Francis Pileggi recently blogged about the Chancery Court’s decision in ChyronHego v. Wight, (Del. Ch.; 7/18), in which Vice Chancellor Glasscock laid out a roadmap for drafters on how to draft enforceable reliance disclaimers in acquisition agreements. Here’s an excerpt with some of the key takeaways:
– Delaware law allows parties to identify the specific information on which a party has relied, and forecloses reliance on other information.
– In order for an anti-reliance provision to be effective, it must be unequivocally clear. By contrast, “Standard Integration Clauses” without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations.
– The court emphasized that in order for anti-reliance language to be enforceable, “the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” See footnote 55 and accompanying text.
– Delaware courts will not condone an anti-reliance provision that one attempts to use in order to: (1) protect a seller from liability for making false representations in a contract; or (2) avoid liability for knowledge that representations in a contract are false.
Also check out this recent blog from Weil’s Glenn West, which discusses ChyronHego & other recent Delaware case law and takes a deep dive into the actions that parties to a contract should take to ensure an enforceable anti-reliance provision.
I’m a really bad golfer, so on the rare occasions when I do play, I’m always glad when my partner’s willing to give me a “mulligan.” I’ll exercise my right to remain silent when it comes to my skills as a lawyer – but I was glad to see that the Delaware Chancery Court recently signed off on a mulligan for the defendants in Almond v. Glenhill Advisors (Del. Ch. 8/18).
In that case, the Court rejected the plaintiffs’ efforts to unwind a merger due to a defective pre-deal stock split. Instead, it held that the buyer’s actions to ratify defective corporate acts under the procedure established in Section 204 and 205 of the DGCL after the closing were sufficient to cure the defects.
Among other things, the plaintiffs alleged that too much time had elapsed since the defective acts to permit use of the statutory ratification procedure – and that the act therefore should not be viewed as a “failure of authorization” within the meaning of the statute. The Chancery Court rejected that out-of-hand:
The plain language of Section 205 does not contain a temporal limitation on the court’s power to validate defective corporate acts, nor would such a limitation make sense where, as here, the effect of a defective corporate act may not manifest itself until years into the future. As noted previously, our Supreme Court has emphasized the need to “read broadly” the term “failure of authorization” to “cure inequities” and “to address any technical defect that would compromise the validity of a corporate action.
Given the highly technical nature of the defect & the Court’s conclusion that “the equities overwhelmingly support correcting this obviously unintended defect,” it concluded that the buyer’s actions were sufficient to ratify the pre-merger defective actions under Delaware law.
Investor relations firm Westwicke Partners recently blogged advice for buyers on how to communicate with Wall Street about an acquisition. Here’s an excerpt addressing some of the key points to address in communications with the Street:
– Deal Terms. These are the transaction’s high-level financial points. How much did you pay, what was the structure of the deal (cash vs. stock vs. cash and stock), how did you finance the deal, etc. This allows the Street to assess the deal’s impact on your current financial profile and frame the rest of its analysis.
– Strategic Rationale. This allows you to answer the question on everyone’s mind: Why did you make this acquisition? Does it grow your top line, does it accelerate your path to profitability, does it expand your addressable market, does it fill a hole in your product or service offering, are there synergies?
– Overview of the Acquired Business & Market Opportunity. Think of this as your opportunity to introduce the company and provide a framework for how to model the new business. What does the company do, how does or will it generate revenues, what is its growth rate, what is its total addressable market, and, if applicable, what is its financial profile?
– Introduce New Co. Building on the other information you’ve just provided, you now need to show what the post-acquisition company looks like, clearly outlining any aspect of your story that has changed. What does the revenue growth rate look like now, how will the acquisition affect your gross margins, and how does this impact your bottom line? Analysts and investors will want to know your outlook post deal.
The blog notes that announcing a new deal often provides an opportunity to reset Wall Street’s expectations for the business, so buyers should pay careful attention to the guidance provided, as it will be used as a benchmark to assess the buyer’s capabilities when it comes to both M&A and making good use of capital.
This recent blog from Weil’s Glenn West discusses the importance of distinguishing between “expert determinations” and “arbitrations” when it comes to addressing post-closing purchase price adjustments. . Here’s an excerpt summarizing the differences between the two mechanisms:
The powers granted to an arbitrator are “analogous to the powers of a judge.” In an arbitration, “[a]rbitrators are expected to rule on issues of law, make binding interpretations of contracts, resolve disputed issues of fact, determine liability, and award damages or other forms of relief.” And pursuant to the Federal Arbitration Act, an arbitrator’s award is enforceable by a court and there are very limited rights to appeal or review that award.
An expert determination, on the other hand, is not a quasi-judicial proceeding at all, but instead is simply an informal determination by an expert of a specific factual issue that a contract requires to be so determined by the designated expert. One must still utilize the courts to enforce that determination as part of a broader breach of contract action. But courts typically do so if the contract so provides. And, unlike an arbitration, the contract can also establish the court’s standard of review, such as “the expert’s determination shall be binding on all parties, except in the case of manifest error.”
The blog notes that Vice Chancellor Laster’s recent decision in Penton Business Media Holdings, LLC v. Informa PLC, (Del. Ch.; 7/18) demonstrates that Delaware courts distinguish between arbitrations and expert determinations as long as the parties make that intent clear in their contract. The blog cautions that because of the significant differences between the two approaches, “deal professionals and their counsel should be cautious in clearly describing the third-party dispute resolution process they are contemplating for any post-closing purchase price adjustments.”
After issuing a second request as part of the HSR review process, antitrust regulators often seek a “timing agreement” addressing key timing and logistical issues arising in the merger investigation. In a recent blog, the FTC announced that it had adopted a new Model Timing Agreement. This excerpt describes the purpose of these agreements:
Merger investigations commonly involve timing agreements, which—among other things—provide an agreed-upon framework for the timing of certain steps in the investigation. Timing agreements also ensure that FTC staff has notice of parties’ plans to consummate the transaction. Both parties and staff benefit from having such a framework established shortly after issuance of the Request for Additional Information and Documentary Material, also known as a Second Request, as it allows staff and the parties to engage efficiently in a substantive exchange without undue uncertainty during the Second Request review period.
The blog summarizes the key provisions of the Model Timing Agreement, and notes that the FTC expects that future timing agreements will conform, or substantially conform, to this Model.
The legality of arrangements with finders & unregistered brokers is a murky and complex area. Fortunately, this Venable memo provides a nice overview of the legal issues and the parameters of available exemptions. This excerpt provides an overview of some of the potential pitfalls of being classified as a unregistered broker under the federal securities laws:
The distinction between a finder and a broker-dealer as classified by the Securities and Exchange Commission can have significant consequences. An unregistered broker-dealer may face sanctions from the SEC, and it may be unable to enforce payment for its services. In addition, transactions involving an unregistered broker-dealer may create a right of rescission in favor of the investors, allowing the investors the right to require the issuer to return the money invested.
One example of the consequences of an unregistered broker-dealer occurred in the Ranieri Partners SEC enforcement action. In that action the SEC brought charges against a private-equity firm, its managing director, and a consultant because of the consultant’s failure to register as a broker-dealer. The SEC’s order found that the private equity firm paid transaction-based fees to a consultant, who was not registered as a broker-dealer, for soliciting investors for private fund investments.
The memo reviews the SEC’s guidance on the difference between “finders” and “brokers,” discusses federal and state securities law provisions relating to “M&A brokers,” reviews FINRA guidance and its regulatory relief for “Capital Acquisition Brokers,” and also addresses issues under the JOBS Act.
The “corporate opportunity” doctrine provides that a corporate fiduciary who take a business opportunity that might have been instead given to the corporate entity is liable to the company for any resulting gains. If you’re a private equity fund with portfolio companies in similar industries, this can create some thorny problems.
However, this Ropes & Gray memo (p. 11) reviews the Delaware Chancery Court’s recent decision in Alarm.com Holdings v. ABS Capital Partners, (Del. Ch.; 6/18) and says that putting in place well drafted contractual carve-outs at the outset of a business relationship can go a long way to preventing corporate opportunity problems from arising. Here’s an excerpt:
This decision highlights that financial sponsors should seek to draft transaction and governance documents to make clear that the sponsor may have invested in the target’s competitors, may invest in those competitors in the future, and is not subject to the “corporate opportunity” doctrine.
While it is not always commercially possible to do so, it is also desirable for such language to also include express “residual information” disclaimers noting that there is information the investor may learn about the target through its investment that it cannot then remove from its collective knowledge, as well as language stating clearly that parallel investments are permissible. Such language could prevent claims for breach of fiduciary duty or misappropriation of trade secrets, or, at a minimum, provide the sponsor with strong arguments to support a motion to dismiss if such claims are asserted.
There are some interesting responses in Intralinks’ recently published 2017 Limited Partners Survey. Here are some of the highlights:
– More than 1/3rd (35%) of LPs confirmed that their current allocation to alternative investments was more than 30%, with one in five committing up to 10% to alternatives.
– Poor performance and outflows of $102 billion in 2016 would suggest that hedge funds have lost a bit of their lustre. At the same time, private equity funds have gone from strength to strength. Last year, 917 funds closed, raising $372 billion of aggregate capital. With to real estate funds, total fund numbers rose between January 2016 and January 2017 from 493 to 533. Last year, this asset class attracted USD117 billion in net inflows.
– One of the ongoing issues and sources of frustration among LPs is the level of transparency they receive. The survey findings underscore this, with more than half of respondents (54%) confirming that there were only “somewhat satisfied” with the level of transparency they receive from fund managers.
– More than 2/3rds (68%) of LPs said that co-investment opportunities were either “very important” or “somewhat important” to them.
– Of those that were interested in direct investing, 60% said that they had increased their pace of direct investing – as opposed to allocating to funds – over the last three years.
While private equity remains a popular alternative investment destination, LPs’ increasing interest in direct investments may mean that there are storm clouds on the horizon for PE funds. There was $846 billion of PE dry powder as of March 2017, and “the more that LPs look to invest directly the more potential there will be for asset prices to rise and for deal opportunities to contract.”
This Vinson & Elkins memo provides a nice overview of the process of putting together a Special Purpose Acquisition Company (SPAC), financing it, and ultimately “De-SPACing” the entity through an acquisition. This excerpt from the intro summarizes the life cycle of a SPAC:
SPAC will go through the typical IPO process of filing a registration statement with the SEC, clearing SEC comments, and undertaking a road show followed by a firm commitment underwriting. The IPO proceeds will be held in a trust account until released to fund the business combination or used to redeem shares sold in the IPO. Offering expenses, including the up-front portion of the underwriting discount, and a modest amount of working capital will be funded by the entity or management team that forms the SPAC (the “sponsor”). After the IPO, the SPAC will pursue an acquisition opportunity and negotiate a merger or purchase agreement to acquire a business or assets (referred to as the “business combination”).
If the SPAC needs additional capital to pursue the business combination or pay its other expenses, the sponsor may loan additional funds to the SPAC. In advance of signing an acquisition agreement, the SPAC will often arrange committed debt or equity financing, such as a private investment in public equity (“PIPE”) commitment, to finance a portion of the purchase price for the business combination and thereafter publicly announce both the acquisition agreement and the committed financing.
Following the announcement of signing, the SPAC will undertake a mandatory shareholder vote or tender offer process, in either case offering the public investors the right to return their public shares to the SPAC in exchange for an amount of cash roughly equal to the IPO price paid. If the business combination is approved by the shareholders (if required) and the financing and other conditions specified in the acquisition agreement are satisfied, the business combination will be consummated (referred to as the “De-SPAC transaction”), and the SPAC and the target business will combine into a publicly traded operating company.