For most people and businesses, 2020 has been a lousy year, but that’s definitely not the case for SPACs. This PitchBook article explains how the events of 2020 have combined to make SPACs the investment vehicle of the moment from the perspective of sponsors, institutional investors & private company sellers. Here’s an excerpt about why SPACs have become a more attractive alternatives for many private company sellers than they have been in the past:
For at least the past three years, the lack of IPOs and shrinking number of public companies in general has been a hot button issue in the financial markets. The cost and arduous process of becoming a publicly traded business represents a huge burden to private companies that could otherwise find massive amounts of capital in the private markets. In our eyes, the reduced time commitment is the main advantage of SPACs for companies pursuing a path to the public markets.
Since the SPAC transaction functions more like an acquisition, the private company has to negotiate with only one party rather than a host of investors on a road show, which will typically smoothen the deal pricing process. A company can transition from identification to completion in around four to six months as opposed to the year or more it takes for an IPO. This reverse merger path also allows for more creative deal structuring and will likely result in a price closer to its true market value. SPACs offer the option to raise more capital than might be available in a traditional IPO by selling a larger proportion of equity either from the SPAC itself or a concurrent PIPE.
PitchBook expects that the current SPAC frenzy will fade once more certainty returns to the financial markets, but also expects that SPACs will remain a potentially attractive alternative for capital-intensive businesses and those with a complicated or long-term story.
Here’s another datapoint on the rise of SPACs – the NYSE recently proposed a rule change that would waive initial listing fees & the first partial year annual fee for any non-NYSE listed company that is the survivor of a de-SPACing transaction involving an NYSE listed SPAC. The change is intended to put these transactions on an equal footing when it comes to fees with those in which the already listed SPAC is the surviving entity.
This September-October Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– The Road to Global Closing: Drafting Local Transfer Agreements in Cross-Border Carve-Outs
– Third Circuit Clarifies Requirements for Risk Factor Disclosures in Merger Proxies
– M&A Purchase Price Considerations in the Context of COVID-19
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.
Delaware’s Corwin doctrine has become the first line of defense against many M&A fiduciary duty claims. But the Chancery Court’s recent decision in In re: USG Corp. Stockholders Litigation, (Del. Ch.; 8/20), demonstrates that even if Corwin doesn’t apply, directors may still be able to prevail on a motion to dismiss, thanks to charter provisions that exculpate them from liability for breach of the duty of care. Here’s the intro to this Cleary Gottlieb blog on the decision:
In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing” did not apply. Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision.
This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement. It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage. In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.”
The blog notes that one of the key takeaways from the case is that in order to avoid dismissal of a claim on the basis of a Section 102(b)(7) provision, the plaintiff must plead facts showing that the directors were interested in the transaction, were not independent of an interested party, or acted in bad faith. When it comes to pleading bad faith, it isn’t enough to allege that the directors didn’t comply with their obligations under Revlon. Instead, the plaintiff “must plead facts showing that the directors intentionally or consciously breached their fiduciary duties.”
Yesterday’s NYT DealBook had a nice write-up on the battle brewing between LVMH and Tiffany & Co. over the French luxury giant’s efforts to back out of its deal to acquire one of America’s most iconic luxury brands.
The deal is the latest high-profile transaction to fall victim to the annus horribilis that is 2020. It has been in trouble for some time, with media reports suggesting that LVMH was squishy about moving forward at the deal price even before Tiffany posted disappointing Q1 numbers reflecting the pandemic’s impact. But the fight formally started on Wednesday, when LVMH issued a somewhat elliiptical statement backing out of the deal. That decision was supposedly prompted by a letter that LVMH received from the French government “directing” it to defer the closing of the deal until after the drop dead date set forth in Section 9.2(a) of the Merger Agreement. Here’s an excerpt from the English version of LVMH’s statement:
The Board learned of a letter from the French European and Foreign Affairs Minister which, in reaction to the threat of taxes on French products by the US, directed the Group to differ the acquisition of Tiffany until after January 6th, 2021. Furthermore, the Board noted Tiffany & Co.’s requested to extend the “Outside Date” in the Merger Agreement from November 24th to December 31st, 2020.
As a results of these elements, and knowledge of the first legal analysis led by the advisors and the LVMH teams, the Board decided to comply with the Merger Agreement signed in November 2019 which provides, in any event for a closing deadline no later than November 24th, 2020 and officially records that, as it stands, the Group LVMH will therefore not be able to complete the acquisition of Tiffany & Co.
Obviously, this loses something in the translation, but you get the gist of it – and so did Tiffany, which responded by filing this 114-page complaint in Delaware Chancery Court. Tiffany is seeking specific performance & a declaratory judgment that, among other things, LMVH breached the Merger Agreement by allegedly dragging its feet in obtaining necessary antitrust approvals, that Tiffany has not experienced an MAE & that it validly extended the Merger Agreement’s drop dead date.
Tiffany also wants the Court to hold that the French government’s letter to LVMH isn’t an “order” entitling LVMH to terminate the Merger Agreement. Here’s an excerpt from the complaint:
Section 8.1(c) of the Merger Agreement sets forth the limited circumstances in which action by a governmental entity can excuse a party’s obligation to complete the transaction. That section provides, in relevant part, that a party need not close if a governmental entity has issued an “Order . . . that is in effect and enjoins, prevents or otherwise prohibits, materially restrains or materially impairs or makes unlawful consummation of the transactions contemplated by this Agreement.”
Tiffany also cites Section 9.2 of the Merger Agreement, which it contends prohibits a party from terminating the agreement unless a particular legal restraint is “in effect and shall have permanently restrained, enjoined or otherwise prohibited the consummation of the Merger and such Legal Restraint shall have become final and non-appealable.” It contends that the French government’s letter doesn’t come close to qualifying as the kind of legal restraint that would prevent LVMH from completing the transaction.
LVMH issued a statement to the effect that Tiffany’s claims are “unfounded” and says that it’s also going file a lawsuit against Tiffany. As always is the case in situations like this, the question is – does LVMH really want out, or is it just looking to renegotiate the price? Tiffany sure seems to think it’s the latter, and said so in its public statement announcing the lawsuit.
I have no idea how this will play out, but I hope the deal comes together in the end. What can I say? I’m a sucker for happy endings.
Even before the disruptions caused by the Covid-19 pandemic, private equity sponsors were increasingly on the receiving end of claims seeking to hold them responsible for liabilities of their portfolio companies. This Proskauer blog identifies the following 10 steps that sponsors can take to help mitigate their liability risk:
– Create a list of companies with sponsor board members.
– Sensitize directors to fiduciary duties to company and shareholders as a whole and fund, and potential conflicts between them.
– Scrutinize corporate transactions, particularly in distressed situations, and document decision making.
– Consider use of special committees to resolve conflicts; retain fund counsel where fund receives a benefit that not all shareholders receive.
– Consider the risk of portfolio company employee claims, including claims arising out of COVID-19.
– Sensitize directors to insolvency issues and be mindful of duties to creditors of an insolvent corporation.
– Observe best practices: participate in deliberations, adhere to formalities, retain good minutes, exercise care in communications.
– Train directors on attorney-client privilege, including distinction between fund counsel and company counsel.
– Expect scrutiny of valuation practices and financial records.
– Assess relevant contracts and rights (investment agreement, shareholder agreement, insurance contracts, and indemnification rights and obligations).
This McDermott Will memo provides a “snapshot” of US and EU antirust regulatory activity during the second quarter of 2020. Here’s the intro:
In the United States, despite requesting additional time to review pending mergers, the US antitrust agencies have continued their work through the COVID-19 pandemic. The Department of Justice (DOJ) and Federal Trade Commission (FTC) reached settlements with a number of merging parties during Q2 2020, and the FTC is proceeding to trial in several merger cases.
Both the FTC and the DOJ are conducting investigational hearings and depositions via remote videoconferencing technology such as Zoom. The FTC also announced it prevented 12 deals from closing in 2020 despite the COVID-19 pandemic. Five of the transactions were blocked and another seven were abandoned due to antitrust concerns, putting the FTC on pace for one of its busiest years for merger enforcement in the past 20 years.
In Europe, in light of the COVID-19 outbreak, the European Commission (EC) warned that merger control filings would likely not be processed as swiftly as usual. The EC encouraged parties to postpone merger notifications because the EC envisaged difficulties, within the statutory deadlines imposed by the EU Merger Regulation, to elicit relevant information from third parties, such as customers, competitors and suppliers. In addition, the EC foresaw limitations in accessing information on a remote basis. This period thus saw a drop in merger notifications to the EC; however, notifications increased in June and July.
In addition to highlighting regulatory initiatives, the memo addresses the timing of resolution of selected merger review enforcement actions in the U.S. and Europe, the status of significant pending litigation and the terms of selected consent orders, and a summary of significant challenged or abandoned transactions.
When I was a young lawyer, a senior labor partner in my my firm kept what he called a “Pontius Pilate Kit” on prominent display in his office. It consisted of a bottle of water, a towel & a basin, which he used to symbolically “wash his hands” of some of the more unsavory tactics used by the contending parties in labor disputes.
It’s probably unfair, but I can’t help thinking about that guy’s Pontius Pilate Kit whenever the idea of addressing director conflicts through recusal has come up. There are all sorts of good reasons for conflicted directors to recuse themselves & abstain from voting on a deal in which the director has a direct or indirect interest – but the Delaware Chancery Court’s recent decision inIn re Coty, Inc. Stockholder Litigation, (Del. Ch.; 8/20), makes it clear that the abstention defense has its limits.
The case involved allegations that the controller and the director defendants breached their fiduciary duties in connection with tender offer in which the controller increased its holdings from 40% to 60% allegedly at an unfair price and through an unfair process. Four of the nine director defendants had ties to the controlling stockholder & recused themselves from the board vote to authorize the transaction.
Chancellor Bouchard reviewed Delaware precedent on the abstention defense, and noted that it required a director to completely avoid any participation in the transaction:
Over twenty-five years ago, then Vice Chancellor Jacobs explained in In re Tri-Star Pictures, Inc. that “Delaware law clearly prescribes that a director who plays no role in the process of deciding whether to approve a challenged transaction cannot be held liable on a claim that the board’s decision to approve that transaction was wrongful.” As this court more recently stated the principle, a “director can avoid liability for an interested transaction by totally abstaining from any participation in the transaction.”
The Chancellor noted that determining whether a director totally abstained can be a difficult determination to make at the motion to dismiss stage, since there are often factual nuances that need to be developed through discovery. In this case, he pointed out the fact that the disclosure document provided to shareholders indicated that the conflicted directors attended the key board meeting at which the transaction was approved, and expressed their support for it before they recused themselves from the vote and left the meeting.
Yesterday, the DOJ released its 38-page Merger Remedies Manual, which updates its 2004 Policy Guide and provides a framework for the Antitrust Division to structure and implement appropriate remedies in merger cases. The DOJ’s press release announcing the new manual notes that it explains the Antitrust Division’s approach to consummated transactions and upfront buyers, outlines certain “red flags” that increase the risk that a remedy will not preserve competition effectively, and reflects important principles implemented in recent Antitrust Division consent decrees.
This excerpt from DOJ’s announcement highlights key elements of its approach to merger remedies that are embodied in the new manual:
Commitment to Effective Structural Relief. The Merger Remedies Manual emphasizes that structural remedies are strongly preferred in horizontal and vertical merger cases because they are clean and certain, effective, and avoid ongoing government regulation of the market. The manual also describes the limited circumstances in which conduct remedies may be appropriate: (1) to facilitate structural relief, or (2) if there are significant efficiencies that would be lost through a structural divestiture, if the conduct remedy would completely cure the competitive harm, and if it can be enforced effectively.
Renewed Focus on Enforcing Consent Decree Obligations. The principles outlined in the Merger Remedies Manual describe how the Antitrust Division will ensure that consent decrees are fully implemented. The manual describes several standard consent decree provisions designed to improve the effectiveness of consent decrees and the Antitrust Division’s ability to enforce them. In addition, the Manual highlights the role of the newly created Office of Decree Enforcement and Compliance, which oversees the Antitrust Division’s decree compliance efforts.
A claim based on the implied covenant of good faith and fair dealing has always reminded me of the “Hail Mary” play in football – it’s usually a desperate last gasp, but every now and again, it works. However, that didn’t happen in Roundpoint Mortgage Servicing Corp. v. Freedom Mortgage Corp., (Del. Ch.; 7/20, a recent Delaware Chancery Court Case in which a buyer’s implied covenant Hail Mary fell incomplete.
This case arose out of a merger agreement that called for the buyer to pay consideration equal to the seller’s book value plus a premium (minus a fixed amount). The merger agreement permitted the seller’s controlling stockholder to extend credit to the seller between signing and closing. However, the merger agreement also made it a condition to the buyer’s obligation to close that the seller “shall have repaid” any such credit “outstanding” to its controlling stockholder.
What actually happened was that the controlling stockholder & the seller engaged in some strategic behavior. The controller lent the seller $150 million, but the seller didn’t repay the vast majority of it – instead, the controller forgave all but $1 million of the loans. The seller paid off that little slice, but the controller’s forgiveness of the rest of the loan had the effect of juicing the seller’s book value and significantly increasing the purchase price that the buyer had to pay.
The buyer balked, and the seller sued for a declaratory judgment & specific performance. The buyer argued that the closing condition in the merger agreement excluded retiring debt by forgiveness. What’s more, the buyer argued that even if the language of the closing condition doesn’t exclude it, the implied covenant serves to provide that term. Vice Chancellor Glasscock rejected both of those arguments. This Morris James blog summarizes his reasoning on the inapplicability of the implied covenant:
The Court reached the Buyer’s implied covenant issue after first agreeing with Seller that the Merger Agreement did not expressly prohibit the controlling stockholder from forgiving the indebtedness. In addressing the implied covenant claim, the Court recognized that it was in the Buyer’s financial interest to prohibit forgiveness.
The Court declined to imply a “no forgiveness” term, however, because Buyer had failed to meet its burden to prove that the parties would have agreed to prohibit forgiveness had they thought to negotiate about it. Considering the parties’ circumstances, the structure of the agreement and the negotiating history, the Court found that the Seller for non-bad-faith reasons may have preferred flexibility in repaying the credit facility.
The Court concluded that, had the issue been discussed, the parties may have reached a compromise on something other than a “no forgiveness” provision. While the Court had no doubt that Buyer would have agreed to the no forgiveness term, the Buyer failed to carry its burden to prove that Seller also would have agreed to that term.
The good news for the buyer is that its implied covenant Hail Mary throw came at the end of the first half, not at the end of the game. The Vice Chancellor granted the seller’s declaratory judgment motion on the limited issues before the Court, but ordered the case to proceed to trial. In that regard, while VC Glasscock ruled that the closing condition at issue in the declaratory judgment action does not prohibit forgiveness of loan, he specifically noted that his ruling didn’t mean that such a restriction could not be found elsewhere in the merger agreement.
Fenwick & West recently published its Silicon Valley Venture Capital Survey for the second quarter of 2020. The survey analyzed the terms of 203 Silicon Valley venture financings closed during the second quarter, and is the first to analyze a full quarter of results since the COVID-19 pandemic hit. Here are some of the highlights:
– Up rounds exceeded down rounds 71% to 15%, with 14% flat in Q2, a decline from Q1 when up rounds exceeded down rounds 79% to 14%, with 7% flat. The percentage of up rounds was the lowest, and the percentage of flat rounds was the highest, since Q4 2016. Meanwhile, the percentage of down rounds was the highest since Q4 2017.
– The median price increase for financings was 26% in Q2, a decline from 54% in the prior quarter and a record 76% in Q4 2019.
– Valuation results across all series of financings declined in Q2 from the prior quarter. Series B financing rounds recorded the strongest valuation results in the quarter and also weakened from the prior quarter by the least amount, while the valuation results for Series C financing rounds experienced the greatest declines.
The internet/digital media industry provided the strongest valuation results during the second quarter, with the software industry following close behind. But valuation results across all industries weakened in Q2 compared with the prior quarter, with the hardware industry experiencing the greatest declines in valuation results. The firm’s data showed that the average price increase declined considerably to 51% in Q2, compared with 93% in the prior quarter and a record 142% in Q4 2019.