Monthly Archives: March 2018

March 15, 2018

Change-in-Control: Structuring Management Retention Plans

Making sure that a seller’s key employees hang around to get a deal to the finish line – and sometimes beyond – is a high priority for both buyers & sellers.  This video presentation from Andrews Kurth Kenyon’s Tony Eppert addresses the business points associated with the structure of a management carve-out or change-in-control bonus plan when a deal is imminent.  We’ve also posted the slides in our “Change-in-Control” Practice Area.

John Jenkins

March 14, 2018

National Security: Broadcom & “The Pentagon Ploy”

Earlier this week, President Trump issued an unprecedented executive order blocking Broadcom’s hostile bid for Qualcomm due to national security concerns. This excerpt from a recent WSJ article explains what prompted the President’s actions:

While Broadcom is a Singapore-based company, the U.S. panel that vets foreign deals said that the bid could have had implications for the U.S.’s broader technological competition with China. That panel, the Committee on Foreign Investment in the U.S., known as CFIUS, said it was worried that Broadcom would stymie research and development at Qualcomm given its reputation as a cost-cutting behemoth. CFIUS said such a move could weaken Qualcomm—and thereby the U.S.—against foreign rivals racing to develop next-generation wireless technology known as 5G, such as China’s Huawei Technologies Co.

The president’s order marks the first time that a bid has been blocked in advance of a signed deal due to national security concerns. His action appears to have been precipitated by allegations that Broadcom violated an interim order issued by CFIUS last week prohibiting it from taking actions to redomesticate in the United States without giving CFIUS 5 business days advance notice. Broadcom’s move to the U.S. may have created jurisdictional issues that would have precluded CFIUS from reviewing the deal.

In a letter written to counsel for the two companies last week, CFIUS said that its national security concerns arose out of “risks associated with Broadcom’s relationships with third party foreign entities.” As this Bloomberg article explains, it was Broadcom’s ties to China’s Huawei Technologies that appear to have set off alarms at CFIUS.

The president’s unprecedented action is a reminder of CFIUS review’s potential use as a takeover defense.  In that regard, the role that CFIUS review played in the Broadcom/Qualcomm fight is reminiscent of the early ’90s heyday of “The Pentagon Ploy.”

John Jenkins

March 13, 2018

March-April Issue: Deal Lawyers Print Newsletter

This March-April issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a no-risk trial):

– Tax Reform’s Impact on Private Equity & M&A
– Delaware Supreme Court Reverses Controversial Dell Appraisal Ruling
– All Merger Side Letters Must Now Be Included in HSR Filings
– California Law Provides Private Company Dissolution Alternatives

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

March 12, 2018

Fiduciary Duties: LLC Members Get Only What They Bargain For

This Fried Frank memo reviews the Delaware Chancery Court’s recent opinion in Miller v. HCP (Del. Ch.; 2/18) – in which the Court refused to impose a duty on an LLC’s board to maximize value in a sale favored by its controlling member. Here’s an excerpt summarizing the case:

Under the LLC operating agreement’s “waterfall” provisions governing the allocation of proceeds on a sale of the company, the controller was entitled to receive almost all of the proceeds of any sale up to $30 million and almost none of any proceeds above that amount (which, the court acknowledged, created little incentive for the board to negotiate a price higher than $30 million).

The buyer initially offered $31 million and ultimately increased the price to $43 million (after the company had received a competing offer for $36 million and an unsolicited indication of interest that valued the company at $50-$60 million—neither of which the controller-allied board members pursued). Only $48,000 of the $13 million price increase was allocated to the plaintiff (who was a co-founder of the company), with the balance being allocated to other minority stockholders who had priority over the plaintiff in the waterfall. Under the waterfall, the plaintiff was entitled to an allocation of significant proceeds on a sale only if the price reached $60 million.

The plaintiff claimed that an open auction process would have resulted in a much higher sale price that would have made proceeds available to all of the Trumpet preferred unitholders. Although, under the LLC operating agreement, all fiduciary duties of the board to the LLC members and of the LLC members to one another were waived, and the board was granted “sole discretion” to approve a sale to an unaffiliated third party, the plaintiff contended that, based on the contractual implied covenant of good faith (which adheres to every contract and cannot be waived), the board was obligated to seek to maximize the price. The court disagreed and granted the motion of the controller and the controller-allied board members to dismiss the case.

While Delaware permits LLCs to waive fiduciary duties in their operating agreements, the implied covenant of good faith continues to apply to all contracts, including  LLC agreements.  But Vice Chancellor Glasscock noted that the covenant of good faith is a gap filler, and a court needs to determine whether there are any gaps to fill before invoking it. Citing prior Delaware authority, he concluded that there wasn’t one here:

“When an LP [or LLC] agreement eliminates fiduciary duties as part of a detailed contractual governance scheme, Delaware courts should be all the more hesitant to resort to the implied covenant.” The reason is that an alternative entity agreement that waives all fiduciary duties “implies an agreement that losses should remain where they fall” rather than being shifted after the fact through fiduciary duty review.

John Jenkins

March 9, 2018

Governing Law: The Long Reach of The Golden State

Keith Bishop recently blogged about the rather unusual governing law section of’s asset purchase agreement with Houserie.  What’s so odd about it? This:, Inc. is an on-line retailer with its principal executive offices located in Midvale, Utah.  Earlier this month, announced that it had agreed to buy the assets of Houserie, Inc.  Both companies are incorporated in Delaware and the asset purchase agreement provides that the closing will occur in Utah. 

The asset purchase agreement provides that it “shall be governed by and construed in accordance with the internal laws of the State of Utah without giving effect to any choice or conflict of law provision or rule, except to the extent that the Laws of the State of Delaware or California are mandatorily applicable”.  How is it possible for California law to govern?

The blog says that the culprit is Section 2115 of the California Corporations Code, better known as the “pseudo-foreign corporation” statute. Section 2115 is complex, but its applicability generally depends on whether a company does most of its business in California and on whether a majority of its shares are owned by California residents.

The statute’s potential applicability mattered in this deal because the seller’s major shareholder was also one of the buyer’s executive officers – and if the pseudo-foreign corporation statute applied, the transaction would be subject to the heightened shareholder approval requirements applicable to entities under common control pursuant to Section 1001(d) of the California Corporations Code.

Since there were uncertainties about the potential application of the statute, these two Delaware corporations agreed to comply with the heightened approval requirements imposed under California law for their deal in Utah.

John Jenkins

March 8, 2018

Stockholders’ Agreements: The Delaware Chancery Speaks!

Stockholders’ agreements are usually the cornerstone of governance arrangements between private company investors, but cases involving them don’t happen every day.  So, when the Chancery Court issues opinions interpreting them, it’s newsworthy. Here’s the intro to this Wilson Sonsini memo:

The Delaware Court of Chancery recently issued two important decisions addressing the interpretation and effects of stockholders’ agreements. In Schroeder v. Buhannic, the Court of Chancery refused to interpret a stockholders’ agreement in a manner that would allow a corporation’s common stockholders to remove the chief executive officer. In Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc., the Court of Chancery held that a corporation’s purported restricted stock issuances were invalid, where the corporation failed to comply with provisions governing stock issuances in a stockholders’ agreement to which the corporation was a party.

These two decisions are noteworthy statements of both the potential limitations and potency of stockholders’ agreements. As often occurs, these decisions also both arose in the context of disputes between factions of stockholders over control of the company—an important reminder about the implications of these issues.

John Jenkins

March 7, 2018

Divestitures: Carving Up “Carve-Out” Financials

If you’re doing a spin-off or divestiture involving a portion of your business, the rules surrounding “carve-out” financial statement requirements can add a significant degree of complexity to your process.  This PwC memo provides guidance on how to prepare these financial statements. This excerpt is from the intro:

Carve-out financial statements refer to separate financial statements that are derived or “carved-out” from the financial statements of a larger entity. They can be prepared for a variety of purposes; e.g.,—to comply with a buyer’s requirement to furnish audited financial statements of an acquired business under Rule 3-05 of Regulation S-X; as the predecessor to the registrant in an initial public offering (“IPO”) of securities or spin-off from a parent company; or to satisfy financing requirements of a buyer.

These financial statements should reflect the historical operations of the carve-out entity on a stand-alone basis.  Unfortunately, they frequently do not exist and need to be prepared for the specific objective. If financial statements do exist, they may not fully reflect the total cost of doing business.

As noted, there is very little authoritative guidance for preparing carve-out financial statements. As a result, judgment is needed in many areas, such as impairment and valuation allowance assessments, corporate overhead, deferred taxes, among other items, to reflect the objectives of the accounting literature and present financial statements of part of an entity.

The memo addresses some of the challenges facing companies when it comes to determining which asset, liability, & expense items should be included in the carve-out financial statements, and also touches on parent company reporting issues associated with a carve-out.

John Jenkins

March 6, 2018

Notice Provisions: To Email or Not to Email?

This Norton Rose Fulbright blog wrestles with the question of whether the notice provisions contained in M&A agreements should provide for notice by email – and how to treat notices received by email when the agreement doesn’t expressly provide for it.  This excerpt addresses the latter scenario:

In the second scenario – where a party sends a notice via email, despite the notice provision having  stipulated otherwise – the question of whether an email will constitute “good notice” depends on the interpretation of the notice provision as permissive or mandatory. As a general rule, notice clauses in a contract must be strictly complied with. Therefore, if the clause uses language such as “must” or “shall”, delivery by email will be ineffective notice, even if the email was received.

On the flip side, courts will permit email notice if the clause is permissive rather than mandatory. The notice provision will likely be viewed as permissive where it does not prohibit email, using language such as “may”. In the case of a “permissive” notice clause, the ultimate test will be whether email delivery is “no less advantageous” to the recipient than the method specified in the agreement.

John Jenkins

March 5, 2018

Tomorrow’s Webcast: “Activist Profiles & Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Jason Alexander of Okapi Partners, Tom Johnson of Abernathy MacGregor and Damien Park of Spotlight Advisors identify who the activists are – and what makes them tick.

John Jenkins

March 2, 2018

Negotiating Working Capital Adjustments

Working capital adjustments are often some of the most heavily negotiated provisions of private company acquisition agreements. This excerpt from a recent FEI blog discusses some of factors that parties should take into account in developing their negotiating positions:

– First, analyze the actual historical monthly working capital; start with the trailing twelve months from the most recent month-end closing. Because most transactions are “Cash Free Debt Free”, cash and funded debt (interest bearing debt) are excluded from the working capital calculation.

– If you are on the sell-side of the transaction, look for opportunities to normalize the historical numbers on the balance sheet giving consideration to what the buyer is likely to experience post-closing and accounting for income statement normalizations. For example, consider excluding certain one-time extended accounts receivable balances if those terms will not exist for the buyer.

– If there are extended (or stretched) accounts payable, the amounts of these accounts may look like funded debt to the buyer and become the responsibility of the seller at closing …resulting in reduced cash to the seller. A seller can defend against this claim if the vendor agrees to provide those terms extended terms permanently.

– Keep in mind that customer deposits for future work are usually carved-out as an exception to the Cash Free Debt Free concept …the seller is expected to leave cash in the business to cover those amounts. A possible solution to minimize the impact to the Seller of this cash exception, is to look for opportunities to reduce the deposit amounts where there may be work in process that has occurred but not been recognized… and then making the recognition.

– For software or subscription based businesses, start the analysis by excluding deferred revenue. A compromise in the negotiation is to accrue the estimated cost of services in the future needed to support the operational commitment created by having those deferred amounts.

– There are three time-based variables that can impact the working capital calculation in some deals: (a) the period used for analyzing and determining the working capital target, (b) the number of days in aging accounts receivable in which the buyer will not recognize the value of invoices, and (c) the number of days in accounts payable that the buyer will consider those invoices as effectively funded debt. For each of these, analyze the numbers in comparison to both historical norms and industry norms to determine opportunities to create an argument for exceptions that will reduce the required level of working capital.

John Jenkins