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Monthly Archives: November 2020

November 11, 2020

Due Diligence: Best Practices for FCPA & Anti-Bribery Issues

This Cahill memo addresses best practices for addressing FCPA and related anti-bribery issues during the due diligence phase of a potential acquisition and during the post-closing integration process. Here’s the intro:

When considering acquisitions or significant investments, acquirers should conduct a thorough review of the target’s corruption risk and its compliance (or non-compliance) with the Foreign Corrupt Practices Act of 1977 (FCPA) and other applicable anti-bribery and corruption (ABC) laws. ABC due diligence is important not only to identify evidence of actual corrupt activity, but also to aid the assessment of overall risk when evaluating a transaction.

Pre-acquisition ABC due diligence can help inform post acquisition compliance integration at the target company and reduce post-closing exposure of the acquirer. A thorough review in advance of the transaction is particularly warranted for acquisitions in high-risk emerging markets. In the current M&A environment, acquirers should consider increased ABC risks that may arise from the COVID-19 pandemic. Modifications to the target’s anti-corruption program due to operational hardships and efforts to accelerate government approvals at a time when many governmental functions are significantly delayed should be particularly evaluated.

The memo provides an in-depth review of the various actions that should be taken as part of the due diligence process, and also provides guidance on developing and implementing an appropriate post-closing compliance program.

John Jenkins

November 10, 2020

Post-Closing Adjustment: Seller’s “Unclean Hands” Don’t Excuse Buyer’s Delay

Most of the time, the Delaware Chancery Court’s opinions that are blog-worthy are quite lengthy.  I run a volume business here, so when I find a short one that fits the bill, you can bet it moves to the top of the pile.  That’s the case with Vice Chancellor Zurn’s recent 12-page order granting plaintiff’s motion for judgment on the pleadings in Hallisey v. Artic Intermediate LLC, (Del. Ch.; 10/20).

The case arose of out the buyer’s failure to delivery a “Closing Date Report” detailing working capital & other post-closing adjustments that it sought within the time period specified in the purchase agreement. The plaintiff filed a declaratory judgment action alleging that the buyer’s failure to file the report in a timely fashion waived its rights to seek a post-closing adjustment under the terms of the purchase agreement.

In response, the buyer alleged that “[t]here were valid and justifiable reasons, caused by one or more Sellers, for any delay in Buyer’s submission of a Closing Date Report.”  In particular, the buyer alleged that the company’s former CFO, who was also a seller,  had “actively manipulated and misrepresented” the target’s financial information before and after the closing.

The buyer claimed that these misdeeds made it impossible for it to provide the Closing Date Report on a timely basis, and that the former CFO and the plaintiff, as sellers’ rep, “engaged in actions so egregious that they offend the very sense of equity” to which the plaintiff appealed, and that the plaintiff should be equitably estopped from the relief that he sought. The Chancery Court didn’t buy that argument:

Even assuming that [the former CFO’s] egregious actions could soil Hallisey’s hands, the doctrine of unclean hands is inapplicable because Hallisey appeals not to equity, but to the law of contract. The parties bargained to allow Buyer six months to submit a Closing Date Report. The parties also bargained to allow Buyer certain indemnity rights if all was not as was represented to be. Those contractual provisions govern the acquisition, purchase price, and the parties’ rights of recovery: they will be respected by this Court, and will not yield to unclean hands.

Vice Chancellor Zurn also rejected the defendant’s argument that the plaintiff was equitably estopped from enforcing the relevant provisions of the purchase agreement. She said that they buyer bargained for representations about the target’s financial information and records, as well as for the remedies applicable to breaches of those reps. VC Zurn concluded that “equitable estoppel is not available to enforce such a bargained-for contract right.”

John Jenkins

November 9, 2020

Antitrust: What Does the FTC Want When It Asks for “All Documents”?

The FTC’s Bureau of Competition recently blogged some guidance about the types of communications covered by the “all documents” specifications in its Second Requests, CIDs & document subpoenas. Not surprisingly, the agency says that the term encompasses a lot more than email & files:

Executives and employees of modern businesses communicate with one another, and with suppliers and customers, in a wide variety of ways. Especially with the current challenges of in-person meetings, electronic exchanges are now the norm for doing business. Emails, memoranda, voicemails, SMS/text messages, instant messages, hard copy notes and collaborative documents are all routinely created and circulated in the ordinary course.

It should come as no surprise, then, that each of these forms of communication (among others) are covered by the “all documents” specifications in our Second Requests, Civil Investigative Demands, and subpoenas for documents. This means that, absent modification of the scope of a request to which FTC staff have affirmatively agreed, recipients must preserve such documents and include them in their collection and production efforts in FTC investigations. As the forms of communication evolve, so too do the obligations of counsel to search for and produce communications in whatever form they take.

Regarding this last point, the Bureau cautions that recipients shouldn’t unilaterally omit any category of documents and materials from their document preservation, collection, & response process. Such action may lead to unwelcome consequences, including rejection of a certification of substantial compliance with a Second Request and the lengthening of the time required for the FTC to complete its investigation.

The blog also cautions that when counsel makes representations to its staff about responsive documents, counsel’s duty of candor and professionalism when practicing before the FTC is implicated, and the Bureau will take violations of that duty seriously.

John Jenkins

November 6, 2020

Controllers: The Facebook Decision’s Lessons for M&A

While the Delaware Chancery Court’s recent decision in United Food & Commercial Workers v. Zuckerberg (Del. Ch.; 10/20) has attracted a lot of attention, the case didn’t involve an M&A transaction, and most of that attention has focused on Vice Chancellor Laster’s approach to the demand futility requirement for derivative claims. But this Fried Frank memo says that there are important lessons to be drawn about the risks of back-channel discussions with controlling stockholders that apply in the transactional context as well. This excerpt says that one of those risks is potential personal liability for directors:

It is well-established that, depending on the facts and circumstances, back-channel communications with a controller relating to the board’s consideration and negotiation of a transaction in which the controller has a personal interest can render the board’s process ineffective. Vice Chancellor Laster’s opinion in this case underscores the problematic nature of such communications.

The Vice Chancellor stated, without discussion, that he made the assumption, at the pleading stage, that the Facebook director who engaged in such communications with Zuckerberg had prevented the special committee from functioning effectively–and thus that he had breached his duty of loyalty and acted in bad faith (unexculpated violations for which he would be personally liable in a fiduciary suit).

The Zuckerberg decision also highlights a number of other process flaws involved in the Facebook special committee’s decision to endorse the proposed recapitalization sought by Zuckerberg that would also raise concern in the transactional context.  The memo points out that these include the absence of a formal charter delineating the committee’s responsibilities, its failure to meet with its financial and legal advisors before hiring them, and the apparent treatment of the proposed recap by all concerned as a fait accompli.

John Jenkins

November 5, 2020

Contract Fraud: Del. Chancery Upholds Another M&A Related Claim

The Delaware Chancery Court’s recent decision in Roma Landmark Theaters v. Cohen Exhibition, (Del. Ch.; 9/20) represents the latest in a series of M&A-related lawsuits in which a buyer’s contract fraud claims have survived motions to dismiss.

The litigation arose out of the parties’ disagreement over post-closing purchase price adjustments arising out of the sale of the sellers’ membership interests in an LLC. The securities purchase agreement required them to submit any dispute over adjustments to an independent accounting firm for a binding resolution. After the accounting firm ruled in the sellers’ favor, they filed suit in the Chancery Court seeking confirmation of the decision & release of escrowed funds.  The buyer counterclaimed, alleging that the sellers misrepresented the target’s financial information, in breach of contractual obligations under the purchase agreement. The buyer also alleged that these misrepresentations amounted to fraud and bad faith.

This excerpt from Morris James’ recent blog on the case says that Vice Chancellor Fioravanti dismissed the buyer’s contractual claims, but declined to dismiss its fraud claims based on the language of the contract:

The Court dismissed buyer’s contract claims against sellers. In the purchase agreement only the company, not sellers, provided representations and warranties regarding the company’s financials. The Court reasoned that the buyer was not entitled to representations and warranty protections from sellers beyond those afforded under the plain terms of their purchase agreement. The Court also dismissed buyer’s implied covenant claim because the buyer had not alleged an implied obligation or contractual gap in the parties’ purchase agreement.

The Court, however, upheld a part of buyer’s fraud claims at the pleadings stage. The Court found that buyer had pled with sufficient particularity that sellers knowingly omitted certain liabilities from interim financial statements, but that buyer had inadequately pled seller’s knowledge of alleged  misrepresentation of other payments and expenses.

In upholding the buyer’s contractual fraud claims, the Vice Chancellor noted that those claims were based on allegations that knowingly provided false representations about the Company’s financial condition which induced Buyer to enter into the purchase agreement. Citing the same Delaware authority that he relied upon in recently upholding another contract-based fraud claim, Vice Chancellor Fioravanti pointed out that:

“It is relatively easy to plead a particularized claim of fraud” “based on a written representation in a contract,” because the allegedly false contractual representation satisfies much of the requirement to plead a claim of fraud with particularity. The only remaining allegations necessary are “facts sufficient to support a reasonable inference that the representations were knowingly false.”

He went on to observe that under Delaware precedent, the plaintiff must “allege sufficient facts from which it can reasonably be inferred that [the falsity] was knowable and that the defendants were in a position to know it” in order to satisfy the knowing falsity requirement, and that the plaintiff met that standard here.

John Jenkins

November 4, 2020

Activism: Third Quarter Highlights

This Lazard report summarizes shareholder activism during the third quarter of 2020. Here are some of the highlights:

– Q3 2020 represented the lowest level of quarterly activist activity since 2013; only 24 campaigns were launched globally in Q3 2020, down 41% from Q2 2020 and 54% lower than Q3 2019 levels

– Q3 capital deployed dropped to seven-year lows (approximately $4.4bn), down over 60% sequentially and year-over-year.

– Q3 U.S. campaigns were down 41% from Q2 and 64% versus Q3 2019; capital deployed decreased 39% from Q2 and 65% compared to Q3 2019.

– Q3 European campaigns were consistent with Q2 but down 62% compared to Q3 2019; capital deployed increased by 2% from Q2, but decreased 63% versus Q3 2019.

– 50% of Q3 campaigns featured an M&A objective, recovering from approximately 34% in H1 2020 and consistent with 2019. The return of M&A as an objective coincided with a resurgence of M&A in Q3 2020 after a quiet first half of the year.

While the number of campaigns and the amount of capital deployed may both be down substantially, the number of directorships activists have won is not. Through the end of the third quarter, activists are winning just as many board seats as in prior years.

However, of the 100 Board seats won by activists this year, only 35 are attributable to campaigns initiated in 2020. Starboard & Elliott Management remain the most successful activists when it comes to board seats, accounting for over 1/3rd of the seats won so far in 2020.

John Jenkins

November 3, 2020

The Election’s Impact On M&A: What Do Dealmakers Think?

As Americans head to the polls today, Datasite’s recent survey on how dealmakers think the election will impact M&A is particularly timely. Here are some of the highlights:

– A majority (53%) of dealmakers surveyed said that the election had no impact on the timing of their transactions; 19% said they accelerated their timeframe for getting deals done, while 18% said they were deferring deals until after the outcome of the election had been decided.

– Over one-third of respondents (36%) expected that the level of deal activity would stay the same with a Biden victory, 23% said it would increase, and 25% said it would decrease.

– Nearly half of respondents (46%) expected that the level of deal activity would remain the same with a Trump victory, 30% said it would increase, and 11% said it would decrease.

Notwithstanding these results, most respondents thought that the biggest driver of deal activity over the next 6-12 months wouldn’t be the outcome of the election. Instead, 29% of dealmakers cited government stimulus in support of economic recovery from Covid-19 & the same percentage cited a safe and available Covid-19 vaccine or treatment as the most important factors in reviving deal activity. An additional 22% cited the relationship between the U.S. and China, while only 19% cited the election and the potential train wreck over its outcome as the most significant factor.

John Jenkins

November 2, 2020

Antitrust: How Will the Election Influence Merger Enforcement?

Dechert recently issued its quarterly report on antitrust merger investigations. The report says that investigative activity declined during Q3, with only four significant merger investigations completed during the quarter. But the report also says that the 2020 YTD total is the third-highest since 2011. In addition to its data on investigations, the report also offers some thoughts on how the outcome of the U.S. election might influence merger enforcement policy. Here’s an excerpt:

– Trump-era merger enforcement levels have been roughly similar to the Obama/Biden administration’s second term, though the U.S. agencies have been taking longer to review mergers.

– If Biden were to win the election, DAMITT data show that a return to the Obama/Biden era would be unlikely to result in a substantial increase in the number of merger enforcement actions absent new legislation or substantially higher agency funding.

– Policy changes are likely to materialize first at the DOJ, where the leadership can be replaced quickly, in comparison to the FTC, where Republican majority control will continue until 2023 absent resignations. If Trump were to win re-election, current enforcement levels likely will continue through his second term.

Although antitrust regulators have been taking longer to review mergers during the Trump administration, the report notes that they’ve picked up the pace in 2020. This year, significant investigations are being completed in an average of 10.3 months, compared with an11.9-month average for 2019. The increased speed of FTC investigations has been a key contributor to the improved overall pace.

John Jenkins