Monthly Archives: October 2021

October 29, 2021

Antitrust: New Tool Helps You Not Sound Like a Supervillain

The HSR notification form requires the parties to furnish all documents that were created or received by directors or officers in connection with evaluation of a transaction, and discuss topics such as markets, market share, and competition. Transaction planners are usually warned about the need to disclose this information to regulators, and to avoid creating documents containing hyperbolic statements about the deal.

All too frequently, somebody won’t get the memo – and you’ll end up finding some sort of “this deal will allow us to take over the world” document that reads like it was written by a corporate supervillain. Now Dechert has come up with a new tool to help identify potentially problematic documents and prevent them from being generated in the first place. It’s called “Boiling Points,” and it’s a collection of real-world documents that government antitrust agencies used to support enforcement decisions against merging companies. The illustrations help to identify “hot content” that is likely to attract regulatory attention during the merger review process. Examples include such gems as the following:

– “The combined firm will be a 900 lb. gorilla”
– “The acquisition is a blocking maneuver so that our largest competitor doesn’t get acquired by a well-funded competitor”
– “Literally, no other competitors”
– “Creates significant competitive barriers to entry and protects our flank”
– The acquisition will eliminate a rival “poised for transformational growth”

I could go on – and Dechert does, for 126 pages! The collection is organized by the kind of common deal analyses that often lead to problematic statements: descriptions of the combined firm, descriptions of the seller, discussions of deal rationale, synergies and valuation, pricing or financial analysis and antitrust risk. The collection is intended to serve as a training tool, and includes tips on how and when to use the illustrations for that purpose.

John Jenkins

October 28, 2021

SPACs: Fitting Square Pegs into Corporate Law’s Round Holes

Over on “The Business Law Prof Blog,” Ann Lipton has an interesting post on how difficult it is to transpose the ordinary corporate law concepts that have guided M&A lawyers into the SPAC arena.  The blog uses the lawsuit involving the de-SPAC deal between GigCapital 3 & Lightning Systems to illustrate these problems. That lawsuit is premised on allegations that the deal was bad for the SPAC investors, and was rushed through in order to beat the deal deadline. This excerpt addresses the problem of applying Delaware’s Corwin doctrine to SPAC votes:

As I previously posted, one problem in this context is that there’s so little shareholder voting in SPACs that some SPACs have resorted asking people who already sold their shares to vote in favor of the merger.  But the other more fundamental issue is that you can vote in favor of the merger and still redeem your shares.  And shareholders do this, because many shareholders also hold warrants to buy shares in the combined company; those warrants are worthless without a merger, but probably worth something even in a bad merger.

This is one of the problems that Usha R. Rodrigues and Michael Stegemoller identify in the paper I highlighted a few weeks ago; they call it empty voting.

Given that, SPAC shareholders, on the whole, should actually prefer a bad deal over liquidation, if those are the only two choices.  Of course, as we know from Revlon and the note holders, the board could not and should not have worried about the warrant holders as warrant holders, even if some warrant holders were also shareholders, so saving the warrant holders could not legitimately be part of the board’s decisionmaking when it agreed to the deal.  But the SPAC shareholders may be thinking about their warrants, which means a vote in favor of the deal is meaningless; shareholders should either prefer a bad merger, or be rationally indifferent as between bad merger or liquidation.

And what that means is, it’s very hard to take the shareholder vote as some kind of Corwin ratification of the deal or the board’s conduct when it comes to SPACs; shareholders have an incentive to vote in favor if it’s a good deal, and they have an incentive to vote in favor if it’s a bad one.  Even if they think it’s bad, they have no incentive to vote no because they can redeem.  Corwin just doesn’t have the same role to play.

SPAC litigation is clearly a growth industry, so sorting out this mess is going to be a lot of fun for the courts – and litigators – that are called upon to do it.

John Jenkins


October 27, 2021

Activism: Third Quarter Highlights

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

– 123 new campaigns have been initiated globally in 2021 YTD, in line with 2020 levels, but below historical averages. Year-over-year stability primarily driven by a strong start to the year, with Q3 new campaigns launched (29) and capital deployed ($8.5bn) below multi-year averages

– U.S. share of YTD global activity (54% of all campaigns) remains elevated relative to 2020 levels (45% of all campaigns) and in-line with historical levels.  The 66 U.S. campaigns initiated in 2021 YTD represent a 27% increase over the prior-year period.

– After a slow start to the year, Elliott remains the most prolific activist in terms of launched campaigns (12), with six new global campaigns reported in Q3, including Citrix, Toshiba  and SSE.

– 73 Board seats have been won by activists in 2021 YTD, below historical average levels. While H1 Board seat activity was stable relative to prior years, only two new Board seats were won in Q3, an unusually low level.

– 45% of all activist campaigns in 2021 YTD have featured an M&A-related thesis, above the multi-year average of 39%. Scuttling or sweetening an announced transaction remained the most prominent M&A demand, accounting for 53% of such campaigns YTD.

The report also says that, despite increasing regulatory scrutiny of investor statements about how ESG considerations are integrated into their investment strategy, money continued to pour into ESG funds during Q3. If you find the prospect of those ESG investors listening to the siren song of activist hedge funds unsettling, check out this CFO Dive article, which has some tips for companies worried about the rising tide of ESG-based activism.

Lazard’s report notes that Q3 closed with a bang, with more than 15 new campaigns launched between 9/27 and 10/8. That suggests that 2021’s final quarter may be a busy one.

John Jenkins

October 26, 2021

Antitrust: FTC Reinstates Prior Approval Policy

Prior to 1995, the FTC had a longstanding policy requiring divestiture orders entered in merger cases to include provisions mandating that respondents seek its prior approval for future acquisitions within certain markets for a period of 10 years. In July, the FTC voted to reinstate that policy, and yesterday, the agency announced the issuance of this Prior Approval Policy Statement that sets forth the details of that policy. Here’s an excerpt:

Going forward, the Commission returns to its prior practice of including prior approval provisions in all merger divestiture orders for every relevant market where harm is alleged to occur, for a minimum of ten years. The Commission is less likely to pursue a prior approval provision against merging parties that abandon their transaction prior to certifying substantial compliance with the Second Request (or in the case of a non-HSR reportable deal, with any applicable Civil Investigative Demand or Subpoena Duces Tecum). This should signal to parties that it is more beneficial to them to abandon an anticompetitive transaction before the Commission staff has to expend significant resources investigating the matter.

In addition, from now on, in matters where the Commission issues a complaint to block a merger and the parties subsequently abandon the transaction, the agency will engage in a case-specific determination as to whether to pursue a prior approval order, focusing on the factors identified below with respect to use of broader prior approval provisions. The fact that parties may abandon a merger after litigation commences does not guarantee that the Commission will not subsequently pursue an order incorporating a prior approval provision.

The Statement goes on to address a list of factors that will be applied holistically to determine whether the FTC may decide to seek a prior approval provision that covers product and geographic markets beyond just the relevant product and geographic markets affected by the merger. It also says that the FTC will require buyers of divested assets in merger consent orders to agree to a prior approval for any future sale of those assets for a minimum of ten years.

John Jenkins

October 25, 2021

Middle Market M&A: Strategic v. PE Valuations

Check out Prairie Capital’s recent “Middle Market Perspective” report.  The report has a lot of interesting data, including a comparison of strategic buyer and private equity buyer valuations. This excerpt says that strategics have a lot going for them:

Strategic buyers are a major factor in the M&A market. Synergistic cost savings, access to new customers and other revenue opportunities provide strategic buyers with reasons to pay more than the typical financial buyer. Our data show that the strategic buyer community was paid a significant premium price before, during and after the pandemic. Clients with “high price” as their major company sale objective need to attract the attention of the strategic buyers in their space.

– Strategic buyers are active participants in middle-market M&A. In Q2 2021, strategic buyers, on average, paid a 1.7x multiple more of cash flow than PEs.

– Over the last five years, EBITDA multiples paid by PE buyers have remained in a range centered around 7.0x.

– The valuation data of the last few years suggest that strategic buyers are paying a premium of at least 1.5x when compared to PE firms in the M&A market, typically paying in the mid to high 8s as a multiple of cash flow.

The report covers a number of other aspects of conditions in the middle market, including M&A activity, deal valuations, LBO capitalizations, financing market conditions and loan issuances.

John Jenkins

October 22, 2021

No Deal: PE Firm Changes Its Vocabulary

By now, I’ll wager that most of you have seen the article that appeared on the front page of yesterday’s WSJ, which discussed a Swiss private equity firm that’s banned the use of the word “deal.”  In most of the PE world, I think that would generally be regarded as a more outrageous move than banning fleece vests, but as the firm’s CEO explains, they have their reasons:

Two decades ago, Mr. Layton says, the buyout business was a $700 billion industry in which firms made big money with a simple formula: buy companies using a large amount of debt, make some cosmetic changes and sell them off. These days, it’s an $8 trillion industry, and if firms want to make the double-digit returns their investors expect, they have to think like entrepreneurs, he says. “We want to act like founders, not financiers,” Mr. Layton says. “Do our customers love us? Is our product resonating?”

He says the word “deal” reduces the ownership of a company—which has executives, employees, a strategy and a mission—to a one-time event. He wants the employees of his firm to act like they are owners of businesses, not merely the doers of deals.

Preferred vocabulary includes “stewardship, governance, strategy, culture, entrepreneurship, operational excellence and sustainability,” he says. Some employees have resorted to using the word “investment” as a substitute for the banned word.

Now, this is a hard thing for somebody who’s the editor of and the Deal Lawyers newsletter to admit, but “deal” can get annoying, and frequently sounds a little too “bro-ey” – if you “deal guys” who “do deals” know what I mean.  That being said, that last paragraph about the new preferred vocabulary strikes me as just bonkers. Do they really think the right answer to refocusing their team is to swap a bro-ism for a bowlful of ESG-babble?  I can just imagine their new “mission statement”:

The cornerstone of our investment (BUZZ!) strategy (BUZZ!) is to provide responsible stewardship (BUZZ!) by leveraging governance (BUZZ!) best practices to assist our portfolio companies in developing and implementing growth strategies (BUZZ!) that ensure operational excellence (BUZZ!) and sustainability (BUZZ!) while maintaining their entrepreneurial (BUZZ!) corporate cultures. (BUZZ!)

Rearrange these buzzwords any way you like – they aren’t going to sound any more credible than what I came up with.  There’s no way that anyone who’s spent more than 10 minutes dealing with private equity is going to swallow something that sounds like it came from Greenpeace. Speaking of which, did you see the part about the penguins? Take it away, WSJ:

“People in our business are called sharks, vultures, wolves…in Germany they call us locusts,” Mr. Layton says. “At Partners, we’re like penguins. When it gets cold they all huddle together to protect the young penguins.”

Yeah, sure. According to the article, this firm has done $27 billion in  deals baby penguin protections in the last year, so this isn’t part of a campaign for a Nobel Peace Prize. They’re just looking for an edge in the highly competitive market for doing deals. protecting penguins.

John Jenkins

October 21, 2021

Tax Considerations: The M&A Implications of Pending Tax Proposals

This SRS Acquiom survey asked M&A professionals for input on the aspects of the Biden administration’s tax proposals that they expect to have the greatest impact on M&A if enacted. Here are some of the highlights:

– Increases in the top federal long-term capital gains tax rate increase are the greatest concern for respondents, with more than half (58%) expressing concern about the tax rate increasing from 20% to 25%.

– One-third (33%) of respondents are most concerned about the tax break for qualified small business stock (QSBS) retroactively ending, and nearly the same number (31%) of respondents are focused on the top marginal individual income tax rate rising to 39.6%.

– Expanded restrictions on carried interest are most important to 19% of respondents. The M&A professionals surveyed were also keeping a close watch on state tax policies: more than half (60%) expressed concern that state tax policies will follow federal precedents for the 2022 planning horizon.

– More than half of the M&A professionals surveyed (62%) are considering long-term capital gains as they evaluate cash flows and exit plans, while some are also monitoring tax basis step-ups (16%) and valuation gaps (12%).

The survey also suggests that dealmakers are accelerating transactions in order to complete them during the current year and avoid the impact of changes in tax laws, with 63% of respondents saying that their own or their clients’ deal activities are being accelerated into 2021 in anticipation of tax changes.

John Jenkins

October 20, 2021

Usury: Toxic Converts Prove Toxic to Lender

The New York Court of Appeals recently determined that the conversion price of convertible debt can be considered interest under New York’s criminal usury laws and that convertible debt that’s found to be usurious is void ab initio.  This Sidley memo reviews the Court’s decision, in Adar Bays LLC v. GeneSys ID, Inc., (NY; 10/21), which involved a toxic convert issued by a small public company. As this excerpt from the Court’s opinion makes clear, the terms of this particular death spiral were – how shall I put this? – familiarly egregious:

On May 24, 2016, Adar Bays loaned GeneSYS $35,000. In exchange, GeneSYS gave Adar Bays a note with eight percent interest that would mature in one year. The note included an option for Adar Bays to convert some or all of the debt into shares of GeneSYS stock at a discount of 35% from the lowest trading price for GeneSYS stock over the 20 days prior to the date on which Adar Bays requested a conversion. Adar Bays could exercise its option starting 180 days after the note was issued and could do so all at once or in separate partial conversions.

The note included additional provisions favorable to Adar Bays. Although GeneSYS could prepay the note within the first 180 days, prepayment would incur significant penalties exceeding 100% of the face of the note and, after Adar Bays’ conversion right ripened, prepayment was prohibited. If GeneSYS went bankrupt or failed to maintain current filings with the U.S. Securities and Exchange Commission (“SEC”), the interest rate would increase to “24 percent per annum or, if such a rate is usurious then at the highest rate of interest permitted by law.” The note further provided for events that would automatically result in an increase in the principal owed. For example, if GeneSYS were delisted from any stock exchange, the principal would increase by 50% and if Adar Bays lost its bid price in a stock market, the principal would increase by 20%.

The 2nd Circuit certified two questions to the Court of Appeals. First, whether conversion option that permits a lender, in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount should be treated as interest for the purpose of determining whether the transaction violates NY’s criminal usury statute. Second, if the interest charged under the agreement is usurious, whether the contract is void ab initio.  As this excerpt from the Sidley memo explains, the Court answered both these questions in the affirmative:

In its ruling, the Court of Appeals answered the second question first, recounting the long history of the prohibition on usury in New York (both the state and the colony). Most relevant here, the court clarified that that the 25% interest rate cap on loans (“criminal usury”) applies to corporate loans, and thus a corporate borrower is not precluded from raising the defense of criminal usury in a civil action. If a borrower proves the defense of criminal usury in a civil action, the usurious loan is deemed void and unenforceable for both the principal and interest. As the court puts it, “loans proven to violate the criminal usury statute are subject to the same consequence as any other usurious loans: complete invalidity of the loan instrument.” (Majority at 15-16).

On the first question, the court makes clear that “in assessing whether the interest on a given loan has exceeded the statutory usury cap, the value of the floating-price convertible options should be included in the determination of interest.” (Majority at 16). This value is a question of fact measured at the time of contracting.

The memo cautions that, as a result of the decision, corporate lenders should expect defaulting borrowers to assert criminal usury as a defense, and says that they would be “well advised to heed the concerns raised by the dissent that “‘stock options to convert debt to equity at a fixed discount must [now] be treated as per se interest rates in all cases.'”

By the way, it turns out that I’m utterly incapable of spelling the word “usury” correctly.  When I originally posted this memo on our sites, I spelled the word “u-s-e-r-y.” Fortunately, our new colleague Emily Sacks-Wilner came to my aid and had our webmaster fix it.  The thing is, I did exactly the same thing the last time I blogged about usury. One of our members bailed me out on that occasion.

John Jenkins

October 19, 2021

Proxy Contests: Del. Chancery Upholds Enforcement of Advance Notice Bylaw

This Ropes & Gray memo reviews the Delaware Chancery Court’s recent decision in Rosenbaum v. CytoDyn, (Del. Ch.; 10/21), in which dissident shareholders challenged the company’s enforcement of provisions of an advance notice bylaw.  The Court ultimately ruled in the company’s favor, and in doing so also shed some light on the appropriate standard of review for cases involving the application of validly adopted advance notice bylaws.

The plaintiffs submitted their nominations and supporting materials on the day before the advance notice bylaw’s deadline. Nearly a month after receiving the nomination materials, the company rejected them due to disclosure deficiencies relating to the bylaw’s requirement to identify the persons putting forward the nominations & the nominees’ financial interests in potential transactions with the company.  The plaintiffs sued, claiming that the company was interfering with the election process. This excerpt from the memo describes their argument & the Chancery Court’s response:

The dissident stockholders argued that the board’s rejection of the nomination notice was an action designed to interfere with the effectiveness of the Company stockholder vote, and as a result, under Atlas v. Blasius, the board needed to demonstrate a “compelling justification” for rejecting the notice. The Court of Chancery denied plaintiffs’ motion, reasoning that Blasius applies only when faithless fiduciaries act for the sole or primary purpose of thwarting a stockholder vote, which the board had not done. The Court found that the advance notice bylaw had been adopted on a “clear day” years prior to the current conflict with the dissident stockholders, and was commonplace in its formulation.

The Court considered whether inequitable conduct, including an inequitable application of the advance notice bylaws, had deprived stockholders of “a fair opportunity” to nominate its director slate. The Court noted that, because the dissident stockholders had filed on the eve of the deadline and as a result, had not left any time for the notice to be corrected, the fact that the Board did not promptly send the deficiency notice did not amount to “manipulative conduct” and change the analysis. The Court also noted that the dissident stockholders understood the terms of, and the effects of non-compliance with, the CytoDyn bylaws. As a result, the Court denied the dissident stockholders’ claim to compel CytoDyn to include the dissident’s slate.

It’s worth noting that the defendants contended that the Court should apply a “purely contractual” analysis. Vice Chancellor Slights rejected that argument. Instead, he concluded that the standard set forth in Schnell v. Chris-Craft Industries, (Del.; 11/71), should apply.

Schnell stands for the proposition that inequitable action by a fiduciary does not become permissible simply because it is legally possible, and the Vice Chancellor said that it required the Court to examine whether a validly adopted bylaw had been applied in an inequitable manner & deprived shareholders of a fair opportunity to nominate director candidates. As noted above, VC Slights held that the company had not applied the bylaw in an inequitable manner.

John Jenkins

October 18, 2021

M&A Agreements: Interpreting Termination Provisions

Last month, I blogged about the Chancery Court’s decision in Yatra Online v. Ebix, (Del. Ch.; 9/21), in which the court held that a target’s decision to terminate a merger agreement deprived it of any recourse for the buyer’s alleged breaches of that agreement.  This Weil blog reviews that decision, along with a couple of recent decisions from other jurisdictions interpreting the effect of contractual termination language.  This excerpt discusses a 9th Cir. decision on the termination provisions of an NDA signed as part of a sale process:

BladeRoom Group Limited v. Emerson Electric Co., 11 F.4th 1010 (9th Cir. Aug. 30, 2021) (applying English law), involved a typical nondisclosure agreement that prohibited the disclosure of confidential information obtained during the consideration of a potential acquisition transaction. The NDA was governed by English law. After the deal failed to materialize and negotiations were terminated, the potential purchaser was alleged by the potential target to have misappropriated and used confidential information obtained during the negotiation of the potential acquisition. The district court found in favor of the target and awarded substantial damages. One of the issues at trial was the impact of the following termination provision in the NDA:

The parties acknowledge and agree that their respective obligations under this agreement shall be continuing and, in particular, they shall survive the termination of any discussions or negotiations between you and the Company regarding the Transaction, provided that this agreement shall terminate on the date 2 years from the date hereof.

The potential acquirer argued that under the plain language of this termination provision, its confidentiality obligation ended 2 years after the date the NDA was signed (apparently there was some question as to whether the use and disclosure of the confidential information occurred before or after that 2 year period and the potential acquirer had sought to exclude any evidence regarding that use or disclosure after the 2 year period). The district court, however, held that despite the proviso terminating the agreement after 2 years, “the purpose of the contract [was] to protect information, not provide for its release after 2 years.” Thus, according to the district court, “the NDA’s confidentiality obligations survived beyond two years.” To hold otherwise, according to the district court, “would lead to an absurd result and would create some inconsistency with the rest of the [NDA].”

But the Ninth Circuit, applying well-recognized principles of English contract interpretation precedent, reversed the district court, holding that the termination provision’s “natural meaning unambiguously terminated the NDA and its confidentiality provision two years after it was signed.”

While English law applied to this particular agreement, the blog says that those principles generally track the approach taken by U.S. courts. The blog goes on to discuss an 8th Cir. decision involving the termination provisions of an executive employment agreement containing a covenant not to compete. Here’s a spoiler alert – the decision doesn’t have a happy ending for the company.

John Jenkins