SRS Acquiom recently released its annual M&A Deal Terms Study, which reviews the financial & other terms of 1,900 private-target acquisitions valued at more than $425 billion that closed between 2016 and 2021. Here are some of the key findings about trends in last year’s deal terms:
– The market appears to be settling on how to deal with COVID-19 or pandemic-related matters. Some data trends, such as earnouts and termination fees, are returning to pre-COVID directions, but certain effects remain. Examples include carveouts to the definition of Material Adverse Effect for COVID-related items, COVID related seller representations, and a carveout for COVID to the covenant to conduct business in the ordinary course.
– The presence of RWI can materially affect certain deal terms, including use of a separate purchase price adjustment escrow, certain seller representations, survival, sandbagging, materiality scrapes, baskets, caps, and escrows.
– A higher number of U.S. public buyers in the SRS Acquiom data set for 2021 & a dramatic increase in M&A deals using buyer stock as consideration.
– A slight decrease in the number of deals with earnouts and a larger decrease in the percentage of consideration tied to earnouts. Earnout periods also trended shorter, with the median down to 22.5 months.
– The number of “no survival” deals (both with and without RWI identified) continuds to increase, up to 26% of all deals.
As always, the study contains plenty of interesting information about closing conditions, indemnification terms, dispute resolution and termination fees.
I recently blogged about some of the implications of the proposed SPAC rules for investment banks that underwrite SPAC IPOs. Under the terms of the proposed rules, these banks could also find themselves subject to underwriter liability in connection with the de-SPAC transaction. Now, this Barnes & Thornburg memo says that it isn’t just the IPO underwriters that might face underwriter liability for the de-SPAC. As this excerpt explains, hedge funds that provide PIPE offering may find themselves in a similar position:
Of course, hedge funds do not underwrite SPAC IPOs. Nonetheless, hedge funds that provide de-SPAC PIPE financing should be deeply concerned by the aggressive SEC attitude toward participation-based underwriter status that underlies proposed Rule 140a. That attitude is on full display in the proposal’s discussion that follows its description of the proposed rule.
The proposal cautions that Rule 140a and the accompanying list of activities potentially indicating de-SPAC underwriter status pursuant thereto are “not intended to provide an exhaustive assessment of underwriter status in the SPAC context.” In particular, the proposal states that federal courts or the SEC “may find” that a party other than a SPAC IPO underwriter has de-SPAC underwriter status due to “perform[ing] activities necessary to the successful completion” of a de-SPAC transaction. In this connection, the proposal says that a de-SPAC PIPE investor, depending on circumstances, could be deemed an underwriter due to “‘participating’ in a distribution” relating to the de-SPAC transaction.
The memo points out that the provision of PIPE financing is often “necessary to the successful completion” of a de-SPAC transaction. When considered along with the SEC’s view that the de-SPAC involves a “distribution” of securities, the memo says this language suggests that the SEC may be open to “pushing the ‘underwriter’ envelope to ensnare hedge funds whose only connection to a de-SPAC transaction is investing the PIPE capital needed for its consummation.”
The May-June issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue contains the following articles:
– SEC Proposed New Rules to More Tightly Regulate SPAC Activity
– Let’s Talk About Tender Offers
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A new regulatory regime that would limit certain US outbound investments in other countries has been kicked around in Congress and by national security officials in the Biden administration. This Morgan Lewis memo describes recent proposed legislation providing for the review of certain outbound investments and possible action the President might authorize independent of any action by Congress. This excerpt summarizes the proposed legislation and its status:
The House of Representatives passed the America COMPETES Act on February 4 as a counterproposal to the Senate’s US Innovation and Competition Act (USICA); it contains a provision, the National Critical Capabilities Defense Act, that would establish a National Critical Capabilities Committee (NCCC) headed by the Office of the US Trade Representative (USTR). The NCCC would be an interagency committee, somewhat similar to the Committee on Foreign Investment in the United States (CFIUS), that would review, and be empowered to block, outbound investment by a wide range of US businesses engaged in manufacturing or otherwise developing identified critical national capabilities. The reviews would be specifically focused on investment in a “country of concern,” which would include “foreign adversary” nations as well as “non-market economy” nations. Although China was certainly top of mind for the legislative sponsors, it seems Russia would likely now also be a focus.
The House bill defines “covered transactions” to include any transaction by a US business that “shifts or relocates to a country of concern, or transfers to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more critical capabilities” identified by the legislation, as well as any transaction that “could result in an unacceptable risk to a national critical capability.”
The bill further defines national critical capabilities as “systems and assets, whether physical or virtual, so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness.” In a nonexhaustive list of such capabilities, the bill includes such items as medical supplies and equipment related to critical infrastructure, as well as services and supply chains related to such items.
The memo reviews some of the implications of the implementation of outbound investment reviews, either legislatively or by executive action, and suggests that the most significant impact might well be the decision of other nations to implement a review regime of their own. In order to avoid disadvantaging U.S. businesses, the memo says that a coordinated approach to implementing such a system with other nations is essential.
This Gibson Dunn memo says that the FTC is contemplating potentially significant changes to the information required to be filed under the HSR Act. Here’s the intro:
According to recent statements of agency officials, the Federal Trade Commission (FTC) is looking to revise the Premerger Notification and Report Form (the “HSR Form”) “to conform to changing market realities and global standards.” The FTC has not released details of the proposed changes, but recent statements from agency leadership provide some indication as to how the agency may expand the filing requirements.
FTC Chair Lina Khan recently announced that the agency is exploring “ways to collect on the front-end information that is more probative of whether parties are proposing an unlawful deal.” And FTC Bureau of Competition Director Holly Vedova explained that the FTC wants, as part of the HSR filing, “overlap information, customers, things like that.” The Bureau Director amplified that, under the proposed changes, the parties would “do that work ahead of time, and come in with that information, so that we don’t spend ten, twenty, thirty days trying to collect all that information.
The memo says that while the proposed changes won’t affect filing thresholds, they would affect the information & documents that companies have to provide in connection with an HSR filing. If the changes ultimately require the type of detailed information often required in other jurisdictions, they could substantially increase the cost and time involved in making HSR filings, even those for deals that don’t raise competition concerns.
The most common structure for acquiring a U.K. public company in a friendly transaction is a “scheme of arrangement,” in which the target company seeks a court order permitting it to put a deal up to a shareholder vote. If a sufficient majority of each shareholder “class” approves the transaction and the conditions to it are satisfied, the scheme will be sanctioned by the court and the deal will close. In addition to being the structure of choice for public company deals with U.K. targets, a scheme of arrangement also provides a way to acquire a private company without the need for all of thee target’s shareholders to sign-off on deal documents.
This Cooley blog provides an overview of how these transactions work and addresses a number of questions about their mechanics. This excerpt discusses what a “class” of shareholders means when dealing with a scheme of arrangement:
In the context of a scheme, a class is essentially a grouping of shareholders. This is not the same as the classes of shares in a company’s share capital (i.e., common stock vs. preferred stock) – a company may have several issued share classes, but the shareholders can all form a single class for the purposes of the scheme. The key here is to assess what rights are being given up and what rights are being granted in return, and whether the treatment differs amongst shareholders to such an extent that it would be impossible for them to have a common interest and consider the scheme together in a single class.
For example, if all common stock shareholders receive the same consideration, then they are all likely to be deemed members of the same class. If, however, some shareholders receive a different mix of consideration or another benefit as a result of the transaction (such as a transaction bonus, repayment of shareholder debt, etc.), they may be deemed to form a separate class and be excluded from the class vote of the other common stock shareholders. Similarly, if the proceeds are flowing through a liquidation waterfall without any element of discretion being applied by the target, you may be able to take the position that the shareholders’ interests are sufficiently aligned, and they can form a single class.
The memo also addresses the vote required to approve a scheme, the use of stock as consideration, and the process and timing of the transaction.
Wachtell Lipton recently published the 2022 edition of its 245-page “Takeover Law and Practice” outline. The outline addresses directors’ fiduciary duties in the M&A context, key aspects of the deal-making process, deal protections and methods to enhance deal certainty, takeover preparedness, responding to hostile offers, structural alternatives and cross-border deals. It’s full of both high-level analysis and real-world examples. For example, check out this excerpt on unsolicited M&A:
The volume of unsolicited deals increased globally both in absolute terms, from $166 billion in 2020 to $421 billion in 2021, and in terms of share of overall deal volume, from 3% in 2020 to 7.5% in 2021. 2021 also saw an increase in the number of topping bids compared to 2020. As markets returned to normalcy after the early days of the COVID-19 pandemic, there arose greater opportunities for unsolicited acquirors to pursue targets that lagged behind their peers in recovering. At the same time, competition for targets intensified, as more potential acquirors entered the market, including a plethora of SPACs that have time limits on making acquisitions (as discussed in Section I.B.5), leading to more competition in some cases for certain targets.
As an example of competition in unsolicited M&A, both Cannae and Senator submitted a joint bid for Corelogic, which then adopted a poison pill and increased its stock buyback program in response. Ultimately, however, neither Cannae nor Senator was successful in acquiring Corelogic, who agreed to a deal with Stone Point at a higher price, showing that the competitive unsolicited deal environment can lead to deals with an acquiror other than the original unsolicited acquiror. Overall, it remains challenging to successfully complete an unsolicited acquisition, and a thoughtfully executed defense may in certain instances enable a target to retain its independence.
Last October, the FTC announced that it was reinstating its policy requiring M&A divestiture orders to include provisions mandating that respondents seek the agency’s prior approval for future acquisitions within certain markets for a period of 10 years. More than six months have passed since that announcement, and this Gibson Dunn memo takes a look at how that policy has been applied in real world settings.
The memo reviews the prior approval terms set forth in the seven consent agreements that the FTC has entered into since reintroducing the prior approval policy, and also offers up some key takeaways for parties considering deals that may be subject to FTC consent orders. This one highlights the fact that the parties may not be out of the woods if they decide to abandon a transaction:
The 2021 Policy Statement put merging parties on notice that even if they abandon a proposed merger after litigation commences, the Commission may subsequently pursue an order incorporating a prior approval provision. To obtain such an order the FTC would have to pursue an enforcement action in its administrative court seeking injunctive relief to prevent a potential recurrence of the alleged violation, which would likely require significant resources.
Since the 2021 Policy Statement was issued, the FTC has yet to pursue such an order against merging parties who have abandoned post-complaint but before fully litigating the challenged transaction. There have been indications, however, that the FTC is exploring the possibility of seeking an order against Hackensack Meridian Health and Englewood Healthcare—who abandoned their proposed merger after the Third Circuit upheld a preliminary injunction entered by the U.S. District Court for the District of New Jersey enjoining the merger—that would require the two hospital systems to provide prior notice should they attempt the same merger in the future.
The memo also points out that the DOJ doesn’t have a prior approval policy, so it remains to be seen whether it will follow the FTC’s lead in consent decrees that it enters into. Of course, the DOJ is currently breathing fire about its desire to litigate antitrust cases, so it may be some time before we have an answer to that question.
Last summer, the Delaware Supreme Court overruled a Chancery Court decision upholding a disputed share issuance used by an incumbent board to resolve a stockholder deadlock. The case arose out of failed negotiations to repurchase the plaintiff’s 50% ownership stake in the company. In response to the breakdown of those negotiations, she filed a lawsuit seeking to have a custodian appointed for the company in order to resolve the deadlock. The board responded by authorizing the issuance of shares to a key employee of the company in order to moot that custodianship proceeding, which led to this lawsuit.
The Chancery Court held that the transaction satisfied the entire fairness standard, but the Supreme Court said that because the case raised concerns about stockholder disenfranchisement, that was only the first step in the analysis. The Supreme Court pointed the Chancery in the direction of two prior decisions. The first, Schnell v. Chris-Craft Industries, held that actions taken by an interested board with the intent of interfering with a stockholder’s voting rights are a breach of the directors’ fiduciary duty. The second, Blasius v. Atlas Industries, held that even good faith actions by the board that have the effect of interfering with voting rights require a “compelling justification.”
On remand, Chancellor McCormick held in Coster v. UIP Companies, (Del. Ch.; 5/22), that the board did not act with an inequitable intent and that it had a compelling justification for its decision to issue the shares. At only 31 pages, Chancellor McCormick’s opinion is brief by Chancery standards, but it nevertheless devotes a lot of attention to the interpretive challenges presented by Schnell and Blasius. After wrestling with those challenges, the Chancellor ultimately concluded that at least in the context of stockholder-franchise challenges, Schnell applies “in the limited scenario wherein the directors have no good faith basis for approving the disenfranchising action.”
In the present case, she concluded that while the board may have been partially motivated by a desire to interfere with the plaintiff’s voting rights, but they were also motivated by a desire to act in the best interests of the company and prevent the harm to its business that would result from the appointment of a custodian. Accordingly, the board’s actions were not completely devoid of a good faith basis, and therefore should be evaluated under Blasius. The Chancellor then concluded that the board’s actions passed muster under the “compelling justification” test:
In the exceptionally unique circumstances of this case, Defendants have met the onerous burden of demonstrating a compelling justification. Defendants proved that the broad relief sought by Plaintiff in the Custodian Action rose to the level of an existential crisis for UIP. Defendants demonstrated that the appointment of a custodian could trigger broad termination provisions in key contracts and threaten a substantial portion of UIP’s revenue. Defendants also proved, more generally, that UIP was a services business dependent on personal relationships; thus, displacing oversight and managerial powers would defeat the founders’ purpose in forming UIP.
Chancellor McCormick also held that the share issuance was appropriately tailored to achieve the goal of mooting the custodian action while also achieving other important goals, including the implementation of a corporate succession plan and rewarding a key employee. She acknowledged that the share issuance eliminated the plaintiff’s ability to use her 50% interest to block stockholder action, but observed that it had the same effect on the other 50% owner by making the new employee-shareholder the swing vote.
As Broc used to so colorfully put it, we’re posting “oodles” of memos on the SEC’s SPAC proposal in our “SPACs” Practice Area. This recent one from Debevoise caught my eye, because it focuses on the proposal’s significant implications for investment banks involved in SPAC transactions. If adopted in their current form, the rules will expose a bank that served as an underwriter of a SPAC’s IPO to liability as an underwriter for its de-SPAC transaction if the bank “facilitates” that transaction or participates directly or indirectly in it. This excerpt from the memo says that this proposed rule could have a significant impact on market practice:
The proposed rules, if adopted, will likely lead to significant changes to current market practice. As noted above, an underwriter of the SPAC IPO often serves in additional roles that could be caught up in the rule. De-SPAC transactions, funded with a substantial new equity placement (through a PIPE), are often larger than the original SPAC IPO, and banks would understandably like to participate in that larger transaction. But under the new rules, participation may trigger underwriter liability for the bank with respect to the de-SPAC registration statement.
It is not always obvious whether a bank will be subject to backend underwriter liability. If the bank plays no role other than as underwriter in the original SPAC IPO, then we believe that the fact that a portion of its compensation is payable only if the de-SPAC transaction is consummated should not, by itself, trigger underwriter liability regarding the de-SPAC disclosure. On the other hand, if an underwriter acts as financial advisor to the target company, under the plain language of the proposed rules, the underwriter could be deemed to be “facilitating” the de-SPAC transaction and thus be subject to underwriter liability on the de-SPAC registration statement.
The memo points out that absent major changes in current market practice, the standard protections that would apply to an IPO underwriter would not apply to the de-SPAC transaction. There would be no underwriting agreement, indemnification rights, due diligence process (including legal opinions and auditor “comfort” letters), and no control over the timing of the closing. Furthermore, once a bank that underwrote the SPAC’s IPO decides to cross the Rubicon and serve as its financial advisor for the de-SPAC, it’s unclear if the bank can avoid liability as an underwriter by withdrawing and foregoing its success fee.