Nixon Peabody recently posted its 2019 MAC Survey, and the results suggest that the terms of MAC clauses continue to move in a buyer-friendly direction. Here’s an excerpt:
Of the 200 agreements surveyed, 196 (98%) contained a material adverse change in the “business, operations, financial conditions of the Company” as a definitional element. This is an increase from the previous survey, when this element appeared in 89% of all agreements . Meanwhile, none of the 200 acquisition agreements reviewed this year lacked a MAC closing condition, compared to 7% reported in the 2017 survey and 3% reported in the 2016 survey . These trends demonstrate the universal acceptance of MAC clauses in M&A documents.
This year’s results indicate a continuing shift toward a more objective test in determining whether a change constitutes a MAC . More agreements contained the pro-bidder “would reasonably be expected to” language in the MAC definition—it appeared in 74% of the deals reviewed this year, while appearing in 62% of all deals reviewed in 2017 . This language appeared in 54% of all deals reviewed in 2016, 61% of deals reviewed in 2015, 56% in 2014, 53% in 2013, 42% in 2012, and just 29% in 2011 . By defining a material adverse effect to involve circumstances that “would reasonably be expected to” lead to a MAC, a bidder introduces a forward-looking feature to the definition, allowing it to adopt a more lenient approach during negotiations over whether a material adverse change in the target’s prospects needs to be covered by the definition.
We also saw an increase in the usage of pro-bidder “disproportionately affect” language in the MAC exceptions during this year’s surveyed period . Such language appeared in 87% of the deals reviewed this year, while appearing in 76% of deals reviewed in 2017 and 81% and 83% of deals reviewed the two years before—which evidenced a significant increase over the 73% found in our 2011 and 2012 surveys and the 48% and 40% found in our 2009 and 2010 surveys, respectively. “Disproportionately affect” language carves out exceptions from the MAC clause to ensure that bidders have the protections of the MAC clause in the event the target company suffers more greatly than its peers from a specified event, such as a general economic or industry downturn . We are optimistic that the increase in the use of “disproportionately affect” clauses reflects the continued maturation and uniformity of MAC provisions generally.
– John Jenkins
Clients are sometimes very impatient with lawyers’ emphasis on getting the “process” right and frequently aren’t shy about expressing their displeasure about it. Well, the next time you find yourself on the receiving end of a complaint like that, don’t hesitate to use the Delaware Chancery Court’s recent decision in Dieckman v. Regency, (Del. Ch.; 10/19), to support your argument that it’s not just a matter of getting the right result, but getting there in the right way.
The case involved an investor challenge to the sale of Regency Energy Partners to an entity affiliated with its general partner. The GP defended the transaction on the basis of its compliance with the terms of a “safe harbor” for affiliated transactions laid out in the limited partnership agreement. A key condition to the applicability of safe harbor was a requirement that the GP rely upon a fairness opinion in making its decision concerning the proposed deal’s fairness.
The Chancery Court rejected the GP’s argument and granted summary judgment to the plaintiffs as to the inapplicability of the partnership agreement’s safe harbor. As this excerpt from Fried Frank’s recent memo on the decision notes, while the GP received the required fairness opinion, its reliance on it in reaching its own fairness determination was another matter:
In Dieckman, the question of reliance arose because the minutes of a Conflicts Committee meeting held before the Committee received the fairness opinion indicated that the Committee determined, at that meeting, that the proposed transaction (which at that time reflected terms that were less favorable than the final terms of the Merger) was fair. The issue was compounded by the fact that the fairness opinion was never updated to reflect the final terms of the Merger.
The memo makes the point that a final determination about fairness should not be made before receipt of the fairness opinion and meeting minutes should state that the board or committee received “and relied on” the fairness opinion.
– John Jenkins
Intralinks’ annual Limited Partner Survey always makes for interesting reading. This excerpt discusses LPs growing interest in co-investment opportunities:
When asked their preferred investment allocation method, alongside traditional LP stakes in commingled funds, 34% of survey respondents said it would be direct investment vehicles. This underscores a growing level of confidence in how they approach the world of alternative assets, as some larger institutions build their own in-house investment teams to improve returns and reduce fees.
The same is true of co-investing as LPs look to build closer partnerships with their GPs to invest side-by-side in buyout deals. In this year’s survey, it was cited by 30% of investors. As reported by Pensions & Investments, the likes of the $226.5 billion CalSTRS and $44 billion University of Texas/Texas A&M Investment Management Co. are making changes to their private equity investment approaches to evolve beyond commingled funds.
“Family offices specifically are very interested in co-investment opportunities,” says a family office investment advisor. “A private equity manager operating a commingled fund will see deal opportunities, and what they will tend to do is say to investors, ‘If you give us another $20 million we could co-invest on this deal for a modest 50 basis point fee.’ There is definitely growing interest in this.”
The survey says that the major drivers of limited partner interest in co-investment are the opportunity to improve returns & to better align their interests with those of the general partners.
– John Jenkins
A simple failure by the seller’s shareholders to approve the deal is an unusual termination fee trigger. In fact, according to the latest ABA Deal Points survey, this so-called “naked no vote” trigger appears in fewer than 3% of public deals. But it does appear in the merger agreement for one of this year’s more high-profile transactions, Google’s pending $2.1 billion acquisition of Fitbit.
Section 8.01(b)(ii) of the merger agreement gives either party the right to terminate if “the Requisite [Fitbit] Stockholder Approval shall not have been obtained at the Company Meeting or at any adjournment or postponement thereof, in each case, at which a vote on such adoption was taken.” In turn, Section 8.03(a)(ii) provides that “If, but only if, this Agreement is terminated by either [Google] or [Fibit] pursuant to Section 8.01(b)(ii), the Company shall pay, or cause to be paid, to Parent or Parent’s designee(s), as the case may be, an amount equal to $21,000,000 (such amount, the “No Vote Fee”).
One thing worth noting here is that the size of the No Vote Fee is much smaller than the size of the termination fee otherwise payable under the more customary triggers found in the agreement. The No Vote Fee represents about 1% of the deal’s equity value, while the termination fee payable in other situations represents about 3.8% of its equity value.
The No Vote Fee raises a couple of questions. The first one is – does this pass muster in Delaware? There’s certainly a risk that, in some situations, a deal protection like this might be viewed as unduly coercive, but a naked no vote termination fee trigger has been upheld by the Delaware Chancery Court in at least one case, based upon the Court’s assessment of the strength of the sale process. In re Lear Corp. Shareholder Litigation,(Del. Ch.; 9/08).
The second question is the more interesting one – namely, why did the parties agree to the No Vote Fee? My guess is that it may have had a lot to do with the fact that, as described in the “Background of the Merger” section of Fitbit’s preliminary proxy statement, Google had formidable competition for the deal – in the form of a perhaps not so mysterious bidder identified in the proxy as “Party A.” That competing bidder may have been unsuccessful in its bid to buy Fitbit, but it was extremely successful in driving up the price Google had to pay to get the deal.
My suspicion is that this competition & the uncertainty about whether the parties have heard the last from Party A may help explain both Google’s insistence on the No Vote Fee & the relatively large size of the termination fee payable in other circumstances. From Fitbit’s perspective, the results of the sale process, which saw Google raise its bid from $4.59 per share to $7.35 per share, as well as the fact that the size of the No Vote Fee approximated the size of the naked no vote fee that passed muster in the Lear case, may have made it comfortable in agreeing to pay such a fee.
The No Vote Fee isn’t the only interesting termination fee potentially payable under the merger agreement. There’s also a whopping $250 million reverse termination fee that comes into play if the deal doesn’t receive antitrust clearance. (Section 8.03(b)). That fee represents 12% of the deal’s equity value, and is 4x higher than the 3.1% median strategic buyer reverse termination fee set forth in the latest data from Houlihan Lokey.
Of course, all of the tech giants are under intense antitrust scrutiny right now, & this deal doesn’t include the kind of “hell or high water” covenant sometimes seen in deals where significant antitrust problems are anticipated, so those factors likely had a lot to do with the size of the reverse termination fee.
– John Jenkins
I know Broc isn’t going to like this, but I can’t let his big announcement go by without remarking on it.
If you ever visit St. Paul’s Cathedral in London, you’ll find the tomb of the great architect Christopher Wren, who was instrumental in rebuilding the city after the Great Fire. Wren designed more than 50 London churches, including the majestic St. Paul’s, and beside his tomb, you’ll find inscribed the words, “Reader, if you seek his monument, look around you.”
I think that’s a fitting farewell for our friend and colleague Broc Romanek as he moves on to the next phase of his remarkable career. I know I speak for all of us when I say how grateful we are for his leadership & his friendship, and how much we will miss his daily presence.
These websites, and this community, are really one of a kind – and they are the product of one man’s extraordinary vision and superhuman capacity for work. So, reader, if you seek Broc’s monument, look around you.
– John Jenkins