I’ve blogged a lot about R&W Insurance, and with good reason – it’s become a central part of the deal process for private company M&A. But until now, I haven’t seen a resource that provides a solid answer to the most fundamental question about these policies: do the insurers pay the claims that are made under them?
Lowenstein Sandler surveyed nearly 150 representatives of buyers & sellers of R&W insurance in an effort to gain an answer to that question – and its recent report on that survey’s results says the answer is a qualified “yes”:
While R&W policies have proliferated, a key question remains unanswered: Do insurers actually pay the claims? The answer is “yes”–with some caveats. A common hurdle to clear is incurring a loss that exceeds the SIR. Our survey revealed that more than two-thirds of all respondents said that all the claims fall within the retention and therefore do not result in payment by insurers.
For claims that do exceed the retention, our survey confirmed that R&W policies provide value to buyers. Indeed, the data shows buyers are able to negotiate with insurers to secure at least partial payment for the vast majority of claims that exceed the SIR.
According to the report, 87% of respondents said at least a partial payment was negotiated for all R&W claims that exceeded the self-insured retention. The report also offers buyers practical guidance to consider when presenting a claim under an R&W policy. If you’ve ever dealt with an insurance company, you probably won’t be surprised to find that one of the key pieces of advice is don’t take “no” for an answer:
Our survey reveals that R&W insurers routinely issue knee-jerk claim denials, but those denials are the beginning, not the end, of the conversation. Ultimately, by challenging an early disclaimer of coverage, most buyers are able to turn the denial into a claim payment.
Over on “M&A Law Prof Blog,” Boston College’s Brian Quinn has linked to a collection of animated M&A training materials put together by Rick Climan & Keith Flaum. As a fan of shows like Rick & Morty, Archer & Bojack (and someone who’s even known to still tune in to The Flintstones from time-to-time), I’ve always thought these were terrific training tools, and Prof. Quinn agrees. Check them out – you may learn something.
By the way, I think the animated likenesses of Rick & Keith are well done, but in case we ever opt for cartoons here on DealLawyers.com, I won’t need anyone to draw one of me. If you’ve seen my Twitter avatar, you already know I’m a dead ringer for Sir Topham Hat from “Thomas the Tank Engine.”
The FTC & DOJ published their HSR Act Annual Report last month, and it discloses that while HSR second requests rose during 2019, the percentage of deals challenged declined significantly. Here’s an excerpt from this Perkins Coie memo on the report with some of the highlights:
In fiscal 2019, a total of 2,089 transactions were reported under the HSR Act, which is just a 1% decrease from the 2,111 transactions reported in fiscal 2018. In 2019, the FTC and the DOJ investigated about 12% of reported transactions in which a Second Request could be issued, a slight decrease from the number investigated in fiscal 2018.
Of the transactions investigated, about 26% resulted in the issuance of Second Requests, a 63.6% increase over the 16% reported in fiscal 2018. Where Second Requests were issued, there was a decrease in the number of transactions which resulted in an abandoned or restructured deal, a consent decree requiring the parties to divest assets, or litigation in federal district court, 62.3% compared to 87% in fiscal 2018.
The memo advises companies considering a deal that’s likely to raise agency concerns to address potential anti-competitive concerns with counsel during the preparation of their HSR filings & engage with regulators as soon as possible during the waiting period.
This Debevoise memo takes a look at the SPAC recently launched by Bill Ackman’s Pershing Square Capital, and notes that in addition to being the largest SPAC IPO of all time ($4 billion), the terms of the deal differ from those found in the typical SPAC template. Here’s an excerpt addressing some of those deviations:
– No Founder Shares. In a striking deviation from customary terms, Pershing Square is foregoing the typical 20% “promote”, consisting of founder shares provided to the sponsor for nominal consideration. Instead, Pershing Square will purchase warrants, at their fair market value, that are not transferrable or exercisable until three years after the closing of the initial business combination. Typically, sponsor warrants are exercisable 30 days after closing of the initial business combination. The Pershing Square Tontine warrants may represent only 5.95% of the post-business combination company and are only exercisable at a 20% premium.
This structure is less dilutive to stockholders than the typical founder share structure and, according to the prospectus, Pershing Square believes “this incentive structure is better aligned with our stockholders and potential merger partners.” However, it is important to note that Pershing Square holds 100 shares of Class B common stock (as opposed to the Class A shares offered in the IPO), with each share of Class B common stock carrying a number of votes such that, in the aggregate, the 100 shares of Class B common stock held by the sponsor have the voting power of 20% of the issued and outstanding common stock of Pershing Square Tontine immediately following the IPO.
– Non-detachable Warrants. In another significant departure from typical SPAC structure, an investor that elects to redeem its shares in response to the acquisition transaction entered into by the SPAC must also give up 2/3 of the warrants the investor received along with its SPAC shares. Traditionally, an investor kept all of its warrants if it redeemed its shares, leading to arbitrage opportunities for investors who could redeem their shares, recouping their original investment, and hold onto their warrants. This type of arbitrage opportunity still exists with Pershing Square Tontine, but its attractiveness is significantly diminished by the reduced number of warrants a redeeming stockholder will hold.
– “Tontine” Warrants. Pershing Square Tontine provides an additional incentive to stockholders to not redeem their shares in connection with the SPACS’s initial business combination. Not only do redeeming shareholders lose their warrants, but all warrants received by the company from redeeming shareholders will be put into a pool to be distributed pro rata to the shareholders who do not redeem their shares. The name “Tontine” is a reference to a 17th century investment plan into which investors contributed capital in exchange for their pro rata shares of an annuity payment, with each surviving investor’s share of the payment increasing as other investors died. Like the 17th century investment plan, this structure rewards those who remain.
The memo notes that there has generally been little variation in standard SPAC terms, but the Pershing Square deal appears to have engaged in a “major rewrite” of those terms that seems to have “turned the market on its head overnight.” These changes, which were intended to better align the interests of founders with those of investors, were favorably received by the market. Pershing Square’s SPAC closed up 6.5% on its first day of trading, and its shares traded as high as 9% above the IPO price that day.
On July 31, 2020, the Treasury Department published its Annual Report to Congress on all notices filed with CFIUS in 2019 and all reviews or investigations completed during the year. This Dechert memo reviews the report & says that it provides some important insights for foreign companies considering acquisitions or investments in the United States. This excerpt discusses the increasing importance of mitigation efforts to address concerns raised during the CFIUS review process:
The data in the 2019 Annual Report reflects a similar theme seen in 2018: more transactions requiring mitigation measures since the implementation of FIRRMA. The percentage of reviewed transactions that required mitigation measures in 2019 (12%) reflects the level of concern seen in 2018 (13%), both of which roughly doubled the number of transactions involving mitigation in 2017. Transaction parties should continue to evaluate in advance of CFIUS review what mitigation measures might be required and determine whether and to what extent such measures might impact the feasibility of proceeding with the transaction.
The Annual Report included examples of mitigation measures negotiated in 2019 – identical to those adopted in 2018 – that required the parties involved to take specific and verifiable actions. These actions included the following:
– Prohibiting or limiting the transfer or sharing of certain intellectual property, trade secrets, or know-how;
– Establishing guidelines and terms for handling existing or future USG contracts, USG customer information, and other sensitive information;
– Ensuring that only authorized persons have access to certain technology, that only authorized persons have access to USG, company or customer information; and that the foreign acquirer not have direct or remote access to systems that hold such information;
– Ensuring that only U.S. citizens handle certain products and services, and ensuring that certain activities and products are located only in the United States;
– Establishing a Corporate Security Committee and other mechanisms to ensure compliance with all required actions, including the appointment of a USG-approved security officer or member of the board of directors and requirements for security policies, annual reports, and independent audits;
– Exclusion of certain sensitive assets from the proposed transaction; and
– Divestiture of all or part of the U.S. business.
The Annual Report discloses that investors from China, Canada and Japan accounted for 40% of all notices filed in 2019. Japanese investors led all others, and were responsible for 20% of all transaction notices & foreign acquisitions of U.S. critical technologies. Not surprisingly given the deteriorating relationship between the U.S. & China, Chinese acquisitions decreased by over 50% compared to the prior two years. Chinese investment in critical technologies also dropped by over 50%.
The Delaware Chancery Court recently rejected a challenge to a retention plan implemented by Fox in connection with the spin-off of its broadcasting business to a new entity & related sale of its remaining businesses to Disney. In Brokerage Jamie Goldenberg Komen Rev Trust v. Breyer, (Del. Ch. 6/20), Chancellor Bouchard held that the plaintiff’s claims were derivative, not direct, and that as a result, the plaintiff lacked standing to pursue them post-merger.
In order to understand the Chancellor’s decision, you need to know a little about the way the deal was structured & what the plaintiff owned. In March 2019, 21st Century Fox (“Old Fox”) spun off its broadcasting business to a new entity, Fox Corporation (“New Fox”), & sold off its It sold its other businesses to Disney for $71.6 billion. As part of the transaction, Old Fox entered into retention comp arrangements with its executives, including Fox co-chair Rupert Murdoch & his sons. The Murdochs’ awards were allegedly worth $82.4 million, which is nice work if you can get it and further proof that, as Mel Brooks put it, “it’s good to be da king!”
The plaintiff was originally an owner of Old Fox common stock, and brought a derivative action on behalf of Old Fox challenging the retention plan prior to the closing. It subsequently became an owner of New Fox and Disney stock as a consequence of the Transaction, and amended its complaint to assert direct and derivative claims on behalf of New Fox. This excerpt from a recent K&L Gates blog on the case addresses the Chancellor’s analysis of whether the plaintiff’s claims were direct or derivative:
Upon Defendant’s motion to dismiss, the issue before the court was whether Plaintiff was permitted to bring the suit as a shareholder under Delaware law. First, the Court analyzed whether Plaintiff’s claims were direct or derivative. The Court explained that in order for a shareholder to bring a direct claim in the context of a merger transaction, the shareholder plaintiff must “allege facts showing that the side payment improperly diverted proceeds that would have [otherwise] ended up in the consideration paid to the target [shareholders].”
Here, Plaintiff contended its claims were direct because Defendants diverted Old Fox assets during the Transaction that reduced the overall consideration paid to Old Fox shareholders. The Court found that Plaintiff failed to adequately plead that Defendants influenced the sale process in such a way that “caused anything to be taken off the table that otherwise would have gone to [the Old Fox shareholders]”, and therefore Plaintiff’s claims are derivative. The Court reasoned that Plaintiff’s allegations did not support an inference that the proceeds for the compensation plan, but for Defendant’s improper interference, would have been paid out to shareholders.
The Chancellor’s conclusion that the claims were derivative put the plaintiff in a bind. That’s because, subject to a couple of exceptions, Delaware requires a derivative plaintiff to be both a continuous and contemporaneous owner of shares. The continuous ownership requirement was a problem for the Old Fox claims because the general rule in Delaware is that derivative claims pass to the buyer at the closing of a merger. As for the claims against New Fox, since the comp plan was put in place before the deal closed, the plaintiff wasn’t a contemporaneous owner of New Fox stock when the actions at issue were taken.
The plaintiff tried to work its way around these problems by arguing that the transaction was “merely a reorganization,” and that the contemporaneous ownership requirement didn’t apply. Chancellor Bouchard didn’t buy this argument. In his view, since New Fox contained only a portion of Old Fox’s business, it was a “vastly different” company and the deal wasn’t merely a reorganization. As a result, the Court dismissed the plaintiff’s claims due to lack of standing.
According to this recent “Institutional Investor” article, PE-backed firms have led the charge when it comes to Covid-19-related defaults on indebtedness – and things may just be getting started. Here’s an excerpt:
Private equity-backed companies are driving defaults in the Covid-19 recession, with companies owned by Blackstone Group, KKR & Co., and Apollo Global Management among those that have run into trouble, according to Moody’s Investors Service. More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody’s said in a report this week. For example, Blackstone-backed Gavilan Resources and Apollo’s CEC Entertainment filed for bankruptcy, while KKR’s Envision Healthcare Corp. defaulted through a distressed debt exchange.
The article says that U.S. defaults have more than tripled since the end of the first quarter, and buyout debt has made PE-owned borrowers particularly vulnerable. The outlook for these borrowers is decidedly grim – with Moody’s expecting the default rate to 12% percent next year.
I never thought that the FTC had anything in common with Santa Claus until I read this recent bit of guidance from the Bureau of Competition. It turns out that, like Ol’ Saint Nick, the FTC knows if you’ve been bad or good – and they take it into account when conducting a merger review:
The FTC’s Bureau of Competition sometimes reviews proposed mergers against the backdrop of civil and criminal antitrust investigations or litigations leveled in the same industry. And at times, such investigations and litigations are leveled against the merger parties themselves. Those ongoing matters may affect our analysis of a merger, as well as the vetting of divestiture packages and proposed divestiture buyers. Even if details of such investigations are not public, Bureau staff are likely to discover their existence during our own investigation of a merger.
To be clear: an ongoing government or private antitrust probe involving the companies or the industry does not necessarily signal that a merger is anticompetitive. Still, such probes may be relevant to the Bureau’s analysis of the merger. Concurrent investigations or litigations regarding party conduct may undermine parties’ arguments about the adequacy of the number of players in the market, the possibility of tacit coordination, or a party’s market position or lack of monopoly power. While the Bureau does not take as proven an allegation that one of the parties has violated the antitrust laws, we cannot ignore such allegations, either.
The FTC highlights the fact that companies and individuals facing criminal probes or civil antitrust claims alleging collusion or coordinated behavior are likely to face heightened scrutiny during the merger review process. It points out that this scrutiny is consistent with both Section 7.2 of the Horizontal Merger Guidelines & relevant case law. The same concerns also may come into play when the FTC vets buyers in connection with proposed divestitures.
This Ropes & Gray memo reviews the pandemic’s impact on private equity around the globe. For the North American market, topics include, among others, portfolio companies’ response to the pandemic, the terms of credit agreement amendments & waivers, emerging deal terms, financing arrangements & the terms of minority investments. This excerpt addresses how the Covid-19 pandemic may influence the evolution of deal terms relating to closing certainty:
As was the case in the aftermath of the 2007-2008 financial crisis, the 2020 market dislocation is likely to lead buyers, sellers and their counsel to closely examine certain typical deal terms related to closing certainty, and may result in the evolution of some of these provisions. For example:
– a further increase in the number of successful bids involving full equity backstop commitments from PE sponsors (a trend that had preceded 2020 and appears to have further accelerated in the pandemic);
– increased focus on the size of reverse termination fees in transactions where a full equity backstop is not available;
– variation in the size of the reverse termination fees, depending on whether payment of the fee is triggered by the buyer’s willful breach or solely as a result of a debt financing failure;
– closing any “daylight” in the interim “ordinary course of business” covenant; and
– changes to the “conditional” or “limited” specific performance construct (i.e., the deal construct that allows the seller to force the buyer to close, as opposed to paying a reverse termination fee when closing conditions are satisfied and the buyer’s debt financing is or would be available at a closing.
The memo also summarizes the pandemic’s impact on Asian and European markets, and on PE fundraising activities.
Francis Pileggi recently blogged about Vice Chancellor Laster’s decision in Woods v. Sahara Enterprises, (Del. Ch.; 7/20). He characterizes the opinion as “must reading,” noting that it provides “warmly welcomed clarity about important nuances of DGCL Section 220 with eminently quotable passages for practitioners who need to brief these issues.” This excerpt from the blog provides some of the key takeaways from the decision:
– A consequential aspect of this jewel of a decision is the instruction by the court that there is no basis in Delaware law to require a stockholder demanding corporate records under Section 220 to explain why the stockholder wants to value her interest in the company–in order to satisfy the recognized proper purpose of valuation. See Slip op. at 11; and 14-15.
– The court provided an extremely helpful list of many recognized “proper purposes” needed to be shown to satisfy Section 220. See Slip op. at 8-9.
– The court also recited several examples of what showing is recognized as sufficient to satisfy the “credible basis requirement” to investigate mismanagement pursuant to Section 220. See Slip op. 18-19.
An always useful recitation of the basic elements of the fiduciary duty of directors of a Delaware corporation and the subsidiary components of the duty of loyalty and care, are also featured. See Slip op. at 20.
– The court categorized the specific requests for documents in this case as follows: (i) formal board materials; (ii) informal board materials; and (iii) officer-level materials. Then the court expounds on the different focus applicable to each category.
While this particular blog provides an overview of the decision, Francis has another blog on the case that takes a much deeper dive.