Paul Weiss put together this presentation on M&A transactions during the month of August. It covers a lot of ground, including information about domestic and global deal volume, strategic v. sponsor activity, SPAC deals, and inbound & outbound cross-border transactions. This excerpt reviews public company deal terms for transactions announced last month:
U.S. public merger highlights in August include the following:
– Cash only consideration was up compared to the LTM average, while stock only consideration was low at 15% of the deals in August compared to 27% LTM.
– Unaffected premium percentages saw a significant increase in August to 47% as compared to 31% in July and 37% LTM.
– The percent of deals relying on tender offers increased to 15% in August which is slightly above the 14% LTM average.
– Reverse break fees increased to 7% compared to 6% LTM.
– Go-shops were used in 8% of deals compared to 8% LTM.
This Fried Frank memo discusses the FTC’s rapidly evolving approach to merger review and enforcement, and makes it clear that there’s a new normal when it comes to the FTC’s priorities. Here’s the intro:
In a memorandum issued to the Federal Trade Commission (FTC) staff last week, Lina Khan, the new Chair of the FTC, indicated that the agency’s priorities and approaches in reviewing proposed M&A deals will differ from those in the past. Kahn stated that the FTC, rather than viewing its work in two “silos” relating to antitrust and consumer protection, will be reviewing deals “holistically” and taking an “integrated approach” to the harms that “Americans are facing in their daily lives.”
She explained, for example, that the agency will focus on whether there are “power asymmetries” leading to “harms across markets, including those directed at marginalized communities,” and whether the business models and structures used will “incentivize or enable” unlawful conduct. Further, she stated that, given “the growing role of private equity and other investment vehicles,” the agency will “examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations,” particularly when “these abuses target marginalized communities ….”
The memo goes on to point out that the FTC’s merger review won’t be based solely on conventional market-based analysis, but will also involve an assessment of the broader societal impacts of a transaction. That appears to be already happening, as the memo notes that “in some deals the FTC has been seeking information during the second request stage of its investigations about topics such as unions, wages, the environment, corporate governance, franchising, diversity, and noncompete agreements.”
As further evidence of the changing environment, the FTC’s Bureau of Competition announced in a blog post yesterday that it was implementing a number of changes to the second request process that were designed to make it more streamlined and more rigorous. While several changes are being made, the expanded approach to merger review outlined in Chair Khan’s memorandum is front and center:
First, we are seeking to ensure our merger reviews are more comprehensive and analytically rigorous. Cognizant of how an unduly narrow approach to merger review may have created blind spots and enabled unlawful consolidation, we are examining a set of factors that may help us determine whether a proposed transaction would violate the antitrust laws.
Providing heightened scrutiny to a broader range of relevant market realities is core to fulfilling our statutory obligations under the law. To better identify and challenge the deals that will illegally harm competition, our second requests may factor in additional facets of market competition that may be impacted. These factors may include, for example, how a proposed merger will affect labor markets, the cross-market effects of a transaction, and how the involvement of investment firms may affect market incentives to compete.
A few years ago, I blogged about Intralinks’ list of top deal code names and concluded that, overall, dealmakers’ efforts were severely lacking in creativity. This recent Intralinks blog setting forth the most unusual deal code names this year suggests that people are getting better at coming up with these. That being said, I think that Intralinks probably overlooked the “elephant in the room” when it discussed the likely reasons behind one deal team’s choice of a particular code word:
Sir Laurence Olivier first uttered the line, “Release the Kraken,” in the 1981 cult classic, Clash of the Titans. Nearly 30 years later, Time magazine included the phrase as one of its Top 10 Buzzwords of the Year after Liam Neeson’s more exuberant delivery of the phrase in the 2010 remake. Today, it’s become a sort of cultural shorthand for “all hell’s about to break loose.” Maybe a dealmaker had this in mind when project “Kraken” was named, calling to memory the Nordic (not Greek) mythical sea monster known for gobbling everything in sight. Maybe this deal was part of a multi-acquisitional strategy?
Yeah, I doubt it. I’m pretty sure that in 2021, this decision to use this particular code word had a lot more to do with Rudy & Sidney than with Larry & Liam.
Last year, I blogged about Vice Chancellor Glasscock’s decision in In re TerraForm Power, Inc. Stockholder Litigation, (Del. Ch.; 10/20), in which he held that dilution claims associated with an allegedly underpriced issuance of shares to a controlling stockholder were direct, not derivative, and therefore survived a motion to dismiss premised on the minority stockholders’ loss of standing due to a merger. Last week, the Delaware Supreme Court reversed his decision, and overturned the precedent upon which it was based in the process.
Vice Chancellor Glasscock’s opinion noted that while such claims would ordinarily be viewed as derivative under Tooley v. Donaldson, Lufkin & Jenrette, (Del.; 4/04), he was compelled to hold that the claim was direct by virtue of the Delaware Supreme Court’s decision in Gentile v. Rossette, (Del.; 8/06). In Gentile, the Court held that fiduciary duty claims for an allegedly underpriced issuance of stock to a controller could be maintained by former stockholders as direct claims even though they no longer had standing to assert derivative claims.
The Vice Chancellor observed that the Gentile decision had been widely criticized, but felt that he was bound by existing precedent. However, he certified an interlocutory appeal to the Delaware Supreme Court, and in Brookfield Asset v. Rosson, (Del.; 9/21), the Supreme Court reversed his ruling & overruled Gentile. In her 50-page opinion for the Court, Justice Valihura reviewed the doctrinal issues with the Gentile decision, and then pointed out that the exception to Tooley that it created was superfluous:
Aside from the doctrinal difficulties discussed above, we see no practical need for the “Gentile carve-out.” Other legal theories, e.g., Revlon, provide a basis for a direct claim for stockholders to address fiduciary duty violations in a change of control context. And as we observed in El Paso, “equity holders confronted by a merger in which derivative claims will pass to the buyer have the right to challenge the merger itself as a breach of the duties they are owed.” Such stockholders might claim that the seller’s board failed to obtain sufficient value for the derivative claims.
Justice Valihura’s opinion also noted that Gentile created the potential practical problem of allowing two separate claimants to pursue the same recovery, which could create double recovery issues. The plaintiffs argued that the Court should of Chancery devise a mechanism to “proportion” any recovery between the plaintiffs if both derivative and direct shareholders claim it, but the Court concluded that permitting such dual claims would unnecessarily complicate their resolution.
Shareholders’ representatives play an important role in many transactions where the target has a relatively large number of shareholders, but I haven’t seen their obligations addressed in judicial decisions. Okay, I admit I haven’t exactly been on the prowl for these decisions, but having stumbled across this Morris James blog describing the Chancery Court’s decision in Houseman v. Sagerman,(Del. Ch.; 7/21), I thought it was worth sharing.
The plaintiffs challenged a number of decisions made by the shareholders’ representative in the administering the proceeds of a merger, and argued that entire fairness was the appropriate standard of review. The matter was referred to a Special Master, who determined that the representative’s conduct should be evaluated under an an abuse of discretion standard. This excerpt from the blog summarizes the Chancery Court’s decision:
The Court of Chancery, upon de novo review of the Special Master’s report, noted that a Shareholders’ Representative, as attorney-in-fact for other shareholders, “generally assumes the obligations of a fiduciary.” However, the powers and duties of such a representative can be modified and circumscribed by contract. Here, the merger agreement indicated that “[t]he Shareholders’ Representative shall not have any duties or responsibilities except those expressly set forth in this Agreement.”
Under the merger agreement, the Shareholders’ Representative was empowered to “do any and all things and tak[e] any and all action that the Shareholders’ Representative, in such Person’s sole and absolute discretion, may consider necessary, proper, or convenient in connection with or to carry out … the transactions contemplated by this Agreement.” The Court interpreted that language as requiring that conduct be measured by the subjective good faith of Shareholders’ Representative.
So long as the Shareholders’ Representative actually concluded in good faith that specific acts were “necessary, proper or convenient” to protect the interests of all shareholders, the Shareholders’ Representative was empowered to take such acts, and all shareholders, even those who did not sign the merger agreement, were bound to such determinations.
That last part – the ability to bind non-signatories – is another interesting aspect of the decision. In support of that conclusion, the Chancery Court cited its prior decision in Aveta v. Cavallieri, (Del. Ch.; 9/10), which held that certain post-closing price adjustments determined through a stockholders’ representative were permissible under Section 251(b) of the DGCL:
The [Aveta] Court concluded that, because post-closing adjustments are generally permissible as a matter of corporate law, the scope of the contractual grant of authority to an agent to administer those adjustments is irrelevant. Accordingly, “it does not matter whether . . . the Purchase Agreement gave [the representative] authority to act on behalf of some, all, or none of [the] stockholders. All that [Section 251] required was for [the representative] to be designated as the individual who would follow the procedures and make or participate in the determinations called for by the Purchase Agreement.”
Since the merger agreement designated the shareholders’ representative to carry out the actions contemplated by that agreement, the shareholders were bound by the representative’s actions taken in conformity with the agreement, regardless of whether they were signatories to it.
The September-October issue of the Deal Lawyers newsletter was just posted – & also sent to the printer. Articles include:
– Recasting a Boilerplate Provision: Exclusive Forum Provisions for Private Delaware LLCs After a Decade of Public Corporate Developments
– Buyer Loses an MAE Claim (Again) in Delaware
– Discounted Cash Flow: “I’m Not Dead Yet!”
Remember that, as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers 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 – 4th 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 newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers 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 newsletter including how to access the issues online.
Well, it was fun while it lasted – a little more than a year after adopting the first overhaul of its Vertical Merger Guidelines in 40 years, the FTC voted to rescind them. Here’s an excerpt from this Cadwalader memo:
On September 16, 2021, the FTC voted 3-2 to withdraw its support for the Vertical Merger Guidelines, which were jointly adopted by the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”), and the Commission’s commentary on vertical merger enforcement. The FTC’s rescinding of policies without issuing new guidance, coupled with the destabilizing blows to the premerger notification filing program under the Hart-Scott-Rodino Act that we discussed recently, leaves merging parties in the lurch, forcing them to navigate the merger review process in the dark.
To add to the confusion, the FTC and DOJ may be applying different policies with regard to vertical mergers, as the DOJ Acting Assistant Attorney General Richard A. Powers issued a statement hours after the FTC’s vote that, although the Department is reviewing the Vertical Merger Guidelines, they currently remain in place at the DOJ.
The memo notes that the DOJ is currentlyreviewing both the Horizontal Merger Guidelines and the Vertical Merger Guidelines “to ensure they are appropriately skeptical of harmful mergers,” and says that while significant policy changes may be deferred until after Jonathan Kanter is confirmed to head the Antitrust Division of the DOJ, it already has identified several aspects of the Vertical Merger Guidelines that “deserve close scrutiny” and has pledged to work closely with the FTC to revise them as appropriate.
The boom in SPAC IPOs has left hundreds of newly-public buyers flush with cash and chasing De-SPAC mergers before the clock strikes midnight – but competition for deals is fierce and regulators are ramping up their scrutiny of SPAC deals. Tune in tomorrow for the webcast – “Navigating De-SPACs in Heavy Seas” – to hear Erin Cahill of PwC, Bill Demers of POINT BioPharma, Reid Hooper of Cooley and Jay Knight of Bass Berry discuss the key issues facing SPACs as they seek to complete their de-SPAC transactions in this challenging environment.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit your state and license number and complete the prompts during the program.
A recent FTI Consulting study looked at the factors driving skyrocketing SPAC valuations, and what they found provides some reason for concern. Here’s an excerpt from the intro summarizing the findings:
What follows is a look at FTI Consulting’s findings, which show three significant trends: 1) SPACs and the resulting newly public companies are increasingly being traded based on multiples of forward revenue (not the more traditional multiples of historical revenue and earnings); 2) projection periods are growing longer; and 3) those forward revenues are projected to grow at much higher rates.
FTI looked at 216 out of 250 SPAC investor presentations that included projections, and found that almost two-thirds of announced de-SPAC mergers in the past year have been for pre-revenue, pre-EBITDA companies. That’s up from just one-quarter of such companies in the period between 2016 and early 2020. These developmental stage companies assumed very high growth rates in their projections extended those projections out over a longer projection period than more mature companies.
How aggressive are the growth rates for these projections? The median CAGR of projected revenues for SPACs over the last year was between 40- 50%, compared to 21% during prior periods – and the latest batch of projections covered four years, as compared to two and a half years in 2016.
For the first 20 years of my career, I was the principal lawyer for the M&A group of a regional investment banking firm, which means that whatever else I had going on during a given day, I could usually count on being asked to draft or negotiate an investment banker’s engagement letter. I don’t mind telling you that I absolutely despised that part of my job.
Negotiating bankers’ engagement letters is a completely miserable experience, but it’s something that everyone involved in M&A needs to know a little about. That’s why I recommend this Venable memo to you if you haven’t had a lot of experience with engagement letters. It provides a nice overview of their terms. For example, here’s an excerpt on “tail” coverage:
Once the engagement is terminated, the “tail” period starts running. The tail provision entitles the advisor to receive its fees if the transaction identified in the engagement letter occurs during some specified period after its termination. The tail provision ensures that the advisor receives its compensation if it has performed its services and introduced the client to the buyer (or other party to the transaction, as determined by the engagement letter), even though the parties closed the deal after the term ended. It also functions as a bad-faith protection, as it prevents clients from terminating the engagement and entering into a transaction immediately after to avoid paying the fee. The tail period generally may last up to 2 years, and frequently it is applicable only to specified potential buyers or other parties to the transaction.
On this last point, in my experience, bankers frequently push to have tail coverage extend to a transaction with any party, not just those contacted during the sale process. The argument is usually some variation of “word gets around” as a result of the banker’s marketing efforts and the bankers don’t want to create an incentive for the seller or a potential buyer to engage in strategic behavior in order to avoid paying a fee.