The changes & enhancements to CFIUS’s national security review that are underway following last year’s enactment of FIRRMA are complicating many aspects of cross-border transactions. This PwC blog highlights how these changes are impacting the process of planning for the integration of an acquired company:
As CFIUS continues to develop regulations to implement FIRRMA, dealmakers will need to consider integration options earlier in the process and consider the following questions: What are the minimum integration steps to successfully close a deal? How much integration is realistic immediately post-close?
In the months after close, it will also be important to monitor and assess newly-merged companies regularly, particularly any agreed-to mitigation measures to demonstrate adherence to CFIUS requirements. Failure to comply with the terms of a National Security Agreement (NSA) can lead to CFIUS re-examining a transaction, with potentially serious consequences for the parties and shareholders.
An effective way to navigate through the new regulations is to start conversations with CFIUS committee staff early before formally filing a transaction for review, demonstrating what the parties are considering early on and the potential national security implications of a transaction. This is a crucial step, and dealmakers are uniquely positioned to stay ahead by also explaining the business rationale for the transaction.
Through this process, dealmakers can reassess the deal thesis based on CFIUS’s feedback requirements. They can also decide if they should continue pursuing the deal, assess the need for an NSA or mitigation measures, and refine their integration strategy where necessary.
Wachtell Lipton recently published this 93-page guide to the U.S. legal considerations applicable to cross-border transaction. Here’s an excerpt from the intro:
Cross-border M&A transactions can be among the most complex and challenging to execute, but can also provide substantial benefits to companies seeking to enhance their competitive position in the global marketplace. The purpose of this Guide is to discuss certain U.S. legal considerations relating to cross-border M&A transactions. In particular, the Guide focuses on two common types of transactions:
– acquisitions of U.S. companies by non-U.S. companies (or “inbound” M&A); and
– acquisitions of non-U.S. companies.
Note in this regard that the second type of transaction above is not limited to non U.S. target companies with securities listed in the United States, nor is it limited to “outbound” cross-border transactions in which the acquiror is a U.S. company. Even an acquisition of a company incorporated and listed only in a foreign jurisdiction, by an acquiror that is itself neither incorporated nor listed in the United States, can implicate the U.S. federal securities laws.
In addition to an extensive review of potential issues under the federal securities laws, the guide also addresses state laws, listing rules, and antitrust & national security considerations.
Earlier this month, I blogged about the rise of mootness fees in federal court M&A litigation. So far, they’ve been easy money for plaintiffs, but a federal judge’s decision to blow up a mootness fee settlement in a case that arose out of last year’s aborted Akorn/Fresenius merger may signal a change in judges’ willingness to sanction these deals. Here’s the intro from this recent article by Allison Frankel:
U.S. District Judge Thomas Durkin of Chicago has thrown down the gauntlet: In a ruling issued Monday, he said it’s time to end the “racket” of “worthless” M&A shareholder litigation. Judge Durkin abrogated a settlement between Akorn and individual shareholders and ordered plaintiffs’ lawyers to return their $322,500 mootness fee to the company, concluding that their purported class action complaints should have been dismissed at the outset of litigation.
The article adds that Judge Durkin pointed to the 7th Circuit’s 2016 Walgreen decision in support of the position that class actions that don’t provide substantive benefits to shareholders should be “dismissed out of hand.”
The study I cited in my earlier blog said that the rise of the mootness fee phenomenon was largely attributable to federal judges not providing the kind of oversight to mootness fee settlements with individual plaintiffs that they provide to class settlements. That didn’t happen here – and that’s because a shareholder watchdog made sure the proposed settlement didn’t escape the judge’s notice:
The decision is vindication for class action watchdog Ted Frank of the Hamilton Lincoln Law Institute. Frank, an Akorn shareholder, tried to intervene in the litigation in 2017, when plaintiffs’ lawyers disclosed their $322,500 mootness fee in a stipulation asking Judge Durkin to sign an order closing cases voluntarily dismissed by individual shareholders.
Judge Durkin denied the motion to intervene but allowed Frank, represented by his colleague Frank Bednarz, to file an amicus brief arguing, among other things, that the 7th Circuit’s Walgreen decision instructs federal judges to scrutinize all prospective class actions, not just cases that end with classwide settlements.
Section 145(c) of the DGCL provides a broad right to mandatory indemnification for a corporate director or officer who has been “successful on the merits or otherwise” in defending against an action brought against that person in their capacity as a director or officer. The Chancery Court’s recent decision in Brown v. Rite-Aid Corporation (Del. Ch.; 5/19) says that this highlighted language means exactly what it says – even if the individual was previously held criminally liable for the conduct at issue & managed to dodge liability in the case for which indemnity was sought on a procedural technicality.
Here’s an excerpt from Francis Pileggi’s recent blog on the case addressing the reasoning underlying Vice Chancellor Zurn’s decision:
The court recited the public policy rationale behind mandatory indemnification as including the need to encourage capable individuals to serve as corporate directors, which is viewed less as an individual benefit and more as a desirable mechanism in return for greater corporate benefits.
A key point and an essential aspect of the court’s reasoning is its reliance on an abundance of case law that interprets the “success” requirement in Section 145(c) very broadly. That is, in order to satisfy the requirement of success “on the merits or otherwise” under Section 145(c), one must merely obtain any result in a lawsuit “other than conviction,” which does not equate with moral exoneration, but rather can be satisfied merely from: “escape from an adverse judgment or other detriment, for whatever reason . . .
Moreover, if such a broad definition of success is achieved, it is not relevant, and the court will not inquire into, whether all arguments were won, or if preliminary motions or other efforts in the underlying litigation failed before the final successful result was reached.
I’ve always kind of enjoyed making fun of my colleagues who practice real estate law. That’s because real estate issues involved in the most complex, cutting edge transactions can almost always be resolved by asking the question: “What would the common law have said about this in 14th century England?”
But this Weil Private Equity blog says that I shouldn’t be so smug – hoary common law doctrines often surface as “gap fillers” in M&A transactions as well. These gap fillers can have some surprising results, even in some pretty sophisticated jurisdictions. For instance, behold the Empire State’s “Mohawk doctrine”:
If you fail to agree on a specific matter expressly as to which the common law provides a gap filler, you have in fact agreed to that gap-filling term. In most cases, however, the agreements of sophisticated parties represented by sophisticated counsel (well-trained in the common law) expressly address these issues so they would rarely come into play. But such is not always the case, and the gap-filling terms that are supplied in some states may come as a surprise to the uninformed.
And that brings us to a unique gap-filling term implied in a New York law governed sale of a business—the Mohawk doctrine. The Mohawk doctrine derives its name from a 1981 New York Court of Appeals decision, Mohawk Maintenance Co. v. Kessler, 419 N.E.2d 324 (N.Y. 1981). In Mohawk, the court, relying on a common law doctrine know as “derogation of the grant,” held that the seller of a business that includes its “good will” is subject to an implied obligation “to refrain from soliciting his former customers.”
The blog points out that the Mohawk doctrine doesn’t prohibit customers from migrating independently or impose a true non-compete on the seller, but here’s the thing – the non-solicitation obligation lasts forever. So if your deal is governed by New York law, this is one gap you’d be well-advised to make sure that you fill.
If your jurisdiction has some common law quirks of its own that can have hair-raising results for an M&A transaction, I’d love to hear about them. . .
This Wachtell memo says that in an era of increased scrutiny of boards by activists & other investors, directors need to think more strategically about the role of board development and succession planning. Here’s the intro:
The intensifying spotlight turned on boards of directors and management teams by investors prompts a fresh look at how public companies approach board development, director succession planning and refreshment in advance of an activist attack, shareholder unrest or a crisis that results in heightened scrutiny.
As the New Paradigm of corporate governance takes hold, the major index fund asset managers, many actively managed funds and the two largest proxy advisory firms have each formally incorporated questions relating to board quality and practices into their direct engagements with companies, voting policies and how they evaluate a proxy contest to remove or replace existing board members and CEOs.
In addition, activist hedge funds will re-frame matters of corporate strategy and performance into referendums on board quality, questioning whether the board had the right skillsets and practices in place to oversee important business decisions.
The memo goes on to review specific practices relating to board development, diversity, managing tenure, onboarding, director education, board culture, investor engagement & other matters that may enhance the board’s strategic position in this environment.
Breach of fiduciary duty allegations premised on a board’s failure to fulfill its oversight obligations are notoriously difficult to establish. One reason that these Caremark claims are so tough to make is that a plaintiff needs to show “bad faith,” meaning that the directors knew that they were not discharging their fiduciary obligations. But earlier this week, in Marchand v. Barnhill, (Del. Sup.; 6/19), the Delaware Supreme Court overruled the Chancery Court and held that – at least for purposes of a motion to dismiss – a shareholder plaintiff stated a viable Caremark claim.
The case arose from a 2015 listeria outbreak at Blue Bell Creameries. In addition to being implicated in the deaths of three people, the outbreak resulted in a recall of all of the company’s products, a complete production shutdown, and a lay-off involving 1/3rd of its workforce. Ultimately, the financial fallout from this incident prompted the company to seek additional financing through a dilutive stock offering.
As a result, the plaintiff brought a derivative action against the board & two of the company’s executives. The plaintiff alleged that the board failed in its oversight duties, but the Chancery Court rejected those allegations. Vice Chancellor Slights determined that the plaintiff did not plead facts supporting allegations that the board his contention that the board “‘utterly’ failed to adopt or implement any reporting and compliance system,” but instead challenged the efficacy of that system. VC Slights held that this wasn’t enough to support a Caremark claim.
The Supreme Court disagreed. This excerpt from Steve Quinlivan’s recent blog on the case summarizes the key facts underlying its reasoning:
The Court noted that under Caremark, a director may be held liable if she acts in bad faith in the sense that she made no good faith effort to ensure that the company had in place any “system of controls.” Using facts discovered as a result of a books and records demand, the Court noted the complaint fairly alleged that before the listeria outbreak engulfed the company:
– no board committee that addressed food safety existed;
– no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed;
– no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed;
– during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board;
– the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and
– the board meetings were devoid of any suggestion that there was any regular discussion of food safety issues.
On top of this, the Court noted that government inspectors found food safety problems at the company’s plants that were so systemic that any reasonable monitoring system would have resulted in them being reported to the board.
The centrality of food safety issues to the company’s business played a key role in the Court’s assessment of the board’s performance of its oversight responsibility. Manufacturing ice cream was the company’s only business, so the Court believed that food safety should have been a prominent board-level issue – and concluded that the record in front of it indicated that it wasn’t:
When a plaintiff can plead an inference that a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation, then that supports an inference that the board has not made the good faith effort that Caremark requires.
Marchand involved a motion to dismiss, and it’s hard to tell whether case suggests that Caremark may be a more viable path to imposing liability than it has been in the past – but it’s worth noting that this decision is the second case in the last two years in which a Delaware court has characterized a Caremark claim against directors as being “viable.”
This Institutional Investor article discusses a PitchBook report that found publicly traded PE firms to more aggressive in raising capital than their privately held counterparts. The report speculates that listed PE firms see themselves as “perpetually undervalued,” because shareholders & analysts “broadly misunderstand the variable cash flows that are innate to private equity.” So, in an effort to please them, these firms aggressively try to increase fund sizes to boost management fees & potential performance fees or carried interest.
The article notes that management fees are particularly favored by publicly traded funds, because unlike carried interest, they are recurring and predictable. This excerpt discusses the disparity in fundraising between the largest listed PE firms & the largest privately held firms:
The average flagship fund size for these listed firms was $18.9 billion between 2015 and 2018, while unlisted companies’ vehicles averaged $11.6 billion during that period. Public firms also grow their coffers by expanding product ranges, the report showed. Between 1997 and 2000 — before any of the four had gone public — they closed an average of 2.5 unique strategy offerings each, versus 1.5 for Advent, Bain, TPG, and Warburg Pincus.
That gap swelled impressively after Apollo, Blackstone, Carlyle, and KKR went public. During the 2015 to 2018 period, they averaged eight distinct strategy closures, while the unlisted group only edged up to 2.3. “The growth in strategy offerings and fund closings shows the public cohort’s desire to diversify the business and grow assets under management and accompanying management fees, while the private cohort has stayed leaner and more focused,” according to PitchBook.
If you read Liz’s blog yesterday over at TheCorporateCounsel.net, then you’ve already heard our big news – the Mothership’s rebranding from “EP Executive Press” to “CCRcorp.” The new name stands for “Corporate Counsel Resources” and reflects how far we’ve come since the days when Jesse Brill was stuffing issues of The Corporate Counsel newsletter into envelopes by hand & mailing them to our earliest subscribers.
It’s been a pretty amazing ride over the past 40+ years, and I’m proud to have been a part of it for the last 3 of them. Interacting with our members and working with Broc, Liz (who’s really the funny one here) and the rest of our team on a daily basis is a privilege & a pleasure – and an opportunity that I remain very grateful to have been given.
For our members, the most noticeable aspect of the new branding will be changes in our logos following the formal announcement. Your user experience will remain the same, and we’ll continue working to make sure our websites & publications provide up-to-date, practical resources that you can count on to help you do your job.
Okay, that’s enough about you – I want to know what’s in this rebranding for ME! I haven’t heard much about that, so I have a few questions that I’m looking for our management to address. Specifically:
– Will there be “CCRcorp” logoed swag?
– If so, will it be available in XXL?
– Can I get it for free?
– Will there be a fleece vest so that I’ll finally have a chance to fulfill my dream of being featured on @midtownuniform?
I’ve bought in to the company’s rebranding – but you know, there’s a difference between “buying in,” and being “all-in.” So, if management is looking for the last full measure of my devotion. . . well folks, let’s hear what you have to say about the swag.
Tune in tomorrow for the webcast – “Joint Ventures: Practice Pointers” – to hear Eversheds Sutherland’s Katie Blaszak, Hunton Andrews Kurth’s Roger Griesmeyer, Orrick’s Libby Lefever, & Davis Polk’s Brian Wolfe provide practical nuggets to help you navigate your next joint venture.