to customer complaints. Because non-reportable deals are often signed and closed simultaneously, customers learn about them only after closing. Their response is the single most important factor in whether the government opens an investigation.
To prevail in a post-closing challenge, the government need not prove the buyer increased its prices after closing. Nevertheless, if a buyer increases those prices,it increases the likelihood of customer complaints and materially strengthens the government’s case if it decides to challenge the deal. Buyers should think long and hard before they do anything likely to turn long-standing customers into government informants.
Actions to help guard against possible post-closing challenges are essential. Post-closing investigations & lawsuits are lengthy, costly and – since they’re usually prompted by complaints from angry customers – usually result in a victory for the government.