I’ve previously blogged about the rather dismal conditions in the M&A marketplace, but despite the challenging environment, some deals are getting done. This recent Bloomberg Law analysis reviews the state of the M&A market. While most categories of deals are way down – and mega deals have fallen off a cliff – purchases of additional stakes and management buyouts are up:
The data indicate that existing shareholders may be throwing lifelines by way of equity injections into ailing companies, and some management may be trying to rescue them outright (all while also taking advantage of low stock prices). Both additional stake purchases and management buyouts, by volume, are up compared to the same period last year.
To date, $4.2 billion in pending and completed management buyouts have been announced this year, compared with $2.4 billion in the same period last year. Announced pending and completed additional stake purchases this year total $141 billion and are up only slightly from last year’s volume of $136 billion during the same period. But, given the current low total global M&A deal volume, this amount now represents a larger portion of the market—roughly 17% of all M&A activity.
One finding that’s perhaps a little surprising is that although the number of distressed deals is higher than last year, there hasn’t been a flood of them – at least not yet. The article also discusses the growth in pandemic MAE exclusions, and highlights the continuing rise of provisions permitting execution by electronic signature, which likely are receiving a boost from the fact that so many dealmakers are working remotely during the pandemic.
Last week, the Treasury Department proposed changes to CFIUS’s mandatory declaration filing rules. The intro to this Locke Lord memo summarizes the proposed changes:
On May 21, 2020, the Treasury Department published a Proposed Rule that would alter the Committee on Foreign Investment in the United States (“CFIUS”) regulations at 31 C.F.R. Part 800 in two important respects. First, the Proposed Rule would modify the mandatory declaration filing provision for “critical technology” transactions by using export control regimes to assess whether parties to a transaction must file with CFIUS, and by eliminating prior reliance on North American Industry Classification System (“NAICS”) codes. Second, the Proposed Rule would change language in 31 C.F.R. § 800.244 to clarify the definition of “substantial interest,” a definition which also plays a role in determining whether parties have to file with CFIUS. The comment period for the Proposed Rule expires on June 22.
Instead of the current requirement that the critical technology bear a connection to a particular NAICS code, the proposed rule would require a mandatory declaration filing for a covered transaction if the U.S. business would be required to obtain an authorization to export the technology to the foreign parties involved in the deal. In determining the need for export authorization, the proposed rules instruct parties to the parties to consult the four major export control regimes administered by the Departments of State, Commerce, and Energy, and the Nuclear Regulatory Commission.
The proposal also clarifies that the national or subnational governments of a single foreign state will be considered to have a “substantial interest” in an entity only if they hold 49% or more of the interest in the general partner, managing member, or equivalent of the entity. It also makes clear that the attribution rules contained in § 800.244(c) apply both to § 800.244(a), which looks to a “voting interest” held by a foreign government, and to § 800.244(b), which looks to an “interest” held by a foreign government.
This May-June Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer – and includes articles on:
– Material Adverse Effect in the Uncertain World of COVID-19
– Does Special Committee Approval Protect a Transaction Involving a Conflicted Board Majority?
– A Dealmaker’s Guide to Post-COVID-19 Purchase and Sale Agreements
– Rise of the Activist Investor: The Shift from Active to Passive
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
The term “golden share” is used to refer to an equity security that provides its holder with a number of consent rights, including the right to block a bankruptcy filing. Courts have differed on the enforceability of golden share provisions under Delaware law. A 2016 Bankruptcy Court decision held that the ability to prevent a bankruptcy filing was against public policy, while a 2018 5th Circuit case applying Delaware law upheld such a provision. This Proskauer memo discusses those decisions, as well as a recent Bankruptcy Court decision striking down a golden share provision. This excerpt reviews that decision:
Recently, the efficacy of the “golden share” was tested again in a bankruptcy filing by Pace Industries (In re: Pace Industries, LLC, Case No. 20-10927-MFW (Bankr. D. Del.)). In connection with its $37.15 million preferred equity investment, the preferred shareholder obtained various rights and protections, including an amendment and restatement of the company’s corporate charter to include a “golden share” provision.
In the wake of the COVID-19 pandemic, Pace Industries found itself in dire financial straits, unable to pay hundreds of millions of dollars of debt, closing many of its manufacturing facilities, and laying off the majority of its employees. However, the company successfully negotiated a restructuring and filed a Chapter 11 petition to implement the restructuring, which was supported by the company’s secured creditors and which proposed to pay unsecured creditors in full. The preferred shareholder did not consent to the petition and moved to dismiss the case.
In denying the motion to dismiss, Judge Walrath was keenly focused on the harsh reality facing Pace Industries. The court was persuaded by the fact that the COVID-19 outbreak had forced the company to shut down most of its operations and that the proposed debtor-in-possession financing was the company’s only source of liquidity in the midst of the global pandemic. Furthermore, Judge Walrath observed that the preferred shareholder had not offered any viable alternatives.
As a result, the court concluded that permitting the bankruptcy filing would likely benefit the greatest number of stakeholders, while dismissing the bankruptcy case would violate federal public policy by taking away a debtor’s constitutional right to bankruptcy relief. In declining to follow the Fifth Circuit’s interpretation of Delaware state law, Judge Walrath went so far as to conclude that a blocking right might create a fiduciary duty on the part of a minority shareholder.
If that last sentence about minority blocking rights potentially creating fiduciary duties sounds familiar, it’s probably because it echoes the Chancery Court’s recent decision in Skye Mineral Investors, LLC v. DXS Capital (U.S.) (Del. Ch.; 2/20), which reached a similar conclusion in a non-bankruptcy setting.
Yesterday, the SEC announced that it had adopted amendments overhauling the rules governing the financial information that public companies must provide for significant acquisitions & divestitures. Here’s the 267-page adopting release. Highlights of the rule changes include:
– Updating the significance tests in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
– Modifying and enhancing the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
– Requiring the acquired company financial statements to cover no more than the two most recent fiscal years;
– Permitting disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
– Permitting the use of, or reconciliation to, IFRS standards in certain circumstances;
– No longer requiring separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance;
The changes 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.
I suppose you’re wondering if the SEC split along partisan lines once again – well, of course they did! Here’s Commissioner Allison Herren Lee’s dissenting statement. We’ll be posting memos in our “Accounting” Practice Area.
Prairie Capital recently published a report on the Covid-19 pandemic’s impact on the M&A market. The publication covers many topics, but I thought what it had to say about how the crisis has impacted deal structure & risk sharing was particularly interesting. Here’s an excerpt:
In the midst of the pre-pandemic seller’s market, all cash M&A deals were the market norm. Occasionally, rolled equity structures were used if the seller wanted to ride along with the buyer for a “second bite of the apple,” but generally, cash was king. Earn-outs and seller notes were reserved for deals where a full valuation could not be supported by the current cash flow, but the buyer still wanted to entertain the seller’s high valuation expectations. In a majority of the transactions, most – if not all – of the deal valuation risk was borne by the buyer.
Those were the “good old days” in the M&A market. However, because of the pandemic, we are in a new M&A environment. The results of the economic shutdown have seriously affected companies’ short-run financial results. Many potential company sell-side candidates will have good historical operating results through 2019 and then a significant change in 2020, with expectations of a return to normal in 2021 and beyond. The EBITDA adjustments described earlier can be used to explain 2020 and will have to be fully documented and supported. Nevertheless, these adjustments may not be as useful to support the return to normal projections provided by the seller.
When EBITDA adjustments or projected financial results are not fully accepted by the buyer, an earn-out or special escrow can be used to bridge the gap and create risk sharing between the buyer and the seller. It is anticipated that many of the pandemic-related EBITDA adjustments and projected performance will be at least partially challenged by buyers, which will lead to potentially larger deal escrows and earn-out provisions.
The seller’s market in M&A during the past several years has also been fueled by an extremely accommodating lending environment. The white paper suggests that lenders are likely to become much more conservative. Among other things, that means sellers will be asked more frequently to take back paper as part of the transaction.
Overall, the message is that the uncertainties created by Covid-19 have created a buyer’s market, and if sellers want to get a deal done now, they’re going to need to be more flexible & willing to accept deal terms that wouldn’t have been on the table just a few months ago.
Tune in tomorrow for the webcast – “Middle Market M&A: The Latest Developments” – to hear to hear Citizens M&A Advisory’s Charles Aquino, Mintz Levin’s Marc Mantell and Duane Morris’s Richard Silfen discuss the state of the middle market and issues dealmakers are confronting in 2020, including bridging valuation gaps, Covid-19’s implications for deal structure and process, and the evolution of deal terms in the Covid-19 environment.
The FTC recently blogged some reminders & tips on HSR filing fees. Paying the HSR filing fee in a timely manner is important, because the HSR waiting period doesn’t start running until the fee is paid. The FTC’s Premerger Notification Office can bounce a filing if the fee doesn’t show up in its account by the end of a two-day grace period, although it usually hasn’t done that. The blog says that’s about to change:
The PNO generally has not bounced filings when fees were received outside the two-day grace period, unless the delay affected the timing of the weekly merger screening review process. Going forward, in order to ensure consistency and give the agencies the maximum time allowed under the HSR Act to analyze the competitive effects of each transaction, the PNO will be strictly enforcing the two-day grace period.
The blog points out that it is up to the party paying the fee to determine when to initiate the wire so that the fee is received within the two-day grace period or earlier, and that the grace period isn’t meant to give filers extra time to initiate a wire or cover processing delays. Filers are urged to coordinate the filing fee process well in advance, and the blog offers tips on avoiding delays with wire transfers.
Forum selection clauses are common in acquisition agreements, but to what extent may they bind a non-signatory? The Chancery Court recently addressed that question in Highway to Health v. Bohn, (Del. Ch.; 4/20), and this recent blog from Francis Pileggi reviews the Court’s decision. Here’s an excerpt:
The most noteworthy aspects of this pithy decision are: (i) a reminder that Delaware enforces forum selection clauses; and (ii) that a non-signatory can be bound by a forum selection clause if a three-part test is satisfied. See footnotes 46-47 and accompanying text. The directors of a Delaware company sought a declaratory judgment against non-residents of Delaware regarding a dispute about stock-appreciation-rights (SAR) that, by contract, required the board to fulfill fiduciary duties towards the SAR holders.
The three-part test requires one to demonstrate that: (i) the forum selection clause is valid; (ii) the non-signatories are third-party beneficiaries; and (iii) the claims arise from their standing relating to the agreement. Slip op. at 15. The third element of the test was not satisfied based on the facts of this case because the agreement containing the forum selection clause was not the same agreement that gave rise to the substantive claims brought by or against the non-signatories.
The blog also notes that the decision also analyzes Delaware’s long-arm jurisdiction statute, and explains why the “specific jurisdiction” requirements under the statute were not satisfied.
The Covid-19 pandemic has added several additional layers of complexity to the due diligence process. This Latham memo identifies some of the issues buyers should consider when undertaking legal due diligence for an acquisition in the era of Covid-19, and highlights for sellers some of the types of due diligence questions they should expect. Here’s an excerpt on diligence issues associated with government assistance programs:
Buyers should determine whether the target has applied for or obtained any financial aid or other assistance or relief under the array of federal, state, and local programs adopted in response to COVID-19, such as the CARES Act and similar non-US programs. If the target has done so, buyers should ensure that the target has complied with the requirements of the applicable program and implemented controls and procedures to maintain ongoing compliance.
As with health, safety, and other laws, orders, and guidelines enacted or issued in response to COVID-19, buyers should continue to monitor developments under these programs and understand the target’s obligations and other implications arising from any relief it may have obtained, as well as any opportunities for the target to obtain additional relief, either before or after the closing of the transaction. Buyers should also consult with their tax advisors in light of the complexity and evolving nature of certain tax law changes implemented in response to COVID-19 and their potential impact on the target.
The memo covers a wide range of issues directly and indirectly impacted by the pandemic. These include compliance with laws and regulations related to Covid-19, employee health and safety, pension plan liabilities, supply chain management, contract performance and force majeure issues, compliance with debt obligations, securities law compliance and regulatory communications.