Monthly Archives: May 2019

May 15, 2019

Study: Private Target Deal Terms

This SRS Acquiom study reviews the financial & other terms of 1,200 private target deals that closed during the period from 2014 through 2018. Here are some of the key findings about trends in last year’s deal terms:

– The median time from first investment round to exit increased to 7 years in 2019, up from 5 years in 2016

– Cash remained the preferred currency for private deals, with stock and cash/stock deals representing less than 15% of deals in 2018

– Post-closing purchase price adjustments are now guaranteed by separate escrows 56% of the time – compared to only 27% as recently as 2015.  More than 2/3rds of 2018 deals used “GAAP, consistent with past practices” as the methodology for preparing purchase price adjustments.

– Earnouts in non-life sciences deals dropped significantly.  Only 13% of those deals had earnouts last year, compared to 23% during 2017.  The size of earnouts also declined, representing just 27% of deal value in 2018 compared to 43% in 2017.

– The median general survival period for indemnity escrows was 15 months in both 2018 & 2017.  Median escrow size was 10% of transaction value. Over 90% of fundamental reps had a defined survival period, reflecting the continuing trend away from indefinite indemnities that began with the Cigna v. Audax decision.

– Nearly half of deals had “Big MAC” qualifiers for the accuracy of seller’s representations, up from 31% in 2015.  The more traditional formulation requiring those reps to be accurate “in all material respects” appeared 51% of deals.

There’s plenty of other interesting stuff to review in this study, including more on financial terms, closing conditions, indemnification, dispute resolution and termination fee arrangements.

John Jenkins

May 14, 2019

Exclusive Forum Bylaws: Fertile Ground for Corp Fin Comments

Here’s something I recently blogged over on

This Bass Berry blog says that companies that have adopted exclusive forum provisions in their charter or bylaws shouldn’t be surprised to receive comments on their disclosures about them in SEC filings. The blog includes links to a handful of recent comment letters touching on various aspects of exclusive forum provisions.  Check it out!

John Jenkins

May 13, 2019

Antitrust: Vertical Mergers Under the Microscope?

Vertical mergers traditionally haven’t been subject to the same regulatory scrutiny as those involving direct competitors.  But this Jenner & Block memo suggests that recent FTC decisions involving merger challenges, as well as the FTC’s hearings on competition & consumer protection in the 21st century indicate that the climate is changing. Here’s an excerpt:

Traditionally, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) have reviewed vertical mergers with more leniency than horizontal mergers. With the Division’s challenge of the AT&T-Time Warner deal and the FTC’s settlement decree in the Staples-Essendant merger, some wonder if the traditional approach may be undergoing a change.

The FTC’s decision earlier this year by the set of all new commissioners on the Staples-Essendant merger, reflected its first bipartisan split. Although the majority decision emphasized the FTC’s continued commitment to mainstream antitrust policy, statements by the Commissioners, especially the dissenting Democratic Commissioners, indicated a possible divergence away from that policy and that vertical mergers may be facing heavier scrutiny going forward.

On April 12, 2019, in the FTC’s 13th hearing of a series of 14 on Competition and Consumer Protection in the 21st Century, FTC commissioners further opined on the benefits of heavier scrutiny, this time on both sides of the political aisle.

In a potentially ominous development, the memo also notes that several Commissioners extolled the potential benefits of “merger retrospectives” – which involve reviewing the effects of a transaction on competition following the closing, and potentially initiating post-closing challenges to the deal.

The memo also points out that the FTC remains relatively friendly to vertical mergers in comparison to the DOJ.  So far, the FTC’s enforcement actions against non-horizontal mergers have been limited to behavioral remedies, while the DOJ has required structural remedies such as divestitures in some recent vertical mergers.

John Jenkins

May 10, 2019

Distressed M&A: A Comprehensive Outline of Acquisition Strategies

Buying distressed companies, whether through bankruptcy or otherwise, presents some unique challenges – as well as some unique opportunities.  This 233-page Wachtell outline provides a comprehensive an overview of alternative methods for acquiring distressed businesses.

Topics addressed include typical corporate responses to debt crises, as well as the various issues associated with out-of-court, hybrid & bankruptcy acquisition strategies, and with acquiring & trading claims in distressed companies.  Here’s an excerpt from the introduction:

Distressed companies can represent attractive acquisition targets. Their stock and their debt often trade at prices reflecting the difficulties they face, and they may be under pressure to sell assets or securities quickly to raise capital or pay down debt. Accordingly, prospective acquirors may have an opportunity to acquire attractive assets or securities at a favorable price. This outline considers how best to acquire a distressed company from every possible point of entry, whether that consists of buying existing or newly issued stock, merging with the target, buying assets, or buying existing debt in the hope that it converts into ownership.

For many M&A lawyers, the world of distressed acquisitions is much different from the one they’re used to operating in – and this outline is a very valuable resource to have at your side when trying to navigate it.

John Jenkins

May 9, 2019

Fraudulent Transfers: SDNY Revives 546(e) Bankruptcy Safe Harbor

Last year, the SCOTUS created significant uncertainty concerning the application of a commonly used mechanism to protect former shareholders in an LBO from fraudulent conveyance claims.  In Merit Management Group, LP v. FTI Consulting, Inc., the Court held that Section 546(e) of the Bankruptcy Code’s safe harbor for transactions made through a financial institution did not apply to transactions in which financial institutions were mere “conduits.”

Prior to the Court’s decision, the safe harbor was widely viewed as protecting public shareholders because the payments that they received in a deal were ordinarily disbursed through a financial institution “paying agent,” and several federal circuits had interpreted this payment procedure as sufficient to invoke the protection of Section 546(e).

The Merit Management decision raised concerns about the continuing viability of this safe harbor, but a recent decision from the SDNY appears to have breathed new life into it.  As this Ropes & Gray memo explains, it did so not by focusing on the level of a financial institution’s involvement in the transaction, but by focusing on what parties might properly be characterized as “financial institutions.” Here’s an excerpt:

In In re Tribune Company Fraudulent Conveyance Litigation, No. 11md2296 (S.D.N.Y. Apr. 23, 2019), U.S. District Court Judge Cote ruled that payments in a leveraged buyout to thousands of shareholders are protected because having a traditional financial institution (e.g., a commercial bank or trust company) as an intermediary in the transaction can qualify the company making the payments (in this case, Tribune) as itself a “financial institution” within the meaning of Bankruptcy Code section 546(e).

Specifically, Judge Cote held that the safe harbor’s statutory definition of “financial institution” included Tribune, as the transferor, because Tribune was a “customer” of Computershare Trust Company (the depositary for the LBO), and CTC acted as Tribune’s agent in the transaction. Judge Cote held that the payments were made “by . . . a financial institution” and were “in connection with a securities contract” (a term that courts define very broadly), thus qualifying for the safe harbor, notwithstanding Merit Management.

The memo also says that the Tribune Company decision  “provides a road map” to secure the safe harbor defenses for payments made in LBOs, leveraged recaps & similar transactions. But it also cautions that Judge Cote’s opinion – though persuasive in its reasoning – is likely to be far from the last word on the issue. 

John Jenkins

May 8, 2019

Appraisal: Delaware Supreme Court Gets Mixed Reviews for Aruba

The early reviews on the Delaware Supreme Court’s Aruba Networks decision are coming in – and they’re mixed.  Academics have a lot of questions about the theoretical basis for the Court’s endorsement of a “deal price minus synergies” approach to appraisal in most settings. Here’s an excerpt from Prof. Ann Lipton’s take:

The problem is, this standard (1) gets further away from DFC’s description of appraisal as providing sellers with “what … would fairly be given to them in an arm’s-length transaction,” and (2) introduces the very uncertainty and judge-imposed economic evaluation that Dell and DFC seemed to want to avoid.  (As Brian Quinn put it, “People understand that ‘deal price minus synergies’ is mumbo-jumbo, right? It’s just a guess. It’s not scientific.”)

But the worst thing about this standard is it how pointless it is.  An analysis that defers to deal price so long as the process is “Dell compliant” at least has a purpose, namely, as a backdoor mechanism of policing compliance with fiduciary duties.  An analysis that looks solely at market price (absent reason to think market price is unreliable) moves appraisal into the box of providing liquidity, which is a reasonable place for it to be.

But a deal-price-minus-synergies test serves no purpose at all.  It doesn’t have anything to do with liquidity, and it doesn’t protect against flawed processes, since a court will probably find enough synergies to suggest that the flawed process still resulted in some add above standalone value.

On the other hand, if you’re a buyer trying to get a deal done as cost-effectively as possible, the Aruba Networks decision is very good news. That’s because, as this excerpt from a recent Dechert memo explains, it strikes another significant blow against appraisal arbitrage:

Though the decision does not mandate a “deal price minus synergies” standard in all statutory appraisal proceedings, absent a showing of deficiencies in the process that led to the deal price or other unusual circumstances, merger consideration less synergies will be viewed as strong—and likely  conclusive—evidence of fair value.

Accordingly, Aruba Networks will likely further limit appraisal arbitrage activity by investors who purchase shares of a target after a transaction is announced and then commence an appraisal proceeding seeking to recover a premium above the deal price. Because fair value must exclude deal synergies, which can be substantial, Aruba Networks shows that stockholders exercising appraisal rights face a substantial risk of receiving less than the deal price.

Appraisal is a messy & cumbersome process that – for a time – was turned very effectively into another way for hedge funds to bet on one side or the other of a deal at the Wall Street casino. Personally, I’m not inclined to shed any crocodile tears for those funds if they find their roll of the dice much riskier now.

But on the other hand, for the past decade, Delaware has increasingly funneled merger litigation into a path that leads to appraisal as the preferred, if not sole, remedy for shareholders unhappy with a merger.  And if that’s now essentially a dead end except in extraordinary circumstances, it’s just another reason for plaintiffs to say “I’ll see you in federal court.”

John Jenkins

May 7, 2019

Tomorrow’s Webcast: “M&A Stories – Practical Guidance (Enjoyably Digested)”

Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Mayer Brown’s Nina Flax, Baker Botts’ Sam Dibble, Shearman & Sterling’s Bill Nelson and our own John Jenkins share M&A “war stories” designed to both educate and entertain.

Broc Romanek

May 6, 2019

SEC Proposes Overhaul of Rules on Financial Info for M&A

On Friday, the SEC issued this 224-page proposing release that would make significant changes to the rules governing the financial information that public companies must provide for significant acquisitions and divestitures. Here’s the SEC’s press release – and we’ll be posting memos in our “Accounting” Practice Area.

The “fact sheet” that the SEC included with its press release summarizes the changes that it proposes to make. As this excerpt indicates, they are fairly extensive:

The proposed changes would, among other things:

– update the significance tests under these rules by revising the investment test and the income test, expanding the use of pro forma financial information in measuring significance, and conforming the significance threshold and tests for a disposed business;
– require the financial statements of the acquired business to cover up to the two most recent fiscal years rather than up to the three most recent fiscal years;
– permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
– clarify when financial statements and pro forma financial information are required;
– permit the use in certain circumstances of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board;
– no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for a complete fiscal year;

The changes would also impact financial statements required under Rule 3-14 of Regulation S-X (which deals with acquisitions of real estate operations), amend existing pro forma requirements to improve the content and relevance of required pro forma financial information, and make corresponding changes in the rules applicable to smaller reporting companies under Article 8 of Regulation S-X.

Interestingly, while Commissioner Jackson voted in favor of moving forward with the rule proposal, he also issued a statement in which he expressed concern that the proposals seem to proceed from the assumption that mergers and acquisitions are “an unalloyed good.” He expressed some skepticism about that, contending that the proposals ignore “decades of data showing that not all acquisitions make sense for investors.”

Ultimately, Jackson urged investors “to help us engage more carefully and critically with longstanding evidence that corporate insiders use mergers as a means to advance their private interests over the long-term interests of investors.”

For more detail on the rule proposals, check out this blog from Cooley’s Cydney Posner.

John Jenkins

May 3, 2019

Private Equity: Getting Out While the Getting’s Good?

This Bloomberg article says that PE funds are holding on to their portfolio company investments for shorter periods than in years past – and that this could be an early warning of trouble ahead for M&A.  Here’s an excerpt:

Private equity firms appear to be signaling “Last one out is a rotten egg.” If those powerhouse investment firms smell something fishy, other investors should take notice.

Holding periods — the amount of time between when a buyout firm makes an acquisition until it flips the company back into the public markets or to another buyer — have been drifting down for the past few years around the world. Last year, though, they took a dive, including in the U.S., where they had risen slightly in 2017. In 2018, it was just 4.5 years from buyout to exit in the U.S., according to research firm Preqin. That’s down from an average of 5.1 years in 2017 and the quickest turnaround time the PE market has seen since 2009.

The article acknowledges that there could be several reasons for the decline, but says that “the most likely answer is that PE professionals see economic trouble ahead and are headed for the exits.”

John Jenkins

May 2, 2019

Due Diligence: All About Permissioned Blockchains

Most businesses seeking to capitalize on blockchain technology involve, to a greater or lesser extent, “permissioned blockchains” – i.e., those that restrict access so that only certain kinds of users can participate in the network. If you’re representing a company that’s thinking about buying or investing in a business involving a permissioned blockchain, you should check out this Davis Polk memo.

The memo lays out the differences between permissioned & permissionless blockchains and addresses a variety of legal issues associated with acquisitions & investments in permissioned blockchain businesses. Here’s an excerpt discussing potential governance issues:

One important consideration relates to governance. As a blockchain becomes more centralized, it looks less like a blockchain and more like a traditional database. Elements of centralization will certainly be useful to the acquirer, but too much centralization will give the acquirer control to manipulate or unmask on-chain data. If the acquirer comes to dominate the acquired blockchain’s technical or economic environment, that blockchain can no longer offer a shared landscape that facilitates the decentralization of trust from one central party—in other words, that blockchain will replicate the centralized dynamic of traditional databases, in which a core administrator controls the other users.

Importantly, even the perception that these outcomes could occur would drive some participants elsewhere, because an acquirer that retains some latent right to unilaterally control or censor the blockchain is still an extremely centralized presence. To mitigate these risks, an acquirer could enter into agreements with other participants that contractually limit its own ability to make certain kinds of governance decisions, such as unmasking on-chain data.

An acquirer could also offer participants equity in a limited joint venture formed for the purposes of governing the blockchain, or transfer governance rights to an independent nonprofit, to signal that the acquirer views decentralization as an important factor in the overall health and value of the blockchain. Finally, the acquirer could give participants the right to influence dispute resolution processes, such as the right to choose an arbitrator.

Other topics addressed include intellectual property issues, risks associated with the potential use of blockchains to avoid sanctions & for other illegal transactions, and cybersecurity issues. The memo also addresses how some of the risks associated with an acquisition of a permissioned blockchain business might be mitigated by an investment instead of an outright purchase of the business.

John Jenkins