In recent years, ESG issues have increasingly become important in mergers and acquisitions, capital markets transactions and shareholder activism. Today, if you’re advising clients on M&A or other transactional matters, it’s essential that you stay on top of the latest developments on the ESG front. That’s why we’re pleased to announce that our PracticalESG.com membership site is now live! Similar to DealLawyers.com and other CCRcorp sites, a membership will allow you to take a giant step forward by connecting the dots on complicated issues.
Subscribers to our free PracticalESG.com blog can continue to read our take on what ESG developments mean to companies & their advisors on a daily basis – that will not go away! With a PracticalESG.com membership, though, you’ll gain the additional benefit of a filtered content library (a huge help for anyone trying to wade through the deluge of ESG info and make sense of it all) – as well as checklists, guidebooks, member-exclusive blogs, and benchmarking surveys. You’ll also be able to access regular programming and a community Q&A forum, which means you can learn from and trade ideas with other practitioners in the ESG trenches. And it’s all being led by folks with decades of experience with Environmental, Social & Governance issues.
Among other topics, we’ll provide practical guidance about establishing, tracking & communicating:
– ESG due diligence and other M&A-related topics;
– Environmental commitments;
– Diversity, equity & inclusion initiatives;
– Supply chain issues;
– Corporate culture; and
– Management and board oversight processes for environmental & social risks and opportunities
To kick off this valuable new resource, we are offering early members 25% off of the regular subscription pricing. Email firstname.lastname@example.org today – or call 1-800-737-1271 – to take advantage of this promotional offer and get tools to make your ESG efforts easier & more successful.
Yesterday, the SEC announced proposed amendments to 1940 Act rules governing private fund advisers. Here’s the 341-page proposing release and the more digestible two-page fact sheet. According to this excerpt from the fact sheet, the proposed rules would:
– Require private fund advisers registered with the Commission to provide investors with quarterly statements detailing information about private fund performance, fees, and expenses;
– Require registered private fund advisers to obtain an annual audit for each private fund and cause the private fund’s auditor to notify the SEC upon certain events;
– Require registered private fund advisers, in connection with an adviser-led secondary transaction, to distribute to investors a fairness opinion and a written summary of certain material business relationships between the adviser and the opinion provider;
– Prohibit all private fund advisers, including those that are not registered, from engaging in certain activities and practices that are contrary to the public interest and the protection of investors; and
– Prohibit all private fund advisers from providing certain types of preferential treatment that have a material negative effect on other investors, while also prohibiting all other types of preferential treatment unless disclosed to current and prospective investors.
The proposed rule would also require all registered advisers to document the annual review of their compliance policies and procedures in writing.
One aspect of the proposed amendments that’s certain to draw plenty of attention is the SEC’s proposal to prohibit certain types of preferential treatment for selected investors. All private fund advisers would be prohibited from providing preferential terms to favored investors on fund redemptions or information on portfolio holdings or exposures that isn’t provided to all investors. While side letters on other investment terms would continue to be permitted, any preferential treatment provided under the terms of those arrangements would have to be disclosed to current and prospective investors.
Comments on the proposal are due by the later of 30 days after the date that it’s published in the Federal Register or April 11,2022. We’ll be posting memos in our “Private Equity” Practice Area.
Transition Services Agreements are an important component of many M&A transactions. Because the parties don’t always know at the outset the nature and extent of the services that will be required, they are often also quite complex agreements to negotiate and implement. This Willis Towers Watson blog – which is the first in a series of blogs on TSAs – provides an overview of the key considerations that buyers and sellers in preparing to enter into a TSA. This excerpt addresses the big picture issues that a seller should keep in mind:
For a seller, it is critical to determine, well in advance of a deal, what support can and should be provided, for how long and at what price. It is also important to understand interdependencies between TSA items. For example, does the target need to remain on the human resources information system (HRIS) to maintain payroll under the TSA?
A seller also needs to determine if the divested business provides resources, support, processes or technology to the RemainCo. If so, the seller may need reverse TSA services. A reverse TSA allows the divested business to provide support to the seller or former parent. However, providing services to the buyer in support of a business that the seller is exiting will not always be high on the priority list of the seller, nor does it always make sense.
Nevertheless, as a seller, if you do not prepare, you may be end up with your back against the wall during the heat of an M&A negotiation. This may result in your business providing broader services or for a long duration just to get the deal done. But with planning and preparation, you will have more control and may be able to structure the deal in such a way that the TSA services will be minimized or may not be required.
The next blog in the series addresses how to structure an effective TSA and a governance process that ensures that the provision of services, billing and exit arrangements are efficient and effective.
Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Dan Scorpio discuss lessons from 2021’s activist campaigns & expectations for what the 2022 proxy season may have in store.
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.
Members of DealLawyers.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing email@example.com – or call us at 800.737.1271.
Now that he’s out of government service and back at Harvard Law School, former SEC Corp Fin Director and General Counsel John Coates isn’t pulling any punches when it comes to his feelings about SPACs. In a recent paper titled “SPAC Law and Myths”, he absolutely clobbers SPACs and those who promote them. Here’s an excerpt from the abstract:
SPAC promoters claimed that (1) securities regulations ban projections from being used in conventional IPOs, (2) liability related to projections was lower and more certain in SPACs than it was (and is), (3) the Securities and Exchange Commission (SEC) registration process makes C-IPOs slower than SPACs, (4) the SEC changed SPAC accounting rules in early 2021, (5) this “change” was the primary reason the SPAC wave slowed and peaked, and (6) the Investment Company Act clearly does not apply to SPACs.
These myths were aimed primarily not at unsophisticated retail investors, but business journalists, sophisticated SPAC sponsors and owner-managers of SPAC targets. They illustrate a broader and underappreciated fact that complex financial-legal innovation permits promoters to exploit the “credence good” character of professional advice, perpetuate “deep fraud,” and distort markets and asset prices more and longer than conventional theory assumes. To moderate deep fraud’s market distortions, regulators have a role in speaking frequently and clearly about law and its uncertainties.
As I read this article, I found it disappointing that Prof. Coates refuses to acknowledge that the SEC may bear some responsibility for facilitating the creation or perpetuation of some of these SPAC “myths,” particularly those relating to accounting issues and the Investment Company Act. Regrettably, he shrugs off any failure to call out these issues during the SEC’s review process for hundreds of SPAC & de-SPAC deals by pointing to the legend that appears on the prospectus cover page:
“The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.”
Yes, that’s true – Staff review doesn’t mean that the SEC has signed off on compliance with all legal and accounting requirements. But when supposedly significant issues are repeatedly “missed” not only by the parties involved in the transactions but by the SEC Staff reviewing those filings, deflecting responsibility by pointing to required boilerplate disclosure is a feeble response. I think that’s particularly true when that effort at hand washing appears in an article that reads like a 21st century J’Accuse. . . ! targeting everyone else involved in the SPAC boom.
Delaware law requires a court dealing with an appraisal action to determine the fair value of a share as of the effective time of a merger. In BCIM Strategic Value Master Fund LP v. HFF, Inc., (Del. Ch.; 2/22), Vice Chancellor Laster focused on how to adjust for an increase in the target’s value between signing and closing that resulted from improved performance when the deal price effectively capped the market’s reaction to that improvement.
After an extended discussion of the background of the transaction and the process by which it was approved, the Vice Chancellor held that the adjusted deal price (i.e., deal price minus synergies) was the appropriate reference point for determining the fair value of the deal at signing. However, he concluded that the improvement in the target’s performance as evidenced by, among other things, a surprisingly positive earnings announcement between signing and closing, increased its value.
Because the upside market price of the target’s shares between signing and closing was limited by the price specified in the merger agreement, the Vice Chancellor could not look directly at a metric like the target’s unadjusted trading price. Instead, he applied an “earnings surprise regression analysis” suggested by the parties’ experts to assess the impact that the target’s improved performance would have had on the unadjusted trading price of its stock in order to generate an implied stock price on the closing date. In adopting this approach, Vice Chancellor Laster acknowledged that it was imperfect:
For one thing, it only provides an indication of the change in the Company’s value as of the Earnings Beat on April 24, 2019. The Merger closed on July 1, 2019. Using the Company’s value as of the Earnings Beat gets closer to the closing date, but does not reflect a value as of the closing date. It is nevertheless a closer measure than the adjusted deal price at signing. It is also likely to be conservative, as the Company’s operating performance continued to improve during 2019. The method is not perfect, but the perfect should not be the enemy of the good.
The court’s approach also includes an element of mixing and matching. To derive the indication of fair value at the time of signing, the court is using the adjusted deal price. To derive a measure of the post-signing change in fair value between signing and closing, the court is using metrics derived from trading prices.
There haven’t been many cases addressing changes in value between signing and closing (I blogged about one last year), but if you read this decision, I think you’re likely to agree that attempting to do that will often be a challenging and messy process.
According to the latest edition of Dechert’s merger investigation timing tracker, while the number of deals subject to significant investigations by the DOJ & FTC last year fell slightly below Trump administration averages, those investigations killed a higher percentage of deals than in years past:
Of note, the combined number of transactions that ended in either a complaint or an abandoned transaction in 2021 matched 2020. With fewer significant investigations concluding in 2021 than 2020, however, the 10 investigations that ended in a complaint or an abandoned transaction in 2021 represented 37 percent of all significant investigations – the highest proportion observed since DAMITT first launched in 2011. As shown below, deals abandoned without a complaint represented 40 percent of these transactions that did not result in a consent decree, the highest proportion since 2014.
Dechert’s report says that these outcomes indicate that the agencies very public skepticism of merger remedies is reducing the number of deals that end in consent decrees, and that the increasing willingness to challenge deals highlights the importance of the language of the antitrust provisions contained in merger agreements.
Wachtell Lipton recently published a memo previewing M&A in 2022. One of the interesting points raised in the memo is the possible return of “club deals,” which were popular prior to the financial crisis but have been less common since then. Here’s what the memo has to say about club deals in 2022:
Looking ahead, one trend to watch for is a possible resurgence of PE club deals (where two or more firms band together to buy a company), which had fallen out of favor following the 2008 financial crisis, but which may be coming back as PE firms look for opportunities to deploy significant capital in transactions involving large targets while strategic buyers face potential regulatory constraints. Indeed, 2021 witnessed the largest buyout involving a club of PE firms since the financial crisis, with the acquisition of Medline by Blackstone, Carlyle and Hellman & Friedman.
Further, major PE players are planning additional capital raises projected to result in record-size funds and unprecedented levels of dry powder. Among many others, Blackstone and Apollo are reportedly preparing for major fundraising efforts (with Blackstone reportedly planning to target as much as $30 billion). We expect that sponsors will continue to pursue acquisitions and actively look for creative opportunities, with PE activity boosted by access to
financing, as well as by a greater availability of potential targets as regulatory concerns cause hesitation among strategics and activists continue to prod companies to become more focused on just their core businesses.
The memo covers a lot of ground. In addition to this nugget on private equity, it addresses M&A trends across a variety of industries, cross-border deals, the impact of the evolving antitrust environment, ESG activism and M&A, and acquisition financing, among other topics.
In Galindo v. Stover, (Del. Ch.; 1/22), the Chancery Court held that Noble Energy’s failure to disclose a prior unsolicited acquisition overture and the reasons for amending its change-in-control severance plan were not material omissions precluding application of Delaware’s Corwin doctrine to fiduciary duty claims arising out of the company’s 2020 sale to Chevron.
Noble Energy’s proxy statement for the Chevron sale did not disclose an unsolicited 2018 proposal from Cynergy to acquire certain of the company’s Mediterranean assets. The plaintiffs alleged that the company’s failure to address this prior overture meant that stockholders lacked “full disclosure of the potential superior offers in the market” when they approved the Chevron transaction. Vice Chancellor Glasscock rejected this argument, and this excerpt from his opinion summarizes his reasoning:
The Cynergy proposal was unsolicited, made in mid-2018, and predated important contextual developments, such as the commercialization of the Leviathan field and the onset of the COVID-19 pandemic. Further, the Cynergy proposal contemplated an entirely different transaction structure than the one achieved in the Merger with Chevron. Additionally, the Cynergy proposal was never entertained by management or the Board. Even drawing all reasonable inferences in favor of the Plaintiffs, the alleged failure to fully inform stockholders with respect to the Cynergy proposal cannot survive.
The Vice Chancellor also rejected claims that the company should have disclosed the timing and rationale for the board’s decision to amend a company severance plan to provide its officers – who took a cut in pay due to the pandemic – with change-in-control benefits that reflected their pre-pandemic salaries. In doing so, he noted that the amended plan & the benefits payable under its terms were both disclosed in the proxy statement, and that the additional information the plaintiffs sought would not have altered the total mix of information available to Noble’s shareholders.