Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Cleary Gottlieb’s Glenn McGrory, Sullivan & Cromwell’s Melissa Sawyer and Haynes and Boone’s Kristina Trauger share M&A “war stories” designed to both educate and entertain. The stories include:
1. Let It Go – how sometimes when you can’t seem to repair a deal after a lot of effort, maybe helping the client be disciplined and walk away actually is the right outcome
2. Déjà Vu, All Over Again – the central truth about the high-yield debt market: companies often plan to merely dip their toes in the debt market only to find, over time, that they have plunged deeper than expected
3. Knowing What the Other Side Doesn’t Know – how a seller figured out what an inexperienced buyer didn’t understand about financing and how it almost killed but ultimately saved the deal.
4. Just the Facts – how sometimes issues that seem like major obstacles in a deal can be resolved dispassionately just by taking a deeper dive into the facts and narrowing the field of the unknown
5. End Goal in Mind – for any type of deal, keep in mind the client’s ultimate objective
6. When Timing Matters, So Does Trust– how last minute issues can scupper deal announcements – and how trust between deal teams can facilitate quick solutions to allow the deals to proceed
7. Dealmakers are Architects in Four Dimensions – how solutions to complex issues in deals require non-linear, creative thinking under pressure
8. Expect the Unexpected – it’s common for clients to imagine a transaction playing out in a certain manner, only to have market conditions steer them in a new direction. So it’s vital for deal lawyers to stay nimble and be ready to quickly pivot, as needed
9. They’ll Never Be the Winner – the hazards of trying to figure out (and plan for) who you think will win an auction, only to have an unexpected contender (and its own particular issues) prevail
10. The Secret’s Not Out– the extreme measures parties take to protect the confidentiality of secret formulae in consumer product transactions
This recent Prof. Bainbridge blog points out a new article that asks an intriguing question – “Is Satan a Transactions Attorney?” The article reviews Old Nick’s deal making activities as recounted throughout Western literature. This excerpt claims that he got his start in the deal business tempting Christ in the desert:
Christ’s temptation in the desert is a turning point in the way Satan deals with human beings. In the cases of Saint Theophilus of Adana, Doctor Faustus, and their scions, the individual is no longer Satan’s victim, but party to a contract with him and complicit with the evil he oversees. Indeed, the medieval and early-modern drive to purge European society of witchcraft is but a perverse recognition of the complicity of individuals with evil. No longer a tormenter exclusively, Satan has become a negotiator, a former of contracts, a transactions attorney.
So, is the Devil a deal lawyer? If he was, it probably wouldn’t be a huge surprise. I think most lawyers would agree that they’ve worked on more than a few deals with somebody who reminded them of The Prince of Darkness.
I’m not sure I agree with a New Testament start date for Lucifer’s career as a dealmaker – although my guess is that he started off in the Old Testament as an investment banker. After all, doesn’t telling Eve that if she & Adam eat of the fruit of the tree, “ye shall be as gods,” sounds very similar to the kind of stuff you hear in bankers’ pitches?
This recent Cooley blog offers tips for addressing employment law issues when navigating acquisitions involving European buyers or sellers. This excerpt deals with issues surrounding reductions in force:
If a reduction in force is being contemplated in the EU (where it will often be referred to as “redundancy”), then that will trigger discrete information and consultation requirements. For example, redundancies in Germany require compelling operational reasons and the application of social selection criteria to potentially at-risk employees. If there is a works council in place, then that can potentially make the process slow and difficult.
Also, redundancy consultation processes in the EU often increase in scope and complexity as the number of employees at risk of redundancy increases. For example, if there is a proposal to dismiss as redundant 20 or more employees in the UK, then that will trigger collective redundancy consultation requirements including the election of employee representatives and a consultation period lasting at least 30 days before any dismissals can take place. It is not always possible to avoid redundancy consultation requirements by simply buying-out the risk (i.e., paying employees in lieu of a period of consultation), so preparation and timing is key.
Other topics addressed include the rights of employee representative organizations, implications of the EU’s Acquired Rights Directive for different transaction structures, employment contracts & protections against termination.
While many surveys report a burgeoning market for private equity-driven M&A, this recent article by Prof. John Colley of Warwick University’s Business School says that its best days may be in the rear-view mirror. Here’s an excerpt:
The longevity of the private equity industry brings its own problems. Attractive opportunities have declined as many businesses have already been through PE at some stage. The potential benefits from a secondary PE owner are bound to be less.
Such companies will already have been subject to financial engineering with assets fully leveraged, and costs honed to the point of limiting future growth. Multinationals disposing of business categorised as no longer core have become more aware of the true value in the market. In short, targets are no longer selling at bargain values which characterised many previous disposals.
The article contends that as the market continues to become tougher, we should expect more bankruptcies among portfolio companies as PE firms are forced into riskier bets. In turn, banks will increase the risk premium on borrowings to PE portfolio companies, and will reduce lending to those borrowers – which will squeeze PE returns before it slows activity in the industry.
This SRS Acquiom study reviews the financial & other terms of 925 private target deals that closed during the period from 2014 through 2017. Here are some of the key findings about trends in last year’s deal terms:
– Earnouts in non-life sciences deals in 2017 increased significantly to 23%, while the size (relative to the closing payment) and length of earnouts decreased. Several key earnout terms (buyer covenants, accelerations, and offsets), trended in a seller-favorable direction.
– Termination Fees made a comeback in 2017, with the frequency of use of termination fees at least doubling in all categories. Seller termination fees increased from 7% in 2016 deals to 14% in 2017, Buyer termination fees went from 2% in 2016 to 5% in 2017, and two-way fees made up 2% of all deals in 2017.
– The median general survival period for representations and warranties dropped slightly again to 15 months, compared to 18 months in recent years. The median general escrow size remained steady at 10% of transaction value when deals with Buy-side RWI are excluded. Once again, deals valued at $50 million or less tend to have larger escrows as a percentage of transaction value.
– Fundamental representations survive for a defined period in 88% of 2017 deals, up from only 71% prior to the Cigna v. Audax decision. Similarly, the number of deals where claw-backs are limited to less than the entire purchase price has modestly increased.
– Use of deductible baskets increased significantly to 52% of 2017 deals, from 31% in 2015. Basket sizes are most frequently less than or equal to 1% of total transaction value.
– Pro-sandbagging clauses in agreements dipped to 48% of 2017 deals, the lowest in recent years; anti-sandbagging clauses rebounded to 4% of 2017 deals.
– Use of a Material Adverse Effect standard for the accuracy of seller’s representations and warranties at closing remained high at 41% in 2017 deals, compared with 43% in 2016 deals and only 31% of 2015 deals.
This Weil blog discusses notice provisions applicable to potentially indemnification claims under the terms of acquisition agreements. The blog points out that the exact language of indemnity provisions must be reviewed in order to determine the permissibility of “placeholder claims” seeking to preserve the ability to claim indemnity for potential breaches & losses that haven’t yet been realized.
However, this except says that recent case law in Delaware & the U.K. raises another important issue – the language of the notice provision:
Recent cases in both the United States and England highlight still another issue that plagues the assertion of post-closing indemnification claims—the exact words used in the written notice asserting a claim and its compliance with the specific terms of the acquisition agreement.
Frequently, a written notice of claim provided prior to the end of the survival period is specifically required to state the claim in “reasonable detail,” include an estimate of the loss, and specify the specific representations and warranties of the seller that have allegedly been, or will be, breached as a result. And those requirements typically exist whether indemnification extends only to alleged “actual” breaches of the representations and warranties that have already occurred, covers threatened third party claims or only actual litigation, requires defense of claims that do not themselves constitute an actual breach of a representation or warranty, or otherwise permits claims respecting anticipated but not yet realized breaches or losses.
The blog explores recent decisions by the English Court of Appeal & the Delaware Chancery Court – and concludes that it’s essential not only to craft the terms of their written acquisition agreements respecting their desired indemnification procedures carefully, but also to read and abide by those terms in making indemnification claims & asserting objections to those claims.
This Francis Pileggi blog highlights a very recent Delaware decision that further underscores the importance of abiding by contractual notice provisions. In PR Acquisitions, LLC v. Midland Funding LLC, (Del. Ch.; 4/18), the court barred a claim made for escrowed funds because notice was mistakenly sent to the escrow agent, instead of the seller as required by the agreement.
If shareholder activism ever had an “everybody into the pool” moment, it probably came last month when Berkshire-Hathaway announced that it would withhold support from USG’s slate of directors at its upcoming annual meeting. Berkshire wasn’t happy about the USG board’s decision to stiff-arm a potential bid from Germany’s Knauf. Last week, USG’s board apparently got the message, and agreed to talks with Knauf.
Many have expressed surprise about Warren Buffett’s willingness to openly oppose the board of a company in which he’s invested. But despite his carefully cultivated public image as the genial “Sage of Omaha,” nobody becomes a billionaire without an iron fist somewhere inside that velvet glove. These 2010 comments from Buffett’s biographer, Alice Schroeder, probably ring true with USG’s board right about now:
“When he sees something he doesn’t like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment—jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus.”
Buffett’s actions are a reminder that at a time when longstanding passive investors are more frequently collaborating with activists to “shake things up” at the companies in which they invest, boards & management can take nothing for granted when it comes to investor support. As USG found out, even Santa Claus sometimes puts coal in your stocking.
This recent blog from Peter Mahler flags an unusual case from Colorado involving a shareholder-employee who dissented from a merger – and successfully argued that, as a result, the surviving corporation should be barred from enforcing his non-compete with the acquired company.
Crocker v. Greater Colorado Anesthesia (Colo. App; 3/18), involved a physician-shareholder of a medical practice that was acquired in a merger. The physician was a party to a 2-year non-compete. He dissented from the merger and obtained employment with another practice in the geographic area covered by the non-compete. He sought an appraisal of his shares under Colorado’s corporate statute, and the buyer sued to enforce the non-compete and obtain liquidated damages. The trial court concluded that it was unreasonable to enforce the non-compete against a dissenting shareholder “forced out” of employment by the merger.
The Colorado appellate court affirmed the trial court’s ruling. This excerpt from the blog summarizes the Court’s rationale:
The appellate court affirmed across the board. Its analysis of the statutory and contractual interplay began with the general rule relied upon by New GCA’s argument, that the rights and obligations of the merging entities vest in, and are enforceable by, the surviving entity. But the general rule did not prevail in Crocker, the court went on to hold, because under Dr. Crocker’s agreements with Old GCA his shareholder and employee rights were inextricably interwoven. Here’s what the court wrote:
[W]e do not agree that the district court erred by considering Crocker’s exercise of his dissenter’s rights when determining that Crocker was no longer bound by the Agreement upon the merger. GCA urges a pure contract law analysis, arguing that Crocker’s statutory rights as a dissenter apply only to Crocker’s shareholder rights and not to his rights as an employee. But under the terms of his agreements with old GCA, Crocker’s shareholder rights are wed to his rights as an employee.
Indeed, the Agreement, which incorporates by reference the Corporate Stock Sale Agreement, does not permit Crocker to be an employee and not a shareholder. And the Corporate Stock Sale Agreement, which incorporates by reference the Agreement, does not permit Crocker to be a shareholder and not an employee. Accordingly, when he exercised his dissenter’s rights, Crocker was forced to cease his employment with GCA. Thus, we cannot construe the enforceability of the Agreement without consideration of Crocker’s rights as a dissenter.
The court acknowledged that it was writing on a blank slate, noting that neither the parties nor the court itself found “any authority evaluating the enforceability of a noncompete provision under similar circumstances . . . in this or any other jurisdiction.”
The Court concluded that enforcing the non-compete would be unreasonable, and would “further penalize Crocker’s exercise of his right to dissent, rather than protect him from the conduct of the majority” in pursuing a merger.
– A Small World After All: R&W Insurance in Cross-Border M&A
– Maximizing Value & Minimizing Risks in Carve-Outs: Seller’s Pre-Sale Preparation
– Director’s Abstention on Merger Vote Deemed Material to Shareholders
– LLCs: The Limits of the Implied Covenant of Good Faith
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Last Friday, a New York judge issued a preliminary injunction prohibiting Xerox from taking further steps to complete its pending deal with Fujifilm. The judge’s 25-page opinion is worth reading – it recounts one of the more remarkable factual backgrounds for an M&A case that I’ve ever seen.
There’s so much going on in this case that I don’t know where to start. So, I’ll just rely on this excerpt from a recent “FT Alphaville” blog summarizing the court’s ruling:
In an extraordinary ruling late Friday, New York state judge Barry Ostrager enjoined Xerox from pursuing a shareholder vote on the deal, a relatively rare move that demonstrated how tainted he found the deal process (based on evidence from discovery and a hearing last week). Longtime Xerox shareholder Darwin Deason, along with a class of other shareholders, alleged that the Xerox CEO Jeff Jacobson engineered a dishonest transaction in order to save his job. They also claim the circumstances of the transaction saved Fuji, his alleged co-conspirator, from the need to deal with Xerox’s largest shareholder, Carl Icahn. (Deason was also allowed by the judge to pursue a proxy fight at Xerox.)
Ostrager said the circumstances of the transaction precluded the court from deferring to independent directors’ judgement. This is because the deal — which was ultimately approved by the board — transferred control of Xerox to Fujifilm without any payment to shareholders, named Jacobson as CEO of the combined entity, and gave Jacobson/Xerox say over the makeup of the combined entity’s board.
Xerox & Fuji both have said they disagree with the ruling & plan to appeal. Xerox is a New York corporation – and this recent column from Alison Frankel asks if Delaware would’ve issued an injunction under these circumstances. Despite the alleged sketchiness of the process, this excerpt says there’s some reason for doubt:
In 2014’s C&J Energy Services v. City of Miami Employees’ Retirement Trust, the Delaware Supreme Court reversed an injunction against C&J’s merger with Nabors Industries. The state justices essentially said that when independent boards exercise their business judgment to approve strategic mergers – and give shareholders a right to vote on the deals – Chancery Court should not stand in the way, particularly if there’s no competing bid for the company.
It will be interesting to see how this case – and this deal – play out. But holy cow, what an opening act!