For better or worse, it looks like the U.K. has decided to open its financial markets to the latest craze from the U.S. – SPACs. This Weil memo discusses the Financial Conduct Authority’s consultation paper outlining proposed amendments to listing criteria intended to encourage SPACs to list on the LSE’s main market. Here’s an excerpt from the intro:
The amendments modify some aspects of the FCA’s Listing Rules that have made it practically impossible for SPACs to list in London with the characteristics that have made them such a popular alternative for companies seeking to go public in the U.S. (as well as lucrative for their sponsors and attractive for certain public market investors).
The key problem is that under the existing rules, the FCA will suspend trading in the SPAC’s shares if there is a leak or an announcement about a potential ‘reverse takeover’ (which, in the case of a SPAC, means any acquisition), until the SPAC can publish sufficient information about the target, typically in a revised prospectus. Under the proposed amendments, suspension will no longer apply if the requirements set out below have been and remain satisfied.
The memo goes on to detail each of the requirements that a SPAC that wants to list on the LSE would have to satisfy. These include raising at least £200m in gross proceeds from the public, “ring-fencing” the capital raised with a third party pending completion of the de-SPAC or liquidation, completion of the de-SPAC within two years of listing, specified disclosures about the target to be included in the announcement, board and shareholder approval requirements, the use of a fairness opinion to address certain conflicts, and a redemption right for shareholders regardless of how they vote on the de-SPAC.
The consultation period ended May 28th, and according to media reports, several SPACs are ready to launch once the rules are in place early this summer.
Recent cyber attacks targeting U.S. businesses & President Biden’s executive order aimed at enhancing the nation’s cybersecurity posture have focused attention on the need for companies to improve their own cyber defenses. This FTI memo says that those efforts to improve cybersecurity are even more critical for companies that may become subject to CFIUS’s scrutiny.
In the current environment, U.S. businesses involved with critical technologies, infrastructure or sensitive data could face increased governmental scrutiny. If those businesses are backed by foreign investors, failure to satisfy that scrutiny could result in greater difficulty in obtaining CFIUS approval for future deals or, in the worst case scenario, an order to divest from a previously completed transaction. This excerpt from the memo provides some of the actions parties should take to help ensure that they are prepared to meet CFIUS’s cyber compliance expectations:
For parties pursuing a deal, assessing cybersecurity posture is critical to meeting CFIUS’ compliance expectations. That might seem straightforward, but it’s easy to get caught in a web of potentially overlapping compliance and regulatory standards. Here are primary actions parties must consider:
– Conduct a regulatory gap assessment to identify necessary changes that need to be made to achieve compliance across export controls, data privacy, and cybersecurity obligations
– Assess the data environment, the control status of any sensitive technology, security infrastructure, and existing cybersecurity policies, procedure, and processes
– Design a control development and revision strategy that will recommend technology solutions, human resources protocol, and policy changes
These actions can enhance a company’s overall cybersecurity posture, and can also reduce corporate risks and reduce the costs associated storing and securing data. The memo cautions that parties pursuing an M&A transaction should pay particularly close attention to these first moves, since cyber risk is often overlooked or given less attention than it merits pre-closing. Proactively identifying and addressing areas of vulnerability early on in the process can help to put the deal on a better footing in the event of CFIUS review.
If you’re interested in the history of how the modern deal economy came to be, check out this excerpt from Prof. Jonathan Levy’s book, “Ages of American Capitalism.” Levy provides an overview of how “financiers blew up the postwar industrial corporation and dethroned the postwar managerial class.” Here’s a discussion of how the mantra of “shareholder value” transformed everything:
The investment bank Drexel Burnham Lambert is a good place to begin to dig into the character of the post-1982 business expansion. In enterprise, the turn to leveraged asset appreciation required nothing short of a revolution in US corporate governance, in which financiers, including investment bankers, continued to wrest ever more power from an already-floundering managerial class.
The weapon was the new gospel of “shareholder value,” which demanded that managers act in the pecuniary interests of shareholders. That often meant slashing wages, foregoing long-term investments, or selling off assets, all in order to benefit the immediate bottom line. There was and is no hard law that says that US corporations must be motivated to maximize short-term profit. Most postwar industrial corporations, focused on long-term growth metrics and the maintenance of “organizational slack,” had not even tried. With the shareholder value revolution of the 1980s, the present stock market price of corporate shares newly became the metric of corporate success.
What enthroned shareholder value was a wave of sometimes hostile corporate takeovers. The movement began in the late 1970s, when oilmen flush with cash from the high prices of the oil shock came to believe that the stocks of large, diversified energy companies were trading below the value of their physical assets. During his 1983 bid to take over Gulf Oil, the Texas oilman T. Boone Pickens declared in The Wall Street Journal, “We are dedicated to the goal of enhancing shareholder value.”
There’s plenty more where that came from, including the story of how Pickens successfully “greenmailed” Gulf Oil, and how institutional investors fueled the corporate takeover boom. Sometimes, it’s easy to forget that things weren’t always like they are today, but it wasn’t all that long ago that “The Organization Man” reigned supreme.
If you’re looking for more on how deal economy has evolved over the past several decades, be sure to check out The Lipton Archive, which contains a treasure trove of material by and about Marty Lipton, the legendary Wachtell Lipton lawyer who was there at the beginning and continues to be a driving force in the development of the law and practice of M&A.
We’ve posted the transcript for our recent webcast: “Capital Markets 2021.” If your practice involves capital markets transactions, you’ll want to check this out. Panelists Katherine Blair of Manatt, Sophia Hudson of Kirkland & Ellis, and Jay Knight of Bass Berry & Sims participated in an in-depth discussion of a number of topics, including:
– The State of the Capital Markets
– The SPAC Phenomenon
– Equity Financing Alternatives for Public Companies
– Debt Financing Alternatives: Investment-Grade/Non-Investment-Grade Issuers
– Recent Offering/Issue Trends
When negotiating an earnout, buyers typically resist efforts to tie their hands when it comes to operating a business post-closing. Frequently, the contract expressly gives the buyer discretion with respect to decisions relating to post-closing operations. That can be a formidable obstacle for a seller to overcome when in earnout litigation, but the Chancery Court’s recent decision in Shareholders Representative Services v. Albertsons, (Del. Ch.; 6/21) shows that it’s not always insurmountable.
The case arose out of the supermarket goliath Albertsons’ 2017 acquisition of Plated, a subscription food kit delivery business. Under the terms of the deal, Albertsons agreed to an upfront payment of $175 million at closing, and an earnout provision obligating it to pay up to an additional $125 million if certain milestones were met.
The earnout language gave Albertsons the right to make all post-closing business and operational decisions “in its sole and absolute discretion” and expressly stated that it would have “no obligation to operate [Plated] in a manner to maximize achievement of the Earnout Issuance.” However, that right was subject to a provision obligating Albertson’s not to “take any action (or omit to take any actions) with the intent of decreasing or avoiding” payment of the earnout.
The plaintiff contended that the earnout was premised on Plated’s historical performance and projected results, and that Albertsons had provided repeated assurances throughout the negotiating process that it intended to grown Plated’s traditional e-commerce business. According to the plaintiff, that would’ve given Plated’s shareholders a good shot at achieving the earnout milestones, but Albertsons immediately put the e-commerce business on the back burner. This excerpt from Steve Quinlivan’s blog on the case provides more detail on the plaintiff’s claims and Vice Chancellor Slights’ response:
According to Plaintiff, immediately upon closing, Albertsons directed that Plated drastically reallocate its resources to get a retail product into 1,000 stores in the span of one week, to the detriment of the e-commerce business. Albertsons, according to Plaintiff, knew this endeavor was commercially unreasonable. It created a reasonable inference that Albertson’s knew its push for in-store sales at the expense of subscriptions and the e-commerce business would cause Plated to fail to reach the earnout targets.
According to the Court, the reasonable inference allowed by Plaintiff’s allegations is not that Albertsons sabotaged a company it just paid $175 million for. Rather it created an inference that Albertsons intended to avoid short-term earnout targets in favor of long term gains. Even if Albertsons took these actions only in part with the purpose of causing Plated to miss the earnout milestones, this was enough at the pleading stage to support Plaintiff’s breach of contract claim.
Albertsons argued that Plaintiff’s allegations cannot sustain a breach of contract claim when the conduct giving rise to the claim was expressly permitted under that same contract. In doing so the Court said Albertsons seized upon its contractual allowance to operate Plated within its discretion. However, Albertsons had ignored the contractual prohibition against operational decisions intended to avoid or reduce the earnout.
The plaintiff alleged that Albertsons’ actions violated its contractual obligations under the terms of the earnout, involved a breach of the implied covenant of good faith and fair dealing, and constituted fraudulent inducement. The Vice Chancellor rejected the latter two claims, but held that the plaintiff had made reasonably conceivable allegations that Albertsons’ actions with respect to Plated’s business were engaged in with the intent to avoid the earnout in violation of its contractual obligations.
I have never minced words when it comes to my personal disdain for letters of intent, which is one reason why I found this Kramer Levin memo on some of the potential litigation traps for the unwary frequently lurking in those documents particularly interesting. The memo addresses two related areas of concern – the need to ensure that the letter of intent is non-binding, and that it is also governed by the law of a jurisdiction that will respect its non-binding nature.
Here’s an excerpt on the latter issue, which says that New York law and New York courts have a lot to offer when it comes to respecting the parties efforts to craft a non-binding document:
LOI litigation is an area in which choice of law and choice of forum make a significant difference. If one wishes to maximize the chances of avoiding liability for breach of an LOI, then the LOI should provide for application of New York law and a New York forum. New York courts generally have extensive experience with LOIs, and the leading cases in the area have been decided by New York courts, both federal and state.
New York courts routinely dismiss on the pleadings breach of contract claims when the parties have executed a preliminary agreement specifically stating that the LOI is not binding or that conditions the parties’ obligations on definitive documentation. And New York courts generally do not permit parties to recast legally defective LOI breach of contract claims as claims for promissory estoppel or unjust enrichment.
New York courts likewise do not allow parties to substitute legally defective LOI contract claims as claims for breach of a supposed good faith duty to negotiate. And unlike other jurisdictions, New York courts do not recognize a duty of good faith and fair dealing separate from obligations explicitly recited in a binding contract. In other words, an LOI plaintiff who cannot sustain a breach of contract claim will not be able to sustain a claim for breach of the duty of good faith and fair dealing; so-called duty of good faith and fair dealing cannot be used to imply terms or require parties to negotiate, unless the LOI contains an explicit binding provision so stating.
Wachtell Lipton recently issued the 2021 edition of its “Spin-Off Guide.” This 79-page publication is a terrific resource for getting up to speed on the wide variety of issues associated with spin-off transactions. This excerpt from the intro gives you a sense for breadth & complexity of the issues involved in a transaction like this:
The process of completing a spin-off is complex. The issues that arise in an individual situation depend largely on the business goals of the separation transaction, the degree to which the businesses were integrated before the transaction, the extent of the continuing relationships between the businesses after the transaction, the structure of the transaction and the desire to obtain (if possible) tax-free treatment of the spin-off.
If the businesses were tightly integrated before the transaction or are expected to have significant business relationships following the transaction, it will take more time and effort to allocate assets and liabilities, identify personnel that will be transferred, separate employee benefits plans, obtain consents relating to contracts and other rights, and document ongoing arrangements for shared services (e.g., legal, finance, human resources and information technology) and continuing supply, intellectual property sharing and other commercial or operating agreements.
If the parent is expected to own a substantial portion of the spin-off company after the closing, careful planning is also required with respect to the composition of the new company’s board, independent director approval of related-party transactions, handling of corporate opportunities and other matters. In addition to these separation-related issues, spin-offs raise various issues associated with taking a company public, such as drafting and filing the initial disclosure documents, applying for listing on a stock exchange, implementing internal controls and managing ongoing reporting obligations and public investor relations. These issues become more complex in a spin-off combined with an initial public offering or other capital markets transaction, or in a spin-off that is part of a larger merger or business combination.
I can attest to that last statement from experience. I was involved in representing the buyer in a Reverse Morris Trust transaction a little more than a decade ago, and my little flyover state lawyer brain was so fried that I still have a headache.
According to this Shearman blog, it isn’t just CFIUS that foreign investors in U.S. businesses need to keep in mind, but also the potential implications of U.S. export controls on the viability of a proposed investment. Here’s an excerpt:
Export controls have been used for decades to protect U.S. technology with military applications. In recent years, however, these controls have expanded to such an extent that some investments or acquisitions in certain U.S. companies may now be precluded. The U.S. government has long sought to control the export of defense articles and services, as well as “dual-use” U.S.-origin civilian products, materials, technology, technical data and software that have potential military applications.
New legislation and regulations over the last several years have expanded that reach, making export controls an additional tool for controlling foreign direct investment. It is therefore important for foreign investors to examine this risk very early in the due diligence process by checking if an export license is required for access to a U.S. target’s technology and whether such a license is likely to be granted.
The blog reviews companion legislation to FIRRMA, the Export Control Reform Act of 2018 (ECRA), and discusses how that legislation and its implementation under both the Trump and Biden Administrations has ramped up oversight and enforcement of export control laws.
Over the years, financial projections used in fairness opinions and board presentations have proven to be popular targets for the plaintiffs bar when bringing M&A disclosure claims. But popularity doesn’t necessarily translate into success, and in Garfield v. Shutterfly, (3d Cir.; 5/21), the 3rd Cir. affirmed a lower court’s decision to dismiss claims based on allegedly false and misleading disclosure of downside case projections included in the merger proxy for Shutterfly’s 2019 sale to affiliates of Apollo Management.
Shutterfly provided its financial advisor, Morgan Stanley, with two sets of projections prepared by the company’s management. One set presented a base case scenario, while the other presented a more pessimistic downside case. Morgan Stanley reviewed both sets of projections in preparing its fairness opinion to Shutterfly’s board, and the merger proxy’s discussion of that opinion included estimates of value ranges based on both sets of projections. The proxy statement also disclosed that Morgan Stanley’s analysis was based on both sets of projections.
The plaintiffs brought claims under Section 14(a) and 20(a) of the Exchange Act alleging a number of false and misleading proxy disclosures relating to the financial projections and the fairness opinion. The district court dismissed their claims, and plaintiffs subsequently appealed. Their appeal focused solely on the proxy statement’s inclusion of valuation ranges based on the downside case projections. Here’s an excerpt from this Goodwin memo summarizing the 3d Cir.’s decision to affirm the dismissal of the case:
The Third Circuit affirmed the district court’s dismissal, holding that the challenged statement “fail[ed] to establish a cause of action because it was not misleading,” and even if it was, it was not materially so. The court first reasoned that “the only statements of fact” in the proxy were that Morgan Stanley calculated the share values and how it estimated those values based, in part, on Shutterfly’s downside projection—neither of which was false or misleading.
Notably, in each instance where the proxy included downside projection values, it: (1) disclosed that Morgan Stanley calculated those values; (2) described the analysis undertaken; (3) included them alongside base-case projection values; and (4) cautioned that the values should not be relied upon as an “independent assessment of Shutterfly’s actual value.” Nor, according to the court, were the downside-projection values “inherently misleading,” as the proxy accurately disclosed values grounded in the base-case projection and that Shutterfly believed these projections more likely to occur.
The court also concluded that, even if the downside-share values were misleading, they were not material, because the proxy “included specific and substantive disclosures and warnings” such that no reasonable investor could conclude that the downside projections should be used to estimate Shutterfly’s actual value.
It’s not unprecedented for a seller to pay an extraordinary dividend as part of a merger, but there’s extraordinary and then there’s extraordinary! The situation confronting the Chancery Court in In Re GGP, Inc. Stockholder Litigation, (Del. Ch.; 5/21), definitely fell into the latter category. That case involved a transaction where 98.5% of the deal consideration would be paid in the form of a pre-closing dividend of cash and shares, with the remaining consideration payable in cash at closing.
Vice Chancellor Slights observed that the claims and defenses asserted in this case tracked what’s become a familiar “rhythm” of post-closing Delaware merger litigation:
In hopes of securing more rigorous judicial scrutiny of fiduciary conduct, stockholders invoke the sounds of minority blockholders who act as if they are controlling stockholders, fiduciary decisionmakers who are overcome by allegiances to the controller, and stockholders who are coerced to sell their shares while starved of accurate and complete information.
In hopes of securing more judicial deference to fiduciary decision making, defendants invoke the sounds of passive minority blockholders and presumptively disinterested, independent (and often exculpated) fiduciaries who have faithfully served fully informed, uncoerced stockholders. When laid down on the same track, the sounds can be perceived as noise. But to the accustomed ear, there is rhythm.
While the Vice Chancellor may have been able to “name that tune” early on in the proceedings, the structure of the transaction lent itself to at least one novel claim. This excerpt from Steve Quinlivan’s recent blog on the decision summarizes that claim and the Court’s response to it:
Plaintiffs, stockholders of GGP, urged the Delaware Court of Chancery to conclude that the transaction’s two step structure—the payment of the pre-closing dividend followed by a post-closing payout—violated positive law. Specifically, plaintiffs argued that 8 Del. C. § 262 required Defendants to offer GGP stockholders appraisal for their shares at a pre-transaction value. By paying the pre-closing dividend separately, plaintiffs asserted defendants removed almost all value underlying the GGP shares available for appraisal.
According to the Court, neither party could identify case law addressing how a pre-closing dividend would (or should) be treated in an appraisal proceeding, but the Court believed the answer lies in the statute itself at Section 262(h). That section directs the Court to value GGP “shares” as if GGP were a going concern “exclusive of any element of value arising from the accomplishment or expectation of the merger,” and then empowers the court to “take into account all relevant factors.”
The Court stated that language is designed to endow Delaware courts with flexibility, enabling the presiding judge to view the transaction as a whole in the course of determining GGP’s fair value at the time of the merger. The Court concluded the pre-closing dividend would, in its view, qualify as a “relevant factor” in the court’s assessment of the fair value of a GGP stockholder’s shares.
If you’re asking yourself – “haven’t I read something previously from Delaware about special dividends in connection with a merger?” – you’re right, you have. In LAMPERS v. Crawford, (Del. Ch.; 2/07),the Court determined that the seller’s stockholders had appraisal rights in a purported stock-for-stock merger because a special dividend declared in connection with transaction should be considered part of the merger consideration.