Acquisition agreements often include language under which the buyer promises that the target’s will continue to receive compensation & benefits comparable to those they received before closing, at least for a specified period of time. This Willis Towers Watson memo discusses the reasons for including comparability provisions in acquisition agreements, the key issues to consider when negotiating them, what they typically cover, as well as best practices and common mistakes. Here’s an excerpt from a section addressing employment terms:
While it would be very rare to see a deal agreement guaranteeing that the buyer will not terminate employees, in certain circumstances, such an agreement can be considered if limited in time, particularly if the business being sold is expected to provide ongoing services to the former parent business.
While how these comparability provisions are applied can become extremely complicated, there is a broad agreement that keeping legal language high-level and principles-based is more productive overall. Noted Baker McKenzie, “A guiding rule of these provisions is generally not to give the transferring employees more protections than they would have had if they had stayed with the seller.”
Similarly, many sellers will recognize that local legislation will grant protections on an individual basis; therefore, deal agreements will often be structured at the aggregate transferring population level to avoid adding unnecessary levels of complication.
The memo also highlights the fact that while a lot of effort may be devoted to negotiating post-closing employee comparability provisions, they are seldom litigated. In public company deals, there usually isn’t anybody left with standing to litigate over a buyer’s compliance with them (although cases like Dolan v. Altice, (Del. Ch.; 6/19), call that view into question).
Yesterday, the Delaware Chancery Court rejected a seller’s claims that it was entitled to cash held in the target’s bank account that it neglected to withdraw prior to the closing of its sale of the target’s stock. In her letter opinion in Deluxe Entertainment Services Inc. v. DLX Acquisition, (Del. Ch.; 3/21), Vice Chancellor Zurn rejected the seller’s arguments that the agreement’s definition of “Net Working Capital” & extrinsic evidence about the parties undocumented agreement that the transaction “cash-free, debt-free” were sufficient to override what she viewed as the plain language of the contract.
Vice Chancellor Zurn observed that in a stock purchase transaction, a buyer acquires all of the assets and the liabilities of the target entity, and that when the seller agreed to transfer all of the target’s shares, it therefore agreed to transfer all of the target’s assets. As a result, by default, the target’s pre-closing assets and liabilities transferred with its shares. The seller argued that the purchase agreement’s exclusion of cash from the definition of Net Working Capital – and thus from the closing date purchase price calculation – indicated the parties’ intent that the deal would be “cash-free, debt-free.” The Vice Chancellor disagreed:
Seller asks too much of these provisions: they simply exclude cash from the calculation of the final purchase price. The definition of Net Working Capital excludes cash from the calculation of Net Working Capital as a “definitional adjustment” for purposes of calculating the Closing Date Purchase Price. The purchase price adjustments are just that: adjustments to how much Buyer paid, not to what assets the Buyer purchased. Nothing in these purchase price provisions indicate the parties’ intention to exclude cash, or any of the other adjustments to Net Working Capital, from the assets transferred by the Transaction.
She observed that if the parties intended to do so, they could have easily drafted a provision stating that assets excluded from the Net Working Capital definition are not transferred – and the fact that the agreement contained a provision addressing excluded assets made it clear the parties knew how to exclude assets from the deal.
Last year, in Sciabacucchi v. Salzberg, (Del. 3/20), the Delaware Supreme Court held that a Delaware corporation could adopt a federal forum bylaw compelling shareholders to bring Securities Act claims only in federal court. Plaintiffs prefer the more liberal pleading standards that apply to these claims in state courts, and prior to Sciabacucchi, those courts have become increasing popular venues for Securities Act claims. This recent article from Alison Frankel suggests that Sciabacucchi has reversed those trends – and that the move to federal court has had a favorable impact on the D&O insurance market in recent months:
Data from Cornerstone and Woodruff Sawyer show that state-court Section 11 filings have declined since the Delaware Supreme Court’s Sciabacucchi decision. According to Cornerstone, of the 24 Section 11 suits filed after Sciabacucchi, 14 were filed only in federal court, reversing the trend of more Section 11 class actions being filed in state court. Woodruff Sawyer data indicated that only 8% of cases in 2020 were filed in state court alone – down from 24% in 2019. In 2019, according to Woodruff, plaintiffs filed only 16% of their Section 11 cases in federal court alone. That number rose to 42% in 2020.
The article quotes Woodruff Sawyer’s Priya Huskins as saying that there is a “straight line” from reduced state court IPO litigation to a “newly stable” D&O insurance market – and that the D&O insurance market might have even been better but for the demand from SPAC IPOs.
There are a whole lot of SPACs sitting on a whole lot of money that they need to put to work. According to this PitchBook article, that means that private equity sponsors should expect to face competition from these entities in one of their favorite hunting grounds – tech sector deals:
More and more SPACs are also looking for tech targets—potentially a bigger concern for private equity. “PE [firms] might lose out to the public markets for a few IPOs, but the big brand-name [listings] were probably going to happen anyway. The real threat is SPACs,” said Dan Malven, managing director of VC firm 4490 Ventures. “[A blank-check company] is almost like a single-purpose private equity firm. They’re targeting the same tier of companies, and they may end up taking over a lot of [PE’s] territory.”
SPACs have taken off in the US over the past year as an easier alternative to traditional listings. Some 232 blank check companies raised nearly $75 billion so far this year, according to data from SPACInsider. And investors in other countries, like the UK, are looking to follow suit.
Many of these vehicles are setting their sights on the venture ecosystem. Among the recent deals announced is auto insurance company Metromile’s reverse merger with Insu Acquisition Corp. II. Even in Europe’s relatively nascent SPAC market, VC-backed companies are looking to this exit route as a preferred source of liquidity. Online car platform Cazoo, for example, is said to be in discussions with Ajax I, a SPAC set up by hedge fund manager Daniel Och, despite earlier reports that the company was leaning toward an IPO.
Of course, PE sponsors have always been a pretty adaptable bunch, and the article notes that one way they’ve responded to the competitive threat posed by SPACs by tapping into the SPAC craze themselves. The article cites two specific examples of PE backed SPAC deals – Apollo’s 2020 launch of Spartan Energy Acquisition Corp. & its subsequent merger with VC-backed electric vehicle maker Fisker, and Learn Capital-backed Nerdy’s January 2021 agreement to go public through a SPAC merger.
Over on its “Competition Matters” blog, the FTC recently provided some reminders to companies about the importance of making sure they’ve received official confirmation of their HSR filings. This typically comes in the form of a “Waiting Period Letter,” and if you haven’t received one within a few days of filing, there may be a problem that you need to address.
The blog says that the Pre-merger Notification Office will only send Waiting Period Letters if both the FTC & DOJ have received complete filings from all parties. If your Waiting Period Letter appears to be delayed, there might be a filing deficiency needs to be addressed, or there may be problems with the filing fee. The blog goes on to offer the following tips on making sure that the clock has started to run on your HSR filing:
– Until you receive a Waiting Period Letter confirming the dates, you should not assume that the waiting period is running or will expire on a certain day. Most of the time, the waiting period will start on the day the agencies receive the filing. Occasionally, if filing deficiencies are not cured promptly or for other reasons (as noted above), PNO staff must delay the start of the waiting period.
– You should not assume that the waiting period is running because the PNO has provided you the transaction number. If there are issues with your filing, PNO staff will give you the transaction number to ensure that corrections and updates are processed appropriately. The assignment of a transaction number, which creates a record of the filing, does not mean that the waiting period has started and is not a substitute for the Waiting Period Letter.
– In 801.30 transactions (such as tender offers or acquisitions from third parties), only the buyer will receive a Waiting Period Letter. 801.30 transactions are by definition non-consensual, and the buyer’s waiting period is confidential under the HSR Rules. After the PNO receives the seller’s 801.30 filing, the PNO will send an acknowledgement letter providing only the transaction number.
– If you need a confirmation that the PNO has received and downloaded your submission before you receive your Waiting Period Letter, use the tracking function of the Accellion FTP platform. You will need to go into your Sent folder in the Accellion FTP application, open the submission, and click on the “Track” button. There is no need to contact the PNO to confirm receipt of the filing.
One of the great things about the Delaware judiciary is their willingness to weigh-in on important legal issues outside of the courtroom. That’s sometimes prompted criticism from fragile, sensitive souls like activist hedge funds, for example, but I think the judges commentary provides a real benefit for those who have to intepret sometimes enigmatic Delaware case law in order to help guide clients through their transactions.
Vice Chancellor Laster is one of the jurists who hasn’t been shy about addressing topical issues outside of the courtroom, and in an interview for Berkeley’s Spring Forum on M&A and Corporate Governance, he tackled a couple of issues that everyone has been keeping an eye on – officer liability & controlling stockholder liability. This excerpt from a Freshfields blog on the event summarizes his comments:
VC Laster explained that, when establishing a damages claim, the ultimate question is not the standard of review, but whether the officer has liability for a breach of his or her duties. He provided an example of how to state a damages claim against a CEO in a sale of control transaction: the plaintiff will need to show that (i) there was an action by the officer that fell outside the range of reasonableness (i.e., violated the Revlon standard of review) and (ii) the CEO acted on behalf of the corporation for his own personal interests, with bad faith, or gross negligence. Not all breaches of fiduciary duty that would be recognized for purposes of injunctive relief will constitute bases for damages claims against officers even though officers are not entitled to exculpation in the same manner as a director.
VC Laster noted further that a critical factor to determine whether a dual director-officer is acting in his or her capacity as an officer (where exculpation is not available), rather than as a director (where exculpation is available), is to look at the non-management directors to see whether they were participating in that same conduct.
The Vice Chancellor then reviewed recent cases addressing when a stockholder has “control” and therefore subjects its transactions with the corporation to the entire fairness standard absent the satisfaction of the MFW safe harbor criteria. He emphasized that the Delaware courts take a holistic approach and will not be looking at certain stock ownership or voting power thresholds as necessarily determinative. In addition to ownership levels, the role the stockholder plays at the company (i.e., is the stockholder a founder, chair, CEO, or corporate visionary?), indicia of the influence of the stockholder in the boardroom, and the governance regime of the company (such as veto rights).
If you’re interested, the Vice Chancellor’s entire hour-long interview – which covers a number of other issues addressed by the Chancery Court – is available on the Forum’s website.
The March-April Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– Troubling Signs From Recent M&A Case Law: Forgetful Gatekeepers, Targeted Executives, and Poor Record Building
– COVID-19 Deal Terminations: Assessing Specific Performance Provisions
– A Canadian Perspective: The 2021 US and Canadian M&A Landscape
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With SPACs & their directors increasingly being targeted for litigation and the D&O insurance market tightening, this Morgan Lewis memo says that captive insurance may help provide a solution:
Captive insurance is a solution to fill coverage gaps or a means to control insurance terms and conditions. A captive insurer is a wholly owned subsidiary that is licensed to insure the risks of its affiliated companies through the issuance of insurance policies in exchange for the payment of a premium. A specialized actuary retained by the captive typically sets the premium, which is composed of a loss reserve and a risk margin. Captive insurance can be utilized flexibly at any “level” of the insurance tower, or at varying levels dependent on the risk insured.
The memo details some of the economic advantages of captive insurance, including the ability to invest the risk premium and tailor coverage, access to reinsurance markets, and tax benefits. In addition, if properly structured, the coverage provided by a captive will be “insurance” under Delaware law and not subject to statutory restrictions applicable to rights to indemnification.
This Sidley blog notes that recent Delaware case law suggests that entities may limit the right of equity holders to demand inspection of books & records. Whether stockholder inspection rights may be completely waived is an open question, but this excerpt lays out some of the reasons why such a waiver might be possible:
In the corporation context, Delaware courts have recognized waiver as to several rights set forth in the Delaware General Corporation Law, including stockholders’ appraisal rights under Section 262, rights to end a joint venture or seek liquidation under Section 273, or rights to seek a receivership under Section 291. Although we are not yet aware of a decision holding that stockholders validly waived inspection rights under Section 220, the Court of Chancery has recently suggested (without reaching the issue) that there may be strong considerations to support waiver of inspection rights in some circumstances—including “Delaware’s broad recognition of parties’ ability to waive other important rights, whether constitutional or statutory”—and that other recent Delaware precedent “implies that a stockholders’ agreement could waive statutory inspection rights if the waiver was sufficiently clear.”
But the method may be key: though Delaware courts have refused past efforts to limit Section 220 rights through provisions in the corporation’s charter, as the same court noted (again, in dicta), “there are arguments for distinguishing between provisions that appear in those documents and waivers in private agreements.” How Delaware courts will receive those arguments remains to be seen.
While the ability to waive inspection rights remains unresolved, given the surge in books & records demands in recent years and the disruption they cause, the blog suggests that companies may wish to consider including limits on inspection rights in their charter documents or negotiating for contractual limits on inspection rights with at the time of a stockholder’s investment.
Can we talk about New York for a minute? I grew up there, many of my family members still live there, and I think The Empire State has a lot to recommend it – but the state legislature’s fondness for burdensome bureaucratic requirements is head-scratching at times. The latest area where that tendency has manifested itself is in antitrust regulation. According to this WilmerHale memo, legislation has recently been introduced that would impose a “mini-HSR” pre-merger notification requirement. Here’s an excerpt with the details:
S933 would require companies to notify the New York Attorney General of any transaction that would result in the acquirer holding more than $8 million in assets or voting securities of the target, in the aggregate, if either the acquirer or the target are subject to the jurisdiction of the New York courts. Notice would be required at least 60 days prior to the close of the transaction. This requirement would be the first merger notification provision under state antitrust law in the United States.
For mergers that are reportable to both the FTC and the DOJ under the federal Hart-Scott-Rodino Act (“HSR”) and to New York under the new notice proposal, merging parties would be required to provide their HSR notifications and accompanying materials to the New York Attorney General. Unlike the HSR Act, however, the bill does not impose on the parties any waiting period before they can consummate their transaction beyond the 60-day notice, even if the Attorney General opens an investigation. Still, the 60-day notice requirement could delay some transactions.
Deals reported under the HSR Act that are not subject to an extended “second request” investigation can close after a 30-day initial waiting period (or earlier, if early termination is granted), and the proposed New York statute would capture many deals that are not HSR reportable at all.
Here’s the text of the bill. The legislation contains a number of other provisions, and is generally aimed at “Big Tech,” but the $8 million threshold has the potential to throw a not inconsequential speed bump in the way of a lot of completely innocuous deals. I guess the good news – aside from the fact that it hasn’t become law yet – is that the memo says that the AG would be authorized to issue rules exempting transactions not likely to violate the statute.