Monthly Archives: August 2019

August 28, 2019

Post-Closing: Buyers Must File New EEO-1 Info for Acquired Companies

Companies with at least 100 employees & some federal contractors with more than 50 employees have to file EEO-1s containing with certain workforce demographic information with the EEOC. In March, a DC federal court ordered the EEOC to begin collecting what’s known as “Component 2” data from companies required to file EEO-1s.  That means that in addition to workforce demographics, these companies must now report employee pay data & hours worked by job category, & by race, ethnicity and sex.

Since this website isn’t called “,” you may be wondering why I’m talking about EEOC requirements.  Well, the thing is that the EEOC just released guidance saying that if you bought a company during 2017 or 2018, you’re on the hook to provide the required information for the acquired company – in some cases, even if the pay period used to measure that data occurred before the closing.  This excerpt from this recent Proskauer blog explains:

In its guidance, EEOC advises, among other things, that acquiring companies are responsible for submitting Component 2 data of their acquired entity – whether the transaction occurred before or after the acquiring company’s workforce snapshot period. Similarly, where two companies merge to form a new entity, the new entity must report its Component 2 data, regardless of whether the merger occurred before or after the workforce snapshot period.

Where a purchasing or newly formed company does not have access to a former entity’s Component 2 data, they should note that in the comments box on the certification page in the EEO-1 online portal. For acquisitions closing in 2018, an acquiring company would not be required to report the 2017 Component 2 data of a purchased company, if the purchased company would not have been obligated to report its own 2017 Component 2 data (i.e., if it had less than 100 employees in 2017).

What if you sold or spun-off a business during the relevant period?  Here’s what the blog says about that:

With respect to spinoffs occurring in 2018, newly created subsidiaries are not responsible for reporting their 2017 Component 2 data. The former parent company, however, would be responsible for filing the 2017 Component 2 data for the employees of the spun off company. Parent companies that sold a part of their business in 2018 are not required to file the 2017 or 2018 Component 2 Data for the sold entity – the purchasing company has that responsibility.

If this is the first you’re hearing of this, you’d better get moving – the Component 2 data is due by September 30th.

John Jenkins

August 28, 2019

Delaware Case Highlights Risks of Executing Counterpart Sig Pages

The final days & hours leading up to a signing or closing usually involve a flurry of ever-changing draft documents that frequently don’t come to rest until the very last minute. Since that’s the case, and because execs have an uncanny knack for falling off the face of the earth when you need them to sign stuff, collecting signed counterpart signature pages that can be attached to the final version of the documents in advance is an almost universal practice.

Unfortunately, a recent Delaware case invalidating a fully executed warrant agreement suggests that if you’re going to engage in this common practice, you need to be absolutely certain that everyone is signing-off on the same document.  This excerpt from Francis Pileggi’s blog about the case provides the key takeaway for deal lawyers:

Careful practitioners should consider the risk (in light of this case) inherent in allowing a client to sign an “orphan” signature-page as a separate page by itself–and then later attaching that page (only) to a document that the signature-page is not indubitably a part of. Rather, a lawyer should be able to prove that the signatory has read and agrees to all the terms of the agreement that the signature-page is attached to.

That may seem obvious, but the contract at issue in this case was ruled to be unenforceable because the signature-page was formatted in such a way that it could be–and was–attached to a version of the contract other than the one that the signatory thought it belonged to. This risk also applies to the common practice of allowing “counterpart signatures” that may not be attached to the agreement at the time it is signed.

These risks need to be kept in mind when thinking about the process of getting your final agreements executed – but it’s worth noting that the facts of this case were pretty bizarre. It seems that nobody involved retained any emails or other records of anything related to the negotiations except for various drafts of the agreement.  What’s more, the plaintiff couldn’t even remember the name of the lawyer who represented her!  So, the court had very little evidence to go on in discerning whether there had been a meeting of the minds but for competing versions of the final agreement.

John Jenkins

August 27, 2019

D&O Insurance: Duty to Defend “Securities Claims” Includes Appraisal

This Morris James blog highlights the Delaware Superior Court’s recent decision in Solera Holdings v. XL Specialty Ins., (Del. Super.; 7/19), which held – among other things – that a D&O policy’s duty to defend “Securities” claims extended to appraisal proceedings. Here’s an excerpt:

The insurers argued that appraisal actions were not covered “Securities Claims” because a claim for a “violation” implies wrongdoing, which need not be proven in an appraisal action. The Court reasoned, however, that “‘[v]iolation’ simply means, among other things, a breach of the law and the contravention of a right or duty.” This usage in the securities context is “logical” given that “[s]everal laws regulating securities can be violated without any showing of scienter or wrongdoing.” Because § 262 appraisal actions are, by nature, allegations that the company contravened the stockholders’ statutory right to fair value, appraisal actions were covered under the policy language at issue.

The Court went on to hold that pre-judgment interest on an appraisal award may be a covered “Loss” under the policy & that breach of a “Consent to Defense” clause doesn’t bar coverage in the absence of prejudice to the insurer.

John Jenkins

August 26, 2019

Money Ball: Using Advanced Analytics in M&A

Today’s high M&A valuations mean that buyers often face daunting challenges when it comes to achieving an appropriate return on their investment. This McKinsey report says that the emphasis on advanced analytics that helps keeps small market MLB teams competitive may be the key to extracting value in M&A. Here’s an excerpt:

For M&A, an area where few companies now apply advanced analytics, there is the potential to enhance all activities. During due diligence, companies may mine new insights from external data, if available. These analyses may be an important source of additional insights, since companies have limited access to internal data during the due-diligence phase.

Advanced analytics may also uncover opportunities for synergy that would have otherwise been overlooked. At the negotiation stage, when transaction documents are being created, companies can use behavioral analytics to understand their potential partners more thoroughly. With this knowledge, they can improve their negotiation strategy. Finally, when the deal is signed, companies can apply advanced analytics to derive maximum value from the transaction.

In addition to the soaring premiums paid in M&A transactions, the report says that another reason the time is right for applying analytics to acquisitions is the dramatic decline in data storage costs & the  dramatic increase in processing power.  These developments allow companies to more easily manage vast amounts of internal and external data – and as data management improves, it will enable companies to make better decisions and meet tight integration deadlines.

John Jenkins

August 23, 2019

Transcript: “Joint Ventures – Practice Pointers (Part II)

We have posted the transcript for our recent webcast: “Joint Ventures – Practice Pointers (Part II).” Here’s the transcript for the first “Joint Ventures – Practice Pointers” webcast.

John Jenkins

August 22, 2019

Appraisal Rights: VC Glasscock Expands On Prior Ruling Allowing Waivers

Last year, I blogged about Vice Chancellor Glasscock’s letter ruling in Manti Holdings v. Authentix Acquisition, (Del. Ch.; 10/18) upholding a contractual waiver of appraisal rights.  In response to a motion for reargument, the Vice Chancellor issued new opinion in the case fleshing out his position and clarifying the circumstances under which waivers of appraisal rights would be permissible under Delaware law.

VC Glasscock’s prior opinion focused primarily on the language of a contractual “drag right” that obligated the shareholder-parties to refrain from exercising appraisal rights. It did not address the predicate issue of “whether a stockholder can, via contract, validly waive her appraisal rights to begin with.”

The Vice Chancellor addressed that issue head-on in this opinion and reaffirmed his conclusion that shareholders could – at least sometimes – lawfully waive appraisal rights. Here’s an excerpt from Steve Quinlivan’s recent blog on the case outlining the key factors supporting that conclusion:

– The stockholders agreement was not a contract of adhesion. Sophisticated parties were involved and were represented by counsel, and counsel exchanged drafts of the proposed stockholders agreement before agreeing to a final contract.

– There is no record evidence that the petitioners were not fully informed.

– The Delaware General Corporation Law, or the DGCL, does not explicitly prohibit contractual modification or waiver of appraisal rights, nor does it require a party to exercise its statutory appraisal rights. Thus, such modification or waiver serves to supplement the DGCL, and is not inconsistent with, nor contrary to, the DGCL.

– The stockholders agreement clearly and unambiguously waived appraisal rights.

– The Court did not decide whether a waiver of appraisal would be upheld in other circumstances.

John Jenkins

August 21, 2019

Advance Notice: Del. Chancery Upholds Bylaw & Torpedoes Activist Slate

This Gibson Dunn memo reviews the Chancery Court’s recent transcript ruling in Bay Capital Finance, LLC v. Barnes & Noble Education, Inc., (Del. Ch.; 8/19), which involved a challenge to a bylaw provision limiting the ability to submit director nominations to shareholders of record.

Bay Capital was a disappointed suitor that had twice made unsolicited proposals to buy Barnes & Noble Education. So, it decided to submit a slate of director nominees for a potential proxy contest.  Under the terms of the company’s advance notice bylaw, director nominations had to be submitted between 120 and 90 days prior to the anniversary of the prior year’s annual meeting, and could only be submitted by holders of record. Bay Capital wasn’t a record holder when it submitted its slate, and the company rejected its nominees.

Bay Capital filed a lawsuit challenging the bylaw provision. Vice Chancellor McCormick shot that down in short order – and this excerpt from the memo suggests that Bay Capital wasn’t exactly a sympathetic plaintiff:

On June 27, 2019, the last day to submit director nominations for the 2019 annual meeting of stockholder, Bay Capital noticed the nomination of a slate of director candidates. Although the notice was timely, as of June 27 Bay Capital was just a beneficial owner of BNED stock and not a record holder. BNED’s Board of Directors therefore rejected the notice as invalid. Two weeks later, Bay Capital filed a complaint in Delaware Court of Chancery seeking injunctive relief to run its slate of directors at the upcoming annual meeting of stockholders.

The Court found that despite being reminded no fewer than four times by its advisor of the record holder requirement set forth in the BNED bylaws, Bay Capital did not acquire shares until three days before the nomination deadline. And when the shares were acquired, it was done through a broker such that there was not sufficient time to get the shares transferred in Bay Capital’s record name.

The Court dismissed various arguments advanced by Bay Capital in seeking an injunction, including a purported ambiguity in the BNED bylaws as to the need for the nominating stockholder to be a holder of record at the time it delivered the notice of nomination.

The facts of the case weren’t great for Bay Capital, but it seems to have made things worse for itself with its conduct during the lawsuit.  First, the transcript notes that shortly after requesting expedited proceedings, Bay Capital objected to the hearing date because it interfered with its managing partner’s travel schedule. Then, its managing partner threw gasoline on the fire with his deposition antics. Here’s what the Vice Chancellor had to say about those:

As I stated earlier, the conduct was not optimal. After making defense counsel fly to London to depose him, Mr. Suri showed up a half hour late, left in the middle of the deposition for over two and a half hours to attend personal appointments scheduled that same day, and then unilaterally terminated the deposition when it suited him. He was evasive and obstructive in his responses,ultimately going as far as to say that the deposition was an “accommodation” to the defendants. This, of course, ignores the fact that it was Mr. Suri who instigated this lawsuit and requested expedition in the first place.

VC McCormick went on to note that although she hadn’t been asked to address whether this deposition conduct warrants fee shifting, that remains “an open issue.”  It amazes me that people continue to act like this in Chancery Court depositions, particularly since the Delaware Supreme Court has so recently made it clear that not only it isn’t going to tolerate deposition shenanigans, but that it’s going to call out the deponent’s counsel for allowing them to occur.

John Jenkins

August 20, 2019

Antitrust: State AGs Want Scrutiny of M&A’s Labor Market Impact

This Jenner & Block memo discusses a recent comment letter submitted to the FTC by 18 state AGs. The letter argues for greater emphasis on labor and workforce issues in antitrust investigations.  In addition to expressing concern about “no-poaching” & non-compete agreements, the letter addresses the merger review process.  It argues that antitrust regulators should scrutinize a deal’s potential impact on the labor market as well as on consumers. This excerpt from the memo summarizes the state AGs’ position:

As to mergers, the signatories argue that antitrust scrutiny should be applied to merger activity not only with respect to the effects on the end consumer, but also to the effects on the entities that themselves are consumers in the labor market (i.e., employers).

The signatories note that mergers involving entities that do not compete in downstream product or service markets nevertheless might compete for labor, and their consolidation could drive down competition and demand for workers, not all that unlike the effects of a horizontal no-poaching agreement. While the attorneys general do not purport to identify a clear solution or recommendation for how to address mergers, they make clear that current approaches to evaluating merger activity do not adequately take all relevant factors into consideration.

Nearly a third of U.S. states & half the population are represented by the signatories to the letter, and while its impact on federal antitrust regulation remains to be seen, the memo points out that the letter makes it clear that “many state enforcers are acutely interested in trying to regulate a wide variety of business activities and practices on workers.”

John Jenkins

August 19, 2019

Rule 16b-3 Exempts Acquisition of Stock In Reverse Sub Merger

Here’s something that Alan Dye recently posted on his Blog:

A judge in the Northern District of California has dismissed a complaint filed against Elon Musk and other Tesla insiders which alleged that their acquisition of Tesla common stock in Tesla’s reverse triangular merger with SolarCity was not a transaction with “the issuer” and therefore was not eligible for exemption under Rule 16b-3(d), making the insiders’ acquisitions matchable with their sales of Tesla stock within less than six months.

The plaintiffs in the case are John Olagues and Ray Wollney, who are part of the group that has been challenging (unsuccessfully, so far) the availability of Rule 16b-3(e) to exempt elective tax withholding transactions under equity compensation plans. The defendants are insiders of Tesla who were stockholders of SolarCity when SolarCity merged with a wholly owned subsidiary of Tesla, with SolarCity surviving the merger. The merger was approved by Tesla’s board of directors and by Tesla’s shareholders following a proxy solicitation. The merger closed four days after the shareholder vote, and the defendants reported their receipt of Tesla stock on Form 4, using transaction code “A” and stating in a footnote that the acquisitions were exempt under Rule 16b-3.

The plaintiffs argued that the defendants’ acquisition didn’t occur at closing, but instead occurred when shareholders approved the merger, giving the defendants a “right to receive” stock in the merger. That acquisition, the plaintiffs’ argued, was a transaction with the subsidiary, not Tesla, and therefore was not eligible for exemption under Rule 16b-3. The plaintiffs also argued that, even if the acquisition occurred at closing, the merger was with a subsidiary and therefore still didn’t involve a transaction with the issuer.

The court rejected both arguments, holding that, regardless of when the acquisitions occurred, they involved a direct issuance of stock by Tesla and therefore were with “the issuer.” The court also said that, even if the transaction were deemed to be with the non-surviving merger subsidiary, the SEC staff said in a 1999 interpretive letter to the American Bar Association that a transaction with a majority owned subsidiary is a transaction with the issuer for purposes of Rule 16b-3. While a staff interpretive letter isn’t binding on a court, the court said it found the staff’s position “persuasive.”

John Jenkins

August 16, 2019

Antitrust: Interlocking Directors in M&A

In late June, the FTC blogged some guidance about compliance issues arising under Section 8 of the Clayton Act, which prohibits an individual from serving as an officer or director of two competing companies.  This prohibition on interlocking directorates isn’t an antitrust issue that’s usually front & center in the M&A context, but this excerpt from the guidance makes it clear that it sometimes needs to be:

Section 8 is a strict liability provision, meaning violations are per se and do not depend on actual harm to competition. It prohibits not only a person from acting as officer or director of two competitors, but also any one firm from appointing two different people to sit as its agents as officers or directors of competing companies, subject to a few limited de minimis exemptions. Here are two transaction scenarios that require extra mindfulness to ensure compliance with Section 8.

– Mergers or acquisitions can implicate Section 8 when a company is acquiring or merging into a new business line. The new business line may create an interlock if there are members of the acquiring or surviving board that also sit on the boards or serve as officers of a now-competing company. Private equity firms that acquire board seats across a diverse portfolio of companies may be particularly likely to encounter Section 8 issues via a merger or acquisition.

– Spin-offs can pose Section 8 problems where an officer or director retains roles with both the parent and the newly independent firm, if those two companies will compete in a line of business going forward.

The good news is that there is a one year grace period for the individual to resign from one of the positions creating the interlock – but even during this grace period, the individual can’t use the position for anti-competitive ends.

John Jenkins