It looks like LVMH & Tiffany decided to kiss and make up. Earlier this week, the parties announced that they had agreed to amend their existing merger agreement & move forward with a revised deal. Media reports on the new deal focused on the reduction in the purchase price from $135 per share to $131.50 per share, which translated into a savings of approximately $430 million for LVMH and an overall reduction in the purchase price of about 2.5%.
But a review of the Form 8-K filing that Tiffany made yesterday reveals some other interesting aspects of the revised transaction. It seems clear from the Amended & Restated Merger Agreement that, in exchange for its concessions on price, Tiffany was able to extract some pretty dramatic changes to the terms of the deal that appear to significantly enhance closing certainty. These include:
– Removing the language contained in Section 8.2(d) of the original agreement conditioning LVMH’s right to close on the absence of a MAE at Tiffany.
– Narrowing the scope of Section 8.2(a) of the original agreement that allowed LVMH to avoid closing if Tiffany breached a rep or warranty. In general, the original deal would have allowed LVMH not to close if a breach of any rep or warranty resulted in a MAE, while the revised condition covers only a handful of core representations & eliminates any reference to a MAE.
– Eliminating one of the conditions that was at the center of the dispute between the parties – LVMH’s right not to close in the event of a “Legal Restraint” permanently enjoining consummation of the deal (See Section 8.1(c) of the original agreement).
– Substantially narrowing LVMH’s right to terminate the deal. Under Article 9 of the revised agreement, LVMH may only terminate the deal prior to the June 30, 2021 drop dead date if Tiffany shareholders vote it down, if the Tiffany board changes its recommendation or if Tiffany breaches the no-shop covenant and the other provisions of Section 7.3 of the revised agreement.
Another interesting aspect of the deal is contained in Section 10.6(b) of the revised agreement, which provides as follows:
In the event that any Proceeding is brought by the Company to enforce the terms of this Agreement or for money damages, the “Per Share Merger Consideration” shall be deemed, for all purposes in that Proceeding, including any award of specific performance or damages, to be $135.00 in cash, without interest and less any required withholding Taxes.
In essence, that means that if LVMH tries to wiggle out of the deal again & Tiffany sues, it will face claims valued at the original purchase price, not at the discounted price contained in the revised agreement. Since the language also addresses specific performance claims, future shenanigans by LVMH could result in an obligation to proceed with the deal at the original $135 per share price.
Some commentators have observed that $430 million seems like a steep price to pay for peace in a dispute in which Tiffany’s legal position appeared to be strong. But with the developed world hunkering down to confront a resurgent pandemic, potential post-election chaos in the U.S., & Tiffany’s continuing lackluster performance, it’s hard for me to second-guess the board’s decision to accept a 2.5% discount in exchange for a much more certain deal for its shareholders.
Last year, I blogged about the Delaware Superior Court’s decision in Solera Holdings v. XL Specialty Ins., (Del. Super.; 7/19), which held that a D&O policy’s duty to defend “Securities Claims” extended to appraisal proceedings. Last week, the Delaware Supreme Court overruled that decision.
Central to the Supreme Court’s ruling was its conclusion that an appraisal action does not involve a “violation” of any federal, state, or local statute, regulation, or rule pertaining to securities, and therefore isn’t a “Securities Claim” as defined in the policy Here’s an excerpt from Kevin LaCroix’s recent blog on the case:
In a unanimous October 23, 2020 opinion written by Justice Karen L. Valihura, the Delaware Supreme Court reversed the lower court, ruling that the appraisal action is not a claim for a “violation” and therefore that the appraisal action does not fall within the definition of a “Securities Claim.” The Supreme Court ruled further that because the appraisal action is not a securities claim and therefore is not covered under the policy, the remaining issues (that is, the questions relating to pre-judgment interest and pre-notice defense expenses) are moot.
In concluding that an appraisal action is not a claim for a “violation,” the Court said that this conclusion is “compelled by the plain meaning of the word ‘violation,’ which involves some element of wrongdoing, even if done with an innocent state of mind.” It is also “compelled,” the Court said, “by section 262’s historical background, its text, and by a long, unbroken line of cases that hold that an appraisal under section 262 is a remedy that does not involve a determination of wrongdoing.” Appraisal, the Court said, that is “limited to the determination of the fair value of the dissenters’ shares as of the effective date of the merger or consolidation.”
Appraisal proceedings, the Court said, are “neutral in nature.” While courts may consider evidence relating to the price negotiation process leading to the signing of a transaction, “this evidence bears on the weight, if any to be accorded to the deal price.” Accordingly, appraisal decisions analyzing the merger process do not support the contention that appraisal actions adjudicate wrongdoing.”
Kevin points out that this case is a big win for insurance companies, but perhaps not quite as big as it would’ve been a few years ago, when appraisal cases were exploding in Delaware.
Bloomberg Law recently surveyed deal lawyers to find out who takes the lead on drafting deal documents in M&A transactions. The results aren’t necessarily surprising, but there are some interesting observations that suggest that a significant percentage of in-house lawyers aren’t completely satisfied with how drafting responsibilities are divided. I’ll get to that in a minute, but first, this excerpt breaks down which parties typically hold the pen:
For principal transaction documents (e.g., merger agreements, stock purchase agreements, asset purchase agreements, etc.), 62% of respondents reported that law firm buyers’ counsel typically held the pen; 30% reported that law-firm sellers’ counsel typically held the pen; and only 5% reported that buyers’ in-house counsel typically held the pen. These results are consistent with the notion that the buyer wants to control the process in a negotiated sale.
Similarly, for ancillary agreements (e.g., license agreements, intellectual property transfer agreements, labor and employment agreements, and so forth), the breakdown was 67% for law firm buyers’ counsel; 21% for law firms’ sellers’ counsel; and 7% buyers’ in-house counsel. Due diligence request lists and checklists received similar responses, with 65% of respondents reporting that buyer-side law firm counsel held the pen. And the document category with the most respondents reporting that buyer-side law firm counsel held the pen was closing checklists: More than three-quarters (77%) of respondents gave this response, likely reflecting buyers’ need to ensure that the final steps of the purchase run smoothly.
Buy-side in-house counsel were tasked with drafting agreements relating to post-closing integration just under one-third (29%) of the time; with drafting term sheets 23% of the time, and with due diligence request lists and checklists 16% of the time. In addition, 13% of respondents reported that integration was not typically part of the deals they worked on.
Like I said, you’re probably not too surprised about how this survey came out. The survey seems to suggest that most in-house counsel are generally happy with this allocation of responsibilities. After all, one of the big reasons companies hire an outside law firm for M&A is for its experience in drafting and negotiating acquisition agreements.
But one thing that came as a bit of a surprise to me is that more than 1/3rd of in-house lawyers said that they would prefer to do more or all of principal transaction document drafting. The Bloomberg Law article suggests that in some cases, in-house departments simply may have too much on their plate to handle the drafting they’d like to do. But it also suggests many in-house departments have plenty of internal drafting capabilities, but that handing law firms a lead role in drafting may be the price they pay for getting them to provide the external deal support that they need.
If that’s so, then a willingness to accommodate that desire present a real client development opportunity for a law firm with M&A capabilities and enough humility to accept a less front and center role in the drafting process.
In Jacobs v. Meghji, (Del. Ch.; 10/20), the Delaware Chancery Court dismissed claims against an investor that participated side-by-side with a controlling stockholder in a financing for Infrastructure & Energy Alternatives (IEA). The plaintiff made fiduciary duty claims against IEA’s directors and its controlling stockholder, Oaktree Power Opportunities Fund II, but it also claimed that the other investor aided & abetted the fiduciaries’ breaches and was unjustly enriched.
The investor, Ares Management, was one of several competing bidders that submitted financing proposals to IEA. The plaintiff contended that Ares aided & abetted the board and controller’s breaches of fiduciary duty because it knew that Oaktree’s influence had unfairly skewed the deal’s terms in its favor, and went forward with its investment because it benefitted from those terms.
Vice Chancellor Zurn didn’t buy that argument, holding that as a bidder, Ares was entitled to look out for its own interests and didn’t have an obligation to promote the interests of the target. This Morris James blog explains the Vice Chancellor’s reasoning:
Critical to the court’s evaluation was that Ares was a bidder. The Court recognized Delaware precedent that a bidder who otherwise owes no fiduciary duty is under no obligation to maximize value for the target. The Court re-affirmed that “To allow a plaintiff to state an aiding and abetting claim against a bidder simply by making a cursory allegation that the bidder got too good a deal is fundamentally inconsistent with the market principles with which our corporate law is designed to operate in tandem.” Applying this principle the Court held that plaintiff had failed to allege that Ares knew about the Company’s process, the role or creation of a special committee the Company formed to negotiate the transaction, or any flaws in the special committee’s negotiations.
Similarly, the Court held that plaintiff failed to allege knowledge of Oaktree’s breaches or “to demonstrate that knowledge of Oaktree’s breach could transitively or constructively support knowledge of the [director defendants’] breaches.” The Court held that the mere participation with a known controller in a beneficial transaction does not, without more, demonstrate aiding and abetting liability and that plaintiff had failed to allege that “Ares had any knowledge that Oaktree wrongfully orchestrated and infected [the Company’s] transaction process such that Ares would know the [director defendants] were breaching their duties.” The Court concluded that “Consistent with longstanding principles of law and capitalism, Ares exercised its right to secure for itself a “sweet” deal.”
The Vice Chancellor also held that Ares’ arms-length negotiations with the company & the special committee and plaintiff’s failure to allege its knowing complicity in any breach of fiduciary duty required the unjust enrichment claim against it to be dismissed as well.
We’re still waiting on U.S. courts to address the issues surrounding MAE clauses & the pandemic, but at least one English court has weighed-in on them. This Goodwin memo discusses the UK Commercial Court’s decision in Travelport Ltd & Ors. v. Wex, (EWHC 10/20), in which the Court was called upon to interpret a contractual MAE clause that came into play when U.S.- based Wex attempted to terminate its $1.7 billion agreement to acquire eNett & Optal, two majority-owned subs of Travelport.
Section 1.1 of the Share Purchase Agreement defines the term “Material Adverse Effect.” Generally, the term is defined to include “any event, change, development, state of facts or effect that, individually or in the aggregate” that has had and continues to have an MAE on the business of eNett or Optal. The agreement included a specific carve-out for conditions resulting from pandemics, and for “changes (or proposed changes) in Tax, regulatory or political conditions (including as a result of the negotiations or outcome with respect to Brexit) or Law.” However, the pandemic carve didn’t apply to conditions that had a “disproportionate effect” on eNett or Optal as compared to other companies in their industries. There was no similar language applicable to the change in law carve-out.
After first addressing which “industry” should serve as a reference point for the exception to the pandemic carve-out, the Court addressed the application of the MAE clause. This excerpt from the memo summarizes the Court’s analysis:
The court also considered how the MAE clause was to be interpreted in circumstances where one or more of the carve outs to the definition were triggered. The sellers argued that to the extent that the wide-ranging travel and quarantine restrictions introduced by governments and authorities fall within the meaning of the legal and political change carve out, they do not qualify for the “disproportionate effect” carve out exception and may not be taken into account when determining an MAE.
WEX argued that if the disproportionate effect exception applied, such that the effects of a pandemic could be taken into account for the purpose of determining whether there had been an MAE, then it did not matter if another carve out from the definition was also triggered. In short, as the court put it, WEX sought to “cherry-pick among various overlapping matters in connection with which an event may be said to have arisen”.
Mrs Justice Cockerill held that: “The fact that changes in Law may be an obvious consequence of a pandemic, is not to the point […] the parties chose not to include changes in regulatory or political conditions or Law within the Carve-Out Exception, even though it was obvious that such changes might result from [a pandemic]”. The sellers’ argument that it does not matter whether the same effects are caused by other carve outs (i.e., the pandemic carve out) made “better commercial sense” and “there is no basis in the wording of the clause to conclude that the parties objectively intended that if two Carve-Outs were engaged they would have to work out which should prevail to the exclusion of the others.”
The memo points out that one of the interesting things about the Court’s opinion is the extent to which it relied on Delaware precedent. Apparently, there’s not much English authority on MAE clauses outside of banking transactions, so the Court looked to Delaware, which it considered a “leading forum for the consideration of these clauses, a forum which is both sophisticated and a common law jurisdiction.”
One thing that’s been conspicuously absent during 2020’s SPAC craze has been a discussion of some of the liability risks that go along with a “de-SPAC” merger transaction. This recent Cleary Gottlieb memo fills the void. The memo addresses the risks for SPAC sponsors in connection with a de-SPAC, reviews recent litigation against SPAC sponsors, and offers some advice on actions sponsors can take to mitigate their risks. This excerpt lays out the memo’s key takeaways:
– In the “de-SPAC” transaction, when a SPAC acquires its target, the SPAC and its sponsors are potentially liable under Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 for misleading statements included in a proxy statement or in other public statements. The SPAC and its sponsors may also be liable under Section 11 of the Securities Act of 1933 if that de-SPAC transaction includes a registered offering.
– Investors have sought to hold SPACs and their sponsors liable for a variety of alleged misstatements, including about the financial outlook of the target companies and the level of due diligence performed by the SPAC.
– The best ways for a SPAC sponsor to mitigate these risks are to perform sufficient due diligence on the target and to be cautious with language in the proxy statement.
I really like this Latham & Watkins “Guide to Acquired Business Financial Statements.” It provides a concise overview of the SEC’s acquired company financial statement requirements. The guide walks through the amended rules, and describes the various scenarios under which a buyer would be required to include financial statements of an acquired business in a Securities Act registration statement. The guide also addresses the timing of those financial statements & the number of years they’ll have to cover. This excerpt summarizes the general acquired company financial statement requirements:
Your prospectus must include (or incorporate by reference) financial statements for a significant acquisition of a business that has closed 75 days or more before the offering. Significant means above 20% on any of the three tests described below. The 75-day grace period does not apply for recently closed acquisitions above the 50% significance level, so financial statements will generally be required. For probable (not yet closed) acquisitions below the 50% significance level, financial statements will not be needed; by contrast, above 50% they will generally be needed. In every case where target financial statements are required, you will also need pro forma financial information.
The guide also reviews the applicable pro forma requirements for acquisitions & provides guidance on issues that apply to selected types of issuers and industries.
If you’re looking to get your arms around the CFIUS national security review regime following the full implementation of FIRRMA, check out this Wilson Sonsini memo. Here’s the intro:
On October 15, 2020, the final rule implementing the baseline requirements of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) took effect. This final rule altered the mandatory filing rules of the Committee on Foreign Investment in the United States (CFIUS or the Committee). The most important change in the new rule replaces an old piece of the mandatory filing tests—i.e., are “critical technologies” used in or designed for use in “sensitive industries”—with a new test that asks instead whether a U.S. regulatory authorization (e.g., a license) would be required for the export or transfer of such technologies to the investing entity or certain affiliated parties. With this rule, a cycle of more than two years of CFIUS rulemaking came to a close.
While the Committee has indicated that its rules are likely to continue to evolve in the future, the end of the initial round of FIRRMA rulemaking marks a moment for investors, companies, and decisionmakers to take stock of the new CFIUS. Earlier incremental variants of the CFIUS rules will continue to apply to transactions finalized before October 15, 2020—and, as discussed below, the CFIUS enforcement team is actively looking at many such transactions—but today’s rules will govern transactions going forward. Accordingly, companies and investors should understand when filings are required, when they are elective, and what the risks are of forgoing a filing under the completed first-generation FIRRMA rules.
The memo addresses basic issues such as the scope of CFIUS’s jurisdiction, mandatory and voluntary filing requirements and the potential downsides of CFIUS review. It also gets into the details of mandatory and voluntary filings, and provides some guidance to companies deciding whether or not to make a voluntary filing.
According to Deloitte’s 2020 M&A Trends Survey, 61% of US dealmakers expect M&A activity to return to pre–COVID-19 levels within the next 12 months. The survey polled 1,000 U.S. corporate executives and PE fund representatives in late August to assess their current and future M&A plans. Here are some of the other key takeaways:
– Given current economic and political uncertainty, 42% of survey participants indicate increased interest in alternatives to traditional M&A
– 33% of dealmakers surveyed are responding to structural sector disruption by accelerating long-term transformation of their business models as part of their M&A strategy in response to COVID-19
– Cybersecurity threats are top of mind for more than half (51%) of respondents as companies manage deals virtually
– The biggest challenges to M&A success are now uncertain market conditions, translating business strategic needs into an M&A strategy, and valuation of assets
– Interest in international dealmaking has declined; focus has shifted to domestic M&A opportunities
One of the survey’s more interesting findings is how dealmakers have reacted to the uncertainties surrounding the U.S. election. Approximately 25% of respondents said that uncertainty surrounding the election has slowed deal activity, while 23% said it has accelerated deal activity.